Insurers: Regulatory intervention points

Part

SUP Supervision manual

Chapter

Insurers: Regulatory intervention points

Printed on: 06/11/2024

Rulebook at: 06/04/2005

SUP App 2

Insurers: Regulatory intervention points

SUP App 2.1

Application

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SUP App 2.1.1

This appendix applies to an insurer unless it is:

(1) a Swiss general insurer; or

(2) an EEA-deposit insurer; or

(3) an incoming EEA firm; or

(4) an incoming Treaty firm.

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SUP App 2.1.2

This appendix applies to every friendly societyas a friendly society is an insurer.

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SUP App 2.2

Interpretation

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SUP App 2.2.1

For the purpose of SUP App 2 :

(1) "capital resources":

(a) in relation to a non-directive friendly society, has the meaning given to "margin of solvency" in rule 4.1(4) of IPRU(FSOC);
(b) in relation to a participating insurance undertaking, means P+T, where P and T have the meanings given by PRU 8.3.45R(3)(a) and (e) respectively, as calculated in accordance with PRU 8.3.43R; and
(c) in relation to any other firm, means the firm's capital resources as calculated in accordance with PRU 2.2.12R;

(2) "guarantee fund":

(a) in relation to a non-directive friendly society, has the meaning given to that term in IPRU(FSOC);
(b) in relation to a participating insurance undertaking, means the amount of capital resources which that firm must hold to comply with PRU 8.3.45R(2);
(c) in relation to a firm which is not covered by (a) or (b), carrying on general insurance business, means the amount of capital resources which that firm must hold to comply with PRU 2.2.18R; and
(d) in relation to a firm which is not covered by (a) or (b), carrying on long-term insurance business, means the amount of capital resources which that firm must hold to comply with PRU 2.2.17R;

(3) "material transaction" means a transaction (when aggregated with any similar transactions) in which:

(a) the price actually paid or received for the transfer of assets or liabilities or the performance of services; or
(b) the price which would have been paid or received had that transaction been negotiated at arm's length between unconnected parties;
exceeds:
(c) in the case of a firm which carries on long-term insurance business, but not general insurance business, the sum of €20,000 and 5% of the firm's liabilities arising from its long-term insurance business, excluding property-linked liabilities and net of reinsurance ceded; or
(d) in the case of a firm which carries on general insurance business, but not long-term insurance business, the sum of €20,000 and 5% of the firm's liabilities arising from its general insurance business, net of reinsurance ceded; or
(e) in the case of a firm which carries on both long-term insurance business and general insurance business:

(i) where the transaction is in connection with the firm's long-term insurance business, the sum of €20,000 and 5% of the firm's liabilities arising from its long-term insurance business, excluding property-linked liabilities and net of reinsurance ceded; and
(ii) in all other cases, the sum of €20,000 and 5% of the firm's liabilities arising from its general insurance business, net of reinsurance ceded; and

(4) "required margin of solvency":

(a) in relation to a non-directive friendly society, has the meaning given to that term in IPRU(FSOC);
(b) in relation to a participating insurance undertaking, means R-S-U, where R, S and U have the meanings given by PRU 8.3.45R(3)(c), (d) and (f) respectively;
(c) in relation to a firm which is not covered by (a) or (b), carrying on general insurance business, means the general insurance capital requirement applicable to that firm; and
(d) in relation to a firm which is not covered by (a) or (b), carrying on long-term insurance business, means the long-term insurance capital requirement applicable to that firm.

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SUP App 2.2.2

The calculation of each of the base capital resources requirement, the long-term insurance capital requirement and the general insurance capital requirement is set out in PRU 2.1. The calculation of each of the "guarantee fund" and "required margin of solvency" for non-directive friendly societies is set out in chapter 4 of IPRU(FSOC).

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SUP App 2.3

Purpose

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SUP App 2.3.1

To fulfil its obligations under the Insurance Directives, and as part of the FSA's risk-based approach to supervision, there are certain times when the FSA needs to monitor a firm more closely than it normally would. This is so the FSA can fulfil its function of supervising firms properly and meet the regulatory objective of securing an appropriate degree of protection for consumers .

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SUP App 2.3.2

The rules in this appendixrequire a firm to submit reports and information to the FSA when:

(1) a firm is failing to satisfy threshold condition 4 (Adequate resources) (see COND 2.2), and its capital resources have fallen below its required margin of solvency, or its guarantee fund; or

(2) the capital resources of a firm have fallen below its capital resources requirement; or

(3) a firm has decided to cease to effect new contracts of insurance; or

(4) a firm is going through periods of potential uncertainty, for example, when it has come under the control of a new parent undertaking or following the grant or variation of permission.

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SUP App 2.3.3

The FSA may also ask a firm to submit reports and information to it when the firm's capital resources fall below the level advised in individual capital guidancegiven to the firm.

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SUP App 2.3.4

In accordance with the Insurance Directives, a firm whose capital resources have fallen below its required margin of solvency, or its guarantee fund, is required, by the rule set out in this appendix, to submit a scheme of operations, together with an explanation of how its capital resources will be adequately restored. In order to secure an appropriate degree of protection for consumers , the FSA applies the rule in this appendix to firms to which the provisions of the Insurance Directives would not otherwise apply.

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SUP App 2.3.5

A firm which is entering into run-off is required to submit a scheme of operations, including an explanation of how its liabilities to policyholders will be met in full. Where the capital resources of such a firm subsequently fall below its required margin of solvency, the firm is required to submit a plan for restoration.

31/12/2004

SUP App 2.3.6

Following a change in control, or the grant or variation of permission, the reports submitted help the FSA to identify when a firm departs from the scheme of operations submitted as part of the notification of a change in control, or an application for the grant or variation of permission, and on which basis such notification or application was approved.

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SUP App 2.3.7

Principle 4 of the FSA's Principles for Businesses provides that firm's should hold adequate financial resources, while PRU 1.2.22 R requires a firm to maintain overall financial resources which are adequate to ensure that there is no significant risk that it cannot meet its liabilities as they fall due. In considering these requirements, a firm may decide to maintain capital resources above the level advised in individual capital guidance given by the FSA , or, if no individual capital guidance has been given, above its capital resources requirement. The amount of any such additional capital resources held is at the discretion of the firm. However, the extent to which a firm matches these additional capital resources to the volatility of its capital base, in conjunction with the strength of its systems and controls environment, is likely to affect the frequency with which it is subject to intervention under this appendix.

31/12/2004

SUP App 2.3.8

In relation to a firm carrying on with-profits insurance business, action which it takes either to restore its capital resources to the levels set by the intervention points in this appendix, or to prevent its capital resources falling below those points, should be consistent with Principle 6 of the FSA's Principles for Businesses. Principle 6 requires a firm to pay due regard to the interests of its customers and treat them fairly.

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SUP App 2.3.9

These rules are in addition to the other rules and guidance in SUP, in particular SUP 2 (Information gathering by the FSA on its own initiative), SUP 15 (Notifications to the FSA ), SUP 16(Reporting requirements) and the Principles for Businesses (PRIN).

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SUP App 2.4

Capital resources below guarantee fund

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SUP App 2.4.1

If a firm's capital resources fall below its guarantee fund, it must, within 14 days of the firm becoming aware of this event, submit to the FSA a short-term financial plan, including:

(1) a scheme of operations (see SUP App 2.12); and

(2) an explanation of how, if at all, and by when, it expects its capital resources to be adequately restored to the guarantee fund.

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SUP App 2.4.2

See SUP App 2.11.2 G for guidance on the period that the scheme of operations should cover.

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SUP App 2.5

Capital resources below required margin of solvency

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SUP App 2.5.1

Unless SUP App 2.5.3 R applies:

(1) if a firm's capital resources are such that they no longer equal or exceed its required margin of solvency; or

(2) if a firm no longer complies with PRU 2.2.16R and PRU 2.2.24R, or PRU 8.3.45R(1)(a) and PRU 8.3.45R(1)(b), as applicable;

it must, within 28 days of becoming aware of this event, submit to the FSA a plan for the restoration of a sound financial position, including:

(3) a scheme of operations; and

(4) an explanation of how, if at all, and by when:

(a) it expects its capital resources to be restored to the required margin of solvency; or

(b) as the case may be, it expects to comply with PRU 2.2.16R and PRU 2.2.24R, or PRU 8.3.45R(1)(a) and PRU 8.3.45R(1)(b), as applicable.

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SUP App 2.5.2

See SUP App 2.11.2 G for guidance on the period that the scheme of operations should cover.

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SUP App 2.5.3

If a firm:

(1) falls into SUP App 2.5.1 R (1) or SUP App 2.5.1 R (2); and

(2) it has previously submitted either a run-off plan in accordance with SUP App 2.8.1 R or a scheme of operations in accordance with SUP App 2.5.1 R;

it must, within 28 days of becoming aware that it falls into SUP App 2.5.1 R (1) or SUP App 2.5.1 R (2):

(3) notify the FSA ; and

(4) submit a plan for restoration which:

(a) explains why the firm's capital resources have fallen below its required margin of solvency or, as the case may be, it no longer complies with PRU 2.2.16R or PRU 2.2.24R, or PRU 8.3.45R(1)(a) and PRU 8.3.45R(1)(b), as applicable; and

(b) demonstrates how, if at all, and by when, the firm will restore it or, as the case may be, resume compliance with PRU 2.2.16R and PRU 2.2.24R, or PRU 8.3.45R(1)(a) and PRU 8.3.45R(1)(b), as applicable.

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SUP App 2.6

Capital resources below capital resources requirement

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SUP App 2.6.1

Unless any of SUP App 2.4.1 R, SUP App 2.5.1 R or SUP App 2.5.3 R applies, if a firm's capital resources fall below its capital resources requirement, it must, within 28 days of becoming aware of this event:

(1) notify the FSA ; and

(2) submit a plan for restoration, which:

(a) explains why the firm's capital resources have fallen below its capital resources requirement; and

(b) demonstrates how, if at all, and by when, the firm will restore it.

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SUP App 2.7

Capital resources below the level of individual capital guidance

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SUP App 2.7.1

Unless any of SUP App 2.4.1 R, SUP App 2.5.1 R, SUP App 2.5.3 R or SUP App 2.6.1 R applies, if a firm's circumstances change, such that its capital resources have fallen, or are expected to fall, below the level advised in individual capital guidance given to the firm by the FSA , then, consistent with PRIN 2.1.1 R Principle 11 (Relations with regulators), a firm should inform the FSA of this fact as soon as practicable, explaining why capital resources have fallen, or are expected to fall, below the level advised in individual capital guidance, and:

(1) what action the firm intends to take to increase its capital resources; or

(2) what modification the firm considers should be made to the individual capital guidance which it has been given.

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SUP App 2.7.2

In the circumstance set out in SUP App 2.7.1 G, the FSA may ask a firm for alternative or more detailed proposals and plans or further assessments and analyses of capital adequacy and risks faced by the firm. The FSA will seek to agree with the firm appropriate timescales and scope for any such additional work, in light of the circumstances which have arisen.

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SUP App 2.7.3

In relation to a firm carrying on with-profits insurance business, if it intends either (a) to remedy a fall in the level of capital resources advised in its individual capital guidance, or (b) to prevent a fall in the level advised in that guidance, for example, in either case, by taking management action to de-risk a with-profits fund or by reducing non-contractual benefits for policyholders, it should explain to the FSA how such proposed actions are consistent with the firm's obligations under PRIN 2.1 Principle 6 (Customers' interests).

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SUP App 2.7.4

If a firm's capital resources fall below the level advised in individual capital guidance given to the firm and, at the same time, any one or more of SUP App 2.4.1 R, SUP App 2.5.1 R, SUP App 2.5.3 R or SUP App 2.6.1 R applies, the firm should first comply with those rules. Those rules are concerned with circumstances where capital resources are likely to have fallen to levels much lower than the level advised in individual capital guidance and are, in some cases, requirements imposed by the Insurance Directives.

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SUP App 2.7.5

If a firm has not accepted individual capital guidance given by the FSA it should, nevertheless, inform the FSA as soon as practicable if its capital resources have fallen below the level suggested by that individual capital guidance. In such circumstances, the FSA may ask the firm for further explanation as to why it does not consider the individual capital guidance to be appropriate. The FSA may also consider using its powers under section 45 of the Act to, on its own initiative, vary a firm's Part IV permission, so as torequire it to hold such capital as the FSA considers is necessary for the firm to comply with PRU 1.2.22R.

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SUP App 2.8

Ceasing to effect contracts of insurance

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SUP App 2.8.1

If a firm decides to cease to effect new contracts of insurance, it must, within 28 days of that decision, submit a run-off plan to the FSA including:

(1) a scheme of operations; and

(2) an explanation of how, or to what extent, all liabilities to policyholders (including, where relevant, liabilities which arise from the regulatory duty to treat customers fairly in setting discretionary benefits) will be met in full as they fall due.

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SUP App 2.8.2

SUP App 2.8.1 R only applies if a firm ceases to effecting new contracts of insurance in respect of the whole of its insurance business.

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SUP App 2.8.3

For the purposes of SUP App 2.8.1 R, a new contracts of insurance excludes contracts effected under a term in a subsisting contract of insurance.

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SUP App 2.8.4

Under Principle 11, the FSA normally expects to be notified by a firm when it decides to cease effecting new contracts of insurance in respect of one or more classes of contract of insurance (see SUP 15.3.8 G). At the same time, the FSA would normally expect the firm to discuss with it the need for the firm to apply to vary its permission (see SUP 6.2.6 G and SUP 6.2.7 G) and, if appropriate, to submit a scheme of operations in accordance with SUP App 2.8.1 R.

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SUP App 2.8.5

See SUP App 2.11.2 G for guidance on the period that the scheme of operations should cover.

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SUP App 2.9

Under control of a new parent undertaking

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SUP App 2.9.1

A firm that has notified the FSA of a new parent undertaking may be requested to submit a scheme of operations (see SUP 11.5.5 G). A scheme of operations would be requested if the significance and circumstances of the change were considered to be sufficient to merit that level of scrutiny. This is normally only likely to be necessary when there has been an ultimate change in control, or when, as a result of the change in control, significant changes are proposed to the firm's regulated activities, business plan or strategy. A firm which has submitted a scheme of operations under SUP 11.5.5 G, is not required to submit a further scheme of operations under this appendix unless SUP App 2.4, SUP App 2.5 or SUP App 2.8 applies. SUP App 2.13 does, however, apply to such a firm.

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SUP App 2.10

Grant or variation of permission

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SUP App 2.10.1

The FSA may ask a firm seeking a grant or variation of permission to provide a scheme of operations as part of the application process (see AUTH 3.9.9 G (1) and SUP 6.3.25 G). Such a firm is not required to submit a further scheme of operations under this appendix unless SUP App 2.4, SUP App 2.5 or SUP App 2.8 applies. SUP App 2.13 and SUP 6 Annex 4 do, however, apply to such a firm.

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SUP App 2.11

Submission of a scheme of operations or a plan for restoration

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SUP App 2.11.1

A firm should discuss its plan in draft with the FSA before submitting it. If a plan is submitted which does not satisfy the FSA that the firm can restore its capital resources (as appropriate), or meet its liabilities as they fall due, the FSA may use its own-initiative power to vary or cancel the firm's permission. If a firm submitting a plan is part of a group of companies, the FSA may ask that firm to provide additional information in relation to other companies in the group, if this is necessary to establish how the firm will restore its own sound financial position. The firm should agree in discussion with the FSA the nature of such additional information.

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SUP App 2.11.2

The schemes of operations required when a firm's capital resources have fallen below its required margin of solvency or its guarantee fund (see SUP App 2.5.1 R and SUP App 2.4.1 R, respectively) should cover a period which is sufficient to demonstrate that the firm's capital resources will be adequately restored. Typically this would be a period of at least three years. However, if a scheme of operations has expired, but SUP App 2.4.1 R or SUP App 2.5.1 R continues to apply, the firm should submit a new scheme of operations. The scheme of operations required by SUP App 2.8.1 R, when a firm ceases to effect new contracts of insurance, should cover the run-off period until all liabilities to policyholders are met.

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SUP App 2.11.3

The period to be covered by, and the details to be included in, the plan for restoration required by SUP App 2.5.3 R will depend on the circumstances of the firm, why its capital resources have fallen below its required margin of solvency and the degree of risk that that fall will be repeated, even if the firm restores its capital resources in accordance with its plan.

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SUP App 2.11.4

In relation to a firm which carries on with-profits insurance business and which submits a plan, the FSA would expect an explanation of how any actions it plans to take to restore capital resources to the level of the guarantee fund, required margin of solvency or capital resources requirement are consistent with the firm's obligations under Principle 6 (Customers' interests).

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SUP App 2.12

Content of a scheme of operations

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SUP App 2.12.1

A scheme of operations must:

(1) describe the firm's business strategy;

(2) include financial projections (including appropriate scenarios and stress-tests) as follows:

(a) a forecast summary profit and loss account in accordance with SUP App 2.12.7 R;

(b) a forecast summary balance sheet in accordance with SUP App 2.12.8 R; and

(3) as at the end of each financial year which falls (in whole or part) within the period to which the scheme of operations relates:

(a) describe the assumptions which underlie those forecasts and the reasons for adopting those assumptions; and

(b) identify any material transactions proposed to be effected or carried out with, or in respect of, any associate.

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SUP App 2.12.2

The business strategy referred to at SUP App 2.12.1R (1) should include a description of the nature of the risks which the firm is underwriting, or intends to underwrite. It should also give an explanation of the firm's strategy for managing the risks associated with carrying on insurance business (including, in particular, reinsurance).

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SUP App 2.12.3

The amount of detail to be given on the firm's business strategy required by SUP App 2.12.1R (1) should be appropriate to the scale and complexity of the firm's operations and the degree of risk involved.

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SUP App 2.12.4

The information required by SUP App 2.12.1R (1) must reflect the nature and content of the rules relating to capital resources applicable to a firm.

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SUP App 2.12.5

In relation to firms covered by this appendix, IPRU(FSOC) 4.1 sets out the rules relating to capital resources for non-directive friendly societies andPRU 2.1, 2.2 and 8.3 set out the rules relating to capital resources for every other firm. The capital resources which a firm is required to maintain vary according to whether the firm has its head office in the United Kingdom or overseas, and depending on the nature of the insurance business it carries on. The information which a firm is required to submit under SUP App 2.12.1 R should reflect the nature and content of the rules relating to capital resources identified above. For example, in order to satisfy SUP App 2.12.1 R, a firm with its head office outside the United Kingdom which is carrying on direct insurance business in the United Kingdom should submit separate information concerning its world-wide activities and its UK activities.

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SUP App 2.12.6

To reflect its obligations under PRU 2.1.10R or IPRU(FSOC) 4.1(2) (as applicable), in order to comply with SUP App 2.12.1 R, a firm which carries on both long-term insurance business and general insurance business should submit separate information for each type of insurance business.

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SUP App 2.12.7

Summary profit and loss account (see SUP App 2.12.1R (2)(a))

(1)

Premiums and claims (gross and net of reinsurance) analysed by accounting class of insurance business

(2)

Investment return

(3)

Expenses

(4)

Other charges and income

(5)

Taxation

(6)

Dividends paid and accrued

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SUP App 2.12.8

Summary balance sheet (see SUP App 2.12.1R (2)(b))

(1)

Investments analysed by type

(2)

Assets held to cover linked liabilities

(3)

Other assets and liabilities separately identifying cash at bank and in hand

(4)

Capital and reserves analysed into called up share capital or equivalent funds, share premium account, revaluation reserve, other reserves and profit and loss account

(5)

Subordinated liabilities

(6)

The fund for future appropriations

(7)

Technical provisions gross and net of reinsurance analysed by accounting class of insurance business and separately identifying the provision for linked liabilities, unearned premiums, unexpired risks and equalisation

(9)

Other liabilities and credits

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SUP App 2.12.9

A forecast statement of capital resources (under SUP App 2.12.1R (2)(c)) must include the forecast capital resources and the forecast required margin of solvency at the end of each financial year or part financial year.

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SUP App 2.13

Obligations on firms which have previously submitted a scheme of operations

01/12/2004

SUP App 2.13.1

A firm which has submitted a scheme of operations to the FSA, whether required by SUP App 2.4, SUP App 2.5 or SUP App 2.8, or as part of an application under SUP 6.3 (see SUP 6.3.25 G), SUP 6.4 (see SUP 6 Annex 4), AUTH 3.9 (see AUTH 3.9.9 G (1)) or SUP 11.5 (see SUP 11.5.5 G), or an amended scheme of operations, must during the period covered by that scheme of operations:

(1) notify the FSA at least 28 days before entering into or carrying out any material transaction with, or in respect of, an associate, unless that transaction is in accordance with a scheme of operations which has been submitted to the FSA;

(2) submit a quarterly financial return to the FSA which must include for, or as at the end of, each quarter:

(a) a summary profit and loss account prepared in accordance with SUP App 2.12.7 R;

(b) a summary balance sheet prepared in accordance with SUP App 2.12.8 R; and

and which must identify and explain differences between the actual results and the forecasts submitted in the scheme of operations; and

(3) notify the FSA promptly of any matter which has either happened or is likely to happen and which represents a significant departure from the scheme of operations; the firm must either:

(a) explain the nature of the departure and the reasons for it and provide revised forecast financial information in the scheme of operations for its remaining term; or

(b) include an amended scheme of operations and explain the amendments and the reasons for them.

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SUP App 2.13.2

A report under SUP App 2.13.1R (2) must be submitted in accordance with the rules in SUP 16.3.6R to SUP 16.3.13R.

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SUP App 2.13.3

For the purpose of SUP App 2.13.1R (1), the FSA considers that transactions with, or in respect of, associates include:

(1) contracting (as either party), advancing, repaying, writing off or agreeing to change the terms of any loan;

(2) entering into (in any capacity), releasing, calling upon or agreeing to change the terms of any guarantee, pledge, security, charge or any off-balance-sheet transaction;

(3) entering into agreements to acquire or dispose of property or which otherwise affect the nature or value of the firm's assets;

(4) making an investment (directly or indirectly) in an associate;

(5) entering into (as either party), commuting or agreeing to change the terms of, any contract of reinsurance; and

(6) entering into, or changing the terms of, any agreement to give or provide services or to share costs.

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SUP App 2.13.4

The FSA considers that a significant departure referred to in SUP App 2.13.1R (3) includes:

(1) entry or withdrawal from a line of insurance business;

(2) significant revision of the firm's strategy for managing risks, in particular the basis upon which risks are reinsured;

(3) forecast premiums being exceeded, by more than 10%, for a single financial year (or part year if the period covered by the scheme of operations is or includes part of a financial year);

(4) claims experience being significantly worse than forecast for a single financial year (or part year if the period covered by the scheme of operations is or includes part of a financial year);

(5) the actual level of capital resources being significantly worse than forecast;

(6) paid or proposed dividends being greater than those forecast; and

(7) any other transaction or circumstance which is likely to have a material effect upon available assets (as defined in IPRU(INS) 11.1).

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SUP App 2.14

Financial Recovery Plan

01/12/2004

SUP App 2.14.1

When:

(1) the FSA has required a financial recovery plan within the meaning of article 20a of the First Non-Life Directive;

(2) the FSA is of the view that policyholders' rights are threatened because the financial position of the firm is deteriorating; and

(3) the FSA decides to require the firm to hold more capital than would otherwise be required under the Handbook to ensure that the firm will be able to fulfil the required margin of solvency in the near future;

any such higher capital requirement will be based on the financial recovery plan.

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