GENPRU 2.1 Calculation of capital resources requirements

1This section applies to:

1. (1)

   a BIPRU firm; and

2. (2)

   an insurer, unless it is:

   1. (a)

      a non-directive friendly society; or

   2. (b)

      a Swiss general insurer; or

   3. (c)

      an EEA-deposit insurer; or

   4. (d)

      an incoming EEA firm; or

   5. (e)

      an incoming Treaty firm.

1. (1)

   This section applies to a firm in relation to the whole of its business, except where a particular provision provides for a narrower scope.

2. (2)

   Where an insurer carries on both long-term insurance business and general insurance business, except where a particular provision provides otherwise, this section applies separately to each type of business.

A firm must at all times monitor whether it is complying with GENPRU 2.1.13 R (the main capital adequacy rule for insurer) or the main BIPRU firm Pillar 1 rules and be able to demonstrate that it knows at all times whether it is complying with those rules.

A firm must notify the FSA immediately of any breach, or expected breach, of GENPRU 2.1.13 R (in the case of an insurer) or the main BIPRU firm Pillar 1 rules (in the case of a BIPRU firm).

1. (1)

   Subject to (2), an insurer must maintain at all times capital resources equal to or in excess of its capital resources requirement (CRR).

2. (2)

   An insurer which is a participating insurance undertaking and, in relation to its own group capital resources, is in compliance with INSPRU 6.1.9 R (Requirement to maintain group capital), is deemed to comply with this rule.

An insurer must comply with GENPRU 2.1.13 R separately in respect of both its long-term insurance business and its general insurance business unless it is a pure reinsurer or a captive reinsurer which has a single MCR in respect of its entire business in accordance with GENPRU 2.1.26 R.

The CRR for any insurer carrying on general insurance business is equal to the MCR in GENPRU 2.1.24 R or, for a pure reinsurer or a captive reinsurer carrying on both general insurance business and long-term insurance business, in GENPRU 2.1.26 R.

The CRR for any insurer to which this rule applies (see GENPRU 2.1.19 R and GENPRU 2.1.20 R) is the higher of:

1. (1)

   the MCR in GENPRU 2.1.24A R2; and

2. (2)

   the ECR in GENPRU 2.1.38 R.

Subject to GENPRU 2.1.20 R, GENPRU 2.1.18 R applies to an insurer carrying on long-term insurance business, other than:

1. (1)

   a non-directive mutual;

2. (2)

   an insurer which has no with-profits insurance liabilities; and

3. (3)

   an insurer which has with-profits insurance liabilities that are, and at all times since 31 December 2004 (the coming into force of GENPRU 2.1.18 R) have remained, less than £500 million.

GENPRU 2.1.18 R also applies to an insurer of a type listed in GENPRU 2.1.19R (3) if:

1. (1)

   the insurer makes an election that GENPRU 2.1.18 R is to apply to it; and

2. (2)

   that election is made by written notice given to the FSA in a way that complies with the requirements for written notice in SUP 15.7 (Form and method of notification).

The CRR for an insurer carrying on long-term insurance business, but to which GENPRU 2.1.18 R does not apply, is equal to the MCR in GENPRU 2.1.25 R or, for a pure reinsurer or a captive reinsurer carrying on both general insurance business and long-term insurance business, in GENPRU 2.1.26 R.

Subject to GENPRU 2.1.26 R, for an insurer carrying on general insurance business the MCR in respect of that business is 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.

2Subject to GENPRU 2.1.26 R, for an insurer carrying on long-term insurance business to which GENPRU 2.1.18 R applies the MCR in respect of that business is 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.

Subject to GENPRU 2.1.26 R, for an insurer carrying on long-term insurance business, but to which GENPRU 2.1.18 R does not apply,2 the MCR in respect of that business is the higher of:

1. (1)

   the base capital resources requirement for long-term insurance business applicable to that firm; and

2. (2)

   the sum of:

   1. (a)

      the long-term insurance capital requirement; and

   2. (b)

      the resilience capital requirement.

For a pure reinsurer or a captive reinsurer carrying on both general insurance business and long-term insurance business:

1. (1)

   the MCR in respect of its general insurance business is the general insurance capital requirement; and

2. (2)

   the MCR in respect of its long-term insurance business is the sum of:

   1. (a)

      the long-term insurance capital requirement; and

   2. (b)

      the resilience capital requirement;

unless the sum of:

1. (3)

   the general insurance capital requirement; and

2. (4)

   the sum of:

   1. (a)

      the long-term insurance capital requirement; and

   2. (b)

      the resilience capital requirement;

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

The amount of an insurer's base capital resources requirement is set out in the table in GENPRU 2.1.30 R. If an insurer falls within one or more of the descriptions of type of firm set out in GENPRU 2.1.30 R, its base capital resources requirement is the highest amount set out against the different types of firm within whose description it falls.

In the case of an insurer and for the purposes of the base capital resources requirement, the exchange rate from the Euro to the pound sterling for each year beginning on 31 December is the rate applicable on the last day of the preceding October for which the exchange rates for the currencies of all the European Union member states were published in the Official Journal of the European Union.

An insurer 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.

An insurer 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; and

4. (4)

   the insurance market risk capital component.

For an insurer carrying on long-term insurance business the ECR in respect of that business is the sum of:

1. (1)

   the long-term insurance capital requirement; and2

2. (2)

   the with-profits insurance capital component.2

A BIPRU firm must maintain at all times capital resources equal to or in excess of the amount specified in the table in GENPRU 2.1.45 R (Calculation of the variable capital requirement for a BIPRU firm).

A BIPRU firm must maintain at all times capital resources equal to or in excess of the base capital resources requirement (see the table in GENPRU 2.1.48 R).

At the time that it first becomes a bank, building society or BIPRU investment firm, a firm must hold initial capital of not less than the base capital resources requirement applicable to that firm.

When a3 UCITS investment firm calculates the credit risk capital requirement and the market risk capital requirement for the purpose of calculating the variable capital requirement under GENPRU 2.1.40 R it must do so only3 in respect of designated investment business. For this purpose scheme management activity is excluded from designated investment business.

The amount of a BIPRU firm's base capital resources requirement is set out in the table in GENPRU 2.1.48 R.

A BIPRU firm must calculate its credit risk capital requirement as the sum of:

1. (1)

   the credit risk capital component;

2. (2)

   the counterparty risk capital component; and

3. (3)

   the concentration risk capital component.

1. (1)

   A BIPRU firm must calculate its market risk capital requirement as the sum of:

   1. (a)

      the interest rate PRR (including the basic interest rate PRR for equity derivatives set out in BIPRU 7.3 (Equity PRR and basic interest rate PRR for equity derivatives));

   2. (b)

      the equity PRR;

   3. (c)

      the commodity PRR;

   4. (d)

      the foreign currency PRR;

   5. (e)

      the option PRR; and

   6. (f)

      the collective investment undertaking PRR.

2. (2)

   Any amount calculated under BIPRU 7.1.9 R - BIPRU 7.1.13 R (Instruments for which no PRR treatment has been specified) must be allocated between the PRR charges in (1) in the most appropriate manner.

In relation to a BIPRU investment firm which is required to calculate a fixed overheads requirement, the amount of that requirementis equal to one quarter of the firm's relevant fixed expenditure calculated in accordance with GENPRU 2.1.54 R.

For the purpose of GENPRU 2.1.53 R, and subject to GENPRU 2.1.55 R to GENPRU 2.1.57 R,a BIPRU investment firm's relevant fixed expenditure is the amount described as total expenditure in its most recent audited annual report and accounts, less the following items (if they are included within such expenditure):

1. (1)

   staff bonuses, except to the extent that they are guaranteed;

2. (2)

   employees' and directors' shares in profits, except to the extent that they are guaranteed;

3. (3)

   other appropriations of profits;

4. (4)

   shared commission and fees payable which are directly related to commission and fees receivable, which are included within total revenue;

5. (5)

   interest charges in respect of borrowings made to finance the acquisition of the firm's readily realisable investments;

6. (6)

   interest paid to customers on client money;

7. (7)

   interest paid to counterparties;

8. (8)

   fees, brokerage and other charges paid to clearing houses, exchanges and intermediate brokers for the purposes of executing, registering or clearing transactions;

9. (9)

   foreign exchange losses; and

10. (10)

    other variable expenditure.

The relevant fixed expenditure of a firm in the following circumstances is:

1. (1)

   where its most recent audited annual report and accounts do not represent a twelve month period, an amount calculated in accordance with GENPRU 2.1.54 R, pro-rated so as to produce an equivalent annual amount; and

2. (2)

   where it has not completed twelve months' trading, an amount based on forecast expenditure included in the budget for the first twelve months' trading, as submitted with its application for authorisation.

A firm must adjust its relevant fixed expenditure calculation so far as necessary if and to the extent that since the date covered by the most recent audited annual report and accounts or (if GENPRU 2.1.55R (2) applies) since the budget was prepared:

1. (1)

   its level of fixed expenditure changes materially; or

2. (2)

   its regulated activities comprised within its permission change.

If a firm has a material proportion of its expenditure incurred on its behalf by third parties and such expenditure is not fully recharged to that firm then the firm must adjust its relevant fixed expenditure calculation by adding back in the whole of the difference between the amount of the expenditure and the amount recharged.

1. (1)

   This rule applies to a bank that meets the following conditions:

   1. (a)

      on 31 December 2006 it had the benefit of IPRU(BANK) rule 3.3.12 (Reduced minimum capital requirement for a bank that is a credit institution which immediately before 1 January 1993 was authorised under the Banking Act 1987);

   2. (b)

      the relevant amount (as referred to in IPRU(BANK) rule 3.3.12) applicable to it was below €5 million as at 31 December 2006; and

   3. (c)

      on 1 January 2007 it did not comply with the base capital resources requirement as set out in the table in GENPRU 2.1.48 R (€5 million requirement).

2. (2)

   Subject to (3), the applicable base capital resources requirement as at any time (the "relevant time") is the higher of:

   1. (a)

      the relevant amount applicable to it under IPRU(BANK) rule 3.3.12 as at 31 December 2006 as adjusted under GENPRU 2.1.62R (2); and

   2. (b)

      the highest amount of eligible capital resources which that bank has held between 1 January 2007 and the relevant time.

3. (3)

   This rule ceases to apply when:

   1. (a)

      that bank's eligible capital resources at any time since 1 January 2007 equal or exceed €5 million; or

   2. (b)

      a person (other than an existing controller) becomes the parent undertaking of that bank.

4. (4)

   If this rule ceases to apply under (3)(a) it continues not to apply if the bank's eligible capital resources later fall below €5 million.

For the purpose of GENPRU 2.1.60 R:

1. (1)

   an existing controller of a bank means:

   1. (a)

      a person who has been a parent undertaking of that bank since 31 December 2006 or earlier; or

   2. (b)

      a person who became a parent undertaking of that bank after 31 December 2006 but who, when he became a parent undertaking of that bank, was a subsidiary undertaking of an existing controller of that bank;

2. (2)

   the relevant amount of capital as referred to in GENPRU 2.1.60R (2)(a) is adjusted by identifying the time as of which the amount of capital it was obliged to hold under IPRU(BANK) rule 3.3.12 as referred to in GENPRU 2.1.60R (2)(a) was fixed and then recalculating the capital resources it held at that time in accordance with the definition of eligible capital resources (as defined in (3)); and

3. (3)

   eligible capital resources mean capital resources eligible under GENPRU 2.2 (Capital resources) to be used to meet the base capital resources requirement.