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, as modified by 16; and
3. (3) in accordance with Insurance General Application 3, managing agents, as modified by 16.

1.2

In this Part, the following definitions shall apply:

cost-of-capital rate

means the rate (above the relevant risk-free interest rate) that must be used in the determination of the cost that a UK Solvency II firm would incur in order to hold an amount of eligible own funds equal to the SCR necessary to support the insurance and reinsurance obligations over their lifetime, which, as specified in regulation 7B(b) of the IRPR Regulations, equals 4%. 

[Note: regulation 7B of the IRPR Regulations provides that where the PRA’s rules require the best estimate and the risk margin to be calculated separately, the risk margin must be calculated in accordance with that regulation. This definition therefore requires a firm that values the best estimate and the risk margin separately to calculate the risk margin using the cost-of-capital rate specified in regulation 7B(b) of the IRPR Regulations]

reference undertaking

means the hypothetical firm which is assumed, for the purpose of calculating the risk margin, to take over the whole portfolio of insurance and reinsurance obligations of the firm (or in the case of a composite firm either the general insurance business or long-term insurance business of the firm) on the basis of the assumptions in 4B.

reference undertaking notional SCR

means the hypothetical SCR of the reference undertaking, calculated in accordance with 4B.1.

volatility adjustment permission

means the permission granted to a firm by the PRA pursuant to section 138BA of FSMA to  permit it to apply a volatility adjustment for the purposes of calculating the best estimate.