Prudential Regulation Authority Rulebook

1.1

Unless otherwise stated, this Part applies to a non-directive friendly society.

1.2

In this Part, the following definitions shall apply:

amount of claims paid

means, in relation to a financial year, the amount that is recorded in the firm’s books at the end of the financial year as paid by it (whether or not payment has been effected in that year) in full or partial settlement of:

1. (1) claims including claims relating to business accounted for over a longer period than a financial year; and
2. (2) expenses (including legal or medical costs) which are incurred by the firm, whether through the employment of its own staff or otherwise, and are directly attributable to the settlement of individual claims, whether or not the individual claims in question are those mentioned in (1),

less any amounts recoverable by the firm in respect of the claims mentioned in (1) or other claims, including amounts recoverable from third parties and amounts recoverable from other insurance undertakings but excluding amounts recoverable in respect of reinsurance ceded by the firm.

capital at risk

means:

1. (1) in any case in which an amount is payable in consequence of death other than a case falling within (2), the amount payable on death; or
2. (2) in any case in which the benefit under the contract in question consists of the making, in consequence of death, of the payment of an annuity, payment of a sum by instalments or any other kind of periodic payments, the present value of that benefit,

less in either case the mathematical reserves in respect of the relevant contracts.

gross premiums

means, in respect of a financial year, premiums after deduction of discounts, refunds and rebates of premiums but before deduction of premiums for reinsurance ceded and before deduction of commission payable.

gross premiums earned

means, in respect of a financial year, such proportion of gross premiums receivable as is attributable to risk borne by the firm during that financial year.

provision for claims outstanding

means, in respect of a financial year, the amount set aside by the firm as at the beginning or end of the financial year as being an amount likely to be sufficient to meet:

1. (1) claims in respect of incidents occurring:
1. (a) in the case of an amount set aside as at the beginning of the financial year, before the beginning of that year; and
2. (b) in the case of an amount set aside as at the end of a financial year, before the end of that year,
2. being claims which have not been treated as claims paid and including claims relating to business accounted for over a longer period than a financial year, claims the amounts of which have not been determined and claims arising out of incidents that have not been notified to the firm; and
3. (2) expenses (such as, for example, legal or medical costs) which are likely to be incurred by the firm, whether through the employment of its own staff or otherwise and are directly attributable to the settlement of individual claims, whether or not the individual claims in question are those mentioned in (1),

less any recoverable amounts estimated by the firm to be recoverable by it in respect of the claims mentioned in (1), including amounts recoverable from third parties and amounts recoverable from other insurance undertakings but excluding amounts recoverable in respect of reinsurance ceded by the firm.

receivable

means such amounts as become due to a firm, whether or not received (including, where appropriate, income which has accrued) in respect of contracts of insurance incepted in the relevant period.

recoverable

means, in relation to a financial year:

1. (1) for the purpose of a provision for claims outstanding, amounts estimated by the firm to be recorded in the firm’s books as due in that year; or
2. (2) otherwise, recorded in the firm’s books as due in that year, whether or not the firm has received any payment.

reference period

means the three last preceding financial years.

2.1

A firm must calculate the required margin of solvency in respect of classes I and II as the aggregate of the results arrived at by applying the calculation described in 2.2 and the calculation described in 2.3.

2.2

A firm must calculate the following:

1. (1) a sum equal to 4% of the mathematical reserves for direct insurance business and reinsurance acceptances without any deduction for reinsurance cessions;
2. (2) the amount of the mathematical reserves at the end of the last preceding financial year after the deduction of reinsurance cessions, expressed as a percentage of the amount of those mathematical reserves before any such deduction; and
3. (3) the sum mentioned in (1) must be multiplied:
1. (a) where the percentage arrived at under (2) is greater than 85%, by that percentage; or
2. (b) in any other case, by 85%.

2.3

A firm must calculate the following:

1. (1) subject to (4) and (5), a sum equal to 0.3% of the capital at risk for contracts on which the capital at risk is not a negative figure;
2. (2) the amount of the capital at risk at the end of the last preceding financial year for contracts on which the capital at risk is not a negative figure, after the deduction of reinsurance cessions, expressed as a percentage of the amount of that capital at risk before any such deduction; and
3. (3) the sum arrived at under (1) must be multiplied:
1. (a) where the percentage arrived at under (2) is greater than 50%, by that greater percentage; or
2. (b) in any other case, by 50%.
4. (4) Where a contract provides for benefits payable only on death within a specified period and:
1. (a) is valid for a period of not more than three years from the date when the contract was first made, the percentage to be taken for the purposes of (1) must be 0.1%; or
2. (b) is valid for a period of more than three years but not more than five years from the date when the contract was first made, the percentage to be taken for the purposes of (1) must be 0.15%.
5. (5) For the purposes of (4), the period of validity of the contract evidencing a group policy is the period from the date when the premium rates under the contract were last reviewed for which the premium rates are guaranteed.

2.4

A firm must calculate the amount of mathematical reserves referred to in 2.2(1) and the capital at risk referred to in 2.3(1) as at the day on which the required margin of solvency is determined.

2.5

For the purposes of calculating the capital at risk, a firm must calculate the mathematical reserves:

1. (1) in respect of 2.3(1), on the day on which the capital at risk is calculated; and
2. (2) in respect of 2.3(2), as at the last preceding financial year.

3.1

A firm must calculate the required margin of solvency in respect of classes III and VII in accordance with 3.2 to 3.4.

3.2

If and in so far as a firm bears an investment risk, the calculation in 2.2 must be applied.

3.3

If and in so far as a firm bears no investment risk and if the allocation to cover management expenses in the relevant contract:

1. (1) has a fixed upper limit which is effective as a limit for a period exceeding five years, the calculation in 2.2 must be applied, but as if 2.2(1) contained a reference to 1% instead of 4%; or
2. (2) does not have a fixed upper limit which is effective as a limit for a period exceeding five years, the required margin of solvency is an amount equivalent to 25% of the preceding financial year’s net administrative expenses pertaining to such business.

3.4

Where a firm covers a death risk, a sum arrived at by applying the calculation in 2.3 (but excluding for these purposes 2.3(4) and (5)) must be added to the required margin of solvency, including a required margin of solvency of zero, arrived at under any of 3.2 and 3.3.

4.1

A firm must calculate the required margin of solvency in respect of class IV by applying the calculation in 2.2 plus the sum arrived at by applying Friendly Society – Overall Resources and Guarantee Fund 3.1(2) as though it were general insurance business class 2.

4.2

If both 4.1 and Friendly Society – Overall Resources and Guarantee Fund 3.2(2) apply, a single combined required margin of solvency must be calculated under Friendly Society – Overall Resources and Guarantee Fund 3.2(2) in respect of the class IV business and subsidiary provisions in classes 1 and 2.

5.1

A firm must calculate the required margin of solvency in respect of class V as 1% of the assets of the relevant tontine.

6.1

A firm must calculate the required margin of solvency in respect of class VI by applying the calculation in 2.2.

7.1

A firm must calculate a premiums basis solvency margin by:

1. (1) aggregating the gross premiums receivable (or contributions, as the case may be) in respect of the firm’s entire general insurance business for the last preceding financial year; and
2. (2) aggregating the gross premiums earned (or contributions, as the case may be) in respect of the firm’s entire general insurance business for the last preceding financial year,

and applying the calculation set out in 7.2 to 7.10.

7.2

From each of the aggregates arrived at under 7.1(1) and 7.1(2) a firm must deduct:

1. (1) any taxes included in the premiums; and
2. (2) any levies that are related to premiums and are recorded in the firm’s books as payable in the last preceding financial year in respect of general insurance business.

7.3

A firm must multiply the amount arrived at under 7.2 by twelve and divide by the number of months in the financial year.

7.4

A firm must calculate 18% of the amount arrived at under 7.3.

7.5

In the case of general insurance business consisting of health insurance based on actuarial principles, 7.4 applies with the substitution of 6% for 18% if the following conditions are satisfied:

1. (1) the gross premiums paid are calculated on the basis of sickness tables appropriate to insurance business;
2. (2) the reserves include provision for increasing age or, in the case of class IV, either the reserves include provision for increasing age, or the business is conducted on a group basis;
3. (3) an additional premium is collected in order to set up a safety margin of an appropriate amount;
4. (4) the contract does not allow the firm to cancel the contract after the end of the third year of the contract; and
5. (5) the contract provides for the possibility of increasing premiums or reducing payments during its currency.

7.6

Where 7.5 applies to a firm whose general insurance business consists partly of health insurance based on actuarial principles and partly of other business, the procedure provided in 7.1 to 7.5 must operate separately for each part of the general insurance business, so as to produce a sum under 7.5 for the health insurance and a sum under 7.4 for the other business.

7.7

If the provision for claims outstanding at:

1. (1) the end of the last preceding financial year exceeds the provision for claims outstanding at the beginning of the financial year two years prior to the last preceding financial year, then a firm must add the amount of the excess to the amount of claims paid in the three year period; and
2. (2) the beginning of the financial year two years prior to the financial year in question exceeds the provision for claims outstanding at the end of the financial year in question, then a firm must deduct the amount of the excess from the amount of claims paid in the three year period.

7.8

From the amount determined under 7.7(1) or (2), a firm must deduct the total sum recoverable in respect of that amount under reinsurance contracts ceded during the relevant period.

7.9

A firm must express the amount determined under 7.8 as a percentage of the amount determined under 7.7(1) or (2).

7.10

A firm must multiply the sum arrived at under 7.4 or 7.5, or the aggregate of the sums arrived at under 7.4 and 7.5, as the case may be:

1. (1) where the percentage arrived at under 7.9 is greater than 50% but not greater than 100%, by the percentage so arrived at;
2. (2) where the percentage arrived at under 7.9 is greater than 100%, by 100%; and
3. (3) in any other case, by 50%.

8.1

This Chapter does not apply to a firm that has not been in existence long enough to acquire a reference period.

8.2

A firm must calculate a claims basis solvency margin by applying the calculation in 8.3 to 8.9.

8.3

If the provision for claims outstanding at:

1. (1) the end of the reference period exceeds the provision for claims outstanding at the beginning of the reference period, a firm must add the amount of the excess to the amount of claims paid in the reference period; or
2. (2) the beginning of the reference period exceeds the provision for claims outstanding at the end of the reference period, a firm must deduct the amount of the excess from the amount of claims paid in the reference period,

where for the purposes of this Chapter, the definitions of amount of claims paid and provision for claims outstanding must be read so as to refer to a reference period rather than a financial year.

8.4

A firm must divide the aggregate obtained under 8.3(1) or (2) by the number of months in the reference period and multiply by twelve.

8.5

A firm must calculate 26% of the amount arrived at under 8.4.

8.6

In the case of general insurance business consisting of health insurance based on actuarial principles, 8.5 applies with the substitution of 8.66% for 26% if the conditions in 7.5(1) to (5) are satisfied.

8.7

Where 8.6 applies to a firm whose general insurance business consists partly of health insurance based on actuarial principles and partly of other business, 8.2 to 8.6 must operate separately for each part of the general insurance business, so as to produce a sum under 8.6 for the health insurance and a sum under 8.5 for the other business.

8.8

A firm must multiply the sum arrived at under 8.6 or 8.7, or the aggregate of the sums arrived at under 8.6 and 8.7, by the same percentage as is applicable for the purposes of 7.10.