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INSPRU 2.2 Asset-related Capital Requirement

Application

INSPRU 2.2.1R

INSPRU 2.2 applies to an insurer unless it is:

  1. (1)

    a non-directive friendly society; or

  2. (2)

    a Swiss general insurer; or

  3. (3)

    an EEA-deposit insurer; or

  4. (4)

    an incoming EEA firm; or

  5. (5)

    an incoming Treaty firm.

INSPRU 2.2.2G

The scope of application of INSPRU 2.2 is not restricted to firms that are subject to the relevant EC directives.

INSPRU 2.2.3R

INSPRU 2.2 applies to a firm only in relation to its general insurance business.

INSPRU 2.2.4G

The adequacy of a firm's financial resources needs to be assessed in relation to all the activities of the firm and the risks to which they give rise.

INSPRU 2.2.5G

The requirements in INSPRU 2.2 apply to a firm on a solo basis.

Purpose

INSPRU 2.2.6G

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. GENPRU 2.1.17 R provides that for a firm carrying on general insurance business the firm's capital resources requirement is the minimum capital requirement.

INSPRU 2.2.7G

The FSA will use the enhanced capital requirement as the benchmark for individual capital guidance for a firm carrying on general insurance business, other than a non-directive insurer. The enhanced capital requirement is the sum of the asset-related capital requirement and the insurance-related capital requirement less the firm's equalisation provisions. This section sets out rules and guidance relating to the asset-related capital requirement. Rules and guidance relating to the insurance-related capital requirement are set out in INSPRU 1.1.

INSPRU 2.2.8G

The asset-related capital requirement is a measure of the capital that a firm should hold against the risk of loss if another party fails to perform its financial obligations to the firm or from adverse movements in the value of assets.

INSPRU 2.2.9G

The asset-related capital requirement is calculated by applying capital charge factors, expressed as a percentage, to different categories of a firm's assets. A firm should refer to GENPRU 1.3 which sets out how a firm must recognise and value assets and liabilities.

Calculation of asset-related capital requirement

INSPRU 2.2.10R

A firm must calculate its asset-related capital requirement in accordance with INSPRU 2.2.11 R.

INSPRU 2.2.11R

  1. (1)

    The value of each of the firm's assets of a kind listed in the table in INSPRU 2.2.16 R must be multiplied by the corresponding capital charge factor.

  2. (2)

    If any amount which is to be multiplied by a capital charge factor is a negative amount, that amount shall be treated as zero.

  3. (3)

    No account shall be taken of:

    1. (a)

      the value of any asset which is not an admissible asset;

    2. (b)

      the amount (if any) by which the value of any assets exceeds the limits on exposures to a type of asset or counterparty as set out in INSPRU 2.1.22 R.

  4. (4)

    Where a firm has entered into a derivative, then for the purposes of applying the appropriate capital charge factor as set out in INSPRU 2.2.16 R, it must treat the value of the derivative and the value of the asset associated with the derivative as a single asset of a type and value which most closely reflects the economic risk to the firm of the combined rights and obligations associated with the derivative and the asset associated with the derivative.

  5. (5)

    The amounts resulting from multiplying each of the asset items referred to in (1) by the corresponding capital charge factor must be aggregated.

  6. (6)

    The asset-related capital requirement is the amount resulting from the aggregation in (5).

INSPRU 2.2.12G

Options: some derivatives may allow a firm an option whether to buy or sell a particular asset. If an option has a positive market value (that is, in-the-money) it is likely that the firm will exercise the option in the future and the current value of the derivative and associated asset will generally acquire new characteristics and volatility (a 'synthetic asset'). For instance, an option to acquire shares at a price below their current market value is likely to be exercised and the appropriate asset-related capital requirement calculation would be to combine the cash cost of acquiring the number of shares covered by the option with the value of the derivative and apply a factor of 16% to that combined value. If an option has no market value (that is, out-of-the-money) then it is unlikely that a firm would exercise the option in which case the appropriate asset-related capital requirement charge would be zero in respect of the derivative, and the corresponding capital charge contained in Table INSPRU 2.2.16 R in relation to the asset associated with the derivative.

INSPRU 2.2.13G

Futures and swaps: futures or swaps may not allow the firm such an option in which case the appropriate asset-related capital charge factor to apply is the one corresponding to the asset that would be held on fulfilment of the contract and the value to which this should be applied would be the value of the asset held after the contract is fulfilled.

INSPRU 2.2.14R

  1. (1)

    The asset-related capital charge factor for money market funds set out in the Table INSPRU 2.2.16 R must be applied to exposures to funds that meet the definition in (2).

  2. (2)

    In INSPRU 2.2 an investment in a money market fund means a participation in a collective investment scheme which satisfies the following conditions:

    1. (a)

      the primary investment objective of the collective investment scheme is:

      1. (i)

        to maintain the net asset value of the collective investment scheme constant at par (net of earnings); or

      2. (ii)

        to maintain the net asset value of the collective investment scheme at the value of investors' initial capital plus earnings;

    2. (b)

      in order to pursue its primary investment objective the collective investment scheme invests exclusively in cash or in short term instruments with characteristics similar to cash or both; and

    3. (c)

      the collective investment scheme undertakes to abide by the following conditions:

      1. (i)

        not to allow the assets held in the collective investment scheme to exceed a weighted average maturity of 60 days;

      2. (ii)

        not to invest in equity or securities with characteristics similar to equity; and

      3. (iii)

        on a basis of marking-to-market at least weekly, not to permit the value of each collective investment scheme unit at any point in time to move by more than 50 basis points (0.5% of total collective investment scheme value).

INSPRU 2.2.15R
INSPRU 2.2.16R

Table: Asset-related capital charge factors

Asset item

ECR asset-related capital charge factor

Investments

Land and Buildings

7.5%

Investments in group undertakings and participating interests

Shares in group undertakings excluding participating interests

Insurance dependants

0%

Other

7.5%

Debt securities issued by, and loans to, group undertakings

3.5%

Participating interests

7.5%

Debt securities issued by, and loans to, undertakings in which the insurer has a participating interest

3.5%

Other financial investments

Shares and other variable-yield securities and units in unit trusts

16.0%

Money market funds

0%

Debt securities and other fixed income securities

Approved securities

3.5%

Other

3.5%

Participation in investment pools

16.0%

Loans secured by mortgages

2.5%

Other loans

2.5%

Deposits with approved credit institutions and approved financial institutions

0%

Other

7.5%

Deposits with ceding undertakings

3.5%

Reinsurers' share of technical provisions

Provision for unearned premium

2.5%

Claims outstanding

2.5%

Other

2.5%

Debtors

Debtors arising out of direct insurance operations

Policyholders

4.5%

Intermediaries

3.5%

Debtors arising out of reinsurance operations

2.5%

Other debtors

1.5%

Called up share capital not paid

0%

Other Assets

Tangible assets

7.5%

Cash at bank and in hand

0%

Other

0%

Prepayments and accrued income

Accrued interest and rent

0%

Deferred acquisition costs

0%

Other prepayments and accrued income

0%

Application of INSPRU 2.2 to Lloyd's

INSPRU 2.2.17R

INSPRU 2.2 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 2.2.18R

This chapter applies to the Society for each member, including the capital charge relating to central assets, to the extent that those assets are held to support a particular member.