PRU 1
Application and general requirements
PRU 1.1
to follow
- 31/12/2004
PRU 1.2
Adequacy of financial resources
- 31/12/2004
Application
PRU 1.2.1
See Notes
- 31/12/2004
PRU 1.2.2
See Notes
- (1) In relation to liquidity risk only, this section applies to a firm in PRU 1.2.3 R unless PRU 1.2.7 R applies.
- (2) Liquidity risk includes the systems, processes and resources required by this section in respect of liquidity risk.
- 31/12/2004
PRU 1.2.3
See Notes
The firms referred to in PRU 1.2.2 R (1) are:
- (1) a building society;
- (2) a bank or an own account dealer (other than a venture capital firm) that is a UK firm;
- (3) an incoming EEA firm which:
- (a) is a full BCD credit institution; and
- (b) has a branch in the United Kingdom;
- (4) an overseas firm which is a bank or an own account dealer (other than a venture capital firm) but which is not:
- (a) an incoming EEA firm; or
- (b) a lead-regulated firm;
- (5) an overseas firm which:
- (a) is a bank;
- (b) is a lead-regulated firm;
- (c) is not an incoming EEA firm; and
- (d) has a branch in the United Kingdom.
- 31/12/2004
PRU 1.2.4
See Notes
- 31/12/2004
PRU 1.2.5
See Notes
- 31/12/2004
PRU 1.2.6
See Notes
If a firm carries on:
- (1) long-term insurance business; and
- (2) general insurance business;
this section applies separately to each type of business.
- 31/12/2004
PRU 1.2.7
See Notes
This section does not apply to:
- (1) a non-directive friendly society; or
- (2) a Swiss general insurer; or
- (3) an EEA-deposit insurer; or
- (4) a UCITS qualifier; or
- (5) an ICVC; or
- (6) an incoming EEA firm (unless PRU 1.2.3 R applies); or
- (7) an incoming Treaty firm.
- 31/12/2004
PRU 1.2.8
See Notes
- 31/12/2004
PRU 1.2.9
See Notes
- 31/12/2004
PRU 1.2.10
See Notes
- 31/12/2004
PRU 1.2.11
See Notes
- 31/12/2004
PRU 1.2.12
See Notes
- 31/12/2004
Purpose
PRU 1.2.14
See Notes
- 31/12/2004
PRU 1.2.15
See Notes
- 31/12/2004
PRU 1.2.16
See Notes
- 31/12/2004
PRU 1.2.17
See Notes
- 31/12/2004
Outline of other related provisions
PRU 1.2.18
See Notes
- 31/12/2004
PRU 1.2.19
See Notes
- 31/12/2004
PRU 1.2.20
See Notes
- 31/12/2004
PRU 1.2.21
See Notes
- 31/12/2004
Main Requirements
PRU 1.2.22
See Notes
- 31/12/2004
PRU 1.2.23
See Notes
- 31/12/2004
PRU 1.2.24
See Notes
- 31/12/2004
PRU 1.2.25
See Notes
- 31/12/2004
PRU 1.2.26
See Notes
- 31/12/2004
PRU 1.2.27
See Notes
- 31/12/2004
PRU 1.2.28
See Notes
- 31/12/2004
PRU 1.2.29
See Notes
- 31/12/2004
PRU 1.2.30
See Notes
- 31/12/2004
PRU 1.2.31
See Notes
The processes and systems required by PRU 1.2.26 R must enable the firm to identify the major sources of risk to its ability to meet its liabilities as they fall due, including the major sources of risk in each of the following categories:
- (1) credit risk;
- (2) market risk;
- (3) liquidity risk;
- (4) operational risk; and
- (5) insurance risk.
- 31/12/2004
PRU 1.2.32
See Notes
In PRU 1.2.31 R:
- (1) operational risk refers to the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events; and
- (2) insurance risk refers to the inherent uncertainties as to the occurrence, amount and timing of insurance liabilities.
- 31/12/2004
PRU 1.2.33
See Notes
- 31/12/2004
PRU 1.2.34
See Notes
- 31/12/2004
PRU 1.2.35
See Notes
For each of the major sources of risk identified in accordance with PRU 1.2.31 R, the firm must carry out stress tests and scenario analyses that are appropriate to the nature of those major sources of risk, as part of which the firm must:
- (1) take reasonable steps to identify an appropriate range of realistic adverse circumstances and events in which the risk identified crystallises; and
- (2) estimate the financial resources the firm would need in each of the circumstances and events considered in order to be able to meet its liabilities as they fall due.
- 31/12/2004
PRU 1.2.36
See Notes
- 31/12/2004
PRU 1.2.37
See Notes
A firm must make a written record of its assessment of the adequacy of its financial resources, including:
- (1) the major sources of risk identified in accordance with PRU 1.2.31 R;
- (2) how it intends to deal with those risks; and
- (3) details of the stress tests and scenario analyses carried out and the resulting financial resources estimated to be required in accordance with PRU 1.2.35 R.
- 31/12/2004
PRU 1.2.38
See Notes
- 31/12/2004
PRU 1.2.39
See Notes
- 31/12/2004
Stress tests and scenario analyses
PRU 1.2.40
See Notes
- 31/12/2004
PRU 1.2.41
See Notes
- 31/12/2004
PRU 1.2.42
See Notes
- 31/12/2004
PRU 1.2.43
See Notes
- 31/12/2004
PRU 1.2.44
See Notes
- 31/12/2004
PRU 1.2.45
See Notes
PRU 1.2.35 R requires a firm, as part of carrying out stress tests and scenario analyses, to take reasonable steps to identify an appropriate range of realistic circumstances and events in which a risk would crystallise. In particular:
- (1) a firm need only carry out stress tests and scenario analyses in so far as the circumstances or events are reasonably foreseeable, that is to say, their occurrence is not too remote a possibility; and
- (2) a firm should also take into account the relative costs and benefits of carrying out the stress tests and scenario analyses in respect of the circumstances and events identified.
- 31/12/2004
PRU 1.2.46
See Notes
- 31/12/2004
PRU 1.2.47
See Notes
Both stress testing and scenario analyses are prospective analysis techniques, which seek to anticipate possible losses that might occur if an identified risk crystallises. In applying them, a firm needs to decide how far forward to look. This should depend upon:
- (1) how quickly it would be able to identify events or changes in circumstances that might lead to a risk crystallising resulting in a loss; and
- (2) after it has identified the event or circumstance, how quickly and effectively it could act to prevent or mitigate any loss resulting from the risk crystallising and to reduce exposure to any further adverse event or change in circumstance.
- 31/12/2004
PRU 1.2.48
See Notes
The time horizon over which stress tests and scenario analysis would need to be carried out for the market risk arising from the holding of investments, for example, should depend upon:
- (1) the extent to which there is a regular, open and transparent market in those assets, which would allow fluctuations in the value of the investment to be more readily and quickly identified; and
- (2) the extent to which the market in those assets is liquid (and would remain liquid in the changed circumstances contemplated in the stress test or scenario analysis) which would allow the firm, if needed, to sell its holding so as to prevent or reduce exposure to future price fluctuations.
- 31/12/2004
PRU 1.2.49
See Notes
In identifying scenarios, and assessing their impact, a firm should take into account, where material, how changes in circumstances might impact upon:
- (1) the nature, scale and mix of its future activities; and
- (2) the behaviour of counterparties, and of the firm itself, including the exercise of choices (for example, options embedded in financial instruments or contracts of insurance).
- 31/12/2004
PRU 1.2.50
See Notes
In determining whether it would have adequate financial resources in the event of each identified realistic adverse scenario, a firm should:
- (1) only include financial resources that could reasonably be relied upon as being available in the circumstances of the identified scenario; and
- (2) take account of any legal or other restriction on the purposes for which financial resources may be used.
- 31/12/2004
PRU 1.2.51
See Notes
- 31/12/2004
PRU 1.2.52
See Notes
- 31/12/2004
PRU 1.2.53
See Notes
- 31/12/2004
PRU 1.2.54
See Notes
- 31/12/2004
PRU 1.2.55
See Notes
- 31/12/2004
PRU 1.3
Valuation
- 31/12/2004
Application
PRU 1.3.1
See Notes
PRU 1.3 applies to an insurer, unless it is:
- (1) a non-directive friendly society; or
- (2) an incoming EEA firm; or
- (3) an incoming Treaty firm.
- 31/12/2004
PRU 1.3.2
See Notes
- 31/12/2004
PRU 1.3.3
See Notes
- (1) PRU 1.3 applies to a firm in relation to the whole of its business.
- (2) Where a firm carries on both long-term insurance business and general insurance business, PRU 1.3 applies separately to each type of business.
- 31/12/2004
Purpose
PRU 1.3.4
See Notes
- 31/12/2004
General requirements: accounting principles to be applied
PRU 1.3.5
See Notes
Subject to PRU 1.3.5A R and PRU 1.3.5B R, except where a rule in PRU provides for a different method of recognition or valuation, whenever a rule in PRU refers to an asset, liability, equity or income statement item, a firm must, for the purpose of that rule, recognise the asset, liability, equity or income statement item and measure its value in accordance with:
- (1) the insurance accounts rules, or the Friendly Societies (Accounts and Related Provisions) Regulations 1994;
- (2) Financial Reporting Standards and Statements of Standard Accounting Practice issued or adopted by the Accounting Standards Board; and
- (3) Statements of Recommended Practice, issued by industry or sectoral bodies recognised for this purpose by the Accounting Standards Board; or
- (4) international accounting standards;
- 21/04/2005
- Past version of PRU 1.3.5 before 21/04/2005
PRU 1.3.5A
See Notes
- 21/04/2005
PRU 1.3.5B
See Notes
For the purposes of PRU, except where a rule in PRU provides for a different method of recognition or valuation, in respect of a defined benefit occupational pension scheme:
- (1) a firm must derecognise any defined benefit asset;
- (2) a firm may substitute for a defined benefit liability the firm's deficit reduction amount.
- 21/04/2005
PRU 1.3.5C
See Notes
- 21/04/2005
PRU 1.3.5D
See Notes
- 21/04/2005
PRU 1.3.6
See Notes
PRU 1.3.5 R provides that unless a rule in PRU provides for a different method of recognition or valuation, the applicable provisions of the Companies Act 1985, the Companies Act (Northern Ireland) Order 1986 or the Friendly Societies (Accounts and Related Provisions) Regulations 1994, as supplemented by Financial Reporting Standards, Statements of Standard Accounting Practice, and Statements of Recommended Accounting Practice, or, where applicable, international accounting standards, should be used to determine the recognition and valuation of assets, liabilities, equity and income statement items for the purposes of PRU, including:
- (1) whether, and when, to recognise or de-recognise an asset or liability;
- (2) the amount at which to value an asset, liability, equity or income statement item;
- (3) which description to place on an asset, liability, equity or income statement item.
- 21/04/2005
- Past version of PRU 1.3.6 before 21/04/2005
PRU 1.3.7
See Notes
In particular, unless an exception applies, PRU 1.3.5 R should be applied for the purposes of PRU to determine how to account for:
- (1) netting of amounts due to or from the firm;
- (2) the securitisation of assets and liabilities (see also PRU 1.3.8 G);
- (3) leased tangible assets;
- (4) assets transferred or received under a sale and repurchase or stock lending transaction; and
- (5) assets transferred or received by way of initial or variation margin under a derivative or similar transaction.
- 31/12/2004
PRU 1.3.8
See Notes
- 21/04/2005
- Past version of PRU 1.3.8 before 21/04/2005
PRU 1.3.9
See Notes
- 31/12/2004
PRU 1.3.10
See Notes
- 31/12/2004
Investments, derivatives and quasi-derivatives
PRU 1.3.11
See Notes
Subject to PRU 1.3.31 R, for the purposes of PRU, a firm must apply PRU 1.3.12 R to PRU 1.3.30 R in order to determine how to account for:
- (1) investments that are, or amounts owed arising from the disposal of:
- (a) debt securities, bonds and other money- and capital-market instruments; or
- (b) loans; or
- (c) shares and other variable yield participations; or
- (d) units in UCITS schemes, non-UCITS retail schemes, recognised schemes and any other collective investment scheme that invests only in admissible assets (including any derivatives or quasi-derivatives held by the scheme); and
- (2) derivatives and quasi-derivatives.
- 31/12/2004
Marking to market
PRU 1.3.12
See Notes
- 31/12/2004
PRU 1.3.13
See Notes
- 31/12/2004
PRU 1.3.14
See Notes
- 31/12/2004
Marking to model
PRU 1.3.15
See Notes
- 31/12/2004
PRU 1.3.16
See Notes
When the model used is developed by the firm, that model must be:
- (1) based on appropriate assumptions which have been assessed and challenged by suitably qualified parties independent of the development process; and
- (2) independently tested, including validation of the mathematics, assumptions, and software implementation.
- 31/12/2004
PRU 1.3.17
See Notes
- 31/12/2004
PRU 1.3.18
See Notes
- 31/12/2004
PRU 1.3.19
See Notes
- 31/12/2004
PRU 1.3.20
See Notes
- 31/12/2004
PRU 1.3.21
See Notes
- 31/12/2004
PRU 1.3.22
See Notes
- 31/12/2004
PRU 1.3.23
See Notes
- 31/12/2004
Independent price verification
PRU 1.3.24
See Notes
- 31/12/2004
PRU 1.3.25
See Notes
- 31/12/2004
Valuation adjustments or reserves
PRU 1.3.26
See Notes
- 31/12/2004
PRU 1.3.27
See Notes
- 31/12/2004
PRU 1.3.28
See Notes
- 31/12/2004
PRU 1.3.29
See Notes
The requirements referred to in PRU 1.3.26 R and PRU 1.3.28 R are:
- (1) a firm must consider the following adjustments or reserves: unearned credit spreads, close-out costs, operational risks, early termination, investing and funding costs, future administrative costs and, where appropriate, model risk; and
- (2) a firm must consider several factors when determining whether a valuation reserve is necessary for less liquid items. These factors include the amount of time it would take to hedge out the position/risks within the position; the average and volatility of bid/offer spreads; the availability of market quotes (number and identity of market makers); and the average and volatility of trading volumes.
- 31/12/2004
Valuation adjustments or reserves
PRU 1.3.30
See Notes
- 21/04/2005
- Past version of PRU 1.3.30 before 21/04/2005
Shares in, and debts due from, related undertakings
PRU 1.3.31
See Notes
PRU 1.3.11 R does not apply to shares in, and debts due from, a related undertaking that is:
- (1) a regulated related undertaking; or
- (2) an ancillary services undertaking; or
- (3) any other subsidiary undertaking, the shares of which a firm elects to value in accordance with PRU 1.3.35 R.
- 31/12/2004
PRU 1.3.32
See Notes
- 31/12/2004
PRU 1.3.33
See Notes
- 31/12/2004
PRU 1.3.34
See Notes
- 31/12/2004
PRU 1.3.35
See Notes
For the purposes of PRU 1.3.33 R, the value of the shares held in an undertaking referred to in PRU 1.3.31 R (1) or PRU 1.3.31R (3) is the sum of:
- (1) the regulatory surplus value of that undertaking; less
- (2) for the purposes of PRU 2.2.90 R, the book value of the total investments in the tier one capital resources and tier two capital resources of that undertaking by the firm and its related undertakings; or
- (3) for other purposes in PRU, the sum of:
- (a) the book value of the investments by the firm and its related undertakings in the tier two capital resources of the undertaking; and
- (b) if the undertaking is an insurance undertaking, its ineligible surplus capital and any restricted assets of the undertaking which have been excluded under PRU 8.3.41 R (1).
- 31/12/2004
PRU 1.3.36
See Notes
For the purposes of PRU 1.3.35 R (1), the regulatory surplus value of an undertaking referred to in PRU 1.3.31 R (1) or PRU 1.3.31R (3) is, subject to PRU 1.3.37 R, the sum of:
- (1) the tier one capital resources of the undertaking; plus
- (2) the tier two capital resources of the undertaking; less
- (3) the individual capital resources requirement of the undertaking.
- 31/12/2004
PRU 1.3.37
See Notes
- (1) Subject to PRU 1.3.38 R, for the purposes of PRU 1.3.36 R, only the relevant proportion of the:
- (a) tier one capital resources of the undertaking;
- (b) tier two capital resources of the undertaking;
- (c) individual capital resources requirement of the undertaking;
- is to be taken into account.
- (2) In (1), the relevant proportion is the proportion of the total number of shares issued by the undertaking held, directly or indirectly, by the firm.
- 31/12/2004
PRU 1.3.38
See Notes
- 31/12/2004
PRU 1.3.39
See Notes
For the purposes of PRU 1.3.35 R to PRU 1.3.38 R:
- (1) in relation to an undertaking referred to in PRU 1.3.31 R (1):
- (a) individual capital resources requirement has the meaning given by PRU 8.3.34 R;
- (b) the following expressions are to be construed in accordance with PRU 8.3.37 R:
- (i) tier one capital resources; and
- (ii) tier two capital resources;
- (c) ineligible surplus capital has the meaning given by PRU 8.3.67 R;
- (2) in relation to an undertaking referred to in PRU 1.3.31 R (3), the following expressions are to be construed as if that undertaking were an insurance holding company:
- (a) individual capital resources requirement;
- (b) tier one capital resources; and
- (c) tier two capital resources.
- 31/12/2004
PRU 1.3.40
See Notes
- 31/12/2004
PRU 1.3.41
See Notes
- 31/12/2004
PRU 1.3.42
See Notes
- 31/12/2004
Community co-insurance operations: general insurance business
PRU 1.3.43
See Notes
Where a relevant insurer determines the amount of a liability in order to make provision for outstanding claims under a Community co-insurance operation, then, if the leading insurer has informed the relevant insurer of the amount of the provision made by the leading insurer for such claims, the amount determined by the relevant insurer:
- (1) must be at least as great as the amount of the provision made by the leading insurer; or
- (2) in a case where it is not the practice in the United Kingdom to make such provision separately, must be sufficient, when all liabilities are taken into account, to include provision at least as great as that made by the leading insurer for such claims;
- 31/12/2004
PRU 1.4
Prudential risk management and associated systems and controls
- 31/12/2004
Application
PRU 1.4.1
See Notes
PRU 1.4 applies to an insurer unless it is:
- (1) a non-directive friendly society; or
- (2) an incoming EEA firm; or
- (3) an incoming Treaty firm.
- 31/12/2004
PRU 1.4.2
See Notes
PRU 1.4 applies to:
- (1) an EEA-deposit insurer; and
- (2) a Swiss general insurer;
only in respect of the activities of the firm carried on from a branch in the United Kingdom.
- 31/12/2004
Purpose
PRU 1.4.3
See Notes
- 31/12/2004
PRU 1.4.4
See Notes
- 31/12/2004
PRU 1.4.5
See Notes
- 31/12/2004
How to interpret PRU 1.4
PRU 1.4.6
See Notes
- 31/12/2004
PRU 1.4.7
See Notes
- 31/12/2004
PRU 1.4.8
See Notes
Appropriate systems and controls for the management of prudential risk will vary from firm to firm. Therefore most of the material in PRU 1.4 is guidance. In interpreting this guidance, a firm should have regard to its own particular circumstances. Following from SYSC 3.1.2 G, this should include considering the nature, scale and complexity of its business, which may be influenced by factors such as:
- (1) the diversity of its operations, including geographical diversity;
- (2) the volume and size of its transactions; and
- (3) the degree of risk associated with each area of its operation.
- 31/12/2004
PRU 1.4.9
See Notes
- 31/12/2004
The role of systems and controls in a prudential context
PRU 1.4.10
See Notes
- 31/12/2004
The prudential responsibilities of senior management and the apportionment of those responsibilities
PRU 1.4.11
See Notes
Ultimate responsibility for the management of prudential risks rests with a firm's governing body and relevant senior managers, and in particular with those individuals that undertake the firm's governing functions and the apportionment and oversight function. In particular, these responsibilities should include:
- (1) overseeing the establishment of an appropriate business plan and risk management strategy;
- (2) overseeing the development of appropriate systems for the management of prudential risks;
- (3) establishing adequate internal controls; and
- (4) ensuring that the firm maintains adequate financial resources.
- 31/12/2004
The delegation of responsibilities within the firm
PRU 1.4.12
See Notes
- 31/12/2004
PRU 1.4.13
See Notes
- 31/12/2004
Firms subject to risk management on a group basis
PRU 1.4.14
See Notes
Some firms organise the management of their prudential risks on a stand-alone basis. In some cases, however, the management of a firm's prudential risks may be entirely or largely subsumed within a whole group or sub-group basis.
- (1) The latter arrangement may still comply with the FSA's prudential policy on systems and controls if the firm's governing body formally delegates the functions that are to be carried out in this way to the persons or bodies that are to carry them out. Before doing so, however, the firm's governing body should have explicitly considered the arrangement and decided that it is appropriate and that it enables the firm to meet the FSA's prudential policy on systems and controls. The firm should notify the FSA if the management of its prudential risks is to be carried out in this way.
- (2) Where the management of a firm's prudential risks is largely, but not entirely, subsumed within a whole group or sub-group basis, the firm should ensure that any prudential issues that are specific to the firm are:
- (a) identified and adequately covered by those to whom it has delegated certain prudential risk management tasks; or
- (b) dealt with by the firm itself.
- 31/12/2004
PRU 1.4.15
See Notes
- 31/12/2004
PRU 1.4.16
See Notes
- 31/12/2004
Business planning and risk management
PRU 1.4.17
See Notes
- 31/12/2004
PRU 1.4.18
See Notes
- 31/12/2004
PRU 1.4.19
See Notes
When establishing and maintaining its business plan and prudential risk management systems, a firm must document:
- (1) an explanation of its overall business strategy, including its business objectives;
- (2) a description of, as applicable, its policies towards market, credit (including provisioning), liquidity, operational, insurance and group risk (that is, its risk policies), including its appetite or tolerance for these risks and how it identifies, measures or assesses, monitors and controls these risks;
- (3) the systems and controls that it intends to use in order to ensure that its business plan and risk policies are implemented correctly;
- (4) a description of how the firm accounts for assets and liabilities, including the circumstances under which items are netted, included or excluded from the firm's balance sheet and the methods and assumptions for valuation;
- (5) appropriate financial projections and the results of its stress testing and scenario analysis (see PRU 1.2 Adequacy of financial resources); and
- (6) details of, and the justification for, the methods and assumptions used in financial projections and stress testing and scenario analysis.
- 31/12/2004
PRU 1.4.20
See Notes
The prudential risk management systems referred to in PRU 1.4.18 R and PRU 1.4.19 R are the means by which a firm is able to:
- (1) identify the prudential risks that are inherent in its business plan, operating environment and objectives, and determine its appetite or tolerance for these risks;
- (2) measure or assess its prudential risks;
- (3) monitor its prudential risks; and
- (4) control or mitigate its prudential risks.
PRU 5.1.78 E is an evidential provision relating to PRU 1.4.18 R concerning risk management systems in respect of liquidity risk arising from substantial exposures in foreign currencies.
- 31/12/2004
PRU 1.4.21
See Notes
- 31/12/2004
PRU 1.4.22
See Notes
A firm's business plan and risk management systems should be:
- (1) effectively communicated so that all employees and contractors understand and adhere to the procedures related to their own responsibilities;
- (2) regularly updated and revised, in particular when there is significant new information or when actual practice or performance differs materially from the documented strategy, policy or systems.
- 31/12/2004
PRU 1.4.23
See Notes
- 31/12/2004
PRU 1.4.24
See Notes
- 31/12/2004
PRU 1.4.25
See Notes
- 31/12/2004
Internal controls: introduction
PRU 1.4.26
See Notes
- 31/12/2004
PRU 1.4.27
See Notes
- 31/12/2004
PRU 1.4.28
See Notes
The precise role and organisation of internal controls can vary from firm to firm. However, a firm's internal controls should normally be concerned with assisting its governing body and relevant senior managers to participate in ensuring that it meets the following objectives:
- (1) safeguarding both the assets of the firm and its customers, as well as identifying and managing liabilities;
- (2) maintaining the efficiency and effectiveness of its operations;
- (3) ensuring the reliability and completeness of all accounting, financial and management information; and
- (4) ensuring compliance with its internal policies and procedures as well as all applicable laws and regulations.
- 31/12/2004
PRU 1.4.29
See Notes
When determining the adequacy of its internal controls, a firm should consider both the potential risks that might hinder the achievement of the objectives listed in PRU 1.4.28 G, and the extent to which it needs to control these risks. More specifically, this should normally include consideration of:
- (1) the appropriateness of its reporting and communication lines (see SYSC 3.2.2 G);
- (2) how the delegation or contracting of functions or activities to employees, appointed representatives or other third parties (for example outsourcing) is to be monitored and controlled (see SYSC 3.2.3 G to SYSC 3.2.4 G, PRU 1.4.12 G to PRU 1.4.16 G and PRU 1.4.33 G; additional guidance on the management of outsourcing arrangements is also provided in SYSC 3A.9);
- (3) the risk that a firm's employees or contractors might accidentally or deliberately breach a firm's policies and procedures (see SYSC 3A.6.3 G);
- (4) the need for adequate segregation of duties (see SYSC 3.2.5 G and PRU 1.4.30 G to PRU 1.4.33 G);
- (5) the establishment and control of risk management committees (see PRU 1.4.34 G to PRU 1.4.37 G);
- (6) the need for risk assessment and the establishment of a risk assessment function (see SYSC 3.2.10 G and PRU 1.4.38 G to PRU 1.4.41 G); and
- (7) the need for internal audit and the establishment of an internal audit function and audit committee (see SYSC 3.2.15 G to SYSC 3.2.16 G and PRU 1.4.42 G to PRU 1.4.45 G).
- 31/12/2004
Internal controls: segregation of duties
PRU 1.4.30
See Notes
The effective segregation of duties is an important internal control in the prudential context. In particular, it helps to ensure that no one individual is completely free to commit a firm's assets or incur liabilities on its behalf. Segregation can also help to ensure that a firm's governing body receives objective and accurate information on financial performance, the risks faced by the firm and the adequacy of its systems. In this regard, a firm should ensure that there is adequate segregation of duties between employees involved in:
- (1) taking on or controlling risk (which could include risk mitigation);
- (2) risk assessment (which includes the identification and analysis of risk); and
- (3) internal audit.
- 31/12/2004
PRU 1.4.31
See Notes
- 31/12/2004
PRU 1.4.32
See Notes
- 31/12/2004
PRU 1.4.33
See Notes
Where a firm outsources a controlled function, such as internal audit, it should take reasonable steps to ensure that every individual involved in the performance of this service is independent from the individuals who perform its external audit. This should not prevent services from being undertaken by a firm's external auditors provided that:
- (1) the work is carried out under the supervision and management of the firm's own internal staff; and
- (2) potential conflicts of interest between the provision of external audit services and the provision of controlled functions are properly managed.
- 31/12/2004
Internal controls: risk management committees
PRU 1.4.34
See Notes
- 31/12/2004
PRU 1.4.35
See Notes
Where a firm decides to create one or more risk management committee(s), adequate internal controls should be put in place to ensure that these committees are effective and that their actions are consistent with the objectives outlined in PRU 1.4.28 G. This should normally include consideration of the following:
- (1) setting clear terms of reference, including membership, reporting lines and responsibilities of each committee;
- (2) setting limits on their authority;
- (3) agreeing routine reporting and non-routine escalation procedures;
- (4) agreeing the minimum frequency of committee meetings; and
- (5) reviewing the performance of these risk management committees.
- 31/12/2004
PRU 1.4.36
See Notes
- 31/12/2004
PRU 1.4.37
See Notes
The effective use of risk management committees can help to enhance a firm's internal controls. In establishing and maintaining its risk management committees, a firm should consider:
- (1) their membership, which should normally include relevant senior managers (such as the head of group risk, head of legal, and the heads of market, credit, liquidity and operational risk, etc.), business line managers, risk management personnel and other appropriately skilled people, for example, actuaries, lawyers, accountants, IT specialists, etc.;
- (2) using these committees to:
- (i) inform the decisions made by a firm's governing body regarding its appetite or tolerance for risk taking;
- (ii) highlight risk management issues that may require attention by the governing body;
- (iii) consider risk at the firm-wide level and, within delegated limits, to determine the allocation of risk limits and financial resources across business lines;
- (iv) consider how exposures may be unwound, hedged, or otherwise mitigated, as appropriate.
- 31/12/2004
Internal controls: risk assessment
PRU 1.4.38
See Notes
Risk assessment is the process through which a firm identifies and analyses (using both qualitative and quantitative methodologies) the risks that it faces. A firm's risk assessment activities should normally include consideration of:
- (1) its total exposure to risk at the firm-wide level (that is, its exposure across business lines and risk categories);
- (2) capital allocation and the need to calculate risk weighted returns for different business lines;
- (3) the potential correlations that can exist between the risks in different business lines; this should also include looking for risks to which a firm's business plan is particularly sensitive, such as interest rate risk, or multiple dealings with the same counterparty;
- (4) the use of stress tests and scenario analysis;
- (5) whether there are risks inherent in the firm's business that are not being addressed adequately;
- (6) the risk adjusted return that the firm is achieving; and
- (7) the adequacy and timeliness of management information on market, credit, insurance, liquidity, operational and group risks from the business lines, including risk limit utilisation.
- 31/12/2004
PRU 1.4.39
See Notes
- 31/12/2004
PRU 1.4.40
See Notes
- 31/12/2004
PRU 1.4.41
See Notes
- 31/12/2004
Internal audit
PRU 1.4.42
See Notes
A firm should ensure that it has appropriate mechanisms in place to assess and monitor the appropriateness and effectiveness of its systems and controls. This should normally include consideration of:
- (1) adherence to and effectiveness of, as appropriate, its market, credit, liquidity, operational, insurance, and group risk policies;
- (2) whether departures and variances from its documented systems and controls and risk policies have been adequately documented and appropriately reported, including whether appropriate pre-clearance authorisation has been sought for material departures and variances;
- (3) adherence to and effectiveness of its accounting policies, and whether accounting records are complete and accurate;
- (4) adherence to and effectiveness of its management reporting arrangements, including the timeliness of reporting, and whether information is comprehensive and accurate; and
- (5) adherence to FSA rules and regulatory prudential standards.
- 31/12/2004
PRU 1.4.43
See Notes
- 31/12/2004
PRU 1.4.44
See Notes
- 31/12/2004
PRU 1.4.45
See Notes
- 31/12/2004
Management information
PRU 1.4.46
See Notes
- 31/12/2004
PRU 1.4.47
See Notes
The role of management information should be to help a firm's governing body and senior managers to understand risk at a firm-wide level. In so doing, it should help them to:
- 31/12/2004
PRU 1.4.48
See Notes
A firm should consider what information needs to be made available to its governing body and senior managers. Some possible examples include:
- (1) firm-wide information such as the overall profitability and value of a firm and its total exposure to risk;
- (2) reports from committees to which the governing body has delegated risk management tasks, if applicable;
- (3) reports from a firm's internal audit and risk assessment functions, if applicable, including exception reports, where risk limits and policies have been breached or systems circumvented;
- (4) financial projections under expected and abnormal (that is, stressed) conditions;
- (5) reconciliation of actual profit and loss to previous financial projections and an analysis of any significant variances;
- (6) matters which require a decision from the governing body or senior managers, for example a significant variation to a business plan, amendments to risk limits, the creation of a new business line, etc;
- (7) compliance with FSA rules and regulatory prudential standards;
- (8) risk weighted returns; and
- (9) liquidity and funding requirements.
- 31/12/2004
PRU 1.4.49
See Notes
The management information that is provided to a firm's governing body and senior managers should have the following characteristics:
- (1) it should be timely, its frequency being determined by factors such as:
- (a) the volatility of the business in which the firm is engaged (that is, the speed at which its risks can change);
- (b) any time constraints on when action needs to be taken; and
- (c) the level of risk that the firm is exposed to, compared to its available financial resources and tolerance for risk;
- (2) it should be reliable, having regard to the fact that it may be necessary to sacrifice a degree of accuracy for timeliness; and
- (3) it should be presented in a manner that highlights any relevant issues on which those undertaking governing functions should focus particular attention.
- 31/12/2004
PRU 1.4.50
See Notes
- 31/12/2004
Record keeping
PRU 1.4.51
See Notes
SYSC 3.2.20 R requires a firm to take reasonable care to make and retain adequate records. The following policy on record keeping supplements SYSC 3.2.20 R by providing some additional rules and guidance on record keeping in a prudential context. The purpose of this policy is to:
- (1) facilitate the prudential supervision of a firm by ensuring that adequate information is available regarding its past/current financial situation and business activities (which includes the design and implementation of systems and controls); and
- (2) help the FSA to satisfy itself that a firm is operating in a prudent manner and is not prejudicing the interests of its customers or market confidence.
- 31/12/2004
PRU 1.4.52
See Notes
- 31/12/2004
PRU 1.4.53
See Notes
- (1) A firm must make and regularly update accounting and other records that are sufficient to enable the firm to demonstrate to the FSA:
- (a) that the firm is financially sound and has appropriate systems and controls;
- (b) the firm's financial position and exposure to risk (to a reasonable degree of accuracy); and
- (c) the firm's compliance with the rules in PRU.
- (2) The records in (1) must be retained for a minimum of three years, or longer as appropriate.
- 31/12/2004
PRU 1.4.54
See Notes
- 31/12/2004
PRU 1.4.55
See Notes
- 31/12/2004
PRU 1.4.56
See Notes
- 31/12/2004
PRU 1.4.57
See Notes
- 31/12/2004
PRU 1.4.58
See Notes
- 31/12/2004
PRU 1.4.59
See Notes
- 31/12/2004
PRU 1.4.60
See Notes
A firm must keep the records required in PRU 1.4.53 R in the United Kingdom, except where:
- (1) they relate to business carried on from an establishment in a country or territory that is outside the United Kingdom; and
- (2) they are kept in that country or territory.
- 31/12/2004
PRU 1.4.61
See Notes
- 31/12/2004
PRU 1.4.62
See Notes
- 31/12/2004
PRU 1.4.63
See Notes
- 31/12/2004
PRU 1.4.64
See Notes
- 31/12/2004
PRU 1.5
to follow
- 31/12/2004
PRU 1.6
to follow
- 31/12/2004
PRU 1.7
to follow
- 31/12/2004
PRU 1.8
Actions for damages
- 31/12/2004
PRU 1.8.1
See Notes
- 11/08/2004
PRU 2
Capital
PRU 2.1
Calculation of capital resources requirements
- 31/12/2004
Application
PRU 2.1.1
See Notes
PRU 2.1 applies to an insurer unless it is:
- (1) a non-directive friendly society; or
- (2) a Swiss general insurer; or
- (3) an EEA-deposit insurer; or
- (4) an incoming EEA firm; or
- (5) an incoming Treaty firm.
- 31/12/2004
PRU 2.1.2
See Notes
- 31/12/2004
PRU 2.1.3
See Notes
- (1) PRU 2.1 applies to a firm in relation to the whole of its business, except where a particular provision provides for a narrower scope.
- (2) Where a firm carries on both long-term insurance business and general insurance business, PRU 2.1 applies separately to each type of business.
- 31/12/2004
PRU 2.1.4
See Notes
- 31/12/2004
Purpose
PRU 2.1.6
See Notes
- 31/12/2004
PRU 2.1.7
See Notes
This section (PRU 2.1) sets capital resources requirements for a firm. PRU 2.2 sets out how, for the purpose of this, the amounts or values of capital, assets and liabilities are to be determined. More detailed rules relating to capital, assets and liabilities are also set out in the following chapters and sections:
PRU 2.1 and PRU 2.2 include appropriate cross-references to these chapters and sections.
- 31/12/2004
PRU 2.1.8
See Notes
- 31/12/2004
Main requirements
PRU 2.1.9
See Notes
- (1) A firm must maintain at all times capital resources equal to or in excess of its capital resources requirement (CRR).
- (2) A firm which is a participating insurance undertaking and, in relation to its own group capital resources, is in compliance with PRU 8.3.9 R, is deemed to comply with (1).
- 31/12/2004
PRU 2.1.10
See Notes
- 31/12/2004
PRU 2.1.11
See Notes
- 31/12/2004
PRU 2.1.12
See Notes
- 31/12/2004
PRU 2.1.13
See Notes
- 31/12/2004
Calculation of the CRR
PRU 2.1.14
See Notes
- 31/12/2004
PRU 2.1.15
See Notes
The CRR for any firm to which this rule applies (see PRU 2.1.16 R and PRU 2.1.17 R) is the higher of:
- (1) the MCR in PRU 2.1.22 R; and
- (2) the ECR in PRU 2.1.34 R.
- 31/12/2004
PRU 2.1.16
See Notes
Subject to PRU 2.1.17 R, PRU 2.1.15 R applies to a firm carrying on long-term insurance business, other than:
- (1) a non-directive mutual;
- (2) a firm which has no with-profits insurance liabilities; and
- (3) a firm which has with-profits insurance liabilities that are, and at all times since 31 December 2004 (the coming into force of PRU 2.1.15 R) have remained, less than £500 million.
- 31/12/2004
PRU 2.1.17
See Notes
PRU 2.1.15 R also applies to a firm of a type listed in PRU 2.1.16 R (3) if:
- (1) the firm makes an election that PRU 2.1.15 R is to apply to it; and
- (2) that election is made by written notice given to the FSA in a way that complies with the requirements for written notice in SUP 15.7.
- 31/12/2004
PRU 2.1.18
See Notes
- 31/12/2004
PRU 2.1.19
See Notes
- 31/12/2004
PRU 2.1.20
See Notes
- 31/12/2004
Calculation of the MCR
PRU 2.1.21
See Notes
For a firm carrying on general insurance business, the MCR in respect of that business is the higher of:
- (1) the base capital resources requirement for general insurance business applicable to that firm; and
- (2) the general insurance capital requirement.
- 31/12/2004
PRU 2.1.22
See Notes
For a firm carrying on long-term insurance business, the MCR in respect of that business is the higher of:
- (1) the base capital resources requirement for long-term insurance business applicable to that firm; and
- (2) the sum of:
- (a) the long-term insurance capital requirement; and
- (b) the resilience capital requirement.
- 31/12/2004
PRU 2.1.23
See Notes
- 31/12/2004
PRU 2.1.24
See Notes
- 31/12/2004
Calculation of the base capital resources requirement
PRU 2.1.25
See Notes
- 31/12/2004
PRU 2.1.26
See Notes
Firm type | Amount: Currency equivalent of | |
General insurance business | ||
Liability insurer (classes 10-15) |
Directive mutual | €2.25 million |
Non-directive insurer | €300,000 | |
Overseas firm | €1.5 million | |
Other | €3 million | |
Other insurer | Directive mutual | €1.5 million |
Non-directive insurer (classes 1 to 8, 16 or 18) |
€225,000 | |
Non-directive insurer (classes 9 or 17) |
€150,000 | |
Overseas firm | €1 million | |
Other | €2 million | |
Long-term insurance business | ||
Mutual | Directive | €2.25 million |
Non-directive | €600,000 | |
Overseas firm | €1.5 million | |
Any other insurer | €3 million |
- 31/12/2004
PRU 2.1.27
See Notes
- (1) Subject to (2) and (3), the amount of the base capital resources requirement specified in the last column of the table in PRU 2.1.26 R for a firm which is not a non-directive insurer will increase each year, starting on the review date of 20 September 2005 (and annually after that), by the percentage change in the European index of consumer prices (comprising all EU member states, as published by Eurostat) from 20 March 2002, to the relevant review date, rounded up to a multiple of €100,000.
- (2) In any year, if the percentage change since the last increase is less than 5%, then there will be no increase.
- (3) The increase will take effect 30 days after the EU Commission has informed the European Parliament and Council of its review and the relevant percentage change.
- 31/12/2004
PRU 2.1.28
See Notes
- 31/12/2004
PRU 2.1.29
See Notes
- 31/12/2004
Calculation of the general insurance capital requirement
PRU 2.1.30
See Notes
A firm must calculate its general insurance capital requirement as the highest of:
- (1) the premiums amount;
- (2) the claims amount; and
- (3) the brought forward amount.
- 31/12/2004
PRU 2.1.31
See Notes
- 31/12/2004
Calculation of the long-term insurance capital requirement
PRU 2.1.32
See Notes
A firm must calculate its long-term insurance capital requirement as the sum of:
- (1) the insurance death risk capital component;
- (2) the insurance health risk capital component;
- (3) the insurance expense risk capital component; and
- (4) the insurance market risk capital component.
- 31/12/2004
PRU 2.1.33
See Notes
- 31/12/2004
Calculation of the ECR
PRU 2.1.34
See Notes
For a firm carrying on long-term insurance business, the ECR in respect of that business is the sum of:
- (1) the long-term insurance capital requirement;
- (2) the resilience capital requirement; and
- (3) the with-profits insurance capital component.
- 31/12/2004
PRU 2.1.35
See Notes
- 31/12/2004
Monitoring requirements
PRU 2.1.36
See Notes
- 31/12/2004
PRU 2.1.37
See Notes
- 31/12/2004
PRU 2.1.38
See Notes
- 31/12/2004
PRU 2.2
Capital resources
- 31/12/2004
Application
PRU 2.2.1
See Notes
PRU 2.2 applies to an insurer unless it is:
- (1) a non-directive friendly society; or
- (2) a Swiss general insurer; or
- (3) an EEA-deposit insurer; or
- (4) an incoming EEA firm; or
- (5) an incoming Treaty firm.
- 31/12/2004
Purpose
PRU 2.2.2
See Notes
- 31/10/2004
Principles underlying the definition of capital resources
PRU 2.2.3
See Notes
- 31/10/2004
PRU 2.2.4
See Notes
- 31/10/2004
Tier one capital
PRU 2.2.5
See Notes
Tier one capital typically has the following characteristics:
- (1) it is able to absorb losses;
- (2) it is permanent;
- (3) it ranks for repayment upon winding up after all other debts and liabilities; and
- (4) it has no fixed costs, that is, there is no inescapable obligation to pay dividends or interest.
- 31/10/2004
PRU 2.2.6
See Notes
- 31/10/2004
Upper and lower tier two capital
PRU 2.2.7
See Notes
Tier two capital includes forms of capital that do not meet the requirements for permanency and absence of fixed servicing costs that apply to tier one capital. Tier two capital includes, for example:
- (1) capital which is perpetual (that is, has no fixed term) but cumulative (that is, servicing costs cannot be waived at the issuer's option, although they may be deferred - for example cumulative preference shares); perpetual capital instruments may be included in upper tier two capital; and
- (2) capital which is not perpetual (that is, it has a fixed term) and which may also have fixed servicing costs that cannot generally be either waived or deferred, for example subordinated debt. Such capital should normally be of a medium to long-term maturity (that is, an original maturity of at least five years). Dated capital instruments are included in lower tier two capital.
- 31/12/2004
- Past version of PRU 2.2.7 before 31/12/2004
Deductions from capital
PRU 2.2.8
See Notes
- 31/10/2004
PRU 2.2.9
See Notes
- 31/12/2004
Calculation of capital resources
PRU 2.2.10
See Notes
- 31/10/2004
PRU 2.2.11
See Notes
Liabilities | Assets | ||
Borrowings | 100 | Admissible assets | 350 |
Ordinary shares | 200 | Intangible assets | 100 |
Profit and loss account and other reserves | 100 | Other inadmissible assets | 100 |
Perpetual subordinated debt | 150 | ||
Total | 550 | Total | 550 |
Calculation of capital resources: eligible assets less foreseeable liabilities | |||
Total assets | 550 | ||
less intangible assets | (100) | ||
less inadmissible assets | (100) | ||
less liabilities (borrowings) | (100) | ||
Capital resources | 250 | ||
Calculation of capital resources: components of capital | |||
Ordinary shares | 200 | ||
Profit and loss account and other reserves | 100 | ||
Perpetual subordinated debt | 150 | ||
less intangible assets | (100) | ||
less inadmissible assets | (100) | ||
Capital resources | 250 |
- 31/10/2004
PRU 2.2.12
See Notes
- 31/10/2004
PRU 2.2.13
See Notes
- 31/10/2004
PRU 2.2.14
See Notes
Related text | Included in the calculation of capital resources | |
A √ denotes that the item is included in the calculation of a firm's capital resources: a x denotes that the item is not included in the calculation of a firm's capital resources. | ||
(A) Core tier one capital: | ||
Permanent share capital | PRU 2.2.36 R | √ |
Profit and loss account and other reserves | PRU 2.2.76 R and PRU 2.2.77 R | √ |
Share premium account | None | √ |
Externally verified interim net profits | PRU 2.2.82 R | √ |
Positive valuation differences | PRU 2.2.78 R | √ |
Fund for future appropriations | None | √ |
(B) Perpetual non-cumulative preference shares | ||
Perpetual non-cumulative preference shares | PRU 2.2.50 R | √ |
(C) Innovative tier one capital | ||
Innovative tier one instruments | PRU 2.2.52 R to PRU 2.2.75 R | √ |
(D) Total tier one capital before deductions = A + B + C | ||
(E) Deductions from tier one capital: | ||
Investments in own shares | None | √ |
Intangible assets | PRU 2.2.84 R | √ |
Amounts deducted from technical provisions for discounting and other negative valuation differences | PRU 2.2.78 R to PRU 2.2.81 R | √ |
(F) Total tier one capital after deductions = D - E | ||
(G) Upper tier two capital: | ||
Perpetual cumulative preference shares | PRU 2.2.101 R | √ |
Perpetual subordinated debt | PRU 2.2.101 R | √ |
Perpetual subordinated securities | PRU 2.2.101 R | √ |
(H) Lower tier two capital | ||
Fixed term preference shares | PRU 2.2.108 R | √ |
Fixed term subordinated debt | PRU 2.2.108 R | √ |
Fixed term subordinated securities | PRU 2.2.108 R | √ |
(I) Total tier two capital = G + H | ||
(J) Positive adjustments for related undertakings | ||
Related undertakings that are regulated related undertakings (other than insurance undertakings) | PRU 2.2.90 R | √ |
(K) Total capital after positive adjustments for regulated related undertakings that are not insurance undertakings but before deductions = F + I + J | ||
(L) Deductions from total capital | ||
Inadmissible assets | PRU 2.2.86 R & PRU 2 Annex 1R | √ |
Assets in excess of market risk and counterparty limits | PRU 3.2.22 R | √ |
Related undertakings that are ancillary services undertakings | PRU 2.2.89 R | √ |
Negative adjustments for related undertakings that are regulated related undertakings (other than insurance undertakings) | PRU 2.2.90 R | √ |
(M) Total capital after deductions = K - L | ||
(N) Other capital resources*: | ||
Unpaid share capital or, in the case of a mutual, unpaid initial funds and calls for supplementary contributions | PRU 2.2.126 G to PRU 2.2.128 G | × |
Implicit items | PRU 2 Annex 2 G | × |
(O) Total capital resources after deductions = M + N | ||
* Items in section (N) of the table can be included in capital resources if subject to a waiver under section 148 of the Act. |
- 31/10/2004
Limits on the use of different forms of capital
PRU 2.2.15
See Notes
- 31/10/2004
PRU 2.2.16
See Notes
At least 50% of a firm's MCR must be accounted for by the sum of:
- (1) the amount calculated at stage A of the calculation in PRU 2.2.14 R; and
- (2) notwithstanding PRU 2.2.20 R (1), the amount calculated at stage B of the calculation in PRU 2.2.14 R;
- 31/10/2004
PRU 2.2.17
See Notes
A firm carrying on long-term insurance business must meet the higher of:
- (1) 1/3 of the long-term insurance capital requirement; and
- (2) the base capital resources requirement;
with the sum of the items listed at stages A, B, G and H less the sum of the items listed at stage E in PRU 2.2.14 R.
- 31/10/2004
PRU 2.2.18
See Notes
A firm carrying on general insurance business must meet the higher of:
- (1) 1/3 of the general insurance capital requirement; and
- (2) the base capital resources requirement;
with the sum of the items listed at stages A, B, G and H less the sum of the items listed at stage E in PRU 2.2.14 R.
- 31/10/2004
PRU 2.2.19
See Notes
- 31/10/2004
PRU 2.2.20
See Notes
In relation to a firm's tier one capital resources calculated at stage F of the calculation in PRU 2.2.14 R:
- (1) at least 50% must be accounted for by core tier one capital; and
- (2) no more than 15% may be accounted for by innovative tier one capital.
- 31/10/2004
PRU 2.2.21
See Notes
- 31/10/2004
PRU 2.2.22
See Notes
- 31/10/2004
PRU 2.2.23
See Notes
Subject to PRU 2.2.24 R, a firm must exclude from the calculation of its capital resources the following:
- (1) the amount (if any) by which tier two capital resources exceed the amount calculated at stage F of the calculation in PRU 2.2.14 R; and
- (2) the amount (if any) by which lower tier two capital resources exceed 50% of the amount calculated at stage F of the calculation in PRU 2.2.14 R.
- 31/10/2004
PRU 2.2.24
See Notes
At least 75% of a firm's MCR must be accounted for by the sum of:
- (1) the amount calculated at stage A plus stage B less stage E of the calculation in PRU 2.2.14 R; and
- (2) the amount calculated at stage G of the calculation in PRU 2.2.14 R.
- 31/10/2004
PRU 2.2.25
See Notes
- 31/10/2004
PRU 2.2.26
See Notes
- 31/10/2004
Characteristics of tier one capital
PRU 2.2.27
See Notes
A firm may not include a share in, or another investment in, or external contribution to the capital of, that firm in its tier one capital resources unless it complies with the following conditions:
- (1) it is included in one of the categories in PRU 2.2.28 R;
- (2) it is not excluded by any of the rules in PRU 2.2; and
- (3) it complies with the conditions set out in PRU 2.2.29 R.
- 31/10/2004
PRU 2.2.28
See Notes
The categories referred to in PRU 2.2.27 R (1) are:
- (1) permanent share capital;
- (2) a perpetual non-cumulative preference share; and
- (3) an innovative tier one instrument.
- 31/10/2004
PRU 2.2.29
See Notes
Subject to PRU 2.2.30 R, an item of capital in a firm complies with PRU 2.2.27 R (3) if:
- (1) it is issued by the firm;
- (2) it is fully paid and the proceeds of issue are immediately and fully available to the firm;
- (3) it:
- (a) cannot be redeemed at all or can only be redeemed on a winding up of the firm; or
- (b) complies with the conditions in PRU 2.2.38 R and PRU 2.2.39 R;
- (4) any coupon is either non-cumulative or, if it is cumulative, it complies with PRU 2.2.40 R;
- (5) it is able to absorb losses to allow the firm to continue trading and in the case of an innovative tier one instrument it complies with PRU 2.2.56 R to PRU 2.2.58 R;
- (6) it ranks for repayment upon winding up no higher than a share of a company incorporated under the Companies Act 1985 or the Companies (Northern Ireland) Order 1986 (whether or not it is such a share);
- (7) the firm has the right to choose whether or not to pay a coupon on it in cash at any time;
- (8) the description of its characteristics used in its marketing is consistent with the characteristics required to satisfy PRU 2.2.29 R (1) to PRU 2.2.29 R (7).
- 31/10/2004
PRU 2.2.30
See Notes
- (1) An item of capital does not comply with PRU 2.2.27 R (3) if the issue of that item of capital by the firm is connected with one or more other transactions which, when taken together with the issue of that item, could produce the effect described in (2).
- (2) The effect referred to in (1) is a reduction in the economic benefit intended to be conferred on the firm by the issue of the item of capital which means that the item of capital no longer displays all of the characteristics set out in PRU 2.2.29 R (1) to (8).
- 31/10/2004
PRU 2.2.31
See Notes
- 31/12/2004
PRU 2.2.32
See Notes
- 31/10/2004
PRU 2.2.33
See Notes
- 31/10/2004
PRU 2.2.34
See Notes
- 31/12/2004
PRU 2.2.35
See Notes
A firm may not include a share in its tier one capital resources unless (in addition to complying with the other relevant rules in PRU 2.2):
- (1) (in the case of a firm that is a company as defined in the Companies Act 1985 or the Companies (Northern Ireland) Order 1986) it is "called-up share capital" within the meaning given to that term in that Act or, as the case may be, that Order; or
- (2) (in the case of any other firm) it is:
- (a) in economic terms; and
- (b) in its characteristics as capital (including loss absorbency, permanency, ranking for repayment and fixed costs);
- substantially the same as called-up share capital falling into (1).
- 31/10/2004
Core tier one capital: permanent share capital
PRU 2.2.36
See Notes
Permanent share capital means an item of capital which (in addition to satisfying PRU 2.2.29 R) meets the following conditions:
- (1) it is:
- (a) an ordinary share; or
- (b) a members' contribution; or
- (c) part of the initial fund of a mutual;
- (2) any coupon on it is not cumulative, and the firm has both the right to choose whether or not to pay a coupon and the right to choose the amount of that coupon ; and
- (3) the terms upon which it is issued do not permit redemption and it is otherwise incapable of being redeemed to at least the degree of an ordinary share issued by a company incorporated under the Companies Act 1985 or the Companies (Northern Ireland) Order 1986 (whether or not it is such a share).
- 31/10/2004
PRU 2.2.37
See Notes
- 31/10/2004
Basic rules about redemption and cumulative coupons
PRU 2.2.38
See Notes
In relation to a perpetual non-cumulative preference share which is redeemable, a firm may not include it in its tier one capital resources unless its contractual terms are such that:
- (1) it is redeemable only at the option of the firm; and
- (2) the firm cannot exercise that redemption right:
- (a) on or before the fifth anniversary of its date of issue;
- (b) unless it has given notice to the FSA in accordance with PRU 2.2.72 R; and
- (c) unless at the time of exercise of that right it complies with PRU 2.1.9 R and will continue to do so after redemption.
- 31/10/2004
PRU 2.2.39
See Notes
In relation to an innovative tier one instrument which is redeemable and which, either:
- (1) is or may become subject to a step-up; or
- (2) satisfies PRU 2.2.54 R (2);
a firm may not include it in its tier one capital resources unless it complies with the conditions in PRU 2.2.38 R, except that in PRU 2.2.38 R (2)(a) "fifth anniversary" is replaced by "tenth anniversary".
- 31/10/2004
PRU 2.2.40
See Notes
- 31/10/2004
PRU 2.2.41
See Notes
- 31/12/2004
Further guidance on redemption
PRU 2.2.42
See Notes
The rules in PRU 2.2 about redemption of potential tier one instruments fall into three classes:
- (1) rules defining whether a firm's potential tier one instruments are eligible for inclusion in its tier one capital resources at all;
- (2) rules defining whether a firm's potential tier one instruments are eligible for inclusion in its permanent share capital; and
- (3) rules defining whether a firm's potential tier one instruments must be classified as innovative tier one instruments.
- 31/10/2004
PRU 2.2.43
See Notes
The rules about redemption that are relevant to deciding whether a firm's potential tier one instruments are eligible for inclusion in its tier one capital resources at all are as follows.
- (1) PRU 2.2.29 R (3) and PRU 2.2.39 R have the following provisions.
- (a) Any capital instrument that is redeemable at the option of the holder cannot form part of a firm's tier one capital resources. Instead, if it is redeemable at all, a capital instrument should only be redeemable at the option of the firm.
- (b) A redemption right should be exercisable no earlier than the fifth anniversary of the date of issue. However, if an instrument is an innovative tier one instrument which is subject to a step-up or any other economic incentive to redeem, any such redemption should be exercisable no earlier than the tenth anniversary.
- (c) Any redemption proceeds should be payable only in cash or in shares.
- (d) The terms of the capital instrument should provide that any redemption right should not be exercised unless and until the firm has given the notice to the FSA required under PRU 2.2.72 R.
- (e) Any redemption right should not be exercisable unless both before and after the redemption the firm complies with PRU 2.1.9 R (which requires that a firm has sufficient capital resources to meet its capital resources requirement).
- (2) Under PRU 2.2.70 R, a firm should not include a potential tier one instrument that is redeemable in whole or in part in permanent share capital in its tier one capital resources unless the firm has:
- (a) sufficient permanent share capital or sufficient authority to issue permanent share capital (and the authority to allot it) to meet any redemption obligations that have become due; and
- (b) a prudent reserve of permanent share capital or sufficient authority to issue permanent share capital (and the authority to allot it) to meet possible future redemption obligations.
- (3) PRU 2.2.65 R contains limits on the amount of permanent share capital that may be issued on a redemption of a potential tier one instrument redeemable in permanent share capital.
- 31/10/2004
PRU 2.2.44
See Notes
- 31/10/2004
PRU 2.2.45
See Notes
The rules about redemption that are relevant to deciding whether a firm's potential tier one instruments should be classified as innovative tier one instruments are as follows.
- (1) Under PRU 2.2.53 R, a redeemable potential tier one instrument is always treated as an innovative tier one instrument if the redemption proceeds are payable otherwise than in cash.
- (2) Under PRU 2.2.54 R, any feature of a tier one instrument that in conjunction with a call would make a firm more likely to redeem it or to have an incentive to do so will make it an innovative tier one instrument.
- (3) Under PRU 2.2.62 R a step-up coupled with a right of redemption results in a potential tier one instrument being treated as an innovative tier one instrument.
- 31/10/2004
Further guidance on coupons
PRU 2.2.46
See Notes
- 31/10/2004
PRU 2.2.47
See Notes
The rules about coupons that are relevant to deciding whether a firm's potential tier one instruments are eligible for inclusion in its tier one capital resources at all are as follows.
- (1) Under PRU 2.2.29 R (4) and PRU 2.2.40 R, any deferred cumulative coupon should only be payable in permanent share capital. If a cumulative coupon is payable on a potential tier one instrument in another form, it should not be included in the firm's tier one capital resources.
- (2) Under PRU 2.2.29 R (7), the firm has the right not to pay a coupon in cash at any time.
- (3) PRU 2.2.63 R says that a potential tier one instrument that may be subject to a step-up that potentially exceeds defined limits should not be included in the firm's tier one capital resources. PRU 2.2.64 R says that any step-up should not arise before the tenth anniversary of the date of issue if it is to be included in the firm's tier one capital resources.
- (4) The provisions of PRU 2.2.70 R summarised in PRU 2.2.43 G (2) also apply to the payment of coupons.
- 31/10/2004
PRU 2.2.48
See Notes
- 31/10/2004
PRU 2.2.49
See Notes
The rules about coupons that are relevant to deciding whether a firm's potential tier one instruments should be classified as innovative tier one instruments are as follows:
- (1) Under PRU 2.2.60 R a potential tier one instrument with a cumulative coupon is an innovative tier one instrument.
- (2) Under PRU 2.2.40 R a potential tier one instrument with a coupon that if deferred must be paid in permanent share capital is an innovative tier one instrument.
- (3) Under PRU 2.2.62 R a step-up coupled with a right of redemption by the firm results in a potential tier one instrument being treated as an innovative tier one instrument.
- 31/10/2004
Perpetual non-cumulative preference shares
PRU 2.2.50
See Notes
A perpetual non-cumulative preference share may be included at stage B of the calculation in PRU 2.2.14 R if:
- (1) it complies with PRU 2.2.29 R, PRU 2.2.35 R and PRU 2.2.38 R;
- (2) any coupon on it is not cumulative, and the firm has the right to choose whether or not to pay a coupon in all circumstances;
- (3) it is not excluded from tier one capital resources by any of the rules in PRU 2.2; and
- (4) it is not an innovative tier one instrument.
- 31/10/2004
PRU 2.2.51
See Notes
- 31/10/2004
Innovative tier one instruments: general rules
PRU 2.2.52
See Notes
- 31/10/2004
PRU 2.2.53
See Notes
- 31/10/2004
PRU 2.2.54
See Notes
If a tier one instrument:
- (1) is redeemable; and
- (2) is issued on terms that are (or its terms are amended and the amended terms are) such that a reasonable person would (judging at or around the time of issue or amendment) think that:
- 31/10/2004
PRU 2.2.55
See Notes
- 31/10/2004
Innovative tier one instruments: loss absorbency
PRU 2.2.56
See Notes
A capital instrument may only be included in innovative tier one capital resources if a firm's obligations under the instrument either:
- (1) do not constitute a liability (actual, contingent or prospective) under section 123(2) of the Insolvency Act 1986; or
- (2) do constitute such a liability but the terms of the instrument are such that:
- (a) any such liability is not relevant for the purposes of deciding whether:
- (i) the firm is, or is likely to become, unable to pay its debts; or
- (ii) its liabilities exceed its assets;
- (b) a creditor (including, but not limited to, a holder of the instrument) is not able to petition for the winding up or administration of the firm on the grounds that the firm is or may become unable to pay any such liability; and
- (c) the firm is not obliged to take into account such a liability for the purposes of deciding whether or not the firm is, or may become, insolvent for the purposes of section 214 of the Insolvency Act 1986 (wrongful trading).
- 31/10/2004
PRU 2.2.57
See Notes
- 31/10/2004
PRU 2.2.58
See Notes
- 31/10/2004
PRU 2.2.59
See Notes
- 31/10/2004
Innovative tier one instruments: Coupons
PRU 2.2.60
See Notes
- 31/10/2004
PRU 2.2.61
See Notes
- 31/10/2004
Innovative tier one instruments and other tier one instruments: step-ups
PRU 2.2.62
See Notes
If:
- (1) a potential tier one instrument is or may become subject to a step-up; and
- (2) that potential tier one instrument is redeemable at any time (whether before, at or after the time of the step-up);
- 31/10/2004
PRU 2.2.63
See Notes
If a potential tier one instrument is or may become subject to a step-up, a firm must not include it in its tier one capital resources if the amount of the step-up exceeds or may exceed;
- (1) 100 basis points; and
- (2) 50% of the initial credit spread.
- 31/10/2004
PRU 2.2.64
See Notes
- 31/10/2004
Innovative tier one instruments: principal stock settlement
PRU 2.2.65
See Notes
A firm must not include a potential tier one instrument that is redeemable in whole or in part in permanent share capital in its tier one capital resources if:
- (1) the conversion ratio as at the date of redemption may be greater than the conversion ratio as at the time of issue by more than 200%; or
- (2) the issue or market price of the conversion instruments issued in relation to one unit of the original capital item (plus any cash element of the redemption) may be greater than the issue price (or, as the case may be, market price) of that original capital item.
- 31/10/2004
PRU 2.2.66
See Notes
In PRU 2.2.65 R to PRU 2.2.69 R:
- (1) the original capital item means the capital item that is being redeemed; and
- (2) the conversion instrument means the permanent share capital issued on its redemption.
- 31/10/2004
PRU 2.2.67
See Notes
In PRU 2.2.65 R to PRU 2.2.69 R, the conversion ratio means the ratio of:
- (1) the number of units of the conversion instrument that the firm must issue to satisfy its redemption obligation (so far as it is to be satisfied by the issue of conversion instruments) in respect of one unit of the original capital item; to
- (2) one unit of the original capital item.
- 31/10/2004
PRU 2.2.68
See Notes
- 31/10/2004
PRU 2.2.69
See Notes
- 31/12/2004
Requirement to have sufficient unissued stock
PRU 2.2.70
See Notes
- (1) This rule applies to a potential tier one instrument of a firm where either:
- (a) the redemption proceeds; or
- (b) any coupon on that capital item;
- can be satisfied by the issue of another tier one instrument.
- (2) A firm may only include an item of capital to which this rule applies in its tier one capital resources if the firm has authorised and unissued tier one instruments of the kind in question (and the authority to issue them):
- (a) that are sufficient to satisfy all such payments then due; and
- (b) are of such amount as is prudent in respect of such payments that could become due in the future.
- 31/10/2004
Notifying the FSA of the issue and redemption of tier one instruments
PRU 2.2.71
See Notes
- 31/10/2004
PRU 2.2.72
See Notes
- 31/12/2004
Non standard capital instruments
PRU 2.2.73
See Notes
- 31/10/2004
Step-ups
PRU 2.2.74
See Notes
In relation to a tier one instrument, a step-up means any change in the coupon rate on that instrument that results in an increase in the amount payable at any time, including a change already provided in the original terms governing those payments. A step-up:
- (1) includes (in the case of a fixed rate) an increase in that coupon rate;
- (2) includes (in the case of a floating rate calculated by adding a fixed amount to a fluctuating amount) an increase in that fixed amount;
- (3) includes (in the case of a floating rate) a change in the identity of the benchmark by reference to which the fluctuating element of the coupon is calculated that results in an increase in the absolute amount of the coupon;
- (4) does not include (in the case of a floating rate) an increase in the absolute amount of the coupon caused by fluctuations in the fluctuating figure by reference to which the absolute amount of the coupon floats.
- 31/10/2004
PRU 2.2.75
See Notes
- 31/10/2004
Profit and loss account and other reserves
PRU 2.2.76
See Notes
- 31/10/2004
PRU 2.2.77
See Notes
- 31/10/2004
Valuation differences
PRU 2.2.78
See Notes
- 31/10/2004
PRU 2.2.79
See Notes
- 21/04/2005
- Past version of PRU 2.2.79 before 21/04/2005
PRU 2.2.80
See Notes
- 21/04/2005
- Past version of PRU 2.2.80 before 21/04/2005
PRU 2.2.81
See Notes
A firm of a kind referred to in PRU 2.2.80 R must deduct from its capital resources the difference between the undiscounted technical provisions or technical provisions before deductions and the discounted technical provisions or technical provisions after deductions. This adjustment must be made for all general insurance business classes, except for risks listed under classes 1 and 2. For classes other than 1 and 2, no adjustment needs to be made in respect of the discounting of annuities included in technical provisions. For classes 1 and 2 (other than annuities), if the expected average interval between the settlement date of the claims being discounted and the accounting date is not at least four years, the firm must deduct:
- (1) the difference between the undiscounted technical provisions and the discounted technical provisions; or
- (2) where it can identify a subset of claims such that the expected average interval between the settlement date of the claims and the accounting date is at least four years, the difference between the undiscounted technical provisions and the discounted technical provisions for the other claims.
- 21/04/2005
- Past version of PRU 2.2.81 before 21/04/2005
Externally verified interim net profits
PRU 2.2.82
See Notes
- 31/10/2004
PRU 2.2.83
See Notes
- 31/10/2004
Intangible assets
PRU 2.2.84
See Notes
- 31/10/2004
PRU 2.2.85
See Notes
- 31/10/2004
Inadmissible assets
PRU 2.2.86
See Notes
- 31/10/2004
PRU 2.2.87
See Notes
- 31/10/2004
PRU 2.2.88
See Notes
The list of admissible assets has been drawn with the aim of excluding assets:
- (1) for which a sufficiently objective and verifiable basis of valuation does not exist; or
- (2) whose realisability cannot be relied upon with sufficient confidence; or
- (3) whose nature presents an unacceptable custody risk; or
- (4) the holding of which may give rise to significant liabilities or onerous duties.
- 31/10/2004
Adjustments for related undertakings
PRU 2.2.89
See Notes
- 31/10/2004
PRU 2.2.90
See Notes
- 31/10/2004
PRU 2.2.91
See Notes
- 31/10/2004
PRU 2.2.92
See Notes
- 31/10/2004
Additional requirements for a tier one or tier two instrument issued by a firm carrying on with-profits insurance business
PRU 2.2.93
See Notes
A firm carrying on with-profits insurance business must, in addition to the other requirements in respect of capital resources elsewhere in PRU 2.2, meet the following conditions before a capital instrument can be included in the firm's capital resources:
- (1) the firm must manage the with-profits fund so that discretionary benefits under a with-profits insurance contract are calculated and paid disregarding, insofar as is necessary for its customers to be treated fairly, any liability the firm may have to make payments under the capital instrument;
- (2) the intention to manage the with-profits fund on the basis set out in PRU 2.2.93 R (1) must be disclosed in the firm's Principles and Practices of Financial Management; and
- (3) no amounts, whether interest, principal, or other amounts, must be payable by the firm under the capital instrument if the firm's assets would then be insufficient to enable it to declare and pay under a with-profits insurance contract discretionary benefits that are consistent with the firm's obligations under Principle 6.
- 31/10/2004
PRU 2.2.94
See Notes
- 31/10/2004
PRU 2.2.95
See Notes
- 31/10/2004
PRU 2.2.96
See Notes
- 31/10/2004
PRU 2.2.97
See Notes
- (1) Upper tier two instruments must meet the requirements of PRU 2.2.101 R (3) which goes beyond the requirement in PRU 2.2.93 R (3) since it requires a firm to have the option to defer payments in all circumstances, not just if necessary to treat customers fairly. However, for lower tier two instruments, PRU 2.2.93 R (3) represents an additional requirement since a failure to pay amounts of interest or principal on a due date must not constitute an event of default under PRU 2.2.108 R (2) for firms carrying on with-profits insurance business.
- (2) For firms which are realistic basis life firms compliance with PRU 2.2.93 R (3) would usually be achieved if the capital instrument provides that no amounts will be payable under it unless the firm's capital resources exceed its capital resources requirement. However, such firms should ensure that the terms of the capital instrument refer to FSA capital resources requirements in force from time to time, including the current realistic reserving requirements and are not restricted to former minimum capital requirements based only on the Insurance Directives' required minimum margin of solvency. For firms which are not realistic basis life firms, compliance with PRU 2.2.93 R (3) will probably require specific reference to be made to treating customers fairly in the terms of the capital instrument.
- 31/10/2004
Tier two capital
PRU 2.2.98
See Notes
- 31/10/2004
PRU 2.2.99
See Notes
- 31/10/2004
Upper tier two capital
PRU 2.2.100
See Notes
Examples of capital instruments which may be eligible to count in upper tier two capital resources include the following:
- (1) perpetual cumulative preference shares;
- (2) perpetual subordinated debt; and
- (3) other instruments that have the same economic characteristics as (1) or (2).
- 31/10/2004
PRU 2.2.101
See Notes
A capital instrument must meet the following conditions before it can be included in a firm's upper tier two capital resources:
- (1) it must meet the general conditions described in PRU 2.2.108 R;
- (2) it must have no fixed maturity date;
- (3) the contractual terms of the instrument must provide for the firm to have the option to defer any interest payment in cash on the debt; and
- (4) the contractual terms of the instrument must provide for the loss-absorption capacity of the debt and unpaid interest, whilst enabling the firm to continue its business.
- 31/10/2004
PRU 2.2.102
See Notes
- 31/10/2004
PRU 2.2.103
See Notes
A capital instrument may only be included in upper tier two capital resources if a firm's obligations under the instrument either:
- (1) do not constitute a liability (actual, contingent or prospective) under section 123(2) of the Insolvency Act 1986; or
- (2) do constitute such a liability but the terms of the instrument are such that:
- (a) any such liability is not relevant for the purposes of deciding whether:
- (i) the firm is, or is likely to become, unable to pay its debts; or
- (ii) its liabilities exceed its assets;
- (b) a creditor (including but not limited to a holder of the instrument) is not able to petition for the winding up or administration of the firm on the grounds that the firm is or may become unable to pay any such liability; and
- (c) the firm is not obliged to take into account such a liability for the purposes of deciding whether or not the firm is, or may become, insolvent for the purposes of section 214 of the Insolvency Act 1986 (wrongful trading).
- 31/10/2004
PRU 2.2.104
See Notes
- 31/10/2004
PRU 2.2.105
See Notes
- 31/10/2004
PRU 2.2.106
See Notes
- 31/10/2004
Lower tier two capital
PRU 2.2.107
See Notes
- 31/10/2004
General conditions for eligibility as tier two capital
PRU 2.2.108
See Notes
A capital instrument must not form part of the tier two capital resources of a firm unless it meets the following conditions:
- (1) the claims of the creditors must rank behind those of all unsubordinated creditors;
- (2) the only events of default must be non-payment of any amount falling due under the terms of the capital instrument or the winding-up of the firm;
- (3) the remedies available to the subordinated creditor in the event of non-payment or other breach of the written agreement or instrument must be limited to petitioning for the winding-up of the firm or proving for the debt and claiming in the liquidation of the firm;
- (4) any events of default and any remedy described in (3) must not prejudice the matters in (1) and (2);
- (5) in addition to the requirement about repayment in (1), the debt must not become due and payable before its stated final maturity date (if any) except on an event of default complying with (2);
- (6) the debt agreement or terms of the capital instrument are governed by the law of England and Wales, or of Scotland or of Northern Ireland;
- (7) to the fullest extent permitted under the laws of the relevant jurisdictions, creditors must waive their right to set off amounts they owe the firm against subordinated amounts included in the firm's capital resources owed to them by the firm;
- (8) the terms of the capital instrument must be set out in a written agreement that contains terms that provide for the conditions set out in (1) to (7);
- (9) the debt must be unsecured and fully paid up;
- (10) the description of its characteristics used in its marketing is consistent with the characteristics required to satisfy (1) to (9); and
- (11) the firm has obtained a properly reasoned external legal opinion stating that the requirements in (1) to (10) have been met.
PRU 2.2.109
See Notes
- 31/10/2004
PRU 2.2.110
See Notes
- 31/10/2004
PRU 2.2.111
See Notes
- 31/10/2004
PRU 2.2.112
See Notes
- 31/10/2004
PRU 2.2.113
See Notes
- (1) An item of capital does not comply with PRU 2.2.101 R or PRU 2.2.108 R if the issue of that item of capital by the firm is connected with one or more other transactions which, when taken together with the issue of that item, could produce the effect described in (2).
- (2) The effect referred to in (1) is a reduction in the economic benefit intended to be conferred on the firm by the issue of the item of capital which means that the item of capital no longer displays all of the characteristics set out in PRU 2.2.101 R or PRU 2.2.108 R.
- 31/10/2004
PRU 2.2.114
See Notes
- 31/10/2004
PRU 2.2.115
See Notes
- 31/12/2004
PRU 2.2.116
See Notes
A firm must not amend the terms of the debt and the documents referred to in PRU 2.2.108 R (8) unless:
- (1) at least one month before the amendment is due to take effect, the firm has given the FSA notice in writing of the proposed amendment and the FSA has not objected; and
- (2) that notice includes confirmation that the legal opinions referred to in PRU 2.2.108 R (11) and, if applicable, PRU 2.2.105 R and PRU 2.2.111 R, continue in full force and effect in relation to the terms of the debt and documents, notwithstanding any proposed amendment.
- 31/10/2004
PRU 2.2.117
See Notes
- 31/10/2004
Step-ups
PRU 2.2.118
See Notes
In relation to a tier two instrument, a step-up in a coupon rate means:
- (1) (in the case of a fixed rate) an increase in that rate;
- (2) (in any other case) any change in the way that the interest or other payment is calculated that may result in an increase in the amount payable at any time, including a change already provided in the original terms governing those payments.
- 31/10/2004
PRU 2.2.119
See Notes
Where a tier two instrument is subject to one or more step-ups, the first date that a step-up can take effect must be treated, for the purposes of this section, as the instrument's final maturity date if its actual maturity date occurs after that, unless the effect of the step-up or step-ups is to increase the coupon rate at which payments are to be made by no more than:
- (1) 50 basis points in the first ten years of the life of the debt; or
- (2) 100 basis points over the whole life of the debt.
- 31/10/2004
PRU 2.2.120
See Notes
- 31/10/2004
PRU 2.2.121
See Notes
- 31/10/2004
PRU 2.2.122
See Notes
- 31/10/2004
PRU 2.2.123
See Notes
- 31/10/2004
PRU 2.2.124
See Notes
- 31/10/2004
PRU 2.2.125
See Notes
- 31/10/2004
Unpaid share capital or initial funds and calls for supplementary contributions
PRU 2.2.126
See Notes
- 31/10/2004
PRU 2.2.127
See Notes
- 31/12/2004
PRU 2.2.128
See Notes
- 31/10/2004
PRU 2.3
Individual Capital Assessment
- 31/12/2004
Application
PRU 2.3.1
See Notes
PRU 2.3 applies to an insurer unless it is:
- (1) a non-directive friendly society; or
- (2) a Swiss general insurer; or
- (3) an EEA-deposit insurer; or
- (4) an incoming EEA firm; or
- (5) an incoming Treaty firm.
- 31/12/2004
Purpose
PRU 2.3.2
See Notes
- 31/12/2004
PRU 2.3.3
See Notes
- 31/12/2004
PRU 2.3.4
See Notes
There are two main purposes of this section:
- (1) to enable firms to understand the issues which the FSA would expect to see assessed and the systems and processes which the FSA would expect to see in operation for capital adequacy assessments by the firm to be regarded as thorough, objective and prudent; and
- (2) to enable firms to understand the FSA's approach to assessing whether the minimum capital resources requirements of PRU 2.1 are appropriate and what action may be taken if the FSA concludes that those requirements are not appropriate to a firm's circumstances.
- 31/12/2004
Main requirements and guidance
PRU 2.3.5
See Notes
- 31/12/2004
PRU 2.3.6
See Notes
- 31/12/2004
PRU 2.3.7
See Notes
- 31/12/2004
PRU 2.3.8
See Notes
- 31/12/2004
PRU 2.3.9
See Notes
- 31/12/2004
PRU 2.3.10
See Notes
- 31/12/2004
PRU 2.3.11
See Notes
A firm to which PRU 2.3.10 R applies must calculate its ECR in respect of its general insurance business as the sum of:
- (1) the asset-related capital requirement; and
- (2) the insurance-related capital requirement; less
- (3) the firm's equalisation provisions.
- 31/12/2004
PRU 2.3.12
See Notes
- 31/12/2004
PRU 2.3.13
See Notes
- 31/12/2004
PRU 2.3.14
See Notes
- 31/12/2004
PRU 2.3.15
See Notes
- 31/12/2004
PRU 2.3.16
See Notes
- 31/12/2004
PRU 2.3.17
See Notes
- 31/12/2004
Stress and scenario requirement
PRU 2.3.18
See Notes
- 31/12/2004
Factors to consider when assessing credit risk
PRU 2.3.19
See Notes
- 31/12/2004
PRU 2.3.20
See Notes
In assessing potential credit risk events that may affect the firm's solvency, a firm should allow for:
- (1) the financial effect of non-payment of reinsurance, considering the likelihood both of non-payment of outstanding claims and for the fact that reinsurance cover purchased for underwritten risks may not be effective (that is, offsetting potential liabilities); and
- (2) the financial effect of non-payment of premium debtors such as intermediaries and policyholders.
- 31/12/2004
PRU 2.3.21
See Notes
Some further areas to consider in developing the credit risk stress tests and scenario analyses might include:
- (1) the adequacy of the reinsurance programme and whether it is appropriate for the risks selected by the firm and adequately takes account of the underwriting and business plans of the firm generally;
- (2) the collapse of a reinsurer or several reinsurers on the firm's reinsurance programme and the subsequent impact this may have on the firm's outstanding reinsurance recoveries and IBNR recoveries;
- (3) a deterioration in the creditworthiness of the firm's reinsurers, intermediaries or other counterparties;
- (4) the degree of credit concentration. For example, the degree to which a firm is exposed to a single counterparty or group;
- (5) the degree of concentration of exposure to reinsurers of particular rating grades;
- (6) the prospect of reinsurance rates increasing substantially or reinsurance being unavailable;
- (7) any existing or possible future disputes relating to reinsurance contracts on a pessimistic basis and the extent that they are not already reflected in the value attributed to the reinsurances;
- (8) greater losses from bad debts than anticipated;
- (9) deterioration in the extent and quality of collateral; and
- (10) guarantees given by the insurer of the performance of others, whether under contracts of insurance or otherwise.
- 31/12/2004
Factors to consider when assessing market risk
PRU 2.3.22
See Notes
- 31/12/2004
PRU 2.3.23
See Notes
In assessing potential market risk events that may affect the firm's solvency, a firm should allow for:
- (1) reduced market values of investments;
- (2) variation in interest rates and the effect on the market value of investments;
- (3) a lower level of investment income than planned; and
- (4) the possibility of counterparty defaults.
- 31/12/2004
PRU 2.3.24
See Notes
Some further areas to consider in developing the market risk scenario might include:
- (1) the possibility of a severe economic or market downturn or upturn leading to adverse interest rate movements affecting the firm's investment position;
- (2) unanticipated losses and defaults of issuers;
- (3) price shifts in asset classes, and their impact on the entire portfolio;
- (4) inadequate valuation of assets;
- (5) the direct impact on the portfolio of currency devaluation, as well as the effect on related markets and currencies;
- (6) extent of any mismatch of assets and liabilities, including reinvestment risk;
- (7) the impact on the portfolio value of a dramatic change in the spread between a market index of interest rates and the risk-free interest rates; and
- (8) the extent to which market moves could have non-linear effects on values, such as derivatives.
- 31/12/2004
Factors to consider when assessing liquidity risk
PRU 2.3.25
See Notes
- 31/12/2004
PRU 2.3.26
See Notes
PRU 5.1 (liquidity risk systems and controls) contains evidential provisions and guidance on how firms should meet PRU 1.2.22 R for liquidity purposes.
- (1) PRU 5.1.61 E states that a scenario analysis in relation to liquidity risk required under PRU 1.2.35 R should include a cash-flow projection for each scenario tested, based on reasonable estimates of the impact of that scenario on the firm's funding needs and sources.
- (2) PRU 5.1.86 E states that a firm should have a contingency funding plan for taking action to ensure, so far as it can, that in each of the scenarios tested under PRU 1.2.35R (2), it would still have sufficient liquid financial resources to meet liabilities as they fall due.
- 31/12/2004
PRU 2.3.27
See Notes
- 31/12/2004
PRU 2.3.28
See Notes
Some further areas to consider in developing the liquidity risk scenario might include:
- (1) any mismatching between expected asset and liability cash flows;
- (2) the inability to sell assets quickly;
- (3) the extent to which the firm's assets have been pledged;
- (4) the cash-flow positions generally of the firm and its ability to withstand sharp, unexpected outflows of funds via claims, or an unexpected drop in the inflow of premiums; and
- (5) the possible need to reduce large asset positions at different levels of market liquidity, and the related potential costs and timing constraints.
- 31/12/2004
Factors to consider when assessing operational risk
PRU 2.3.29
See Notes
- 31/12/2004
PRU 2.3.30
See Notes
- 31/12/2004
PRU 2.3.31
See Notes
Examples of some issues that a firm might want to consider include:
- (1) the likelihood of fraudulent activity occurring that may impact upon the financial or operational aspects of the firm;
- (2) the obligation a firm may have to fund a pension scheme for its employees;
- (3) the technological risks that the firm may be exposed to regarding its operations. For example, risks relating to both the hardware systems and the software utilised to run those systems;
- (4) the reputational risks to which the firm is exposed. For example, the impact on the firm if the firm's brand is damaged resulting in a loss of policyholders from the underwriting portfolio;
- (5) the marketing and distribution risks that the firm may be exposed to. For example, the dependency on intermediary business or a firm's own sales force;
- (6) the impact of legal risks. For example a non-insurance related legal action being pursued against the firm;
- (7) the management of employees - for instance staff strikes, where dissatisfied staff may withdraw goodwill and may indulge in fraud or acts giving rise to reputational loss;
- (8) the resourcing of key functions such as the risk management function by staff in appropriate numbers and with an appropriate mix of skills such as underwriting, claims handling, accounting, actuarial and legal expertise.
- 31/12/2004
PRU 2.3.32
See Notes
- 31/12/2004
Factors to consider when assessing insurance risk
PRU 2.3.33
See Notes
As a result of the differences between the nature of general and long-term insurance business, some aspects of the risk assessment vary depending on the type of business written. In assessing potential insurance risk events that may affect the firm's solvency, general and long-term insurance business firms should:
- (1) analyse the potential for catastrophic losses, including both risk and event losses, the cost of reinstatement premiums and any possible reinsurance exhaustion; and
- (2) determine the likelihood of any other feature of insurance risk that may lead to a variation in projected outcomes.
- (3) Firms carrying on general insurance business should in addition:
- (a) analyse the potential for claims reserves to deteriorate beyond the current reserving level; and
- (b) determine the effect of loss ratios being higher than planned by analysing historic loss ratio experience and volatility.
- (4) Firms carrying on long-term insurance business should in addition:
- (a) analyse the potential for mathematical reserves subsequently to prove inadequate compared with the current reserving level; and
- (b) determine the effect of claims experience being more costly than planned by analysing historic claims experience, volatility and trends in experience.
- 31/12/2004
PRU 2.3.34
See Notes
Some further areas to consider in developing the insurance risk scenario might include:
- (1) For underwriting risks, general insurance business and long-term insurance business firms:
- (a) the adequacy of the firm's pricing. For example, the firm should be able to satisfy itself that it can charge adequate rates, taking into account the business and the risk profile of different products, the business environment (e.g. premium cycle-non-life) and its own internal profit targets;
- (b) the uncertainty of claims experience;
- (c) the dependence on intermediaries for a disproportionate share of the insurer's premium income; the effects of a high level of uncertainty in pricing in new or emerging underwriting markets due to a lack of information needed to enable the insurer to make a proper assessment of the price of the risk; the geographical mix of the portfolio or whether any geographical or jurisdictional concentrations exist;
- (d) the appropriateness of policy wordings;
- (e) the risk of mis-selling, for example, the number of complaints or disputed claims; and
- (f) the tolerance for expense reserve variations or variations in expenses (including indirect costs).
- (2) For firms carrying on general insurance business, in addition:
- (a) the length of tail of the claims development and latent claims; and
- (b) the effects of rapid growth or decline in the volume of the underwriting portfolio.
- (3) For firms carrying on long-term insurance business, in addition:
- (a) the uncertainty of future investment returns;
- (b) the effects of rapid growth or decline in the volume and nature of new business written; and
- (c) the ability of firms to adjust premium rates or charges for some products.
- (4) For reserving and claims risks, both general insurance business and long term insurance business firms:
- (a) the frequency and size of large claims;
- (b) possible outcomes relating to any disputed claims, particularly where the outcome is subject to legal proceedings;
- (c) the ability of the firm to withstand catastrophic events, increases in unexpected exposures, latent claims or aggregation of claims;
- (d) the possible exhaustion of reinsurance arrangements, both on a per risk and per event basis;
- (e) social changes regarding an increase in the propensity to claim and to sue; and
- (f) other social, economic and technological changes.
- (5) For firms carrying on general insurance business:
- (a) the adequacy and uncertainty of the technical claims provisions, such as outstanding claims, IBNR and claims handling expense reserves;
- (b) the adequacy of other underwriting provisions, such as the provisions for unearned premium and unexpired risk reserves;
- (c) the appropriateness of catastrophe models and underlying assumptions used, such as possible maximum loss (PML) factors used;
- (d) unanticipated legal judgements and legal change with retrospective effect specifically with regard to the claims reserves; and
- (e) the effects of inflation.
- (6) For firms carrying on long-term insurance business:
- (a) the adequacy and sensitivity of the mathematical reserves to variations in future experience, including:
- (i) the risk that investment returns differ from those assumed in the reserving assumptions;
- (ii) the risk of variations in mortality, morbidity and persistency experience and in the exercise of options under contracts;
- (iii) the rates of taxation applied, in particular where there is uncertainty over the tax treatment; and
- (b) unanticipated legal judgements and legal change with retrospective effect specifically with regard to the impact on mathematical reserves.
- 31/12/2004
Other assessments of the adequacy of capital resources
PRU 2.3.35
See Notes
- 31/12/2004
PRU 2.3.36
See Notes
- 31/12/2004
PRU 2.3.37
See Notes
Firms may find it helpful for their own assessment process if they also consider divergences from the assumptions described in PRU 2.3.36 G under the headings set out below. These are the areas which the FSA considers when forming its view of the adequacy of a firm's capital resources.
Business risk factors:
- (1) market risk;
- (2) securitisation risk;
- (3) residual risk;
- (4) concentration risk;
- (5) high impact, low probability events; and
- (6) cyclicality and capital planning.
Control risk factors:
- (1) systems and controls.
- 31/12/2004
PRU 2.3.38
See Notes
- 31/12/2004
PRU 2.3.39
See Notes
- 31/12/2004
PRU 2.3.40
See Notes
- 31/12/2004
PRU 2.3.41
See Notes
- 31/12/2004
PRU 2.3.42
See Notes
- 31/12/2004
PRU 2.3.43
See Notes
- 31/12/2004
PRU 2.3.44
See Notes
- 31/12/2004
PRU 2.3.45
See Notes
- 31/12/2004
PRU 2.3.46
See Notes
- 31/12/2004
PRU 2.3.47
See Notes
Systems and controls: a firm may decide to hold additional capital resources to mitigate weaknesses in its overall control environment. Weaknesses might be indicated by the following:
- (1) a failure by the firm to complete an assessment of its systems and controls in line with SYSC 3.1 (Systems and Controls) and PRU 1.4;
- (2) a failure by the firm's senior management to approve its financial results; and
- (3) a failure by the firm to consider an analysis of relevant internal and external information on its business and control environment.
- 31/12/2004
PRU 2.3.48
See Notes
- 31/12/2004
Capital models
PRU 2.3.49
See Notes
- 31/12/2004
PRU 2.3.50
See Notes
- 31/12/2004
PRU 2.3.51
See Notes
There is no prescribed modelling approach for how a firm develops its internal model. However, firms should be able to demonstrate:
- (1) the extent of use of the internal capital model within the firm's capital management policy;
- (2) that sound and appropriate risk-management techniques are employed and are embedded in the daily operations and financial resources requirements of the firm;
- (3) that all material risks to which the firm is exposed have been adequately addressed by quantitative and qualitative means as appropriate;
- (4) the confidence levels set and whether these are linked to the firm's corporate strategy;
- (5) the time horizons set for the different types of business that the firm undertakes;
- (6) the extent of historic data used and back testing carried out; and
- (7) whether sufficient accuracy and validation in the internal capital model has been undertaken.
- 31/12/2004
Quantitative factors
PRU 2.3.52
See Notes
- 31/12/2004
PRU 2.3.53
See Notes
Good models will have as inputs (in addition to the specific examples given under the stress and scenario guidance):
For both firms carrying on general insurance business and long-term insurance business:
- (1) assumed future investment returns. In particular, assumptions for future interest rates (to the extent that they impact on interest income on funds on deposit, price of and yield on fixed stock that may be purchased in future and interest income on variable interest rate assets), equity prices, dividend income, property prices, property rental income and inflation. The assumptions should take account of likely volatility and historic volatility in interest rates and asset prices;
- (2) five-year predictions as to premium rates in each homogeneous category of business taking account of the effect of underwriting cycles;
- (3) predictions of exposures written in each homogeneous category of business in the next five years;
- (4) predictions of premium volume and expected growth under a five year business plan;
- (5) expenses and commission;
- (6) catastrophic events, aggregations of claims and claims affecting more than one class of business;
- (7) inflation in terms of how it might affect future claims, non-settled claims that have occurred to date, future expenses, future reinsurance costs and future investment returns;
- (8) reinsurance programmes in place, allowing for changing term conditions, reinstatements and loss experience features;
- (9) estimates of non-recovery of reinsurance and other debtors taking account of the financial strength of each reinsurance or other counterparty; and
- (10) foreign exchange movements.
- (11) frequency and severity of claims (including costs associated with claims such as professional fees) for each homogeneous category of business, allowing for any impact of future social, legal and inflationary effects (especially concerning price, earnings, medical and claims) on future claims costs;
- (12) settlement patterns of claims and reinsurance recoveries for each homogeneous category of business (including occurred and future claims);
- (13) unintended coverage of risks; and
- (14) correlation between these risks.
- For firms carrying on long-term insurance business in particular:
- (15) projected claims experience for each homogeneous category of business allowing for trends in mortality/ morbidity experience;
- (16) assumptions for future policyholder actions such as lapsing or surrendering a policy, ceasing to pay premiums or choosing to exercise an option under the contract; and
- (17) for business where management has discretion over the level of benefits or charges, assumptions about management reactions to changes in economic conditions and consequent changes to the benefits or charges.
- 31/12/2004
PRU 2.3.54
See Notes
- 31/12/2004
PRU 2.3.55
See Notes
- 31/12/2004
PRU 2.3.56
See Notes
- 31/12/2004
PRU 2 Annex 1
Admissible assets in insurance
- 31/12/2004
See Notes
(1) | Investments
that are, or amounts owed arising from the disposal of: (a)debt securities, bonds
and other money and capital market instruments; (b) loans;(c)shares and other variable
yield participations;(d) units in UCITS schemes, non-UCITS retail schemes, recognised schemes and
any other collective investment
scheme that invests only in admissible assets (including any derivatives or quasi-derivatives held
by the scheme);(e) land, buildings
and immovable property rights;(f) an approved derivative or quasi-derivative transaction
that satisfies the conditions in PRU 4.3.5 R or
an approved stock lending transaction that
satisfies the conditions in PRU 4.3.36 R. |
(2) | Debts
and claims (a)debts owed by reinsurers, including reinsurers' shares of technical provisions;(b)deposits with and debts owed by ceding undertakings;(c) debts owed
by policyholders and
intermediaries arising out of direct and reinsurance operations
(except where overdue for more than 3 months and other than commission prepaid to agents or intermediaries);(d) for general insurance business only,
claims arising out of salvage and subrogation;(e) for long-term insurance business only,
advances secured on, and not exceeding the surrender value of, long-term insurance contracts issued by the insurer;(f) tax recoveries;(g) claims against compensation funds. |
(3) | Other
assets (a) tangible fixed
assets, other than land and buildings;(b) cash at bank
and in hand, deposits with credit institutions and
any other bodies authorised to receive deposits;(c) for general insurance business only, deferred acquisition costs;(d) accrued interest
and rent, other accrued income and prepayments;(e) for long-term insurance business only,
reversionary interests. |
- 31/12/2004
PRU 2 Annex 2
Guidance on applications for waivers relating to implicit items Implicit items under the Act
- 31/12/2004
See Notes
1 | PRU 2.2.14 R does not permit implicit items to be included in the calculation of a firm'scapital resources, except subject to a waiver under section 148 of the Act. Article 27(4) of the Consolidated Life Directive states that implicit items can be included in the calculation of a firm'scapital resources, within limits, provided that the supervisory authority agrees. Certain implicit items, however, are not eligible for inclusion beyond 31 December 2009 (see paragraph 5). The FSA may be prepared to grant a waiver from PRU 2.2.14 R to allow implicit items, in line with the purpose of the Consolidated Life Directive, and provided the conditions as set out in article 27(4) of the Consolidated Life Directive are met. Such a waiver would allow an implicit item to count towards the firm'scapital resources available to count against its capital resources requirement (CRR) set out for realistic basis life firms in PRU 2.1.15 R and for regulatory basis only life firms in PRU 2.1.20 R. Where a firm applies for an implicit item waiver the firm may also apply for a waiver from PRU 2.2.16 R, which requires at least 50% of a firm's MCR to be covered by core tier one capital and perpetual non-cumulative preference shares. Under PRU 2.2.17 R a firm must meet the guarantee fund from the sum of the items listed at stages A, B, G and H less the sum of the items listed at stage E of PRU 2.2.14 R. PRU 2.2.17 R addresses the requirement in article 29(1) of the Consolidated Life Directive that implicit items should be excluded from capital eligible to cover the guarantee fund. Where an implicit items waiver is granted, an implicit item may potentially count as either tier one or tier two capital, but not core tier one capital. PRU 2.2.20 R requires that at least 50% of a firm's tier one capital resources must be accounted for by core tier one capital. | ||
2 | Under section 148 of the Act, the FSA may, on the application of a firm, grant a waiver from PRU. There are general requirements that must be met before any waiver can be granted. As explained in SUP 8, the FSA may not give a waiver unless the FSA is satisfied that: | ||
(1) | compliance by the firm with the rules will be unduly burdensome, or would not achieve the purpose for which the rules were made; and | ||
(2) | the waiver would not result in undue risk to persons whose interests the rules are intended to protect. | ||
3 | The FSA will assess compliance with the requirements in the light of all the relevant circumstances. This will include consideration of the costs incurred by compliance with a particular rule or whether a rule is framed in a way that would make compliance difficult in view of the firm's circumstances. For example, the firm may demonstrate that if an implicit item were not allowed, the firm would either have to suffer increased (and unwarranted) costs in injecting further capital resources or operate with a lower equity backing ratio (see case studies in paragraph 43). Even if a firm can demonstrate a case for an implicit item waiver, it should not assume that the FSA will grant the waiver requested, or that any waiver will be granted for the full amount of the implicit item which could be granted, as set out in this annex. The FSA will consider each application on its own merits, and taking into account all relevant circumstances, including the financial situation and business prospects of the firm. | ||
4 | Implicit items are economic reserves which are contained within the long-term insurance business provisions. Article 27(4) of the Consolidated Life Directive identifies three types of implicit item, in respect of: future profits, zillmerisation and hidden reserves. This annex is intended to amplify the guidance in SUP 8 relating to the granting of waivers for implicit items and to provide guidance on other aspects. Whilst this guidance applies to applications for waivers for implicit items generally, for a realistic basis life firm, to the extent that an implicit item is allocated to a with-profits fund, this guidance relates to implicit items for the purposes of determining the regulatory value of assets (see PRU 7.4.24 R). | ||
5 | The Consolidated Life Directive (reflecting the changes introduced by the Solvency 1 Directive) requires member states to end a firm's ability to take into account future profits implicit items by (at the latest) 31 December 2009. Until then, the maximum amount of the implicit item relating to future profits permitted under the Consolidated Life Directive is limited to 50% of the product of the estimated annual profits and the average period to run (not exceeding six years) on the policies in the portfolio. The Consolidated Life Directive further limits the maximum amount of these economic reserves that can be counted to 25% of the lesser of the available solvency margin and the required solvency margin. The changes introduced by the Solvency 1 Directive take effect for financial years beginning on or after 1 January 2004. However, the Consolidated Life Directive allows for a transitional period of five years, which runs from 20 March 2002 (the publication date of the Solvency 1 Directive), for firms to become fully compliant with these new requirements. Firms will need to consider the potential impact of these changes when engaging in future capital planning. When applying for an implicit item waiver a firm should provide the FSA with a plan showing how the firm intends to maintain its capital adequacy over the period to 31 December 2009. Firms should also be aware that the FSA will typically only grant waivers for a maximum of 12 months. | ||
Future Profits | |||
6 | The future profits implicit item allows firms to take credit for margins in the mathematical reserves to the extent that these are expected to emerge from in force business. The future profit from in force business should be assessed, in the first instance, on prudent assumptions, to demonstrate that there is an 'economic reserve'. Having demonstrated that it exists, the amount should be limited to an amount calculated using a formula that takes into account the actual profit which has emerged over the last five years (see paragraph 28). | ||
Zillmerisation | |||
7 | Zillmerisation is an allowance for acquisition costs that are expected, under prudent assumptions, to be recoverable from future premiums. Firms can make a direct adjustment to their reserves for zillmerisation, subject to the rules on mathematical reserves. However, where no such adjustment has been made, the FSA will consider an application for a waiver to take into account an implicit item. | ||
Hidden reserves | |||
8 | Hidden reserves are reserves resulting from the underestimation of assets (other than mathematical reserves). | ||
Process for applying for a waiver, including limits applicable when a waiver is granted | |||
9 | This annex sets out the procedures to be followed and the form of calculations and data which should be submitted by firms to the FSA. This guidance should also be read in conjunction with the general requirements relating to the waiver process described in SUP 8. The FSA expects that applications for waivers in respect of future profits and zillmerising will not normally be considered to pass the "not result in undue risk to persons whose interests the rules are intended to protect" test unless the relevant criteria set out in this guidance have been satisfied and an application for such a waiver may require further criteria to be satisfied for this test to be passed. As set out below, waivers in respect of either zillmerising or hidden reserves will not normally be given except in very exceptional circumstances. | ||
Timing | |||
10 | A long-term insurer may apply to the FSA for a waiver in respect of implicit items. A waiver will not apply retrospectively (see SUP 8.3.6 G). Consequently, applications intended for a particular accounting reference date will normally need to be made well before that reference date. Applications by firms must be made to the FSA in writing and include the relevant details specified under SUP 8.3.3 D. Given the uncertainty in predicting the future, waivers will normally be granted for a maximum of 12 months at a time and any further applications will need to be made accordingly. | ||
11 | The information that will be required to enable an application to be considered as set out below, should normally include a demonstration of how the capital resources requirement is to be met, with and without the waiver. Clearly, up-to-date information may not be available before the financial year-end. In some cases information from the previous year-end's return may be used, as long as any known significant changes in the structure of the firm, or the assumptions used, have been taken into account. | ||
12 | If the application for a waiver is granted, when a firm submits its next return the amount of the implicit item shown should not exceed that supported by the firm's calculations as at the valuation date. In the event that the amount of the future profits item calculated by the firm based on these updated assumptions is less than the amount calculated at the time of the firm's waiver application, the lower figure should be used in the return. | ||
13 | An implicit item in respect of zillmerising or hidden reserves is related to the basis on which liabilities or assets have been valued. In the case of hidden reserves, as explained below, the granting of a waiver will be dependent on the overall capital resources of the firm. Waivers in respect of these implicit items will, therefore, only be made in relation to the position shown in a particular set of returns and it will be essential for firms to submit applications to the FSA well in advance of the latest date for the submission of the relevant return. | ||
14 | Waivers may be withdrawn by the FSA at any time (e.g. where the FSA considers the amount in respect of which a waiver has been given can no longer be justified). This may be as a result of changes in the firm's position or as a result of queries arising on scrutiny of the returns. | ||
Information to be submitted | |||
15 | An application for a waiver (which includes an application for an extension to or other variation of a waiver) should be prepared using the standard application form for a waiver (see SUP 8 Annex 2D). In addition, the application should be accompanied by full supporting information to enable the FSA to arrive at a decision on the merits of the case. In particular, the application should state clearly the nature and the amounts of the implicit items that a firm wishes to count against its capital resources requirement and the treatment it proposes to adopt in counting the implicit items towards the firm's capital resources. Furthermore, the application should demonstrate that in allowing for |