Prudent Person Principle: Additional Requirements Where the Investment Risk Is Not Borne by the Policyholder


This Chapter does not apply in respect of assets covering technical provisions for linked long-term contracts of insurance unless, and to the extent that, the assets are held to cover the technical provisions in respect of any guarantee of investment performance or other guaranteed benefit provided under those linked long-term contracts of insurance.

[Note: Art. 132(3) – (4) of the Solvency II Directive]


Subject to 5.1, and without prejudice to 2, 3 and 4, a firm must invest its assets in accordance with the following requirements:

  1. (1) the firm must not invest in a derivative or quasi-derivative unless, and to the extent that, it contributes to a reduction of risks or facilitates efficient portfolio management;
  2. (2) investments and assets which are not admitted to trading on a regulated market must be kept to prudent levels;
  3. (3) assets must be properly diversified in such a way as to avoid:
    1. (a) excessive reliance on any particular asset, issuer, group of undertakings or geographical area; and
    2. (b) excessive accumulation of risk in the portfolio as a whole;
  4. (4) investments in assets issued by the same issuer, or issuers belonging to the same group, must not expose the firm to excessive risk concentration.

[Note: Art. 132(4) of the Solvency II Directive]