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INSPRU 1.5 Internal-contagion risk



INSPRU 1.5 applies to an insurer except any insurer in (1) to (3):8

  1. (1)


    1. (a)

      non-directive friendly societies; or8

    2. (b)

      Solvency II firms;8

  2. (2)


  3. (3)

    INSPRU 1.5.33 R (payment of financial penalties) does not apply to mutuals.8

[1.5.2 to 1.5.3 not used]


In its application to a firm with its head office in the United Kingdom, this section applies to the whole of the firm's business carried on world-wide.


10In the application of this section to a firm with its head office outside the United Kingdom:9

  1. (1)

    INSPRU 1.5.13 R to INSPRU 1.5.13B G apply in relation to the whole of its business carried on world-wide;

  2. (2)

    all other provisions of this section apply only in relation to activities carried on from a branch in the United Kingdom.9


The requirements of this section apply to a firm on a solo basis.



This section sets out requirements for a firm relating to 'internal-contagion risk'. This is the risk that losses or liabilities from one activity might deplete or divert financial resources held to meet liabilities from another activity. It arises where the two activities are carried on within the same firm. It may also arise from the combination of activities within the same group, but this aspect of internal-contagion risk falls outside the scope of this section.8


Internal-contagion risk includes in particular the risk that arises where a firm carries on:

  1. (1)

    both insurance and non-insurance activities; or

  2. (2)

    two or more different types of insurance activity; or

  3. (3)

    insurance activities from offices or branches located in both the United Kingdom and overseas.


This section requires firms other than pure reinsurers to limit non-insurance activities to those that directly arise from their insurance business, e.g. investing assets, employing insurance staff etc. It also requires that an adequate provision be established for non-insurance liabilities. pure reinsurers must limit their activities to the business of reinsurance and related operations.


This section also sets out requirements for the separation of different types of insurance activity. However, in most circumstances the combination of different types of insurance activity within the same firm is a source of strength. Adequate pooling and diversification of insurance risk is fundamental to sound business practice. The requirements, therefore, only apply in two specific cases where without adequate protection the combination might operate to the detriment of policyholders. They apply where a firm carries on both:

  1. (1)

    general insurance business and long-term insurance business;

  2. (2)

    linked and non-linked insurance business.


Finally, the section sets out requirements to protect policyholders of the United Kingdom branches of firms with their head office outside the United Kingdom9.

Requirements: Non-insurance activities

Restriction of business


  1. (1)

    A firm other than a pure reinsurer must not carry on any commercial business other than insurance business and activities directly arising from that business.

  2. (2)

    (1) does not prevent a friendly society which was on 15 March 1979 carrying on long-term insurance business from continuing to carry on savings business.


A pure reinsurer must not carry on any business other than the business of reinsurance and related operations.


In INSPRU 1.5.13A R related operations include, for example, activities such as provision of statistical or actuarial advice, risk analysis or research for its clients. It may also include a holding company function and activities with respect to financial sector activities within the meaning of Article 2, point 8, of the Financial Groups Directive. But it does not allow the carrying on of, for example, unrelated banking and financial activities.

Requirements: long-term insurance business


INSPRU 1.5.18 R, INSPRU 1.5.21 R, INSPRU 1.5.30 R and INSPRU 1.5.31 R require a firm to identify the assets attributable to the receipts of the long-term insurance business, called long-term insurance assets, and only to apply those assets for the purpose of that business. This has the effect of prohibiting a composite firm from using long-term insurance assets to meet general insurance liabilities. It also keeps long-term insurance assets separate from shareholder funds.

Permissions not to include both types of insurance

  1. (1)

    Under section 19 of the Act, a firm may not carry on a regulated activity unless it has permission to do so (or is exempt in relation to the particular activity). Both general insurance business and long-term insurance business are regulated activities and permission will extend to the effecting or carrying out of one or more particular classes of contracts of insurance.3

  2. (2)

    A firm's permission can be varied so as to add other classes. The permission of an existing composite firm may be varied by adding classes of both general insurance business and long-term insurance business. 3

  3. (3)

    It is the policy of the appropriate regulator not to grant or vary permission if that would allow a newly established firm, or an existing firm engaging solely in general insurance business or solely in long-term insurance business, to engage in both general insurance business and long-term insurance business. This does not apply where a firm's permission to carry on long-term insurance business is or is to be restricted to reinsurance. It also does not apply where a firm's permission to carry on general insurance business is or is to be restricted to effecting or carrying out accident or sickness contracts of insurance . 3

  4. (4)

    Where a firm's permission extends to effecting or carrying out life and annuity contracts of insurance this will normally include permission to effect or carry out accident contracts of insurance or sickness contracts of insurance on a supplementary basis.3


Separately identify and maintain long term insurance assets


A firm carrying on long-term insurance business must identify the assets relating to its long-term insurance business which it is required to hold by virtue of the requirements in the Non Solvency II firms: Insurance Company – Technical Provisions and Non-Solvency II firms: Insurance Company – Mathematical Reserves parts of the PRA Rulebook.8


The overall impact of the requirements in the PRA Rulebook to hold admissible assets of a value at least equal to the amount of technical provisions, when read together with INSPRU 1.5.18R, is that any firm writing long-term insurance business must identify separately assets of a value at least equal to the amount of its long-term insurance business technical provisions, including those in respect of any property-linked liabilities or index-linked liabilities, and its other long-term insurance liabilities.8


INSPRU 1.5.18 R does not prohibit a firm from identifying other assets as being available to meet the liabilities of its long-term insurance business. It may transfer such other assets to a long-term insurance fund (see INSPRU 1.5.21 R and INSPRU 1.5.22 R ) and the transfer will take effect when it is recorded in the firm's accounting records (see INSPRU 1.5.23 R). After the transfer takes effect, a firm may not transfer the assets out of a long-term insurance fund except where they represent an established surplus (see INSPRU 1.5.27 R).


  1. (1)

    A firm's long-term insurance assets are the items in (2), adjusted to take account of:

    1. (a)

      outgo in respect of the firm's long-term insurance business; and

    2. (b)

      any transfers made in accordance with INSPRU 1.5.27 R.

  2. (2)

    The items are:

    1. (a)

      the assets identified under INSPRU 1.5.18 R (including assets into which those assets have been converted) but excluding any assets identified as being held to cover liabilities in respect of subordinated debt3;

    2. (b)

      any other assets identified by the firm as being available to cover its long-term insurance liabilities (including assets into which those assets have been converted) including, if the firm so elects, assets which are excluded under (a)3;

    3. (c)

      premiums and other receivables in respect of long-term insurance contracts;

    4. (d)

      other receipts of the long-term insurance business; and

    5. (e)

      all income and capital receipts in respect of the items in (2).


  1. (1)

    Unless (2) applies, all the long-term insurance assets of the firm constitute its long-term insurance fund.

  2. (2)

    Where a firm identifies particular long-term insurance assets in connection with different parts of its long-term insurance business, the assets identified in relation to each such part constitute separate long-term insurance funds of the firm.


A firm must maintain a separate accounting record in respect of each of its long-term insurance funds (including any with-profits fund).


Firms must ensure that long-term insurance assets are separately identified and allocated to a long-term insurance fund at all times. Assets in external accounts, for example at banks, custodians, or brokers should be segregated in the firm's books and records into separate accounts for long-term insurance business and general insurance business. Where a firm has more than one long-term insurance fund, a separate accounting record must be maintained for each fund. Accounting records should clearly document the allocation.


Where the surplus arising from business is shared between policyholders and shareholders in different ways for different blocks of business, it may be necessary to maintain a separate fund to ensure that policyholders are, and will be, treated fairly. For example, if a proprietary company writes some business on a with-profits basis, this should be written in a with-profits fund separate from any business where the surplus arising from that business is wholly owned by shareholders.


Where a firm merges separate funds for different types of business, it will need to ensure that the merger will not result in policyholders being treated unfairly. When considering merging the funds, the firm should consider the impact on its PPFM (see COBS 20.32) and on its obligations to notify the FCA8 (see SUP 15.3). In particular, a firm would need to consider how any inherited estate would be managed and how the fund would be run in future, such that policyholders are treated fairly.


A firm may not transfer assets out of a long-term insurance fund unless:

  1. (1)

    the assets represent an established surplus; and

  2. (2)

    no more than three months have passed since the determination of that surplus.


As a result of INSPRU 1.5.27R (2), an actuarial investigation undertaken to determine an established surplus remains in-date for three months from the date as at which the determination of the surplus was made. However, even where the investigation is still in-date, the firm should not make the transfer unless there is sufficient surplus at the time of the transfer to allow it to be made without breach of8 the requirements in PRA Rulebook: Non Solvency II firms: Insurance Company – Technical Provisions8.


INSPRU 1.1.27 R provides8 further constraints on the transfer of assets out of a with-profits fund. INSPRU 1.1.27 R requires a firm to have admissible assets in each of its with-profits funds to cover the technical provisions and other long-term insurance liabilities relating to all the business in that fund.


Exclusive use of long-term insurance assets


  1. (1)

    A firm must apply or use 7a long-term insurance asset only for the purposes of its long-term insurance business.

  2. (2)

    For the purpose of (1), applying or using7an asset includes coming under any obligation (even if only contingently) to apply or use7 that asset.


A firm must not agree to, or allow, any mortgage or charge on its long-term insurance assets other than in respect of, and for the purposes of, 7 a long-term insurance liability.


The purposes of the long-term insurance business include the payment of claims, expenses and liabilities arising from that business, the acquisition of lawful access to fixed assets to be used in that business and the investment of assets. The payment of liabilities may include repaying a loan but only where that loan was incurred for the purpose of the long-term insurance business. The purchase or investment of assets may include an exchange at fair market value of assets (including money) between the long-term insurance fund and other assets of the firm. A firm may also lend securities held in a long-term insurance fund under a stock lending transaction or transfer assets as collateral for a stock lending transaction where the firm is the borrower, where such lending or transfer is for the benefit of the long-term insurance business.

Payment of financial penalties


If the FCA or PRA10 imposes a financial penalty on a long-term insurer, the firm must not pay that financial penalty from a long-term insurance fund.


Requirements: property-linked funds


INSPRU 3.1.57 R requires a firm to cover, as closely as possible, its property-linked liabilities by the property to which those liabilities are linked. In order to comply with this rule, a firm should identify the assets it holds to cover property-linked liabilities and should not apply those assets (as long as they are needed to cover the property-linked liabilities) for any purpose other than to meet those liabilities.


A firm must select, allocate and manage the assets to which its property-linked liabilities are linked taking into account:

  1. (1)

    the firm's contractual obligations to holders of property-linked policies; and

  2. (2)

    its regulatory duty to treat customers fairly, including in the way it makes discretionary decisions as to how it selects, allocates and manages assets.


Property-linked liabilities may be linked either to specified assets (with no contractual discretion given to the firm as to the choice of assets) or to assets of a specified kind where the selection of the actual assets is left to the firm.