Some of the rules in this section require a company to consider its regulatory duty to treat customers fairly. A company may include amounts recoverable from an ISPV in the cash flows to be valued in a future valuation if it obtains a waiver from INSPRU 1.2.28 R under sections 138A and 138B of the Act. 1) all guaranteed benefits including guaranteed surrender values and non-contributory values;.
Options
For example, improving life expectancy can increase the value of guaranteed annuity options that accrue further in the future. In this case, the prices from the asset model used in the stochastic approach should be benchmarked to relevant market asset prices before determining the value of the option.
Reinsurance
Application of INSPRU 1.2 to Lloyd's
Internal-contagion risk
Application
1.5.2 to 1.5.3 not used]
Purpose
Requirements: Non-insurance activities
In ■INSPRU 1.5.13A R related operations include, for example, activities such as the provision of statistical or actuarial advice, risk analysis or customer research. However, it does not allow, for example, the performance of unrelated banking and financial activities.
Requirements: long-term insurance business
A pure reinsurer may not engage in any business other than reinsurance and related business.
Permissions not to include both types of insurance
Separately identify and maintain long term insurance assets
A company must maintain separate accounts for each of its long-term insurance funds (including with-profits funds). When a company has more than one long-term insurance fund, separate accounts must be kept for each fund.
Exclusive use of long-term insurance assets
Payment of financial penalties
Requirements: property-linked funds
Application of INSPRU 1.5 to Lloyd's
Capital resources Annex 1 requirements and technical
Mathematical reserves) and INSPRU 1.3 (With-profits 1 insurance capital component)
Annex 1/2
Insurance Prudential Sourcebook
Credit risk in insurance
Market risk
- Market risk in insurance
Market risk scenario for assets invested outside the United Kingdom
Covering linked liabilities
Orders made by the Department for Work and Pensions under section 148 of the Social Security Administration Act 1992, and which are limited to 5% per annum, can also be matched by a fixed interest investment matching cash flows which at 5% per annum composite rises. When choosing the appropriate cover, the firm must ensure that both credit risk, and the risk that the value or yield in the assets will not in all circumstances correspond to fluctuations in the relevant index, are within acceptable limits. Where liabilities are linked to orders made under section 148 of the Social Security Administration Act 1992, the risks associated with the business can be mitigated by holding assets to cover an alternative index that is reasonably expected to at least exceed the section 148 order to cover (eg RPI plus a margin) over the duration of the link.
The firm's exposure to an order under Section 148 in excess of this index must be appropriately mitigated by limiting the liabilities associated with the order so that risks remain within acceptable limits.
Pure reinsurers
The firm must avoid excessive risk exposure to a single counterparty and to other derivative or quasi-derivative operations; Investments in assets issued by the same issuer or by issuers. belonging to the same group should not expose the firm to excessive concentration of risk; and.
Application of INSPRU 3.1 to Lloyd's
Derivatives in insurance
This section applies to a firm in relation to the whole of its business, except where a particular provision provides for a narrower scope. PRA Rulebook: Non-Solvency II Firms: Insurance Company – Capital Resources 13 provides that a derivative, quasi-derivative or share lending transaction will only be an allowable asset if approved. This section sets out the criteria for determining when a derivative, quasi-derivative or equity loan transaction is approved for this purpose.■INSPRU 3.2.5 Rto■INSPRU 3.2.35 R sets out the criteria for derivatives and quasi-derivatives .■INSPRU 3.2.36 Rto.
Derivatives and quasi-derivatives
Efficient portfolio management
Generation of additional capital or income
Reduction of investment risk
Significant increase in risk
Often a derivative or quasi-derivative is effected to protect against a serious adverse consequence arising in only one circumstance. In all other circumstances it may itself lead to adverse consequences, if only because it becomes worthless leading to the loss of the purchase price. Conversely, a derivative or quasi-derivative may reduce risk in a wide range of circumstances, but lead to adverse consequences when a particular circumstance arises, e.g.
The test is simply that the increase in risk should not be substantial, that is, it must be both small and reasonable, or the risk must be small.
Investment risk
Conversely, a derivative or quasi-derivative can reduce risk under a wide range of circumstances, but lead to negative consequences when a particular circumstance occurs, e.g. the counterparty's default.
Cover
A company must implicitly or explicitly record a provision equal to the value of assets held or offsetting transactions to cover an unapproved derivative or quasi-derivative transaction. The value of the cover increases (or if the cover is a liability, the amount of that liability decreases) to match an increase in the obligations under the transaction. The third purpose of coverage is to protect against the risk that the Company may be unable to deliver assets (including money in any currency) of the correct type when the obligation under the transaction falls due.
An obligation to deliver assets is covered only if the firm holds those assets or has entered into an offsetting transaction that would deliver those assets when required.
Offsetting transactions
Transaction exposure includes exposure arising from a right to the firm's (or its subsidiary's) option to dispose of assets. An obligation to pay money is only offset if the firm holds cash in the correct currency, its equivalent or assets that can be reliably converted into cash in the correct currency. A transaction offsets an obligation to transfer assets away from the firm only if it provides for the transfer to the firm of those assets, or their value, at the time, or before the obligation expires.
A transaction settles an obligation to pay an amount of money only if it provides for that amount of money to be paid to the company on or before the earliest date on which the obligation falls due.
Lending and borrowing assets
Off-market transactions
Stock lending
2) ■INSPRU 3.2.36R (1)(c) does not apply to a share lending transaction made through the securities lending and borrowing program of Euroclear Bank SA/NV.
Collateral
Liquidity risk management
Operational Risk Management
Group Risk: Insurance Groups
Insurance Groups
Application
Calculation of GCR - Deductions under requirement deduction method from group capital resources
Individual Capital Assessment
Individual Capital Section 7.1 : Application
Assessment
Application
Calculation of GCR - Assets in excess of market risk and counterparty exposure limits
General approach
According to ■GENPRU 1.2.60 R, these assessments must be documented so that they can be readily reviewed by the relevant regulator as part of the relevant regulator's assessment of the adequacy of the firm's capital resources. The relevant regulator may request that the results of these assessments be provided to it together with a description of the procedures by which the assessments were made, the range of results of each stress test or scenario analysis performed and the main assumptions. the relevant regulator may also conduct a more detailed review of the details of the company's processes and calculations. Where relevant, the firm's ECR will be a key input to the relevant regulator's assessment of the adequacy of the firm's capital resources.
Where a firm carries out an assessment in accordance with■GENPRU 1.2 of the adequacy of its overall financial resources to cover the risk in the overall financial adequacy rule, i.e. the risk that it will not be able to meet its obligations come as it is due. , the assessment of the adequacy of the firm's capital resources must:.
Representative of the firm's characteristics
Based on this information and other information available to him, the appropriate regulator will consider whether the capital resources. requirement applicable to the firm is applicable. It must also ensure that if the firm were to close new business (if it has not already done so), it would be able to meet its existing obligations. Where a firm has not already closed for new business, the ICA must be made on the basis that the firm closes for new business after an appropriate period.
Any contract that the firm is legally obligated to renew should be considered part of the firm's existing liabilities and not treated as new business.
Consistency with a firm's practice, systems and controls
This period should allow time for the firm to identify the need for closure and implement the necessary actions. When considering the appropriate level of expenditure in a projection, the firm must consider the acceptability of the service provided to policyholders and the resources required by senior management to manage the firm. However, the ICA must include all payments that must be made to avoid jeopardizing the policyholder's interests, including any payment for which a failure could cause the firm to close.
Companies should also consider whether their systems and controls provide sufficient information to allow senior management to identify the crystallization of risks in a timely manner, allowing them to respond and allowing the company to obtain the full value of the modeled management action. .
Considering all material risks
The ICA should assume that a company will continue to manage its business taking into account the PRA's and FCA's principles for companies. Where the entity relies on systems and controls to mitigate risk, the entity should consider the risk of those systems and controls failing at the confidence level at which the ICA is performed. If a company summarizes cash flows over part of the life of the portfolio using a balance sheet, but is exposed to risks that arise after the balance sheet date, then these longer-dated risks can be captured by adjusting the assumptions used in the closing balance sheet.
Valuation basis
ICA submitted to appropriate regulator: confidence level
The relevant regulator 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 relevant regulator to assess whether the minimum capital resource requirements in ■GENPRU 2.1 are suitable. This then allows the appropriate regulator to deliver a consistent level of individual capital guidelines across the industry. If a firm chooses a time horizon longer than one year, it may choose to use a confidence level lower than 99.5%.
In such a case, the firm must be prepared to justify its choice and explain why this confidence interval is appropriate and how it compares to a 99.5% confidence level over a one-year time frame.
Measurement
When considering the value of liabilities for the purpose of ■INSPRU 7.1.42 R, companies must follow the instructions in ■INSPRU 7.1.21 G,.
Documenting ICAs submitted to the appropriate regulator
Appropriate regulator assessment process - all firms
General provisions applying
General provisions Section 8.1 : Application
Application
Special provisions for Lloyd's
Management of risk
Insurance receivables to be carried to trust funds
Amendments to byelaws, trust deeds and standard form letters of credit and guarantees
Capacity Transfer Market
The rules and guidelines in this section are intended to promote market confidence at Lloyd's and to protect certain consumers of services provided by the Society in the conduct of, or in connection with or for the benefit of its regulated activities. They do this by ensuring that the Company adequately and effectively regulates the capacity transfer market so that it functions in a fair and transparent manner.
Requirement to make byelaws governing conduct in the capacity transfer market
Actions for damages
- Actions for damages
A breach of the rules in INSPRU does not give rise to a right of action by a private person under section 138D of the Act (and each of these rules is specified in section 138D(3) of the Act as a provision which does not give rise to such a right of action) .
INSPRU TP
Transitional provisions
Insurance Prudential Sourcebook Schedule 1
Record keeping requirements
G Table
Insurance Prudential Sourcebook Schedule 2
Notification and reporting requirements
G Table
Insurance Prudential Sourcebook Schedule 3
Fees and other requirement payments
Insurance Prudential Sourcebook Schedule 4
Powers exercised
G [deleted]
G [deleted]
Insurance Prudential Sourcebook Schedule 5
Rights of action for damages
Insurance Prudential Sourcebook Schedule 6
Rules that can be waived
