Related provisions for INSPRU 7.1.17
1 - 4 of 4 items.
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.
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
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.
2This section sets out in greater detail the approach to be taken by a firm when carrying out the assessment of capital described in the preceding paragraph. This is the assessment referred to as an individual capital assessment. 3GENPRU 1.2.42 R is a general requirement for a firm to carry out stress tests and scenario analyses taking into account an appropriate range of adverse circumstances and events relevant to the firm's business and risk profile and to estimate the financial
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.
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
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
Where a firm is carrying out an assessment in accordance with GENPRU 1.22 of the adequacy of its overall financial resources to cover the risk in the overall financial adequacy rule, that is, the risk of its being unable to meet its liabilities as they fall due2, 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
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.
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.
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
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
The ICA should reflect the firm's ability to react to events as they occur. When relying on prospective management actions, firms should understand the implications of taking such actions, including the financial effect, and taking into consideration any preconditions that might affect the value of management actions as risk mitigants.
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).
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
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.
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.
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
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.
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.
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
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.
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.
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
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.
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
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.
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).
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
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.
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)