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PRU 2.1 1Calculation of capital resources requirements

Application

PRU 2.1.1R

PRU 2.1 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.

PRU 2.1.2G

The scope of application of PRU 2.1 is not restricted to firms that are subject to the relevant EC Directives. It applies, for example, to pure reinsurers.

PRU 2.1.3R

  1. (1)

    PRU 2.1 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, PRU 2.1 applies separately to each type of business.

PRU 2.1.4G

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

PRU 2.1.5G

The requirements in PRU 2.1 apply to a firm on a solo basis.

Purpose

PRU 2.1.6G

Principle 4 requires a firm to maintain adequate financial resources. PRU 2 sets out provisions that deal specifically with the adequacy of that part of a firm's financial resources that consists of capital resources. The adequacy of a firm's capital resources needs to be assessed both by the firm and the FSA. Through its rules, the FSA sets minimum capital resources requirements for firms. It also reviews a firm's own assessment of its capital needs, and the processes and systems by which that assessment is made, in order to see if the minimum capital resources requirements are appropriate (see PRU 2.3.2 G to PRU 2.3.3 G).

PRU 2.1.7G

This section (PRU 2.1) sets capital resources requirements for a firm. PRU 2.2 sets out how, for the purpose of this, the amounts or values of capital, assets and liabilities are to be determined. More detailed rules relating to capital, assets and liabilities are also set out in the following chapters and sections:

  1. (1)

    PRU 1.3 Valuation;

  2. (2)

    PRU 3 Credit risk;

  3. (3)

    PRU 4 Market risk;

  4. (4)

    PRU 5 Liquidity risk;

  5. (5)

    PRU 6 Operational risk;

  6. (6)

    PRU 7 Insurance risk; and

  7. (7)

    PRU 8 Group risk.

PRU 2.1 and PRU 2.2 include appropriate cross-references to these chapters and sections.

PRU 2.1.8G

PRU 2.1 implements minimum EC standards for the capital resources required to be held by a firm undertaking business that falls within the scope of the Consolidated Life Directive (2002/83/EC) or the First Non-Life Directive (73/239/EEC) as amended.

Main requirements

PRU 2.1.9R
  1. (1)

    A firm must maintain at all times capital resources equal to or in excess of its capital resources requirement (CRR).

  2. (2)

    A firm which is a participating insurance undertaking and, in relation to its own group capital resources, is in compliance with PRU 8.3.9 R, is deemed to comply with (1).

PRU 2.1.10R

A firm must comply with PRU 2.1.9 R separately in respect of both its long-term insurance business and its general insurance business.

PRU 2.1.11G

In order to comply with PRU 2.1.10 R, a firm carrying on both general insurance business and long-term insurance business will need to allocate its capital resources between its general insurance business and long-term insurance business so that the capital resources allocated to its general insurance business are equal to or in excess of its CRR for its general insurance business and the capital resources allocated to its long-term insurance business are equal to or in excess of its CRR for its long-term insurance business. Whereas long-term insurance assets cannot be used towards meeting a firm's CRR for its general insurance business, surplus general insurance assets may be used towards meeting the CRR for its long-term insurance business (see PRU 7.6.30 R to PRU 7.6.32 G). PRU 7.6 sets out the detailed requirements for the separation of long-term and general insurance business.

PRU 2.1.12G

Firms commonly use different terminology for the various PRU requirements. For example, the MCR is traditionally known as the required minimum margin.

PRU 2.1.13G

The FSA may impose a higher capital requirement than the minimum requirement set out in this section as part of the firm's Part IV permission. (See PRU 2.3).

Calculation of the CRR

PRU 2.1.14R

The CRR for any firm carrying on general insurance business is equal to the MCR in PRU 2.1.21 R.

PRU 2.1.15R

The CRR for any firm to which this rule applies (see PRU 2.1.16 R and PRU 2.1.17 R) is the higher of:

  1. (1)

    the MCR in PRU 2.1.22 R; and

  2. (2)

    the ECR in PRU 2.1.34 R.

PRU 2.1.16R

Subject to PRU 2.1.17 R, PRU 2.1.15 R applies to a firm carrying on long-term insurance business, other than:

  1. (1)

    a non-directive mutual;

  2. (2)

    a firm which has no with-profits insurance liabilities; and

  3. (3)

    a firm which has with-profits insurance liabilities that are, and at all times since 31 December 2004 (the coming into force of PRU 2.1.15 R) have remained, less than £500 million.

PRU 2.1.17R

PRU 2.1.15 R also applies to a firm of a type listed in PRU 2.1.16 R (3) if:

  1. (1)

    the firm makes an election that PRU 2.1.15 R is to apply to it; and

  2. (2)

    that election is made by written notice given to the FSA in a way that complies with the requirements for written notice in SUP 15.7.

PRU 2.1.18G

The effect of PRU 2.1.16 R (3) is that a firm to which PRU 2.1.15 R applies because it has with-profits insurance liabilities of £500 million or more, will continue to be subject to PRU 2.1.15 R even if its with-profits insurance liabilities fall below £500 million. However, if that happens, it may apply for a waiver from PRU 2.1.15 R under section 148 of the Act. In exercising its discretion under section 148 of the Act, the FSA will have regard (among other factors) to whether there has been a material and permanent change to the firm's business and to the prospects of it continuing to have with-profits insurance liabilities of less than £500 million.

PRU 2.1.19G

A firm that has always had with-profits insurance liabilities of less than £500 million since PRU 2.1.15 R came into force may wish to "opt in" to PRU 2.1.15 R and therefore become a realistic basis life firm. By doing so, it becomes obliged to calculate a with-profits insurance capital component (see PRU 2.1.34 R and PRU 7.4), but it also becomes entitled to certain modifications to the way that a firm is required to calculate its mathematical reserves (see PRU 7.3.46 R and PRU 7.3.76 R). The firm is also then required to report its liabilities on a realistic basis (see IPRU(INS) rule 9.31R(b)). In order to "opt in", the firm must make an election under PRU 2.1.17 R that PRU 2.1.15 R is to apply to it. If a firm that has elected to calculate and report its with-profits insurance liabilities on a realistic basis subsequently decides that it no longer wishes to do so, it may seek to "opt out" by applying for a waiver from PRU 2.1.15 R under section 148 of the Act. In exercising its discretion under section 148 of the Act, the FSA will have regard (among other factors) to whether there has been a material and permanent change to the firm's business and to whether it continues to have with-profits insurance liabilities of less than £500 million.

PRU 2.1.20R

The CRR for a firm carrying on long-term insurance business, but to which PRU 2.1.15 R does not apply, is equal to the MCR in PRU 2.1.22 R.

Calculation of the MCR

PRU 2.1.21R

For a firm carrying on general insurance business, the MCR in respect of that business is the higher of:

  1. (1)

    the base capital resources requirement for general insurance business applicable to that firm; and

  2. (2)

    the general insurance capital requirement.

PRU 2.1.22R

For a firm carrying on long-term insurance business, the MCR in respect of that business is the higher of:

  1. (1)

    the base capital resources requirement for long-term insurance business applicable to that firm; and

  2. (2)

    the sum of:

    1. (a)

      the long-term insurance capital requirement; and

    2. (b)

      the resilience capital requirement.

PRU 2.1.23G

The MCR gives effect to the EC Directive minimum requirements. For general insurance business, the EC Directive minimum is the higher of the general insurance capital requirement and the relevant base capital resources requirement. For long-term insurance business, the EC Directive minimum is the higher of the long-term insurance capital requirement and the base capital resources requirement. The base capital resources requirement is the minimum guarantee fund for the purposes of article 29(2) of the Consolidated Life Directive (2002/83/EC) and article 17(2) of the First Non-Life Directive (73/239/EEC) as amended. The resilience capital requirement is an FSA requirement that is additional to the EC minimum requirement for long-term insurance business.

PRU 2.1.24G

The calculation of the resilience capital requirement is set out in PRU 4.2.

Calculation of the base capital resources requirement

PRU 2.1.25R

The amount of a firm's base capital resources requirement is set out in Table 2.1.26R.

PRU 2.1.26R

Table: Base capital resources requirement

Firm type

Amount: Currency equivalent of

General insurance business

Liability insurer

(classes 10-15)

Directive mutual

€2.25 million

Non-directive insurer

€300,000

Overseas firm

€1.5 million

Other

€3 million

Other insurer

Directive mutual

€1.5 million

Non-directive insurer

(classes 1 to 8, 16 or 18)

€225,000

Non-directive insurer

(classes 9 or 17)

€150,000

Overseas firm

€1 million

Other

€2 million

Long-term insurance business

Mutual

Directive

€2.25 million

Non-directive

€600,000

Overseas firm

€1.5 million

Any other insurer

€3 million

PRU 2.1.27R

  1. (1)

    Subject to (2) and (3), the amount of the base capital resources requirement specified in the last column of the table in PRU 2.1.26 R for a firm which is not a non-directive insurer will increase each year, starting on the review date of 20 September 2005 (and annually after that), by the percentage change in the European index of consumer prices (comprising all EU member states, as published by Eurostat) from 20 March 2002, to the relevant review date, rounded up to a multiple of €100,000.

  2. (2)

    In any year, if the percentage change since the last increase is less than 5%, then there will be no increase.

  3. (3)

    The increase will take effect 30 days after the EU Commission has informed the European Parliament and Council of its review and the relevant percentage change.

PRU 2.1.28G

Any increases in the base capital resources requirement referred to in PRU 2.1.27 R will be published on the FSA website.

PRU 2.1.29R

For the purposes of the base capital resources requirement, the exchange rate from the Euro to the pound sterling for each year beginning on 31 December is the rate applicable on the last day of the preceding October for which the exchange rates for the currencies of all the European Union member states were published in the Official Journal of the European Union.

Calculation of the general insurance capital requirement

PRU 2.1.30R

A firm must calculate its general insurance capital requirement as the highest of:

  1. (1)

    the premiums amount;

  2. (2)

    the claims amount; and

  3. (3)

    the brought forward amount.

PRU 2.1.31G

The calculation of each of the premiums amount, claims amount and brought forward amount is set out in PRU 7.2.

Calculation of the long-term insurance capital requirement

PRU 2.1.33G

The calculation of each of the capital components is set out in PRU 7.2.

Calculation of the ECR

PRU 2.1.34R

For a firm carrying on long-term insurance business, the ECR in respect of that business is the sum of:

  1. (1)

    the long-term insurance capital requirement;

  2. (2)

    the resilience capital requirement; and

  3. (3)

    the with-profits insurance capital component.

PRU 2.1.35G

Details of the resilience capital requirement and the with-profits insurance capital component are set out in PRU 4.2 and PRU 7.4 respectively.

Monitoring requirements

PRU 2.1.36R

A firm must at all times monitor whether it is complying with PRU 2.1.9 R and be able to demonstrate that it knows at all times whether it is complying with that rule.

PRU 2.1.37G

For the purposes of PRU 2.1.36 R, a firm should have systems in place to enable it to be certain whether it has adequate capital resources to comply with PRU 2.1.9 R at all times. This does not necessarily mean that a firm needs to measure the precise amount of its capital resources and its CRR on a daily basis. A firm should, however, be able to demonstrate the adequacy of its capital resources at any particular time if asked to do so by the FSA.

PRU 2.1.38R

A firm must notify the FSA immediately of any breach, or expected breach, of PRU 2.1.9 R.