Technical Article on PS26/15

Solvency II

18 January 2016

The prudential regime, and implementation of the Senior Insurance Managers Regime, for non-Solvency II firms

On 26 November the PRA issued Policy Statement “The prudential regime, and implementation of the Senior Insurance Managers Regime, for nonSolvency II firms – PS26/15” following consultation in CP26/15 and 27/15. The policy statement sets out how the new Senior Insurance Managers Regime (SIMR) applies to firms outside the provisions of Solvency II and also sets out the rules for valuation which will apply to small firms.

This technical article explains the new requirements with regards to valuation and capital requirements. It also reviews the revised requirements for governance and actuarial appointments. It does not cover the detailed requirements of the SIMR.

The requirements with regard to valuation and capital are very much the same as under the existing regime. For the “large” non-Directive firms the main additional requirements come in the implementation of the SIMR.

The new Prudential Regime

The new rules form two separate sections of the PRA Handbook: one setting out capital requirements and valuation rules for insurance companies; and one doing the same for Friendly Societies. The insurance companies section is essentially a straight copy from INS(PRU) and GENPRU and the Friendly Society section is a similar copy from IPRU(FSOC). There is a third section which deals with governance matters which is common to both.

Capital and Valuation Rules for Insurance Companies

As noted above, the requirements of INSPRU have been copied across into this section. One difference is that the Base Capital Resources Requirement is now expressed in Sterling terms rather than Euros which is a welcome simplification.

The PRA emphasise there is no change in policy intention and the fact that these rules relate only to small insurance companies means that there has been considerable simplification as, for example, all the rules relating to realistic basis firms have been removed and the required rules are all in one place rather than being split between GENPRU and INSPRU.

Small insurance companies will be required to carry out a regular assessment of their capital resources and requirements. These do not have to be submitted to the PRA but must be available, should the PRA ask for them. The capital assessment is required to be forward-looking over a period of 3-5 years. It should be on a realistic basis with assets at market value and liabilities valued without risk margins. Further information is contained in Supervisory Statement SS43/15.

Capital and Valuation Rules for Friendly Societies

The chapters in this section are all copied from IPRU(FSOC). Here again capital requirements are now expressed in Sterling terms rather than Euros. There is also no change in policy intentions. One point worthy of note is that the specific provisions in Annex4 of IPRU(FSOC) regarding the resilience test have not been included in the new section of the Rule Book relating to Friendly Societies. This was raised as an issue in the response to the consultation and the PRA’s reply is that is has been recast as Liability Valuation Rule 6.4. However, while this Rule has been lifted out of the Valuation Rules in IPRU(FSOC) the Annex 4 guidance which aligned the test with that applicable to insurance companies has not been carried across so, at least in theory, Societies can devise their own resilience test.

The PRA has also preserved the anomaly that the resilience provision is a capital requirement for companies, but a reserve for Friendly Societies, so the reserve for Friendly Societies is subject to an additional 4% capital requirement.

Governance requirements for all small firms

This section applies to both companies and Friendly Societies. There are three chapters dealing with “large” insurers, “small” insurers and Friendly Societies. The large insurer category is defined as firms with £25m or more of assets “relating to regulated activities” at two consecutive year-ends.

The PRA has clarified the original draft and emphasised in the policy statement that all firms must comply with Chapter 2 or 3 according to size and Friendly Societies must also observe the requirements in Chapter 4.

There are chapters on Outsourcing, Record Keeping and Business Planning which apply to all firms. There are chapters on Internal Controls, Internal Audit and Actuarial Function which apply only to large insurers. There is nothing exceptional in these chapters, however, the chapter on the actuarial function does not specifically require the work to be performed by an actuary.

There is a separate section relating to with-profits business. The main requirement here is that there must be sufficient assets in a with-profits fund to cover the with-profits liabilities. This is the same approach as the one that has been taken for large firms. The PRA believes that this is sufficient as firms also have to comply with the FCA Rules. The Policy Statement reminds firms that the FCA do require that there should be sufficient assets in the with-profits fund to cover all policy liabilities – but this rule only applies to insurance companies, not to Friendly Societies! We recommend that all firms should always have enough assets in their funds to cover all their liabilities.


There is a final section on the Actuarial Function. This section is lifted out of SUP and applies to all firms. The existing distinctions between incorporated and registered Friendly Societies have been retained, so a Society which is registered, or is incorporated but is a flat rates benefit Society, is not required to appoint an Actuarial Function Holder, but only to require an Appropriate Actuary to carry out a valuation.

The Rules copied across from SUP do not require the appointee to be a Fellow of the Institute or Faculty, but are otherwise substantially the same with a number of simplifications proportionate to the smaller size of the firms being considered. The requirements relating to actuarial investigations relate only to investigations at 31 December 2015 and it is not clear what will be required after that.

The section on the duties of actuaries excludes any formal requirement to whistleblow, but does require an actuary to notify the regulator if he/she is removed from office.

What is there for firms to do?

Essentially these Rules mean “business as usual” for most firms outside the scope of the Directive. For firms caught within the definition of “large non-Directive firm” there is nothing particularly different in these Rules, but such firms will need to study carefully the requirements of the SIMR.

How can OAC help?

If you have any questions about this article, or want further information, please talk to your usual OAC consultant, or contact me.


David Lechmere

For more information
David Lechmere
Consultant Actuary

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