Prudential Sourcebook CP195 Background

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CP195 started off this discussion on how the ICAS framework should be applied to the insurance sector.

It stated that there will be a twin-peaks approach to calculate the ECR –Enhanced Capital Requirements for firm with assets over £500 million.

For with profit firms, they will be required to hold the higher of the Regulatory Peak and the Realistic Peak , ‘twin peaks’ .

The Regulatory Peak represents the capital requirements by an actuarial assesment to prudently meet contractual guarantees to the policyholder. However, the mathematical reserves would include allowances for adverse deviations and the EU solvency margin currently around 4 %.

The Realistic Peak would reqresent ‘expected’ liabilities, and not just contractual like the Regulatory Peak. It would also include a fair provision for expected discresionaery payments sucha s future annual and terminal bonuses. A firm would also calculate an explicit risk capital margin on top of realistic provisions.