BoE: Consultation on PRA-authorised insurers' use of subordinated guarantees and the quality of capital

30 May 2014

This consultation seeks views on a draft statement which sets out the PRA’s expectations of PRA-authorised insurers regarding the use of subordinated guarantees, the quality of capital and how the guarantor’s regulatory capital position should be reported.

This consultation seeks views on a draft supervisory statement which sets out the PRA’s expectations of PRA-authorised insurers (firms) in relation to:

• the use of subordinated guarantees in connection with capital instruments issued by a company, whereby the payment of coupons and repayment of principal are guaranteed by a firm (the guarantor);
• how subordinated guarantees should not undermine the quality of capital held by firms to meet capital requirements (this expectation applies regardless of both the motivation for using a subordinated guarantee and the structure in which a guarantee is used); and
• how the guarantor’s regulatory capital position should be reported if the liability created by the guarantee serves to undermine the guarantor’s quality of capital.

The draft supervisory statement is intended to apply to all firms and may also be relevant to insurance holding companies and other entities in the same group, together with their advisors. The statement also looks ahead to Solvency II (SII), and is aimed at firms and groups within the scope of the Directive. It is intended to be equally relevant for life insurers, general insurers and mutuals.

The statement is designed to help the PRA meets its statutory objectives of promoting the safety and soundness of the firms it regulates and contribute to securing an appropriate degree of protection for policyholders. As set out in the insurance approach document, capital is a key risk mitigant in the PRA’s supervisory framework as high-quality capital absorbs unexpected losses and reduces the risk of insolvency.

Guarantees should not override the loss-absorbing features of a capital instrument and investors should not avoid bearing losses when it is appropriate for the holders of a capital instrument to do so.

The statement will assist firms in assessing their compliance with the General Prudential sourcebook (GENPRU) rules on connected transactions (GENPRU 2.2.65R and 2.2.169R). It sets out the actions that the PRA expects to be taken by firms and the time frames for such actions.

The consultation will close on Friday 11 July 2014.

Full consultation paper

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