Aviva 2009 Annual Report Download - page 124

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Aviva plc Additional information for Shareholders continued
Annual Report and Accounts 2009
The FSA therefore seeks to monitor the strategy and
performance of the Group’s international businesses through
regular ‘Close and Continuous’ meetings with the CEOs and
Finance Directors of the overseas Regions.
The FSA aims to play a leading role in the development of
both EU and international regulation. It is, in particular, at the
vanguard of the movement towards risk-based insurance
regulation. The FSA has increased its desire for a principles
based approach to regulation. In line with this FSA continues
to place increasing weight on the ‘Treating Customers Fairly’
principle. More recently FSA has rewritten the conduct of
business rules to remove many of the more granular
requirements.
Intervention and enforcement
The FSA has extensive powers to investigate and intervene in
the affairs of Authorised Firms and is obliged under FSMA to
monitor compliance with the requirements imposed by, and to
enforce the provisions of, FSMA, related secondary legislation
and the rules made thereunder.
The FSA’s enforcement powers, which may be exercised
against both Authorised Firms and Approved Persons, include
public censure, imposition of unlimited fines and, in serious
cases, the variation or revocation of permission to carry on
regulated activities or of an Approved Person’s status. The FSA
may also vary or revoke an Authorised Firm’s permission to
protect the interests of consumers or potential consumers, or
if the Authorised Firm has not engaged in regulated activity for
12 months, or if it is failing to meet the threshold conditions for
authorisation. The FSA has further powers to obtain injunctions
against Authorised Persons and to impose or seek restitution
orders where persons have suffered loss.
In addition to its ability to apply sanctions for market abuse,
the FSA has the power to prosecute criminal offences arising
under FSMA and insider dealing under Part V of the Criminal
Justice Act 1993 and breaches of money laundering regulations.
The FSA’s stated policy is to pursue criminal prosecution in all
appropriate cases.
The Financial Services Compensation Scheme (FSCS)
The FSCS is intended to compensate individuals and small
businesses for claims against an Authorised Firm where the
Authorised Firm is unable or unlikely to be able to meet those
claims (generally, when it is insolvent or has gone out of
business). Under a new funding system that started on 1 April
2008, for the purposes of funding FSCS compensation costs,
the FSCS levy is split into five broad classes:
— Deposits
— Long-term insurance and savings
— General insurance
— Investments
— Home finance
With the exception of the deposits class, each broad class is
divided into two sub-classes based on provider/intermediation
activities. Each of the ‘sub-classes’ is made up of firms which
are providers or intermediaries and engage in similar styles of
business with similar types of customer.
The sub-classes are based on the activities a firm undertakes
(and are aligned to their FSA permissions). A firm could be
allocated to one or more sub-classes according to the activities
that it undertakes. In the event of a failure of a market
participant, the Authorised Firms in the Group could be required
to make contributions to compensate investors.
Restrictions on business
Under the FSA’s Handbook, an insurance company is restricted
from carrying on any commercial business other than insurance
business and activities directly arising from that business.
Therefore, the FSA authorised insurance companies in the
Group are bound by this restriction.
Capital and solvency rules for insurers
Under the FSA Handbook, a UK insurer (including those within
the Group) must hold capital resources equal to at least the
Minimum Capital Requirement (the ‘MCR’). Insurers with
with-profits liabilities of more than £500 million must hold
capital equal to the higher of MCR and the Enhanced Capital
Requirement (the ECR). The ECR is intended to provide a more
risk responsive and “realistic” measure of a with-profits insurer’s
capital requirements, whereas the MCR is broadly speaking
equivalent to the previous required minimum margin and
satisfies the minimum EU standards.
Determination of the ECR involves the comparison of two
separate measurements of the Authorised Firm’s financial
resources requirements, which the FSA refers to as the ‘twin
peaks’ approach. The two separate peaks are:
— The requirement comprised by the mathematical reserves
plus the ‘long-term insurance capital requirement’ (the
LTICR), together known as the ‘regulatory peak’; and
— A calculation of the “realistic” present value of the insurer’s
expected future contractual liabilities together with projected
‘fair’ discretionary bonuses to policyholders, plus a risk capital
margin, together known as the ‘realistic peak’.
The regulatory peak implements the Solvency I Directives, the
latter forming part of the European Commission’s efforts to
achieve a single European market for financial services. The
LTICR is made up of several components, but in general is equal
to approximately 4% of the mathematical reserves, although
the formula varies according to the type of business written.
All insurers must also assess for themselves the amount
of capital needed to back their business (Individual Capital
Assessments). If the FSA views the result of this assessment
as insufficient, the FSA may draw up its own Individual Capital
Guidance for the firm, which can be imposed as a requirement
on the scope of the Authorised Firm’s permission.
Long-term assets and liabilities
Where a UK insurer carries on life insurance business, then long-
term business assets and liabilities – namely those assets and
liabilities relating to life and health insurance policies – must be
segregated from the assets and liabilities attributable to non-life
insurance business or to shareholders. Separate accounting and
other records must be maintained and a separate fund must be
established to hold all receipts of long-term business.
The extent to which long-term fund assets may be used for
purposes other than long-term business is restricted by the rules
in the FSA Handbook. Only the “established surplus” – the
excess of assets over liabilities in the long-term fund, as
determined by actuarial investigation – may be transferred so as
to be available for other purposes. Restrictions also apply to the
payment of dividends by the insurance company, as described
below. The rules in the FSA Handbook for insurers require the
maintenance of sufficient assets in the separate long-term
insurance fund to cover the actuarially determined value of the
insurance liabilities.