Solvency calculations form

Guidance Note: Solvency Calculations Form

October 2021

1 Introduction

1.1 This document refers to the Article 24 of the Insurance Business (Jersey) Law 1996 (the Law) and the Insurance Business (Solvency Margin) (Jersey) Order 1996 (the Order).

1.2 The Order prescribes a minimum margin of solvency for Category B permit holders. It also includes a description of approved assets that are admissible in support of the margin of solvency.

1.3 The margin of solvency is the excess of the value of the permit holder’s approved assets over the amount of its liabilities. Separate margins of solvency are prescribed for:

1.3.1 general insurance companies; and

1.3.2 long term insurance companies.

1.4 The margin of solvency for Category B permit holders shall be:

1.4.1 17.5% of net premium income – if conducting general business;

1.4.2 2.5% of the value of the long term business fund or £50,000, whichever is the greater – if conducting long term business

1.5 In order to maintain the margin of solvency, a Category B permit holder must have:

1.5.1 at least 75% of assets as approved assets, at any time - if conducting general business;

1.5.2 at least 25% of assets as approved assets – if conducting long term business

2 Timing

2.1 It is the responsibility of the permit holder to ensure that the company’s ability to meet its liabilities and its minimum solvency margin requirement is maintained at all times.

2.2 The permit holder is required to submit to the JFSC at six-monthly intervals financial statements that show the company’s position in respect of (among others) its liabilities and minimum solvency margin.

2.3 The solvency calculations must be made available to the JFSC for review upon request.

3 Solvency Calculations

3.1 The attached forms, which are supplied in Excel spreadsheet format, are intended to assist with the calculation of the margins of solvency as required under Article 24.

3.1.1 Solvency calculation for General Insurance Business;

3.1.2 Solvency calculation for Long Term Insurance Business.

3.2 The figures required for this calculation should be available from the permit holder’s management accounts or from ledger printouts from an accounting system that can support the figures used.

3.3 Approved Assets in accordance with Article 2 of the Order.

3.3.1 For the purposes of the Order approved assets are:

• (a) Cash in hand and at bank;
• (b) Bank Certificates of Deposit;
• (c) Eurobonds approved by the Commission;
• (d) Government securities quoted on a recognized stock exchange;
• (e) Net investment income receivable in relation to assets described in sub-paragraphs (a) to (d);
• (f) Premiums receivable;
• (g) Reinsurance balances receivable;
• (h) Accounts receivable, net of provisions for bad debts;
• (i) Irrevocable Letters of Credit provided by a bank registered under the Banking Business (Jersey) Law 1991.

3.3.2 The figures required for the following balances can be extracted from the permit holder’s management accounts and from the “approved assets” that must be included in the calculation in the column of the spreadsheet, headed “Balance Sheet Values”.

3.3.3 If the permit holder carries on business other than the general insurance and is therefore authorised to carry on that business under another relevant law, then for the purposes of this calculation, those figures relative to the other business need to be deducted from the balances in a) – i) above. Once the figures for other business activities are inserted into the column headed “Inadmissible”, the spreadsheet automatically calculates the figures for “approved assets” that are admissible for the solvency calculation.

3.4 Other Assets on Balance Sheet

3.4.1 This section may be used to record other assets of the permit holder that are acceptable, such as tangible fixed assets or amounts owed from group companies.

3.5 Total Assets

3.5.1 This figure is automatically calculated and is the result of total approved and other assets.

3.6 Total Liabilities

3.6.1 The total liabilities figure can be extracted from the balance sheet in the permit holder’s management accounts. A deduction is also required for non-general insurance business liabilities.

3.7 Net Free Assets

3.7.1 This figure is automatically calculated and is the result of total assets less total liabilities.

3.8 Technical Provisions

3.8.1 This figure represents the amount that an insurer requires to fulfil its insurance obligations and settle all expected commitments to policyholders and other beneficiaries arising over the lifetime of the insurer's portfolio of insurance contracts.

3.8.2 In accordance with section 5.9 of the Insurance Business Code of Practice, the permit holder must ensure that its insurance liabilities (technical provisions) are calculated and monitored on a continuous basis.

3.8.3 The liabilities must be calculated according to generally accepted insurance industry principles and accounting standards.

3.8.4 In the case of long term insurance, the technical provisions must be calculated and certified as correct by a qualified actuary.

3.9 Net premium income in respect of general business in accordance with Article 1(1) of the Order shall be taken to be:

3.9.1 during the financial period in which the permit holder first carries on general business in Jersey, the amount stated in the permit holder’s application for a permit in respect of that business as the maximum gross premium income which the permit holder proposes to earn in respect of general business during that financial period reduced by the amount stated in that application as the total estimated rebates, refunds and reinsurance commissions which will, on the basis of that proposed maximum gross premium income, be payable by the permit holder, and, subject to paragraph (2), by the gross amount of the premiums for any reinsurance which will, on that basis, be ceded by the permit holder in respect of general business during that financial period;

3.9.2 at any other time, the gross premium income earned in respect of general business during the last preceding financial period of the permit holder reduced by any rebates, refunds and reinsurance commissions payable by the permit holder, and, subject to paragraph (2), by the gross amount of the premiums for any reinsurance ceded by the insurer, during that preceding financial period;

3.9.3 if a permit holder’s first or preceding financial period, as the case may be, is not a period of 12 calendar months, an amount calculated in accordance with sub-paragraph (a) or (b) divided by the number of days in that first or preceding financial period, as the case may be, and the resultant figure multiplied by 365

3.10 Long term business fund in respect of long term insurance business

3.10.1 A special fund designed to keep all receipts from the permit holder’s long term business separate from all other assets.

3.10.2 The long term business fund is required to be maintained by the permit holder by Article 26(2)(b) of the Law.

3.11 Required minimum margin of solvency

3.11.1 The spreadsheet automatically calculates the required amount as:

3.11.1.1 17.5% of net premium income for general insurance business

3.11.1.2 2.5% of the value of the long term business fund or £50,000 whichever is the greater for long term insurance business.

3.11.2 The spreadsheet automatically determines if the net assets exceed the amount of a required minimum margin of solvency, as at the date used in the calculation.

3.12 Excess/ (Shortfall) against minimum margin of solvency

3.12.1 Provided the excess is not a negative figure then the permit holder has the required margin of solvency. If, however, there is a shortfall then the margin of solvency test has failed and the permit holder must notify the JFSC immediately under Article 15 of the Order.

3.13 Date, signature and printed name of person calculating margin

3.13.1 The person performing the calculation should complete this section and ensure that their name is printed as well as providing a signature and date. This assists with verification purposes should any query arise from the calculation.

4 Breaches and shortfall

4.1 Article 24(3) of the Law requires a permit holder to notify the commission immediately if its margin of solvency is not at any time maintained.

4.2 Under Article 24(4) of the Law the JFSC may give notice to a permit holder to submit a short-term financial scheme for the remedying of a shortfall of solvency within 30 days of the issue of the notice or such longer period as the JFSC may agree.

4.3 If a short-term financial scheme is not agreed, the JFSC will need to consider alternative regulatory action. This may include:

4.3.1 an application to the Royal Court under Article 24(8) of the Law for the winding up of the permit holder; or

4.3.2 appointment of a manager under Article 9A of the Law.

Disclaimer

The solvency calculation template is provided for guidance only and the JFSC accepts no responsibility for its relevance to your business, or the results produced when using your own data.

Whilst every effort has been made to test the construction of the template and its robustness, the JFSC accepts no responsibility for the results when used by registered persons.