Aviva 2013 Annual Report Download - page 298

Aviva plc
Annual report and accounts 2013
296
Shareholder information continued
realised in time to meet obligations to policyholders and the
matching of linked assets with linked liabilities.
Capital and solvency rules for insurers
The PRA rules require that a UK insurer (including those within
the Group) must hold capital resources equal to at least the
Minimum Capital Requirement (MCR). Insurers with with-profits
liabilities of more than £500 million (which is the case with
Aviva’s with-profits fund) must hold capital equal to the higher
of MCR and the Enhanced Capital Requirement (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 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 PRA 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’.
All UK insurers must also carry out an Individual Capital
Assessment (ICA) to calculate the amount of capital needed to
back their business. If the PRA decides that the final ICA amount
is insufficient, it may draw up its own Individual Capital
Guidance (ICG) for the firm, which can be imposed as a
requirement on the scope of the Authorised Firm’s permission.
Day-to-day supervision
Both the PRA and FCA take a risk-based approach to
supervision, with the PRA focusing on those issues and
authorised firms posing the greatest risk to the stability of the
UK financial system and policyholders, and the FCA conducting
in-depth structured supervision work with those firms with the
potential to cause the greatest risk to its objectives.
Given our size and our share of the UK retail market, a
major issue within our business which causes concern for the
regulators may have a significant impact on these objectives.
Both regulators therefore maintain proactive engagement
with us, with day-to-day supervision of Aviva conducted by
dedicated teams within the PRA and FCA. In practice, this
means that a wide range of Group and UK business unit senior
managers have regular scheduled meetings with the UK
regulators, and other meetings and discussions on specific issues
take place as the need occurs. This adds up to frequent
regulatory interaction at business unit and Group level, and the
sharing of detailed information about the Group.
Areas of potential risk or weakness where the regulators
particularly require Aviva to focus attention are formally set out
in a Risk Mitigation Plans (RMPs) from FCA and key actions
from PRA.
All open actions are being progressed in accordance with
timescales agreed with the PRA and FCA.
Outside of the UK, each Aviva business is regulated by its
own national regulator(s). However, overseas operations are
also within the remit of the PRA to the extent that they have
an interest in the systems and controls by which the Group
manages its overseas businesses to mitigate the risk of financial
shocks arising overseas flowing through to the UK.
The PRA monitors the strategy and performance of the
Group’s international businesses through its programme of
regular meetings and reviews.
The UK regulators aim to play a leading role in the
development of both EU and international regulation.
Intervention and enforcement
The PRA and FCA have extensive powers to investigate and
intervene in the affairs of Authorised Firms. In relation to dual
regulated firms, under the terms of a Memorandum of
Understanding entered into in April 2013, the PRA and FCA will
consult each other before taking enforcement action. The PRA
has the right to veto certain FCA regulatory actions in relation to
dual regulated firms, but the FCA is not required to comply if in
its opinion it would be incompatible with any EU or other
international obligation of the UK.
The regulators 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 FCA
may also vary or revoke an Authorised Firm’s permissions to
protect the interests of consumers or potential consumers 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 FCA has further powers to obtain injunctions
against Authorised Persons and to impose or seek restitution
orders where consumers have suffered loss.
In addition to applying sanctions for market abuse, the FCA
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
FCA’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).
The FSCS levy is to split into twelve broad classes:
 the deposits class;
 the life and pensions provision class;
 the general insurance provision class;
 the investment provision class;
 the life and pensions intermediation class;
 the home finance intermediation class;
 the investment intermediation class;
 the general insurance intermediation class;
 the deposit acceptor’s contribution class;
 the insurers – life contribution class;
 the insurers – general contribution class; and
 the home finance providers and administrators’
contribution class.
The permissions held by each firm determine into which class,
or classes, it falls.
Restrictions on business
UK regulatory rules restrict an insurance company from carrying
on any commercial business other than insurance business and
activities directly arising from that business. Therefore,
authorised insurance companies in the Group are bound by
this restriction.