PRU 7.2 Capital resources requirements and technical provisions for insurance business

PRU 7.2 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)

   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 a non-EEA direct insurer with a branch in the United Kingdom, the part of this section headed "Capital requirements for insurers" (PRU 7.2.43 G to PRU 7.2.91 R) applies to its world-wide activities, whilst the parts of this section headed "Establishing technical provisions" (PRU 7.2.12 R to PRU 7.2.19 G), "Assets of a value sufficient to cover technical provisions" (PRU 7.2.20 R to PRU 7.2.29 G), "Matching of assets and liabilities" (PRU 7.2.34 R to PRU 7.2.40 G) and "Premiums for new business" (PRU 7.2.41 R to PRU 7.2.42 G) apply in respect of its activities carried on from a branch in the United Kingdom. The part of this section headed "Localisation" (PRU 7.2.30 R to PRU 7.2.33 R) does not apply (see PRU 7.6 (Internal contagion risk)).

For an EEA-deposit insurer or a Swiss general insurer, the parts of this section headed "Establishing technical provisions" (PRU 7.2.12 R to PRU 7.2.19 G), "Assets of a value sufficient to cover technical provisions" (PRU 7.2.20 R to PRU 7.2.29 G), "Matching of assets and liabilities" (PRU 7.2.34 R to PRU 7.2.40 G) and "Premiums for new business" (PRU 7.2.41 R to PRU 7.2.42 G) apply in respect of the activities of the firm carried on from a branch in the United Kingdom. The parts of this section headed "Capital requirements for insurers" (PRU 7.2.43 G to PRU 7.2.91 R) and "Localisation" (PRU 7.2.30 R to PRU 7.2.33 R) do not apply.

For an UK-deposit insurer, the part of this section headed "Capital requirements for insurers" (PRU 7.2.43 G to PRU 7.2.91 R) applies to its world-wide activities, whilst the parts of this section headed "Establishing technical provisions" (PRU 7.2.12 R to PRU 7.2.19 G), "Assets of a value sufficient to cover technical provisions" (PRU 7.2.20 R to PRU 7.2.29 G), "Matching of assets and liabilities" (PRU 7.2.34 R to PRU 7.2.40 G) and "Premiums for new business" (PRU 7.2.41 R to PRU 7.2.42 G) apply in respect of the activities of the firm carried on from branches in EEA States. The part of this section headed "Localisation" (PRU 7.2.30 R to PRU 7.2.33 R) does not apply (see PRU 7.6 (Internal contagion risk)).

For general insurance business, a firm must establish adequate technical provisions:

1. (1)

   in accordance with the rules in PRU 7.5 for equalisation provisions; and

2. (2)

   otherwise, in accordance with PRU 1.3.5R.

For long-term insurance business, a firm must establish adequate technical provisions:

1. (1)

   for its long-term insurance contracts, in accordance with the rules and guidance in PRU 7.3 relating to mathematical reserves, and with due regard to generally accepted actuarial practice; and

2. (2)

   for long-term insurance liabilities which have fallen due, in accordance with PRU 1.3.5R.

A firm must hold admissible assets of a value at least equal to the amount of the technical provisions that it is required to establish under PRU 7.2.12 R and PRU 7.2.16 R (excluding technical provisions for property-linked and index-linked benefits and the assets held to cover them under PRU 4.2.57R and PRU 4.2.58R).1

A composite firm must ensure that:

1. (1)

   its separately identified long-term insurance assets have a value at least equal to the amount of:

   1. (a)

      its technical provisions for long-term insurance liabilities; and

   2. (b)

      any other liabilities connected with long-term insurance business; and

2. (2)

   that it has other admissible assets of a value at least equal to the amount of its technical provisions for general insurance liabilities.

For the purpose of determining the value of assets available to meet long-term insurance liabilities in accordance with PRU 7.2.20 R, PRU 7.2.21 R, PRU 7.2.27 R and PRU 7.2.28 R, no value is to be attributed to debts and claims other than in respect of1:

1. (1)

   amounts that have already fallen due;

2. (2)

   tax recoveries and claims against compensation funds to the extent not already offset in mathematical reserves.1

A firm carrying on long-term insurance business must ensure that it has admissible assets in each of its with-profits funds of a value sufficient to cover the technical provisions in respect of all the business written in that with-profits fund.1

In addition to complying with PRU 7.2.27 R, a realistic basis life firm must also ensure that the realistic value of assets for each of its with-profits funds is at least equal to the realistic value of liabilities of that fund.

1. (1)

   Subject to (2), a UK firm must hold admissible assets held pursuant to PRU 4.2.53R:

   1. (a)

      (where the admissible assets cover technical provisions in pounds sterling), in any EEA State; and

   2. (b)

      (where the admissible assets cover technical provisions in any currency other than pounds sterling), in any EEA State or in the country of that currency.

2. (2)

   In the case of a community co-insurance operation and a relevant insurer, the admissible assets covering technical provisions must be held in any EEA State.

PRU 7.2.30 R does not apply to:

1. (1)

   a pure reinsurer; or

2. (2)

   debts owed by reinsurers; or

3. (3)

   insurance business carried on by a UK firm outside the EEA States; or

4. (4)

   general insurance business class groups 3 and 4 in IPRU(Ins), Annex 11.2, Part II.

For the purposes of PRU 7.2.30 R:

1. (1)

   a tangible asset is to be treated as held in the country or territory where it is situated;

2. (2)

   an admissible asset consisting of a claim against a debtor is to be treated as held in any country or territory where it can be enforced by legal action;

3. (3)

   a listed security is to be treated as held in any country or territory where there is a regulated market on which the security is dealt; and

4. (4)

   a security which is not a listed security is to be treated as held in the country or territory in which the issuer has its head office.

1. (1)

   Subject to (4), the assets held by a firm to cover its technical provisions (see PRU 7.2.20 R and PRU 7.2.21 R) must:

   1. (a)

      have characteristics of safety, yield and marketability which are appropriate to the type of business carried on by the firm;

   2. (b)

      be diversified and adequately spread; and

   3. (c)

      comply with (2).

2. (2)

   The assets referred to in (1) must, in addition to meeting the criteria set out in (1)(a) and (b), be of a sufficient amount, and of an appropriate currency and term, to ensure that the cash inflows from those assets will meet the expected cash outflows from the firm's insurance liabilities as they become due.

3. (3)

   For the purpose of (2), a firm must take into consideration in determining expected cash outflows any options which exist in the firm's contracts of insurance.

4. (4)

   (1) does not apply to assets held to cover index-linked liabilities or property-linked liabilities, except that where the linked long-term contract of insurance in question includes a guarantee of investment performance or some other guaranteed benefit, (1) will nevertheless apply to assets held to cover that guaranteed element.

A firm must not enter into a long-term insurance contract unless it is satisfied on reasonable actuarial assumptions that:

1. (1)

   the premiums receivable and the investment income expected to be earned from those premiums; and

2. (2)

   the reinsurance arrangements made in respect of the risk or risks covered by that new contract;

   are sufficient to enable it, when taken together with the firm's other resources, to:

   1. (a)

      establish adequate technical provisions as required by PRU 7.2.16 R;

   2. (b)

      hold admissible assets of a value at least equal to the amount of the technical provisions as required by PRU 7.2.20 R to PRU 7.2.28 R; and

   3. (c)

      maintain adequate overall financial resources as required by PRU 1.2.22R.

The premiums amount is:

1. (1)

   18% of the gross adjusted premiums amount; less 2% of the amount, if any, by which the gross adjusted premiums amount exceeds €50 million; multiplied by

2. (2)

   the reinsurance ratio set out in PRU 7.2.54 R.

The claims amount is:

1. (1)

   26% of the gross adjusted claims amount; less 3% of the amount, if any, by which the gross adjusted claims amount exceeds € 35 million; multiplied by

2. (2)

   the reinsurance ratio set out in PRU 7.2.54 R.

1. (1)

   Subject to (2) and (3), the Euro amounts specified in PRU 7.2.45 R (1) and PRU 7.2.47 R (1) will increase each year, starting on the first review date of 20 September 2005 (and annually after that), by the percentage change in the European index of consumer prices (comprising all European Union member states, as published by Eurostat) from 20 March 2002 to the relevant review date, rounded up to a multiple of €100,000.

2. (2)

   In any year, if the percentage change since the last increase is less than 5%, then there will be no increase.

3. (3)

   The increase will take effect 30 days after the EU Commission has informed the European Parliament and Council of its review and the relevant percentage change.

For the purposes of PRU 7.2.45 R (1) and PRU 7.2.47 R (1), 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.

The brought forward amount is the general insurance capital requirement (GICR) 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, determined in accordance with PRU 7.2.12 R; to

2. (2)

   the technical provisions (calculated net of reinsurance) for claims outstanding at the beginning of the prior financial year, determined in accordance with PRU 7.2.12 R.

The reinsurance ratio referred to in PRU 7.2.45 R (2) and PRU 7.2.47 R (2) is:

1. (1)

   if the ratio 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 (a) and (b) of (1) is 50% or less; and

3. (3)

   100%, if the ratio calculated in (a) and (b) of (1) is 100% or more.

For the purpose of PRU 7.2.45 R, the gross adjusted premiums amount is the higher of the written and earned gross premiums (as determined in accordance with PRU 7.2.66 R) for the financial year in question, adjusted by:

1. (1)

   except for a pure reinsurer that does not have permission under the Act to effect contracts of insurance, increasing by 50% the amount included in respect of the premiums for general insurance business classes 11, 12 and 13;

2. (2)

   deducting 66.7% of the premiums for actuarial health insurance that meets the conditions set out in PRU 7.2.72 R; 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.

For the purpose of PRU 7.2.47 R and subject to PRU 7.2.62 R, the gross adjusted claims amount is the amount of gross claims incurred (as determined in accordance with PRU 7.2.66 R) over the reference period (as specified in PRU 7.2.63 R) and adjusted by:

1. (1)

   except for a pure reinsurer that does not have permission under the Act to effect contracts of insurance, increasing by 50% the amount included in respect of the claims incurred for general insurance business classes 11, 12 and 13;

2. (2)

   deducting 66.7% of the claims for actuarial health insurance that meets the conditions set out in PRU 7.2.72 R; 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.

For the purposes of PRU 7.2.47 R, 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.

1. (1)

   Except in those cases where paragraph (2) applies, the reference period to be used in PRU 7.2.60 R and PRU 7.2.62 R must be:

   1. (a)

      the financial year in question and the two previous financial years; or

   2. (b)

      the period the firm had been in existence at the end of the financial year in question, if shorter.

2. (2)

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

   1. (a)

      the financial year in question and the six previous financial years; or

   2. (b)

      the period the firm had been in existence at the end of the financial year in question, if shorter.

For the purposes of PRU 7.2.54 R, PRU 7.2.56 R, PRU 7.2.60 R and PRU 7.2.62 R, amounts of premiums and claims must be:

1. (1)

   determined in accordance with PRU 1.3 (Valuation); and

2. (2)

   adjusted for transfers that were approved by the relevant authority (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 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 to the firm.

Where there has been a significant change in the business portfolio of the firm since the end of the financial year in question, for example, a line of business has been transferred to another firm, or the firm no longer carries on a particular class of insurance business, 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 PRU 1.3 (Valuation).

The conditions referred to in PRU 7.2.56 R (2) and PRU 7.2.60 R (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.

A firm must calculate its insurance-related capital requirement in accordance with PRU 7.2.77 R.

1. (1)

   The value of:

   1. (a)

      the net written premiums; and

   2. (b)

      the technical provisions;

   in respect of each class of business listed in the table in PRU 7.2.79 R must be multiplied by the corresponding capital charge factor.

2. (2)

   If any amount which is to be multiplied by a capital charge factor is a negative amount, that amount shall be treated as zero.

3. (3)

   The amounts resulting from multiplying the net written premiums in respect of each such class of business by the corresponding capital charge factor must be aggregated.

4. (4)

   The amounts resulting from multiplying the technical provisions in respect of each such class of business by the corresponding capital charge factor must be aggregated.

5. (5)

   The insurance-related capital requirement is the sum of the amounts calculated in accordance with (3) and (4).

In PRU 7.2.77 R references to technical provisions comprise:

1. (1)

   outstanding claims;

2. (2)

   provisions for incurred but not reported (IBNR) claims;

3. (3)

   provisions for incurred but not enough reported (IBNER) claims;

4. (4)

   unearned premium reserves less deferred acquisition costs; and

5. (5)

   unexpired risk reserves;

in each case net of reinsurance receivables.

The insurance death risk capital component is the aggregate of the amounts which represent the fractions specified by PRU 7.2.82 R of the capital at risk, defined in PRU 7.2.83 R, for 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 preceding financial year of:

   1. (a)

      the aggregate capital at risk net of reinsurance cessions; to

   2. (b)

      the aggregate capital at risk gross of reinsurance cessions.

For the purpose of PRU 7.2.81 R, 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.

For the purpose of PRU 7.2.81 R, 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.

The insurance health risk capital component is the highest of:

1. (1)

   the premiums amount (determined in accordance with PRU 7.2.45 R);

2. (2)

   the claims amount (determined in accordance with PRU 7.2.47 R); and

3. (3)

   the brought forward amount (determined in accordance with PRU 7.2.51 R);

   in respect of:

   1. (a)

      contracts of insurance falling in long-term insurance business class IV (see PRU 7.2.86 R); and

   2. (b)

      risks falling in general insurance business classes 1 or 2 that are written as part of a long-term insurance contract.

For the purposes of PRU 7.2.85 R, in the case of contracts of insurance falling in long-term insurance business class IV, condition (3) as set out in PRU 7.2.72 R (Actuarial health insurance) is modified to: "either the reserves include a provision for increasing age, or the business is conducted on a group basis.".

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 preceding financial year 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 5 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" (as defined in PRU 7.2.90 R and PRU 7.2.91 R).

The insurance market risk capital component is 3% of the "adjusted mathematical reserves" (as defined in PRU 7.2.90 R and PRU 7.2.91 R) for all contracts of insurance except those which:

1. (1)

   fall in long-term insurance business classes III, VII or VIII and in respect of which the firm does not bear any investment risk; or

2. (2)

   fall in long-term insurance business class V.

For the purpose of PRU 7.2.88 R and PRU 7.2.89 R, the "adjusted mathematical reserves" is the amount of mathematical reserves (gross of reinsurance cessions), multiplied 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 preceding financial year of:

   1. (a)

      the mathematical reserves net of reinsurance cessions; to

   2. (b)

      the mathematical reserves gross of reinsurance cessions.

The "adjusted mathematical reserves" do not include:

1. (1)

   for the purposes of PRU 7.2.88 R (3) and PRU 7.2.89 R, amounts arising from tontines (long-term insurance business class V);

2. (2)

   for the purposes of PRU 7.2.88 R (3), amounts arising from insurance business in classes III, VII or VIII, to the extent that such business meets the conditions in PRU 7.2.88 R (1);

3. (3)

   for the purposes of PRU 7.2.89 R, amounts arising from insurance business in classes III, VII or VIII, to the extent that such business meets the conditions in PRU 7.2.89 R (1).