Prudential Regulation Authority Rulebook

6.1

Solvency II is a largely maximum-harmonising directive applicable to all EU Member States. Notwithstanding the suggestions made by some respondents to CP12/38, it is not within the power of national jurisdictions to exempt individual firms within its scope from the application of Solvency II. 

6.2

Under Solvency II a ring-fenced fund (RFF) will arise when own-fund items have a reduced capacity to fully absorb losses on a going concern basis due to lack of transferability within an insurance or reinsurance undertaking because this restricted capital can only be used to cover losses:

• on a defined portion of contracts;
• in respect of certain policyholders or beneficiaries; or
• arising from particular risks.

6.3

The assessment of whether an arrangement gives rise to a RFF is based on the restrictions on assets which arise from the particular characteristics of the arrangement, contract or product. Restrictions on assets result from the nature and regulatory context of with-profits business in the United Kingdom. The PRA expects that these restrictions will generally mean that each with-profit fund gives rise to a RFF.

6.4

Where a with-profits fund is regarded as a RFF for the purposes of Solvency II, the effect of the RFF requirements is to reflect the lack of availability of assets and capital within the with-profits fund to support the risks of the rest of the firm.

6.5

The RFF regime requires a firm to calculate a notional solvency capital requirement and then make a capital adjustment to the extent that the capital held within the RFF exceeds this notional requirement. In the case of a with-profits fund this adjustment will reflect reality, that capital within the with-profits fund will not be available to support risks elsewhere, ie risks of the business of the members’ fund.

6.6

The identification of a RFF for the purposes of Solvency II will depend on the extent to which the members’ fund is restricted and therefore has a reduced capacity to fully absorb losses on a going concern basis due to lack of transferability within a firm. Provided that the assets and capital resources held in the mutual members’ fund are not restricted in this way, the fund should not meet the criteria for identification as a RFF.