The Friendly Societies (Long Term Insurance Business) Regulations 1987

• (1) Notwithstanding anything contained in the rules of a society or in the 1974 Act, the committee of management or other directing body of a society which has been authorised under these Regulations may, by resolution passed before 31st December 1988, agree upon any amendments to its rules required for conformity with any provision of these Regulations and shall send two copies of its resolution to the Central Office within 21 days of its having been passed.

• (2) The Central Office, on being satisfied that the amended rules are in conformity with the 1974 Act and these Regulations, shall register one copy of the amended rules and place it on the public file of the society and shall return the other copy to the society with an acknowledgement of its registration.

• (3) The amendments to the society’s rules shall take effect on the date on which they are registered.

SCHEDULE 1

PART I — CLASSES OF LONG TERM BUSINESS

Number	Description	Nature of business
I	Life and annuity.	Effecting and carrying out contracts of insurance on human life or contracts to pay annuities on human life, but excluding (in each case) contracts within Class III below.
II	Marriage and birth.	Effecting and carrying out contracts of insurance to provide a sum on marriage or on the birth of a child, being contracts expressed to be in effect for a period of more than one year.
III	Linked long term.	Effecting and carrying out contracts of insurance on human life or contracts to pay annuities on human life where the benefits are wholly or partly to be determined by reference to the value of, or the income from, property of any description (whether or not specified in the contracts) or by reference to fluctuation in, or in an index of, the value of property of any description (whether or not so specified).
IV	Permanent health.	Effecting and carrying out contracts of insurance providing specified benefits against risks of persons becoming incapacitated in consequence of sustaining injury as a result of an accident or of an accident of a specified class or of sickness or infirmity, being contracts that– are expressed to be in effect for a period of not less than five years, or until the normal retirement age for the persons concerned, or without limit of time, and either are not expressed to be terminable by the insurer, or are expressed to be so terminable only in special circumstances mentioned in the contract.
V	Tontines.	Effecting and carrying out tontines.
VI	Capital redemption.	Effecting and carrying out capital redemption contracts.
VII	Pension fund management.	Effecting and carrying out– contracts to manage the investments of pension funds, or contracts of the kind mentioned in paragraph (a) above that are combined with contracts of insurance covering either conservation of capital or payment of a minimum interest.

PART II — CLASSES OF SUPPLEMENTARY BUSINESS

Number	Description	Nature of business
1	Accident.	Effecting and carrying out contracts of insurance providing fixed pecuniary benefits or benefits in the nature of indemnity (or a combination of both) against risks of the person insured or, in the case of a contract made by virtue of section 140, 140A or 140B of the Local Government Act 1972, a person for whose benefit the contract is made– sustaining injury as the result of an accident or of an accident of a specified class, or dying as the result of an accident or of an accident of a specified class, or becoming incapacitated in consequence of disease or of disease of a specified class, inclusive of contracts relating to industrial injury and occupational disease but exclusive of contracts falling within class 2 below or within class IV in Part I of this Schedule (permenant health).
2.	Sickness.	Effecting and carrying out contracts of insurance providing fixed pecuniary benefits or benefits in the nature of indemnity (or a combination of the two) against risks of loss to the persons insured attributable to sickness or infirmity, but exclusive of contracts falling within class IV in Part I of this Schedule.

SCHEDULE 2 — INFORMATION REQUIRED WITH APPLICATION FOR AUTHORISATION

Solvency

1

A statement showing the amount by which the assets are expected to exceed liabilities at the date of authorisation (after application of Parts VI and VII of these Regulations) and how calculated.

Classification of business

2

Particulars of the classes of long term business which the society wishes to be included in the authorisation.

Scheme of operations

3

The sources of business (for example, insurance brokers, agents, own employees or direct selling), and the approximate percentage expected from each source.

4

The nature of the commitments which the society proposes to take on and the general and special policy conditions which it proposes to use.

5

The technical bases that the actuary who will be appointed by the society for the purposes of these Regulations proposes to employ for each class of business, including the data needed to calculate premium rates and mathematical reserves.

6

The guiding principles as to reinsurance including the society’s maximum retention per risk or event after all reinsurance ceded and the names of the principal reinsurers.

7

The assets which represent or will represent the minimum guarantee fund being assets admissible under and valued in accordance with Part VI of these Regulations.

8

The estimated cost of installing the administrative services and organisation for securing business, and the financial resources intended to cover those costs.

Projections

9

For each of the first three years of account following authorisation–

• (a) a forecast balance sheet (on both optimistic and pessimistic bases);

• (b) a plan (on both optimistic an pessimistic bases) setting out detailed estimates of income and expenditure in respect of direct business and reinsurance cessions; and

• (c) estimates relating to the financial resources intended to cover underwriting liabilities and the margin of solvency.

Other information

10

A statement showing the types of investments which are expected to represent the insurance funds and the estimated proportion which will be represented by each type of investment.

11

Copies or drafts of reinsurance treaties.

12

Copies or drafts of any standard agreements with brokers or agents.

13

Copies or drafts of any agreements with persons (other than employees of the society) who manage or will manage the business of the society.

14

A certificate by the actuary appointed for the purposes of these Regulations that–

• (a) he considers the premium rates to be suitable,

• (b) he considers the financing of the society to be sufficient to cover both technical reserves and the required margin of solvency during the first three years of account following authorisation, and

• (c) he agrees with the information provided under paragraphs 6 and 9 above.

SCHEDULE 3 — SUPPLEMENTARY BUSINESS—SOLVENCY MARGIN: PREMIUM BASIS OF CALCULATION

1

In this Schedule–

• “gross premiums”, in relation to a society and a year of account means premiums after the deduction of discounts, refunds and rebates of premium but before deduction of premiums for reinsurance ceded and before deduction of commission payable by the society;

• “receivable”, in relation to a society, a year of account and a premium, means recorded in the society’s books as due to the society in respect of– a contract commencing in that year, or a contract not accounted for in an annual revenue account of the society prior to that year, even though the contract commenced in an earlier year of account, whether or not the society has received the premium;

• “recoverable”, in relation to a society and a year of account, means recorded in the society’s books as due in that year, whether or not the society has received any payment.

2

The gross premiums receivable in respect of the society’s entire supplementary business for the last preceding year of account shall be aggregated.

3

From the aggregate arrived at under paragraph 2 above there shall be deducted–

• (a) any taxes included in the premiums mentioned in paragraph 2 above, and

• (b) any levies that are related to premiums and are recorded in the society’s books as payable in the last preceding year of account in respect of general business.

4

The amount arrived at under paragraph 3 above shall be multiplied by twelve and divided by the number of months in the year of account.

5

If the amount arrived at under paragraph 4 above is more than 10 million units of account, it shall be divided into two portions, the former consisting of 10 million units of account and the latter comprising the excess.

6

Where there has been a division into two portions pursuant to paragraph 5 above, there shall be calculated and added together 18 per cent and 16 per cent of the two portions respectively; and where there has been no such division, there shall be calculated 18 per cent of the amount arrived at under paragraph 4 above.

7

• (1) If the provision for claims outstanding at the end of the last preceding year of account exceeds the provision for claims outstanding at the beginning of that year, the amount of the excess shall be added to the amount of claims paid in the last preceding year of account.

• (2) If the provision for claims outstanding at the beginning of the last preceding year of account exceeds the provision for claims outstanding at the end of that year, the amount of the excess shall be deducted from the amount of the claims paid in the last preceding year of account.

8

• (1) For the purpose of paragraph 7 above, the amount of claims paid, in relation to a society and a year of account, is the amount that is recorded in the society’s books as at the end of the year of account as paid by it (whether or not payment has been effected in that year) in full or partial settlement of–

• (a) the claims described in sub-paragraph (2) below, and

• (b) the expenses described in sub-paragraph (3) below,

less any recoverable amounts within the meaning of sub-paragraph (4) below.

• (2) The claims mentioned in sub-paragraph (1) above are claims under contracts of insurance including claims relating to business accounted for over a longer period than a year of account.

• (3) The expenses mentioned in sub-paragraph (1) above are expenses (such as, for example, legal or medical costs) which are incurred by the society, whether through employment of its own staff or otherwise, and are directly attributable to the settlement of individual claims, whether or not the individual claims in question are those mentioned in sub-paragraph (1) above.

• (4) Recoverable amounts for the purposes of sub-paragraph (1) above are amounts recoverable by the society in respect of the claims mentioned in that sub-paragraph or other claims, including amounts recoverable from third parties and amounts recoverable in respect of reinsurance ceded by the society.

9

• (1) For the purposes of paragraph 7 above, the provision for claims outstanding, in relation to a society and a year of account, is (subject to any applicable valuation regulations) the amount set aside by the society as at the beginning or end of the year of account as being an amount likely to be sufficient to meet–

• (a) the claims described in sub-paragraph (2) below, and

• (b) the expenses described in sub-paragraph (3) below,

less any recoverable amounts within the meaning of sub-paragraph (4) below.

• (2) The claims mentioned in sub-paragraph (1) above are claims under contracts of insurance in respects of incidents occurring–

• (a) in the case of an amount set aside as at the beginning of the year of account, before the beginning of that year, and

• (b) in the case of an amount set aside as at the end of a year of account, before the end of that year,

being claims which have not been treated as claims paid and including claims relating to business accounted for over a longer period than a year of account, claims the amounts of which have not been determined and claims arising out of incidents that have not been notified to the society.

• (3) The expenses mentioned in sub-paragraph (1) above are expenses (such as, for example, legal or medical costs) which are likely to be incurred by the society, whether through the employment of its own staff or otherwise, and are directly attributable to the settlement of individual claims, whether or not the individual claims in question are those mentioned in sub-paragraph (1) above.

• (4) Recoverable amounts for the purposes of sub-paragraph (1) above are amounts estimated by the society to be recoverable by it in respect of the claims mentioned in that sub-paragraph, including amounts recoverable from third parties and amounts recoverable from other insurers but excluding amounts recoverable in respect of reinsurance ceded by the society.

10

From the amount determined under paragraph 7(1) or (2) above, there shall be deducted the total sum recoverable in respect of that amount under reinsurance contracts ceded.

11

The amount determined under paragraph 10 above shall be expressed as a percentage of the amount determined under paragraph 7(1) or (2) above.

12

The sum arrived at under paragraph 6 above shall be multiplied–

• (a) where the percentage arrived at under paragraph 11 above is greater than 50 per cent but not greater than 100 per cent, by the percentage so arrived at,

• (b) where the percentage so arrived at is greater than 100 per cent, by 100 per cent, and

• (c) in any other case, by 50 per cent.

SCHEDULE 4 — ASSETS TO BE TAKEN INTO ACCOUNT ONLY TO A SPECIFIED EXTENT

PART I

1

A piece of land (not being land held as a security for a debt) or a number of pieces of such land to which in the most recent proper valuation of such pieces of land an aggregate value is ascribed which is greater than the aggregate of the value of each such piece of land valued separately.

2

A debt (other than a listed debenture) due or to become due to the society from any person (not being an individual) which is fully secured on land or a number of such debts all of which are secured on the same land.

3

Debts (other than listed debentures, debts to which regulation 36(2), (3) or (4) above applies, debts of the descriptions specified in paragraph 2 above or paragraph 14 below) which are due or will become due to the society within 12 months of the relevant date (including debts which would become due within that period if the society were to exercise any right to which it is entitled to require payment or repayment of the same) from–

• (a) any one company and any of its connected companies,

4

Debts (other than listed debentures, debts to which regulation 36(2), (3) or (4) above applies, and debts of the description specified in paragraph 2 or 3 above or paragraph 14 below) which will become due to the society from–

• (a) any one company and any of its connected companies

5

Listed equity shares in any one company and any of its connected companies.

6

Listed shares (including listed equity shares but only to the extent that such shares may be taken into account in accordance with paragraph 5 above) and listed debentures in any one company and any of its connected companies.

7

Unlisted shares in any one company and any of its connected companies.

8

Debenture options and share options (including traded options) in any one company and any of its connected companies.

9

Options of the description specified in paragraph 8 above and debts and shares of the descriptions specified in paragraphs 3, 4, 5, 6 and 7 above due or to become due from or held in any one company and any of its connected companies to the extent that such debts and shares and options may be taken into account in accordance with the provisions of those paragraphs.

10

Debts due or to become due to the society from an individual (other than debts of the descriptions specified in regulation 36(2) above, or paragraphs 3(b) and 4(b) above or paragraphs 11 and 14 below).

11

Debts due or to become due to the society from an individual, being debts which are fully secured on any dwelling or any land appurtenant thereto owned or to be purchased by the individual and used or to be used by him for his own residence.

12

Computer equipment.

13

Office machinery (other than computer equipment), furniture, motor vehicles and other equipment.

PART II

14

Amounts recorded in the society’s books as due in respect of contributions or premiums which either–

• (a) have not been paid, or

• (b) have been received by an intermediary on behalf of the society, but have not been paid to the society by the intermediary,

less any rebates, refunds and commission recorded in the society’s books as allowable or payable in respect of any such amounts.

Signed

J. M. Bridgeman — Chief Registrar of Friendly Societies — 10th December 1987

Explanatory note

(This note is not part of the Regulations)

These Regulations implement for friendly societies the relevant provisions of the First Council Directive on the co-ordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of direct life assurance (79/267/EEC), referred to in this Note as “the Life Directive”. The Life Directive affects both insurance companies and (simplifying for the sake of brevity) friendly societies with an annual contribution income from life insurance business of at least 500,000 ECUs, the sterling equivalent of which for 1988 is £345,308 (calculated as from 31 December each year according to the value of the ECU at the end of October in that year). The Life Directive was implemented for insurance companies by primary legislation, now the Insurance Companies Act 1982, and by subordinate legislation, now the Insurance Companies Regulations 1981 (S.I. 1981/1654) and the Insurance Companies (Accounts and Statements) Regulations 1983 (S.I. 1983/1811), as amended.

The Regulations are divided into eight Parts: Part I contains the usual preliminary provisions as to citation, interpretation and application; Part II deals with the authorisation; Part III deals with the regulation of authorised societies—actuarial investigation, solvency margins, matching and localisation, partial transfers of engagements and investment; Part IV provides safeguard measures enabling the Chief Registrar to call for a restoration plan or a short term financial scheme if specified solvency requirements are not met; Part V deals with withdrawal of authorisation; Parts VI and VII set out the rules to be applied in valuing assets and determining liabilities; and Part VIII contains final provisions of a miscellaneous nature.

Part I is largely self-explanatory. Regulation 3 contains the exemptions in the Life Directive which apply to the circumstances of friendly societies and which therefore require specific mention. Once a society has lost an exemption based on its annual contribution income, whether through fluctuation of the value of the ECU or otherwise, the exemption is lost permanently, and the society will remain within the scope of the Life Directive and implementing Regulations, even if its contribution income subsequently drops below the exemption limit.

In Part II, regulation 4 contains the fundamental prohibition on the carrying on of long term business by a society to which the Life Directive applies, unless it is authorised to do so by the Chief Registrar. Regulation 5 provides for existing societies, to which the Regulations apply immediately on their coming into force on 1st January 1988, to be authorised on satisfying the Chief Registrar as to their contribution income and the classes of business that they carry on. This provision also applies to existing societies which cross the contribution income threshold at a later date, except that any class of long term business which was not commenced until after 1st January 1988 will require separate authorisation under regulation 9. The authorisation procedure for new societies is laid down in regulation 6 and Schedule 2. Regulations 7 to 10 contain supplementary provisions as to the scope of an authorisation, extensions of authorisation, the time within which the Chief Registrar must decide on application, and the requirement that he should give reasons when he refuses an authorisation.

In Part III, regulation 11 requires authorised societies to have an annual actuarial investigation for solvency purposes. Regulation 11(6) and (7) allow a period of six months from the end of the year of account for the submission of annual returns and valuation reports. Regulation 12 defines the term “required margin of solvency”. Failure to maintain this margin will make it necessary for a society to submit a plan for the restoration of a sound financial position (see regulation 30). Regulations 13 to 16 set out the required margins for the various classes of long term business, supplementary business being dealt with separately in regulation 17 and Schedule 3. Regulation 18 provides for aggregation where the nature of a society’s business produces more than one solvency margin. Regulation 19 defines the guarantee fund as one-third of the required margin of solvency. The guarantee fund therefore cannot be quantified until that margin has been calculated. Regulation 19 goes on to provide that the guarantee fund shall not be less than the minimum arrived at in accordance with regulation 20. Failure to maintain the minimum guarantee fund makes it necessary for a society to submit a short term financial scheme (see regulation 31). Regulation 19(3) limits the extent to which implicit items may be taken into account in the composition of the guarantee fund and minimum guarantee fund. Implicit items are future surpluses, zillmerising and hidden reserves, and they are covered in regulations 21 to 24. Regulations 25 to 27 (matching and localisation of assets) are necessary to implement the Directive as regards the business some friendly societies do in the Republic of Ireland. Matching means holding assets in a currency appropriate to the society’s liabilities, and localisation means holding those assets in the country appropriate to them. Regulation 28 deals with partial transfers of engagements between societies. Regulation 29 removes the limitations on investment under section 46 of the Friendly Societies Act 1974, so far as authorised societies are concerned.

In Part IV, regulation 30 provides for a plan for the restoration of a sound financial position where a society fails to maintain its margin of solvency required under regulation 12. Regulation 31 provides for a short term financial scheme where a society’s margin of solvency falls below the amount of its guarantee fund (which will be either one-third of its solvency margin, or the amount of its minimum guarantee fund, whichever is the larger).

Part V of the Regulations deals with withdrawal of authorisation. It provides that the Chief Registrar may withdraw a society’s authorisation to do new business, either at the request of the society, or on one of the grounds specified in regulation 32(2). Regulation 33 lays down the procedure to be followed where withdrawal is contemplated otherwise than at the request of the society.

Parts VI and VII are concerned with the valuation of assets and determination of liabilities and are essentially adaptations of Parts V and VI of the Insurance Companies Regulations 1981. Part VI is intended to ensure a satisfactory spread of assets by requiring that any asset, the valuation of which is not provided for in the Regulations, is to be left out of account altogether, and assets of a description specified in Schedule 4 may be taken into account only within the limits specified in that Schedule; this is consistent with similar provisions applying to insurance companies. Part VII contains, in regulation 51, provision for valuation of future premiums by the net premium method, subject to the exclusion of certain types of sickness insurance carried on by Holloway and other societies, to which the net premium method is not appropriate.

Part VIII contains miscellaneous provisions. The Life Directive requires continuous monitoring of the insurance undertakings to which the Directive applies. Regulation 59 therefore contains the necessary powers for the Chief Registrar to obtain information. Regulation 60 extends the Chief Registrar’s powers under the 1974 Act, to enable him to prescribe the form and particulars of valuations and annual returns, required for the purposes of the Regulations and amends the 1974 Act to enable the Treasury to make regulations determining the fees payable for matters to be transacted or for the inspection of documents under these Regulations. Regulation 61 prescribes penalties in respect of contraventions of regulation 4 (restrictions on carrying on business) and offences in connection with the furnishing of information. Regulation 62 contains power for the Chief Registrar to modify the requirements of the Regulations as to annual actuarial valuation; valuation of assets and liabilities; and the solvency margin. These powers are exercisable only in the limited circumstances described in the Regulation. Regulation 63 enables societies to apply to the Chief Registrar for a direction that section 7 of the Industrial Assurance Act 1923 (deposits by collecting societies) should cease to apply to the applicant. Regulation 64 contains provision for the exercise of the Chief Registrar’s functions when he is absent from the country or otherwise unable to exercise them. As a transitional measure, regulation 65 contains a simplified procedure for amendment of the rules of friendly societies to achieve conformity with these Regulations.

Footnotes

[^f00001]: The European Communities (Designation) Order 1984 (S.I. 1984/353).

[^f00002]: 1972 c. 68.

[^f00003]: 1923 c. 8.

[^f00004]: 1974 c. 46.

[^f00005]: OJ No. L379, 30.12.78, p. l.

[^f00006]: 1979 c. 37.

[^f00007]: 1987 c. 22.

[^f00008]: 1964 c. 48.

[^f00009]: 1973 c. 37.

[^f00010]: 1973 c. 65.

[^f00011]: 1985 c. 51.

[^f00012]: 1968 c. 73.

[^f00013]: 1986 c. 53.

[^f00014]: 1965 c. 12.

[^f00015]: 1969 c. 24 (N.I.).

[^f00016]: 1985 c. 6.

[^f00017]: S.I. 1986/1032 (N.I. 6).

[^f00018]: 1986 c. 10.

[^f00019]: 1973 c. 65.

[^f00020]: S.I. 1976/87; the relevant amending instrument was S.I. 1981/725; both instruments were revoked by S.I. 1981/1654.

[^f00021]: S.I. 1974/2203, revoked by S.I. 1976/87.

[^f00022]: 1958 c. 45.

[^f00023]: 1940 c. 9 (N.I.).