Prudential Regulation Authority Rulebook

1.

When calculating the basic SCR, a firm must only take into account a risk-mitigation technique as referred to in Solvency Capital Requirement – General Provisions 3.5 where all of the following qualitative criteria are met:

1. (1) the contractual arrangements and transfer of risk are legally effective and enforceable in all relevant jurisdictions;
2. (2) the firm has taken all appropriate steps to ensure the effectiveness of the arrangement and to address the risks related to that arrangement;
3. (3) the firm is able to monitor the effectiveness of the arrangement and the related risks on an ongoing basis;
4. (4) the firm has, in the event of a default, insolvency or bankruptcy of a counterparty or other credit event set out in the transaction documentation for the arrangement, a direct claim on that counterparty; and
5. (5) there is no double counting of risk-mitigation effects in own funds and in the calculation of the SCR or within the calculation of the SCR.

2.

Subject to 3G2.3, a firm must take a risk-mitigation technique into account in the calculation of the basic SCR on the following basis:

1. (1) full recognition of the risk mitigation effect of the risk-mitigation technique where it is in force for at least the next 12 months and meets the qualitative criteria set out in Section 3G; or
2. (2) partial recognition of the risk-mitigation effect of a risk-mitigation technique where it is in force for a period shorter than 12 months and meets the qualitative criteria set out in Section 3G, in proportion to the length of time involved for the shorter of the full term of the risk exposure or the period that the risk-mitigation technique is in force.

3.

A firm must take a risk-mitigation technique into account in the calculation of the basic SCR on the basis of full recognition of its risk mitigation effect, where contractual arrangements governing the risk-mitigation technique will be in force for a period shorter than the next 12 months and the firm intends to replace that risk-mitigation technique at the time of its expiry with a similar arrangement or where that risk-mitigation technique is subject to an adjustment to reflect changes in the exposure that it covers, provided all of the following qualitative criteria are met:

1. (1) the firm has a written policy on the replacement or adjustment of that risk-mitigation technique, covering situations including the situation where the firm uses several contractual arrangements in combination to transfer risk as referred to in 3G3.5;
2. (2) the replacement or adjustment of the risk-mitigation technique takes place more often than once per week only in cases where, without the replacement or adjustment, an event would have a material adverse impact on the solvency position of the firm;
3. (3) the replacement or adjustment of the risk-mitigation technique is not conditional on any future event which is outside of the control of the firm and where the replacement or adjustment of the risk-mitigation technique is conditional on any future event that is within the control of the firm, the conditions for such replacement or adjustment are clearly documented in the written policy referred to in (1);
4. (4) the replacement or adjustment of the risk-mitigation technique is realistically based on replacements and adjustments undertaken previously by the firm and consistent with the firm’s current business practice and business strategy;
5. (5) there is no material risk that the risk-mitigation technique cannot be replaced or adjusted due to an absence of liquidity in the market;
6. (6) the risk that the cost of replacing or adjusting the risk-mitigation technique increases during the following 12 months is reflected in the SCR;
7. (7) the replacement or adjustment of the risk-mitigation technique would not be contrary to requirements that apply to future management actions set out in Technical Provisions – Further Requirements 8.5;
8. (8) the initial contractual maturity is not shorter than one month in cases where the firm transfers risks through the purchase or issuance of financial instruments; and
9. (9) the initial contractual maturity is not shorter than three months where the firm transfers underwriting risks using reinsurance contracts or special purpose vehicles.