Related provisions for INSPRU 7.1.25

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INSPRU 7.1.7GRP
In assessing whether the minimum capital resources requirements are appropriate, the FSA is principally concerned with capital resources as calculated in accordance with GENPRU 2.2.17 R. However, in carrying out its own assessment of its capital needs, a firm may take into account other capital available to it (see GENPRU 1.2.30 R and GENPRU 1.2.36 R), although it should be able to explain and justify its reliance on these other forms of capital.
INSPRU 7.1.8GRP
There are two main aims in this section:(1) to enable firms to understand the issues which the FSA would expect to see assessed and the systems and processes which the FSA would expect to see in operation for ICAs by firms to be regarded as thorough, objective and prudent; and(2) to enable firms to understand the FSA's approach to assessing whether the minimum capital resources requirements of GENPRU 2.1 are appropriate and what action may be taken if the FSA concludes that those
INSPRU 7.1.9GRP
The rules in GENPRU 1.2 require a firm to identify and assess risks to its being able to meet its liabilities as they fall due, to assess how it intends to deal with those risks and to quantify the financial resources it considers necessary to mitigate those risks. To meet these requirements, a firm should consider:(1) the extent to which capital is an appropriate mitigant for the risks identified; and(2) assess the amount and quality of capital required.
INSPRU 7.1.10GRP
GENPRU 1.2.42 R requires a firm to carry out stress tests and scenario analyses for each of the major sources of risk identified in accordance with GENPRU 1.2.30 R. A firm may also approach the assessment of the adequacy of its capital resourcesin another way. The method should be proportionate to the size and nature of its business.
INSPRU 7.1.11GRP
In accordance with GENPRU 1.2.60 R, these assessments must be documented so that they can be easily reviewed by the FSA as part of the FSA's assessment of the adequacy of the firm'scapital resources.
INSPRU 7.1.12GRP
The FSA may ask for the results of these assessments to be provided to it together with a description of the processes by which the assessments have been made, the range of results from each stress test or scenario analysis performed and the main assumptions made. The FSA may also carry out a more detailed examination of the details of the firm's processes and calculations.
INSPRU 7.1.13GRP
Based upon this information and other information available to it, the FSA will consider whether the capital resources requirement applicable to the firm is appropriate. Where relevant, the firm'sECR will be a key input to the FSA's assessment of the adequacy of the firm'scapital resources. For firms carrying on general insurance business, the ECR is calculated in accordance with INSPRU 1.1.72C R. For realistic basis life firms, the ECR forms part of the CRR and is calculated
INSPRU 7.1.14GRP
Firms that are required to calculate an ECR may wish to note that the ECR as calculated is based upon the assumptions that a firm's business is well diversified, well managed with assets matching its liabilities and good controls, and stable with no large, unusual, or high risk transactions. Firms may find it helpful to assess the extent to which their actual business differs from these assumptions and therefore what adjustments it might be reasonable to make to the CRR or ECR
INSPRU 7.1.15RRP
Where a firm is carrying out an assessment of the adequacy of its overall financial resources in accordance with GENPRU 1.2, the assessment of the adequacy of the firm's capital resources must:(1) reflect the firm's assets, liabilities, intra-group arrangements and future plans; (2) be consistent with the firm's management practice, systems and controls;(3) consider all material risks that may have an impact on the firm's ability to meet its liabilities to policyholders; and(4)
INSPRU 7.1.16GRP
The ICA should reflect both the firm's desire to fulfil its business objectives and its responsibility to meet liabilities to policyholders. This means that the ICA should demonstrate that the firm holds sufficient capital to be able to make planned investments and take on new business (within an appropriate planning horizon). It should also ensure that if the firm had to close to new business (if it has not already done so), it would be able to meet its existing commitments.
INSPRU 7.1.17GRP
Where a firm has not already closed to new business, the ICA should be made on the basis that the firm closes to new business after an appropriate period. This period should allow for the time it would take for the firm to identify the need for closure and to implement the necessary action.
INSPRU 7.1.18GRP
Where including new business would increase the capital resources by more than any increase in the capital required, or reduce the capital required by more than any reduction in available capital, new business should be excluded. To the extent that including new business increases the required capital, a firm should consider whether it is appropriate to include the additional amount within the ICA.
INSPRU 7.1.20GRP
For a firm to discharge its financial obligations to policyholders, it will incur certain expenses, including payments to the firm's own staff, contributions to any pension scheme and fees to outsourcing suppliers or service companies. All of these expenses, and risks associated with these payments, should be considered when carrying out the ICA. When considering the appropriate level of expenses in a projection, the firm should consider the acceptability of the service provided
INSPRU 7.1.21GRP
Where a firm's liabilities include payments which are subordinated to liabilities to policyholders, these payments do not need to be included within the ICA. However, the ICA should include all payments that must be made to avoid putting policyholders' interests at risk, including any payment on which a default might trigger the winding up of the firm. For example, if the principal of a loan could be recalled on default of a coupon payment, coupon payments over the lifetime of
INSPRU 7.1.26GRP
The ICA should assume that a firm will continue to manage its business having regard to the FSA's Principles for Businesses. In particular, a firm should take into account how the FSA's Principles for Businesses may constrain its prospective management actions, for example, Principle 6 (Treating Customers Fairly).
INSPRU 7.1.29GRP
The ICA should give the required level of confidence that the firm's liabilities to policyholders will be paid. The ICA should consider all material risks which may arise before the policyholder liabilities are paid (including those risks set out in GENPRU 1.2.30 R).
INSPRU 7.1.30GRP
Firms should not ignore risks simply because they relate to events that occur with an expected likelihood beyond the confidence level. However, the capital required in the face of these tail events may be reduced for the purpose of carrying out the ICA. For example, while an A-rated bond may be assumed not to default within the required confidence level, allowance should be made for the devaluation of that bond through a more likely downgrade or change in credit spreads or other
INSPRU 7.1.31GRP
Notwithstanding INSPRU 7.1.30 G, risks which have an immaterial effect on the firm's financial position or only occur with an extreme probability may be excluded from the ICA.
INSPRU 7.1.32GRP
The number of claims, the amount paid and the timing of a firm's liabilities may be uncertain. The ICA should consider risks which result in a change in the cost of those liabilities.
INSPRU 7.1.34GRP
Where the firm is relying on systems and controls in order to mitigate risks, the firm should consider the risk of those systems and controls failing at the confidence level at which the ICA is being carried out.
INSPRU 7.1.37GRP
In carrying out the ICA, wherever possible the value of assets should be marked to market. Where marking to market is not possible, the ICA should use a method suitable for assessing the underlying economic benefit of holding each asset.
INSPRU 7.1.41GRP
The firm should carry out a broad reconciliation of key parts of any balance sheet used in the ICA with the corresponding entry from audited results.
INSPRU 7.1.42RRP
Where the FSA requests a firm to submit to it a written record of the firm's assessments of the adequacy of its capital resources carried out in accordance with INSPRU 7.1.15 R, those assessments must include an assessment comparable to a 99.5% confidence level over a one year timeframe that the value of assets exceeds the value of liabilities, whether or not this is the confidence level otherwise used in the firm's own assessments.
INSPRU 7.1.44GRP
The FSA requires firms to submit a capital assessment calibrated to a common confidence level, as set out in INSPRU 7.1.42 R, to enable the FSA to assess whether the minimum capital resources requirements in GENPRU 2.1 are appropriate. This then allows the FSA to give a consistent level of individual capital guidance across the industry.
INSPRU 7.1.45GRP
If a firm selects a longer time horizon than one year it may choose to use a lower confidence level than 99.5%. In such a case, the firm should be prepared to justify its choice and explain why this confidence interval is appropriate and how it is comparable to a 99.5% confidence level over a one year timeframe. An assessment based on a longer timeframe should also demonstrate that there are sufficient assets to cover liabilities at all future dates. This may be illustrated by
INSPRU 7.1.46GRP
In determining the strength of the ICA, a firm should consider all risks in aggregate making appropriate allowance for diversification such that the assessment meets the required confidence level overall. The firm should be able to describe and explain each of the main diversification benefits allowed for.
INSPRU 7.1.47GRP
For risks that can be observed to crystallise over a short period of the order of a year, the confidence level may be measured with reference to the probability distribution for the impact of the risks over one year. For example, catastrophic events such as hurricanes can be measured in this way by estimating the ultimate capital cost.
INSPRU 7.1.48GRP
For risks that are not observable over a short period (such as long-tailed liability business or annuitant mortality), the confidence level may be measured with reference to the probability distribution for the emergence of that risk over the lifetime of the liabilities.
INSPRU 7.1.49RRP
The written record of a firm'sindividual capital assessments carried out in accordance with INSPRU 7.1.15 R submitted by the firm to the FSA must:(1) in relation to the assessment comparable to a 99.5% confidence level over a one year timeframe that the value of assets exceeds the value of liabilities, document the reasoning and judgements underlying that assessment and, in particular, justify:(a) the assumptions used;(b) the appropriateness of the methodology used; and(c) the
INSPRU 7.1.91GRP
In assessing the adequacy of a firm'scapital resources, the FSA draws on more than just a review of the submitted ICA. Use is made of wider supervisory knowledge of a firm and of wider market developments and practices. When forming a view of any individual capital guidance to be given to a firm, the review of the firm'sICA along with the ARROW risk assessment and any other issues arising from day-to-day supervision will be considered.
INSPRU 7.1.92GRP
The FSA will take a risk-based and proportionate approach to the review of a firm'sICA, focusing on the firm's approach to dealing with the key risks it faces. Any individual capital guidance given will reflect the judgements reached through the ARROW review process as well as the review of the firm'sICA.
INSPRU 7.1.93GRP
A firm should not expect the FSA to accept as adequate any particular model that the firm develops or that the results from the model are automatically reflected in any individual capital guidance given to the firm for the purpose of determining adequate capital resources. However, the FSA will take into account the results of any sound and prudent model when giving individual capital guidance or considering applications for a waiver under section 148 of the Act of the capital
INSPRU 7.1.94GRP
Where the FSA considers that a firm will not comply with GENPRU 1.2.26 R (adequate financial resources, including capital resources) by holding the capital resources required by GENPRU 2.1, the FSA may give the firmindividual capital guidance advising it of the amount and quality of capital resources which the FSA considers it needs to hold in order to meet that rule.
INSPRU 7.1.95GRP
In giving individual capital guidance, the FSA seeks a balance between delivering consistent outcomes across the individual capital guidance it gives to all firms and recognising that such guidance should reflect the individual features of the firm. Comparison with the assumptions used by other firms will be used to trigger further enquiry. Debate will be sought where good arguments are made for a particular result that differs markedly from those of a firm's peers. The FSA also
INSPRU 7.1.96GRP
Following an internal validation process, the FSA will write to the Board of the firm being assessed providing both quantitative and qualitative feedback on the results of the FSA's assessment. This letter will notify the firm of the individual capital guidance considered appropriate. The letter will include reasons for any capital add-ons identified, where applicable.
INSPRU 7.1.97GRP
If a firm considers that the individual capital guidance is inappropriate to its circumstances, then the firm should inform the FSA that it does not intend to follow that guidance. Informing the FSA of such an intention would be expected if a firm is to comply with Principle 11 (Relations with regulators).
INSPRU 7.1.99GRP
Where a firm considers that the capital resources requirements of GENPRU 2.1 require the holding of more capital than is needed for the firm to comply with GENPRU 1.2.26 R then the firm may apply to the FSA for a waiver of the requirements in GENPRU 2.1 under section 148 of the Act. In addition to the statutory tests under section 148, in deciding whether to grant a waiver and, if granted, its terms, the FSA will consider the thoroughness, objectivity and prudence of a firm'sICA
SUP 4.3.15GRP
SUP 4.3.13 R is not intended to be exhaustive of the professional advice that a firm should take whether from an actuary appointed under this chapter or from any other actuary acting for the firm. Firms should consider what systems and controls are needed to ensure that they obtain appropriate professional advice on financial and risk analysis; for example:11(1) risk identification, quantification and monitoring;1(2) stress and scenario testing;1(3) ongoing financial conditions;1(4)
A firm's run-off plan should include:(1) a revised individual capital assessment for the firm (see INSPRU 7.12), which reflects the impact of the closure of the relevant with-profits fund; or2(2) a statement that the firm is satisfied that the closure will not materially affect the firm's most recent assessment.
GENPRU 1.2.57RRP
The overall financial adequacy rule applies to a firm on a solo basis whether or not it also applies to the firm on a consolidated basis.