Insurers: Regulatory intervention points

Part

SUP Supervision manual

Chapter

Insurers: Regulatory intervention points

Printed on: 01/07/2024

Rulebook at: 30/12/2004

SUP App 2

Insurers: Regulatory intervention points

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.An insurer which has submitted a scheme of operations to the FSA, whether required by SUP App 2.3 to SUP App 2.5, 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 (see SUP App 2.11.1 G) 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 2.9.7 R;

(b) a summary balance sheet prepared in accordance with SUP App 2.9.8 R; and

(c) a statement of solvency prepared in accordance with SUP App 2.9.9 R;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 insurer 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 2.11

Meaning of "material transaction"Submission of a scheme of operations or a plan for restoration

01/12/2004

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. In this appendix, a transaction is a "material transaction" if (when aggregated with any similar transactions):

(1) the price actually paid or received for the transfer of assets or liabilities or the performance of services; or

(2) the price which would have been paid or received had that transaction been negotiated at arm's length between unconnected parties

exceeds:

(3) in the case of an insurer which carries on either general insurance business or long-term insurance business, but not both, 5% in any one year of the general insurance business amount (as defined in IPRU(INS) 11.1), or the long-term business amount (as defined in IPRU(INS) 11.1), as applicable; or

(4) in the case of an insurer that carries on both types of business either:

(a) 5% in any one year of the long-term insurance business amount (as defined) in IPRU(INS) 11.1) where the transaction is in connection with the insurer's long-term business; or

(b) In other cases, 5% in any one year of the general insurance business amount (as defined in IPRU(INS) 11.1).

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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

Financial Recovery Plan

01/12/2004

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.

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 insurer is deteriorating; and

(3) the FSA decides to require the insurer to hold more capital than would otherwise be required under the Handbook to ensure that the insurer 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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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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