Prudential Regulation Authority Rulebook

2.1

This Chapter does not apply to a Swiss general insurer.

2.2

If a firm carries on long-term insurance business and general insurance business the rules in this Chapter apply separately to each type of business.

2.3

A firm must at all times maintain overall financial resources, including capital resources and liquidity resources, which are adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due.

2.4

A firm must have in place sound, effective and complete processes, strategies and systems to assess and maintain on an ongoing basis the amounts, types and distribution of financial resources and capital resources that it considers adequate to cover:

1. (1) the nature and level of the risks to which it is or might be exposed;
2. (2) the risk that its liabilities cannot be met as they fall due; and
3. (3) the risk that the firm might not be able to meet its CR Requirement in the future.

2.5

The processes, strategies and systems required by 2.4 must enable a firm to identify and manage the major sources of risks referred to in 2.4, including the major sources of risk in each of the following categories where they are relevant to the firm given the nature and scale of its business:

1. (1) credit risk;
2. (2) market risk;
3. (3) liquidity risk;
4. (4) operational risk;
5. (5) insurance risk;
6. (6) concentration risk;
7. (7) residual risk;
8. (8) securitisation risk;
9. (9) business risk;
10. (10) interest rate risk;
11. (11) pension obligation risk; and
12. (12) group risk.

2.6

A firm must identify separately the amount of tier one capital, tier two capital, other capital eligible to form part of its capital resources and each category of capital (if any) that is not eligible to form part of its capital resources which it considers adequate for the purposes described in 2.4.

2.7

The processes and systems required by 2.4 must:

1. (1) include an assessment of how the firm intends to deal with each of the major sources of risk identified in accordance with 2.5;
2. (2) take into account the impact of diversification effects and how such effects are factored into the firm's systems for measuring and managing risks; and
3. (3) include an assessment of the firm-wide impact of the risks identified in accordance with 2.4, to which end a firm must aggregate the risks across its various business lines and units, making appropriate allowance for the correlation between risks.

2.8

A firm must carry out assessments of the processes, strategies and systems required by 2.4 to ensure that they remain compliant with this Chapter.

2.9

A firm must carry out the assessments required by 2.4 and 2.8:

1. (1) annually; and
2. (2) whenever changes in the business, strategy, nature or scale of its activities or operational environment suggest that the current level of financial resources is no longer adequate.

2.10

A firm must make and retain for at least three years a written record of the assessments required under this Chapter, including a written record of:

1. (1) the major sources of risk identified in accordance with 2.5; and
2. (2) how it intends to deal with those risks.