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INSPRU 1.1 Application

INSPRU 1.1.1 R RP

1 INSPRU 1.1 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

INSPRU 1.1.2 R RP

  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.

INSPRU 1.1.3 R RP

For a non-EEA insurer with a branch in the United Kingdom whose insurance business in the United Kingdom is not restricted to reinsurance (other than an EEA-deposit insurer, a Swiss general insurer or a UK-deposit insurer):

  1. (1)

    the part of this section headed "Capital requirements for insurers" (INSPRU 1.1.43 G to INSPRU 1.1.92B G) applies to its world-wide activities;

  2. (2)

    the parts of this section headed:

    1. (a)

      "Establishing technical provisions" (INSPRU 1.1.12 R to INSPRU 1.1.19 G);

    2. (b)

      "Reinsurance and analogous non-reinsurance financing agreements: risk transfer principle" (INSPRU 1.1.19A R to INSPRU 1.1.19F G);

    3. (c)

      "Assets of a value sufficient to cover technical provisions and other liabilities" (INSPRU 1.1.20 R to INSPRU 1.1.29 G);

    4. (d)

      "Matching of assets and liabilities" (INSPRU 1.1.34 R to INSPRU 1.1.40 G); and

    5. (e)

      "Premiums for new business" (INSPRU 1.1.41 R to INSPRU 1.1.42 G);

    apply separately in respect of its world-wide activities and its activities carried on from a branch in the United Kingdom; and

  3. (3)

    the part of this section headed "Localisation" (INSPRU 1.1.30 R to INSPRU 1.1.33 R) does not apply (see INSPRU 1.5 (Internal contagion risk)).

INSPRU 1.1.4 R RP

For an EEA-deposit insurer or a Swiss general insurer:

  1. (1)

    the parts of this section headed:

    1. (a)

      "Establishing technical provisions" (INSPRU 1.1.12 R to INSPRU 1.1.19 G);

    2. (b)

      "Reinsurance and analogous non-reinsurance financing agreements: risk transfer principle" (INSPRU 1.1.19A R to INSPRU 1.1.19F G);

    3. (c)

      "Assets of a value sufficient to cover technical provisions and other liabilities" (INSPRU 1.1.20 R to INSPRU 1.1.29 G);

    4. (d)

      "Matching of assets and liabilities" (INSPRU 1.1.34 R to INSPRU 1.1.40 G); and

    5. (e)

      "Premiums for new business" (INSPRU 1.1.41 R to INSPRU 1.1.42 G);

    apply in respect of the activities of the firm carried on from a branch in the United Kingdom; and

  2. (2)

    the parts of this section headed "Capital requirements for insurers" (INSPRU 1.1.43 G to INSPRU 1.1.92B G) and "Localisation" (INSPRU 1.1.30 R to INSPRU 1.1.33 R) do not apply.

INSPRU 1.1.5 R RP

For a UK-deposit insurer:

  1. (1)

    the part of this section headed "Capital requirements for insurers" (INSPRU 1.1.43 G to INSPRU 1.1.92B G) applies to its world-wide activities;

  2. (2)

    the parts of this section headed:

    1. (a)

      "Establishing technical provisions" (INSPRU 1.1.12 R to INSPRU 1.1.19 G);

    2. (b)

      "Reinsurance and analogous non-reinsurance financing agreements: risk transfer principle" (INSPRU 1.1.19A R to INSPRU 1.1.19F G);

    3. (c)

      "Assets of a value sufficient to cover technical provisions and other liabilities" (INSPRU 1.1.20 R to INSPRU 1.1.29 G);

    4. (d)

      "Matching of assets and liabilities" (INSPRU 1.1.34 R to INSPRU 1.1.40 G); and

    5. (e)

      "Premiums for new business" (INSPRU 1.1.41 R to INSPRU 1.1.42 G);

    apply separately in respect of its world-wide activities and its activities carried on from branches in EEA States; and

  3. (3)

    the part of this section headed "Localisation" (INSPRU 1.1.30 R to INSPRU 1.1.33 R) does not apply (see INSPRU 1.5 (Internal contagion risk)).

INSPRU 1.1.6 G RP

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.

Purpose

INSPRU 1.1.7 G

INSPRU 1.1 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.

INSPRU 1.1.8 G

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.

INSPRU 1.1.9 G

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. (1)

    article 15 of the First Non-Life Directive, as substituted by article 17 of the Third Non-Life Directive; and

  2. (2)

    article 20 of the Consolidated Life Directive (this Directive consolidates the provisions of the previous First, Second and Third Life Directives).

INSPRU 1.1.10 G

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

  1. (1)

    the general insurance capital requirement; and

  2. (2)

    the long-term insurance capital requirement.

INSPRU 1.1.11 G

These requirements are dealt with in the part of this section headed "Capital requirements for insurers" (see INSPRU 1.1.43 G to INSPRU 1.1.91 R). That part of this section also contains rules about the calculation2 of the enhanced capital requirement for firms carrying on general insurance business, including the calculation of the insurance-related capital requirement2. The calculation of the2asset-related capital requirement, which also forms part of the calculation of the ECR2 for firms carrying on general insurance business is set out in INSPRU 2.2.

Establishing technical provisions

INSPRU 1.1.12 R

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

  1. (1)

    in accordance with the rules in INSPRU 1.4 for equalisation provisions; and

  2. (2)

    otherwise, in accordance with GENPRU 1.3.4 R.

INSPRU 1.1.13 G

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).

INSPRU 1.1.14 G

Discounting (that is discounting for the time value of money) general insurance businesstechnical provisions may be carried out only in limited circumstances and on a prudent basis (see GENPRU 2.2.107 R 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.

INSPRU 1.1.15 G

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 INSPRU 1.4 (Equalisation provisions)).

INSPRU 1.1.16 R

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

  1. (1)

    mathematical reserves in accordance with the rules and guidance in INSPRU 1.2 relating to such reserves, and with due regard to generally accepted actuarial practice; and

  2. (2)

    for liabilities in respect of such contracts that have fallen due, in accordance with GENPRU 1.3.4 R.

INSPRU 1.1.17 G

Rules and guidance for calculating mathematical reserves are set out in INSPRU 1.2. 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 Board for Actuarial Standards to assist actuaries appointed to the actuarial function are important sources of evidence as to generally accepted actuarial practice, as referred to in INSPRU 1.1.16R (1).

INSPRU 1.1.18 G

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 INSPRU 1.2 (Mathematical reserves)).

INSPRU 1.1.19 G

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 INSPRU 1.2).

Reinsurance and analogous non-reinsurance financing agreements: risk transfer principle

INSPRU 1.1.19A R

  1. (1)

    A firm may only take credit for reinsurance if and to the extent that there has been an effective transfer of risk from the firm to a third party.

  2. (2)

    In INSPRU 1.1.19A R to INSPRU 1.1.19F G, references to reinsurance and contracts of reinsurance include:

    1. (a)

      all contracts of reinsurance with an ISPV; and

    2. (b)

      analogous non-reinsurance financing agreements.

INSPRU 1.1.19B R

For the purposes of INSPRU 1.1.19AR (2)(b), analogous non-reinsurance financing agreements include contingent loans, securitisations and any other arrangements in respect of contracts of insurance that are analogous to contracts of reinsurance in terms of the risks transferred and the finance provided.

INSPRU 1.1.19C G

There are a number of ways in which a firm may be able to take credit for reinsurance under the rules in GENPRU and INSPRU. Examples include:

  1. (1)

    treating the reinsurer's share of technical provisions as an admissible asset in accordance with GENPRU 2 Annex 7;

  2. (2)

    reducing its solvency requirements in accordance with the deduction for reinsurance allowed in the calculation of the general insurance capital requirement or the long-term insurance capital requirement under INSPRU 1.1; and

  3. (3)

    bringing into account amounts receivable under the contract when valuing cash flows for the purpose of a prospective valuation of mathematical reserves under INSPRU 1.2. In particular, a contingent loan or other analogous non-reinsurance financing agreement may then give rise to an addition to capital resources as a positive valuation difference in accordance with GENPRU 2.2.105 R.

INSPRU 1.1.19D G

The amount of credit taken by a firm for a risk transferred should be measured by applying the standard methods for determining the regulatory balance sheet set out in INSPRU. For example, where credit is being taken so as to reduce technical provisions, the amount of that credit should reflect the difference in technical provisions that arises from changing the assumptions used to reflect the risk transferred.

INSPRU 1.1.19E G

For the purposes of INSPRU 1.1.19AR (1), the transfer of risk from the firm to the third party should be effective in all circumstances in which the firm may wish to rely upon the transfer. Examples of factors which the firm should take into account in assessing whether the transaction effectively transfers risk and the extent of that transfer include:

  1. (1)

    whether the documentation associated with the reinsurance reflects the economic substance of the transaction;

  2. (2)

    whether the extent of the risk transfer is clearly defined and incontrovertible;

  3. (3)

    whether the transaction contains any terms or conditions the fulfilment of which is outside the direct control of the firm. Such terms or conditions may include those which:

    1. (a)

      would allow the third party unilaterally to cancel the transaction, except for the non-payment of monies due from the firm to the third party under the contract; or

    2. (b)

      would increase the effective cost of the transaction to the firm in response to an increased likelihood of the third party experiencing losses under the transaction; or

    3. (c)

      would oblige the firm to alter the risk that had been transferred with the purpose of reducing the likelihood of the third party experiencing losses under the transaction; or

    4. (d)

      would allow for the termination of the transaction due to an increased likelihood of the third party experiencing losses under the transaction; or

    5. (e)

      could prevent the third party from being obliged to pay out in a timely manner any monies due under the transaction; or

    6. (f)

      could allow the maturity of the transaction to be reduced;

  4. (4)

    whether the transaction is legally effective and enforceable in all relevant jurisdictions.

INSPRU 1.1.19F G

A firm should also take into account circumstances in which the benefit to the firm of the transfer of risk could be undermined. For instance, where the firm, with a view to reducing potential or actual losses to third parties, provides support to the transaction, including support beyond its contractual obligations (implicit support). Another example of a situation where the firm should consider whether it should take reduced credit for a transaction is where it has invested in the bonds issued by an ISPV with which it has reinsured risks.

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

INSPRU 1.1.20 R

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 INSPRU 1.1.12 R or INSPRU 1.1.16 R; and

  2. (2)

    its other general insurance liabilities or long-term insurance liabilities;

but excluding, where the firm is not a pure reinsurer,4property-linked liabilities and index-linked liabilities and the assets held to cover them under INSPRU 3.1.57 R and INSPRU 3.1.58 R.

INSPRU 1.1.21 R

A composite firm must ensure that:

  1. (1)

    it holds admissible assets separately identified in accordance with INSPRU 1.5.18 R of a value at least equal to the amount of:

    1. (a)

      the technical provisions that it is required to establish under INSPRU 1.1.16 R; and

    2. (b)

      its other long-term insurance liabilities;

    but excluding, where the firm is not a pure reinsurer,4property-linked liabilities and index-linked liabilities and the assets held to cover them under INSPRU 3.1.57 R and INSPRU 3.1.58 R; and

  2. (2)

    it holds other admissible assets (other than those excluded under (1)) of a value at least equal to the amount of:

    1. (a)

      the technical provisions that it is required to establish under INSPRU 1.1.12 R; and

    2. (b)

      its other general insurance liabilities.

INSPRU 1.1.22 G

INSPRU 1.5 (Internal-contagion risk) sets out the rules and guidance on identifying and holding in a separate fund long-term insurance assets.

INSPRU 1.1.23 G

When valuing assets for the purposes of INSPRU 1.1.20 R and INSPRU 1.1.21 R, a firm should bear in mind:

  1. (1)

    that the technical provisions and other long-term insurance liabilities or general insurance liabilities should be covered by admissible assets (see GENPRU 2 Annex 7); and

  2. (2)

    the market and counterparty limits set out in INSPRU 2.1 (Credit risk in insurance). INSPRU 2.1 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.

INSPRU 1.1.24 G

Rules and guidance on the valuation of assets are set out in GENPRU 1.3 (Valuation), including the treatment of shares in, and debts due from, related undertakings in GENPRU 1.3.43 R to GENPRU 1.3.54 G. INSPRU 3.1 (Market risk in insurance) addresses market risk and sets out the matching requirements for linked assets and liabilities. INSPRU 3.1 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.

INSPRU 1.1.25 R

For the purpose of determining the value of assets available to meet technical provisions and other long-term insurance liabilities in accordance with INSPRU 1.1.20 R, INSPRU 1.1.21 R, INSPRU 1.1.27 R and INSPRU 1.1.28 R, no value is to be attributed to:

  1. (1)

    debts owed by reinsurers; or

  2. (2)

    claims; or

  3. (3)

    tax recoveries; or

  4. (4)

    claims against compensation funds;

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

INSPRU 1.1.26 G

Certain debts and claims are excluded from INSPRU 1.1.20 R, INSPRU 1.1.21 R, INSPRU 1.1.27 R and INSPRU 1.1.28 R to avoid double-counting. The rules and guidance in INSPRU 1.2 (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.

INSPRU 1.1.27 R RP

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; and

  2. (2)

    its other long-term insurance liabilities in respect of that with-profits fund.

INSPRU 1.1.28 R

In addition to complying with INSPRU 1.1.27 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.

INSPRU 1.1.29 G

INSPRU 1.1.27 R and INSPRU 1.1.28 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 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)

INSPRU 1.1.30 R

  1. (1)

    Subject to (2), a UK firm must hold admissible assets held pursuant to INSPRU 3.1.53 R:

    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.

INSPRU 1.1.31 G

INSPRU 1.5 (Internal contagion risk) sets out the rules and guidance on localisation for firms other than UK firms.

INSPRU 1.1.32 R

INSPRU 1.1.30 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 businessclass groups 3 and 4 in IPRU(INS), Annex 11.2, Part II.

INSPRU 1.1.33 R

For the purposes of INSPRU 1.1.30 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 security which is listed5 is to be treated as held in any country or territory where there is a regulated market on which the security is dealt; and

    5
  4. (4)

    a security which is not listed5 is to be treated as held in the country or territory in which the issuer has its head office.

    5

Matching of assets and liabilities

INSPRU 1.1.34 R

  1. (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 (see INSPRU 1.1.20 R and INSPRU 1.1.21 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'scontracts of insurance.

  4. (4)

    (1) does not apply to:

    1. (a)

      a pure reinsurer; or

    2. (b)

      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.

INSPRU 1.1.34A G

INSPRU 1.1.34 R is not applied to pure reinsurers because they are subject under INSPRU 3.1.61A R to the "prudent person" investment principles from the Reinsurance Directive.

INSPRU 1.1.35 G

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 meet the requirements of INSPRU 1.1.34R (2).

INSPRU 1.1.36 G

For the purpose of INSPRU 1.1.34R (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. A firm may receive cash inflows as a result of:

  1. (1)

    selling assets or closing out transactions;

  2. (2)

    holding assets that generate dividends, interest or other income; and

  3. (3)

    receiving future premiums for existing business.

INSPRU 1.1.37 G

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.

INSPRU 1.1.38 G

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.

INSPRU 1.1.39 G

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.

INSPRU 1.1.40 G

INSPRU 1.1.20 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. The INSPRU 1.1.34R (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 INSPRU 1.1.20 R.

Premiums for new business

INSPRU 1.1.41 R

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 INSPRU 1.1.16 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 as required by INSPRU 1.1.20 R to INSPRU 1.1.28 R; and

    3. (c)

      maintain adequate overall financial resources as required by the overall financial adequacy rule.

INSPRU 1.1.42 G

For the purposes of INSPRU 1.1.41 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

INSPRU 1.1.43 G

  1. (1)

    GENPRU 2.1.13 R requires a firm to maintain capital resources equal to or in excess of its capital resources requirement (CRR). GENPRU 2.1 sets out the overall framework of the CRR; in particular, GENPRU 2.1.17 R requires that for a firm carrying on general insurance business the CRR is equal to the minimum capital requirement (MCR). GENPRU 2.1.18 R requires that for realistic basis life firms the CRR is the higher of the MCR and the ECR. GENPRU 2.1.23 R requires that for regulatory basis only life firms the CRR is equal to the MCR.

  2. (2)

    For non-life firms the MCR represents the minimum capital requirement (or margin of solvency) prescribed by the Insurance Directives. GENPRU 2.1.24 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. GENPRU 2.1.24A R provides that, for a firm carrying on long-term insurance business which is a realistic basis life firm, 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 long-term insurance capital requirement.2GENPRU 2.1.25 R provides that, for a firm carrying on long-term insurance business which is a regulatory basis only life firm2, 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 GENPRU 2.1.14 R, a firm carrying on both general insurance business and long-term insurance business must apply GENPRU 2.1.13 R (referred to in paragraph (1) above) separately to its general insurance business and its long-term insurance business.

  3. (3)

    The calculation of the general insurance capital requirement is set out in INSPRU 1.1.44 G to INSPRU 1.1.72 R below. INSPRU 1.1.73 to INSPRU 1.1.79 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 INSPRU 1.1.80 G to INSPRU 1.1.91 R below.

General insurance capital requirement

INSPRU 1.1.44 G

In relation to the MCR (see INSPRU 1.1.43 G), GENPRU 2.1.34 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 INSPRU 1.1 as follows:

  1. (1)

    the premiums amount in INSPRU 1.1.45 R;

  2. (2)

    the claims amount in INSPRU 1.1.47 R; and

  3. (3)

    the brought forward amount in INSPRU 1.1.51 R.

The premiums amount

INSPRU 1.1.45 R

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 53.1 million; multiplied by

  2. (2)

    the reinsurance ratio set out in INSPRU 1.1.54 R.

INSPRU 1.1.46 G

Rules and guidance as to how the gross adjusted premiums amount is to be calculated are set out in INSPRU 1.1.56 R to INSPRU 1.1.59 G.

The claims amount

INSPRU 1.1.47 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 37.26 million; multiplied by

  2. (2)

    the reinsurance ratio set out in INSPRU 1.1.54 R.

INSPRU 1.1.48 G

Rules and guidance as to how the gross adjusted claims amount is to be calculated are set out in INSPRU 1.1.60 R to INSPRU 1.1.65 G.

INSPRU 1.1.49 G

  1. (1)

    Under the Insurance Directives the Euro amounts specified in INSPRU 1.1.45R (1) and INSPRU 1.1.47R (1) are subject to annual review. The relevant amounts will be increased by the percentage change in the European index of consumer prices (comprising all EU member states, as published by Eurostat) from 20 March 2002, to the relevant review date, rounded up to a multiple of 100,000, provided that where the percentage change since the last increase is less than 5%, no increase will take place.

  2. (2)

    No provision for the index-linking of these amounts is made by the Reinsurance Directive. However, to ensure consistency as between pure reinsurers, mixed insurers and other insurers, the FSA intends to amend the Euro amounts specified in INSPRU 1.1.45R (1) and INSPRU 1.1.47R (1) for all such firms when an index-linked increase is required by the Insurance Directives.

INSPRU 1.1.50 R

For the purposes of INSPRU 1.1.45R (1) and INSPRU 1.1.47R (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

INSPRU 1.1.51 R
4
  1. (1)

    Subject to (2) and (3), 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:4

    4
    1. (a)

      the (calculated net of ) for outstanding at the end of the prior , determined in accordance with INSPRU 1.1.12 R; to4

    2. (b)

      the technical provisions (calculated net of reinsurance) for claims outstanding at the beginning of the prior financial year, determined in accordance with INSPRU 1.1.12 R.4

  2. (2)

    If the amount of the technical provisions (calculated net of reinsurance) in (1)(a) and (b) is in both cases zero, 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:4

    4
    1. (a)

      the technical provisions (calculated gross of reinsurance) for claims outstanding at the end of the prior financial year, determined in accordance with INSPRU 1.1.12 R; to4

    2. (b)

      the technical provisions (calculated gross of reinsurance) for claims outstanding at the beginning of the prior financial year, determined in accordance with INSPRU 1.1.12 R.4

  3. (3)

    If the amount of the technical provisions (calculated gross of reinsurance) in (2)(a) and (b) is in both cases zero, the brought forward amount is the general insurance capital requirement (GICR) for the prior financial year. 4

INSPRU 1.1.52 G

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 the technical provisions (calculated net of reinsurance) have fallen, the brought forward amount is itself reduced by the same percentage fall. If the technical provisions (calculated net of reinsurance) are zero at the beginning and end of that financial year and the technical provisions gross of reinsurance have fallen, the brought forward amount is reduced by the percentage fall in technical provisions gross of reinsurance.4

4
INSPRU 1.1.53 G

[deleted]4

4

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

INSPRU 1.1.54 R

The reinsurance ratio referred to in INSPRU 1.1.45R (2) and INSPRU 1.1.47R (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.

INSPRU 1.1.54A G

For the treatment of amounts recoverable from ISPVs when calculating the reinsurance ratio, see INSPRU 1.1.92A R and INSPRU 1.1.92B G.

INSPRU 1.1.55 G

Rules and guidance as to how the net and gross claims are to be calculated are set out in INSPRU 1.1.66 R to INSPRU 1.1.71 R.

Gross adjusted premiums amount used in calculating the premiums amount

INSPRU 1.1.56 R

For the purpose of INSPRU 1.1.45 R, the gross adjusted premiums amount is the higher of the gross written premiums and gross earned premiums (as adjusted in accordance with INSPRU 1.1.66 R) for the financial year in question, adjusted by:

  1. (1)

    except for a pure reinsurer which became a firm in run-off before 31 December 2006 and whose Part IV permission has not subsequently been varied to add back the regulated activity of effecting contracts of insurance, increasing by 50% the amount included in respect of the premiums for general insurance businessclasses 11, 12 and 13;

  2. (2)

    deducting 66.7% of the premiums for actuarial health insurance that meets the conditions set out in INSPRU 1.1.72 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.

INSPRU 1.1.57 G

A firm may use statistical methods in order to allocate premiums in respect of the classes 11, 12 and 13 for the purposes of INSPRU 1.1.56 R.

INSPRU 1.1.58 G

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

INSPRU 1.1.59 G

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

INSPRU 1.1.60 R

For the purpose of INSPRU 1.1.47 R and subject to INSPRU 1.1.62 R, the gross adjusted claims amount is the amount of gross claims incurred (as determined in accordance with INSPRU 1.1.66 R) over the reference period (as specified in INSPRU 1.1.63 R) and adjusted by:

  1. (1)

    except for a pure reinsurer which became a firm in run-off before 31 December 2006 and whose Part IV permission has not subsequently been varied to add back the regulated activity of effecting contracts of insurance, increasing by 50% the amount included in respect of the claims incurred for 11, 12 and 13;

  2. (2)

    deducting 66.7% of the claims for actuarial health insurance that meets the conditions set out in INSPRU 1.1.72 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.

INSPRU 1.1.61 G

A firm may use statistical methods in order to allocate claims in respect of classes 11, 12 and 13 for the purposes of INSPRU 1.1.60 R.

INSPRU 1.1.62 R

For the purposes of INSPRU 1.1.47 R, in relation to general insurance businessclass 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.

INSPRU 1.1.63 R

  1. (1)

    Except in those cases where paragraph (2) applies, the reference period to be used in INSPRU 1.1.60 R and INSPRU 1.1.62 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.

INSPRU 1.1.64 G

The classification of the risks referred to in INSPRU 1.1.63R (2) is as follows: credit - as included in general insurance businessclass 14; storm - as included in general insurance businessclass 8; hail - as included in general insurance businessclass 9; and frost - as included in general insurance businessclass 9.

INSPRU 1.1.65 G

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

INSPRU 1.1.66 R

For the purposes of INSPRU 1.1.54 R, INSPRU 1.1.56 R, INSPRU 1.1.60 R and INSPRU 1.1.62 R, amounts of premiums and claims must be:

  1. (1)

    determined in accordance with the insurance accounts rules or the Friendly Societies (Accounts and Related Provisions) Regulations 1994, as appropriate; 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 by2 the firm.

INSPRU 1.1.67 G

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 INSPRU 1.1.66 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.

INSPRU 1.1.68 G

INSPRU 1.1.66R (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.

INSPRU 1.1.69 G

Conversely, INSPRU 1.1.66R (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 by2 the other body.

INSPRU 1.1.70 G

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.

INSPRU 1.1.71 R

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 appropriate.

Actuarial health insurance

INSPRU 1.1.72 R

The conditions referred to in INSPRU 1.1.56R (2) and INSPRU 1.1.60R (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.

Enhanced capital requirement for general insurance business

INSPRU 1.1.72A G

2This section sets out the requirement for firms carrying on general insurance business, other than non-directive insurers, to calculate their ECR. 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 its consideration of the appropriateness of the firm's own capital assessment. For firms where an ECR is not calculated, the MCR will provide a benchmark for the firm's own capital assessment.

INSPRU 1.1.72B R

2A firm carrying on general insurance business, other than a non-directive insurer, must calculate the amount of its ECR.

INSPRU 1.1.72C R

2A firm to which INSPRU 1.1.72B R applies must calculate its ECR in respect of its general insurance business as the sum of:

  1. (1)

    the asset-related capital requirement; and

  2. (2)

    the insurance-related capital requirement; less

  3. (3)

    the firm'sequalisation provisions.

INSPRU 1.1.72D G

2Details of the calculation of the asset-related capital requirement are set out in INSPRU 2.2.10 R to INSPRU 2.2.16 R. Details of the calculation of the insurance-related capital requirement are set out in INSPRU 1.1.76 R to INSPRU 1.1.79 R.

Insurance-related capital requirement2

INSPRU 1.1.73

[intentionally blank]2

INSPRU 1.1.74 G

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

  1. (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. (2)

    the premiums a firm charges in respect of particular business not being adequate to fund future liabilities arising from that business.

INSPRU 1.1.75 G

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 GENPRU 1.3.4 R which sets out how a firm must recognise and value assets and liabilities.

Calculation of the insurance-related capital requirement

INSPRU 1.1.76 R

A firm must calculate its insurance-related capital requirement in accordance with INSPRU 1.1.77 R.

INSPRU 1.1.77 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 INSPRU 1.1.79 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).

INSPRU 1.1.78 R

In INSPRU 1.1.77 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 (IBNER3) claims;

  4. (4)

    unearned premium reserves less deferred acquisition costs; and

  5. (5)

    unexpired risk reserves;

in each case net of reinsurance receivables.

INSPRU 1.1.79 R

Table: Insurance-related Capital Charge Factors

Class of Business

Net Written Premium capital charge factor

Technical provision capital charge factor

Reporting Group: Direct and facultative business

Direct and facultative accident and health

5.0%

7.5%

Direct and facultative personal lines motor business

10.0%

9.0%

Direct and facultative household and domestic all risks

10.0%

10.0%

Direct and facultative personal lines financial loss

25.0%

14.0%

Direct and facultative commercial motor business

10.0%

9.0%

Direct and facultative commercial lines property

10.0%

10.0%

Direct and facultative commercial lines liability

14.0%

14.0%

Direct and facultative commercial lines financial loss

25.0%

14.0%

Direct and facultative aviation

32.0%

14.0%

Direct and facultative marine

22.0%

17.0%

Direct and facultative goods in transit

12.0%

14.0%

Direct 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

53.0%

12.0%

Non-proportional liability (non-motor)

14.0%

14.0%

Non-proportional financial lines

39.0%

14.0%

Non-proportional aggregate cover

53.0%

12.0%

Reporting Group: Proportional Treaty

Proportional accident & health

12.0%

16.0%

Proportional motor

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 lines

25.0%

14.0%

Proportional aggregate cover

23.0%

12.0%

Reporting Group: Miscellaneous Reinsurance

Miscellaneous reinsurance accepted business

39.0%

14.0%

Long-term insurance capital requirement

Insurance death risk capital component

INSPRU 1.1.81 R

The insurance death risk capital component is the aggregate of the amounts which represent the fractions specified by INSPRU 1.1.82 R of the capital at risk, defined in INSPRU 1.1.83 R, for each category of contracts of insurance (as specified in INSPRU 1.1.81A R), in respect of those contracts where the capital at risk is not a negative figure, multiplied by the higher of:

  1. (1)

    50%; and

  2. (2)

    the ratio as at the end of the financial year in question of:

    1. (a)

      the aggregate capital at risk in respect of that category of contracts net of reinsurance cessions; to

    2. (b)

      the aggregate capital at risk in respect of that category of contracts gross of reinsurance cessions.

INSPRU 1.1.81A R

For the purpose of INSPRU 1.1.81 R, the categories of contracts of insurance are as follows:

  1. (1)

    contracts which fall in long-term insurance businessclasses I, II or IX; and

  2. (2)

    contracts which fall in long-term insurance businessclasses III, VII or VIII.

INSPRU 1.1.82 R

For the purpose of INSPRU 1.1.81 R, the fraction is:

  1. (1)

    for long-term insurance businessclasses 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 businessclasses III, VII and VIII, except for a pure reinsurer; and

  3. (3)

    0.1% for a pure reinsurer.

INSPRU 1.1.83 R

For the purpose of INSPRU 1.1.81 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.

INSPRU 1.1.83A R

INSPRU 1.1.81 R does not apply to:

  1. (1)

    a pure reinsurer; or

  2. (2)

    a mixed insurer;

in respect of life protection reinsurance business.

INSPRU 1.1.84 G

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) which also applies to the risk of death covered in the life protection reinsurance business of pure reinsurers and mixed insurers. Tontines (class V) and capital redemption operations (class VI) also have separate risk components. There is no specified risk margin for other insured risks.

INSPRU 1.1.84A G

For the treatment of amounts recoverable from ISPVs when calculating the insurance death risk capital component in accordance with INSPRU 1.1.81 R, see INSPRU 1.1.92A R and INSPRU 1.1.92B G.

Insurance health risk and life protection reinsurance capital component

INSPRU 1.1.85 R

The insurance health risk and life protection reinsurance capital component is the highest of:

  1. (1)

    the premiums amount (determined in accordance with INSPRU 1.1.45 R);

  2. (2)

    the claims amount (determined in accordance with INSPRU 1.1.47 R); and

  3. (3)

    the brought forward amount (determined in accordance with INSPRU 1.1.51 R); in respect of:

    1. (a)

      contracts of insurance falling in long-term insurance businessclass IV (see INSPRU 1.1.86 R);

    2. (b)

      risks falling in general insurance businessclasses 1 or 2 that are written as part of a long-term insurance contract; and

    3. (c)

      in the case of a pure reinsurer or a mixed insurer, life protection reinsurance business.

INSPRU 1.1.86 R

For the purposes of INSPRU 1.1.85 R, in the case of contracts of insurance falling in long-term insurance businessclass IV, condition (3) as set out in INSPRU 1.1.72 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.".

Insurance expense risk capital component

INSPRU 1.1.88 R

The insurance expense risk capital component is:

  1. (1)

    in respect of long-term insurance businessclasses III, VII and VIII, an amount equivalent to 25% of the net administrative expenses in the financial year in question relevant to the business of each of those classes, in so far as the firm bears no investment risk and the allocation to cover management expenses in the contract of insurance does not have a fixed upper limit which is effective as a limit for a period exceeding 5 years from the commencement of the contract;

  2. (2)

    in respect of any tontine (long-term insurance businessclass 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 INSPRU 1.1.89A R).

INSPRU 1.1.88A R

Insurance market risk capital component

INSPRU 1.1.89 R

The insurance market risk capital component is 3% of the "adjusted mathematical reserves" (as defined in INSPRU 1.1.89A R) for all insurance liabilities except those of a kind which:

  1. (1)

    arise from contracts of insurance falling in long-term insurance businessclasses III, VII or VIII to the extent that the firm does not bear any investment risk; or

  2. (2)

    arise from contracts of insurance falling in long-term insurance businessclass V; or

  3. (3)

    for a pure reinsurer or a mixed insurer, arise from contracts of insurance falling within:

    1. (a)

      its life protection reinsurance business; or

    2. (b)

      its permanent health reinsurance business.

Adjusted mathematical reserves

INSPRU 1.1.89A R

  1. (1)

    For the purpose of INSPRU 1.1.88 R and INSPRU 1.1.89 R, the "adjusted mathematical reserves" is the aggregate of the amounts which result from the performance of the calculation in INSPRU 1.1.90 R for each category of insurance liability specified in (2).

  2. (2)

    The categories of insurance liability referred to in (1) are:

    1. (a)

      for the purpose of INSPRU 1.1.88 R, those categories described in INSPRU 1.1.91R (1), (2), (3), (4) and (5); and

    2. (b)

      for the purpose of INSPRU 1.1.89 R, those categories described in INSPRU 1.1.91R (1), (2), (4) and (5).

INSPRU 1.1.90 R

The calculation referred to in INSPRU 1.1.89AR (1) is the multiplication of the amount of the mathematical reserves (gross of reinsurance cessions) in respect of a category of insurance liability by the higher of:

  1. (1)

    85% or, in the case of a pure reinsurer, 50%; and

  2. (2)

    the ratio as at the end of the financial year in question of:

    1. (a)

      the mathematical reserves in respect of that category of insurance liability net of reinsurance cessions; to

    2. (b)

      the mathematical reserves in respect of that category of insurance liability gross of reinsurance cessions.

INSPRU 1.1.91 R

For the purpose of INSPRU 1.1.89A R and INSPRU 1.1.90 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 businessclasses I, II or IX;

  2. (2)

    liabilities of a kind which arise from contracts of insurance falling in long-term insurance businessclasses III, VII or VIII to the extent that the firm bears an investment risk;

  3. (3)

    liabilities of a kind which arise from contracts of insurance falling in long-term insurance businessclasses III, VII or VIII to the extent that the firm bears no investment risk and where the allocation to cover management expenses in the contract of insurance has a fixed upper limit which is effective as a limit for a period exceeding 5 years from the commencement of the contract;

  4. (4)

    liabilities of a kind which arise from contracts of insurance falling in long-term insurance businessclass IV; and

  5. (5)

    liabilities of a kind which arise from contracts of insurance falling in long-term insurance businessclass VI.

INSPRU 1.1.92 G

Where 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. INSPRU 1.1.91R (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. INSPRU 1.1.88 R and INSPRU 1.1.89 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).

Insurance special purpose vehicles

INSPRU 1.1.92A R

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

  1. (1)

    the reinsurance ratio in accordance with INSPRU 1.1.54 R; or

  2. (2)

    the insurance death risk capital component in accordance with INSPRU 1.1.81 R; or

  3. (3)

    the "adjusted mathematical reserves" in accordance with INSPRU 1.1.90 R.

INSPRU 1.1.92B G

A firm may treat amounts recoverable from an ISPV as reinsurance for these purposes if it obtains a waiver of INSPRU 1.1.92A R under section 148 of the Act. The conditions that will need to be met, in addition to the statutory tests under section 148(4) of the Act, before the FSA will consider granting such a waiver are set out in INSPRU 1.6.13 G to INSPRU 1.6.18 G

Application of INSPRU 1.1 to Lloyd's

INSPRU 1.1.93 R

INSPRU 1.1 applies to the Society in accordance with INSPRU 8.1.2 R.

INSPRU 1.1.94 R
INSPRU 1.1.95 R

The Society must calculate the brought forward amount for the members in aggregate in accordance with INSPRU 1.1.51 R, using the result of GENPRU 2.3.6 R for the prior financial year and the aggregate of all members'technical provisions for the relevant periods.

INSPRU 1.1.96 R

For the purposes of INSPRU 1.1.66 R and further to that rule, in the case of Lloyd's members, amounts of premiums and claims must be adjusted for approved reinsurance to close to exclude any amount included in, or adjustment made to, premiums and claims to reflect the consideration for an approved reinsurance to close.