UK Law and Practice Contributed by: Clare Swirski, E. Drew Dutton, Hugo Laing and Rosamund Wood, Debevoise & Plimpton LLP
writers participating in the Lloyd’s market are also subject to Lloyd’s supervision. 2.2 Writing of Insurance and Reinsurance Due to the “general prohibition” in Section 19 of the FSMA, a firm seeking to conduct (re)insurance busi- ness in the UK must obtain authorisation or permis- sions under Part 4A of the FSMA from the PRA (unless it is exempt – see 3. Overseas Firms Doing Business in the Jurisdiction ). The FCA must consent to the PRA’s granting authorisation. Insurance intermediar- ies apply to the FCA rather than to the PRA. To obtain authorisation, a firm must satisfy the “thresh- old conditions” set out in FSMA on an ongoing basis. These conditions include: • legal status (ie, being a company, friendly society or member of Lloyd’s); • the firm’s head and registered office are in the UK or the firm carries out business in the UK; • adequate capital to conduct the (re)insurance busi- ness in question; and • individuals managing the firm are fit and proper and suitably qualified to do so. PRA-regulated activities referred to as “(re)insurance business” are set out in the FSMA 2000 (PRA-Regu- lated Activities) Order 2013, and include effecting and carrying out contracts of insurance (ie, entering into and performing contracts of insurance) and managing the underwriting capacity of a Lloyd’s syndicate as managing agent at Lloyd’s. A regulated activity is subject to the general prohibi- tion to the extent it is carried on “by way of business” in the UK. This restricts the applicability of the rules to persons who undertake the activity in a commercial context and with some degree of regularity. Assuming the activities themselves are carried out in the UK, it is irrelevant if the underlying risks are located outside the UK or if the contracts are subject to a different governing law. If the activity is not carried on in the UK, authorisation is not required under the FSMA even if policyholders and/or underlying risks are in the UK. Statute does not fully define the term “contract of insurance”. FSMA 2000 (Regulated Activities) Order
2001 does not define when a contract is an insur- ance contract, so common law must be used for this analysis. There is also detailed regulatory guidance on the identification of contracts of insurance in the FCA’s Perimeter Guidance manual (PERG 6). Although the regulators may determine whether a contract is a contract of insurance, this may be challenged in court. A firm will need to seek PRA authorisation for each class of business it intends to write. The FSMA divides insurance business into 18 classes of general busi- ness and ten classes of long-term (or life) business. Capital and Reserve Requirements Under Solvency II UK (re)insurance companies are subject to the capi- tal requirements originally contained in Solvency II and, since Brexit, incorporated in local legislation as amended, and as set out and expanded upon in the PRA Rulebook. The UK regime is now referred to as Solvency UK, although it is still largely similar to Sol- vency II. Basic requirements apply to all authorised (re)insurers, and additional and different requirements apply for general insurers, life insurers and pure rein- surers. The PRA can impose additional capital require- ments on individual firms if deemed necessary to address certain risks, such as operational or conduct risks. The capital requirements under Solvency UK consist of the minimum capital requirement (MCR – the mini- mum amount of capital a (re)insurer needs to cover its risks) and the solvency capital requirement (SCR – effectively the amount of capital a (re)insurer needs to operate as a going concern), assessed on a val- ue-at-risk measure. A firm’s SCR can be calculated according to a standard formula or, with PRA approv- al, using its own internal model. Capital requirements apply at the entity and group levels. Lloyd’s Solvency UK capital requirements are calculated based on its internal model and apply to the market across all Lloyd’s syndicates. Lloyd’s operates its own capital assessment of each syndicate, the Economic Capital Assessment, based broadly on Solvency UK with an uplift to achieve the Lloyd’s market rating. Solvency UK and the PRA Rulebook also provide the requirements for reserves to be maintained by UK (re)
510 CHAMBERS.COM
Powered by FlippingBook