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HMRC internal manual

General Insurance Manual

Regulatory framework: the Prudential sourcebook for insurers (INSPRU): technical provisions and capital resource requirements

INSPRU1 gives guidance relating to technical provisions and capital resource requirements, addressing what was referred to as the ‘solvency margin’ under earlier regulatory regimes.

INSPRU1.1.12 provides that a general insurer must establish adequate technical provisions

  • as regards equalisation provisions (see GIM7000+), in accordance with INSPRU1.4
  • as regards other technical provisions, in accordance with GENPRU 1.3.4R - this applies company law, financial reporting standards and the ABI SORP (see GIM Chapter 2).

INSPRU1.1.43 refers to GENPRU2.1.13R which requires a firm to maintain capital resources at least equal to its ‘capital resources requirement’ (CRR). For a general insurer, the CRR is equal to the ‘minimum capital requirement’ (MCR) which is defined in INSPRU as the higher of the ‘base capital resources requirement’ under the European Insurance Accounts Directive, and the general insurance capital requirement defined at INSPRU1.1.44 - the highest of:

  • the ‘premiums amount’ defined at INSPRU1.1.45R
  • the ‘claims amount’ defined at INSPRU 1.1.47R, and
  • the ‘brought forward amount’ defined at INSPRU 1.1.51R.

GENPRU2 Annex 1 defines capital resources for an insurer in the same terms as those used for banks, building societies and investment firms, that is, in terms of tier one and upper and lower tier two.

INSPRU7 provides guidance on how firms are to assess the adequacy of their capital resources under the ‘individual capital assessment’ approach, both to comply with the capital adequacy rules, and to enable the FSA to assess whether the minimum capital resources requirement are appropriate.

INSPRU1.1.72A sets out the ‘enhanced capital requirement’ (ECR) of a general insurer which is the sum of:

  • the asset related capital requirement (INSPRU2.2.10R) and
  • the insurance related capital requirement (INSPRU1.1.74)
  • less the firm’s equalisation reserves (INSPRU1.4).

ECRs reflect a move towards the standards being developed under the Solvency II proposals (GIM3110).

Other INSPRU Chapters referred to in GIM3120 deal with aspects of risk an insurance firm needs to address. INSPRU1.5 deals with ‘internal contagion’ - for example, INSPRU1.5.13 restricts an insurer, other than a pure reinsurer, to carrying on insurance business and activities directly related to it, and INSPRU1.5.17 prohibits an insurer (except for historical composites) from carrying on both general and long term business.