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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.

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

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.

The brought forward amount

INSPRU 1.1.53 G

[deleted]4

4

Insurance-related capital requirement2

INSPRU 1.1.73

[intentionally blank]2

INSPRU 1.1.74 G

[deleted]

INSPRU 1.1.75 G

[deleted]

INSPRU 1.2 Mathematical reserves

Application

INSPRU 1.2.1 R RP

Purpose

INSPRU 1.2.6 G RP

A number of the rules in this section require a firm to take into account its regulatory duty to treat customers fairly. In this section, references to such a duty are to the duty of a firm regulated by the FCA9 to pay due regard to the interests of its customers and to treat them fairly (see the FCA's9Principle 6 in PRIN). This duty is owed to both policyholders and potential policyholders.

9
INSPRU 1.2.6A G RP

9A number of rules in this section are made by the FCA and the PRA. Some of the rules made by the FCA and PRA contain references to, or are reliant on, rules that are only made by the PRA. Firms should consider GEN 2.2.13A R (cross-references in the Handbook) and GEN 2.2.23 R to GEN 2.2.25 G (cutover: application of provisions made by both the FCA and the PRA) when applying these rules. In the context of mathematical reserves, the FCArules ensure a firm takes into account its regulatory duty to treat customers fairly. Where an FCArule refers to a PRArule, GEN 2.2.13A R and GEN 2.2.23 R will apply so that the PRArule is also made by the FCA to the extent necessary to make the FCArule function but only to the extent of the FCA's powers and regulatory responsibilities.

Methods and assumptions

INSPRU 1.2.10 R RP

In the actuarial valuation under INSPRU 1.2.7 R, a firm must use methods and prudent assumptions which:

  1. (1)

    are appropriate to the business of the firm;

  2. (2)

    are consistent from year to year without arbitrary changes (see INSPRU 1.2.11 G);

  3. (3)

    are consistent with the method of valuing assets (see GENPRU 1.3);

  4. (4)

    include appropriate margins for adverse deviation of relevant factors (see INSPRU 1.2.12 G);

  5. (5)

    recognise the distribution of profits (that is, emerging surplus) in an appropriate way over the duration of each contract of insurance;

  6. (6)

    take into account its regulatory duty to treat its customers fairly (see FCA's9Principle 6); and

  7. (7)

    are in accordance with generally accepted actuarial practice.

INSPRU 1.2.11 G RP

INSPRU 1.2.10R (2) prohibits only arbitrary changes in methods and assumptions, that is, changes made without adequate reasons. Any such changes would hinder comparisons over time as to the amount of the mathematical reserves and so obscure trends in solvency and the emergence of surplus.

Record keeping

INSPRU 1.2.20 R RP

A firm must make, and retain for an appropriate period, a record of:

  1. (1)

    the methods and assumptions used in establishing its mathematical reserves, including the margins for adverse deviation, and the reasons for their use; and

  2. (2)

    the nature of, reasons for, and effect of, any change in approach, including the amount by which the change in approach increases or decreases its mathematical reserves.

INSPRU 1.2.21 G RP

SYSC 14.1.53 R requires firms to maintain accounting and other records for a minimum of three years, or longer as appropriate. For the purposes of INSPRU 1.2.20 R, a period of longer than three years will be appropriate for a firm'slong-term insurance business. In determining an appropriate period, a firm should have regard to:

  1. (1)

    the detailed rules and guidance on record keeping in SYSC 14.1.51 G - SYSC 14.1.64 G;

  2. (2)

    the nature and term of the firm's long-term insurance business; and

  3. (3)

    any additional provisions or statutory requirements applicable to the firm or its records.

Cash flows to be valued

INSPRU 1.2.28 R RP

In a prospective valuation, a firm must:

  1. (1)

    include in the cash flows to be valued the following:

    1. (a)

      future premiums (see INSPRU 1.2.35 G to INSPRU 1.2.47 G);

    2. (b)

      expenses, including commissions (see INSPRU 1.2.50 R to INSPRU 1.2.58 G);

    3. (c)

      benefits payable (see INSPRU 1.2.29 R); and

    4. (d)

      subject to (2), amounts to be received or paid in respect of the long-term insurance contracts under contracts of reinsurance or analogous non-reinsurance financing agreements (see INSPRU 1.2.77A R to INSPRU 1.2.89 G); but

  2. (2)

    exclude from those cash flows amounts recoverable from an ISPV.

INSPRU 1.2.28A G RP

A firm may include amounts recoverable from an ISPV in the cash flows to be valued in a prospective valuation if it obtains a waiver of INSPRU 1.2.28 R under sections 138A and 138B of the Act. The conditions that will need to be met, in addition to the statutory tests under section 138A(4) of the Act, before the PRA will consider granting such a waiver are set out in INSPRU 1.6.13 G to INSPRU 1.6.18 G.

INSPRU 1.2.29 R RP

For the purpose of 3INSPRU 1.2.28R (1)(c)3, benefits payable include:

  1. (1)

    all guaranteed benefits including guaranteed surrender values and paid-up values;

  2. (2)

    vested, declared and allotted bonuses to which the policyholder is entitled;

  3. (3)

    all options available to the policyholder under the terms of the contract; and

  4. (4)

    discretionary benefits payable in accordance with the firm's regulatory duty to treat its customers fairly.

INSPRU 1.2.30 G RP

All cash flows are to be valued using prudent assumptions in accordance with generally accepted actuarial practice. Cash flows may be omitted from the valuation calculations provided the reserves obtained as a result of leaving those cash flows out of the calculation are not less than would have resulted had all cash flows been included (see INSPRU 1.2.22R (2)(b)2). Provision for future expenses in respect of with-profits insurance contracts (excluding accumulating with-profits policies) may be made implicitly, using the net premium method of valuation (see INSPRU 1.2.43 R below). For the purposes of INSPRU 1.2.28R (1)(b)3, any charges included in expenses should be determined in accordance with the firm's regulatory duty to treat its customers fairly.

3
INSPRU 1.2.31 G RP

INSPRU 1.2.29R (4) requires regulatory basis only life firms to make allowance for any future annual bonus that a firm would expect to grant, assuming future experience is in line with the assumptions used in the calculation of the mathematical reserves. final bonuses do not have to be taken into consideration in these calculations except in relation to accumulating with-profits policies (see INSPRU 1.2.9 R). The calculations required for accumulating with-profits policies are set out in INSPRU 1.2.71R (1). For realistic basis life firms, except for accumulating with-profits policies, the mathematical reserves may be calculated without taking into account discretionary benefits, including both annual bonuses and final bonuses. For such firms full allowance for discretionary benefits is made in the calculation of the realistic value of liabilities (see INSPRU 1.3.105R (5)).

Mortality and Morbidity

INSPRU 1.2.59 R RP

A firm must set the assumptions for mortality and morbidity using prudent rates of mortality and morbidity that are appropriate to the country or territory of residence of the person whose life or health is insured.

INSPRU 1.2.60 G RP

The rates of mortality or morbidity should contain prudent margins for adverse deviation (see INSPRU 1.2.13 R to INSPRU 1.2.19 G). In setting those rates, a firm should take account of:

  1. (1)

    the systems and controls applied in underwriting long-term insurance contracts and whether they provide adequate protection against anti-selection (that is, selection against the firm) including:

    1. (a)

      adequately defining and identifying non-standard risks; and

    2. (b)

      where such risks are underwritten, allocating to them an appropriate weighting;

  2. (2)

    the nature of the contractual exposure to mortality or morbidity risk including:

    1. (a)

      whether lower mortality increases or decreases the firm's liability;

    2. (b)

      the period of cover and whether risk charges can be varied during that period and, if so, how quickly; and

    3. (c)

      whether the options in the contract give rise to a significant risk of anti-selection (for example, opportunities for voluntary discontinuance, guaranteed renewal at the option of the policyholder and rights for conversion of benefits);

  3. (3)

    the credibility of the firm's actual experience as a basis for projecting future experience including:

    1. (a)

      whether there is sufficient data (especially for medical or financial risks and for new types of benefit or new methods of distribution); and

    2. (b)

      whether the data is reliable and has been appropriately validated;

  4. (4)

    the availability and reliability of:

    1. (a)

      any published tables of mortality or morbidity for the country or territory of residence of the person whose life or health is insured; and

    2. (b)

      any other information as to the industry-wide insurance experience for that country or territory;

  5. (5)

    anticipated or possible future trends in experience including, but only where they increase the liability:

    1. (a)

      anticipated improvements in mortality;

    2. (b)

      changes arising from improved detection of morbidity (including critical illnesses);

    3. (c)

      diseases the impact of which may not yet be reflected fully in current experience; and

    4. (d)

      changes in market segmentation (such as impaired life annuities) which, in the light of developing experience, may require different assumptions for different parts of the policy class.

INSPRU 1.2.61 G RP

An additional provision for diseases covered by INSPRU 1.2.60G (5)(c) may be needed, in particular for unit-linked policies. In determining whether such a provision is needed a firm may take into consideration any ability to increase product charges commensurately (provided that such increase does not infringe on its regulatory duty to treat its customers fairly), but a provision would still be required for the period until such an increase could be brought into effect.

Options

INSPRU 1.2.62 R RP

When a firm establishes its mathematical reserves in respect of a long-term insurance contract, the firm must include an amount to cover any increase in liabilities which might be the direct result of its policyholder exercising an option under, or by virtue of, that contract of insurance. Where the surrender value of a contract is guaranteed, the amount of the mathematical reserves for that contract at any time must be at least as great as the value guaranteed at that time.

INSPRU 1.2.62A G RP

2A contract has a guaranteed surrender value where the policy wording states that a surrender value is payable and either provides for a minimum amount payable on surrender or sets out a method for calculating such an amount. For example, where a unit-linked contract provides for a surrender value equal to the value of the units allocated to the contract, the firm must establish mathematical reserves for that contract greater than or equal to the value of the units allocated at the valuation date.

INSPRU 1.2.63 G RP

An option exists where a policyholder is given a choice between alternative forms of benefit, for example, a choice between receiving a cash benefit upon maturity or an annuity at a guaranteed rate. In some cases, the contract may designate one or other of these alternatives as the principal benefit and any other as an option. This designation, in itself, is not one of substance in the context of reserving since it does not affect the policyholder's choices. Other forms of option include:

  1. (1)

    the right to convert to a different contract on guaranteed terms;

  2. (2)

    the right to increase cover on guaranteed terms;

  3. (3)

    the right to a specified amount on surrender; and

  4. (4)

    the right to a paid up value.

INSPRU 1.2.64 G RP

The firm should provide for the benefit which the firm anticipates the policyholder is most likely to choose. P2ast experience may be used as a guide, but only if this is likely to give a reasonable estimate of future experience. For example, past experience of the take-up of a cash payment option instead of an annuity would not be a reliable guide, if, in the past, market rates exceeded those guaranteed in the annuity but no longer do so. Similarly, past experience on the take-up of options may not be relevant in the light of the assumptions made in respect of future interest rates and mortality rates in the valuation of the benefits.

INSPRU 1.2.65 G RP

Many options are long-term and need careful consideration. Improving longevity, for example, can increase the value of guaranteed annuity options vesting further in the future. firms also need to have regard to the fact that policyholder behaviour can change in the future as policyholders become more aware of the value of their options. The impact on policyholder behaviour of possible changes in taxation should also be considered.

INSPRU 1.2.66 G RP

In accordance with INSPRU 1.2.7 R and INSPRU 1.2.13 R, take-up rates for guaranteed annuity options should be assessed on a prudent basis with assumptions that include margins for adverse deviation (see INSPRU 1.2.13 R to INSPRU 1.2.19 G) that take account of current experience and the potential for future change. The firm should reserve for option take-up at least at a prudent margin over current experience for options shortly to vest. For longer term options where the option becomes increasingly valuable in the future due to projected mortality improvements, increased take-up rates should be assumed. In view of the growing uncertainty over take-up rates for projections further in the future, for guaranteed annuity option dates 20 years or more ahead at least a 95% take-up rate assumption should be made.

INSPRU 1.2.67 G RP

Where there is considerable variation in the cost of the option depending on conditions at the time the option is exercised, and where that variation constitutes a material risk for the firm, it will generally be appropriate to use stochastic modelling. In this case prices from the asset model used in the stochastic approach should be benchmarked to relevant market asset prices before determining the value of the option. Where stochastic modelling is not undertaken, market option prices should be used to determine suitable assumptions for the valuation of the option. If no market exists for a particular option, a firm should take the value of the nearest equivalent benefit or right for which a market exists and document the way in which it has adjusted that valuation to reflect the original option.

INSPRU 1.2.68 G RP

Where the option offers a choice between two non-discretionary financial benefits (such as between a guaranteed cash sum or a guaranteed annuity value, or between a unit value and a maturity guarantee) and where there is a wide range of possible outcomes, the firm should normally model such liabilities stochastically. In carrying out such modelling firms should take into account the likely choices to be made by policyholders in each scenario. Firms should make and retain a record of the development and application of the model.

INSPRU 1.2.69 G RP

The value of a contract with an option is greater than the value of a similar contract without the option, that is, the option has value whether it is expected to be exercised or not. Although in theory a firm can rebalance its investments to match the expected cost of the option to the firm (including the time value of the option), this takes time to achieve and the market may move more quickly than the firm is able to respond. Also, there are likely to be transaction costs. Firms should take these aspects into consideration in setting up mathematical reserves.

INSPRU 1.2.70 R RP

  1. (1)

    Where a policyholder may opt to be paid a cash amount, or a series of cash payments, the mathematical reserves for the contract of insurance established under INSPRU 1.2.7 R must be sufficient to ensure that the payment or payments could be made solely from:

    1. (a)

      the assets covering those mathematical reserves; and

    2. (b)

      the resources arising from those assets and from the contract itself.

  2. (2)

    In (1) references to a cash amount or a series of cash payments include the amount or amounts likely to be paid on a voluntary discontinuance.

  3. (3)

    For the purposes of (1), the firm must assume that:

    1. (a)

      the assumptions adopted for the current valuation remain unaltered and are met; and

    2. (b)

      discretionary benefits and charges will be set so as to fulfil the firm's regulatory duty to treat its customers fairly.

  4. (4)

    (1) may be applied to a group of similar contracts instead of to the individual contracts within that group except where the cash amount or series of cash payments is the amount or amounts likely to be paid on a voluntary discontinuance.

INSPRU 1.2.71 R RP

For the purposes of INSPRU 1.2.70 R, a firm must assume that the amount of a cash payment secured by the exercise of an option is:

  1. (1)

    in the case of an accumulating with-profits policy, the lower of:

    1. (a)

      the amount which the policyholder would reasonably expect to be paid if the option were exercised, having regard to the representations made by the firm and including any expectations of a final bonus; and

    2. (b)

      that amount, disregarding all discretionary adjustments;

  2. (2)

    in the case of any other policy, the amount which the policyholder would reasonably expect to be paid if the option were exercised, having regard to the representations made by the firm, without taking into account any expectations regarding future distributions of profits or the granting of discretionary additions in respect of an established surplus.

INSPRU 1.2.72 G RP

INSPRU 1.2.71R (1) applies only to accumulating with-profits policies; INSPRU 1.2.71R (2) applies to any other type of policy, including non-profit insurance contracts. In INSPRU 1.2.71R (1)(a) a firm must take into consideration, for example, a market value adjustment where such an adjustment has been described in representations made to policyholders by the firm. However, any discretionary adjustment, such as a market value adjustment, must not be included in the amount calculated in INSPRU 1.2.71R (1)(b).

Persistency assumptions

INSPRU 1.2.73

2[intentionally blank]

INSPRU 1.2.74

2[intentionally blank]

INSPRU 1.2.75

2[intentionally blank]

Reinsurance

INSPRU 1.2.86 R RP

For the purposes of INSPRU 1.2.79R (2) and INSPRU 1.2.85 R, future surplus Future surplus may only be offset against future reinsurance cash outflow in respect of surplus on non-profit insurance contracts and the charges or shareholder transfers arising as surplus from with-profits insurance contracts. Such charges and transfers may only be allowed for to the extent consistent with the regulatory duty of the firm to treat its customers fairly.

INSPRU 1.2.90 R

[deleted]

INSPRU 1.2.91 G

[deleted]

Application of INSPRU 1.2 to Lloyd's

INSPRU 1.2.92 R

INSPRU 1.2 applies to managing agents in accordance with INSPRU 8.1.4 R.

INSPRU 1.3 With-profits insurance capital component

Application

INSPRU 1.3.1 R
INSPRU 1.3.2 G

A realistic basis life firm means a firm to which GENPRU 2.1.18 R applies. The application of GENPRU 2.1.18 R is set out in GENPRU 2.1.19 R and GENPRU 2.1.20 R. GENPRU 2.1.13 R requires that a firm must maintain at all times capital resources equal to or in excess of its capital resources requirement. The enhanced capital requirement forms part of the capital resources requirement for a realistic basis life firm. The with-profits insurance capital component forms part of the enhanced capital requirement which a realistic basis life firm is required to calculate in accordance with GENPRU 2.1.38 R.

Main requirements

INSPRU 1.3.9 G

SUP 4 (Actuaries) sets out the role and responsibilities of the actuarial function and of the with-profits actuary.

  1. (1)

    As part of his duties under SUP 4.3.13 R, the actuary appointed by the firm to perform the actuarial function must calculate the firm'smathematical reserves and, in the context of the calculation of the with-profits insurance capital component, must also:

    1. (a)

      advise the firm's governing body on the methods and assumptions to be used in the calculation of the firm's with-profits insurance capital component;

    2. (b)

      perform that calculation in accordance with the methods and assumptions determined by the firm'sgoverning body; and

    3. (c)

      report to the firm'sgoverning body on the results of that calculation.

  2. (2)

    As part of his duties under SUP 4.3.16G, the with-profits actuary must advise the firm'sgoverning body on the discretion exercised by the firm. In the context of the calculation of the with-profits insurance capital component, the with-profits actuary must also advise the firm'sgoverning body as to whether the methods and assumptions (including the allowance for management actions) used for that calculation are consistent with the firm'sPrinciples and Practices of Financial Management (PPFM - seeCOBS 20.33) and with its regulatory duty to treat its customers fairly.

    3

General

Definitions

INSPRU 1.3.13 R

Unless the context otherwise requires, all references (however expressed) in this section to realistic liabilities, or to liabilities which are included in the calculation of realistic liabilities, include discretionary benefits payable by the firm in accordance with the firm's regulatory duty to treat its customers fairly.

INSPRU 1.3.14 G

In this section, any reference to a firm's regulatory duty to treat its customers fairly is a reference to the duty of a firm regulated by the FCA7 under FCA's7Principle 6 (Customers' interests). This states that a firm must pay due regard to the interests of its customers and treat them fairly.

7
INSPRU 1.3.15 G

In this section, any reference to the Principles and Practices of Financial Management (PPFM) is a reference to the requirements in the FCA'srules at7COBS 20.33 (Principles and Practices of Financial Management) for firms to establish, maintain and record the principles and practices of financial management according to which the business of its with-profits funds is conducted.

3
INSPRU 1.3.16 G

The extent to which a firm requires a separate PPFM for each of its with-profits funds will depend on the firm's circumstances and any relevant representations made by the firm to its with-profits policyholders. In this section, any reference to a firm'sPPFM refers to the PPFM which relate to the with-profits fund or the with-profits insurance contracts in question.

Record keeping

INSPRU 1.3.17 R

A firm must make, and retain for an appropriate period of time, a record of:

  1. (1)

    the methods and assumptions used in making any calculation required for the purposes of this section (and any subsequent changes) and the reasons for their use; and

  2. (2)

    any change in practice and the nature of, reasons for, and effect of, any change in approach with respect to those methods and assumptions.

INSPRU 1.3.18 G

SYSC 14.1.53 R requires firms to maintain accounting and other records for a minimum of three years, or longer as appropriate. For the purposes of INSPRU 1.3.17 R, a period of longer than three years will be appropriate for a firm'slong-term insurance business. In determining an appropriate time period, a firm should have regard to:

  1. (1)

    the detailed guidance on record keeping in SYSC 14.1.51 G to SYSC 14.1.64 G;

  2. (2)

    the nature and term of the firm's long-term insurance contracts; and

  3. (3)

    any additional provisions or statutory requirements applicable to the firm or its records.

INSPRU 1.3.19 R

A firm must also identify in the record required to be kept by INSPRU 1.3.17 R changes in practice, in particular changes in those items which will or may be significant in relation to the eventual claim values.

INSPRU 1.3.20 G

Some of the changes identified in accordance with INSPRU 1.3.19 R may have to be notified to the firm'spolicyholders in accordance with the firm'sPPFM.

Regulatory value of assets

INSPRU 1.3.27

1[intentionally blank]

Management actions

INSPRU 1.3.52 R

In calculating the risk capital margin for a with-profits fund, a firm may reflect, in its projections of the value of assets and liabilities under the scenarios in INSPRU 1.3.44 R, the firm's prospective management actions (INSPRU 1.3.53 R).

INSPRU 1.3.53 R

Prospective management actions refer to the foreseeable actions that would be taken by the firm's management, taking into account:

  1. (1)

    an appropriately realistic period of time for the management actions to take effect; and

  2. (2)

    the firm'sPPFM and its regulatory duty to treat its customers fairly.

INSPRU 1.3.54 G

The management actions in INSPRU 1.3.53 R may include, but are not limited to, changes in future bonus rates, reductions in surrender values, changes in asset dispositions (taking into account the associated selling costs) and changes in the amount of charges deducted from asset shares for with-profits insurance contracts.

INSPRU 1.3.55 G

A firm should use reasonable assumptions in incorporating management actions into its projections of claims such that the mitigating effects of the management actions are not overstated. In modelling management actions, a firm should ensure consistency with its PPFM and take into account its regulatory duty to treat its customers fairly.

INSPRU 1.3.56 G

In accordance with INSPRU 1.3.17 R, a firm should make and retain a record of the approach used, in particular the nature and effect of anticipated management actions (including, where practicable, the amount by which the actions would serve to reduce the projected values of assets and liabilities).

INSPRU 1.3.57 G

A firm which deducts charges in respect of any adverse experience or cost of capital to with-profits insurance contracts should keep a record under INSPRU 1.3.17 R of the amount of any such charges to its customers and of how it has ensured their fair treatment.

Policyholder actions

INSPRU 1.3.58 R

In calculating the risk capital margin for a with-profits fund, a firm must reflect, in its projections of the value of assets and liabilities under the scenarios in INSPRU 1.3.44 R, a realistic assessment of the actions of its policyholders (see INSPRU 1.3.59 R).

INSPRU 1.3.59 R

Policyholder actions refer to the foreseeable actions that would be taken by the firm'spolicyholders, taking into account:

  1. (1)

    the experience of the firm in the past; and

  2. (2)

    the changes that may occur in the future if options and guarantees become more valuable to policyholders than in the past.

INSPRU 1.3.60 G

A firm should use realistic assumptions in incorporating policyholder actions into its projections of claims such that any mitigating effects of policyholder actions are not overstated and any exacerbating effects of policyholder actions are not understated. In modelling policyholder actions, a firm should ensure consistency with its PPFM and take into account its regulatory duty to treat its customers fairly in determining the options and information that would be available to policyholders.

INSPRU 1.3.61 G

In calculating the persistency scenario in INSPRU 1.3.100 R, a firm needs to make assumptions regarding the future termination rates exhibited by policies, at points described in particular in INSPRU 1.3.101 R. Such assumptions should be realistic. However, the firm must have regard to the economic scenarios being projected. For example, if the value of an option became significantly greater in a future scenario than in the recent past, then the behaviour of policyholders in taking up the option is likely to differ in this future scenario compared with the recent past.

Market risk scenario

INSPRU 1.3.66 G

[deleted]

Credit risk scenarios

General

Methods and assumptions: general

INSPRU 1.3.108

[intentionally blank]1

Future costs of non-contractual commitments

INSPRU 1.3.154 R

A firm must make provision for future costs in addition to those in INSPRU 1.3.148 R where the firm expects to pay further amounts to meet non-contractual commitments to customers or pay other benefits that need to be provided to fulfil a firm's regulatory duty to treat its customers fairly.

INSPRU 1.3.155 G

Some examples of these non-contractual commitments are:

  1. (1)

    statements by the firm regarding the ability of policies to cover defined amounts, such as the repayment of a mortgage;

  2. (2)

    statements by the firm regarding regular withdrawals from a policy being without penalty;

  3. (3)

    guaranteed annuity and cash option rates being provided beyond the strict interpretation of the policy; and

  4. (4)

    the costs of any promises to customers or other benefits that need to be provided to fulfil a firm's regulatory duty to treat its customers fairly.

INSPRU 1.5 Internal-contagion risk

Application

INSPRU 1.5.1 R RP

INSPRU 1.5 applies to an insurer.

INSPRU 1.5.2A R

10 INSPRU 1.5 does not apply, to the extent stated, to any insurer in (1) to (3):

  1. (1)

    none of the provisions apply to non-directive friendly societies;

  2. (2)

    none of the provisions, apart from INSPRU 1.5.33 R (payment of financial penalties), apply to firms which qualify for authorisation under Schedule 3 or 4 of the Act;

  3. (3)

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

INSPRU 1.5.3 G

The scope of application of INSPRU 1.5 is not restricted to firms that are subject to the relevant EU5 directives.

5
INSPRU 1.5.4 R RP

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.

INSPRU 1.5.5A R RP

10In the application of this section to activities carried on by a non-EEA insurer:

  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:

    1. (a)

      in the case of any UK-deposit insurer, activities carried on from branches in any EEA State; and

    2. (b)

      in any other case, activities carried on from a branch in the United Kingdom.

INSPRU 1.5.7 G

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

Purpose

INSPRU 1.5.8 G RP

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. Requirements relevant to group contagion risk are set out in INSPRU 6.

INSPRU 1.5.9 G RP

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.

INSPRU 1.5.10 G RP

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.

INSPRU 1.5.11 G RP

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.

INSPRU 1.5.12 G RP

Finally, the section sets out requirements to protect policyholders of branches of non-EEA firms where these are supervised by the appropriate regulator. These apply only to a non-EEAfirm that has established a branch in the United Kingdom.

Requirements: Non-insurance activities

Restriction of business

INSPRU 1.5.13 R RP

  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.

INSPRU 1.5.13A R RP

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

INSPRU 1.5.13B G RP

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 1.5.16 G RP

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

INSPRU 1.5.17 G RP
3
  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'spermission 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, in compliance with EU5 directives on insurance, 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'spermission to carry on long-term insurance business is or is to be restricted to reinsurance. It also does not apply where a firm'spermission to carry on general insurance business is or is to be restricted to effecting or carrying outaccident or sicknesscontracts of insurance (see article 18(2) of the Consolidated Life Directive). 3

    5
  4. (4)

    Where a firm'spermission extends to effecting or carrying outlife and annuitycontracts of insurance this will normally include permission to effect or carry outaccidentcontracts of insurance or sicknesscontracts of insurance on a supplementary basis (see article 2(1)(c) of the Consolidated Life Directive).3

Separately identify and maintain long term insurance assets

INSPRU 1.5.18 R RP

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 :3

3
  1. (1)

    in the case of a pure reinsurer:

    1. (a)

      INSPRU 1.1.20 R or INSPRU 1.1.21 R; and

    2. (b)

      INSPRU 3.1.61A R; and

      3
  2. (2)

    in any other case:3

    1. (a)

      INSPRU 1.1.20 R or INSPRU 1.1.21 R; and3

    2. (b)

      INSPRU 3.1.57 R and INSPRU 3.1.58 R.3

INSPRU 1.5.19 G RP
3
  1. (1)

    INSPRU 1.1.16 R requires a firm to establish adequate technical provisions for its long-term insurance contracts. INSPRU 1.1.20 R requires a firm which is not a composite firm to hold admissible assets of a value at least equal to the amount of the technical provisions and its other long-term insurance liabilities. INSPRU 1.1.21 R ensures that a composite firm identifies separate admissible assets with a value at least equal to the technical provisions for long-term insurance business and its other long-term insurance liabilities as well as holding other admissible assets of a value at least equal to the amount of its technical provisions for general insurance business and its other general insurance liabilities.3

  2. (2)

    In the case of a firm carrying on long-term insurance business which is not a pure reinsurer, there are excluded from the scope of INSPRU 1.1.20 R and INSPRU 1.1.21 Rproperty-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. The latter two rules do not apply to a pure reinsurer (see INSPRU 3.1.58A R). However, a pure reinsurer is required by INSPRU 3.1.61A R to invest all its assets in accordance with the requirements of that rule.3

  3. (3)

    The overall impact of these provisions in INSPRU 1.1 and INSPRU 3.1, when read together with INSPRU 1.5.18 R, 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 businesstechnical provisions, including those in respect of any property-linked liabilities or index-linked liabilities, and its other long-term insurance liabilities.3

INSPRU 1.5.20 G RP

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).

INSPRU 1.5.21 R RP

  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'slong-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).

INSPRU 1.5.22 R RP

  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.

INSPRU 1.5.23 R RP

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

INSPRU 1.5.24 G RP

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.

INSPRU 1.5.25 G RP

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.

INSPRU 1.5.26 G RP

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 appropriate regulator (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.

2
INSPRU 1.5.27 R RP

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.

INSPRU 1.5.28 G RP

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 of INSPRU 1.1.20 R or INSPRU 1.1.21 R of the PRAHandbook10.

INSPRU 1.5.29 G RP

INSPRU 1.1.27 R and INSPRU 1.1.28 R provide 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. INSPRU 1.1.28 R requires a realistic basis life firm to 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.

Exclusive use of long-term insurance assets

INSPRU 1.5.30 R RP

  1. (1)

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

  2. (2)

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

INSPRU 1.5.31 R RP

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

INSPRU 1.5.32 G RP

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

INSPRU 1.5.33 R RP

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.

10
INSPRU 1.5.34 G

10 INSPRU 1.5.2A R states that this provision applies to all firms, except mutuals, and includes firms qualifying for authorisation under Schedule 3 or 4 to the Act.

Requirements: property-linked funds

INSPRU 1.5.35 G RP

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.

INSPRU 1.5.36 R RP

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.

INSPRU 1.5.37 G RP

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.

Application of INSPRU 1.5 to Lloyd's

INSPRU 1.5.58 R

INSPRU 1.5 applies to managing agents and to the Society in accordance with:

  1. (1)

    for managing agents, INSPRU 8.1.4 R; and

  2. (2)

    for the Society, INSPRU 8.1.2 R.

INSPRU 1.5.59 R

The Society and managing agents must take all reasonable steps to ensure that:

  1. (1)

    a corporate member does not carry on any commercial business other than insurance business and activities arising directly from that business; and

  2. (2)

    individual members do not, in their capacity as underwriting members, carry on any commercial business other than insurance business and activities arising directly from that business.