1 INSPRU 3.1 applies to an insurer, unless it is:

1. (1)

   a non-directive friendly society; or

2. (2)

   an incoming EEA firm; or

3. (3)

   an incoming Treaty firm.

1. (1)

   INSPRU 3.1 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 a firm carries on both long-term insurance business and general insurance business, INSPRU 3.1 applies separately to each type of business.

For the purposes of INSPRU 3.1:

1. (1)

   real estate means an interest in land, buildings or other immovable property;

2. (2)

   a significant territory is any country or territory in which more than 2.5% of a firm'slong-term insurance assets (by market value), excluding assets held to cover index-linked liabilities or property-linked liabilities (see INSPRU 3.1.57 R and INSPRU 3.1.58 R), are invested;

3. (3)

   the long term gilt yield means the annualised equivalent of the fifteen year gilt yield for the United Kingdom Government fixed-interest securities index jointly compiled by the Financial Times, the Institute of Actuaries and the Faculty of Actuaries; and

4. (4)

   the member states of the European Union which have adopted the Euro as the official currency may be treated as a single territory.

1. (1)

   A regulatory basis only life firm2 must calculate a resilience capital requirement in accordance with (2) to (5).

2. (2)

   The firm must identify relevant assets (see INSPRU 3.1.10A R) which, after applying the scenarios in (3), have a value that is equal to the firm'slong-term insurance liabilities under those scenarios.

3. (3)

   For the purpose of (2), the scenarios are:

   1. (a)

      for those relevant assets invested in the United Kingdom, the market risk scenario set out in INSPRU 3.1.16 R;

   2. (b)

      subject to (c) and to INSPRU 3.1.26 R, for those relevant assets invested outside of the United Kingdom, the market risk scenario set out in INSPRU 3.1.23 R; and

   3. (c)

      where the relevant assets in (b) are:

      1. (i)

         held to cover index-linked liabilities or property-linked liabilities; or

      2. (ii)

         not invested in a significant territory outside the United Kingdom;

   the market risk scenario set out in INSPRU 3.1.16 R.

4. (4)

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

   1. (a)

      A is the value of the relevant assets which will produce the result described in (2); and

   2. (b)

      B is the firm'slong-term insurance liabilities.

5. (5)

   In calculating the value of the firm'slong-term insurance liabilities under any scenario, a firm is not required to adjust the provision made under GENPRU 1.3.4 R in respect of a defined benefits pension scheme.

In INSPRU 3.1.10 R relevant assets means a range of assets which must be selected by the firm 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.

In INSPRU 3.1.10R (3)(a), the market risk scenario for assets invested in the United Kingdom and for assets (including assets invested outside the United Kingdom) 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 4/3 rds 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 (see INSPRU 3.1.19 R);

2. (2)

   a fall in real estate values of 20% less the real estate market adjustment ratio for an appropriate real estate index (see INSPRU 3.1.21 R);

3. (3)
   1. (a)

      the more onerous of either a fall or rise in yields on all fixed interest securities by the percentage point amount determined in (b);

   2. (b)

      for the purpose of (a), the percentage point amount is equal to 20% of the long-term gilt yield.

For the purposes of INSPRU 3.1.16R (1) and INSPRU 3.1.16R (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 INSPRU 3.1.36 R to INSPRU 3.1.38 R); and

2. (2)

   model a fall in equity and real estate markets as if the fall occurred instantaneously.

The equity market adjustment ratio referred to in INSPRU 3.1.16R (1)(b) is:

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%.

In INSPRU 3.1.19 R, the average value of the FTSE Actuaries All Share Index over any period of 90 calendar days means 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.

The real estate market adjustment ratio for a real estate index referred to in INSPRU 3.1.16R (2) and INSPRU 3.1.23R (2) is:

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%.

In INSPRU 3.1.10R (3)(b), subject to INSPRU 3.1.26 R, the market risk scenario for assets invested outside the United Kingdom (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 United Kingdom:

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 INSPRU 3.1.16 R;

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 (see INSPRU 3.1.21 R); and

3. (3)
   1. (a)

      the more onerous of either a fall or a rise in yields on all fixed interest securities by the percentage point amount determined in (b);

   2. (b)

      for the purpose of (a), the percentage point amount is equal to 20% of the nearest equivalent (in respect of the method of calculation) to the long term gilt yield.

For the purposes of INSPRU 3.1.23R (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).

Where the assets of a firm invested in a significant territory of a kind referred to in INSPRU 3.1.23R (1), INSPRU 3.1.23R (2) or INSPRU 3.1.23R (3)(a) represent less than 0.5% of the firm'slong-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 United Kingdom set out in INSPRU 3.1.16 R instead of the market risk scenario set out in INSPRU 3.1.23 R.

1. (1)

   2The rates of interest required by INSPRU 1.2.33 R to be used by a firm for the calculation of the present value of a long-term insurance liability must not exceed 97.5% of the risk-adjusted yield (see INSPRU 3.1.30 R to INSPRU 3.1.48 G) that is expected to be achieved on:

   1. (a)

      the assets allocated to cover that liability;

   2. (b)

      the reinvestment of sums expected to be received from those assets (see INSPRU 3.1.45 R to INSPRU 3.1.48 G); and

   3. (c)

      the investment of future premium receipts (see INSPRU 3.1.45 R to INSPRU 3.1.48 G).

2. (2)

   (1) does not apply to a long-term insurance contract in respect of which the firm has calculated a negative value for the mathematical reserves in accordance with INSPRU 1.2.24 R.

For the purposes of INSPRU 3.1.28 R, the rates of interest assumed must allow appropriately for the rates of tax that apply to the investment return on policyholder assets. The rates of tax assumed must be such that the firm's total implied liability for tax arising from the allocation of assets to liabilities is not less than the firm's actual expected liability for tax for the period in respect of which tax is to be assessed.

A risk-adjusted yield on an asset must be calculated by:

1. (1)

   taking the asset together with any covering derivatives, forward transactions and quasi-derivatives;

2. (2)

   assuming that the factors which affect the yield will remain unchanged after the valuation date (see INSPRU 3.1.33 R);

3. (3)

   valuing the asset (together with any offsetting transaction) in accordance with GENPRU 1.3 (Valuation);

4. (4)

   making reasonable assumptions as to whether, and if so when, any options or other rights embedded in the asset (or in any offsetting transaction) will be exercised.

For the purpose of INSPRU 3.1.30R (2), the factors that affect yield should be ascertained as at the valuation date (that is, the date to which present values of cash flows are being calculated). All changes known to have occurred by that date must be taken into account including:

1. (1)

   changes in the rental income from real estate;

2. (2)

   changes in dividends or audited profit on equities;

3. (3)

   known or forecast changes in dividends which have been publicly announced by the issuer by the valuation date;

4. (4)

   known or forecast changes in earnings which have been publicly announced by the issuer by the valuation date;

5. (5)

   alterations in capital structure; and

6. (6)

   the value (at the most recent date at or before the valuation date for which it is known) of any determinant of the amount of any future interest or capital payment.

The risk-adjusted yield is either:

1. (1)

   (for equities and real estate) a running yield (see INSPRU 3.1.36 R to INSPRU 3.1.38 R, INSPRU 3.1.41 R and INSPRU 3.1.44 R); or

2. (2)

   (for all other assets) the internal rate of return (see INSPRU 3.1.39 R, INSPRU 3.1.41 R and INSPRU 3.1.44 R).

The risk-adjusted yield on a basket of assets is the arithmetic mean of the risk-adjusted yield on each asset weighted by that asset's market value.

For real estate the running yield is the ratio of:

1. (1)

   the rental income arising from the real estate over the previous 12 months; to

2. (2)

   the market value of the real estate.

For equities the running yield is:

1. (1)

   the dividend yield, if the dividend yield is more than the earnings yield;

2. (2)

   otherwise, the sum of the dividend yield and the earnings yield, divided by two.

For the purposes of INSPRU 3.1.37 R:

1. (1)

   the dividend yield is the ratio (expressed as a percentage) of dividend income over the previous 12 months from the equities for which the running yield is being calculated ("the relevant equities") to the market value of those equities;

2. (2)

   the earnings yield is the ratio (expressed as a percentage) of the audited profit (including exceptional items and extraordinary items) for the preceding financial year of the issuer of the relevant equities to the market value of those equities;

3. (3)

   the earnings yield must be calculated in accordance with whichever is most appropriate (to the issuer of the relevant equities) of United Kingdom, US or international generally accepted accounting practice.

The internal rate of return on an asset is the annual rate of interest which, if used to calculate the present value of future income (before deduction of tax) and of repayments of capital (before deduction of tax) would result in the sum of those amounts being equal to the market value of the asset.

In both the running yield and internal rate of return the yield must be reduced to exclude that part of the yield that represents compensation for credit risk arising from the asset.

Provision for credit risk for securities that are not credit-rated must be made on principles at least as prudent as those adopted for credit-rated securities.

Except as provided in INSPRU 3.1.46 R:

1. (1)

   the risk-adjusted yield assumed for the investment or reinvestment of sterling sums (other than sums expected to be received within the next three years) must not exceed the lowest of:

   1. (a)

      the long-term gilt yield;

   2. (b)

      3% per annum, increased by two thirds of the excess, if any, of the long-term gilt yieldover 3% per annum; and

   3. (c)

      6.5% per annum; and

2. (2)

   the risk-adjusted yield assumed for the investment or reinvestment of those sterling sums expected to be received within the next three years must not exceed the risk-adjusted yield on the assets actually held adjusted linearly over the three-year period to the risk-adjusted yield determined under (1).

For the with-profits insurance contractsof a realistic basis life firm, the risk-adjusted yield assumed for the investment or reinvestment of sums denominated in sterling must be no more than rates derived from the forward gilts yield

.

The risk-adjusted yield assumed for the investment or reinvestment of non-sterling sumsmust be at least as prudent as in INSPRU 3.1.45 R and INSPRU 3.1.46 R.

A firm must cover a contract providing for the purchase or sale of foreign currency by:

1. (1)

   holding the currency that must be paid by the firm under the contract; or

2. (2)

   being subject to an offsetting transaction.

1. (1)

   Subject to INSPRU 3.1.54 R, a firm must hold admissible assets in each currency of an amount equal to at least 80% of the amount of its liabilities in that currency arising under or in connection with contracts of insurance (but excluding, for a firm that carries on general insurance business, any non-credit equalisation provision5), except where the amount of those assets does not exceed 7% of the assets in other currencies.

2. (2)

   In (1) references to an asset in a currency are to an asset which is expressed in or capable of being realised (without exchange risk) in that currency, and an asset is capable of being so realised if it is reasonably capable of being realised in that currency without risk that changes in exchange rates would reduce the cover for liabilities in that currency.

INSPRU 3.1.53 R does not apply to:

1. (1)

   a pure reinsurer; or

2. (2)

   assets held to cover index-linked liabilities or property-linked liabilities.

For the purpose of INSPRU 3.1.53 R, the currency of the liability under a contract of insurance is the currency in which the cover under the contract of insurance is expressed or, if the contract does not specify a currency:

1. (1)

   the currency of the country or territory in which the risk is situated; or

2. (2)

   if the firm on reasonable grounds so decides, the currency in which the premium payable under the contract is expressed; or

3. (3)

   if, taking into account the nature of the risks insured, the firm considers it more appropriate:

   1. (a)

      the currency (based on past experience) in which it expects the claims to be paid; or

   2. (b)

      if there is no past experience, the currency of the country or territory in which the firm or relevant branch is established:

      1. (i)

         for contracts covering risks falling within general insurance business classes 4, 5, 6, 7, 11, 12 and 13 (producer's liability only); and

      2. (ii)

         for contracts covering risks falling within any other general insurance business class where, in accordance with the nature of the risks, the firm's liabilities are liabilities to be provided in a currency other than that which would result from the application of (1) or (2); or

4. (4)

   (where a claim has been notified to the firm and the firm's liability in respect of that claim is payable in a currency other than that which would result from the application of (1), (2) or (3)) the currency in which the claim is to be paid; or

5. (5)

   (where a claim is assessed in a currency known to the firm in advance and is a currency other than that which would result from the application of (1), (2), (3) or (4)) the currency in which the claim is to be assessed.

A firm must cover its property-linked liabilities with:

1. (1)

   (as closely as possible) the assets to which those liabilities are linked; or

2. (2)

   a property-linked reinsurance contract; or

3. (3)

   a combination of (1) and (2).

A firm must cover its index-linked liabilities with:

1. (1)

   either:

   1. (a)

      the assets which represent that index; or

   2. (b)

      assets of appropriate security and marketability which correspond, as closely as possible, to the assets which are comprised in, or which form, the index or other reference of value to which those liabilities are linked; or

2. (2)

   a portfolio of assets whose value or yield is reasonably expected to correspond closely with the index-linked liability; or

3. (3)

   an index-linked reinsurance contract; or

4. (4)

   an index-linked approved derivative; or

5. (5)

   an index-linked approved quasi-derivative; or

6. (6)

   a combination of any of (1) to (5).

INSPRU 3.1.57 R and INSPRU 3.1.58 R do not apply to a pure reinsurer.

A pure reinsurer must invest its assets in accordance with the following requirements:

1. (1)

   the assets must take account of the type of business carried out by the firm, in particular the nature, amount and duration of expected claims payments, in such a way as to secure the sufficiency, liquidity, security, quality, profitability and matching of its investments;

2. (2)

   the firm must ensure that the assets are diversified and adequately spread and allow the firm to respond adequately to changing economic circumstances, in particular developments in the financial markets and real estate markets or major catastrophic events; the firm must assess the impact of irregular market circumstances on its assets and must diversify the assets in such a way as to reduce such impact;

3. (3)

   investment in assets which are not admitted to trading on a regulated market must be kept to prudent levels;

4. (4)

   investment in derivatives and quasi-derivatives must contribute to a reduction of investment risks or facilitate efficient portfolio management and such investments must be valued on a prudent basis, taking into account the underlying assets, and included in the valuation of the firm's assets. The firm must avoid excessive risk exposure to a single counterparty and to other derivative or quasi-derivative operations;

5. (5)

   the assets must be properly diversified in such a way as to avoid:

   1. (a)

      excessive reliance on any one particular asset, issuer or group of undertakings; and

   2. (b)

      accumulations of risk in the portfolio as a whole.

   Investments in assets issued by the same issuer or by issuers belonging to the same group must not expose the firm to excessive risk concentration; and

6. (6)

   (5) does not apply to investment in government bonds.

INSPRU 3.1 applies to managing agents and to the Society in accordance with:

1. (1)

   for managing agentsINSPRU 8.1.4 R, subject to INSPRU 3.1.65 R below; and

2. (2)

   for the Society, INSPRU 8.1.2 R.

Managing agents must calculate the amount of the resilience capital requirement for the long-term insurance business carried on through the syndicates they manage.

The Society must determine the resilience capital requirement for the insurance business of each member under INSPRU 3.1.10 R as the member's proportionate share of the resilience capital requirement calculated by the managing agent for the long-term insurance business carried on through the syndicate.

For the purposes of INSPRU 3.1.53 R, a managing agent must ensure that:

1. (1)

   syndicate liabilities are covered by matching syndicate assets as required by INSPRU 3.1.53 R3; or that

2. (2)

   it immediately notifies to the Society the nature and extent of any syndicate liabilities not covered by matching assets under (1).

On receipt of a notification by a managing agent under INSPRU 3.1.65R (2), the Society must ensure that the liabilities in respect of the insurance business of the members in aggregate are covered with matching assets complying with INSPRU 3.1.53 R.

This section applies to an insurer, unless it is:

1. (1)

   a non-directive friendly society; or

2. (2)

   an incoming EEA firm; or

3. (3)

   an incoming Treaty firm; or

4. (4)

   a pure reinsurer.

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 a firm carries on both long-term insurance business and general insurance business, this section applies separately to each type of business.

For the purpose of GENPRU 2 Annex 7 (Admissible assets in insurance), and also in relation to permitted links,1 a derivative or quasi-derivative is approved if:

1. (1)

   it is held for the purpose of efficient portfolio management (INSPRU 3.2.6 R to INSPRU 3.2.7 R) or reduction of investment risk (INSPRU 3.2.8 R to INSPRU 3.2.13 G);

2. (2)

   it is covered (INSPRU 3.2.14 R to INSPRU 3.2.33 G); and

3. (3)

   it is effected or issued:

   1. (a)

      on or under the rules of a regulated market; or

   2. (b)

      off-market with an approved counterparty and, except for a forward transaction, on approved terms and is capable of valuation (INSPRU 3.2.34 R to INSPRU 3.2.35 R).

A derivative or quasi-derivative is held for the purpose of efficient portfolio management if the firm reasonably believes the derivative or quasi-derivative (either alone or together with any other covered transactions) enables the firm to achieve its investment objectives by one of the following (or, in relation to permitted links, in a manner which includes but is not limited to)1:

1. (1)

   generating additional capital or income in one of the ways described in INSPRU 3.2.7 R; or

2. (2)

   reducing tax or investment cost in relation to admissible assets or permitted links1; or

3. (3)

   acquiring or disposing of rights in relation to admissible assets or permitted links1, or their equivalent, more efficiently or effectively.

The generation of additional capital or income falls within INSPRU 3.2.6R (1) where it arises from:

1. (1)

   taking advantage of pricing imperfections in relation to the acquisition and disposal (or disposal and acquisition) of rights in relation to assets the same as, or equivalent to, admissible assets or permitted links1; or

2. (2)

   receiving a premium for selling a covered call option or its equivalent, the underlying of which is an admissible asset or permitted link1, even if that additional capital or income is obtained at the expense of surrendering the chance of greater capital or income.

A derivative or quasi-derivative is held for the purpose of reducing investment risk if the derivative or quasi-derivative (either alone or together with other fully covered transactions) reduces any aspect of investment risk without significantly increasing any other aspect of that risk.

For the purposes of INSPRU 3.2.8 R, an increase in risk from a derivative or quasi-derivative is significant unless:

1. (1)

   relative to any reduction in investment risk it is both small and reasonable; or

2. (2)

   the risk is remote.

For the purposes of INSPRU 3.2.8 R, investment risk is the risk that the assets held by a firm:

1. (1)

   (where they are admissible assets held by the firm to cover its technical provisions) might not be:

   1. (a)

      of a value at least equal to the amount of those technical provisions as required by INSPRU 1.1.20 R; or

   2. (b)

      of appropriate safety, yield and marketability as required by INSPRU 1.1.34R (1)(a); or

   3. (c)

      of an appropriate currency match as required by INSPRU 3.1.53 R;

2. (2)

   (where they are held to cover index-linked liabilities) might not be appropriate cover for those liabilities as required by INSPRU 3.1.58 R; and

3. (3)

   (where they are held to cover property-linked liabilities) might not be appropriately selected in accordance with contractual and constructive liabilities as required by INSPRU 1.5.36 R and appropriate cover for those liabilities as required by INSPRU 3.1.57 R.

A firm must cover an obligation to transfer assets or pay monetary amounts that arises from:

1. (1)

   a derivative or quasi-derivative; or

2. (2)

   a contract (other than a contract of insurance) for the purchase, sale or exchange of assets.

An obligation to transfer assets or pay monetary amounts (see INSPRU 3.2.14 R) must be covered:

1. (1)

   by assets, a liability or a provision (see INSPRU 3.2.16 R to INSPRU 3.2.24 R); or

2. (2)

   by an offsetting transaction (see INSPRU 3.2.25 R to INSPRU 3.2.27 R).

An obligation to transfer assets (other than money) or to pay monetary amounts based on the value of, or income from, assets is covered if the firm holds:

1. (1)

   those assets; or

2. (2)

   in the case of an index or basket of assets, a reasonable approximation to those assets.

An obligation to pay a monetary amount (whether or not falling in INSPRU 3.2.16 R) is covered if:

1. (1)

   the firm holds admissible assets or permitted links1 that are sufficient in value so that the firm reasonably believes that following reasonably foreseeable adverse variations (relying solely on cashflows from, or from realising, those assets) it could pay the monetary amount in the right currency when it falls due; or

2. (2)

   the obligation to pay the monetary amount is offset by a liability. An obligation is offset by a liability where an increase in the amount of that obligation would be offset by a decrease in the amount of that liability; or

3. (3)

   a provision at least equal to the value of the assets in (1) is implicitly or explicitly set up. A provision is implicitly set up to the extent that the obligation to pay the monetary amount is recognised under GENPRU 1.3 (Valuation) either by offset against an asset or as a separate liability. A provision is explicitly set up if it is in addition to an implicit provision.

A firm must implicitly or explicitly set up a provision equal to the value of the assets or offsetting transactions held to cover a non-approved derivative or quasi-derivative transaction.

Cover used for one transaction must not be used for cover in respect of another transaction or any other agreement to acquire, or dispose of, assets or to pay or repay money.

An offsetting transaction means:

1. (1)

   an approved derivative, approved stock lending transaction or an approved quasi-derivative; or

2. (2)

   a covered transaction with an approved counterparty for the purchase of assets.

A transaction offsets an obligation to transfer assets away from the firm only if it provides for the transfer to the firm of those assets, or their value, at the time, or before, the obligation falls due.

A transaction offsets an obligation to pay a monetary amount only if it provides for that monetary amount to be paid to the firm at or before the earliest date on which the obligation might fall due.

Assets that have been lent by the firm are not available for cover, unless:

1. (1)

   they are non-monetary assets that have been lent under a transaction that fulfils the conditions in INSPRU 3.2.36 R; and

2. (2)

   the firm reasonably believes the assets to be obtainable (by return or re-acquisition) in time to meet the obligation for which cover is required.

Assets that have been borrowed by the firm are not available for cover except as allowed by INSPRU 3.2.30 R.

Borrowed money may be used as cover only where:

1. (1)

   the money has been advanced or an approved credit institution has committed itself to advance the money; and

2. (2)

   the borrowing is or would be covered.

For the purpose of INSPRU 3.2.5R (3)(b), a derivative or quasi-derivative is on approved terms only if the firm reasonably believes that it could, in all reasonably foreseeable circumstances and under normal market conditions, readily enter into a further transaction with the counterparty or a third party to close out the derivative or quasi-derivative at a price not less than the value attributed to it by the firm, taking into account any valuation adjustments or reserves established by the firm under GENPRU 1.3.29 R to GENPRU 1.3.34 R.

For the purpose of INSPRU 3.2.5R (3)(b), a derivative or quasi-derivative is capable of valuation only if the firm:

1. (1)

   is able to value it with reasonable accuracy on a reliable basis in compliance with GENPRU 1.3.4 R; and

2. (2)

   reasonably believes that it will be able to do so throughout the life of the transaction.

1. (1)

   For the purposes of GENPRU 2 Annex 7 (Admissible assets in insurance), a stock lending transaction (including a repo transaction) 3is approved if:

   1. (a)

      the assets lent are admissible assets;

   2. (b)

      , the counterparty is an authorised person, an approved counterparty, a person registered as a broker-dealer with the Securities and Exchange Commission of the United States of America or a bank, or a branch of a bank, supervised, and authorised to deal in investments as principal, with respect to OTC derivatives by at least one of the following federal banking supervisory authorities of the United States of America:

      1. (i)

         the Office of the Comptroller of the Currency;

      2. (ii)

         the Federal Deposit Insurance Corporation;

      3. (iii)

         the Board of Governors of the Federal Reserve System; and

      4. (iv)

         the Office of Thrift Supervision; and

   3. (c)

      adequate and sufficiently immediate collateral (INSPRU 3.2.38 R to INSPRU 3.2.41 R) is obtained to secure the obligation of the counterparty.

2. (2)

   INSPRU 3.2.36R (1)(c) does not apply to a stock lending transaction made through Euroclear Bank SA/NV's Securities Lending and Borrowing Programme.

1. (1)

   1For the purposes of the rules on permitted links, a stock lending transaction (including a repo transaction) is approved if:

   1. (a)

      the assets lent are permitted links;

   2. (b)

      the counterparty is an authorised person, an approved counterparty, a person registered as a broker-dealer with the Securities and Exchange Commission of the United States of America or a bank, or a branch of a bank, supervised, and authorised to deal in investments as principal, with respect to OTC derivatives by at least one of the following federal banking supervisory authorities in the United States of America:

      1. (i)

         the Office of the Comptroller of the Currency;

      2. (ii)

         the Federal Deposit Insurance Corporation;

      3. (iii)

         the Board of Governors of the Federal Reserve System; and

      4. (iv)

         the Office of Thrift Supervision; and

   3. (c)

      adequately and sufficiently immediate collateral (INSPRU 3.2.38 R to INSPRU 3.2.41 R) is obtained to secure the obligation of the counterparty; and

   4. (d)

      provided that, for the purposes of property-linked assets only:

      1. (i)

         where the linked policyholder bears the whole of the risk associated with the stock lending transaction, they must receive the whole of the recompense (net of fees and expenses);

      2. (ii)

         the extent of any risk that the linked policyholder bears in relation to the stock lending transaction must be disclosed to them; and

      3. (iii)

         where the risk associated with the stock lending transaction is borne outside the linked fund, the linked fund should receive a fair and reasonable recompense for the use of the linked policyholders' funds.

2. (2)

   INSPRU 3.2.36R (1)(c) does not apply to a stock lending transaction made through Euroclear Bank SA/NVs Securities Lending and Borrowing Programme.

For the purposes of INSPRU 3.2.36R (1)(c), collateral is adequate only if it:

1. (1)

   is transferred to the firm or its agent or, in the case of a letter of credit, meets the conditions described in INSPRU 3.2.38A R;

2. (2)

   is, at the time of the transfer or, in the case of a letter of credit, at the time of issue, at least equal in value to the value of the securities transferred, or consideration provided, by the firm; and

3. (3)

   is of adequate quality.

The conditions referred to in INSPRU 3.2.38R (1) are that the letter of credit is:

1. (1)

   direct, explicit, unconditional and irrevocable; and

2. (2)

   issued by an undertaking which is:

   1. (a)

      not a related undertaking of the counterparty; and

   2. (b)

      either an approved credit institution or a bank, or a branch of a bank, whether chartered by the federal government of the United States of America or a US state, that is supervised and examined by at least one of the following US federal banking supervisory authorities:

      1. (i)

         the Office of the Comptroller of the Currency;

      2. (ii)

         the Federal Deposit Insurance Corporation;

      3. (iii)

         the Board of Governors of the Federal Reserve System; and

      4. (iv)

         the Office of Thrift Supervision.

For the purposes of INSPRU 3.2.36R (1)(c), collateral is sufficiently immediate only if:

1. (1)

   it is transferred or, in the case of a letter of credit, issued before, or at the same time as, the transfer of the securities by the firm; or

2. (2)

   it will be transferred or, in the case of a letter of credit, issued, at latest, by the close of business on the day of the transfer.

Collateral continues to be adequate only if its value is at all times at least equal to the value of the securities transferred by the firm. This will be satisfied in respect of collateral where the validity of the collateral or the firm's interest in the collateral is about to expire or has expired if sufficient collateral will again be transferred or issued at the latest by the close of business on the day of expiry.

INSPRU 3.2 applies to managing agents and to the Society in accordance with:

1. (1)

   for managing agents, INSPRU 8.1.4 R; and

2. (2)

   for the Society, INSPRU 8.1.2 R.