• PINS Part 4.4 PINS Part 4.4 Components of capital: tier 2

    Editorial changes (as from 1 January 2015).

    • PINS 4.4 Guidance

      1. Tier 2 capital consists of instruments that, to varying degrees, fall short of the quality of tier 1 capital but nonetheless contribute to the overall strength of an insurer. Such instruments include some forms of hybrid capital instruments that have the characteristics of both equity and debt, that is they are structured like debt, but exhibit some of the loss absorption and funding flexibility features of equity.
      2. Tier 2 capital is divided into upper tier 2 capital and lower tier 2 capital. A major distinction between upper tier 2 capital and lower tier 2 capital is that only perpetual instruments may be included in upper tier 2 capital whereas dated instruments are included in lower tier 2 capital.
      Amended by QFCRA RM/2012-5 (as from 1st July 2013).

    • PINS 4.4.1 PINS 4.4.1 Perpetual qualifying hybrid capital instruments

      An insurer may only include perpetual qualifying hybrid capital instruments as part of its upper tier 2 capital if:

      (a) they are unsecured, subordinated and fully paid-up;
      (b) they are perpetual; and
      (c) they are available to absorb losses on a going concern basis.
      Editorial changes (as from 1 January 2015).

      • PINS 4.4.1 Guidance

        A perpetual cumulative preference share is an example of a capital instrument that would meet the criteria of PINS Rule 4.4.1.

        Derived from QFCRA RM01/2006 (as from 1st October 2006)

    • PINS 4.4.2 Subordinated debt

      (1) An insurer must not include subordinated debt as part of its eligible capital unless it meets the following conditions:

      (a) the claims of the subordinated creditors must rank behind those of all unsubordinated creditors;
      (b) no interest or principal may be payable:

      (i) at a time when the insurer is in breach of its minimum capital requirement; or
      (ii) if the payment would mean that the insurer would be in breach of the these rules;
      (c) the only events of default must be non-payment of any interest or principal under the debt agreement or the winding-up of the insurer;
      (d) the remedies available to the subordinated creditor in the event of non-payment in respect of the subordinated debt must be limited to petitioning for the winding up of the insurer or proving for the debt and claiming in the liquidation of the insurer;
      (e) any events of default and any remedy described in paragraph (d) must not prejudice the matters in paragraphs (a) and (b);
      (f) in addition to the requirements about repayment in paragraphs (a) and (b), the subordinated debt must not become due and payable before its stated final maturity date except on an event of default complying with paragraph (c);
      (g) the agreement and the debt are governed by the laws of a jurisdiction
      (i) under which the other conditions mentioned in this subrule can be met; or
      (ii) that is otherwise acceptable, generally or in a particular case, to the Regulatory Authority;
      (h) to the fullest extent permitted under the Rules of the relevant jurisdictions, creditors must waive their right to set off amounts they owe the insurer against subordinated amounts owed to them by the insurer;
      (i) the terms of the subordinated debt must be set out in a written agreement or instrument that contains terms that provide for the conditions set out in paragraphs (a) to (h);
      (j) the debt must be unsecured and fully paid up;
      (k) the insurer has notified the Regulatory Authority that it intends to include subordinated debt as part of its eligible capital and the Regulatory Authority has not advised the insurer in writing within thirty days of the date of the notification that the subordinated debt must not form part of its eligible capital.
      (2) An insurer must not include in its eligible capital subordinated debt issued with step-ups in the first 5 years following the date of issue.
      (3) An insurer may include subordinated debt in its lower tier 2 capital only if:
      (a) it has an original maturity of at least 5 years or is subject to 5 years' notice of repayment; and
      (b) payment of interest or principal is permitted only if after such payment the insurer's eligible capital would be greater than the amount required by PINS Rule 3.2.1.
      Amended by QFCRA RM/2013-1 and Editorial changes (as from 1st January 2015).

    • PINS 4.4.3 Assumed amortisation of subordinated debt

      For the purposes of calculating the amount of subordinated debt that may be included in its eligible capital, an insurer must amortise the principal amount on a straight-line basis by 20% per annum in its final 4 years to maturity.

      Amended by QFCRA RM/2015-3 (as from 1st January 2016).