Prudential Regulation Authority Rulebook

1.1

Unless otherwise stated, this Part applies to a non-directive friendly society.

1.2

In this Part, the following definitions shall apply:

ancillary risk

means, in relation to a principal risk belonging to a class of general insurance business, a risk included in another such class which is:

(1) connected with the principal risk;

(2) concerned with the object which is covered against the principal risk; and

(3) the subject of the same contract of insurance as the principal risk.

annual contribution income

means, in relation to a firm’s long-term insurance business, the income of the firm in a financial year without any deduction for reinsurance cessions.

implicit items

means economic reserves arising in respect of assets which relate to future surpluses, zillmerising or hidden reserves.

initial fund

means the items of capital that were available to a mutual on the date it received a Part 4A permission to effect contracts of insurance or carry out contracts of insurance.

1.3

For the purposes of this Part:

1. (1) a contract of insurance is to be treated as falling within a class of long-term insurance business notwithstanding the fact that it contains supplementary provisions falling within general insurance business class 1 (accident) or class 2 (sickness) if:
1. (a) its principal object is that of a contract falling within a class of long-term insurance business;
2. (b) it is effected or carried out by a firm which has Part 4A permission to effect contracts of insurance or carry out contracts of insurance falling within long-term insurance business class I (life and annuity); and
2. (2) a contract of insurance whose principal risk falls within any of general insurance business classes 1, 2 or 16 is to be treated as falling within that class and no other, notwithstanding the fact that it also covers ancillary risks.

2.1

Subject to 2.3, a firm (other than a flat rate benefits business friendly society) must maintain a margin of solvency equal to or greater than the required margin of solvency.

2.2

Where a firm carries on both long-term insurance business and general insurance business, 2.1 has effect as if the requirement to maintain a margin of solvency were a requirement to maintain separate margins in respect of the two kinds of business.

2.3

2.1 does not apply to a firm which does not have Part 4A permission to effect contracts of insurance and is only carrying out contracts of insurance which were effected before 13 September 1993 (or effected pursuant to the terms of such a contract), provided that the firm maintains an excess of the value of its assets over the amount of its liabilities.

3.1

Subject to 3.2 to 3.6, the required margin of solvency must be determined:

1. (1) with respect to long-term insurance business carried on by a firm, in accordance with Friendly Society - Required Margin 2 to 6; and
2. (2) with respect general insurance business carried on by a firm, by taking the greater of:
1. (a) the higher of the two sums resulting from the calculation of a premiums basis solvency margin set out in Friendly Society - Required Margin 7; and
2. (b) the sum resulting from the calculation of a claims basis solvency margin set out in Friendly Society - Required Margin 8.

3.2

For a contract of insurance to which 1.3 applies, the required margin of solvency must be determined by taking the aggregate of the results arrived at by applying:

1. (1) in the case of that portion of the contract as is within any class of long-term insurance business, the method of calculation set out in 3.1(1) for that class; and
2. (2) in the case of that portion of the contract as is within general insurance business class 1 or 2, the method of calculation set out in 3.1(2).

3.3

Where a firm carries on long-term insurance business and owing to the nature of that business more than one required margin of solvency applies in respect of that business by the operation of these rules, those required margins of solvency must be aggregated.

3.4

Where a firm carries on both long-term insurance business and general insurance business and is accordingly required to maintain separate margins of solvency in respect of the two kinds of business:

1. (1) the provisions in 3.1 to 3.3 apply for determining the required margin of solvency for each kind of business separately; and
2. (2) assets other than those representing the funds maintained by the firm in respect of its long-term insurance business must only be taken into account in covering the liabilities and the required margin of solvency for the firm’s long-term insurance business if they are not included among the assets covering the liabilities and the required margin of solvency relating to the firm’s general insurance business.

3.5

Subject to 3.6, in each case in which 3.1(2) applies, if the required margin of solvency under 3.1(2) is lower than the required margin of solvency of the preceding financial year, then the required margin of solvency must be adjusted so it is at least equal to the required margin of solvency of the preceding financial year multiplied, if the ratio is less than one, by the ratio (expressed as a percentage) of:

1. (1) the amount of the insurance liabilities for claims outstanding at the end of the preceding financial year; to
2. (2) the amount of the insurance liabilities for claims outstanding at the beginning of the preceding financial year.

3.6

For the purpose of 3.5:

1. (1) insurance liabilities must not be discounted, or reduced, to take account of investment income, unless:
1. (a) they relate to risks in general insurance business classes 1 or 2; or
2. (b) they are reduced to reflect the discounting of annuities; and
2. (2) insurance liabilities must be calculated net of reinsurance.

3.7

A firm must notify the PRA immediately in accordance with Notifications 7 where the nature or quality of reinsurance relied on to reduce the required margin of solvency materially changes during the financial year.

4.1

This Chapter only applies to an incorporated friendly society.

4.2

A firm must ensure that its margin of solvency does not fall below the guarantee fund.

5.1

The guarantee fund is an amount equal to the greater of:

1. (1) one-third of the required margin of solvency; and
2. (2) the minimum guarantee fund.

5.2

In the case of long-term insurance business, a firm must maintain a margin of solvency (excluding implicit items), that are sufficient to cover the greater of:

1. (1) the minimum guarantee fund; and
2. (2) 50% of the guarantee fund.

5.3

In the case of general insurance business, the unpaid initial fund of a firm and, in the case of a firm with variable contributions, any claim which the firm has against its members by way of a call for supplementary contributions for a financial year may not be taken into account in complying with 4.2.

5.4

In the case of long-term insurance business, the unpaid initial fund of a firm and implicit items which relate to future profits and zillmerising may not be taken into account in complying with 4.2.

6.1

Subject to 6.2, the minimum guarantee fund for long-term insurance business is the amount in column 2 of the following table, which corresponds to the firm’s highest annual contribution income in respect of that business in any preceding financial year, as shown in column 1 of the table:

6.2

If a firm has not been in existence long enough to have a preceding financial year, the minimum guarantee fund for long-term insurance business is £90,000.

7.1

The minimum guarantee fund for general insurance business is £210,000.

8.1

A firm must take account of 8.2 to 8.6 in determining the extent to which a firm’s margin of solvency covers the required margin of solvency, the guarantee fund and the minimum guarantee fund.

8.2

A firm with variable contributions, carrying on general insurance business, must treat any claim which the firm has against its members by way of a call for supplementary contributions for a financial year as having no value.

8.3

A firm must treat implicit items as having no value.

8.4

A firm must treat an unpaid initial fund as having no value.

8.5

Subject to 8.6, if a firm discounts or reduces its insurance liabilities for claims outstanding to take account of investment income, the margin of solvency must be reduced by the difference between:

1. (1) the undiscounted insurance liabilities for claims outstanding or the insurance liabilities for claims outstanding before deductions; and
2. (2) the discounted insurance liabilities for claims outstanding or the insurance liabilities for claims outstanding after deductions.

For these purposes, insurance liabilities must be calculated net of reinsurance.

8.6

8.5 does not apply:

1. (1) to risks in general insurance business classes 1 or 2; or
2. (2) in respect of the discounting of annuities.