GIM10150 - Non-resident insurers: scope of UK taxing rights: section 11 ICTA & Article 7 OECD Model: attribution of the investment return: regulatory guidance

Regulatory authorities and the market expect an entity with insurance business to have a substantial margin of income-producing assets above its liabilities to policyholders and more than the absolute minimum statutory solvency margin. The position here is evolving. The current set of Directives, pending the introduction (expected in 2012) of a new EU framework (Solvency II), is known as Solvency I. In the UK, the Financial Services Authority (FSA) introduced interim standards from 1 January 2005 based on a consultation paper CP190 鈥楨nhanced capital requirements and individual capital assessments for non-life insurers鈥� (July 2003).

Solvency I

A 鈥榬equired minimum margin鈥� (RMM), a proportion of the technical provisions, is added to the provisions. The result is larger than the absolute minimum capital, the 鈥榤inimum guarantee fund鈥� (MGF). CP190 made public the FSA鈥檚 鈥榠nformal supervisory rule of thumb鈥� that required at least twice the RMM to be added to the provisions.

CP190

Under the 鈥榯hree pillar鈥� approach to regulation, originally developed for banking under the Basel Accord

  • Pillar 1 is a set of harmonised valuation standards and minimum capital requirements
  • Pillar 2 is a supervisory review process, with active regulator participation, ensuring insurers have good processes and adequate capital, involving 鈥榠ndividual capital guidance鈥� (ICG) input from the regulator
  • Pillar 3 is market disclosure and discipline, allowing comparison across institutions.

The new risk-based regulatory requirement (enhanced capital requirement, or ECR) for Pillar 1 and individual capital adequacy standards (ICAS) regime are steps towards the standards being developed for Solvency II The CP190 proposals are now reflected in INSPRU, in succession to PRU (see GIM3120).

Solvency II

Pillars 1 - 3 will be in place across the EU. The MGF will be replaced by a 鈥榤inimum capital requirement鈥� (MCR) and the ECR by a 鈥榮olvency capital requirement鈥� (SCR), a risk based level of solvency capital which may be topped up (鈥榓djusted SCR鈥�) through the ICAS process. A Community wide regulatory reporting process will be in place. It is expected that this will comprise

  • A public Solvency and Financial Condition Report (SFCR), and
  • A private Report to Supervisors (RTS).

These reports will include quantitative and narrative information supporting the regulatory process, including (for Pillar 2) what is known as an Own Risk and Solvency assessment (ORSA). The information contained will be useful in assessing capital requirements (while bearing in mind that the supervisory view is not conclusive).

GIM10160+ discusses the relevance of these regulatory capital standards in the light of OECD developments.