The Friendly Societies (Insurance Business) Regulations 1993

• (a) each premium paid increases the benefits (other than benefits arising from a distribution of surplus) provided under the contract, or

• (b) the amount of a premium payable in future is not determinable until it comes to be paid,

future premiums and the corresponding liability may be left out of account so long as adequate provision is made against any risk that the increase in the liabilities of the society resulting from the payment of future premiums might exceed the amount of the premiums.

• (4) The provisions of this regulation do not apply to a contract which is a linked long term contract, a permanent health contract, or a contract whose principal object is permanent health insurance but which contains related and subsidiary provisions for life or birth insurance business.

Acquisition expenses

39

• (1) In order to take account of acquisition expenses, the maximum annual premium to be valued under regulation 38 above may (subject to paragraph (2) below) be increased by an amount not greater than the equivalent, taken over the whole period of premium payments and calculated according to the rates of interest and rates of mortality or disability employed in valuing the contract, of 3.5 per cent (or the defined percentage, if it is lower than 3.5 per cent) of the relevant capital sum under the contract.

• (2) For the purposes of paragraph (1) above “the defined percentage” is the percentage arrived at by taking (for all contracts of the same type as the contract in question for which an adjustment is made) the average of the percentages of the relevant capital sum under each such contract that represent the acquisition costs for which, after allowing for the effects of taxation, allowance is made in the premiums.

• (3) The increase permitted by paragraph (1) above shall be subject to the limitation that the amount of a future premium valued shall not in any event be greater than the amount of the premium actually payable by the policyholder.

• (4) For the purposes of this regulation—

• (a) for contracts other than temporary assurances, the relevant capital sum under a contract shall be arrived at in accordance with regulation 10(4) above, and

• (b) for temporary assurances, the relevant capital sum shall be the sum assured on the valuation date.

Rates of interest

40

• (1) In determining the rates of interest to be used in calculating the present value of future payments by or to a society, regard shall be had to the yields on the existing assets attributed to the long term business and, to the extent appropriate, to the yield which it is expected will be obtained on sums to be invested in the future.

• (2) For the purposes of paragraph (1) above, the assumed yield on an asset attributed to the long term business, before any adjustment to take account of the effect of taxation, shall not exceed the yield on that asset calculated in accordance with paragraphs (3) to (6) below, reduced by 7.5 per cent of that yield.

• (3) For the purpose of calculating the yield on an asset—

• (a) the asset shall be valued in accordance with Part IV of these Regulations, excluding any provision under which assets may be taken at lower book values for the purposes of an investigation to which section 46 of the 1992 Act applies; and

• (b) where a particular asset is required to be taken into account only to a specified extent by the operation of regulation 31 above, the future income to be taken into account (whether interest, dividends or repayments of capital) shall be correspondingly reduced.

• (4) For fixed interest investments (that is to say, investments which are fixed interest securities as defined in regulation 19(1) above) the yield on an asset, subject to paragraph (6) below, shall be that annual rate of interest which, if used to calculate the present value of future payments of interest before the deduction of tax and the present value of repayments of capital, would result in the sum of those amounts being equal to the value of the asset.

• (5) For variable interest investments (that is to say, investments which are not fixed interest securities as defined in regulation 19(1) above) the yield on an asset, subject to paragraph (6) below, shall be the ratio to the value of the asset of the income before deduction of tax which would be received in the period of 12 months following the valuation date on the assumption that the assets will be held throughout that period and that the factors which affect income will remain unchanged, so however that account shall be taken of any changes in those factors known to have occurred by the valuation date and in particular, without prejudice to the generality of the foregoing, of—

• (a) any known changes in the rental income from property or in dividends on equity shares,

• (b) any forecast changes in dividends which have been publicly announced by the valuation date,

• (c) the effect of any alterations in capital structure, and

• (d) the value (at the most recent date for which it is known at the valuation date) of any determinant of the amount of any future interest payment, the said value being deemed to remain unaltered for all subsequent dates.

• (6) In calculating the yield on an asset under this regulation—

• (a) if the asset does not consist of equity shares or land—

• (i) an adjustment shall be made to exclude that part of the yield estimated to represent compensation for the risk that the income from the asset might not be maintained or that capital repayments might not be received as they fall due, and

• (ii) in making that adjustment, regard shall be had wherever possible to the yields on risk-free investments of a similar term in the same currency;

• (b) for assets which are equity shares or land, adjustments to yields shall be made as appropriate to exclude that part, if any, of the total yield from those assets, taken together, that is needed to compensate for the risk that the aggregate income from those assets taking one year with another might not be maintained, so however that the yield assumed on an asset shall not be greater than that on British Government 2½ per cent Consolidated Stock on the valuation date.

• (7) To the extent that it is necessary to make an assumption about the yields which will be obtained on sums to be invested in future, the yield assumed on any investment to be made more than three years after the valuation date shall not exceed 7.2 per cent per annum before any adjustment to take account of the effect of taxation.

• (8) In no case shall a rate of interest determined for the purposes of paragraph (1) above exceed the adjusted overall yield on assets calculated as the weighted average of the reduced yields on the individual assets arrived at under paragraph (2) above; and when that weighted average is calculated—

• (a) the weight given to each investment shall be its value as an asset determined in accordance with Part IV of these Regulations, excluding any provision under which assets may be taken at lower book values for the purposes of an investigation to which section 46 of the 1992 Act applies, and

• (b) except in relation to the rate of interest used in valuing payments of property linked benefits (as defined in regulation 19(1) above), both the yield and the value of any linked assets (as so defined) shall be omitted from the calculation.

• (9) For the purpose of determining the rates of interest to be used in valuing a particular category of contracts the assets may, where appropriate, be notionally apportioned between different categories of contracts and in such cases the limit under paragraph (8) above shall be applied on the basis of the overall yield on the assets apportioned to the contracts in question.

Rates of mortality and disability

41

The amount of the liability in respect of any category of contract shall, where relevant, be determined on the basis of appropriate rates of mortality and disability that take into account—

• (a) relevant published tables of rates of mortality and disability, and

• (b) the rates of mortality and disability experienced in connection with any similar contracts issued by the society in the past.

Expenses

42

• (1) Provision shall be made for meeting the expenses likely to be incurred in future in fulfilling the existing contracts, taking account of the effect of taxation as appropriate, but credit may be taken to the extent appropriate for the fractions of future premiums left out of account pursuant to regulation 38(1) above.

• (2) The provision mentioned in paragraph (1) above shall have regard to, among other things, the society’s actual expenses in the last twelve months before the valuation date and the contingency that the society may cease to transact new business.

Options

43

• (1) Provision shall be made to cover any increase in liabilities caused by policyholders exercising options under their contracts.

• (2) Where a contract includes an option whereby the policyholder could secure a guaranteed cash payment within twelve months following the valuation date, the provision for that option shall be such as to ensure that the value placed on the contract is not less than the amount required to provide for the payments that would have to be made if the option were exercised.

Contracts not to be treated as assets

44

No contract for long term business shall be treated as an asset.

No credit for profits from voluntary discontinuance

45

Allowance shall not be made in the valuation for the voluntary discontinuance of any contract if the amount of the liability so determined would thereby be reduced.

PART VI — LINKED LONG TERM CONTRACTS

Application: Part VI

46

This Part of these Regulations shall apply to any incorporated friendly society which has entered into contracts to which regulation 47(3) below applies including any such contracts entered into before the coming into force of these Regulations.

Linked long term contracts

47

• (1) Benefits payable under any contract to which this regulation applies shall not be determined, either wholly or partly, by reference to the value of, or the income from, or fluctuations in the value of, property of any description other than—

• (a) property of any of the descriptions specified in Part I of Schedule 6, or

• (b) property which was property of any of the descriptions specified in paragraphs 1 to 10 of Part I of Schedule 6 when it first became a property by reference to which benefits under that contract, or under any contract of a similar description to that contract, were to be determined, and which ceased to conform with that description not more than fifteen months previously.

• (2) Benefits payable under any contract to which this regulation applies shall not be determined, either wholly or partly, by reference to fluctuations in any index of the value of property other than an index described in Part II of Schedule 6.

• (3) This regulation applies to long term contracts entered into by societies which—

• (a) are contracts under which the benefits payable to the policyholder 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 contract) or by reference to fluctuations in, or in an index of, the value of property of any description (whether or not so specified); and

• (b) are not contracts specified in paragraph (4) below as being contracts to which this regulation does not apply.

• (4) The contracts referred to in paragraph (3)(b) above to which this regulation does not apply are—

• (a) contracts with any policyholder who is a person not ordinarily resident in the United Kingdom;

• (b) contracts under or relating to a retirement benefits scheme (whether evidenced by deed, agreement or series of agreements or other arrangement) not being a scheme whereby—

• (i) the benefit is assured by means of one or more contracts;

• (ii) each contract provides in respect of each member of the scheme separate assurance, the proceeds of which are to go to that member at least to the extent that they are not greater than the benefits to which he is entitled at normal pension age;

• (iii) the premium payable under each contract in respect of each member is payable at least annually; and

• (iv) the amount of the premium (expressed as an annual rate) remains unchanged except in consequence of the declaration of a bonus or a change in the premium rate of the society;

• (c) contracts entered into before the date of coming into force of these Regulations providing for benefits which would, if they had become due for payment on that date, have been wholly or partly determined either—

• (i) by reference to the value of, or the income from or fluctuations in the value of, property of any description other than a description specified in Part I of Schedule 6, or

• (ii) by reference to fluctuations in an index of the value of property other than an index specified in Part II of Schedule 6,

providing that the Commission has altered the requirements of paragraphs (1), (2) or (3) above in relation to such contracts in accordance with section 56(4) of the 1992 Act.

• (5) In this regulation “retirement benefits scheme” means a scheme for the provision to a member of the scheme or his wife or widow, children, dependants or personal representatives of any pension, annuity, lump sum, gratuity or other like benefit given or to be given on retirement or on death, or in anticipation of retirement, or, in connection with past service, after retirement or death, except that it does not include any benefit which is to be afforded solely by reason of the disablement by accident of a member occurring during his service or of his death by accident so occurring and for no other reason.

• (6) Any reference in this regulation to contracts of a similar description to any specified contract is a reference to contracts which correspond with that contract in both the following respects—

• (a) the provisions defining the descriptions of property or indices by reference to which the benefits payable thereunder are to be determined are the same as in that contract; and

• (b) the society or other person undertaking to pay the benefits provided for thereunder is the same as in that contract.

PART VII — MISCELLANEOUS

Annual actuarial investigation: prescribed societies

48

Any incorporated friendly society carrying on long term business other than a society to which section 37(2) of the 1992 Act applies is prescribed for the purposes of section 46(1)(b) of the 1992 Act and accordingly shall, once in every period of 12 months, cause an investigation to be made by the appropriate actuary into the financial condition of the society in respect of its long term business in accordance with section 46 of that Act.

Annual investigation: signature of copy of abstract

49

• (1) For the purposes of section 46(3) of the 1992 Act (signature of a copy of an abstract of an actuary’s report), one copy of the abstract of the actuary’s report shall be signed by the following persons:

• (a) the actuary who prepared the report;

• (b) the chief executive;

• (c) the secretary; and

• (d) subject to paragraph (2) below, one member of the committee of management.

• (2) Where the offices of chief executive and secretary are held by the same person, the copy of the abstract shall be signed, in addition to the persons referred to in paragraphs (1)(a) and (b) above, by two members of the committee of management.

SCHEDULE 1 — LONG TERM BUSINESS MARGIN OF SOLVENCY

Long term classes I and II

1

• (1) For long term business of class I or II the required margin of solvency shall be determined by taking the aggregate of the results arrived at by applying the calculation described in paragraph (2) below (“the first calculation”) and the calculation described in paragraphs (3), (4) and (5) below (“the second calculation”).

• (2) For the first calculation—

• (a) there shall be taken a sum equal to 4 per cent of the mathematical reserves for direct business and reinsurance acceptances without any deduction for reinsurance cessions;

• (b) the amount of the mathematical reserves at the end of the last preceding financial year after the deduction of reinsurance cessions shall be expressed as a percentage of the amount of those mathematical reserves before any such deduction; and

• (c) the sum mentioned in subparagraph (a) above shall be multiplied—

• (i) where the percentage arrived at under subparagraph (b) above is greater than 85 per cent, by that greater percentage, and

• (ii) in any other case, by 85 per cent.

• (3) For the second calculation—

• (a) there shall be taken, subject to paragraphs (4) and (5) below, a sum equal to 0.3 per cent of the capital at risk for contracts on which the capital at risk is not a negative figure;

• (b) the amount of the capital at risk at the end of the last preceding financial year for contracts on which the capital at risk is not a negative figure, after the deduction of reinsurance cessions, shall be expressed as a percentage of the amount of that capital at risk before any such deduction; and

• (c) the sum arrived at under subparagraph (a) above shall be multiplied—

• (i) where the percentage arrived at under subparagraph (b) above is greater than 50 per cent, by that greater percentage, and

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

• (4) Where a contract provides for benefits payable only on death within a specified period and is valid for a period of not more than three years from the date when the contract was first made, the percentage to be taken for the purposes of paragraph (3)(a) above shall be 0.1 per cent; and where the period of validity from the date is more than three years but not more than five years, the percentage to be so taken shall be 0.15 per cent.

• (5) For the purposes of paragraph (4) above, the period of validity of the contract evidencing a group policy is the period from the date when the premium rates under the contract were last reviewed for which the premium rates are guaranteed.

• (6) For the purposes of the second calculation, the capital at risk is—

• (a) in any case in which an amount is payable in consequence of death other than a case falling within subparagraph (b) below, the amount payable on death, and

• (b) in any case in which the benefit under the contract in question consists of the making, in consequence of death, of the payment of an annuity, payment of a sum by instalments or any other kind of periodic payments, the present value of that benefit,

less in either case the mathematical reserves in respect of the relevant contracts.

• (7) When the amount of the mathematical reserves referred to in paragraph (2)(a) above, or the amount of the capital at risk referred to in paragraph (3)(a) above, is to be calculated for the purposes of determining the required margin of solvency, the day as on which that amount is calculated shall be the same as that on which the margin of solvency is determined; and the mathematical reserves referred to in paragraph (6) above shall also be calculated as on that day when the capital at risk in question is that referred to in paragraph (3)(a) above, but shall be calculated as at the end of the last preceding financial year when the capital at risk in question is that referred to in paragraph (3)(b) above.

Long term classes III and VII

2

• (1) For long term business of class III or VII the required margin of solvency shall be determined in accordance with paragraphs (2) to (5) below.

• (2) In so far as a society bears an investment risk, the first calculation shall be applied.

• (3) In so far as—

• (a) a society bears no investment risk, and

• (b) the total expired and unexpired term of the relevant contract exceeds five years, and

• (c) the allocation to cover management expenses in the relevant contract has a fixed upper limit which is effective as a limit for a period exceeding five years,

the first calculation shall be applied, but as if paragraph 1(2)(a) above contained a reference to one per cent instead of four per cent.

• (4) If neither paragraph (2) nor paragraph (3) above applies, then, subject to paragraph (5) below, the required margin of solvency is zero.

• (5) Where a society covers a death risk, a sum arrived at by applying the second calculation disregarding paragraph 1(4) and (5) shall be added to any required margin of solvency, including a required margin of solvency of zero, arrived at under paragraph (2), (3) or (4) above.

Long term classes IV and VI

3

For long term business of class IV or VI the required margin of solvency shall be determined by applying the first calculation.

Long term class V

4

For long term business of class V the required margin of solvency shall be equal to one per cent of the assets of the relevant tontine.

SCHEDULE 2 — GENERAL BUSINESS SOLVENCY MARGIN: FIRST METHOD OF CALCULATION (PREMIUM BASIS)

1

In this Schedule—

• “gross premiums”, in relation to a society and a financial year— means premiums after 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, and includes premiums receivable by the society under reinsurance contracts accepted by the society;

• “receivable”, in relation to a society, a financial year 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 financial year, whether or not the society has received the premium;

• “recoverable”, in relation to a society and a financial year, 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 general business for the last preceding financial year 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 financial year 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 financial year.

5

If the amount arrived at under paragraph 4 above is more than 10 million ECU, it shall be divided into two portions, the former consisting of 10 million ECU 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

In the case of general business consisting of health insurance based on actuarial principles, paragraph 6 above shall apply with the substitution of “6 per cent” for “18 per cent” and “5⅓ per cent” for “16 per cent”, but only if all the necessary conditions are satisfied.

8

For the purposes of paragraph 7 above, the necessary conditions are as follows, that is to say—

• (a) the gross premiums receivable shall be calculated on the basis of sickness tables appropriate to insurance business;

• (b) the reserves shall include provision for increasing age;

• (c) an additional premium shall be collected in order to set up a safety margin of an appropriate amount;

• (d) it shall not be possible for the society to cancel the contract after the end of the third year of insurance;

• (e) the contract shall provide for the possiblity of increasing premiums or reducing payments during its currency.

9

Where paragraph 7 above applies to a society whose general business consists partly of health insurance based on actuarial principles and partly of other business, the procedure provided in paragraphs 2 to 7 above shall operate separately for each part of the general business, so as to produce a sum under paragraph 7 above for the health insurance and a sum under paragraph 6 above for the other business.

10

• (1) If the provision for claims outstanding at the end of the last preceding financial year 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 financial year.

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

11

• (1) For the purposes of paragraph 10 above, the amount of claims paid, in relation to a society and a financial year, is the amount that is recorded in the society’s books at the end of the financial year 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 subparagraph (2) below, and

• (b) the expenses described in subparagraph (3) below,

less any recoverable amounts within the meaning of subparagraph (4) below.

• (2) The claims mentioned in subparagraph (1) above are claims under contracts of insurance (and under contracts of reinsurance accepted by the society) including claims relating to business accounted for over a longer period than a financial year.

• (3) The expenses mentioned in subparagraph (1) above are expenses (such as, for example, legal or medical costs) which are 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 subparagraph (1) above.

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

12

• (1) For the purposes of paragraph 10 above, the provision for claims outstanding, in relation to a society and a financial year, is (subject to any applicable valuation regulations in Part IV of these Regulations) the amount set aside by the society as at the beginning or end of the financial year as being an amount likely to be sufficient to meet—

• (a) the claims described in subparagraph (2) below, and

• (b) the expenses described in subparagraph (3) below,

less any recoverable amounts within the meaning of subparagraph (4) below.

• (2) The claims mentioned in subparagraph (1) above are claims under contracts of insurance in respect of incidents occurring—

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

• (b) in the case of an amount set aside as at the end of a financial year, 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 financial year, 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 subparagraph (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 subparagraph (1) above.

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

13

From the amount determined under paragraph 10(1) or (2) above there shall be deducted the total sum recoverable in respect of that amount under reinsurance contracts ceded.

14

The amount determined under paragraph 13 above shall be expressed as a percentage of the amount determined under paragraph 10(1) or (2) above.

15

The sum arrived at under paragraph 6 or 7 above or the aggregate of the sums arrived at under those paragraphs, as the case may be, shall be multiplied—

• (a) where the percentage arrived at under paragraph 14 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 3 — GENERAL BUSINESS SOLVENCY MARGIN: SECOND METHOD OF CALCULATION (CLAIMS BASIS)

1

In this Schedule “reference period”, in relation to a society, means the three last preceding financial years.

2

If a society has not been in existence long enough to acquire a reference period, this Schedule shall be deemed to give a lower result than that given by Schedule 2 and shall otherwise not apply to the society.

3

• (1) If the provision for claims outstanding at the end of the reference period exceeds the provision for claims outstanding at the beginning of the reference period, the amount of the excess shall be added to the amount of claims paid in the reference period.

• (2) If the provision for claims outstanding at the beginning of the reference period exceeds the provision for claims outstanding at the end of the reference period, the amount of the excess shall be deducted from the amount of claims paid in the reference period.

• (3) For the purposes of this paragraph, the expressions “amount of claims paid” and “provision for claims outstanding” have, in relation to a reference period, the same meaning as they have in paragraph 10 of Schedule 2 in relation to a financial year.

4

The aggregate obtained under paragraph 3(1) or (2) above shall be divided by the number of months in the reference period and multiplied by twelve.

5

If the amount arrived at under paragraph 4 above is more than 7 million ECU, it shall be divided into two portions, the former consisting of 7 million ECU and the later 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 26 per cent and 23 per cent of the two portions respectively; and where there has been no such division, there shall be calculated 26 per cent of the amount arrived at under paragraph 4 above.

7

In the case of general business consisting of health insurance based on actuarial principles, paragraph 6 above shall apply with the substitution of “8⅔ per cent” for “26 per cent” and “7⅔ per cent” for “23 per cent”, but only if all the necessary conditions are satisfied.

8

The necessary conditions for the purposes of paragraph 7 above are the same as those set out in paragraph 8 of Schedule 2.

9

In a case of the kind mentioned in paragraph 9 of Schedule 2, that paragraph shall apply (with the necessary modifications) so as to produce separate sums under paragraphs 6 and 7 above.

10

The sum arrived at under paragraph 6 or 7 above or the aggregate of the sums arrived at under those paragraphs, as the case may be, shall be multiplied by the same percentage as is applicable for the purposes of paragraph 15 of Schedule 2.

SCHEDULE 4 — VALUE OF DEPENDANTS

PART I — THE SUPPLEMENTARY AMOUNT

1

Subject to paragraph 2(1) below, the supplementary amount in relation to assets of a relevant description held by a dependant of the society shall be determined in accordance with the following formula—

$$A=B×DC$ in which— A is the supplementary amount; B is the amount by which the value of assets of that description held by the dependant, excluding any long term business assets of the dependant if it is an insurance company, exceeds the permitted limit applicable to the dependant in relation to those assets; C is the aggregate of the amount specified in B above and of the amounts by which the value of assets of the same description held by other relevant dependants, excluding any long term business assets of a dependant which is an insurance company, exceeds respectively the permitted limits applicable to such other relevant dependants in relation to those assets; D is— where the society holds no assets of the same description of the relevant class, the amount of the permitted limit that would be applicable to the society in relation to such assets were it to hold them; and where the society holds assets of the same description of the relevant class, the amount by which the permitted limit applicable to the society in relation to those assets exceeds the value of those assets.$

2

• (1) Where for the purpose of determining any supplementary amount in accordance with paragraph 1 above the society cannot reasonably ascertain—

• (a) the value of any asset of a relevant dependant, or

• (b) the amount of the permitted limit applicable in relation to any asset of a relevant dependant,

the asset in question shall be left out of account for that purpose.

• (2) In this Part of this Schedule—

• “relevant dependant” means— where this Schedule is being applied in relation to the determination of the value of a share in, or debt due or to become due from, a dependant of the society which is a long term business asset of the society, any dependant of the society— a share in which, or in any body (whether incorporated or not) of which it is a jointly controlled body, is a long term business asset of the society, or from which a debt is due, or will become due, to the society which is a long term business asset of that society; and in any other case, any dependant of the society— a share in which, or in any body (whether incorporated or not) of which it is a jointly controlled body, is a general business asset of the society, or from which a debt is due, or will become due, to the society which is a general business asset of that society.

PART II — FURTHER PROVISIONS AND MODIFICATIONS OF THE REGULATIONS APPLICABLE WITH RESPECT TO THE DETERMINATION OF THE VALUE OF DEPENDANTS

3

• (1) This paragraph applies where, for the purpose of ascertaining the value of the assets of the subject company under regulation 22 above, any determination falls to be made in accordance with regulation 22 of the value of the assets of a dependant of the society, a share in which, or a debt due or to become due from which, is an asset of the subject company; and references herein to a determination of the value of assets of a dependant to which this paragraph applies are references to any such determination.

• (2) Regulation 22(4) shall not apply with respect to a determination of the value of assets of a dependant to which this paragraph applies.

• (3) Where, in the case of a determination of the value of assets of a dependant to which this paragraph applies—

• (a) the dependant is an insurance company and has general business assets of a relevant description or is not an insurance company and has assets of a relevant description,

• (b) the value of such assets exceeds the permitted limit applicable to the dependant in relation to those assets, and

• (c) any controller of the dependant has no assets of the same description of the relevant class, or has assets of the same description of the relevant class and their value is less than the permitted limit applicable to that controller in relation to those assets;

then, for the purposes of such determination, there shall be added to the permitted limit applicable to the dependent in relation to the assets referred to in subparagraph (a) above an amount equal to the supplementary amount or, if there is more than one such controller, to the aggregate of the supplementary amounts, determined with respect to any such controller in accordance with Part I of this Schedule, subject where the controller is not the society, to the modifications specified in subparagraph (5) below.

• (4) In this paragraph, “a controller” means, in relation to a dependant—

• (a) the society, and

• (b) the subject company, if it is an insurance company.

• (5) Where subparagraph (3) above is being applied in relation to a controller, other than the society—

• (a) Part I of this Schedule, as applied in accordance with the said subparagraph (3), shall have effect as if, for the reference to the society, there were substituted references to the controller, and

• (b) the references to assets being of a relevant class in the said subparagraph (3) and in Part I of this Schedule, as so applied, shall be construed as referring to long term business assets of the controller, if subparagraph (3) is being applied in connection with the determination of the value of a long term business asset of the controller, and to general business assets of the controller, in any other case.

4

The modifications of these Regulations applicable (in addition to that specified in paragraph 3(2) above) with respect to the determination of the value of the assets of the subject company where it is not an insurance company are as follows—

• (a) these Regulations shall apply to the subject company as if it were an insurance company and its assets were being valued for the purpose specified in regulation 38(1) of the 1981 Regulations;

• (b) regulation 38(2) of the 1981 Regulations shall not apply; and

• (c) regulation 49 of those Regulations shall not apply.

5

In this Schedule, “subject company” means the dependant of the society the value of whose assets is being determined in accordance with regulation 22(2) or (3) (as the case may be).

SCHEDULE 5 — 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 or a dependant of the society) 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 23(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 (not being a dependant of the society),

4

Debts (other than listed debentures, debts to which regulation 23(2), (3) or (4) above applies, and debts of the descriptions 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 (not being a dependant of the society),

5

Listed equity shares in any one company and any of its connected companies (not being a dependant of the society).

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 (not being a dependant of the society).

7

Unlisted shares in any one company and any of its connected companies (not being a dependant of the society).

8

Debenture options and share options (including traded options) in any one company and any of its connected companies (not being a dependant of the society).

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 23(2) above, or paragraph 3(b) or 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—

PART III

15

In this Schedule, a company is a connected company of another company if it is—

• (a) a subsidiary of that other company, or

• (b) the holding company of that other company, or

• (c) a subsidiary of the holding company of that other company.

16

In this Schedule, references to “subsidiary” and “holding company” shall have the same meanings as they have for the purposes of the 1981 Regulations as defined in regulation 2 of those Regulations.

17

In this Schedule, a debt is fully secured on land if the amount that would be realised on the sale of that land at a price equal to the most recent proper valuation of that land would (after deducting the reasonable expenses of sale) be sufficient to enable that debt (and any other obligation secured on that land which has priority to or ranks equally with that debt) to be discharged in full.

SCHEDULE 6 — PERMITTED LINKS

PART I — DESCRIPTIONS OF PROPERTY BY REFERENCE TO WHICH BENEFITS MAY BE DETERMINED

1

Securities (other than traded options) listed on any recognised stock exchange specified in paragraph 16 of this Schedule.

2

Securities of a company in which dealings on the exchange are allowed by an exchange which is a recognised investment exchange within the meaning of the Financial Services Act 1986[^f00022] or which are dealt in on a regulated market in another member State which operates regularly and is recognised and open to the public.

3

Securities traded on the over-the-counter market in the United States of America regulated by the National Association of Securities Dealers.

4

Securities of the following governments: the government of Canada or of any province of Canada, the government of the United States of America or of any state of the United States of America.

5

Land (including any interest in land) in Australia, Austria, Belgium, Canada, the Channel Islands, Denmark, the Federal Republic of Germany, Finland, France, Gibraltar, Greece, Hong Kong, Iceland, The Republic of Ireland, Italy, the Isle of Man, Liechtenstein, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, the Republic of South Africa, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States of America.

6

Loans—

• (a) which are fully secured by mortgage or charge on land (or any interest in land) which—

• (i) is situated in any of the countries specified in paragraph 5 above, and

• (ii) in the case of a loan made to a person other than a body corporate, is not used wholly or mainly for domestic purposes, and

• (b) of which the rate of interest and the due dates for the payment of interest and the repayment of principal can be fully ascertained from the terms of any agreement relating to the loan.

7

Units in an authorised unit trust scheme or a recognised scheme within the meaning of section 207(1) of the Financial Services Act 1986.

8

Loans to, shares in, and deposits with, a building society within the meaning of the Building Societies Act 1986[^f00023].

9

Loans to or deposits with Her Majesty’s Government in the United Kingdom or any public or local authority or nationalised industry or undertaking in the United Kingdom.

10

Loans to, deposits with (including certificates of deposits issued by), amounts standing to the credit of any account with and bills of exchange accepted by any of the following being, in any case, in the currency of any country,

• the Bank of England;

• the National Savings Bank;

• an institution authorised or deemed to be authorised under the Banking Act 1987[^f00024] or a European deposit-taker within the meaning of the Banking Coordination (Second Council Directive) Regulations 1992[^f00025];

• the European Atomic Energy Community;

• the European Bank for Reconstruction and Development;

• the European Economic Community;

• the International Bank for Reconstruction and Development;

• the International Finance Corporation;

• the International Monetary Fund;

• the Inter-American Development Bank;

• the African Development Bank;

• the Asian Development Bank;

• the Caribbean Development Bank;

• the European Investment Bank.

11

Income due or to become due in respect of property of any of the descriptions specified in the foregoing paragraphs of this Schedule.

12

Cash.

PART II — INDICES BY REFERENCE TO WHICH BENEFITS MAY BE DETERMINED

13

The Financial Times Industrial Ordinary Stock Index.

14

The Financial Times Actuaries Share Indices jointly compiled by the Financial Times, the Institute of Actuaries and the Faculty of Actuaries.

15

The Financial Times-Stock Exchange 100 Share Index.

PART III

16

In this Schedule “recognised stock exchange” means any of the following—

• (a) any stock exchange in any of the countries specified below which is a stock exchange within the meaning of the law of that country relating to stock exchanges—

• Austria; Belgium; Brazil; Greece; Iceland; Republic of Ireland; Italy; Japan; Liechtenstein; Luxembourg; Mexico; Netherlands; New Zealand; Norway; Portugal; Spain; Sweden; Switzerland;

• (b) the Stock Exchange; the Copenhagen Stock Exchange; the Helsinki Stock Exchange; the Johannesburg Stock Exchange; the Kuala Lumpur Stock Exchange; the Singapore Stock Exchange;

• (c) any stock exchange in Australia which is a member of the Australian Associated Stock Exchanges, being a prescribed stock exchange within the meaning of Australian law relating to stock exchanges;

• (d) any stock exchange prescribed for the purposes of the Canadian Income Tax Act;

• (e) any stock exchange approved under the laws relating to stock exchanges in the Federal Republic of Germany;

• (f) any stock exchanges set up in France in accordance with the French legislation;

• (g) any stock exchange in Hong Kong which is recognised under the laws of Hong Kong;

• (h) any exchange registered with the Securities and Exchange Commission of the United States as a national securities exchange.

17

For the purposes of this Schedule the expression “traded option” does not include an option granted by the company to the securities of which the option relates, but otherwise means any traded option, whether within the meaning of regulation 19(1) above or not.

Signed

In witness whereof the common seal of the Friendly Societies Commission is hereunto fixed, and is authenticated by me, a person authorised under paragraph 13 of Schedule 1 to the Friendly Societies Act 1992, on

Michael Cook — Secretary to the Commission — 18th January 1993.

We consent to regulations 1-11 and 19-49.

Irvine Patnick — Nicholas Baker — Two of the Lords Commissioners of Her Majesty’s Treasury — 21st January 1993

Explanatory note

(This note is not part of the Regulations)

The Friendly Societies Act 1992 (“the 1992 Act”) provides for the establishment of a new type of friendly society, the incorporated friendly society. These Regulations apply to incorporated friendly societies which carry on insurance business. They do not apply to friendly societies which remain registered under the Friendly Societies Act 1974.

These Regulations implement for incorporated friendly societies provisions of (a) 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, Directive 79/267/EEC (O.J. No. L63, 13.3.79, p.1); (b) 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 insurance other than life assurance, Directive 73/239/EEC (O.J. No. L228, 16.8.73, p.3); and (c) the Second Council Directive on the co-ordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance and laying down provisons to facilitate the effective exercise of freedom to provide services and amending Directive 73/239/EEC, Directive 88/357/EEC (O.J. No. L172, 4.7.88, p.1).

The Regulations are divided into seven Parts: Part I contains the usual preliminary provisions as to citation and interpretation; Part II deals with margins of solvency; Part III deals with matching and localisation; Parts IV and V set out the rules to be applied in valuing assets and determining liabilities; Part VI makes special provision for linked long term contracts; and Part VII contains final provisions of a miscellaneous nature.

Part I is largely self-explanatory. Regulation 1 provides that the Regulations apply to incorporated societies from 19th February 1993.

In Part II, regulation 4 deals with the margins of solvency to be maintained by incorporated friendly societies. Regulation 4 is made under section 48 of the 1992 Act, which provides for the amount of the margin to be prescribed by or determined in accordance with regulations. The margin for the various classes of long term business is to be determined in accordance with the detailed rules in Schedule 1. The margin for general business is the higher of the results given by the methods of calculation set out in Schedules 2 and 3 respectively. Regulation 5, which is made under section 49 of the 1992 Act, sets out the minimum level of the margin of solvency. Regulation 5 refers to that level as the “guarantee fund” which is defined as one-third of the required margin of solvency subject in any event to a minimum amount referred to as the “minimum guarantee fund”. The minimum guarantee fund is arrived at in accordance with regulation 6 with respect to long term business and regulation 7 for general business. The guarantee fund therefore cannot be quantified until the required margin of solvency has been calculated. If the margin of solvency falls below the guarantee fund, the Commission may request the society concerned to submit a short-term financial scheme to restore the position (section 49 of the 1992 Act). Regulation 5(3) limits the extent to which implicit items may be taken into account in the composition of the guarantee fund and minimum guarantee fund for long term business. Implicit items are future surpluses, zillmerising and hidden reserves, as provided in regulations 8-11 which are valuation regulations made under section 45 of the 1992 Act.

Regulations 12 to 18 in Part III are necessary to implement the above-mentioned directives as regards matching and localisation. 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.

Parts IV and V are valuation regulations made under section 45 of the 1992 Act. They are essentially adaptations of Parts V and VI of the Insurance Companies Regulations 1981. Part IV 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 5 may be taken into account only within the limits specified in that Schedule; this is consistent with similar provision applying to insurance companies. Regulations 21 and 22 make provision for valuation of shares in and debts due from dependants. Dependants are defined as subsidiaries of, or bodies jointly controlled by, an incorporated friendly society within the meaning of section 13 of the 1992 Act. Part V contains, in regulation 38, 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.

In Part VI, regulation 47 makes provision for all long term linked contracts entered into by incorporated societies (including those entered into prior to the coming into force of these Regulations) other than contracts expressly excluded by regulation 47(4) and is made under section 56 of the 1992 Act.

Part VII contains miscellaneous provisions. Regulation 48 (in conjunction with section 46(1)(a) of the 1992 Act) ensures that all incorporated societies carrying on long term business are required to carry out annual actuarial investigations into their financial condition. Regulation 49 prescribes the persons required to sign one copy of the abstract of the actuary’s report for the purposes of section 46(3) of the 1992 Act.

Footnotes

[^f00001]: 1972 c. 68.

[^f00002]: The European Communities (Designation) (No. 5) Order 1992 (S.I. 1992/3197).

[^f00003]: 1992 c. 40; section 119(1) contains a definition of “the Commission”.

[^f00004]: 1974 c. 46.

[^f00005]: 1982 c. 50.

[^f00006]: S.I. 1981/1654 amended by S.I. 1981/1655, 1982/675, 1983/48, 1983/396, 1985/1419, 1987/2130, 1988/673, 1990/1181, 1990/1333. 1991/1999, 1991/2511, 1992/445, 1992/2890.

[^f00007]: S.I. 1987/2132.

[^f00008]: 1923 c. 8.

[^f00009]: 1987 c. 22.

[^f00010]: S.I. 1992/3218.

[^f00011]: 1964 c. 48.

[^f00012]: 1985 c. 51.

[^f00013]: 1968 c. 73.

[^f00014]: 1986 c. 53.

[^f00015]: 1965 c. 12.

[^f00016]: 1969 c. 24 (N.I.).

[^f00017]: 1986 c. 10.

[^f00018]: 1973 c. 65.

[^f00019]: S.I. 1976/87; the relevant amending instrument was S.I. 1981/725; both instruments were revoked by S.I. 1981/1654.

[^f00020]: S.I. 1974/2203, revoked by S.I. 1976/87.

[^f00021]: 1986 c. 60.

[^f00022]: 1986 c. 60.

[^f00023]: 1986 c. 53.

[^f00024]: 1987 c. 22.

[^f00025]: S.I. 1992/3218.