Prudential Regulation Authority Rulebook

1.1

Unless otherwise stated, this Part applies to:

1. (1) a UK Solvency II firm;
2. (2) in accordance with Insurance General Application 3, the Society; and
3. (3) in accordance with Insurance General Application 3, managing agents.

1.2

In this Part, the following definitions shall apply:

original lender

has the meaning given in Securitisation 1.3.

originator

has the meaning given in Securitisation 1.3.

sponsor

has the meaning given in Securitisation 1.3.

2.1

A firm must invest its assets in accordance with the following requirements:

1. (1) the firm must only invest in assets and instruments the risks of which it can properly identify, measure, monitor, manage, control and report and appropriately take into account in the assessment of its overall solvency needs in accordance with Conditions Governing Business 3.8(2)(a);
2. (2) all the assets of the firm must be:
1. (a) invested in such a manner as to ensure the security, quality, liquidity and profitability of the portfolio of assets of the firm as a whole; and
2. (b) localised such as to ensure their availability; and
3. (3) in the case of a conflict of interest, the firm must, or must procure that any third party which manages its assets will ensure that the investment of assets is made in the best interest of policyholders.

[Note: Art. 132(1) – (2) of the Solvency II Directive]

3.1

In addition to meeting the requirements set out in 2.1, a firm must ensure that assets held to cover its technical provisions are invested in a manner appropriate to the nature and duration of the firm’s insurance and reinsurance liabilities and in the best interests of all policyholders, taking into account any disclosed policy objectives.

[Note: Art. 132(2) of the Solvency II Directive]

4.1

This Chapter does not apply to a pure reinsurer.

4.2

In addition to the requirements set out in 2.1 and 3.1, where a firm carries out linked long-term contracts of insurance, it must also satisfy the requirements in 4.3.

4.3

Where 4.2 applies, the firm must cover its technical provisions in respect of its linked long-term liabilities as closely as possible with:

1. (1) where the linked benefits are linked to the value of units, those units;
2. (2) where the linked benefits are linked to the value of assets contained in an internal fund of the firm:
1. (a) in a case where the internal fund is divided into notional units, the assets represented by those notional units; or
2. (b) in a case where notional units are not established, those assets; and
3. (3) where the linked benefits are linked to a share index or other reference value not mentioned in (1) or (2), assets of appropriate security and marketability which correspond as closely as possible to the assets on which the reference value is based.

[Note: Art. 132(3) of the Solvency II Directive]

5.1

This Chapter does not apply in respect of assets covering technical provisions for linked long-term contracts of insurance unless, and to the extent that, the assets are held to cover the technical provisions in respect of any guarantee of investment performance or other guaranteed benefit provided under those linked long-term contracts of insurance.

[Note: Art. 132(3) – (4) of the Solvency II Directive]

5.2

Subject to 5.1, and without prejudice to 2, 3 and 4, a firm must invest its assets in accordance with the following requirements:

1. (1) the firm must not invest in a derivative or quasi-derivative unless, and to the extent that, it contributes to a reduction of risks or facilitates efficient portfolio management;
2. (2) investments and assets which are not admitted to trading on a regulated market must be kept to prudent levels;
3. (3) assets must be properly diversified in such a way as to avoid:
1. (a) excessive reliance on any particular asset, issuer, group of undertakings or geographical area; and
2. (b) excessive accumulation of risk in the portfolio as a whole;
4. (4) investments in assets issued by the same issuer, or issuers belonging to the same group, must not expose the firm to excessive risk concentration.

[Note: Art. 132(4) of the Solvency II Directive]

6.1

A firm must ensure that the requirements set out in Article 6 of Chapter 2, Chapter 3 and Chapter 4 of the Securitisation Part, that need to be met by undertakings that repackage loans into tradable securities and other financial instruments in order for a firm to be allowed to invest in such securities or instruments, are met in respect of securities or instruments held by the firm that were:

1. (1) issued after 1 January 2011; or
2. (2) issued before 1 January 2011 where new underlying exposures were added or substituted after 31 December 2014.

[Note: Art. 135(2)(a) and Art. 308b (11) of the Solvency II Directive]

7.1

Where a firm becomes aware that the originator, sponsor or original lender fails to comply with the risk retention requirements set out in either Article 6 of Chapter 2 or in Chapter 3 of the Securitisation Part, or a firm becomes aware that the due diligence requirements set out in either Article 5(1), (2), (3) and (4) of Chapter 2 or in Chapter 3 of the Securitisation Part are not being complied with, it shall inform the PRA immediately.