Prudential Regulation Authority Rulebook

3.1

Subject to 3.2 to 3.6, the required margin of solvency must be determined:

1. (1) with respect to long-term insurance business carried on by a firm, in accordance with Friendly Society - Required Margin 2 to 6; and
2. (2) with respect general insurance business carried on by a firm, by taking the greater of:
1. (a) the higher of the two sums resulting from the calculation of a premiums basis solvency margin set out in Friendly Society - Required Margin 7; and
2. (b) the sum resulting from the calculation of a claims basis solvency margin set out in Friendly Society - Required Margin 8.

3.2

For a contract of insurance to which 1.3 applies, the required margin of solvency must be determined by taking the aggregate of the results arrived at by applying:

1. (1) in the case of that portion of the contract as is within any class of long-term insurance business, the method of calculation set out in 3.1(1) for that class; and
2. (2) in the case of that portion of the contract as is within general insurance business class 1 or 2, the method of calculation set out in 3.1(2).

3.3

Where a firm carries on long-term insurance business and owing to the nature of that business more than one required margin of solvency applies in respect of that business by the operation of these rules, those required margins of solvency must be aggregated.

3.4

Where a firm carries on both long-term insurance business and general insurance business and is accordingly required to maintain separate margins of solvency in respect of the two kinds of business:

1. (1) the provisions in 3.1 to 3.3 apply for determining the required margin of solvency for each kind of business separately; and
2. (2) assets other than those representing the funds maintained by the firm in respect of its long-term insurance business must only be taken into account in covering the liabilities and the required margin of solvency for the firm’s long-term insurance business if they are not included among the assets covering the liabilities and the required margin of solvency relating to the firm’s general insurance business.

3.5

Subject to 3.6, in each case in which 3.1(2) applies, if the required margin of solvency under 3.1(2) is lower than the required margin of solvency of the preceding financial year, then the required margin of solvency must be adjusted so it is at least equal to the required margin of solvency of the preceding financial year multiplied, if the ratio is less than one, by the ratio (expressed as a percentage) of:

1. (1) the amount of the insurance liabilities for claims outstanding at the end of the preceding financial year; to
2. (2) the amount of the insurance liabilities for claims outstanding at the beginning of the preceding financial year.

3.6

For the purpose of 3.5:

1. (1) insurance liabilities must not be discounted, or reduced, to take account of investment income, unless:
1. (a) they relate to risks in general insurance business classes 1 or 2; or
2. (b) they are reduced to reflect the discounting of annuities; and
2. (2) insurance liabilities must be calculated net of reinsurance.

3.7

A firm must notify the PRA immediately in accordance with Notifications 7 where the nature or quality of reinsurance relied on to reduce the required margin of solvency materially changes during the financial year.