PRU 7.2 Capital resources requirements and technical provisions for insurance business

Application

PRU 7.2.1 R 31/12/2004

PRU 7.2 applies to an insurer unless it is:

(1)
a non-directive friendly society; or
(2)
an incoming EEA firm; or
(3)
an incoming Treaty firm.

PRU 7.2.2 R 31/12/2004

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

PRU 7.2.3 R 31/12/2005

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 and other liabilities1" (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)).

PRU 7.2.4 R 31/12/2005

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 and other liabilities1" (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.

PRU 7.2.5 R 31/12/2005

For a 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 and other liabilities1" (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)).

PRU 7.2.6 G 31/12/2004

This section may apply in cases where a firm has its head office in another EEA State but is neither an incoming EEA firm nor an incoming Treaty firm; this could arise in the case of a non-directive mutual or a pure reinsurer.

Purpose

PRU 7.2.7 G 31/12/2004

PRU 7.2 has the aim of reducing the risk that a firm may fail to meet its liabilities to its policyholders as a result of insurance risk, that is, the risk that arises from the inherent uncertainties as to the occurrence, amount and timing of insurance liabilities.

PRU 7.2.8 G 31/12/2004

This section requires that the technical provisions that firms establish are adequate to meet their liabilities to policyholders under contracts of insurance. It also requires that firms hold assets of a value sufficient to cover their liabilities, including technical provisions, and that there is suitable matching of assets and liabilities. Technical provisions are the on-balance sheet provisions made by a firm in respect of liabilities arising under or in connection with contracts of insurance. There are different rules and guidance applicable to the calculation of technical provisions for general insurance business and for long-term insurance business.

PRU 7.2.9 G 31/12/2004

This section implements requirements of the Insurance Directives for both general insurance business and long-term insurance business with regard to the technical provisions. The relevant articles of the Directives include:

(1)
article 15 of the First Non-Life Directive, as substituted by article 17 of the Third Non-Life Directive; and
(2)
article 20 of the Consolidated Life Directive (this Directive consolidates the provisions of the previous First, Second and Third Life Directives).

PRU 7.2.10 G 31/12/2004

This section also sets out detailed rules and guidance on the calculation of the following elements of a firm's capital resources requirement (CRR) (see PRU 2.1):

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

PRU 7.2.11 G 31/12/2004

These requirements are dealt with in the part of this section headed "Capital requirements for insurers" (see PRU 7.2.43 G to PRU 7.2.91 R). That part of this section also contains rules about the calculation of the insurance-related capital requirement, which forms part of the enhanced capital requirement for firms carrying on general insurance business. The asset-related capital requirement for firms carrying on general insurance business is set out in PRU 3.3.

Establishing technical provisions

PRU 7.2.12 R 31/12/2004

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

(1)
in accordance with the rules in PRU 7.5 for equalisation provisions; and
(2)
otherwise, in accordance with PRU 1.3.5R.

PRU 7.2.13 G 31/12/2004

For general insurance business, the technical provisions include outstanding claims provisions, unearned premiums provisions, unexpired risk provisions and equalisation provisions. These provisions take into account the expected ultimate cost of claims, including those not yet incurred, related expenses and include an allowance for smoothing claims (the equalisation provision).

PRU 7.2.14 G 31/12/2004

Discounting (that is discounting for the time value of money) general insurance business technical provisions may be carried out only in limited circumstances and on a prudent basis (see PRU 2.2.80R and PRU 2.2.81R and paragraph 48 of the insurance accounts rules). The fact that the expected liabilities are generally not discounted helps to protect against risk from inherent uncertainty in the timing, but not necessarily the amount, of claims.

PRU 7.2.15 G 31/12/2004

For some categories of general insurance business, equalisation provisions are required. These ensure that a firm retains additional assets to provide some extra protection against uncertainty as to the amount of claims. Equalisation provisions are particularly suitable for volatile business, where claims in any future year may be subject to significant adverse deviation from recent or average expected claims experience, or where trends in claims experience may be subject to change. Such volatile claims experience arises in a number of types of business, for example, property, marine and aviation, nuclear, certain non-proportional reinsurance treaty business, and credit insurance. The equalisation provisions help to equalise fluctuations in loss ratios in future years (see PRU 7.5 (Equalisation provisions)).

PRU 7.2.16 R 31/12/2005

For long-term insurance business, a firm must establish adequate technical provisions in respect of its long-term insurance contracts as follows1:

(1)
mathematical reserves 1 in accordance with the rules and guidance in PRU 7.3 relating to such reserves1, and with due regard to generally accepted actuarial practice; and
1 1
(2)
for liabilities in respect of such contracts that1 have fallen due, in accordance with PRU 1.3.5R.
1

PRU 7.2.17 G 31/12/2004

Rules and guidance for calculating mathematical reserves are set out in PRU 7.3. Firms are advised by the actuarial function (see SUP 4) on the methods and assumptions to be used in calculating the mathematical reserves. The standards and guidance issued by the Faculty and Institute of Actuaries to assist actuaries appointed to the actuarial function are important sources of evidence as to generally accepted actuarial practice, as referred to in PRU 7.2.16 R (1).

PRU 7.2.18 G 31/12/2004

For long-term insurance business, the technical provisions include the mathematical reserves. These are actuarial estimates of a firm's liabilities in respect of future benefits due to policyholders, including bonuses already declared. The mathematical reserves may be reduced by the actuarial value of that component of future premiums attributable to meeting future liabilities (see PRU 7.3 (Mathematical reserves)).

PRU 7.2.19 G 31/12/2004

For long-term insurance business, the mathematical reserves are typically valued on a discounted basis but include valuation margins intended to provide protection against adverse deviations in experience (see PRU 7.3).

Assets of a value sufficient to cover technical provisions and other liabilities1

PRU 7.2.20 R 31/12/2005

A firm which is not a composite firm must hold admissible assets of a value at least equal to the amount of:1

(1)
the technical provisions that it is required to establish under PRU 7.2.12 R or PRU 7.2.16 R; and1
(2)
its other general insurance liabilities or long-term insurance liabilities;1

but excluding property-linked liabilities and index-linked liabilities and the assets held to cover them under PRU 4.2.57 R and PRU 4.2.58 R.1

PRU 7.2.21 R 31/12/2005

A composite firm must ensure that:

(1)
it holds admissible assets separately identified in accordance with PRU 7.6.18 R of1 a value at least equal to the amount of:
1
1. (a)
  the technical provisions that it is required to establish under PRU 7.2.16 R1; and
  1
2. (b)
  its other long-term insurance liabilities;1
  1
but excluding property-linked liabilities and index-linked liabilities and the assets held to cover them under PRU 4.2.57 R and PRU 4.2.58 R; and1
(2)
it holds other admissible assets (other than those excluded under (1)) of a value at least equal to the amount of:1
1
1. (a)
  the technical provisions that it is required to establish under PRU 7.2.12 R; and1
2. (b)
  its other general insurance liabilities.1

PRU 7.2.22 G 31/12/2004

PRU 7.6 (Internal-contagion risk) sets out the rules and guidance on identifying and holding in a separate fund long-term insurance assets.

PRU 7.2.23 G 31/12/2005

When valuing assets for the purposes of PRU 7.2.20 R and PRU 7.2.21 R, a firm should bear in mind:

(1)
that the technical provisions and other long-term insurance liabilities or general insurance liabilities 1 should be covered by admissible assets (see PRU 2 Annex 1 RR); and
(2)
the market and counterparty limits set out in PRU 3.2 (Credit risk in insurance). PRU 3.2 requires that a firm restrict to prudent levels its exposure to reinsurer and other counterparties, and, in particular, that for the purpose of its balance sheet, a firm must not take into account any exposure which exceeds the large exposure limits.

PRU 7.2.24 G 31/12/2004

Rules and guidance on the valuation of assets are set out in PRU 1.3 (Valuation), including the treatment of shares in, and debts due from, related undertakings in PRU 1.3.31R to PRU 1.3.42 G. PRU 4.2 (Market risk in insurance) addresses market risk and sets out the matching requirements for linked assets and liabilities. PRU 4.2 also sets out rules and guidance on the matching by currency of assets and liabilities, to reduce a firm's exposure to currency market risk.

PRU 7.2.25 R 31/12/2005

For the purpose of determining the value of assets available to meet technical provisions and other1 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:

(1)
debts owed by reinsurers; or
1
(2)
claims; or1
1
(3)
tax recoveries; or1
(4)
claims against compensation funds;1

to the extent already offset in the calculation of technical provisions.1

PRU 7.2.26 G 31/12/2005

Certain debts and claims1 are excluded from PRU 7.2.20 R, PRU 7.2.21 R, PRU 7.2.27 R and PRU 7.2.28 R to avoid double-counting. The rules and guidance in PRU 7.3 (Mathematical reserves) set out how a firm may offset debts and claims against liabilities in calculating the mathematical reserves required for long-term insurance business.

1 1

PRU 7.2.27 R 31/12/2005

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:1

(1)
the technical provisions in respect of all the business written in that with-profits fund; and1
(2)
its other long-term insurance liabilities in respect of that with-profits fund.1

PRU 7.2.28 R 31/12/2004

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.

PRU 7.2.29 G 31/12/2005

PRU 7.2.27 R and PRU 7.2.28 R support the funding of policyholder benefits by requiring firms to maintain admissible assets in with-profits funds to cover the technical provisions and other long-term insurance liabilities 1 relating to all the business in that fund and, in the case of a realistic basis life firm, realistic assets to cover the realistic liabilities of the with-profits insurance contracts written in the fund.

Localisation (UK firms only)

PRU 7.2.30 R 31/12/2004

(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)
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 7.2.31 G 31/12/2004

PRU 7.6 (Internal contagion risk) sets out the rules and guidance on localisation for firms other than UK firms.

PRU 7.2.32 R 31/12/2004

PRU 7.2.30 R does not apply to:

(1)
a pure reinsurer; or
(2)
debts owed by reinsurers; or
(3)
insurance business carried on by a UK firm outside the EEA States; or
(4)
general insurance business class groups 3 and 4 in IPRU(Ins), Annex 11.2, Part II.

PRU 7.2.33 R 31/12/2004

For the purposes of PRU 7.2.30 R:

(1)
a tangible asset is to be treated as held in the country or territory where it is situated;
(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)
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)
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.

Matching of assets and liabilities

PRU 7.2.34 R 31/12/2005

(1)
Subject to (4), the assets held by a firm to cover its technical provisions and other long-term insurance liabilities or general insurance liabilities 1 (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)
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)
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)
(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.

PRU 7.2.35 G 31/12/2005

A firm should take account of the amount, currency and timing of its expected cash outflows in determining whether the assets it holds to cover its technical provisions and other long-term insurance liabilities or general insurance liabilities 1 meet the requirements of PRU 7.2.34 R (2).

PRU 7.2.36 G 31/12/2005

For the purpose of PRU 7.2.34 R (2), the relevant cash inflows are those which the firm reasonably expects to receive from the admissible assets which it holds to cover its technical provisions and other long-term insurance liabilities or general insurance liabilities 1. A firm may receive cash inflows as a result of:

(1)
selling assets or closing out transactions;
(2)
holding assets that generate dividends, interest or other income; and
(3)
receiving future premiums for existing business.

PRU 7.2.37 G 31/12/2004

Anticipated cash inflows from future new business should not be included, for example where the customer has not yet contracted to pay the premium, and where the associated liabilities and potential cash outflows should also not be included.

PRU 7.2.38 G 31/12/2004

A firm should compare cash inflows and outflows based on current expectations of amounts and timings. Current market expectations of future asset values, interest rates and currency exchange rates should be used. Where inflows are received in a currency different from that in which outflows are to be paid, account should be taken of the cost of converting the currency received.

PRU 7.2.39 G 31/12/2004

In considering the value and suitability of assets required to ensure that the firm's liabilities are met as they become due, a firm should take account of the risk of default on inflows from those assets, and other risks that may mean that future inflows are reduced relative to outflows.

PRU 7.2.40 G 31/12/2005

PRU 7.2.20 R lays down a general requirement for a firm that carries on long-term insurance business to hold admissible assets that are of a value sufficient to cover its technical provisions and other long-term insurance liabilities 1. The PRU 7.2.34 R (2) requirement to match liabilities with assets that allow cash outflows to be met with suitable inflows as the outflows become due may mean that a firm has to hold assets of a value greater than would otherwise be required by the general rule in PRU 7.2.20 R.

Premiums for new business

PRU 7.2.41 R 31/12/2005

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

(1)
the premiums receivable and the investment income expected to be earned from those premiums; and
(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 and other long-term insurance liabilities 1 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.

PRU 7.2.42 G 31/12/2004

For the purposes of PRU 7.2.41 R, the adequacy of premiums may be assessed in the context of a firm's total portfolio of business and its other resources. It thus does not prevent a firm writing loss leaders nor writing contracts which might incur large losses, but only if the firm can meet the losses that might reasonably arise, including those that would arise from an event specifically insured against.

Capital requirements for insurers

PRU 7.2.43 G 31/12/2004

(1)
PRU 2.1.9R requires a firm to maintain capital resources equal to or in excess of its capital resources requirement (CRR). PRU 2.1 sets out the overall framework of the CRR; in particular, PRU 2.1.14 R requires that for a firm carrying on general insurance business the CRR is equal to the minimum capital requirement (MCR). PRU 2.1.15 R requires that for realistic basis life firms the CRR is the higher of the MCR and the ECR. PRU 2.1.20 R requires that for regulatory basis only life firms the CRR is equal to the MCR.
(2)
For non-life firms the MCR represents the minimum capital requirement (or margin of solvency) prescribed by the Insurance Directives. PRU 2.1.21 R provides that, for a firm carrying on general insurance business, the MCR in respect of that business is the higher of the base capital resources requirement for general insurance business applicable to that firm and the general insurance capital requirement. PRU 2.1.22 R provides that, for a firm carrying on long-term insurance business, the MCR in respect of that business is the higher of the base capital resources requirement for long-term insurance business applicable to that firm and the sum of the long-term insurance capital requirement and the resilience capital requirement. As specified in PRU 2.1.10 R, a firm carrying on both general insurance business and long-term insurance business must apply PRU 2.1.9R (referred to in paragraph (1) above) separately to its general insurance business and its long-term insurance business.
(3)
The calculation of the general insurance capital requirement is set out in PRU 7.2.44 G to PRU 7.2.72 R below. PRU 7.2.73 G to PRU 7.2.79 R set out the calculation of the insurance-related capital requirement for non-life firms. The calculation of the long-term insurance capital requirement is set out in PRU 7.2.80 G to PRU 7.2.91 R below.

General insurance capital requirement

PRU 7.2.44 G 31/12/2004

In relation to the MCR (see PRU 7.2.43 G), PRU 2.1.30 R requires a firm to calculate its general insurance capital requirement (GICR) as the highest of the premiums amount, the claims amount, and the brought forward amount. The elements for this computation are set out in PRU 7.2 as follows:

(1)
the premiums amount in PRU 7.2.45 R;
(2)
the claims amount in PRU 7.2.47 R; and
(3)
the brought forward amount in PRU 7.2.51 R.

The premiums amount

PRU 7.2.45 R 31/12/2004

The premiums amount is:

(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)
the reinsurance ratio set out in PRU 7.2.54 R.

PRU 7.2.46 G 31/12/2004

Rules and guidance as to how the gross adjusted premiums amount is to be calculated are set out in PRU 7.2.56 R to PRU 7.2.59 G.

The claims amount

PRU 7.2.47 R 31/12/2004

The claims amount is:

(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)
the reinsurance ratio set out in PRU 7.2.54 R.

PRU 7.2.48 G 31/12/2004

Rules and guidance as to how the gross adjusted claims amount is to be calculated are set out in PRU 7.2.60 R to PRU 7.2.65 G.

PRU 7.2.49 R 31/12/2004

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

PRU 7.2.50 R 31/12/2004

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

PRU 7.2.51 R 31/12/2004

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)
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)
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.

PRU 7.2.52 G 31/12/2004

The brought forward amount is the same as the GICR for the prior financial year, except where claims outstanding have fallen during that financial year. If they have fallen, the brought forward amount is itself reduced by the same percentage fall.

PRU 7.2.53 G 31/12/2004

If the GICR for the prior financial year is less than the premiums amount or the claims amount, then a brought forward amount is not required to be calculated.

Reinsurance ratio used in calculating the premiums amount and the claims amount

PRU 7.2.54 R 31/12/2004

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

(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)
50%, if the ratio calculated in (a) and (b) of (1) is 50% or less; and
(3)
100%, if the ratio calculated in (a) and (b) of (1) is 100% or more.

PRU 7.2.55 G 31/12/2004

Rules and guidance as to how the net and gross claims are to be calculated are set out in PRU 7.2.66 R to PRU 7.2.71 R.

Gross adjusted premiums amount used in calculating the premiums amount

PRU 7.2.56 R 31/12/2005

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 adjusted1 in accordance with PRU 7.2.66 R) for the financial year in question, adjusted by:

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

PRU 7.2.57 G 31/12/2004

A firm may use statistical methods in order to allocate premiums in respect of the classes 11, 12 and 13 for the purposes of PRU 7.2.56 R.

PRU 7.2.58 G 31/12/2004

General insurance business classes 11, 12 and 13 are, respectively, the marine liability, aviation liability and general liability insurance classes.

PRU 7.2.59 G 31/12/2004

Where the firm did not carry on insurance business in the financial year in question, the gross adjusted premiums amount, and therefore the premiums amount, is nil.

Gross adjusted claims amount used in calculating the claims amount

PRU 7.2.60 R 31/12/2004

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

PRU 7.2.61 G 31/12/2004

A firm may use statistical methods in order to allocate claims in respect of classes 11, 12 and 13 for the purposes of PRU 7.2.60 R.

PRU 7.2.62 R 31/12/2004

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.

PRU 7.2.63 R 31/12/2004

(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)
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.

PRU 7.2.64 G 31/12/2004

The classification of the risks referred to in PRU 7.2.63 R (2) is as follows: credit - as included in general insurance business class 14; storm - as included in general insurance business class 8; hail - as included in general insurance business class 9; and frost - as included in general insurance business class 9.

PRU 7.2.65 G 31/12/2004

Where the firm did not carry on insurance business in the reference period, the gross adjusted claims amount, and therefore the claims amount, is nil.

Accounting for premiums and claims

PRU 7.2.66 R 31/12/2005

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)
determined in accordance with the insurance accounts rules or the Friendly Societies (Accounts and Related Provisions) Regulations 1994, as appropriate1; and
1
(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.

PRU 7.2.67 G 31/12/2004

To ensure that all rights and obligations under a contract of insurance are transferred, a number of alternative mechanisms could be used. These are: an insurance business transfer under Part VII of the Act; under earlier United Kingdom insurance legislation; under equivalent foreign legislation; or by novation of contracts. The term "relevant authority" in paragraph (2) of PRU 7.2.66 R may refer to whatever body has responsibility in a country, whether within or outside the EEA, for the approval of transfers of portfolios of contracts of insurance; the body may be a supervisory authority for financial services as such or it may be a judicial authority which has the necessary responsibility.

PRU 7.2.68 G 31/12/2004

PRU 7.2.66 R (2)(b) requires a firm, for the purpose of calculating its GICR, to account for contracts of insurance transferred by it to another body as if it had never written those contracts. All amounts of premiums and claims arising in respect of those contracts are excluded, including amounts that arose in the financial year in question or previous financial years.

PRU 7.2.69 G 31/12/2004

Conversely, PRU 7.2.66 R (2)(c) requires a firm, for the purpose of calculating its GICR, to account for contracts of insurance transferred to it by another body as if it had been responsible for those contracts from inception and not merely from the date of transfer. All amounts of premiums and claims that arose from those contracts are included even where they arose prior to the date of transfer and were, in fact, receivable by or payable to the other body.

PRU 7.2.70 G 31/12/2004

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.

PRU 7.2.71 R 31/12/2005

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 the insurance accounts rules or the Friendly Societies (Accounts and Related Provisions) Regulations 1994, as appropriate1.

Actuarial health insurance

PRU 7.2.72 R 31/12/2004

The conditions referred to in PRU 7.2.56 R (2) and PRU 7.2.60 R (2) are that:

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

Insurance-related capital requirement (general insurance business only)

PRU 7.2.73 G 31/12/2004

PRU 2.3.11 R requires firms carrying on general insurance business, other than a non-directive insurer, to calculate their ECR as the sum of the asset-related capital requirement and the insurance-related capital requirement less the firm's equalisation provisions. The ECR for firms carrying on general insurance business is an indicative measure of the capital resources that a firm may need to hold based on risk sensitive calculations applied to its business profile. For firms carrying on general insurance business, the FSA will use the ECR as a benchmark for individual capital guidance for a firm carrying on general insurance business. Details of the calculation of the asset-related capital requirement are set out in PRU 3.3. Details of the calculation of the insurance-related capital requirement are set out in PRU 7.2.76 R to PRU 7.2.79 R.

PRU 7.2.74 G 31/12/2004

The insurance-related capital requirement is a measure of the capital that a firm should hold against the risk of:

(1)
an adverse movement in the value of a firm's liabilities, to recognise that there may be substantial volatility in claims and other technical provisions made by the firm. Such variations may be due to inflationary increases, interest rate changes, movements in the underlying provisions themselves, changes in expense costs, inadequate rate pricing or premium collections (or both) from intermediaries differing from projected assumptions; and
(2)
the premiums a firm charges in respect of particular business not being adequate to fund future liabilities arising from that business.

PRU 7.2.75 G 31/12/2004

The insurance-related capital requirement is calculated by applying capital charge factors, expressed as a percentage, to the value of the net written premiums and the technical provisions in respect of different classes of business. Firms should refer to PRU 1.3.5 R which sets out how a firm must recognise and value assets and liabilities.

Calculation of the insurance-related capital requirement

PRU 7.2.76 R 31/12/2004

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

PRU 7.2.77 R 31/12/2004

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

PRU 7.2.78 R 31/12/2004

In PRU 7.2.77 R references to technical provisions comprise:

(1)
outstanding claims;
(2)
provisions for incurred but not reported (IBNR) claims;
(3)
provisions for incurred but not enough reported (IBNER) claims;
(4)
unearned premium reserves less deferred acquisition costs; and
(5)
unexpired risk reserves;

in each case net of reinsurance receivables.

PRU 7.2.79 R 31/12/2005

Table: Insurance-related Capital Charge Factors

Class of Business	Net Written Premium capital charge factor	Technical provision capital charge factor
2Reporting Group: Direct and facultative business
2Direct and facultative accident and health	5.0%	7.5%
2Direct and facultative personal lines motor business	10.0%	9.0%
2Direct and facultative household and domestic all risks	10.0%	10.0%
2Direct and facultative personal lines financial loss	25.0%	14.0%
2Direct and facultative commercial motor business	10.0%	9.0%
2Direct and facultative commercial lines property	10.0%	10.0%
2Direct and facultative commercial lines liability	14.0%	14.0%
2Direct and facultative commercial lines financial loss	25.0%	14.0%
2Direct and facultative aviation	32.0%	14.0%
2Direct and facultative marine	22.0%	17.0%
2Direct and facultative goods in transit	12.0%	14.0%
2Direct and facultative miscellaneous	25.0%	14.0%
Reporting Group: Non-Proportional Treaty
Non-proportional accident & health	35.0%	16.0%
Non-proportional motor	10.0%	14.0%
Non-proportional transport	16.0%	15.0%
Non-proportional aviation	61.0%	16.0%
Non-proportional marine	38.0%	17.0%
Non-proportional property 2	53.0%	12.0%2
Non-proportional liability (non-motor)	14.0%	14.0%
Non-proportional financial lines2 2	39.0%	14.0%
Non-proportional aggregate cover	53.0%	12.0%
Reporting Group: Proportional Treaty
Proportional accident & health 2	12.0%	16.0%
Proportional motor 2	10.0%	12.0%
Proportional transport	12.0%	15.0%
Proportional aviation	33.0%	16.0%
Proportional marine	22.0%	17.0%
Proportional property	23.0%	12.0%
Proportional liability (non-motor)	14.0%	14.0%
Proportional financial lines2 2	25.0%	14.0%
Proportional aggregate cover	23.0%	12.0%2
Reporting Group: Miscellaneous Reinsurance
Miscellaneous reinsurance accepted business	39.0%	14.0%

Long-term insurance capital requirement

PRU 7.2.80 G 31/12/2004

PRU 2.1.9 R requires a firm to which PRU 2 applies to maintain capital resources equal to or in excess of its capital resources requirement. PRU 2.1.15 R defines the capital resources requirement for a firm to which that rule applies (a realistic basis life firm) as the higher of the MCR and the ECR. For other firms carrying on long-term insurance business (regulatory basis only life firms), the capital resources requirement is equal to the MCR. The MCR is defined as the higher of the base capital resources requirement and the sum of the long-term insurance capital requirement (LTICR) and the resilience capital requirement (see PRU 2.1.22 R). PRU 2.1.32 R defines the LTICR as the sum of the insurance death, health, expense, and market risk capital components (see PRU 7.2.81 R to PRU 7.2.91 R). Rules and guidance about the resilience capital requirement are set out in PRU 4.2.9 G to PRU 4.2.26 R.

Insurance death risk capital component

PRU 7.2.81 R 31/12/2005

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 each category of contracts of insurance (as specified in PRU 7.2.81A R), in respect of1 those contracts where the capital at risk is not a negative figure, multiplied by the higher of:

(1)
50%; and
(2)
the ratio as at the end of the financial year in question 1 of:
1
1. (a)
  the aggregate capital at risk in respect of that category of contracts1 net of reinsurance cessions; to
2. (b)
  the aggregate capital at risk in respect of that category of contracts1 gross of reinsurance cessions.

PRU 7.2.81A R 31/12/2005

1For the purpose of PRU 7.2.81 R, the categories of contracts of insurance are as follows:

(1)
contracts which fall in long-term insurance business classes I, II or IX; and
(2)
contracts which fall in long-term insurance business classes III, VII or VIII.

PRU 7.2.82 R 31/12/2004

For the purpose of PRU 7.2.81 R, the fraction is:

(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)
0.3% for long-term insurance business classes III, VII and VIII, except for a pure reinsurer; and
(3)
0.1% for a pure reinsurer.

PRU 7.2.83 R 31/12/2004

For the purpose of PRU 7.2.81 R, the capital at risk is:

(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)
in any other case, the amount payable as a result of death;

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

PRU 7.2.84 G 31/12/2004

The insurance death risk capital component only relates to the risk of death. There is a separate risk component for insured health risks (class IV). Tontines (class V) and capital redemption operations (class VI) also have separate risk components. There is no specified risk margin for other insured risks.

Insurance health risk capital component

PRU 7.2.85 R 31/12/2004

The insurance health risk capital component is the highest of:

(1)
the premiums amount (determined in accordance with PRU 7.2.45 R);
(2)
the claims amount (determined in accordance with PRU 7.2.47 R); and
(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.

PRU 7.2.86 R 31/12/2004

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.".

PRU 7.2.87 G 31/12/2004

The insurance health risk capital component only arises for permanent health insurance (long-term insurance business class IV) and accident and sickness insurance (general insurance business classes 1 and 2).

Insurance expense risk capital component

PRU 7.2.88 R 31/12/2005

The insurance expense risk capital component is:

(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 1 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;
1
(2)
in respect of any tontine (long-term insurance business class V), 1% of the assets of the tontine;
(3)
in the case of any other long-term insurance business, 1% of the "adjusted mathematical reserves" (as defined in PRU 7.2.89A R1).
1

Insurance market risk capital component

PRU 7.2.89 R 31/12/2005

The insurance market risk capital component is 3% of the "adjusted mathematical reserves" (as defined in PRU 7.2.89A R1) for all insurance liabilities1 except those of a kind1 which:

1 1

(1)
arise from contracts of insurance falling1 in long-term insurance business classes III, VII or VIII to the extent that1 the firm does not bear any investment risk; or
1 1
(2)
arise from contracts of insurance falling1 in long-term insurance business class V.
1

Adjusted mathematical reserves

PRU 7.2.89A R 31/12/2005

(1)
1For the purpose of PRU 7.2.88 R and PRU 7.2.89 R, the "adjusted mathematical reserves" is the aggregate of the amounts which result from the performance of the calculation in PRU 7.2.90 R for each category of insurance liability specified in (2).
(2)
The categories of insurance liability referred to in (1) are:
1. (a)
  for the purpose of PRU 7.2.88 R, those categories described in PRU 7.2.91 R (1), (2), (3), (4) and (5); and
2. (b)
  for the purpose of PRU 7.2.89 R, those categories described in PRU 7.2.91 R (1), (2), (4) and (5).

PRU 7.2.90 R 31/12/2005

The calculation referred to in PRU 7.2.89A R (1)1 is the multiplication of1 the amount of the1 mathematical reserves (gross of reinsurance cessions) in respect of a category of insurance liability1 by the higher of:

1 1

(1)
85% or, in the case of a pure reinsurer, 50%; and
(2)
the ratio as at the end of the financial year in question 1 of:
1
1. (a)
  the mathematical reserves in respect of that category of insurance liability1 net of reinsurance cessions; to
2. (b)
  the mathematical reserves in respect of that category of insurance liability1 gross of reinsurance cessions.

PRU 7.2.91 R 31/12/2005

For the purpose of PRU 7.2.89A R and PRU 7.2.90 R, the categories of insurance liability are as follows:1

(1)
liabilities of a kind which arise from contracts of insurance falling in long-term insurance business classes I, II or IX;1
1
(2)
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;1
1
(3)
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;1
1
(4)
liabilities of a kind which arise from contracts of insurance falling in long-term insurance business class IV; and1
(5)
liabilities of a kind which arise from contracts of insurance falling in long-term insurance business class VI.1

PRU 7.2.92 G 31/12/2005

1Where a firm has written a unit-linked contract, the firm's liability under the contract may consist of a unit liability, where the firm bears no investment risk, and other liabilities for which the firm bears an investment risk, and for which a separate reserve is held. PRU 7.2.91 R (2) and (3) require a firm to analyse its liabilities under unit-linked contracts between those for which it bears an investment risk and those for which it does not. PRU 7.2.88 R and PRU 7.2.89 R taken together result in a capital requirement for any liabilities for which the firm bears an investment risk of 4% of "adjusted mathematical reserves" (1% for expense risk and 3% for market risk).

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