Minimum Capital Requirement

1.1

Unless otherwise stated, this Part applies to:

1. (1) a UK Solvency II firm; and
2. (2) in accordance with Insurance General Application 3, the Society, as modified by 5.

1.2

In this Part, the following definitions shall apply: [Note: there are currently no Part specific definitions]

2.1

A firm must hold eligible own funds covering the MCR.

[Note: Art. 128 of the Solvency II Directive]

3.1

[Deleted]

3.1A

The MCR must be equal to the following:

\[\mathrm{MCR=max(MCR_{combined},\ AMCR)}\]

where:

1. (1) MCR_combined denotes the combined minimum capital requirement referred to in 3.1B; and
2. (2) AMCR denotes the absolute floor referred to in 3.2.

3.1B

The combined minimum capital requirement must be equal to the following:

\[\mathrm{MCR_{combined}\ =\ min(max(MCR_{linear},\ 0.25\ \cdot \ SCR),\ 0.45\ \cdot \ SCR)}\]

where:

1. (1) MCR_linear denotes the linear minimum capital requirement, calculated in accordance with 3A to 3C; and
2. (2) SCR denotes the SCR calculated in accordance with SCR Rules.

3.2

The MCR must have an absolute floor of:

1. (1) £2,400,000 for firms, including captive insurers, which have Part 4A permission to effect contracts of insurance or carry out contracts of insurance that are contracts of general insurance, except in the case where all or some of the general insurance business classes 10 to 15 are covered, in which case it must be no less than £3,500,000;
2. (2) £3,500,000 for firms, including captive insurers, which have Part 4A permission to effect contracts of insurance or carry out contracts of insurance that are contracts of long term insurance;
3. (3) £3,500,000 for pure reinsurers, except in the case of captive reinsurers that are pure reinsurers, in which case the MCR must be no less than £1,200,000;
4. (4) Unless (5) applies, the sum of the amounts set out in (1) and (2) for composite firms other than pure reinsurers; or
5. (5) For composite firms, other than pure reinsurers, whose Part 4A permission in relation to general insurance business is limited to general insurance business class 1 (accident) or class 2 (sickness) and where the gross written premiums for either:
   1. (a) general insurance business; or
   2. (b) long-term insurance business,
   3. do not exceed 10% of total gross written premiums of the firm as a whole, the amount set out in (2).

3.3

Without prejudice to the requirements on the absolute floor in 3.2, the MCR must neither fall below 25% nor exceed 45% of the firm’s SCR, calculated in accordance with SCR Rules, and including any capital add-on which has been imposed.

[Note: Art. 129(3) of the Solvency II Directive]

3A.1

The linear minimum capital requirement referred to in 3.1B must be equal to the following:

\[\mathrm{MCR_{linear}\ =\ MCR_{(linear,gi)}\ +\ MCR_{(linear,l)}}\]

where:

1. (1) MCR_(linear,gi) denotes the linear formula component for general insurance and reinsurance obligations; and
2. (2) MCR_(linear,l) denotes the linear formula component for long-term insurance and reinsurance obligations.

3B.1

The linear formula component for general insurance and reinsurance obligations referred to in 3A.1 must be equal to the following:

\[\mathrm{MCR_{linear,gi}}=\sum_{s}\mathrm{(\alpha_{s}\cdot TP_{(gi,s)})+(\beta_{s}\cdot P_{s})}\]

where:

1. (1) the sum covers all segments set out in 6.1;
2. (2) TP_(gi,s) denotes the technical provisions without a risk margin for general insurance and reinsurance obligations in the segment _s after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, with a floor equal to zero;
3. (3) P_s denotes the premiums written for general insurance and reinsurance obligations in the segment _s during the last 12 months, after deduction of premiums for reinsurance contracts, with a floor equal to zero; and
4. (4) the factors α_s and β_s are set out in 6.1.

3B.2

The amounts recoverable from reinsurance contracts and special purpose vehicles referred to in 3B.1(2) must not include any of the following amounts:

1. (1) amounts recoverable from reinsurance contracts or special purpose vehicles that cannot be taken into account in accordance with Technical Provisions – Further Requirements 23.3 and 23.5; and
2. (2) amounts recoverable from reinsurance contracts or special purpose vehicles, that do not comply with Solvency Capital Requirement – Standard Formula 3G2, 3G3, 3G5 and 3G7 or with Solvency Capital Requirement – Internal Models 11.10 to 11.12.

3B.3

In the calculation of premiums written after deduction of premiums for reinsurance contracts referred to in 3B.1(3), the following premiums for reinsurance contracts must not be deducted:

1. (1) premiums in relation to non-insurance events or settled insurance claims that are not accounted for in the cashflows referred to in Technical Provisions – Further Requirements 23.3; and
2. (2) premiums for reinsurance contracts that do not comply with Solvency Capital Requirement – Standard Formula 3G2, 3G3, 3G5 and 3G7, or with Solvency Capital Requirement – Internal Models 11.10 to 11.12.

3C.1

The linear formula component for long-term insurance and reinsurance obligations referred to in 3A.1 must be equal to the following:

\[\mathrm{MCR_{linear,l}\ =\ 0.037\ \cdot \ TP_{(l,1)}\ – 0.052 \cdot TP_{(l,2)} + 0.007 \cdot TP_{(l,3)} + 0.021 \cdot TP_{(l,4)} + 0.0007 \cdot CAR}\]

where:

1. (1) TP_(l,1) denotes the technical provisions without a risk margin in relation to guaranteed benefits provided for long-term insurance obligations with profit participation, after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, with a floor equal to zero, and technical provisions without a risk margin for reinsurance obligations where the underlying long-term insurance obligations include profit participation, after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, with a floor equal to zero;
2. (2) TP_(l,2) denotes the technical provisions without a risk margin in relation to future discretionary benefits for long-term insurance obligations with profit participation, after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, with a floor equal to zero;
3. (3) TP_(l,3) denotes the technical provisions without a risk margin for linked long-term liabilities, after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, with a floor equal to zero;
4. (4) TP_(l,4) denotes the technical provisions without a risk margin for long-term insurance and reinsurance obligations other than those mentioned in (1) to (3), after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, with a floor equal to zero; and
5. (5) CAR denotes the total capital at risk, being the sum, in relation to each contract of insurance that gives rise to long-term insurance and reinsurance obligations, of the capital at risk of the contracts, where the capital at risk of a contract means the higher of zero and the difference between the following two amounts:
6. (a) the sum of all of the following:
   1. (i) the amount that the firm would currently pay in the event of the death or disability of the persons insured under the contract of insurance after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles; and
   2. (ii) the expected present value of amounts not covered in (i) that the firm would pay in the future in the event of the immediate death or disability of the persons insured under the contract of insurance after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles; and
7. (b) the best estimate of the corresponding obligations after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles.

3C.2

The amounts recoverable from reinsurance contracts and special purpose vehicles referred to in 3C.1(1) to (4), must not include any of the following:

1. (1) amounts recoverable from reinsurance contracts or special purpose vehicles that cannot be taken into account in accordance with Technical Provisions – Further Requirements 23.3 and 23.5; and
2. (2) amounts recoverable from reinsurance contracts or special purpose vehicles that do not comply with Solvency Capital Requirement – Standard Formula 3G2, 3G3, 3G5, 3G6, 3G7, 3G8 and 3G9 or with Solvency Capital Requirement – Internal Models 11.10 to 11.12.

4.1

A firm must calculate the MCR at least quarterly and report the results of that calculation to the PRA in accordance with the requirements laid down in Reporting 2.1 to 2.5.

[Note: Art. 129(4) of the Solvency II Directive]

4.2

Where either of the limits referred to in 3.3 determines a firm’s MCR the firm must provide the PRA information allowing a proper understanding of the reasons therefor.

[Note: Art. 129(4) of the Solvency II Directive]

5.1

This Chapter applies to the Society.

5.2

In calculating the MCR for Lloyd’s, in the manner required by 3, the Society must ensure that the MCR is calibrated so as to include all quantifiable risks to which:

1. (1) members are exposed as a consequence of those members carrying on insurance business at Lloyd’s; and
2. (2) the Society is exposed, including risks to the central assets and central liabilities.

5.3

The Society must determine, at least quarterly, the ratio of the Lloyd’s MCR to the Lloyd’s SCR and notify the PRA of the result at the same time it reports the quarterly MCR calculation required by 4.1.

5.4

The Society must calculate a reporting point for each underwriting member, in accordance with 5.5.

5.5

The reporting point for each underwriting member must be calculated using the ratio referred to in 5.3, expressed as a percentage of the member’s notional SCR referred to in Solvency Capital Requirement – General Provisions 8.4.

5.6

The Society must notify the PRA if own funds attributable to a member fall below the reporting point determined in accordance with 5.5 as soon as it is observed by the Society.

6.1