Prudential Regulation Authority Rulebook

1.1

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

1.2

If a firm carries on long-term insurance business and general insurance business, except where a particular provision provides otherwise, the rules in this Part apply separately to each type of business.

1.3

In this Part, the following definitions shall apply:

adjusted mathematical reserves

has the meaning given in 19.1.

administrative expenses

has the meaning set out in the insurance accounts rules.

base capital resources requirement

has the meaning given in 6.1.

defined benefits pension scheme

means a pension policy under which the only money-purchase benefits are benefits ancillary to other benefits which are not money-purchase benefits.

equity market adjustment ratio

means:

1. (1) if the ratio calculated in (a) and (b) lies between 75% and 100%, the result of 100% less the ratio (expressed as a percentage) of:
1. (a) the current value of the FTSE Actuaries All Share Index; to
2. (b) the average value of the FTSE Actuaries All Share Index over the preceding 90 calendar days;
2. (2) 0%, if the ratio calculated in (1)(a) and (b) is more than 100%; and
3. (3) 25%, if the ratio calculated in (1)(a) and (b) is less than 75%,

where the average value of the FTSE Actuaries All Share Index over any period of 90 calendar days is the arithmetic mean based on levels at the close of business on each of the days in that period on which the London Stock Exchange was open for trading.

gross adjusted claims amount

has the meaning given in 9.2 to 9.5.

gross adjusted premiums amount

has the meaning given in 8.2.

life protection reinsurance business

means reinsurance acceptances which are contracts of insurance:

1. (1) falling within long-term insurance business class I; or
2. (2) falling within long-term insurance business class III and providing index-linked benefits;

that are not:

1. (3) with-profits policies;
2. (4) whole life assurances;
3. (5) contracts to pay annuities on human life; or
4. (6) contracts which pay a sum of money on the survival of the life assured to a specific date or on his earlier death.

long-term gilt yield

means the annualised equivalent of the 15 year gilt yield for the UK Government fixed-interest securities index jointly compiled by the Financial Times, the Institute of Actuaries and the Faculty of Actuaries.

mixed insurer

means an insurer (other than a pure reinsurer) which carries on reinsurance business and where one or more of the following conditions is met in respect of its reinsurance acceptances:

1. (1) the premiums collected in respect of those acceptances during the previous financial year exceeded 10% of its total premiums collected during that year; and
3. (2) the technical provisions in respect of those acceptances at the end of the previous financial year exceeded 10% of its total technical provisions at the end of that year.

money-purchase benefits

means benefits, the rate or amount of which are calculated by reference to a payment or payments made by a member of the scheme.

permanent health reinsurance business

means reinsurance acceptances which are contracts of insurance falling within long-term insurance business class IV.

real estate market adjustment ratio

means:

1. (1) if the ratio calculated in (a) and (b) lies between 90% and 100%, the result of 100% less the ratio (expressed as a percentage) of:
1. (a) the current value of the real estate index; to
2. (b) the average value of that real estate index over the three preceding financial years;
2. (2) 0%, if the ratio calculated in (1)(a) and (b) is more than 100%; and
3. (3) 10%, if the ratio calculated in (1)(a) and (b) is less than 90%.

reinsurance ratio

has the meaning given in 11.1.

relevant assets

means a range of assets which must be selected by the firm pursuant to 20.2 from the assets specified in (1) and (2) in the order specified:

1. (1) its long-term insurance assets; and
2. (2) only where the firm has selected all the assets within (1), its shareholder assets, other than assets of an amount and kind required:
1. (a) to cover its liabilities arising outside its long-term insurance funds; or
2. (b) to meet any regulatory capital requirements in respect of business written outside its long-term insurance funds.

significant territory

means any country or territory in which more than 2.5% of a firm's long-term insurance assets (by market value), excluding assets held to cover index-linked liabilities or property-linked liabilities, are invested and for these purposes the member states of the EU which have adopted the Euro as the official currency may be treated as a single territory.

whole life assurance

means a contract of insurance which, disregarding any benefit payable on surrender, secures a capital sum only on death or either on death or on disability, but does not include a term assurance.

2.1

A firm must at all times monitor whether it is complying with 3.1 and be able to demonstrate that it knows at all times whether it is complying with that rule.

2.2

A firm must notify the PRA immediately in accordance with Notifications 2 of any breach, or expected breach, of 3.1.

3.1

A firm must maintain at all times capital resources equal to or in excess of its CR Requirement.

3.2

A firm that carries on both long-term insurance business and general insurance business must comply with 3.1, and apply 4.2 and 4.3, separately in respect of both its long-term insurance business and its general insurance business, unless it is a pure reinsurer which has a single CR Requirement in respect of its entire business in accordance with 5.2 and 5.3.

4.1

This Chapter does not apply to a pure reinsurer.

4.2

The CR Requirement for a firm carrying on general insurance business is equal to the higher of:

1. (1) the base capital resources requirement for general insurance business applicable to that firm; and
2. (2) the general insurance capital requirement.

4.3

The CR Requirement for a firm carrying on long-term insurance business is equal to the higher of:

1. (1) the base capital resources requirement for long-term insurance business applicable to that firm; and
2. (2) the long-term insurance capital requirement.

5.1

This Chapter only applies to a pure reinsurer.

5.2

Subject to 5.3, for a pure reinsurer:

1. (1) the CR Requirement in respect of its general insurance business is the general insurance capital requirement; and
2. (2) the CR Requirement in respect of its long-term insurance business is the long-term insurance capital requirement.

5.3

If the sum of:

1. (1) the general insurance capital requirement; and
2. (2) the long-term insurance capital requirement,

is lower than the base capital resources requirement, the firm has a single CR Requirement in respect of its entire business equal to the base capital resources requirement.

6.1

The amount of a firm’s base capital resources requirement is:

6.2

If a firm falls within one or more of the descriptions of type of firm set out in 6.1, its base capital resources requirement is the highest amount set out against the different types of firm within whose description it falls.

7.1

A firm carrying on general insurance business must calculate its general insurance capital requirement as the highest of:

1. (1) the premiums amount;
2. (2) the claims amount; and
3. (3) the brought forward amount.

8.1

The premiums amount is:

1. (1) 18% of the gross adjusted premiums amount; multiplied by
2. (2) the reinsurance ratio.

8.2

For the purpose of 8.1, the gross adjusted premiums amount is the higher of the gross written premiums and gross earned premiums (as adjusted in accordance with 12.1) for the financial year in question, adjusted by:

1. (1) except for a pure reinsurer which ceased to conduct new reinsurance contracts before 31 December 2006, increasing the amount included in respect of the premiums for general insurance business classes 11, 12 and 13 by 50%;
2. (2) deducting 66.7% of the premiums for actuarial health insurance that meets the conditions set out in 13.1; and
3. (3) multiplying the resulting figure by 12 and dividing by the number of months in the financial year. For the purposes of this calculation, the number of months in the financial year is the number of complete calendar months in the financial year plus any fractions of a month at the beginning and the end of the financial year.

9.1

The claims amount is:

1. (1) 26% of the gross adjusted claims amount; multiplied by
2. (2) the reinsurance ratio.

9.2

For the purpose of 9.1 and subject to 9.3, the gross adjusted claims amount is the amount of gross claims incurred (as determined in accordance with 12.1) over the reference period and adjusted by:

1. (1) except for a for a pure reinsurer which ceased to conduct new reinsurance contracts before 31 December 2006, increasing by 50% the amount included in respect of the claims incurred for 11, 12 and 13;
2. (2) deducting 66.7% of the claims for actuarial health insurance that meets the conditions set out in 13.1; and
3. (3) multiplying the resulting figure by 12 and dividing by the number of months in the reference period. For the purposes of this calculation, the number of months in the reference period is the number of complete calendar months in the reference period plus any fractions of a month at the beginning and the end of the reference period.

9.3

For the purposes of 9.1, in relation to general insurance business class 18, the amount of claims incurred used to calculate the gross adjusted claims amount must be the amount of costs recorded in the firm's books in the reference period as borne by the firm (whether or not borne in the reference period) in respect of the assistance given.

9.4

Except in those cases where 9.5 applies, the reference period to be used in 9.2 and 9.3 must be:

1. (1) the financial year in question and the two previous financial years; or
2. (2) the period the firm had been in existence at the end of the financial year in question, if shorter.

9.5

In the case of a firm which underwrites only one or more of the general insurance business risks of credit (as included in general insurance business class 14), storm (as included in general insurance business class 8), hail or frost (as included in general insurance business class 9 and including other business written in connection with such risks), the reference period to be used must be:

1. (1) the financial year in question and the six previous financial years; or
2. (2) the period for which the firm had been in existence at the end of the financial year in question, if shorter.

10.1

Subject to 10.2 and 10.3, the brought forward amount is the general insurance capital requirement for the prior financial year, multiplied, if the ratio is less than one, by the ratio (expressed as a percentage) of:

1. (1) the technical provisions (calculated net of reinsurance) for claims outstanding at the end of the prior financial year; to
2. (2) the technical provisions (calculated net of reinsurance) for claims outstanding at the beginning of the prior financial year.

10.2

If the amount of the technical provisions (calculated net of reinsurance) in 10.1(1) and (2) is in both cases zero, the brought forward amount is the general insurance capital requirement for the prior financial year, multiplied, if the ratio is less than one, by the ratio (expressed as a percentage) of:

1. (1) the technical provisions (calculated gross of reinsurance) for claims outstanding at the end of the prior financial year; to
2. (2) the technical provisions (calculated gross of reinsurance) for claims outstanding at the beginning of the prior financial year.

10.3

If the amount of the technical provisions (calculated gross of reinsurance) in 10.2(1) and (2) is in both cases zero, the brought forward amount is the general insurance capital requirement for the prior financial year.

11.1

The reinsurance ratio is:

1. (1) if the ratio calculated in (a) and (b) lies between 50% and 100%, the ratio (expressed as a percentage) of:
1. (a) the claims incurred (net of reinsurance) in the financial year in question and the two previous financial years; to
2. (b) the gross claims incurred in that three-year period;
2. (2) 50%, if the ratio calculated in (1)(a) and (b) is 50% or less; and
3. (3) 100%, if the ratio calculated in (1)(a) and (b) is 100% or more.

12.1

For the purposes of 8.2, 9.2, 9.3, 10.1, 10.2 and 11.1, amounts of premiums and claims must be:

1. (1) determined in accordance with the insurance accounts rules; and
2. (2) adjusted for transfers that were approved by the authority with responsibility for the approval of transfers of portfolios of contracts of insurance at the relevant time (or became effective where approval by an authority was not required) before the end of the financial year in question:
1. (a) to exclude any amount included in, or adjustment made to, premiums and claims to reflect the consideration for a transfer of contracts of insurance to or from the firm;
2. (b) to exclude premiums and claims (including amounts that arose in the financial year in question or previous financial years) which arose from contracts of insurance that have been transferred by the firm to another body; and
3. (c) to account for premiums and claims which arose from contracts of insurance that have been transferred to the firm from another body as if they were receivable by or payable by the firm (including where they arose prior to the date of transfer and were, in fact, receivable by or payable by the other body).

12.2

For both transfers to and from the firm, the consideration receivable or payable in respect of the transfer is excluded from premiums and claims in order to avoid double counting.

12.3

Where there has been a significant change in the business portfolio of the firm since the end of the financial year in question, the gross adjusted premiums amount and the gross adjusted claims amount must both be recalculated to take into account the impact of this change. The recalculation must take into account the requirements of the insurance accounts rules.

13.1

The conditions referred to in 8.2(2) and 9.2(2) are that:

1. (1) the health insurance is underwritten on a similar technical basis to that of life insurance;
2. (2) the premiums paid are calculated on the basis of sickness tables according to the mathematical method applied in insurance;
3. (3) a provision is set up for increasing age;
4. (4) an additional premium is collected in order to set up a safety margin of an appropriate amount;
5. (5) it is not possible for the firm to cancel the contract after the end of the third year of insurance; and
6. (6) the contract provides for the possibility of increasing premiums or reducing payments even for current contracts.

14.1

A firm carrying on long-term insurance business must calculate its long-term insurance capital requirement as the sum of:

1. (1) the insurance death risk capital component;
2. (2) the insurance health risk and life protection reinsurance capital component;
3. (3) the insurance expense risk capital component;
4. (4) the insurance market risk capital component; and
5. (5) the resilience capital requirement.

15.1

This Chapter does not apply to:

1. (1) a pure reinsurer; or
2. (2) a mixed insurer;

in respect of life protection reinsurance business.

15.2

The insurance death risk capital component is the aggregate of the amounts which represent the fractions specified by 15.3 of the capital at risk, defined in 15.4, for contracts of insurance which fall within long-term insurance business classes I, II, III, VII, VIII or IX, in respect of those contracts where the capital at risk is not a negative figure, multiplied by the higher of:

1. (1) 50%; and
2. (2) the ratio as at the end of the financial year in question of:
1. (a) the aggregate capital at risk in respect of that category of contracts net of reinsurance cessions; to
2. (b) the aggregate capital at risk in respect of that category of contracts gross of reinsurance cessions.

15.3

For the purpose of 15.2, the fraction is:

1. (1) for long-term insurance business classes I, II and IX, except for a pure reinsurer:
1. (a) 0.1% for temporary insurance on death where the original term of the contract is three years or less;
2. (b) 0.15% for temporary insurance on death where the original term of the contract is five years or less but more than three years; and
3. (c) 0.3% in any other case;
2. (2) 0.3% for long-term insurance business classes III, VII and VIII, except for a pure reinsurer; and
3. (3) 0.1% for a pure reinsurer.

15.4

For the purpose of 15.2, the capital at risk is:

1. (1) where the benefit under a contract of insurance payable as a result of death includes periodic or deferred payments, the present value of the benefits payable; and
2. (2) in any other case, the amount payable as a result of death,

less, in either case, the mathematical reserves for the contract.

16.1

Subject to 16.2 the insurance health risk and life protection reinsurance capital component is the highest of:

1. (1) the premiums amount;
2. (2) the claims amount; and
3. (3) the brought forward amount.

16.2

16.1 only applies in respect of:

1. (1) contracts of insurance falling in long-term insurance business class IV (and subject to the conditions set out in 13.1 as modified by 16.3);
2. (2) risks falling in general insurance business classes 1 or 2 that are written as part of a contract of long-term insurance; and
3. (3) in the case of a pure reinsurer or a mixed insurer, life protection reinsurance business.

16.3

For the purposes of 16.2, 13.1(3) is replaced with: "either the reserves include a provision for increasing age, or the business is conducted on a group basis."

17.1

This Chapter does not apply to:

1. (1) a pure reinsurer; or
2. (2) a mixed insurer;

in respect of life protection reinsurance business or permanent health reinsurance business.

17.2

The insurance expense risk capital component is:

1. (1) in respect of long-term insurance business classes III, VII and VIII, an amount equivalent to 25% of the net administrative expenses in the financial year in question relevant to the business of each of those classes, in so far as the firm bears no investment risk and the allocation to cover management expenses in the contract of insurance does not have a fixed upper limit which is effective as a limit for a period exceeding five years from the commencement of the contract;
2. (2) in respect of any tontine (long-term insurance business class V), 1% of the assets of the tontine;
3. (3) in the case of any other long-term insurance business, 1% of the adjusted mathematical reserves.

18.1

The insurance market risk capital component is 3% of the adjusted mathematical reserves for all insurance liabilities except those of a kind which:

1. (1) arise from contracts of insurance falling in long-term insurance business classes III, VII or VIII to the extent that the firm does not bear any investment risk; or
2. (2) arise from contracts of insurance falling in long-term insurance business class V; or
3. (3) for a pure reinsurer or a mixed insurer, arise from contracts of insurance falling within:
1. (a) its life protection reinsurance business; or
2. (b) its permanent health reinsurance business.

19.1

The adjusted mathematical reserves referred to in 17.2 and 18.1 is the aggregate of the amounts which result from the performance of the calculation in 19.3 for each category of insurance liability specified in 19.2.

19.2

The categories of insurance liability referred to in 19.1 are:

1. (1) for the purpose of 17.2:
1. (a) liabilities of a kind which arise from contracts of insurance falling in long-term insurance business classes I, II or IX;
2. (b) liabilities of a kind which arise from contracts of insurance falling in long-term insurance business classes III, VII or VIII to the extent that the firm bears an investment risk;
3. (c) liabilities of a kind which arise from contracts of insurance falling in long-term insurance business classes III, VII or VIII to the extent that the firm bears no investment risk and where the allocation to cover management expenses in the contract of insurance has a fixed upper limit which is effective as a limit for a period exceeding 5 years from the commencement of the contract;
4. (d) liabilities of a kind which arise from contracts of insurance falling in long-term insurance business class IV; and
5. (e) liabilities of a kind which arise from contracts of insurance falling in long-term insurance business class VI; and
2. (2) for the purpose of 18.1, those categories described in (1)(a), (b), (d) and (e).

19.3

The calculation referred to in 19.1 is the multiplication of the amount of the mathematical reserves (gross of reinsurance cessions) in respect of a category of insurance liability by the higher of:

1. (1) 85% or, in the case of a pure reinsurer, 50%; and
2. (2) the ratio as at the end of the financial year in question of:
1. (a) the mathematical reserves in respect of that category of insurance liability net of reinsurance cessions; to
2. (b) the mathematical reserves in respect of that category of insurance liability gross of reinsurance cessions.

20.1

A firm carrying on long-term insurance business must calculate a resilience capital requirement in accordance with this Chapter.

20.2

A firm must identify relevant assets which, after applying the scenarios in 20.3, have a value that is equal to the firm's long-term insurance liabilities under those scenarios.

20.3

For the purpose of 20.2, the scenarios are:

1. (1) for those relevant assets invested in the UK, the market risk scenario set out in 20.6;
2. (2) subject to (3) and to 20.10, for those relevant assets invested outside of the UK, the market risk scenario set out in 20.8; and
3. (3) where the relevant assets in (2) are:
1. (a) held to cover index-linked liabilities or property-linked liabilities; or
2. (b) not invested in a significant territory outside the UK;

the market risk scenario set out in 20.6.

20.4

The resilience capital requirement is the result of deducting B from A, where:

1. (1) A is the value of the relevant assets which will produce the result described in 20.2; and
2. (2) B is the firm's long-term insurance liabilities.

20.5

In calculating the value of the firm's long-term insurance liabilities under a scenario specified in 20.3, a firm is not required to adjust the provision made under Insurance Company – Overall Resources and Valuation 3.1 in respect of a defined benefits pension scheme.

20.6

In 20.3(1) and (3), the market risk scenario for assets invested in the UK and for assets (including assets invested outside the UK) held to cover index-linked liabilities or property-linked liabilities which a firm must assume is:

1. (1) a fall in the market value of equities of at least 10% or, if greater, the lower of:
1. (a) a percentage fall in the market value of equities which would produce an earnings yield on the FTSE Actuaries All Share Index equal to four-thirds of the long-term gilt yield; and
2. (b) a fall in the market value of equities of 25% less the equity market adjustment ratio;
2. (2) a fall in real estate values of 20% less the real estate market adjustment ratio for an appropriate real estate index; and
3. (3) the more onerous of either a fall or rise in yields on all fixed interest securities by the percentage point amount equal to 20% of the long-term gilt yield.

20.7

For the purposes of 20.6(1) and (2), a firm must:

1. (1) assume that earnings for equities and rack rents for real estate fall by 10%, but dividends for equities remain unaltered (see Insurance Company – Mathematical Reserves 9.5 and 9.6); and
2. (2) model a fall in equity and real estate markets as if the fall occurred instantaneously.

20.8

In 20.3(2), subject to 20.10, the market risk scenario for assets invested outside the UK (other than assets held to cover index-linked liabilities or property-linked liabilities) which a firm must assume is, for each significant territory in which assets are invested outside the UK:

1. (1) an appropriate fall in the market value of equities invested in that territory, which is at least equal to the percentage fall determined in 20.6;
2. (2) a fall in real estate values in that territory of 20% less the real estate market adjustment ratio for an appropriate real estate index for that territory; and
3. (3) the more onerous of either a fall or a rise in yields on all fixed interest securities by the percentage point amount equal to 20% of the nearest equivalent (in respect of the method of calculation) to the long-term gilt yield.

20.9

For the purposes of 20.8(1), an appropriate fall in the market value of equities invested in a significant territory must be determined having regard to:

1. (1) an appropriate equity market index for that territory; and
2. (2) the historical volatility of the equity market index selected in (1).

20.10

Where the assets of a firm invested in a significant territory of a kind referred to in 20.8 represent less than 0.5% of the firm's long-term insurance assets (excluding assets held to cover index-linked liabilities or property-linked liabilities), measured by market value, the firm may assume for those assets the market risk scenario for assets of that kind invested in the UK set out in 20.6 instead of the market risk scenario set out in 20.8.

21.1

A firm must not treat any amounts recoverable from an ISPV as reinsurance for the purposes of the calculation of:

1. (1) the reinsurance ratio; or
2. (2) the insurance death risk capital component; or
3. (3) the adjusted mathematical reserves.