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INSPRU 2.1 Application

INSPRU 2.1.1R

1INSPRU 2.1 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 2.1.2R

All of INSPRU 2.1, except INSPRU 2.1.20 R and INSPRU 2.1.23 R to INSPRU 2.1.32 G, applies to:

  1. (1)

    an EEA-deposit insurer; and

  2. (2)

    a Swiss general insurer;

but only in respect of the activities of the firm carried on from a branch in the United Kingdom.

INSPRU 2.1.3G

The scope of application of INSPRU 2.1 is not restricted to firms that are subject to relevant EU8 directives.

8
INSPRU 2.1.4R

  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.

Purpose

INSPRU 2.1.5G

The purpose of this section is to protect policyholders and potential policyholders by setting out the requirements applicable to a firm in respect of credit risk. Credit risk is incurred whenever a firm is exposed to loss if a counterparty fails to perform its contractual obligations including failure to perform them in a timely manner. Credit risk may therefore have an impact upon a firm's ability to meet its valid claims as they fall due. Credit risk can also arise from underlying causes that have an impact upon the creditworthiness of all counterparties of a particular description or geographical location. A detailed explanation of credit risk is given at SYSC 15.1.4 G.

INSPRU 2.1.6G

The requirements in this section address both current and contingent exposure to credit risk. PRIN and SYSC require a firm to establish adequate internal systems and controls for exposure to credit risk. This section requires a firm to restrict its exposure to different counterparties and assets to prudent levels and to ensure that those exposures are adequately diversified. It also requires a firm to make deductions from the value of assets in respect of exposures to one asset, counterparty or group of closely related counterparties in excess of prescribed limits.

INSPRU 2.1.7G

This section also sets limits on the market risk arising from holding assets including securities issued or guaranteed by counterparties. This market risk is incurred whenever a firm is exposed to loss if an asset were to reduce in value or even become worthless. These market risk limits are set out in this section rather than the market risk sections in INSPRU because they are closely linked to the counterparty limits set out in this section.

Overall limitation of credit risk

INSPRU 2.1.8R

Taking into account relevant risks, a firm must restrict its counterparty exposures and asset exposures to prudent levels and ensure that those exposures are adequately diversified.

INSPRU 2.1.9R

  1. (1)

    For the purposes of INSPRU 2.1, counterparty exposure is the amount a firm would lose if a counterparty were to fail to meet its obligations (either to the firm or to any other person) and if simultaneously securities issued or guaranteed by the counterparty were to become worthless.

  2. (2)

    For the purposes of INSPRU 2.1, asset exposure is the amount a firm would lose if an asset or class of identical assets (whether or not held directly by the firm) were to become worthless.

  3. (3)

    For the purposes of (1) and (2), the amount of loss is the amount, if any, by which the firm's capital resources (as calculated in accordance with the capital resources table but without making any deduction for assets in excess of market risk and counterparty limits) would decrease as a result of the counterparty failing to meet its obligations and the securities or assets becoming worthless.

  4. (4)

    In determining the amount of loss in accordance with (3), the firm must take into account decreases in its capital resources that would result not only from its own direct exposures but also from:

    1. (a)

      exposures held by any of its subsidiary undertakings; and

    2. (b)

      synthetic exposures arising from derivatives or quasi-derivatives held or entered into by the firm or any of its subsidiary undertakings.

  5. (5)

    If a firm elects under INSPRU 2.1.35 R to make a deduction in respect of collateral, the firm must deduct from the amount of loss determined in accordance with (3) so much of the value of that collateral as:

    1. (a)

      would be realised by the firm were it to exercise its rights in relation to the collateral; and

    2. (b)

      does not exceed any of the relevant limits in INSPRU 2.1.22R (3).

INSPRU 2.1.10G

Exposure is defined in terms of loss (which is decrease in capital). It does not include exposures arising from assets that are not represented in capital or exposures which if crystallised in a loss would be offset by a consequent gain, reduction in liabilities or release of provisions, but only in so far as that gain, reduction or release would itself lead to an offsetting increase in capital resources. Examples include:

  1. (1)

    exposure from the holding of assets to which the firm has attributed no value;

  2. (2)

    exposure from the holding of assets that the firm has deducted from capital resources; and

  3. (3)

    exposure in respect of which (and to the extent that) the firm has established a provision.

INSPRU 2.1.11G

In assessing the adequacy of diversification required by INSPRU 2.1.8 R, a firm should take into account concentrations of exposure including those arising from:

  1. (1)

    different types of exposure to the same counterparty, such as deposits, loans, securities, reinsurance and derivatives;

  2. (2)

    links between counterparties such that default by one might have an impact upon the creditworthiness of another; and

  3. (3)

    possible changes in circumstance that would have an impact upon the creditworthiness of all counterparties of particular description or geographical location.

INSPRU 2.1.12G

A firm should consider how the spreading of credit risk will impact on overall counterparty quality.

INSPRU 2.1.13G

In assessing its exposure to a counterparty for the purpose of INSPRU 2.1.8 R, a firm should take into account:

  1. (1)

    the period for which the exposure to that counterparty might continue;

  2. (2)

    the likelihood of default during that period by the counterparty; and

  3. (3)

    the loss that might result in the event of default.

INSPRU 2.1.14G

In assessing the loss that might result from the default of a counterparty for the purposes of INSPRU 2.1.8 R, a firm should take into account the circumstances that might lead to default and, in particular, how these might have an impact upon:

  1. (1)

    the amount of exposure to the counterparty; and

  2. (2)

    the effectiveness of any loss mitigation techniques employed by the firm.

INSPRU 2.1.15G

Often the same circumstances which lead to the crystallisation of contingent credit exposure, e.g. a significant claims event or a significant movement in interest, currency or asset values, also lead to an increase in the risk of default by the counterparty. In particular, if a reinsurer or derivative counterparty is being relied upon to provide protection against the consequences of an event or circumstance, a firm should take into account how that event or circumstance might have an impact upon the creditworthiness of the reinsurer or derivative counterparty.

INSPRU 2.1.16R

For the purposes of INSPRU 2.1.8 R and of determining counterparty exposure and asset exposure in accordance with INSPRU 2.1.9 R and reinsurance exposure in accordance with INSPRU 2.1.25 R, a firm must only rely upon a loss mitigation technique where it has good reason to believe that, taking into account the possible circumstances of default, it is likely to be effective.

INSPRU 2.1.17G

Loss mitigation techniques include:

  1. (1)

    the right, upon default, to preferential access to some or all of the counterparty's assets, for example by exercising rights of set off, holding collateral or assets deposited back, or exercising rights under fixed or floating charges;

  2. (2)

    rights against third parties upon default by the counterparty, such as guarantees, credit insurance and credit derivatives; and

  3. (3)

    where the counterparty is a reinsurer, having back-up or flexible reinsurance which covers the gap in coverage left by the reinsurer's default, for example 'top and drop' reinsurance.

INSPRU 2.1.18R

For the purposes of INSPRU 2.1.8 R and of determining counterparty exposure and asset exposure in accordance with INSPRU 2.1.9 R and reinsurance exposure in accordance with INSPRU 2.1.25 R, a firm must not rely upon preferential access to assets unless it has taken into account appropriate professional advice as to its effectiveness.

INSPRU 2.1.19G

In particular, a firm should consider whether any preferential access to a counterparty's assets would be effective even if the counterparty were wound up by a court or other legal process or it were to be subject to any other insolvency process. A firm should also consider, where it is relying upon a right against a third party, whether, in the circumstances of the counterparty's default, the creditworthiness of that third party might be impaired.

Large exposure limits

INSPRU 2.1.20R

  1. (1)

    A firm must take reasonable steps to limit its counterparty exposure or asset exposure to:

    1. (a)

      a single counterparty;

    2. (b)

      each of the counterparties within a group of closely related counterparties; and

    3. (c)

      an asset or class of identical assets;

    to a level where, if a total default were to occur, the firm would not become unable to meet its liabilities as they fall due.

  2. (2)

    In (1), a total default occurs where:

    1. (a)

      the single counterparty or all of the counterparties within the group of closely related counterparties fail to meet its or their obligations and simultaneously any securities issued or guaranteed by it or any of them become worthless; or

    2. (b)

      the asset becomes worthless or all of the assets within the identical class become worthless at the same time.

  3. (3)

    (1) does not apply to:

    1. (a)

      a reinsurance exposure; or

    2. (b)

      a counterparty exposure or asset exposure to an approved credit institution.

INSPRU 2.1.21G

In assessing its exposure to a counterparty or group of closely related counterparties, a firm should consider exposures from different sources including deposits, loans, securities and derivatives.

Market risk and counterparty limits

INSPRU 2.1.22R

  1. (1)

    A firm must calculate the amount of the deduction from total capital required by stage L in the capital resources table in respect of assets in excess of market risk and counterparty limits as the aggregate amount by which its counterparty exposures and asset exposures exceed the relevant limits set out in (3).

  2. (2)

    Except where the contrary is expressly stated in INSPRU, whenever:

    1. (a)

      a rule in INSPRU refers to assets of a firm, or of any part of a firm, or of any fund or part of a fund within a firm, which are assets of a kind referred to in any of the limits in (3); and

    2. (b)

      the firm's counterparty exposure (or aggregate exposure arising from the counterparty exposures to each member of a group of closely related persons) or asset exposure in respect of those assets exceeds any of the limits in (3);

    the firm must deduct from the measure of the value of those assets (as determined in accordance with GENPRU 1.3) the amount by which that exposure exceeds the relevant limit in (3), or that portion of the deduction that relates to the part of the firm or fund or part of a fund in question.

  3. (3)

    The limits referred to in (1) and (2) are the following, expressed as a percentage of the firm's business amount:

    1. (a)

      for a counterparty exposure to an individual, unincorporated body of individuals or the aggregate exposure arising from the counterparty exposures to each member of a group of closely related individuals or unincorporated bodies of individuals:

      1. (i)

        ΒΌ% for that part of the exposure that arises from unsecured debt7;

        7
      2. (ii)

        1% for the whole exposure (after deduction of the excess arising from the limit in (a)(i));

    2. (b)

      for a counterparty exposure to an approved counterparty or the aggregate exposure arising from the counterparty exposures to each member of a group of closely related approved counterparties6:

      6
      1. (i)

        40% for that part of the exposure arising from covered bonds;6

        6
      2. (ii)

        5% for that part of the exposure not arising from covered bonds or, if the counterparty is an approved credit institution, from short term deposits; this limit is increased to 10% if the total of such exposures which are greater than 5% arising from applying a 10% limit, when taken together with any exposures arising from covered bonds which are within the 40% limit in (i), does not exceed 40%;6

        6
      3. (iii)

        20% or 2 million, if larger, for the whole exposure (but excluding any exposure arising from covered bonds and after deduction of the excess arising from the limit in (b) (ii));6

    3. (c)

      for a counterparty exposure to a person, or the aggregate exposure arising from the counterparty exposures to each member of a group of closely related persons, who do not fall into the categories of counterparty to whom (a) and (b) apply:

      1. (i)

        1% for that part of the exposure arising from unsecured debt7; this limit is increased to 2.5% in the case of an exposure to a regulated institution;

        7
      2. (ii)

        1% for that part of the exposure arising from shares and other variable yield participations, bonds, debt securities3 and other money market instruments and capital market instruments from the same counterparty that are not dealt in on a regulated market, or a2 beneficial interest in a collective investment scheme to which INSPRU 2.1.39 R applies2; the limit for that part of the exposure arising from debt securities (other than hybrid securities) issued by the same regulated institution is increased to 5%;

      3. (iii)

        5% for the whole exposure (after deduction of the excesses arising from the limits in (c)(i) and (ii));

    4. (d)

      5% for the aggregate of all counterparty exposures that fall within (c)(i) whether or not they arise from persons who are closely related, but excluding amounts that are in excess of the limit in (c)(i);

    5. (e)

      10% for the aggregate of all counterparty exposures and asset exposures2 that fall within (c)(ii) above or (j) below, 2whether or not they arise from persons who are closely related, but excluding amounts that are in excess of the limit in (c)(ii) above or, in the case of an asset exposure, (j) below2;

    6. (f)

      5% for the aggregate of all counterparty exposures arising from unsecured loans, other than those falling within (3)(b);

    7. (g)

      3% for the asset exposure arising from all cash in hand;

    8. (h)

      10% for the asset exposure (including an exposure arising from a reversionary interest) arising from any one piece of land or building, or a number of pieces of land or buildings close enough to each other to be considered effectively as one investment;2

    9. (i)

      5% for the asset exposure arising from a beneficial interest in any single non-UCITS retail scheme or recognised scheme which does not fall within the UCITS Directive; and2

    10. (j)

      1% for the asset exposure arising from a beneficial interest in any single collective investment scheme which does not fall within the UCITS Directive and is not a non-UCITS retail scheme or a recognised scheme.2

  4. (4)

    In (3) a firm's business amount means the sum of:

    1. (a)

      the firm's total gross technical provisions (that is, calculated gross of reinsurance);5

    2. (b)

      the amount of its other liabilities (except those included in the calculation of capital resources in accordance with the capital resources table); and

    3. (c)

      such amount as the firm may select not exceeding, in the case of a firm which is not a participating insurance undertaking, the amount of the firm's total capital after deductions as calculated at stage M of the capital resources table or, in the case of a firm which is a participating insurance undertaking, the amount calculated in accordance with (5A) or, in either case, if higher:

      1. (i)

        in the case of a firm carrying on general insurance business, the amount of its general insurance capital requirement; and

      2. (ii)

        in the case of a firm carrying on long-term insurance business, the amount of its long-term insurance capital requirement and, where it is a regulatory basis only life firm,2 the amount of its resilience capital requirement.

  5. (5)

    For the purpose of (4)(a), a firm's total gross technical provisions exclude technical provisions in respect of 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, the total gross technical provisions include the technical provisions in respect of that guaranteed element.

  6. (5A)

    For the purpose of (4)(c), a firm which is a participating insurance undertaking must calculate the amount of the firm's group capital resources less the difference between:

    1. (a)

      the firm's group capital resources requirement; and

    2. (b)

      the firm's capital resources requirement.

  7. (5B)

    In (3)(b)(ii5) short term deposit means a deposit which may be withdrawn at the discretion of the lender without penalty or loss of accrued interest by giving notice of withdrawal of one month or less.

  8. (6)

    In (3)(c)(ii) hybrid security means a debt security, other than an approved security, the terms of which provide, or have the effect that, the holder does not, or would not, have an unconditional entitlement to payment of interest and repayment of capital in full within 75 years of the date on which the security is being valued.

  9. (7)

    In (3)(a)(i) and (3)(c)(i) an unsecured debt is any debt in respect of which the conditions in INSPRU 2.1.35 R or INSPRU 2.1.36 R and INSPRU 2.1.37 R are not satisfied or, if satisfied only in relation to part of the debt, that part of the debt which is not covered by collateral or a guarantee, letter of credit or credit derivative in accordance with those rules.7

INSPRU 2.1.22AR

INSPRU 2.1.22 R does not apply to a pure reinsurer.

Large exposure calculation for reinsurance exposures

INSPRU 2.1.23R

A firm must notify the FSA in accordance with SUP 15.7 as soon as it first becomes aware that:

  1. (1)

    a reinsurance exposure to a reinsurer or group of closely related reinsurers is reasonably likely to exceed 100% of its capital resources; or

  2. (2)

    if (1) does not apply, that it has exceeded this limit.

INSPRU 2.1.24R

Upon notification under INSPRU 2.1.23 R, a firm must:

  1. (1)

    demonstrate that prudent provision has been made for the reinsurance exposure in excess of the 100% limit, or explain why in the opinion of the firm no provision is required; and

  2. (2)

    explain how the reinsurance exposure is being safely managed.

INSPRU 2.1.25R

  1. (1)

    For the purposes of INSPRU 2.1, a reinsurance exposure is the amount of loss which a firm would suffer if a reinsurer or group of closely related reinsurers were to fail to meet its or their obligations under contracts of reinsurance reinsuring any of the firm's contracts of insurance.

  2. (2)

    For the purposes of (1), the amount of loss is the amount, if any, by which the firm's capital resources (as calculated in accordance with the capital resources table but without making any deduction for assets in excess of market risk and counterparty limits) would decrease as a result of the reinsurer or group of closely related reinsurers failing to meet its or their obligations under the contracts of reinsurance.

  3. (3)

    If a firm elects under INSPRU 2.1.35 R to make a deduction in respect of collateral, the firm must deduct from the amount of loss determined in accordance with (2) so much of the value of that collateral as:

    1. (a)

      would be realised by the firm were it to exercise its rights in relation to the collateral; and

    2. (b)

      does not exceed any of the relevant limits in INSPRU 2.1.22R (3).

INSPRU 2.1.26R

A firm must, in determining its reinsurance exposures for the purposes of INSPRU 2.1, aggregate any reinsurance exposure where the identity of the reinsurer is not known by the firm with the highest reinsurance exposure where it does know the identity of the reinsurer.

INSPRU 2.1.27G

INSPRU 2.1.8 R provides that, taking into account relevant risks, a firm must restrict to prudent levels, and adequately diversify, its exposure to counterparties.

INSPRU 2.1.28E

  1. (1)

    In each financial year, a firm should restrict the gross earned premiums which it pays to a reinsurer or group of closely related reinsurers to the higher of:

    1. (a)

      20% of the firm's projected gross earned premiums for that financial year; or

    2. (b)

      4 million.

  2. (2)

    Compliance with this provision may be relied upon as tending to establish compliance with INSPRU 2.1.8 R.

INSPRU 2.1.29R

A firm must notify the FSA immediately in accordance with SUP 15.7 if it has exceeded, or anticipates exceeding, the limit expressed in INSPRU 2.1.28 E.

INSPRU 2.1.30R

Upon notification under INSPRU 2.1.29 R, a firm must explain to the FSA how, despite the excess reinsurance concentration, the credit risk is being safely managed.

INSPRU 2.1.31G

For the purposes of INSPRU 2.1.24 R and INSPRU 2.1.30 R, a firm's explanation of how a reinsurance exposure is being safely managed should also describe the reinsurance market in which the exposure has occurred, and the nature of the reinsurance contract. If appropriate, the firm should also provide a detailed plan and timetable explaining how the excess exposure will be reduced to an acceptable level. The explanation should be approved by a person at the firm of appropriate seniority.

INSPRU 2.1.32G

Where a firm can demonstrate that the arrangement does not give rise to unacceptable levels of credit risk it is unlikely that further action will be required.

Exposures excluded from limits

INSPRU 2.1.33R

In INSPRU 2.1.20 R and INSPRU 2.1.22 R, references to a counterparty exposure or an asset exposure do not include such an exposure arising from:

  1. (1)

    [deleted]

  2. (2)

    premium debts;

  3. (3)

    advances secured on, and not exceeding the surrender value of, long-term insurance contracts of the firm;

  4. (4)

    rights of salvage or subrogation;

  5. (5)

    deferred acquisition costs;

  6. (6)

    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, INSPRU 2.1.20 R and INSPRU 2.1.22 R will nevertheless apply to assets held to cover that guaranteed element;

  7. (7)

    moneys due from, or guaranteed by, a Zone A country;

  8. (8)

    an approved security;

  9. (9)

    a holding in a collective investment scheme falling within the UCITS Directive.

INSPRU 2.1.34R

In INSPRU 2.1.22 R references to a counterparty exposure or an asset exposure do not include such an exposure resulting from debts arising from reinsurance ceded5 and the reinsurer's share of technical provisions.

5
INSPRU 2.1.35R

If:

  1. (1)

    a firm has a counterparty exposure, an asset exposure or a reinsurance exposure in respect of which it has rights over collateral (except where that collateral is a letter of credit see INSPRU 2.1.36 R and INSPRU 2.1.37 R); and

  2. (2)

    the assets constituting that collateral would, if owned by the firm, be admissible assets;

the firm may, in determining the amount of that exposure, deduct the value of that collateral in accordance with INSPRU 2.1.9R (5) or, in the case of a reinsurance exposure, INSPRU 2.1.25R (3).

INSPRU 2.1.36R

If a firm has a counterparty exposure, asset exposure or reinsurance exposure the whole or any part of which is:

  1. (1)

    guaranteed by a credit institution or an investment firm subject in either case to the Capital Adequacy Directive or supervision by a third country (non-EEA) supervisory authority with a Capital Adequacy Directive-equivalent regime; or

  2. (2)

    adequately mitigated by a credit derivative;

the firm may, for the purposes of INSPRU 2.1.20 R, INSPRU 2.1.22 R and INSPRU 2.1.23 R, treat that exposure, or that part of the exposure which is so guaranteed or mitigated, as an exposure to the guarantor or derivative counterparty, rather than to the original counterparty, asset or reinsurer.

INSPRU 2.1.37R

For the purposes of INSPRU 2.1.36 R, references to an exposure being guaranteed include an exposure secured by a letter of credit, but to fall within INSPRU 2.1.36 R the guarantee or letter of credit must be direct, explicit, unconditional and irrevocable.

INSPRU 2.1.38G

The portion of exposure which is guaranteed or mitigated by a credit derivative is itself, as an exposure to the guarantor or derivative counterparty, subject to the limits in INSPRU 2.1.20 R and INSPRU 2.1.22 R.

INSPRU 2.1.39R

For the purposes of INSPRU 2.1.20 R and INSPRU 2.1.22 R, units in a collective investment scheme that does not fall within the UCITS Directive must be treated as a counterparty exposure to the issuer of the units in that scheme if the issuer and those units are to be regarded as constituting a single risk because they are so interconnected that, if the issuer were to experience financial problems, this would be likely to affect the value of the units.2

INSPRU 2.1.39AG

2Where the value of units in a collective investment scheme other than one falling within the UCITS Directive would be likely to be adversely affected by financial problems experienced by the issuer of those units, for the purposes of INSPRU 2.1.20 R and INSPRU 2.1.22 R, the units must be treated as a counterparty exposure to the issuer, with the result that the exposure is subject to the limit in INSPRU 2.1.22R (3)(c)(ii). In all other cases, the units would fall to be treated as an asset exposure, with the result that they are subject to the relevant limit under INSPRU 2.1.22R (3)(i) or (j).

Meaning of closely related

INSPRU 2.1.40R

For the purposes of INSPRU 2.1, a group of persons is closely related if it consists solely of two or more persons2 who, unless it is shown otherwise, constitute a single risk because as between any two of them one or other of the following relationships apply:

  1. (1)

    one of them, directly or indirectly, has control, as defined in INSPRU 2.1.41 R, over the other or they are both controlled by the same third party; or

  2. (2)

    there is no relationship of control as defined in INSPRU 2.1.41 R but they are to be regarded as constituting a single risk because they are so interconnected that, if one of them were to experience financial problems, the other would be likely to encounter repayment difficulties.

INSPRU 2.1.41R

For the purposes of INSPRU 2.1.40 R, control means the relationship between a parent undertaking and a subsidiary undertaking, as defined in Article 1 of the Consolidated Accounts Directive (83/349/EEC), or a similar relationship between any natural or legal person and an undertaking.

Meaning of reinsurance

INSPRU 2.1.41AR

4For the purposes of INSPRU 2.1, references to reinsurance include analogous non-reinsurance financing agreements, including 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 and references to reinsurer shall be construed accordingly.

Application of INSPRU 2.1 to Lloyd's

INSPRU 2.1.42R

Subject to INSPRU 2.1.43 R, INSPRU 2.1 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 2.1.43R

INSPRU 2.1.23 R to INSPRU 2.1.32 G (Large exposure calculation for reinsurance exposures) do not apply to the Society.

Overall limitation of credit risk

INSPRU 2.1.44G

For Lloyd's, counterparty exposure is:

  1. (1)

    for managing agents, the amount by which the net assets managed by or under the direction of a managing agent in respect of a syndicate together with any relevant balancing amount would decrease if the counterparty were to default;

  2. (2)

    for the Society, the amount by which its net assets (which include those of its subsidiary undertakings) would decrease if the counterparty were to default; and

  3. (3)

    for the Society's management of each member's funds at Lloyd's, the amount by which the member's net assets would decrease if the counterparty were to default.

Large exposures

INSPRU 2.1.45R

For the purposes of INSPRU 2.1.20 R (Large exposure limits: counterparty exposure and asset exposure), the Society may determine the exposure to any letters of credit, guarantees or members' life assurance policies as an exposure of the members in aggregate.

INSPRU 2.1.46R

For the purposes of INSPRU 2.1.22 R (Large exposure limits: market risk and counterparty limits), the Society must calculate the amount of and deduct from capital resources:

  1. (1)

    an exposure (expressed as a percentage of the relevant member's capital resources held as funds at Lloyd's), other than to the assets identified in INSPRU 2.1.46R (2)(a) to INSPRU 2.1.46R (2)(c), of a member's capital resources held as funds at Lloyd's to a counterparty, in excess of the limits in INSPRU 2.1.22 R;

  2. (2)

    an exposure in excess of 20% (expressed as a percentage of the aggregate of capital resources held as funds at Lloyd's) of the aggregate of capital resources held as funds at Lloyd's to a single issuer of:

    1. (a)

      letters of credit;

    2. (b)

      guarantees; or

    3. (c)

      members' life assurance policies;

  3. (3)

    an exposure of its own to a counterparty, in excess of the limits in INSPRU 2.1.22 R, expressed as a percentage of the Society's own assets.

INSPRU 2.1.47R

For the purposes of INSPRU 2.1.22 R (Large exposure limits: market risk and counterparty limits), managing agents must calculate the amount of and deduct from capital resources an exposure (expressed as a percentage of the admissible assets held in respect of the relevant syndicate) of admissible assets held in respect of a syndicate to a counterparty in excess of the limits in INSPRU 2.1.22 R.

INSPRU 2.1.48R

If the exposures of capital resources held as funds at Lloyd's for members in the aggregate do not exceed the limits in INSPRU 2.1.22R (3)(c), then, for each individual member, that limit may be replaced by 10%.

Exposures excluded from the large exposure limits

INSPRU 2.1.49R

For managing agents, in INSPRU 2.1.33 R and INSPRU 2.1.35 R, references to an exposure do not include exposure arising from balancing amounts.