Prudential Regulation Authority Rulebook

2.1

Firms must establish adequate technical provisions with respect to all of their insurance and reinsurance obligations towards policyholders.

[Note: Art. 76(1) of the Solvency II Directive]

2.2

The value of technical provisions must correspond to the current amount that the firm would have to pay if it were to transfer its insurance and reinsurance obligations immediately to another Solvency II undertaking.

[Note: Art. 76(2) of the Solvency II Directive]

2.3

Firms must calculate their technical provisions:

1. (1) such that the calculation makes use of and is consistent with information provided by the financial markets and generally available data on underwriting risks (market consistency);
2. (2) in a prudent, reliable and objective manner;
3. (3) taking into account the principles set out in Valuation 2; and
4. (4) in accordance with 2.4 to 12.2.

[Note: Art. 76(3)–(5) of the Solvency II Directive]

2.4

The value of technical provisions must be equal to the sum of a best estimate and a risk margin which must be calculated in accordance with 2.5, 3 and 4.

[Note: Art. 77(1) of the Solvency II Directive]

2.5

1. (1) Firms must value the best estimate and the risk margin separately, except where (2) applies.
2. (2) Where:
1. (a) future cash-flows associated with insurance or reinsurance obligations can be replicated reliably; and
2. (b) that replication is provided using financial instruments; and
3. (c) those financial instruments have a reliable market value which is observable;

then the value of technical provisions associated with those future cash-flows must be determined on the basis of the market value of those financial instruments.

[Note: Art. 77(4) of the Solvency II Directive]