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Ownership and organisational requirements

Ownership of (re)insurers

Are there any restrictions on ownership of or investment in (re)insurers in your jurisdiction, including any limits on foreign ownership/investment?

There is no general prohibition on the overseas ownership of UK insurance companies. However, when a (re)insurer first applies for authorisation, it must supply information relating to its controllers (see below), which the Prudential Regulation Authority (PRA) assesses.

What regulations, procedures and eligibility criteria govern the transfer of control of/acquisition of a stake in a (re)insurer?

When a transaction will result in a change in control of a (re)insurer, the PRA must give prior approval. In certain instances, prior consent to a change in the level of control within the (re)insurer is also required.

A change in control takes place when a person acquires or holds 10% or more of the shares or voting rights in the (re)insurer or in its parent undertaking. The rules also extend to circumstances where a party is able to exercise significant influence over the insurer by virtue of the holding of shares or voting rights in the insurer or any of its parent undertakings.

When a person wishes to increase their level of control above the following thresholds:

  • 20% or more, but less than 30%;
  • 30% or more, but less than 50%; or
  • 50% or more, they must also seek approval.

Failure to obtain the required consent amounts to a criminal offence (see Part XII of Financial Services and Markets Act). A person increasing or decreasing their level of control within a particular bracket need not seek permission, but must still notify the PRA.

When considering whether to grant approval, the PRA focuses on whether the proposed change in control will have any adverse impact on the (re)insurer’s ability to meet its regulatory responsibilities.

A purchase of a book of business from an insurer also requires both regulatory and court consent under the Part VII process laid down by the Financial Services and Markets Act.

Organisational requirements

Must (re)insurers adopt a certain legal structure in order to operate? If no mandatory company organisation applies, what are the common structures used?

(Re)insurers can take the form of:

  • a company limited by shares or guarantee or unlimited;
  • a society registered under the Industrial and Provident Societies Acts;
  • a society registered under the Friendly Societies Acts or by the association of underwriters known as Lloyd’s. 

Do any particular corporate governance requirements apply to (re)insurers, including any eligibility criteria for directors and officers?

The Solvency II Directive (2009/138/EC) as amended was implemented in the United Kingdom on January 1 2016. What is known as Pillar 2 of the Solvency II regime introduced a framework of rules requiring (re)insurers – among other requirements – to “have in place an effective system of governance which provides for sound and prudent management of the business” (Article 41). In particular, (re)insurers must have in place effective:

  • risk-management systems (Article 44);
  • internal controls (Article 46); and
  • internal audit functions (Article 47).

(Re)insurers must also ensure that all persons who ‘effectively run’ or ‘have other key functions’ within the firm are:

  • ‘fit’ – meaning that their professional qualifications, knowledge and experience are adequate to enable sound and prudent management; and
  • ‘proper’ – meaning that they are of good repute and integrity – under Article 42.

It is the (re)insurer’s responsibility to ensure such persons satisfy these requirements.

On March 7 2016, the Senior Insurance Managers Regime (SIMR) was also introduced, which replaced the application of the existing ‘approved persons regime’ to (re)insurers. The SIMR complements the Solvency II fit and proper provisions.

The SIMR determines that applicants for defined roles (known as ‘senior insurance management functions’) must be pre-approved by the PRA before taking up these positions; the Financial Conduct Authority must also give its consent. Examples of senior insurance management functions include chief executive and head of internal audit roles.

The application of these requirements is detailed within the PRA Rulebook with which (re)insurers must comply (see the following sections applicable to Solvency II firms: Conditions Governing Business; Insurance – Fitness and Propriety; and Insurance – Senior Insurance Management Functions). 

Operating requirements

Authorisation procedure

Which (re)insurers must obtain authorisation from the regulator before operating on the market and what is the procedure for doing so?

All firms effecting or carrying out contracts of insurance – a regulated activity as defined in Section 22 of the Financial Services and Markets Act and the Regulated Activities Order 2001 – must be authorised to do so pursuant to Part IVA of Financial Services and Markets Act, unless they fall within one of the limited exemptions.

The application for authorisation should be made to the Prudential Regulation Authority (PRA), which administers the application and is responsible for granting authorisation. The Financial Conduct Authority (FCA) also regulates the firm for conduct purposes and both the PRA and the FCA must be satisfied before a firm is authorised. The regulators encourage applicants to engage in a series of pre-application meetings before an application is submitted. The PRA and FCA make a decision within six months of receiving a completed application or within 12 months if an incomplete application is received.  

If a person operates without obtaining the appropriate authorisation, this is a criminal offence and they are liable to a fine or imprisonment on conviction (see Section 23 of the Financial Services and Markets Act). As a further deterrent, any agreement, including a contract of insurance, entered into in breach of the general prohibition in Section 19 of the Financial Services and Markets Act is unenforceable against the breaching party. 

Financial requirements

What are the minimum capital and solvency requirements for (re)insurers operating in your jurisdiction?

Pillar 1 of the Solvency II Directive (2009/138/EC) provides a detailed framework for the solvency and quantitative financial requirements applicable to (re)insurers.

This includes, among others, rules for calculating the following:

  • ‘technical provisions’ (or reserves) in respect of (re)insurance obligations to policyholders and beneficiaries (Articles 76 to 85);
  • the ‘solvency capital requirement’ (SCR) (Articles 100 to 127);
  • the ‘minimum capital requirement’ (MCR) (Articles 128 to 131); and
  • a firm’s ‘own funds’ (Articles 87 to 99).

The SCR is calculated using either the standard formula prescribed in Articles 103-110 or a bespoke model within the parameters of Articles 112 to 126. This is a comprehensive analysis and includes risks such as market and counterparty credit risk (Article 101(4)).

The SCR is greater in value than the MCR and must be calculated by firms at least once a year (Article 102). The MCR should be calculated on a quarterly basis at a minimum (Article 129).

A firm’s own funds are classified as basic or ancillary and divided into tiers 1-3. Solvency II prescribes quantitative limits on the amount of each tier that can be used to satisfy the MCR and SCR (eligible own funds). The overall analysis is complex and subject to significant actuarial and accounting input. The minimum requirements also vary depending on the characteristic of the firm in question (eg, its size, structure and reserving methods adopted).

Lloyd’s syndicates are subject to Lloyd’s capital requirements and a review of their SCR by Lloyd’s.

Do any other financial requirements apply?

(Re)insurers are also subject to rules that require the currency matching of assets to liabilities and the localisation of assets maintained to cover liabilities arising in a particular territory. 

Personnel qualifications

Are personnel of (re)insurers subject to any professional qualification requirements?

The Solvency II Directive (2009/138/EC) as amended was implemented in the United Kingdom on January 1 2016. What is known as Pillar 2 of the Solvency II regime introduced a framework of rules requiring (re)insurers – among other requirements – to “have in place an effective system of governance which provides for sound and prudent management of the business” (Article 41). In particular, (re)insurers must have in place effective:

  • risk-management systems (Article 44);
  • internal controls (Article 46); and
  • internal audit functions (Article 47).

(Re)insurers must also ensure that all persons who ‘effectively run’ or ‘have other key functions’ within the firm are:

  • ‘fit’ – meaning that their professional qualifications, knowledge and experience are adequate to enable sound and prudent management; and
  • ‘proper’ – meaning that they are of good repute and integrity – under Article 42.

It is the (re)insurer’s responsibility to ensure such persons satisfy these requirements.

On March 7 2016, the Senior Insurance Managers Regime (SIMR) was also introduced, which replaced the application of the existing ‘approved persons regime’ to (re)insurers. The SIMR complements the Solvency II fit and proper provisions.

The SIMR determines that applicants for defined roles (known as ‘senior insurance management functions’) must be pre-approved by the PRA before taking up these positions; the Financial Conduct Authority must also give its consent. Examples of senior insurance management functions include chief executive and head of internal audit roles.

The application of these requirements is detailed within the PRA Rulebook with which (re)insurers must comply (see the following sections applicable to Solvency II firms: Conditions Governing Business; Insurance – Fitness and Propriety; and Insurance – Senior Insurance Management Functions). 

Business plan

What rules and requirements govern the business plans of (re)insurers?

When seeking authorisation, (re)insurers must submit a regulatory business plan to the PRA by providing answers to questions on:

  • the insurance activities they propose to conduct;
  • corporate governance;
  • non-financial resources;
  • risk management;
  • internal systems and controls; and
  • complex IT systems.

Firms are also required to provide a scheme of operations when seeking authorisation. The information required to be included in a scheme of operations is set out in Article 23 of the Solvency II Directive and includes the nature of the risks the (re)insurer proposes to cover and details of its reinsurance arrangements, as well as other information. Firms are also required to submit an own risk and solvency assessment (ORSA) with their application.

Lloyd’s managing agents are also required by the Lloyd’s minimum standards to prepare and submit each year a syndicate business plan and an appropriate strategy document relating to each syndicate managed or to be managed. This is an important document as it dictates matters such as the limits per risk and overall capacity of the syndicate. Managing agents are also required to ensure there is an ORSA for each managed syndicate. 

Risk management

What risk management systems and procedures must (re)insurers adopt?

(Re)insurers must have procedures in place to identify deteriorating financial conditions. Firms are also required to undertake their own ORSA, which must include at least an assessment of:

  • its overall solvency needs;
  • the extent to which the risk profile of the firm deviates from the assumptions underlying the SCR; and
  • its compliance with the SCR, MCR and technical requirements.

ORSAs should be performed regularly and following changes in a firm’s risk profile (see Article 45 of Solvency II and the Conditions Governing Business section of the PRA Rulebook applicable to Solvency II firms).

Solvency II also imposes strict rules on the outsourcing of material functions (such as claims handling) to which (re)insurers must adhere. For more information, see

  • the outsourcing chapter within the Conditions Governing Business Section of the PRA Rulebook; and
  • Senior Management Arrangements, Systems and Controls 13 and 14 of the FCA Handbook; and
  • Article 49 of Solvency II.

Reporting and disclosure

What ongoing regulatory reporting and disclosure requirements apply to (re)insurers?

Pillar 3 of Solvency II requires (re)insurers to provide the PRA with a minimum set of information to enable the PRA to review and supervise the (re)insurer (known as the supervisory review process) – see Articles 35 to 36 of Solvency II.

Included within this framework is the Solvency and Financial Condition Report, which sets out the solvency and financial position of insurers and is published annually (Article 51 of Solvency II). The SCR and MCR must also be reported to the PRA when calculated.

(Re)insurers must also notify matters such as changes to personnel under the Senior Insurance Managers Regime and any change in control. 

Other requirements

Do any other operating requirements apply in your jurisdiction?

(Re)insurers must comply with those rules in the FCA Handbook and PRA Rulebook that are applicable to their business.

Entities regulated by Lloyd’s will also be subject to its rules (eg, Lloyd’s minimum standards and bylaws).

Non-compliance

What are the consequences of non-compliance with the operating requirements applicable to (re)insurers?

By having two thresholds – the SCR and the MCR – supervising authorities such as the PRA become aware at a much earlier stage that a firm is in distress; if the SCR is breached, there is a chance that steps can be taken to prevent the distressed firm breaching the MCR. A breach of the MCR is considered to expose policyholders and beneficiaries to an unacceptable level of risk were the firm allowed to continue its operations (Article 129(1)(b) of Solvency II).

If a (re)insurer:

  • does not comply with technical provisions, the PRA can prevent it disposing its assets (Article 137 of Solvency II);
  • breaches the SCR, the PRA must be notified immediately and a recovery plan submitted to the PRA within two months (Article 138 of Solvency II);
  • breaches the MCR, the PRA must be notified immediately and a short-term realistic finance scheme to restore (within the next three months) eligible own funds to at least the level of the MCR be submitted within one month (Article 138 of Solvency II).

For more information on distressed firms, see section Undertakings in Difficulty in the PRA Rulebook applicable to Solvency II firms and Articles 136 to 144 of Solvency II.

A firm or an individual that breaches a rule or principle in the PRA Rulebook or the FCA Handbook can also be subjected to private or public censure, a ban or a fine.

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