02015R0035 — EN — 08.07.2019 — 005.001


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COMMISSION DELEGATED REGULATION (EU) 2015/35

of 10 October 2014

supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II)

(Text with EEA relevance)

(OJ L 012 17.1.2015, p. 1)

Amended by:

 

 

Official Journal

  No

page

date

►M1

COMMISSION DELEGATED REGULATION (EU) 2016/467 of 30 September 2015

  L 85

6

1.4.2016

 M2

COMMISSION DELEGATED REGULATION (EU) 2016/2283 of 22 August 2016

  L 346

111

20.12.2016

 M3

COMMISSION DELEGATED REGULATION (EU) 2017/669 of 16 December 2016

  L 97

3

8.4.2017

►M4

COMMISSION DELEGATED REGULATION (EU) 2017/1542 of 8 June 2017

  L 236

14

14.9.2017

►M5

COMMISSION DELEGATED REGULATION (EU) 2018/1221 of 1 June 2018

  L 227

1

10.9.2018

►M6

COMMISSION DELEGATED REGULATION (EU) 2019/981 of 8 March 2019

  L 161

1

18.6.2019


Corrected by:

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Corrigendum, OJ L 307, 25.11.2015, p.  31 (2015/35)

►C2

Corrigendum, OJ L 264, 13.10.2017, p.  24 (2017/1542)

►C3

Corrigendum, OJ L 168, 25.6.2019, p.  16 (2019/981)




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COMMISSION DELEGATED REGULATION (EU) 2015/35

of 10 October 2014

supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II)

(Text with EEA relevance)

TABLE OF CONTENTS

TITLE I

►C1  VALUATION AND RISK-BASED CAPITAL REQUIREMENTS (PILLAR I), ENHANCED GOVERNANCE (PILLAR II) AND INCREASED TRANSPARENCY (PILLAR III) ◄

CHAPTER I

General provisions

SECTION 1

Definitions and general principles

SECTION 2

External credit assessments

CHAPTER II

Valuation of assets and liabilities

CHAPTER III

Rules relating to technical provisions

SECTION 1

General provisions

SECTION 2

Data quality

SECTION 3

Methodologies to calculate technical provisions

SUBSECTION 1

Assumptions underlying the calculation of technical provisions

SUBSECTION 2

Information underlying the calculation of best estimates

SUBSECTION 3

Cash flow projections for the calculation of the best estimate

SUBSECTION 4

Risk margin

SUBSECTION 5

Calculation of technical provisions as a whole

SUBSECTION 6

Recoverables from reinsurance contracts and special purpose vehicles

SECTION 4

Relevant risk-free interest rate term structure

SUBSECTION 1

General provisions

SUBSECTION 2

Basic risk free interest rate term structure

SUBSECTION 3

Volatility adjustment

SUBSECTION 4

Matching adjustment

SECTION 5

Lines of business

SECTION 6

Proportionality and simplifications

CHAPTER IV

Own funds

SECTION 1

Determination of own funds

SUBSECTION 1

Supervisory approval of ancillary own funds

SUBSECTION 2

Own funds treatment of participations

SECTION 2

Classification of own funds

SECTION 3

Eligibility of own funds

SUBSECTION 1

Ring-fenced funds

SUBSECTION 2

Quantitative limits

CHAPTER V

Solvency capital requirement standard formula

SECTION 1

General provisions

SUBSECTION 1

Scenario based calculations

SUBSECTION 2

Look-through approach

SUBSECTION 3

Regional governments and local authorities

SUBSECTION 4

Material basis risk

SUBSECTION 5

Calculation of the basic solvency capital requirement

SUBSECTION 6

Proportionality and simplifications

SUBSECTION 7

Scope of the underwriting risk modules

SECTION 2

Non-life underwriting risk module

SECTION 3

Life underwriting risk module

SECTION 4

Health underwriting risk module

SECTION 5

Market risk module

SUBSECTION 1

Correlation coefficients

SUBSECTION 1a

Qualifying infrastructure investments

SUBSECTION 2

Interest rate risk sub-module

SUBSECTION 3

Equity risk sub-module

SUBSECTION 4

Property risk sub-module

SUBSECTION 5

Spread risk sub-module

SUBSECTION 6

Market risk concentrations sub-module

SUBSECTION 7

Currency risk sub-module

SECTION 6

Counterparty default risk module

SUBSECTION 1

General provisions

SUBSECTION 2

Type 1 exposures

SUBSECTION 3

Type 2 exposures

SECTION 7

Intangible asset module

SECTION 8

Operational risk

SECTION 9

Adjustment for the loss-absorbing capacity of technical provisions and deferred taxes

SECTION 10

Risk mitigation techniques

SECTION 11

Ring fenced funds

SECTION 12

Undertaking-specific parameters

SECTION 13

Procedure for updating correlation parameters

CHAPTER VI

Solvency capital requirement — full and partial internal models

SECTION 1

Definitions

SECTION 2

Use test

SECTION 3

Statistical quality standards

SECTION 4

Calibration standards

SECTION 5

Integration of partial internal models

SECTION 6

Profit and loss attribution

SECTION 7

Validation standards

SECTION 8

Documentation standards

SECTION 9

External models and data

CHAPTER VII

Minimum capital requirement

CHAPTER VIII

Investments in securitisation positions

CHAPTER IX

System of governance

SECTION 1

Elements of the system of governance

SECTION 2

Functions

SECTION 3

Fit and proper requirements

SECTION 4

Outsourcing

SECTION 5

►C1  Remuneration ◄ policy

CHAPTER X

Capital add-on

SECTION 1

Circumstances for imposing a capital add-on

SECTION 2

Methodologies for calculating capital add-ons

CHAPTER XI

Extension of the recovery period

CHAPTER XII

Public disclosure

SECTION 1

Solvency and financial condition report: structure and contents

SECTION 2

Solvency and financial condition report: non-disclosure of information

SECTION 3

Solvency and financial condition report: deadlines, means of disclosure and updates

CHAPTER XIII

Regular supervisory reporting

SECTION 1

Elements and contents

SECTION 2

Deadlines and means of communication

CHAPTER XIV

Transparency and accountability of supervisory authorities

CHAPTER XV

Special purpose vehicles

SECTION 1

Authorization

SECTION 2

Mandatory contract conditions

SECTION 3

System of governance

SECTION 4

Supervisory reporting

SECTION 5

Solvency requirements

TITLE II

INSURANCE GROUPS

CHAPTER I

Solvency calculation at group level

SECTION 1

Group solvency: choice of calculation method and general principles

SECTION 2

Group solvency: calculation methods

CHAPTER II

Internal models for the calculation of the consolidated group solvency capital requirement

SECTION 1

Full and partial internal models used to calculate only the group solvency capital requirement

SECTION 2

Use of a group internal model

CHAPTER III

Supervision of group solvency for groups with centralised risk management

CHAPTER IV

Coordination of group supervision

SECTION 1

Colleges of supervisors

SECTION 2

Exchange of information

SECTION 3

National or regional subgroup supervision

CHAPTER V

Public disclosure

SECTION 1

Group solvency and financial condition report

SECTION 2

Single solvency and financial condition report

CHAPTER VI

Group supervisory reporting

SECTION 1

Regular reporting

SECTION 2

Reporting on risk concentrations and intragroup transactions

TITLE III

THIRD COUNTRY EEQUIVALENCE AND FINAL PROVISIONS

CHAPTER I

Undertakings carrying out reinsurance activities with their head office in a third country

CHAPTER II

Related third country insurance and reinsurance undertakings

CHAPTER III

Insurance and reinsurance undertakings with the parent undertakings outside the union

CHAPTER IV

Final provisions



TITLE I

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VALUATION AND RISK-BASED CAPITAL REQUIREMENTS (PILLAR I), ENHANCED GOVERNANCE (PILLAR II) AND INCREASED TRANSPARENCY (PILLAR III)

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CHAPTER I

GENERAL PROVISIONS



SECTION 1

Definitions and general principles

Article 1

Definitions

For the purposes of this Regulation, the following definitions shall apply:

1. alternative valuation methods' means valuation methods that are consistent with Article 75 of Directive 2009/138/EC, other than those which solely use the quoted market prices for the same or similar assets or liabilities;

2. ‘scenario analysis’ means the analysis of the impact of a combination of adverse events;

3. ‘health insurance obligation’ means an insurance obligation that covers one or both of the following:

(i) the provision of medical treatment or care including preventive or curative medical treatment or care due to illness, accident, disability or infirmity, or financial compensation for such treatment or care,

(ii) financial compensation arising from illness, accident, disability or infirmity;

4. ‘medical expense insurance obligation’ means an insurance obligation that covers the provision or financial compensation referred to in point (3)(i);

5. ‘income protection insurance obligation’ means an insurance obligation that covers the financial compensation referred to in point (3)(ii) other than the financial compensation referred to in point (3)(i);

6. ‘workers compensation insurance obligation’ means an insurance obligation that covers the provision or financial compensation referred to in points (3)(i) and (ii) and which arises only from to accidents at work, industrial injury and occupational disease;

7. ‘health reinsurance obligation’ means a reinsurance obligation which arises from accepted reinsurance covering health insurance obligations;

8. ‘medical expense reinsurance obligation’ means a reinsurance obligation which arises from accepted reinsurance covering medical expense insurance obligations;

9. ‘income protection reinsurance obligation’ means a reinsurance obligation which arises from accepted reinsurance covering income protection insurance obligations;

10. ‘workers' compensation reinsurance obligation’ means a reinsurance obligation which arises from accepted reinsurance covering workers' compensation insurance obligations;

11. ‘written premiums’ means the premiums due to an insurance or reinsurance undertaking during a specified time period regardless of whether such premiums relate in whole or in part to insurance or reinsurance cover provided in a different time period;

12. ‘earned premiums’ means the premiums relating to the risk covered by the insurance or reinsurance undertaking during a specified time period;

13. ‘surrender’ means all possible ways to fully or partly terminate a policy, including the following:

(i) voluntary termination of the policy with or without the payment of a surrender value;

(ii) change of insurance or reinsurance undertaking by the policy holder;

(iii) termination of the policy resulting from the policy holder's refusal to pay the premium;

14. ‘discontinuance’ of an insurance policy means surrender, lapse without value, making a contract paid-up, automatic non-forfeiture provisions or exercising other discontinuity options or not exercising continuity options;

15. ‘discontinuity options’ mean all legal or contractual policyholder rights which allow that policyholder to fully or partly terminate, surrender, decrease, restrict or suspend insurance cover or permit the insurance policy to lapse;

16. ‘continuity options’ mean all legal or contractual policyholder rights which allow that policyholder to fully or partly establish, renew, increase, extend or resume insurance or reinsurance cover;

17. ‘coverage of an internal model’ means the risks that are reflected in the probability distribution forecast underlying the internal model;

18. ‘scope of an internal model’ means the risks that the internal model is approved to cover; the scope of an internal model may include both risks which are and which are not reflected in the standard formula for the Solvency Capital Requirement;

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18a. ‘securitisation’ means a transaction or scheme as defined in Article 2(1) of Regulation (EU) 2017/2402 ( 1 );

18b. ‘STS securitisation’ means a securitisation designated ‘simple, transparent and standardised’ or ‘STS’ in accordance with the requirements set out in Article 18 of Regulation (EU) 2017/2402;

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19. ‘securitisation position’ means a securitisation position within the meaning of Article 2(19) of Regulation (EU) 2017/2402;

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19a. ‘senior securitisation position’ means a senior securitisation position within the meaning of Article 242(6) of Regulation (EU) No 575/2013 ( 2 );

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20. ‘re-securitisation position’ means an exposure to a re-securitisation within the meaning of Article 2(4) of Regulation (EU) 2017/2402;

21. ‘originator’ means an originator within the meaning of Article 2(3) of Regulation (EU) 2017/2402;

22. ‘sponsor’ means a sponsor within the meaning of Article 2(5) of Regulation (EU) 2017/2402;

23. ‘tranche’ means tranche within the meaning of Article 2(6) of Regulation (EU) 2017/2402;

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24. ‘central bank’ means central bank within the meaning ofArticle 4(1)(46) of Regulation (EU) No 575/2013.

25. ‘basis risk’ means the risk resulting from the situation in which the exposure covered by the risk-mitigation technique does not correspond to the risk exposure of the insurance or reinsurance undertaking;

26. ‘collateral arrangements’ means arrangements under which collateral providers do one of the following:

(a) transfer full ownership of the collateral to the collateral taker for the purposes of securing or otherwise covering the performance of a relevant obligation;

(b) provide collateral by way of security in favour of, or to, a collateral taker, and the legal ownership of the collateral remains with the collateral provider or a custodian when the security right is established;

27. in relation to a set of items, ‘all possible combinations of two’ such items means all ordered pairs of items from that set;

28. ‘pooling arrangement’ means an arrangement whereby several insurance or reinsurance undertakings agree to share identified insurance risks in defined proportions. The parties insured by the members of the pooling arrangement are not themselves members of the pooling arrangement.

29. ‘pool exposure of type A’ means the risk ceded by an insurance or reinsurance undertaking to a pooling arrangement where the insurance or reinsurance undertaking is not a party to that pooling arrangement.

30. ‘pool exposure of type B’ means the risk ceded by an insurance or reinsurance undertaking to another member of a pooling arrangement, where the insurance or reinsurance undertaking is a party to that pooling arrangement;

31. ‘pool exposure of type C’ means the risk ceded by an insurance or reinsurance undertaking which is a party to a pooling arrangement to another insurance or reinsurance undertaking which is not a member of that pooling arrangement.

32. ‘deep market’ means a market where transactions involving a large quantity of financial instruments can take place without significantly affecting the price of the instruments.

33. ‘liquid market’ means a market where financial instruments can readily be converted through an act of buying or selling without causing a significant movement in the price.

34. ‘transparent market’ means a market where current trade and price information is readily available to the public, in particular to the insurance or reinsurance undertakings.

35. ‘future discretionary bonuses’ and ‘future discretionary benefits’ mean future benefits other than index-linked or unit-linked benefits of insurance or reinsurance contracts which have one of the following characteristics:

(a) they are legally or contractually based on one or more of the following results:

(i) the performance of a specified group of contracts or a specified type of contract or a single contract;

(ii) the realised or unrealised investment return on a specified pool of assets held by the insurance or reinsurance undertaking;

(iii) the profit or loss of the insurance or reinsurance undertaking or fund corresponding to the contract;

(b) they are based on a declaration of the insurance or reinsurance undertaking and the timing or the amount of the benefits is at its full or partial discretion;

36. ‘basic risk-free interest rate term structure’ means a risk-free interest rate term structure which is derived in the same way as the relevant risk-free interest rate term structure to be used to calculate the best estimate referred to in Article 77(2) of Directive 2009/138/EC but without application of a matching adjustment or a volatility adjustment or a transitional adjustment to the relevant risk-free rate structure in accordance with Article 308c of that Directive;

37. ‘matching adjustment portfolio’ means a portfolio of insurance or reinsurance obligations to which the matching adjustment is applied and the assigned portfolio of assets as referred to in Article 77b(1)(a) of Directive 2009/138/EC.

38. ‘SLT Health obligations’ means health insurance obligations that are assigned to the lines of business for life insurance obligations in accordance with Article 55(1).

39. ‘NSLT Health obligations’ means health insurance obligations that are assigned to the lines of business for non-life insurance obligations in accordance with Article 55(1).

40. ‘Collective investment undertaking’ means an undertaking for collective investment in transferable securities (UCITS) as defined in Article 1(2) of Directive 2009/65/EC of the European Parliament and of the Council ( 3 ) or an alternative investment fund (AIF) as defined in Article 4(1)(a) of Directive 2011/61/EU of the European Parliament and of the Council ( 4 );

41. in relation to an insurance or reinsurance undertaking, ‘major business unit’ means a defined segment of the insurance and reinsurance undertaking that operates independently from other parts of the undertaking and has dedicated governance resources and procedures within the undertaking and which contains risks that are material in relation to the entire business of the undertaking;

42. in relation to an insurance or reinsurance group, ‘major business unit’ means a defined segment of the group that operates independently from other parts of the group and has dedicated governance resources and procedures within the group and which contains risks that are material in relation to the entire business of the group; any legal entity belonging to the group is a major business unit or consists of several major business units;

43. ‘administrative, management or supervisory body’ shall mean, where a two-tier board system comprising of a management body and a supervisory body is provided for under national law, the management body or the supervisory body or both of those bodies as specified in the relevant national legislation or, where nobody is specified in the relevant national legislation, the management body;

44. ‘aggregate maximum risk exposure’ means the sum of the maximum payments, including expenses that the special purpose vehicles may incur, excluding expenses that meet all of the following criteria:

(a) the special purpose vehicle has the right to require the insurance or reinsurance undertaking which has transferred risks to the special purpose vehicle to pay the expense;

(b) the special purpose vehicle is not required to pay the expense unless and until an amount equal to the expense has been received from the insurance or reinsurance undertaking which has transferred the risks to the special purpose vehicle;

(c) the insurance or reinsurance undertaking which has transferred risks to the special purpose vehicle does not include the expense as an amount recoverable from the special purpose vehicle in accordance with Article 41 of this Regulation.

45. ‘existing insurance or reinsurance contract’ means an insurance or reinsurance contract for which insurance or reinsurance obligations have been recognised;

46. ‘the expected profit included in future premiums’ means the expected present value of future cash flows which result from the inclusion in technical provisions of premiums relating to existing insurance and reinsurance contracts that are expected to be received in the future, but that may not be received for any reason, other than because the insured event has occurred, regardless of the legal or contractual rights of the policyholder to discontinue the policy.

47. ‘mortgage insurance’ means credit insurance that provides cover to lenders in case their mortgage loans default.

48. ‘subsidiary undertaking’ means any subsidiary undertaking within the meaning of Article 22(1) and (2) of Directive 2013/34/EU, including subsidiaries thereof;

49. ‘related undertaking’ either a subsidiary undertaking or other undertaking in which a participation is held, or an undertaking linked with another undertaking by a relationship as set out in Article 22(7) of Directive 2013/34/EU;

50. ‘regulated undertaking’ means ‘regulated entity’ within the meaning of Article 2(4) of Directive 2002/87/EC of the European Parliament and of the Council ( 5 );

51. ‘non-regulated undertaking’ means any undertaking other than those listed in Article 2(4) of Directive 2002/87/EC;

52. ‘non-regulated undertaking carrying out financial activities’ means a non-regulated undertaking which carries one or more of the activities referred to in Annex I of Directive 2013/36/EU of the European Parliament and of the Council ( 6 ) where those activities constitute a significant part of its overall activity;

53. ‘ancillary services undertaking’ means a non-regulated undertaking the principal activity of which consists of owning or managing property, managing data-processing services, health and care services or any other similar activity which is ancillary to the principal activity of one or more insurance or reinsurance undertakings.

54. ‘UCITS management company’ means a management company within the meaning of Article 2(1)(b) of Directive 2009/65/EC or an investment company authorised pursuant to Article 27 of that Directive provided that it has not designated a management company pursuant to that Directive;

55. ‘alternative investment fund manager’ means an alternative investment funds manager within the meaning of Article 4(1)(b) of Directive 2011/61/EU;

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55a. ‘infrastructure assets’ means physical assets, structures or facilities, systems and networks that provide or support essential public services;

55b. ‘infrastructure entity’ means an entity or corporate group which, during the most recent financial year of that entity or group for which figures are available or in a financing proposal, derives the substantial majority of its revenues from owning, financing, developing or operating infrastructure assets;

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56. ‘institutions for occupational retirement provision’ means institutions within the meaning of Article 6(a) of Directive 2003/41/EC of the European Parliament and of the Council ( 7 );

57. ‘domestic insurance undertaking’ means an undertaking authorised and supervised by third-country supervisory authorities which would require authorisation as an insurance undertaking in accordance with Article 14 of Directive 2009/138/EC if its head office were situated in the Union;

58. ‘domestic reinsurance undertaking’ means an undertaking authorised and supervised by third-country supervisory authorities which would require authorisation as a reinsurance undertaking in accordance with Article 14 of Directive 2009/138/EC if its head offices were situated in the Union;

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59. ‘CCP’ means a CCP as defined in point (1) of Article 2 of Regulation (EU) No 648/2012 of the European Parliament and of the Council ( 8 );

60. ‘bankruptcy remote’, in relation to client assets, means that effective arrangements exist which ensure that those assets will not be available to the creditors of a CCP or of a clearing member in the event of the insolvency of that CCP or clearing member respectively, or that the assets will not be available to the clearing member to cover losses it incurred following the default of a client or clients other than those that provided those assets;

61. ‘client’ means a client as defined in point (15) of Article 2 of Regulation (EU) No 648/2012 or an undertaking that has established indirect clearing arrangements with a clearing member in accordance with Article 4(3) of that Regulation;

62. ‘clearing member’ means a clearing member as defined in point (14) of Article 2 of Regulation (EU) No 648/2012;

63. ‘CCP-related transaction’ means a contract or a transaction listed in paragraph 1 of Article 301 of Regulation (EU) No 575/2013 between a client and a clearing member that is directly related to a contract or a transaction listed in that paragraph between that clearing member and a CCP.

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Article 2

Expert judgement

1.  Where insurance and reinsurance undertakings make assumptions about rules relating to the valuation of assets and liabilities, technical provisions, own funds, solvency capital requirements, minimum capital requirements and investment rules, these assumptions shall be based on the expertise of persons with relevant knowledge, experience and understanding of the risks inherent in the insurance or reinsurance business.

2.  Insurance and reinsurance undertakings shall, taking due account of the principle of proportionality, ensure that internal users of the relevant assumptions are informed about their relevant content, their degree of reliability and their limitations. For that purpose, service providers to whom functions or activities have been outsourced shall be considered to be internal users.



SECTION 2

External credit assessments

Article 3

Association of credit assessments to credit quality steps

The scale of credit quality steps referred to in Article 109a(1) of Directive 2009/138/EC shall include credit quality steps 0 to 6.

Article 4

General requirements on the use of credit assessments

1.  Insurance or reinsurance undertakings may use an external credit assessment for the calculation of the Solvency Capital Requirement in accordance with the standard formula only where it has been issued by an External Credit Assessment Institution (ECAI) or endorsed by an ECAI in accordance with Regulation (EC) No 1060/2009 of the European Parliament and of the Council ( 9 ).

2.  Insurance or reinsurance undertakings shall nominate one or more ECAI to be used for the calculation of the Solvency Capital Requirement according to the standard formula.

3.  The use of credit assessments shall be consistent and such assessments shall not be used selectively

4.  When using credit assessments, insurance and reinsurance undertakings shall comply with all of the following requirements:

(a) where an insurance or reinsurance undertaking decides to use the credit assessments produced by a nominated ECAI for a certain class of items, it shall use those credit assessments consistently for all items belonging to that class;

(b) where an insurance or reinsurance undertaking decides to use the credit assessments produced by a nominated ECAI, it shall use them in a continuous and consistent way over time;

(c) an insurance or reinsurance undertaking shall only use nominated ECAI credit assessments that take into account all amounts of principal and interest owed to it;

(d) where only one credit assessment is available from a nominated ECAI for a rated item, that credit assessment shall be used to determine the capital requirements for that item;

(e) where two credit assessments are available from nominated ECAIs and they correspond to different parameters for a rated item, the assessment generating the higher capital requirement shall be used;

(f) where more than two credit assessments are available from nominated ECAIs for a rated item, the two assessments generating the two lowest capital requirements shall be used. If the two lowest capital requirements are different, the assessment generating the higher capital requirement of those two credit assessments shall be used. If the two lowest capital requirements are the same, the assessment generating that capital requirement shall be used;

(g) where available, insurance and reinsurance undertakings shall use both solicited and unsolicited credit assessments.

5.  Where an item is part of the larger or more complex exposures of the insurance or reinsurance undertaking, the undertaking shall produce its own internal credit assessment of the item and allocate it to one of the seven steps in a credit quality assessment scale. Where the own internal credit assessment generates a lower capital requirement than the one generated by the credit assessments available from nominated ECAIs, then the own internal credit assessment shall not be taken into account for the purposes of this Regulation.

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6.  For the purposes of paragraph 5, the larger or more complex exposures of an undertaking shall include securitisation positions as referred to in Article 178(8) and (9) and re-securitisation positions.

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Article 5

Issuers and issue credit assessment

1.  Where a credit assessment exists for a specific issuing program or facility to which the item constituting the exposure belongs, that credit assessment shall be used.

2.  Where no directly applicable credit assessment exists for a certain item, but a credit assessment exists for a specific issuing program or facility to which the item constituting the exposure does not belong or a general credit assessment exists for the issuer, that credit assessment shall be used in either of the following cases:

(a) it produces the same or higher capital requirement than would otherwise be the case and the exposure in question ranks pari passu or junior in all respects to the specific issuing program or facility or to senior unsecured exposures of that issuer, as relevant;

(b) it produces the same or lower capital requirement than would otherwise be the case and the exposure in question ranks pari passu or senior in all respects to the specific issuing program or facility or to senior unsecured exposures of that issuer, as relevant.

In all other cases, insurance or reinsurance undertakings shall consider that there is no credit assessment by a nominated ECAI available for the exposure.

3.  Credit assessments for issuers within a corporate group shall not be used as the credit assessment for another issuer within the same corporate group.

Article 6

Double credit rating for securitisation positions

By way of derogation from Article 4(4)(d), where only one credit assessment is available from a nominated ECAI for a securitisation position, that credit assessment shall not be used. The capital requirements for that item shall be derived as if no credit assessment by a nominated ECAI is available.



CHAPTER II

VALUATION OF ASSETS AND LIABILITIES

Article 7

Valuation assumptions

Insurance and reinsurance undertakings shall value assets and liabilities based on the assumption that the undertaking will pursue its business as a going concern.

Article 8

Scope

Articles 9 to 16 shall apply to the recognition and valuation of assets and liabilities, other than technical provisions.

Article 9

Valuation methodology — general principles

1.  Insurance and reinsurance undertakings shall recognise assets and liabilities in conformity with the international accounting standards adopted by the Commission in accordance with Regulation (EC) No 1606/2002.

2.  Insurance and reinsurance undertakings shall value assets and liabilities in accordance with international accounting standards adopted by the Commission pursuant to Regulation (EC) No 1606/2002 provided that those standards include valuation methods that are consistent with the valuation approach set out in Article 75 of Directive 2009/138/EC. Where those standards allow for the use of more than one valuation method, insurance and reinsurance undertakings shall only use valuation methods that are consistent with Article 75 of Directive 2009/138/EC.

3.  Where the valuation methods included in international accounting standards adopted by the Commission in accordance with Regulation (EC) No 1606/2002 are not consistent either temporarily or permanently with the valuation approach set out in Article 75 of Directive 2009/138/EC, insurance and reinsurance undertakings shall use other valuation methods that are deemed to be consistent with Article 75 of Directive 2009/138/EC.

4.  By way of derogation from paragraphs 1 and 2, and in particular by respecting the principle of proportionality laid down in paragraphs 3 and 4 of Article 29 of Directive 2009/138/EC, insurance and reinsurance undertakings may recognise and value an asset or a liability based on the valuation method it uses for preparing its annual or consolidated financial statements provided that:

(a) the valuation method is consistent with Article 75 of Directive 2009/138/EC;

(b) the valuation method is proportionate with respect to the nature, scale and complexity of the risks inherent in the business of the undertaking;

(c) the undertaking does not value that asset or liability using international accounting standards adopted by the Commission in accordance with Regulation (EC) No 1606/2002 in its financial statements;

(d) valuing assets and liabilities using international accounting standards would impose costs on the undertaking that would be disproportionate with respect to the total administrative expenses.

5.  Insurance and reinsurance undertakings shall value individual assets separately.

6.  Insurance and reinsurance undertakings shall value individual liabilities separately.

Article 10

Valuation methodology — valuation hierarchy

1.  Insurance and reinsurance undertakings shall, when valuing assets and liabilities in accordance with Article 9 (1), (2) and (3), follow the valuation hierarchy set out in paragraphs 2 to 7, taking into account the characteristics of the asset or liability where market participants would take those characteristics into account when pricing the asset or liability at the valuation date, including the condition and location of the asset or liability and restrictions, if any, on the sale or use of the asset.

2.  As the default valuation method insurance and reinsurance undertakings shall value assets and liabilities using quoted market prices in active markets for the same assets or liabilities.

3.  Where the use of quoted market prices in active markets for the same assets or liabilities is not possible, insurance and reinsurance undertakings shall value assets and liabilities using quoted market prices in active markets for similar assets and liabilities with adjustments to reflect differences. Those adjustments shall reflect factors specific to the asset or liability including all of the following:

(a) the condition or location of the asset or liability;

(b) the extent to which inputs relate to items that are comparable to the asset or liability; and

(c) the volume or level of activity in the markets within which the inputs are observed.

4.  Insurance and reinsurance undertakings' use of quoted market prices shall be based on the criteria for active markets, as defined in international accounting standards adopted by the Commission in accordance with Regulation (EC) No 1606/2002.

5.  Where the criteria referred to in paragraph 4 are not satisfied, insurance and reinsurance undertakings shall, unless otherwise provided in this Chapter, use alternative valuation methods.

6.  When using alternative valuation methods, insurance and reinsurance undertakings shall rely as little as possible on undertaking-specific inputs and make maximum use of relevant market inputs including the following:

(a) quoted prices for identical or similar assets or liabilities in markets that are not active;

(b) inputs other than quoted prices that are observable for the asset or liability, including interest rates and yield curves observable at commonly quoted intervals, implied volatilities and credit spreads;

(c) market-corroborated inputs, which may not be directly observable, but are based on or supported by observable market data.

All those markets inputs shall be adjusted for the factors referred to in paragraph 3.

To the extent that relevant observable inputs are not available including in circumstances where there is little, if any, market activity for the asset or liability at the valuation date, undertakings shall use unobservable inputs reflecting the assumptions that market participants would use when pricing the asset or liability, including assumptions about risk. Where unobservable inputs are used, undertakings shall adjust undertaking-specific data if reasonable available information indicates that other market participants would use different data or there is something particular to the undertaking that is not available to other market participants.

When assessing the assumptions about risk referred to in this paragraph undertakings shall take into account the risk inherent in the specific valuation technique used to measure fair value and the risk inherent in the inputs of that valuation technique.

7.  Undertakings shall use valuation techniques that are consistent with one or more of the following approaches when using alternative valuation methods:

(a) market approach, which uses prices and other relevant information generated by market transactions involving identical or similar assets, liabilities or group of assets and liabilities. Valuation techniques consistent with the market approach include matrix pricing.

(b) income approach, which converts future amounts, such as cash flows or income or expenses, to a single current amount. The fair value shall reflect current market expectations about those future amounts. Valuation techniques consistent with the income approach include present value techniques, option pricing models and the multi-period excess earnings method;

(c) cost approach or current replacement cost approach reflects the amount that would be required currently to replace the service capacity of an asset. From the perspective of a market participant seller, the price that would be received for the asset is based on the cost to a market participant buyer to acquire or construct a substitute asset of comparable quality adjusted for obsolescence.

Article 11

Recognition of contingent liabilities

1.  Insurance and reinsurance undertakings shall recognise contingent liabilities, as defined in accordance with Article 9 of this Regulation, that are material, as liabilities.

2.  Contingent liabilities shall be material where information about the current or potential size or nature of those liabilities could influence the decision-making or judgement of the intended user of that information, including the supervisory authorities.

Article 12

Valuation methods for goodwill and intangible assets

Insurance and reinsurance undertakings shall value the following assets at zero:

1. goodwill;

2. intangible assets other than goodwill, unless the intangible asset can be sold separately and the insurance and reinsurance undertaking can demonstrate that there is a value for the same or similar assets that has been derived in accordance with Article 10(2), in which case the asset shall be valued in accordance with Article 10.

Article 13

Valuation methods for related undertakings

1.  For the purposes of valuing the assets of individual insurance and reinsurance undertakings, insurance and reinsurance undertakings shall value holdings in related undertakings, within the meaning of Article 212(1)(b) of Directive 2009/138/EC in accordance with the following hierarchy of methods:

(a) using the default valuation method set out in Article 10(2) of this Regulation;

(b) using the adjusted equity method referred to in paragraph 3 where valuation in accordance with point (a) is not possible;

(c) using either the valuation method set out in Article 10(3) of this Regulation or alternative valuation methods in accordance with Article 10(5) of this Regulation provided that all of the following conditions are fulfilled:

(i) neither valuation in accordance with point (a) nor point (b) is possible;

(ii) the undertaking is not a subsidiary undertaking, as defined in Article 212(2) of Directive 2009/138/EC.

2.  By way of derogation from paragraph 1, for the purposes of valuing the assets of individual insurance and reinsurance undertakings, insurance and reinsurance undertakings shall value holdings in the following undertakings at zero:

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(a) undertakings that are excluded from the scope of the group supervision under Article 214(2) of Directive 2009/138/EC;

▼B

(b) undertakings that are deducted from the own funds eligible for the group solvency in accordance with Article 229 of Directive 2009/138/EC.

3.  The adjusted equity method referred to in point (b) of paragraph 1 shall require the participating undertaking to value its holdings in related undertakings based on the share of the excess of assets over liabilities of the related undertaking held by the participating undertaking.

4.  When calculating the excess of assets over liabilities for related undertakings, the participating undertaking shall value the undertaking's individual assets and liabilities in accordance with Articles 75 of Directive 2009/138/EC and, where the related undertaking is an insurance or reinsurance undertaking or a special purpose vehicle referred to in Article 211 of that Directive, technical provisions in accordance Articles 76 to 85 of that Directive.

5.  When calculating the excess of assets over liabilities for related undertakings other than insurance or reinsurance undertakings, the participating undertaking may consider the equity method as prescribed in international accounting standards adopted by the Commission in accordance with Regulation (EC) No 1606/2002 to be consistent with Articles 75 of Directive 2009/138/EC, where valuation of individual assets and liabilities in accordance with paragraph 4 is not practicable. In such cases, the participating undertaking shall deduct from the value of the related undertaking the value of goodwill and other intangible assets that would be valued at zero in accordance with Article 12(2) of this Regulation.

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6.  Where the criteria referred to in Article 9(4) of this Regulation are satisfied, and where the use of the valuation methods referred to in points (a) and (b) of paragraph 1 is not possible, holdings in related undertakings may be valued based on the valuation method the insurance or reinsurance undertakings uses for preparing its annual or consolidated financial statements. In such cases, the participating undertaking shall deduct from the value of the related undertaking the value of goodwill and other intangible assets that would be valued at zero in accordance with Article 12(2) of this Regulation.

▼B

Article 14

Valuation methods for specific liabilities

1.  Insurance and reinsurance undertakings shall value financial liabilities, as referred to in international accounting standards adopted by the Commission in accordance with Regulation (EC) No 1606/2002, in accordance with Article 9 of this Regulation upon initial recognition. There shall be no subsequent adjustment to take account of the change in own credit standing of the insurance or reinsurance undertaking after initial recognition.

2.  Insurance and reinsurance undertakings shall value contingent liabilities that have been recognised in accordance with Article 11. The value of contingent liabilities shall be equal to the expected present value of future cash flows required to settle the contingent liability over the lifetime of that contingent liability, using the basic risk-free interest rate term structure.

Article 15

Deferred taxes

1.  Insurance and reinsurance undertakings shall recognise and value deferred taxes in relation to all assets and liabilities, including technical provisions, that are recognised for solvency or tax purposes in accordance with Article 9.

2.  Notwithstanding paragraph 1, insurance and reinsurance undertakings shall value deferred taxes, other than deferred tax assets arising from the carryforward of unused tax credits and the carryforward of unused tax losses, on the basis of the difference between the values ascribed to assets and liabilities recognised and valued in accordance with Article 75 of Directive 2009/138/EC and in the case of technical provisions in accordance with Articles 76 to 85 of that Directive and the values ascribed to assets and liabilities as recognised and valued for tax purposes.

3.  Insurance and reinsurance undertaking shall only ascribe a positive value to deferred tax assets where it is probable that future taxable profit will be available against which the deferred tax asset can be utilised, taking into account any legal or regulatory requirements on the time limits relating to the carryforward of unused tax losses or the carryforward of unused tax credits.

Article 16

Exclusion of valuation methods

1.  Insurance and reinsurance undertakings shall not value financial assets or financial liabilities at cost or amortized cost.

2.  Insurance and reinsurance undertakings shall not apply valuation models that value at the lower of the carrying amount and fair value less costs to sell.

3.  Insurance and reinsurance undertakings shall not value property, investment property, plant and equipment with cost models where the asset value is determined as cost less depreciation and impairment.

4.  Insurance and reinsurance undertakings which are lessees in a financial lease or lessors shall comply with all of the following when valuing assets and liabilities in a lease arrangement:

(a) lease assets shall be valued at fair value;

(b) for the purposes of determining the present value of the minimum lease payments market consistent inputs shall be used and no subsequent adjustments to take account of the own credit standing of the undertaking shall be made;

(c) valuation at depreciated cost shall not be applied.

5.  Insurance and reinsurance undertakings shall adjust the net realisable value for inventories by the estimated cost of completion and the estimated costs necessary to make the sale where those costs are material. Those costs shall be considered to be material where their non-inclusion could influence the decision-making or the judgement of the users of the balance sheet, including the supervisory authorities. Valuation at cost shall not be applied.

6.  Insurance and reinsurance undertakings shall not value non-monetary grants at a nominal amount.

7.  When valuing biological assets, insurance and reinsurance undertakings shall adjust the value by adding the estimated costs to sell if the estimated costs to sell are material.



CHAPTER III

RULES RELATING TO TECHNICAL PROVISIONS



SECTION 1

General provisions

Article 17

Recognition and derecognition of insurance and reinsurance obligations

For the calculation of the best estimate and the risk margin of technical provisions, insurance and reinsurance undertakings shall recognise an insurance or reinsurance obligation at the date the undertaking becomes a party to the contract that gives rise to the obligation or the date the insurance or reinsurance cover begins, whichever date occurs earlier. Insurance and reinsurance undertakings shall only recognise the obligations within the boundary of the contract.

Insurance and reinsurance undertakings shall derecognise an insurance or reinsurance obligation only when it is extinguished, discharged, cancelled or expires.

Article 18

Boundary of an insurance or reinsurance contract

1.  The boundaries of an insurance or reinsurance contract shall be defined in accordance with paragraphs 2 to 7.

2.  All obligations relating to the contract, including obligations relating to unilateral rights of the insurance or reinsurance undertaking to renew or extend the scope of the contract and obligations that relate to paid premiums, shall belong to the contract unless otherwise stated in paragraphs 3 to 6.

3.  Obligations which relate to insurance or reinsurance cover provided by the undertaking after any of the following dates do not belong to the contract, unless the undertaking can compel the policyholder to pay the premium for those obligations:

(a) the future date where the insurance or reinsurance undertaking has a unilateral right to terminate the contract;

(b) the future date where the insurance or reinsurance undertaking has a unilateral right to reject premiums payable under the contract;

(c) the future date where the insurance or reinsurance undertaking has a unilateral right to amend the premiums or the benefits payable under the contract in such a way that the premiums fully reflect the risks.

Point (c) shall be deemed to apply where an insurance or reinsurance undertaking has a unilateral right to amend at a future date the premiums or benefits of a portfolio of insurance or reinsurance obligations in such a way that the premiums of the portfolio fully reflect the risks covered by the portfolio.

However, in the case of life insurance obligations where an individual risk assessment of the obligations relating to the insured person of the contract is carried out at the inception of the contract and that assessment cannot be repeated before amending the premiums or benefits, insurance and reinsurance undertakings shall assess at the level of the contract whether the premiums fully reflect the risk for the purposes of point (c).

Insurance and reinsurance undertakings shall not take into account restrictions of the unilateral right as referred to in points (a), (b) and (c) of this paragraph and limitations of the extent to which premiums or benefits can be amended that have no discernible effect on the economics of the contract.

4.  Where the insurance or reinsurance undertaking has a unilateral right as referred to in paragraph 3 that only relates to a part of the contract, the same principles as defined in paragraph 3 shall apply to that part of the contract.

5.   ►M6  Obligations that do not relate to premiums which have already been paid do not belong to an insurance or reinsurance contract if all of the following requirements are met:

a) the contract does not provide compensation for a specified uncertain event that adversely affects the insured person;

b) the contract does not include a financial guarantee of benefits;

c) the undertaking cannot compel the policyholder to pay the future premium for those obligations. ◄

For the purpose of points (a) and (b), insurance and reinsurance undertakings shall not take into account coverage of events and guarantees that have no discernible effect on the economics of the contract.

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6.  Where an insurance or reinsurance contract can be unbundled into two parts and where one of those parts meets the requirements set out in points (a), (b) and (c) of paragraph 5, any obligations that do not relate to the premiums of that part and which have already been paid do not belong to the contract.

▼B

7.  Insurance and reinsurance undertakings shall, for the purposes of paragraph 3, only consider that premiums fully reflect the risks covered by a portfolio of insurance or reinsurance obligations, where there is no circumstance under which the amount of the benefits and expenses payable under the portfolio exceeds the amount of the premiums payable under the portfolio.



SECTION 2

Data quality

Article 19

Data used in the calculation of technical provisions

1.  Data used in the calculation of the technical provisions shall only be considered to be complete for the purpose of Article 82 of Directive 2009/138/EC where all of the following conditions are met:

(a) the data include sufficient historical information to assess the characteristics of the underlying risks and to identify trends in the risks;

(b) the data are available for each of the relevant homogeneous risk groups used in the calculation of the technical provisions and no relevant data is excluded from being used in the calculation of the technical provisions without justification.

2.  Data used in the calculation of the technical provisions shall only be considered to be accurate for the purpose of Article 82 of Directive 2009/138/EC where all of the following conditions are met:

(a) the data are free from material errors;

(b) data from different time periods used for the same estimation are consistent;

(c) the data are recorded in a timely manner and consistently over time.

3.  Data used in the calculation of the technical provisions shall only be considered to be appropriate for the purpose of Article 82 of Directive 2009/138/EC where all of the following conditions are met:

(a) the data are consistent with the purposes for which they will be used;

(b) the amount and nature of the data ensure that the estimations made in the calculation of the technical provisions on the basis of the data do not include a material estimation error;

(c) the data are consistent with the assumptions underlying the actuarial and statistical techniques that are applied to them in the calculation of the technical provisions;

(d) the data appropriately reflect the risks to which the insurance or reinsurance undertaking is exposed with regard to its insurance and reinsurance obligations;

(e) the data were collected, processed and applied in a transparent and structured manner, based on a documented process that comprises all of the following:

(i) the definition of criteria for the quality of data and an assessment of the quality of data, including specific qualitative and quantitative standards for different data sets;

(ii) the use of and setting of assumptions made in the collection, processing and application of data;

(iii) the process for carrying out data updates, including the frequency of updates and the circumstances that trigger additional updates;

(f) Insurance or reinsurance undertakings shall ensure that their data are used consistently over time in the calculation of the technical provisions.

For the purposes of point (b), an estimation error in the calculation of the technical provisions shall be considered to be material where it could influence the decision-making or the judgement of the users of the calculation result, including the supervisory authorities.

4.  Insurance and reinsurance undertakings may use data from an external source provided that, in addition to fulfilling the requirements set out in paragraphs 1 to 4, all of the following requirements are met:

(a) insurance or reinsurance undertakings are able to demonstrate that the use of that data is more suitable than the use of data which are exclusively available from an internal source;

(b) insurance or reinsurance undertakings know the origin of that data and the assumptions or methodologies used to process that data;

(c) insurance or reinsurance undertakings identify any trends in that data and the variation, over time or across data, of the assumptions or methodologies in the use of that data;

(d) insurance or reinsurance undertakings are able to demonstrate that the assumptions and methodologies referred to in points (b) and (c) reflect the characteristics of the insurance or reinsurance undertaking's portfolio of insurance and reinsurance obligations.

Article 20

Limitations of data

Where data does not comply with Article 19, insurance and reinsurance undertakings shall document appropriately the limitations of the data including a description of whether and how such limitations will be remedied and of the functions within the system of governance of the insurance or reinsurance undertaking responsible for that process. The data, before adjustments to remedy limitations are made to it, shall be recorded and stored appropriately.

Article 21

Appropriate use of approximations to calculate the best estimate

Where insurance and reinsurance undertakings have insufficient data of appropriate quality to apply a reliable actuarial method, they may use appropriate approximations to calculate the best estimate provided that all of the following requirements are met:

(a) the insufficiency of data is not due to inadequate internal processes and procedures of collecting, storing or validating data used for the valuation of technical provisions;

(b) the insufficiency of data cannot be remedied by the use of external data;

(c) it would not be practicable for the undertaking to adjust the data to remedy the insufficiency.



SECTION 3

Methodologies to calculate technical provisions



Subsection 1

Assumptions underlying the calculation of technical provisions

Article 22

General provisions

1.  Assumptions shall only be considered to be realistic for the purposes of Article 77(2) of Directive 2009/138/EC where they meet all of the following conditions:

(a) insurance and reinsurance undertakings are able to explain and justify each of the assumptions used, taking into account the significance of the assumption, the uncertainty involved in the assumption as well as relevant alternative assumptions;

(b) the circumstances under which the assumptions would be considered false can be clearly identified;

(c) unless otherwise provided in this Chapter, the assumptions are based on the characteristics of the portfolio of insurance and reinsurance obligations, where possible regardless of the insurance or reinsurance undertaking holding the portfolio;

(d) insurance and reinsurance undertakings use the assumptions consistently over time and within homogeneous risk groups and lines of business, without arbitrary changes;

(e) the assumptions adequately reflect any uncertainty underlying the cash flows.

For the purpose of point (c), insurance and reinsurance undertakings shall only use information specific to the undertaking, including information on claims management and expenses, where that information better reflects the characteristics of the portfolio of insurance or reinsurance obligations than information that is not limited to the specific undertaking or where the calculation of technical provisions in a prudent, reliable and objective manner without using that information is not possible.

2.  Assumptions shall only be used for the purpose of Article 77(3) of Directive 2009/138/EC where they comply with paragraph 1 of this Article.

3.  Insurance and reinsurance undertakings shall set assumptions on future financial market parameters or scenarios that are appropriate and consistent with Article 75 of Directive 2009/138/EC. Where insurance and reinsurance undertakings use a model to produce projections of future financial market parameters, it shall comply with all of the following requirements:

(a) it generates asset prices that are consistent with asset prices observed in financial markets;

(b) it assumes no arbitrage opportunity;

(c) the calibration of the parameters and scenarios is consistent with the relevant risk-free interest rate term structure used to calculate the best estimate as referred to in Article 77(2) of Directive 2009/138/EC.

Article 23

Future management actions

1.  Assumptions on future management actions shall only be considered to be realistic for the purposes of Article 77(2) of Directive 2009/138/EC where they meet all of the following conditions:

(a) the assumptions on future management actions are determined in an objective manner;

(b) assumed future management actions are consistent with the insurance or reinsurance undertaking's current business practice and business strategy, including the use of risk-mitigation techniques; where there is sufficient evidence that the undertaking will change its practices or strategy, the assumed future management actions are consistent with the changed practices or strategy;

(c) assumed future management actions are consistent with each other;

(d) assumed future management actions are not contrary to any obligations towards policy holders and beneficiaries or to legal requirements applicable to the undertaking;

(e) assumed future management actions take account of any public indications by the insurance or reinsurance undertaking as to the actions that it would expect to take or not take.

2.  Assumptions about future management actions shall be realistic and include all of the following:

(i) a comparison of assumed future management actions with management actions taken previously by the insurance or reinsurance undertaking;

(ii) a comparison of future management actions taken into account in the current and in the past calculations of the best estimate;

(iii) an assessment of the impact of changes in the assumptions on future management actions on the value of the technical provisions.

Insurance and reinsurance undertakings shall be able to explain any relevant deviations in relation to points (i) and (ii) upon request of the supervisory authorities and, where changes in an assumption on future management actions have a significant impact on the technical provisions, the reasons for that sensitivity and how the sensitivity is taken into account in the decision-making process of the insurance or reinsurance undertaking.

3.  For the purpose of paragraph 1, insurance and reinsurance undertakings shall establish a comprehensive future management actions plan, approved by the administrative, management or supervisory body of the insurance and reinsurance undertaking, which provides for all of the following:

(a) the identification of future management actions that are relevant to the valuation of the technical provisions;

(b) the identification of the specific circumstances in which the insurance or reinsurance undertaking would reasonably expect to carry out each respective future management action referred to in point (a);

(c) the identification of the specific circumstances in which the insurance or reinsurance undertaking may not be able to carry out each respective future management action referred to in point (a), and a description of how those circumstances are considered in the calculation of technical provisions;

(d) the order in which future management actions referred to in point (a) would be carried out and the governance requirements applicable to those future management actions;

(e) a description of any on-going work required to ensure that the insurance or reinsurance undertaking is in a position to carry out each respective future management action referred to in point (a);

(f) a description of how the future management actions referred to in point (a) have been reflected in the calculation of the best estimate;

(g) a description of the applicable internal reporting procedures that cover the future management actions referred to in point (a) included in the calculation of the best estimate;

4.  Assumptions about future management actions shall take account of the time needed to implement the management actions and any expenses caused by them.

5.  The system for ensuring the transmission of information shall only be considered to be effective for the purpose of Article 41(1) of Directive 2009/138/EC where the reporting procedures referred to in point (g) of paragraph 3 of this Article include at least an annual communication to the administrative, supervisory or management body.

Article 24

Future discretionary benefits

Where future discretionary benefits depend on the assets held by the insurance or reinsurance undertaking, undertakings shall base the calculation of the best estimate on the assets currently held by the undertakings and shall assume future changes of their asset allocation in accordance with Article 23. The assumptions on the future returns of the assets shall be consistent with the relevant risk-free interest rate term structure, including where applicable a matching adjustment, a volatility adjustment, or a transitional measure on the risk-free rate, and the valuation of the assets in accordance with Article 75 of Directive 2009/138/EC.

Article 25

Separate calculation of the future discretionary benefits

When calculating technical provisions, insurance and reinsurance undertakings shall determine separately the value of future discretionary benefits.

Article 26

Policyholder behaviour

When determining the likelihood that policy holders will exercise contractual options, including lapses and surrenders, insurance and reinsurance undertakings shall conduct an analysis of past policyholder behaviour and a prospective assessment of expected policyholder behaviour. That analysis shall take into account all of the following:

(a) how beneficial the exercise of the options was and will be to the policy holders under circumstances at the time of exercising the option;

(b) the influence of past and future economic conditions;

(c) the impact of past and future management actions;

(d) any other circumstances that are likely to influence decisions by policyholders on whether to exercise the option.

The likelihood shall only be considered to be independent of the elements referred to in points (a) to (d) where there is empirical evidence to support such an assumption.



Subsection 2

Information underlying the calculation of best estimates

Article 27

Credibility of information

Information shall only be considered to be credible for the purposes of Article 77(2) of Directive 2009/138/EC where insurance and reinsurance undertakings provide evidence of the credibility of the information taking into account the consistency and objectivity of that information, the reliability of the source of the information and the transparency of the way in which the information is generated and processed.



Subsection 3

Cash flow projections for the calculation of the best estimate

Article 28

Cash flows

The cash flow projection used in the calculation of the best estimate shall include all of the following cash flows, to the extent that these cash flows relate to existing insurance and reinsurance contracts:

(a) benefit payments to policy holders and beneficiaries;

(b) payments that the insurance or reinsurance undertaking will incur in providing contractual benefits that are paid in kind;

(c) payments of expenses as referred to in point (1) of Article 78 of Directive 2009/138/EC;

(d) premium payments and any additional cash flows that result from those premiums;

(e) payments between the insurance or reinsurance undertaking and intermediaries related to insurance or reinsurance obligations;

(f) payments between the insurance or reinsurance undertaking and investment firms in relation to contracts with index-linked and unit-linked benefits;

(g) payments for salvage and subrogation to the extent that they do not qualify as separate assets or liabilities in accordance with international accounting standards, as endorsed by the Commission in accordance with Regulation (EC) No 1606/2002;

(h) taxation payments which are, or are expected to be, charged to policy holders or are required to settle the insurance or reinsurance obligations.

Article 29

Expected future developments in the external environment

The calculation of the best estimate shall take into account expected future developments that will have a material impact on the cash in- and out-flows required to settle the insurance and reinsurance obligations over the lifetime thereof. For that purpose future developments shall include demographic, legal, medical, technological, social, environmental and economic developments including inflation as referred to in point (2) of Article 78 of Directive 2009/138/EC.

Article 30

Uncertainty of cash flows

The cash flow projection used in the calculation of the best estimate shall, explicitly or implicitly, take account of all uncertainties in the cash flows, including all of the following characteristics:

(a) uncertainty in the timing, frequency and severity of insured events;

(b) uncertainty in claim amounts, including uncertainty in claims inflation, and in the period needed to settle and pay claims;

(c) uncertainty in the amount of expenses referred to in point (1) of Article 78 of Directive 2009/138/EC;

(d) uncertainty in expected future developments referred to in Article 29 to the extent that it is practicable;

(e) uncertainty in policyholder behaviour;

(f) dependency between two or more causes of uncertainty;

(g) dependency of cash flows on circumstances prior to the date of the cash flow.

Article 31

Expenses

1.  A cash flow projection used to calculate best estimates shall take into account all of the following expenses, which relate to recognised insurance and reinsurance obligations of insurance and reinsurance undertakings and which are referred to in point (1) of Article 78 of Directive 2009/138/EC:

(a) administrative expenses;

(b) investment management expenses;

(c) claims management expenses;

(d) acquisition expenses.

The expenses referred to in points (a) to (d) shall take into account overhead expenses incurred in servicing insurance and reinsurance obligations.

2.  Overhead expenses shall be allocated in a realistic and objective manner and on a consistent basis over time to the parts of the best estimate to which they relate.

3.  Expenses in respect of reinsurance contracts and special purpose vehicles shall be taken into account in the gross calculation of the best estimate.

4.  Expenses shall be projected on the assumption that the undertaking will write new business in the future.

Article 32

Contractual options and financial guarantees

When calculating the best estimate, insurance and reinsurance undertakings shall take into account all of the following:

(a) all financial guarantees and contractual options included in their insurance and reinsurance policies;

(b) all factors which may affect the likelihood that policy holders will exercise contractual options or realise the value of financial guarantees.

Article 33

Currency of the obligation

The best estimate shall be calculated separately for cash flows in different currencies.

Article 34

Calculation methods

1.  The best estimate shall be calculated in a transparent manner and in such a way as to ensure that the calculation method and the results that derive from it are capable of review by a qualified expert.

2.  The choice of actuarial and statistical methods for the calculation of the best estimate shall be based on their appropriateness to reflect the risks which affect the underlying cash flows and the nature of the insurance and reinsurance obligations. The actuarial and statistical methods shall be consistent with and make use of all relevant data available for the calculation of the best estimate.

3.  Where a calculation method is based on grouped policy data, insurance and reinsurance undertakings shall ensure that the grouping of policies creates homogeneous risk groups that appropriately reflect the risks of the individual policies included in those groups.

4.  Insurance and reinsurance undertakings shall analyse the extent to which the present value of cash flows depend both on the expected outcome of future events and developments and on how the actual outcome in certain scenarios could deviate from the expected outcome.

5.  Where the present value of cash flows depends on future events and developments as referred to in paragraph 4, insurance and reinsurance undertakings shall use a method to calculate the best estimate for cash flows which reflects such dependencies.

Article 35

Homogeneous risk groups of life insurance obligations

The cash flow projections used in the calculation of best estimates for life insurance obligations shall be made separately for each policy. Where the separate calculation for each policy would be an undue burden on the insurance or reinsurance undertaking, it may carry out the projection by grouping policies, provided that the grouping complies with all of the following requirements:

(a) there are no significant differences in the nature and complexity of the risks underlying the policies that belong to the same group;

(b) the grouping of policies does not misrepresent the risk underlying the policies and does not misstate their expenses;

(c) the grouping of policies is likely to give approximately the same results for the best estimate calculation as a calculation on a per policy basis, in particular in relation to financial guarantees and contractual options included in the policies.

Article 36

Non-life insurance obligations

1.  The best estimate for non-life insurance obligations shall be calculated separately for the premium provision and for the provision for claims outstanding.

2.  The premium provision shall relate to future claim events covered by insurance and reinsurance obligations falling within the contract boundary referred to in Article 18. Cash flow projections for the calculation of the premium provision shall include benefits, expenses and premiums relating to these events.

3.  The provision for claims outstanding shall relate to claim events that have already occurred, regardless of whether the claims arising from those events have been reported or not.

4.  Cash flow projections for the calculation of the provision for claims outstanding shall include benefits, expenses and premiums relating to the events referred to in paragraph 3.



Subsection 4

Risk margin

Article 37

Calculation of the risk margin

1.  The risk margin for the whole portfolio of insurance and reinsurance obligations shall be calculated using the following formula:

image

where:

(a)  CoC denotes the Cost-of-Capital rate;

(b) the sum covers all integers including zero;

(c) SCR(t) denotes the Solvency Capital Requirement referred to in Article 38(2) after t years;

(d) r(t + 1) denotes the basic risk-free interest rate for the maturity of t + 1 years.

The basic risk-free interest rate r(t + 1) shall be chosen in accordance with the currency used for the financial statements of the insurance and reinsurance undertaking.

2.  Where insurance and reinsurance undertakings calculate their Solvency Capital Requirement using an approved internal model and determine that the model is appropriate to calculate the Solvency Capital Requirement referred to in Article 38(2) for each point in time over the lifetime of the insurance and reinsurance obligations, the insurance and reinsurance undertakings shall use the internal model to calculate the amounts SCR(t) referred to in paragraph 1.

3.  Insurance and reinsurance undertakings shall allocate the risk margin for the whole portfolio of insurance and reinsurance obligations to the lines of business referred to in Article 80 of Directive 2009/138/EC. The allocation shall adequately reflect the contributions of the lines of business to the Solvency Capital Requirement referred to in Article 38(2) over the lifetime of the whole portfolio of insurance and reinsurance obligations.

Article 38

Reference undertaking

1.  The calculation of the risk margin shall be based on all of the following assumptions:

(a) the whole portfolio of insurance and reinsurance obligations of the insurance or reinsurance undertaking that calculates the risk margin (the original undertaking) is taken over by another insurance or reinsurance undertaking (the reference undertaking);

(b) notwithstanding point (a), where the original undertaking simultaneously pursues both life and non-life insurance activities according to Article 73(5) of Directive 2009/138/EC, the portfolio of insurance obligations relating to life insurance activities and life reinsurance obligations and the portfolio of insurance obligations relating to non-life insurance activities and non-life reinsurance obligations are taken over separately by two different reference undertakings;

(c) the transfer of insurance and reinsurance obligations includes any reinsurance contracts and arrangements with special purpose vehicles relating to these obligations;

(d) the reference undertaking does not have any insurance or reinsurance obligations or own funds before the transfer takes place;

(e) after the transfer, the reference undertaking does not assume any new insurance or reinsurance obligations;

(f) after the transfer, the reference undertaking raises eligible own funds equal to the Solvency Capital Requirement necessary to support the insurance and reinsurance obligations over the lifetime thereof;

(g) after the transfer, the reference undertaking has assets which amount to the sum of its Solvency Capital Requirement and of the technical provisions net of the amounts recoverable from reinsurance contracts and special purpose vehicles;

(h) the assets are selected in such a way that they minimise the Solvency Capital Requirement for market risk that the reference undertaking is exposed to;

(i) the Solvency Capital Requirement of the reference undertaking captures all of the following risks:

(i) underwriting risk with respect to the transferred business,

(ii) where it is material, the market risk referred to in point (h), other than interest rate risk,

(iii) credit risk with respect to reinsurance contracts, arrangements with special purpose vehicles, intermediaries, policyholders and any other material exposures which are closely related to the insurance and reinsurance obligations,

(iv) operational risk;

(j) the loss-absorbing capacity of technical provisions, referred to in Article 108 of Directive 2009/138/EC, in the reference undertaking corresponds for each risk to the loss-absorbing capacity of technical provisions in the original undertaking;

(k) there is no loss-absorbing capacity of deferred taxes as referred to in Article 108 of Directive 2009/138/EC for the reference undertaking;

(l) the reference undertaking will, subject to points (e) and (f), adopt future management actions that are consistent with the assumed future management actions, as referred to in Article 23, of the original undertaking.

2.  Over the lifetime of the insurance and reinsurance obligations, the Solvency Capital Requirement necessary to support the insurance and reinsurance obligations referred to in the first subparagraph of Article 77(5) of Directive 2009/138/EC shall be assumed to be equal to the Solvency Capital Requirement of the reference undertaking under the assumptions set out in paragraph 1.

3.  For the purposes of point (i) of paragraph 1, a risk shall be considered to be material where its impact on the calculation of the risk margin could influence the decision-making or the judgment of the users of that information, including supervisory authorities.

Article 39

Cost-of-Capital rate

The Cost-of-Capital rate referred to in Article 77(5) of Directive 2009/138/EC shall be assumed to be equal to 6 %.



Subsection 5

Calculation of technical provisions as a whole

Article 40

Circumstances in which technical provisions shall be calculated as a whole and the method to be used

1.  For the purposes of the second subparagraph of Article 77(4) of Directive 2009/138/EC, reliability shall be assessed pursuant to paragraphs 2 and 3 of this Article and technical provisions shall be valued pursuant to paragraph 4 of this Article.

2.  The replication of cash flows shall be considered to be reliable where those cash flows are replicated in amount and timing in relation to the underlying risks of those cash flows and in all possible scenarios. The following cash flows associated with insurance or reinsurance obligations cannot be reliably replicated:

(a) cash flows associated with insurance or reinsurance obligations that depend on the likelihood that policy holders will exercise contractual options, including lapses and surrenders;

(b) cash flows associated with insurance or reinsurance obligations that depend on the level, trend, or volatility of mortality, disability, sickness and morbidity rates;

(c) all expenses that will be incurred in servicing insurance and reinsurance obligations.

3.  Financial instruments shall be considered to be financial instruments for which a reliable market value is observable where those financial instruments are traded on an active, deep, liquid and transparent market. Active markets shall also comply with Article 10(4).

4.  Insurance and reinsurance undertakings shall determine the value of technical provisions on the basis of the market price of the financial instruments used in the replication.



Subsection 6

Recoverables from reinsurance contracts and special purpose vehicles

Article 41

General provisions

1.  The amounts recoverable from reinsurance contracts and special purpose vehicles shall be calculated consistently with the boundaries of the insurance or reinsurance contracts to which those amounts relate.

2.  The amounts recoverable from special purpose vehicles, the amounts recoverable from finite reinsurance contracts as referred to in Article 210 of Directive 2009/138/EC and the amounts recoverable from other reinsurance contracts shall each be calculated separately. The amounts recoverable from a special purpose vehicle shall not exceed the aggregate maximum risk exposure of that special purpose vehicle to the insurance or reinsurance undertaking.

3.  For the purpose of calculating the amounts recoverable from reinsurance contracts and special purpose vehicles, cash flows shall only include payments in relation to compensation of insurance events and unsettled insurance claims. Payments in relation to other events or settled insurance claims shall be accounted for outside the amounts recoverable from reinsurance contracts and special purpose vehicles and other elements of the technical provisions. Where a deposit has been made for the cash flows, the amounts recoverable shall be adjusted accordingly to avoid a double counting of the assets and liabilities relating to the deposit.

4.  The amounts recoverable from reinsurance contracts and special purpose vehicles for non-life insurance obligations shall be calculated separately for premium provisions and provisions for claims outstanding in the following manner:

(a) the cash flows relating to provisions for claims outstanding shall include the compensation payments relating to the claims accounted for in the gross provisions for claims outstanding of the insurance or reinsurance undertaking ceding risks;

(b) the cash flows relating to premium provisions shall include all other payments.

5.  Where cash flows from the special purpose vehicles to the insurance or reinsurance undertaking do not directly depend on the claims against the insurance or reinsurance undertaking ceding risks, the amounts recoverable from those special purpose vehicles for future claims shall only be taken into account to the extent that it can be verified in a prudent, reliable and objective manner that the structural mismatch between claims and amounts recoverable is not material.

Article 42

Counterparty default adjustment

1.  Adjustments to take account of expected losses due to default of a counterparty referred to in Article 81 of Directive 2009/138/EC shall be calculated separately from the rest of the amounts recoverable.

2.  The adjustment to take account of expected losses due to default of a counterparty shall be calculated as the expected present value of the change in cash flows underlying the amounts recoverable from that counterparty, that would arise if the counterparty defaults, including as a result of insolvency or dispute, at a certain point in time. For that purpose, the change in cash flows shall not take into account the effect of any risk mitigating technique that mitigates the credit risk of the counterparty, other than risk mitigating techniques based on collateral holdings. The risk mitigating techniques that are not taken into account shall be separately recognised without increasing the amount recoverable from reinsurance contracts and special purpose vehicles.

3.  The calculation referred to in paragraph 2 shall take into account possible default events over the lifetime of the reinsurance contract or arrangement with the special purpose vehicle and whether and how the probability of default varies over time. It shall be carried out separately by each counterparty and for each line of business. In non-life insurance, it shall also be carried out separately for premium provisions and provisions for claims outstanding.

4.  The average loss resulting from a default of a counterparty, referred to in Article 81 of Directive 2009/138/EC, shall not be assessed at lower than 50 % of the amounts recoverable excluding the adjustment referred to in paragraph 1, unless there is a reliable basis for another assessment.

5.  The probability of default of a special purpose vehicle shall be calculated on the basis of the credit risk inherent in the assets held by the special purpose vehicle.



SECTION 4

Relevant risk-free interest rate term structure



Subsection 1

General provisions

▼M6

Article 43

General provisions

1.  The rates of the basic risk-free interest rate term structure shall meet all of the following criteria:

(a) insurance and reinsurance undertakings are able to earn the rates in a risk-free manner in practice;

(b) the rates are reliably determined based on financial instruments traded in a deep, liquid and transparent financial market.

The rates of the relevant risk-free interest rate term structure shall be calculated separately for each currency and maturity, based on all information and data relevant for that currency and that maturity.

2.  The techniques, data specifications and parameters used for determining the technical information on the relevant risk-free interest rate term structure referred to in Article 77e(1) of Directive 2009/138/EC, including the ultimate forward rate, the last maturity for which the relevant risk-free interest rate term structure is not being extrapolated and the duration of its convergence towards the ultimate forward rate, shall be transparent, prudent, reliable, objective and consistent over time.

3.  EIOPA shall inform the Commission of any substantial change in the data used for determining the technical information on the relevant risk-free interest term structure. A substantial change shall mean any change which renders the techniques, data specifications or parameters invalid, including the ultimate forward rate, the last maturity for which the basic risk-free interest rate term structure is not being extrapolated and the duration of its convergence towards the ultimate forward rate.

4.  In the event of a substantial change in the data as referred to in paragraph 3, EIOPA may submit to the Commission a proposal containing such modifications to the techniques, data specifications or parameters as are needed to address the invalidity and are proportionate to the substantial change in question. That proposal shall be accompanied by an assessment of the appropriateness and impact of those proposed modifications.

5.  A technique, data specification or parameter, including the ultimate forward rate, the last maturity for which the basic risk-free interest rate term structure is not being extrapolated and the duration of its convergence towards the ultimate forward rate, shall be modified by EIOPA at the request of the Commission to ensure that the rates of the relevant risk-free interest rate term structure are determined in a transparent, prudent, reliable and objective manner that is consistent over time.

▼B



Subsection 2

Basic risk free interest rate term structure

Article 44

Relevant financial instruments to derive the basic risk-free interest rates

1.  For each currency and maturity, the basic risk-free interest rates shall be derived on the basis of interest rate swap rates for interest rates of that currency, adjusted to take account of credit risk.

2.  For each currency, for maturities where interest rate swap rates are not available from deep, liquid and transparent financial markets the rates of government bonds issued in that currency, adjusted to take account of the credit risk of the government bonds, shall be used to derive the basic risk free-interest rates, provided that, such government bond rates are available from deep, liquid and transparent financial markets.

Article 45

Adjustment to swap rates for credit risk

The adjustment for credit risk referred to in Article 44(1) shall be determined in a transparent, prudent, reliable and objective manner that is consistent over time. The adjustment shall be determined on the basis of the difference between rates capturing the credit risk reflected in the floating rate of interest rate swaps and overnight indexed swap rates of the same maturity, where both rates are available from deep, liquid and transparent financial markets. The calculation of the adjustment shall be based on 50 percent of the average of that difference over a time period of one year. The adjustment shall not be lower than 10 basis points and not higher than 35 basis points.

Article 46

Extrapolation

1.  The principles applied when extrapolating the relevant risk free interest rate term structure shall be the same for all currencies. This shall also apply as regards the determination of the longest maturities for which interest rates can be observed in a deep, liquid and transparent market and the mechanism to ensure a smooth convergence to the ultimate forward rate.

2.  Where insurance and reinsurance undertakings apply Article 77d of Directive 2009/138/EC, the extrapolation shall be applied to the risk-free interest rates including the volatility adjustment referred to in that Article.

3.  Where insurance and reinsurance undertakings apply Article 77b of Directive 2009/138/EC, the extrapolation shall be based on the risk-free interest rates without a matching adjustment. The matching adjustment referred to in that Article shall be applied to the extrapolated risk-free interest rates.

Article 47

Ultimate forward rate

1.  For each currency, the ultimate forward rate referred to in paragraph 1 of Article 46 shall be stable over time and shall only change as a result of changes in long-term expectations. The methodology to derive the ultimate forward rate shall be clearly specified in order to ensure the performance of scenario calculations by insurance and reinsurance undertakings. It shall be determined in a transparent, prudent, reliable and objective manner that is consistent over time.

2.  For each currency the ultimate forward rate shall take account of expectations of the long-term real interest rate and of expected inflation, provided those expectations can be determined for that currency in a reliable manner. The ultimate forward rate shall not include a term premium to reflect the additional risk of holding long-term investments.

Article 48

Basic risk-free interest rate term structure of currencies pegged to the euro

1.  For a currency pegged to the euro, the basic risk-free interest rate term structure for the euro, adjusted for currency risk, may be used to calculate the best estimate with respect to insurance or reinsurance obligations denoted in that currency, provided that all of the following conditions are met:

(a) the pegging ensures that the exchange rate between that currency and the euro stays within a range not wider than 20 % of the upper limit of the range;

(b) the economic situation of the euro area and the area of that currency are sufficiently similar to ensure that interest rates for the euro and that currency develop in a similar way;

(c) the pegging arrangement ensures that the relative changes in the exchange rate over a one-year-period do not exceed the range referred to in point (a) of this paragraph, in the event of extreme market events, that correspond to the confidence level set out in Article 101(3) of Directive 2009/138/EC;

(d) one of the following criteria is complied with:

(i) participation of that currency in the European Exchange Rate Mechanism (ERM II);

(ii) existence of a decision from the Council which recognizes pegging arrangements between that currency and the euro;

(iii) establishment of the pegging arrangement by the law of the country establishing that country's currency.

For the purpose of point (c), the financial resources of the parties that guarantee the pegging shall be taken into account.

2.  The adjustment for currency risk shall be negative and shall correspond to the cost of hedging against the risk that the value in the pegged currency of an investment denominated in euro decreases as a result of changes in the level of the exchange rate between the euro and the pegged currency. The adjustment shall be the same for all insurance and reinsurance undertakings.



Subsection 3

Volatility adjustment

Article 49

Reference portfolios

1.  The reference portfolios referred to in Article 77d(2) and (4) of Directive 2009/138/EC shall be determined in a transparent, prudent, reliable and objective manner that is consistent over time. The methods applied when determining the reference portfolios shall be the same for all currencies and countries.

2.  For each currency and each country, the assets of the reference portfolio shall be valued in accordance with Article 10(1) and shall be traded in markets that, except in periods of stressed liquidity, comply with Article 40(3). Financial instruments traded in markets that temporarily cease to comply with Article 40(3) may only be included in the portfolio where that market is expected to comply with the criteria again within a reasonable period.

3.  For each currency and each country, the reference portfolio of assets shall meet all of the following requirements:

(a) for each currency, the assets are representative of the investments made by insurance and reinsurance undertakings in that currency to cover the best estimate for insurance and reinsurance obligations denominated in that currency; for each country, the assets are representative of the investments made by insurance and reinsurance undertakings in that country to cover the best estimate for insurance and reinsurance obligations sold in the insurance market of that country and denominated in the currency of that country;

(b) where available the portfolio is based on relevant indices which are readily available to the public and published criteria exist for when and how the constituents of those indices will be changed;

(c) the portfolio of assets includes all of the following assets:

 bonds, securitisations and loans, including mortgage loans

 equity

 property

For the purposes of points (a) and (b), investments of insurance and reinsurance undertakings in collective investment undertakings and other investments packaged as funds shall be treated as investments in the underlying assets.

Article 50

Formula to calculate the spread underlying the volatility adjustment

For each currency and each country the spread referred to in Article 77d(2) and (4) of Directive 2009/138/EC shall be equal to the following:

image

where:

(a)  wgov denotes the ratio of the value of government bonds included in the reference portfolio of assets for that currency or country and the value of all the assets included in that reference portfolio;

(b)  Sgov denotes the average currency spread on government bonds included in the reference portfolio of assets for that currency or country;

(c)  wcorp denotes the ratio of the value of bonds other than government bonds, loans and securitisations included in the reference portfolio of assets for that currency or country and the value of all the assets included in that reference portfolio;

(d)  Scorp denotes the average currency spread on bonds other than government bonds, loans and securitisations included in the reference portfolio of assets for that currency or country.

For the purposes of this Article, ‘government bonds’ means exposures to central governments and central banks.

Article 51

Risk-corrected spread

The portion of the average currency spread that is attributable to a realistic assessment of expected losses, unexpected credit risk or any other risk referred to in Article 77d(3) and (4) of Directive 2009/138/EC shall be calculated in the same manner as the fundamental spread referred to in Article 77c (2) of Directive 2009/138/EC and Article 54 of this Regulation.



Subsection 4

Matching adjustment

Article 52

Mortality risk stress

1.  The mortality risk stress referred to in Article 77b(1)(f) of Directive 2009/138/EC shall be the more adverse of the following two scenarios in terms of its impact on basic own funds:

(a) an instantaneous permanent increase of 15 % in the mortality rates used for the calculation of the best estimate;

(b) an instantaneous increase of 0.15 percentage points in the mortality rates (expressed as percentages) which are used in the calculation of technical provisions to reflect the mortality experience in the following 12 months.

2.  For the purpose of paragraph 1 the increase in mortality rates shall only apply to those insurance policies for which the increase in mortality rates leads to an increase in technical provisions taking into account all of the following:

(a) multiple insurance policies in respect of the same insured person may be treated as if they were one insurance policy;

(b) where the calculation of technical provisions is based on groups of policies as referred to in Article 35, the identification of the policies for which technical provisions increase under an increase of mortality rates may also be based on those groups of policies instead of single policies, provided that it yields a result which is not materially different.

3.  With regard to reinsurance obligations, the identification of the policies for which technical provisions increase under an increase of mortality rates shall apply to the underlying insurance policies only and shall be carried out in accordance with paragraph 2.

Article 53

Calculation of the matching adjustment

1.  For the purpose of the calculation referred to in Article 77c(1)(a) of Directive 2009/138/EC insurance and reinsurance undertakings shall only consider the assigned assets whose expected cash flows are required to replicate the cash flows of the portfolio of insurance and reinsurance obligations, excluding any assets in excess of that. The ‘expected cash flow’ of an asset means the cash flow of the asset adjusted to allow for the probability of default of the asset that corresponds to the element of the fundamental spread set out in Article 77c(2)(a)(i) of Directive 2009/138/EC or, where no reliable credit spread can be derived from the default statistics, the portion of the long term average of the spread over the risk-free interest rate set out in Article 77c(2)(b) and (c) of that Directive.

2.  The deduction of the fundamental spread, referred to in Article 77c(1)(b) of Directive 2009/138/EC, from the result of the calculation set out in Article 77c(1)(a) of that Directive, shall include only the portion of the fundamental spread that has not already been reflected in the adjustment to the cash flows of the assigned portfolio of assets, as set out in paragraph 1 of this Article.

Article 54

Calculation of the fundamental spread

1.  The fundamental spread referred to in Article 77c(2) shall be calculated in a transparent, prudent, reliable and objective manner that is consistent over time, based on relevant indices where available. The methods to derive fundamental spread of a bond shall be the same for each currency and each country and may be different for government bonds and for other bonds.

2.  The calculation of the credit spread referred to in Article 77c(2)(a)(i) of Directive 2009/138/EC shall be based on the assumption that in case of default 30 % of the market value can be recovered.

3.  The long-term average referred to in Article 77c(2)(b) and (c) of Directive 2009/138/EC shall be based on data relating to the last 30 years. Where a part of that data is not available, it shall be replaced by constructed data. The constructed data shall be based on the available and reliable data relating to the last 30 years. Data that is not reliable shall be replaced by constructed data using that methodology. The constructed data shall be based on prudent assumptions.

4.  The expected loss referred to in Article 77c(2)(a)(ii) of Directive 2009/138/EC shall correspond to the probability-weighted loss the insurance or reinsurance undertaking incurs where the asset is downgraded to a lower credit quality step and is replaced immediately afterwards. The calculation of the expected loss shall be based on the assumption that the replacing asset meets all of the following criteria:

(a) the replacing asset has the same cash flow pattern as the replaced asset before downgrade;

(b) the replacing asset belongs to the same asset class as the replaced asset;

(c) the replacing asset has the same credit quality step as the replaced asset before downgrade or a higher one.



SECTION 5

Lines of business

Article 55

Lines of business

1.  The lines of business referred to in Article 80 of Directive 2009/138/EC shall be those set out in Annex I to this Regulation.

2.  The assignment of an insurance or reinsurance obligation to a line of business shall reflect the nature of the risks relating to the obligation. The legal form of the obligation shall not necessarily be determinative of the nature of the risk.

3.  Provided that the technical basis is consistent with the nature of the risks relating to the obligation, obligations of health insurance pursued on a similar technical basis to that of life insurance shall be assigned to the lines of business for life insurance and obligations of health insurance pursued on a similar technical basis to that of non-life insurance shall be assigned to the lines of business for non-life insurance.

4.  Where the insurance obligations arising from the operations referred to in Article 2(3)(b) of Directive 2009/138/EC cannot clearly be assigned to the lines of business set out in Annex I to this Regulation on the basis of their nature, they shall be included in line of business 32 as set out in that Annex.

5.  Where an insurance or reinsurance contract covers risks across life and non-life insurance, the insurance or reinsurance obligations shall be unbundled into their life and non-life parts.

6.  Where an insurance or reinsurance contract covers risks across the lines of business as set out in Annex I to this Regulation, the insurance or reinsurance obligations shall, where possible, be unbundled into the appropriate lines of business.

7.  Where an insurance or reinsurance contract includes health insurance or reinsurance obligations and other insurance or reinsurance obligations, those obligations shall, where possible, be unbundled.



SECTION 6

Proportionality and simplifications

Article 56

Proportionality

1.  Insurance and reinsurance undertakings shall use methods to calculate technical provisions which are proportionate to the nature, scale and complexity of the risks underlying their insurance and reinsurance obligations.

2.  In determining whether a method of calculating technical provisions is proportionate, insurance and reinsurance undertakings shall carry out an assessment which includes:

(a) an assessment of the nature, scale and complexity of the risks underlying their insurance and reinsurance obligations;

(b) an evaluation in qualitative or quantitative terms of the error introduced in the results of the method due to any deviation between the following:

(i) the assumptions underlying the method in relation to the risks;

(ii) the results of the assessment referred to in point (a).

3.  The assessment referred to in point (a) of paragraph 2 shall include all risks which affect the amount, timing or value of the cash in- and out-flows required to settle the insurance and reinsurance obligations over their lifetime. For the purpose of the calculation of the risk margin, the assessment shall include all risks referred to in Article 38(1)(i) over the lifetime of the underlying insurance and reinsurance obligations. The assessment shall be restricted to the risks that are relevant to that part of the calculation of technical provisions to which the method is applied.

4.  A method shall be considered to be disproportionate to the nature, scale and complexity of the risks if the error referred to in point (b) of paragraph 2 leads to a misstatement of technical provisions or their components that could influence the decisions-making or judgment of the intended user of the information relating to the value of technical provisions, unless one of the following conditions are met:

(a) no other method with a smaller error is available and the method is not likely to result in an underestimation of the amount of technical provisions;

(b) the method leads to an amount of technical provisions of the insurance or reinsurance undertaking that is higher than the amount that would result from using a proportionate method and the method does not lead to an underestimation of the risk inherent in the insurance and reinsurance obligations that it is applied to.

Article 57

Simplified calculation of recoverables from reinsurance contracts and special purpose vehicles

1.  Without prejudice to Article 56 of this Regulation, insurance and reinsurance undertakings may calculate the amounts recoverable from reinsurance contracts and special purpose vehicles before adjusting those amounts to take account of the expected loss due to default of the counterparty as the difference between the following estimates:

(a) the best estimate calculated gross as referred to in Article 77(2) of Directive 2009/138/EC;

(b) the best estimate, after taking into account the amounts recoverable from reinsurance contracts and special purpose vehicles and without an adjustment for the expected loss due to default of the counterparty (unadjusted net best estimate) calculated in accordance with paragraph 2.

2.  Insurance and reinsurance undertakings may use methods to derive the unadjusted net best estimate from the gross best estimate without an explicit projection of the cash flows underlying the amounts recoverable from reinsurance contracts and special purpose vehicles. Insurance and reinsurance undertakings shall calculate the unadjusted net best estimate based on homogeneous risk groups. Each of those homogeneous risk groups shall cover not more than one reinsurance contract or special purpose vehicles unless those reinsurance contracts or special purpose vehicles provide a transfer of homogeneous risks.

Article 58

Simplified calculation of the risk margin

Without prejudice to Article 56, insurance and reinsurance undertakings may use simplified methods when they calculate the risk margin, including one or more of the following:

(a) methods which use approximations of the amounts denoted by the terms SCR(t) referred to in Article 37(1);

(b) methods which approximate the discounted sum of the amounts denoted by the terms SCR(t) as referred to in Article 37(1) without calculating each of those amounts separately.

Article 59

Calculations of the risk margin during the financial year

Without prejudice to Article 56, insurance and reinsurance undertakings may derive the risk margin for calculations that need to be performed quarterly from the result of an earlier calculation of the risk margin without an explicit calculation of the formula referred to in Article 37(1).

Article 60

Simplified calculation of the best estimate for insurance obligations with premium adjustment mechanism

Without prejudice to Article 56, insurance and reinsurance undertakings may calculate the best estimate of life insurance obligations with an arrangement by which the insurance undertaking has the right or the obligation to adjust the future premiums of an insurance contract to reflect material changes in the expected level of claims and expenses (premium adjustment mechanism) using cash flow projections which assume that changes in the level of claims and expenses occur simultaneously with premium adjustments and which result in a net cash flow that is equal to zero, provided that all of the following conditions are met:

(a) the premium adjustment mechanism fully compensates the insurance undertaking for any increase in the level of claims and expenses in a timely manner;

(b) the calculation does not result in an underestimation of the best estimate;

(c) the calculation does not result in an underestimation of the risk inherent in those insurance obligations.

Article 61

Simplified calculation of the counterparty default adjustment

Without prejudice to Article 56 of this Regulation, insurance and reinsurance undertakings may calculate the adjustment for expected losses due to default of the counterparty, referred to in Article 81 of Directive 2009/138/EC, for a specific counterparty and homogeneous risk group to be equal as follows:

image

where:

(a)  PD denotes the probability of default of that counterparty during the following 12 months;

(b)  Durmod denotes the modified duration of the amounts recoverable from reinsurance contracts with that counterparty in relation to that homogeneous risk group;

(c)  BErec denotes the amounts recoverable from reinsurance contracts with that counterparty in relation to that homogeneous risk group.



CHAPTER IV

OWN FUNDS



SECTION 1

Determination of own funds



Subsection 1

Supervisory approval of ancillary own funds

Article 62

Assessment of the application

1.  Supervisory authorities shall take all of the following into account for the purposes of the assessment referred to in Article 90 (4) of Directive 2009/138/EC:

(a) the legal effectiveness and enforceability of the terms of the commitment in all relevant jurisdictions;

(b) the contractual terms of the arrangement that the insurance or reinsurance undertaking has entered into, or will enter into, with the counterparties to provide funds;

(c) where relevant, the insurance or reinsurance undertaking's memorandum and articles of association or statutes;

(d) whether the insurance or reinsurance undertaking has processes in place to inform the supervisory authorities of any future changes, which may have the effect of reducing the loss-absorbency of the ancillary own-fund item, to any of the following:

(i) the structure or contractual terms of the arrangement;

(ii) the status of the counterparties concerned;

(iii) the recoverability of the ancillary own funds item.

2.  Supervisory authorities shall also assess whether Article 90 of Directive 2009/138/EC is complied with taking into account the range of circumstances under which the item can be called up to absorb losses.

3.  Where the insurance or reinsurance undertaking is seeking approval of a method by which to determine the amount of each ancillary own-fund item, the supervisory authorities shall assess whether the undertaking's process for regularly validating the method is appropriate to ensure that the results of the method reflect the loss-absorbency of the item on an ongoing basis.

4.  In addition to the requirements set out in paragraphs 1 to 3, supervisory authorities shall assess the application for approval of ancillary own funds on the basis of the criteria set out in Articles 63, 64 and 65.

Article 63

Assessment of the application — Status of the counterparties

1.  Supervisory authorities shall take all of the following into account for the purposes of the assessment of the counterparties' ability to pay referred to in Article 90(4)(a) of Directive 2009/138/EC:

(a) the risk of default of the counterparties;

(b) the risk that default arises from a delay in the counterparties satisfying their commitments under the ancillary own funds item.

2.  In relation to paragraph 1(a), the supervisory authorities shall assess the risk of default of the counterparties by examining the probability of default of the counterparties and the loss given default, taking into account all of the following criteria:

(a) the credit standing of the counterparties, provided that this appropriately reflects the counterparties' ability to satisfy their commitments under the ancillary own funds item;

(b) whether there are any current or foreseeable practical or legal impediments to the counterparties' satisfaction of their commitments under the ancillary own funds item;

(c) whether the counterparties are subject to legal or regulatory requirements that reduce the counterparties' ability to satisfy their commitments under the ancillary own funds item;

(d) whether the legal form of the counterparties prejudice the counterparties' satisfaction of their commitments under the ancillary own funds item;

(e) whether the counterparties are subject to other exposures which reduce the counterparties' ability to satisfy their commitments under the ancillary own funds item;

(f) whether, in relation to their commitment under the ancillary own fund item, the contractual terms of the arrangement under any applicable law are such that the counterparties have rights to set-off amounts they owe against any amounts owed to them by the insurance or reinsurance undertaking.

3.  In relation to paragraph 1(b), the supervisory authorities shall assess the liquidity position of the counterparties, taking into account all of the following:

(a) whether there are any current or foreseeable practical or legal impediments to the counterparties' ability to promptly satisfy their commitments under the ancillary own funds item;

(b) whether the counterparties are subject to legal or regulatory requirements that may reduce the counterparties' ability to promptly satisfy their commitments under the ancillary own funds item;

(c) whether the legal form of the counterparties prejudices the counterparties' prompt satisfaction of their commitments under the ancillary own funds item.

4.  Supervisory authorities shall take all of the following into account for the purposes of the assessment of the counterparties' willingness to pay referred to in Article 90(4)(a) of Directive 2009/138/EC:

(a) the range of circumstances under which the ancillary own funds item can be called up to absorb losses;

(b) whether incentives or disincentives exist which may affect the counterparties' willingness to satisfy their commitments under the ancillary own funds item;

(c) whether previous transactions between the counterparties and the insurance or reinsurance undertaking, including the counterparties' previous satisfaction of their commitments under ancillary own funds items, give an indication as to the counterparties' willingness to satisfy their current commitments under the ancillary own funds item.

5.  The supervisory authorities shall, in assessing the counterparties' ability and willingness to pay, consider any other factors relevant to the status of the counterparties including, where relevant, the insurance or reinsurance undertaking's business model.

6.  Where an ancillary own-fund item concerns a group of counterparties, supervisory authorities and insurance and reinsurance undertakings may assess the status of the group of counterparties as though it were a single counterparty provided that all of the following conditions are fulfilled:

(a) the counterparties are individually non-material;

(b) the counterparties included in that group are sufficiently homogeneous;

(c) the assessment of a group of counterparties does not overestimate the ability and willingness to pay of the counterparties included in that group.

7.  A counterparty shall be considered as material where the status of that single counterparty is likely to have a significant effect on the assessment of the group of counterparties' ability and willingness to pay.

Article 64

Assessment of the application — Recoverability of the funds

Supervisory authorities shall take all of the following into account for the purposes of the assessment of the recoverability of the funds referred to in Article 90(4)(b) of Directive 2009/138/EC:

(a) whether the recoverability of the funds is increased as a result of the availability of collateral or an analogous arrangement that complies with Articles 209 to 214;

(b) whether there is any current or foreseeable practical or legal impediment to the recoverability of the funds;

(c) whether the recoverability of the funds is subject to legal or regulatory requirements;

(d) the ability of the insurance or reinsurance undertaking to take action to enforce the counterparties' satisfaction of their commitments under the ancillary own funds item.

Article 65

Assessment of the application — Information on the outcome of past calls

Supervisory authorities shall take all of the following into account for the purposes of the assessment of the information on the outcome of past calls referred to in Article 90(4)(c) of Directive 2009/138/EC:

(a) whether the insurance or reinsurance undertaking has made past calls from the same or similar counterparties under the same or similar circumstances;

(b) whether that information is relevant and reliable as regards the expected outcome of future calls.

Article 66

Specification of amount relating to an unlimited amount of ancillary own funds

1.  The supervisory authorities shall not approve an unlimited amount of ancillary own funds.

2.  Where the supervisory authorities approve an amount of ancillary own funds, the decision of the supervisory authorities shall specify whether the amount that has been approved is the amount for which the insurance or reinsurance undertaking has applied or a lower amount.

Article 67

Specification of amount and timing relating to the approval of a method

Where the supervisory authorities approve a method to determine the amount of each ancillary own fund item, the supervisory authorities' decision shall set out all of the following:

(a) the initial amount of the ancillary own funds item that has been calculated using that method at the date the approval is granted;

(b) the minimum frequency of recalculation of the amount of ancillary own funds item using that method where it is more frequent than annual, and the reasons for that frequency;

(c) the time period for which the calculation of the ancillary own funds item using that method is granted.



Subsection 2

Own funds treatment of participations

Article 68

Treatment of participations in the determination of basic own funds

1.  For the purpose of determining the basic own funds of insurance and reinsurance undertakings, basic own funds as referred to in Article 88 of Directive 2009/138/EC shall be reduced by the full value of participations, as referred to in Article 92(2) of that Directive, in a financial and credit institution that exceeds 10 % of items included in points (a) (i), (ii), (iv) and (vi) of Article 69.

2.  For the purpose of determining the basic own funds of insurance and reinsurance undertakings, basic own funds as referred to in Article 88 of Directive 2009/138/EC shall be reduced by the part of the value of all participations, as referred to in Article 92(2) of that Directive, in financial and credit institutions, other than participations referred to in paragraph 1, that exceeds 10 % of items included in points (a) (i), (ii), (iv) and (vi) of Article 69.

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3.  Notwithstanding paragraphs 1 and 2, insurance and reinsurance undertakings shall not deduct strategic participations as referred to in Article 171 which are included in the calculation of the group solvency on the basis of method 1 as set out in Annex I to Directive 2002/87/EC or on the basis of method 1 as set out in Article 230 of Directive 2009/138/EC.

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4.  The deductions set out in paragraph 2 shall be applied on a pro-rata basis to all participations referred to in that paragraph.

5.  The deductions set out in paragraphs 1 and 2 shall be made from the corresponding tier in which the participation has increased the own funds of the related undertaking as follows:

(a) holdings of Common Equity Tier 1 items of financial and credit institutions shall be deducted from the items included in points (a) (i), (ii), (iv) and (vi) of Article 69;

(b) holdings of Additional Tier 1 instruments of financial and credit institutions shall be deducted from the items included in points (a)(iii) and (v) and point (b) of Article 69;

(c) holdings of Tier 2 instruments of financial and credit institutions shall be deducted from the basic own-fund items included in Article 72.



SECTION 2

Classification of own funds

Article 69

Tier 1 — List of own-fund items

The following basic own-fund items shall be deemed to substantially possess the characteristics set out in Article 93(1)(a) and (b) of Directive 2009/138/EC, taking into consideration the features set out in Article 93(2) of that Directive, and shall be classified as Tier 1, where those items display all of the features set out in Article 71:

(a) the part of excess of assets over liabilities, valued in accordance with Article 75 and Section 2 of Chapter VI of Directive 2009/138/EC, comprising the following items:

(i) paid-in ordinary share capital and the related share premium account;

(ii) paid-in initial funds, members' contributions or the equivalent basic own-fund item for mutual and mutual-type undertakings;

(iii) paid-in subordinated mutual member accounts;

(iv) surplus funds that are not considered as insurance and reinsurance liabilities in accordance with Article 91(2) of Directive 2009/138/EC;

(v) paid-in preference shares and the related share premium account;

(vi) a reconciliation reserve;

(b) paid-in subordinated liabilities valued in accordance with Article 75 of Directive 2009/138/EC.

Article 70

Reconciliation Reserve

1.  The reconciliation reserve referred to in point (a)(vi) of Article 69 equals the total excess of assets over liabilities reduced by all of the following:

(a) the amount of own shares held by the insurance and reinsurance undertaking;

(b) foreseeable dividends, distributions and charges;

(c) the basic own-fund items included in points (a)(i) to (v) of Article 69, Article 72(a) and Article 76(a);

(d) the basic own-fund items not included in points (a)(i) to (v) of Article 69, point (a) of Article 72 and point (a) of Article 76, which have been approved by the supervisory authority in accordance with Article 79;

(e) the restricted own-fund items that meet one of the following requirements:

(i) exceed the notional Solvency Capital Requirement in the case of matching adjustment portfolios and ring-fenced funds determined in accordance with Article 81(1);

(ii) that are excluded in accordance with Article 81(2);

(f) the amount of participations held in financial and credit institutions as referred to in Article 92(2) of Directive 2009/138/EC deducted in accordance with Article 68, to the extent that this is not already included in points (a) to (e).

2.  The excess of assets over liabilities referred to in paragraph 1 includes the amount that corresponds to the expected profit included in future premiums set out in paragraph 2 of Article 260.

3.  The determination of whether, and to what extent, the reconciliation reserve displays the features set out in Article 71 shall not amount to an assessment of the features of the assets and liabilities that are included in computing the excess of assets over liabilities or the underlying items in the undertakings' financial statements.

Article 71

Tier 1 — Features determining classification

1.  The features referred to in Article 69 shall be the following:

(a) the basic own fund item:

(i) in the case of items referred to in points (a) (i) and (ii) of Article 69, ranks after all other claims in the event of winding-up proceedings regarding the insurance or reinsurance undertaking;

(ii) in the case of items referred to in points (a)(iii) and (v) and point (b) of Article 69, ranks to the same degree as, or ahead of, the items referred to in points (a)(i) and (ii) of Article 69, but after items listed in Articles 72 and 76 that display the features set out in Article 73 and 77 respectively and after the claims of all policy holders and beneficiaries and non-subordinated creditors;

(b) the basic own-fund item does not include features which may cause the insolvency of the insurance or reinsurance undertaking or may accelerate the process of the undertaking becoming insolvent;

(c) the basic own fund item is immediately available to absorb losses;

(d) the basic own-fund item absorbs losses at least once there is non-compliance with the Solvency Capital Requirement and does not hinder the recapitalisation of the insurance or reinsurance undertaking;

(e) the basic own-fund item, in the case of items referred to in points (a)(iii) and (v) and point (b) of Article 69, possesses one of the following principal loss absorbency mechanisms to be triggered at the trigger event specified in paragraph 8:

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(i) the nominal or principal amount of the basic own-fund item is written down as set out in paragraphs 5 and 5a;

(ii) the basic own-fund item automatically converts into a basic own-fund item listed in point (a)(i) or (ii) of Article 69 as set out in paragraphs 6 and 6a of this Article;

▼B

(iii) a principal loss absorbency mechanism that achieves an equivalent outcome to the principal loss absorbency mechanisms set out in points (i) or (ii);

(f) the basic own-fund item meets one of the following criteria:

(i) in the case of items referred to in points (a)(i) and (ii) of Article 69, the item is undated or, where the insurance or reinsurance undertaking has a fixed maturity, is of the same maturity as the undertaking;

(ii) in the case of items referred to in points (a)(iii) and (v) and point (b) of Article 69, the item is undated; the first contractual opportunity to repay or redeem the basic own-fund item does not occur before 5 years from the date of issuance;

(g) the basic own-fund item referred to in points (a)(iii) and (v) and point (b) of Article 69 may only allow for repayment or redemption of that item between 5 and 10 years after the date of issuance where the undertaking's Solvency Capital Requirement is exceeded by an appropriate margin taking into account the solvency position of the undertaking including the undertaking's medium-term capital management plan;

(h) the basic own-fund item, in the case of items referred to in points (a)(i), (ii), (iii) and (v) and point (b) of Article 69, is only repayable or redeemable at the option of the insurance or reinsurance undertaking and the repayment or redemption of the basic own-fund item is subject to prior supervisory approval;

(i) the basic own-fund item, in the case of items referred to in points (a)(i), (ii), (iii) and (v) and point (b) of Article 69, does not include any incentives to repay or redeem that item that increase the likelihood that an insurance or reinsurance undertaking will repay or redeem that basic own-fund item where it has the option to do so;

(j) the basic own-fund item, in the case of items referred to in points (a)(i), (ii), (iii) and (v) and point (b) of Article 69, provides for the suspension of repayment or redemption of that item where there is non-compliance with the Solvency Capital Requirement or repayment or redemption would lead to such non-compliance until the undertaking complies with the Solvency Capital Requirement and the repayment or redemption would not lead to non-compliance with the Solvency Capital Requirement;

(k) notwithstanding point (j), the basic own-fund item may only allow for repayment or redemption of that item where there is non-compliance with the Solvency Capital Requirement or repayment or redemption would lead to such non-compliance, where all of the following conditions are met:

(i) the supervisory authority has exceptionally waived the suspension of repayment or redemption of that item;

(ii) the item is exchanged for or converted into another Tier 1 own-fund item of at least the same quality;

(iii) the Minimum Capital Requirement is complied with after the repayment or redemption.

(l) the basic own-fund item meets one of the following criteria:

(i) in the case of items referred to in points (a)(i) and (ii) of Article 69(1), either the legal or contractual arrangements governing the basic own-fund item or national legislation allow for the cancellation of distributions in relation to that item where there is non-compliance with the Solvency Capital Requirement or the distribution would lead to such non-compliance until the undertaking complies with the Solvency Capital Requirement and the distribution would not lead to non-compliance with the Solvency Capital Requirement;

(ii) in the case of items referred to in points (a)(iii) and (v) and point (b) of Article 69 the terms of the contractual arrangement governing the basic own-fund item provide for the cancellation of distributions in relation to that item where there is non-compliance with the Solvency Capital Requirement or the distribution would lead to such non-compliance until the undertaking complies with the Solvency Capital Requirement and the distribution would not lead to non-compliance with the Solvency Capital Requirement;

(m) the basic own-fund item may only allow for a distribution to be made where there is non-compliance with the Solvency Capital Requirement or the distribution on a basic-own fund item would lead to such non-compliance, where all of the following conditions are met:

(i) the supervisory authority has exceptionally waived the cancellation of distributions;

(ii) the distribution does not further weaken the solvency position of the insurance or reinsurance undertaking;

(iii) the Minimum Capital Requirement is complied with after the distribution is made.

(n) the basic own fund item, in the case of items referred to in points (a)(i), (ii), (iii) and (v) and point (b) of Article 69, provides the insurance or reinsurance undertaking with full flexibility over the distributions on the basic own-fund item;

(o) the basic own-fund item is free from encumbrances and is not connected with any other transaction, which when considered with the basic own-fund item, could result in that basic own-fund item not complying with Article 94(1) of Directive 2009/138/EC.

2.  For the purposes of this Article, the exchange or conversion of a basic own-fund item into another Tier 1 basic own-fund item or the repayment or redemption of a Tier 1 own-fund item out of the proceeds of a new basic own-fund item of at least the same quality shall not be deemed to be a repayment or redemption, provided that the exchange, conversion, repayment or redemption is subject to the approval of the supervisory authority.

3.  For the purposes of point (n) of paragraph 1, in the case of basic own-fund items referred to in points (a)(i) and (ii) of Article 69, full flexibility over the distributions is provided where all of the following conditions are met:

(a) there is no preferential distribution treatment regarding the order of distribution payments and the terms of the contractual arrangement governing the own-fund item do not provide preferential rights to the payment of distributions;

(b) distributions are paid out of distributable items;

(c) the level of distributions is not determined on the basis of the amount for which the own-fund item was purchased at issuance and there is no cap or other restriction on the maximum level of distribution;

(d) notwithstanding point (c), in the case of instruments issued by mutual and mutual-type undertakings, a cap or other restriction on the maximum level of distribution may be set, provided that cap or other restriction is not an event linked to distributions being made, or not made, on other own fund items;

(e) there is no obligation for an insurance or reinsurance undertaking to make distributions;

(f) non-payment of distributions does not constitute an event of default of the insurance or reinsurance undertaking;

(g) the cancellation of distributions imposes no restrictions on the insurance or reinsurance undertaking.

4.  For the purposes of point (n) of paragraph 1, in the case of basic own-fund items referred to in points (a)(iii) and (a)(v) and point (b) of Article 69 full flexibility over the distributions is provided where all of the following conditions are met:

(a) distributions are paid out of distributable items;

(b) insurance and reinsurance undertakings have full discretion at all times to cancel distributions in relation to the own-fund item for an unlimited period and on a non-cumulative basis and the undertakings may use the cancelled payments without restriction to meet its obligations as they fall due;

(c) there is no obligation to substitute the distribution by a payment in any other form;

(d) there is no obligation to make distributions in the event of a distribution being made on another own fund item;

(e) non-payment of distributions does not constitute an event of default of the insurance or reinsurance undertaking;

(f) the cancellation of distributions imposes no restrictions on the insurance or reinsurance undertaking.

5.  For the purposes of paragraph (1)(e)(i), the nominal or principal amount of the basic own-fund item shall be written down in such a way that all of the following are reduced:

(a) the claim of the holder of that item in the event of winding-up proceedings;

(b) the amount required to be paid on repayment or redemption of that item;

(c) the distributions paid on that item.

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5a.  For the purposes of point (i) of point (e) of paragraph 1, the provisions governing the write-down of the nominal or principal amount of the basic own-fund item shall provide for all of the following:

a) if the trigger event specified in paragraph 8 has occurred in the circumstances described in point (c) of the second subparagraph of that paragraph and a partial write-down would be sufficient to re-establish compliance with the Solvency Capital Requirement, there is a partial write-down of the nominal or principal amount for an amount that is at least sufficient to re-establish compliance with the Solvency Capital Requirement;

b) if the trigger event specified in paragraph 8 has occurred in the circumstances described in point (c) of the second subparagraph of that paragraph and a partial write-down would not be sufficient to re-establish compliance with the Solvency Capital Requirement, the nominal or principal amount as determined at the time of original issuance of the basic own-fund item is written down at least on a linear basis in a manner which ensures that full write-down will occur when 75 % coverage of the Solvency Capital Requirement is reached, or prior to that event;

c) if the trigger event specified in paragraph 8 has occurred in the circumstances described in point (a) or point (b) of the second subparagraph of that paragraph, the nominal or principal amount is written down in full;

d) following a write-down in accordance with point (b) of this paragraph (‘the initial write-down’):

(i) if the trigger event specified in paragraph 8 subsequently occurs in the circumstances described in point (a) or point (b) of the second subparagraph of that paragraph, the nominal or principal amount is written down in full;

(ii) if, by the end of the period of three months from the date of the trigger event that resulted in the initial write-down, no trigger event has occurred in the circumstances described in point (a) or point (b) of the second subparagraph of paragraph 8 but the solvency ratio has deteriorated further, the nominal or principal amount as determined at the time of original issuance of the basic own-fund item is written down further in accordance with point (b) of this paragraph to reflect that further deterioration in the solvency ratio;

(iii) a further write-down is made in accordance with point (ii) for each subsequent deterioration in the solvency ratio at the end of each subsequent period of three months until the insurance or reinsurance undertaking has re-established compliance with the Solvency Capital Requirement.

For the purposes of this paragraph, ‘solvency ratio’ means the ratio of the eligible amount of own funds to cover the Solvency Capital Requirement and the Solvency Capital Requirement, using the latest available values.

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6.  For the purposes of paragraph (1)(e)(ii), the provisions governing the conversion into basic own-fund items listed in points (a) (i) or (ii) of Article 69 shall specify either of the following:

(a) the rate of conversion and a limit on the permitted amount of conversion;

(b) a range within which the instruments will convert into the basic own funds item listed in points (a)(i) or (ii) of Article 69.

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6a.  For the purposes of point (ii) of point (e) of paragraph 1, the provisions governing the conversion into basic own-fund items listed in points (i) or (ii) of point (a) of Article 69 shall provide for all of the following:

a) if the trigger event specified in paragraph 8 has occurred in the circumstances described in point (c) of the second subparagraph of that paragraph and a partial conversion would be sufficient to re-establish compliance with the Solvency Capital Requirement, there is a partial conversion of the item for an amount that is at least sufficient to re-establish compliance with the Solvency Capital Requirement;

b) if the trigger event specified in paragraph 8 has occurred in the circumstances described in point (c) of the second subparagraph of that paragraph and a partial conversion would not be sufficient to re-establish compliance with the Solvency Capital Requirement, the item is converted in such a way that the remaining nominal or principal amount of the item decreases at least on a linear basis ensuring that full conversion will occur when 75 % coverage of the Solvency Capital Requirement is reached, or prior to that event;

c) if the trigger event specified in paragraph 8 has occurred in the circumstances described in point (a) or point (b) of the second subparagraph of that paragraph, the item is converted in full;

d) following a conversion in accordance with point (b) of this paragraph (‘the initial conversion’):

(i) if the trigger event specified in paragraph 8 subsequently occurs in the circumstances described in point (a) or point (b) of the second subparagraph of that paragraph, the item is converted in full;

(ii) if, by the end of the period of three months from the date of the trigger event that resulted in the initial conversion, no trigger event has occurred in the circumstances described in point (a) or point (b) of the second subparagraph of paragraph 8 but the solvency ratio has deteriorated further, the item is converted further in accordance with point (b) of this paragraph to reflect that further deterioration in the solvency ratio;

(iii) a further conversion is made in accordance with point (ii) for each subsequent deterioration in the solvency ratio at the end of each subsequent period of three months until the insurance or reinsurance undertaking has re-established compliance with the Solvency Capital Requirement.

For the purposes of this paragraph, ‘solvency ratio’ has the same meaning as it has for the purposes of paragraph 5a.

▼B

7.  The nominal or principal amount of the basic own-fund item shall absorb losses at the trigger event. Loss absorbency resulting from the cancellation of, or a reduction in, distributions shall not be deemed to be sufficient to be considered to be a principal loss absorbency mechanism in accordance with paragraph (1)(e).

8.  The trigger event referred to in paragraph (1)(e) shall be significant non-compliance with the Solvency Capital Requirement.

For the purposes of this paragraph, non-compliance with the Solvency Capital Requirement shall be considered significant where any of the following conditions is met:

(a) the amount of own-fund items eligible to cover the Solvency Capital Requirement is equal to or less than the 75 % of the Solvency Capital Requirement;

(b) the amount of own-fund items eligible to cover the Minimum Capital Requirement is equal to or less than Minimum Capital Requirement;

(c) compliance with the Solvency Capital Requirement is not re-established within a period of three months of the date when non-compliance with the Solvency Capital Requirement was first observed.

Insurance and reinsurance undertakings may specify, in the provisions governing the instrument, one or more trigger events in addition to the events referred to in points (a) to (c).

9.  For the purposes of points (d), (j) and (l) of paragraph 1, references to the Solvency Capital Requirement shall be read as references to the Minimum Capital Requirement where non-compliance with the Minimum Capital Requirement occurs before non-compliance with the Solvency Capital Requirement.

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10.  Notwithstanding the requirement in point (e) of paragraph 1 for the principal loss absorbency mechanism to be triggered at the trigger event specified in paragraph 8, the basic own-fund item may allow for the principal loss absorbency mechanism not to be triggered at that event where all of the following conditions are met:

a) the trigger event occurs in the circumstances described in point (c) of the second subparagraph of paragraph 8;

b) there have been no previous trigger events in the circumstances described in point (a) or (b) of the second subparagraph of that paragraph;

c) the supervisory authority agrees exceptionally to waive the triggering of the principal loss absorbency mechanism on the basis of both of the following pieces of information:

(i) projections provided to the supervisory authority by the insurance or reinsurance undertaking when that undertaking submits the recovery plan required by Article 138(2) of Directive 2009/138/EC, that demonstrate that triggering the principal loss absorbency mechanism in that case would be very likely to give rise to a tax liability that would have a significant adverse effect on the undertaking's solvency position;

(ii) certificate issued by that undertaking's statutory auditors certifying that all of the assumptions used in the projections are realistic.

11.  Notwithstanding the requirement in point (ii) of point (f) of paragraph (1), the basic own-fund item may allow for repayment or redemption earlier than that period where all of the following conditions are met:

(a) the undertaking's Solvency Capital Requirement, after the repayment or redemption, will be exceeded by an appropriate margin taking into account the solvency position of the undertaking, including the undertaking's medium-term capital management plan;

(b) the circumstances are as described in point (i) or point (ii):

(i) there is a change in the regulatory classification of the basic own-fund item which would be likely to result in its exclusion from own funds or reclassification as a lower tier of own funds, and both of the following conditions are met:

 the supervisory authority considers such a change to be sufficiently certain;

 the undertaking demonstrates to the satisfaction of the supervisory authority that the regulatory reclassification of the basic own-fund item was not reasonably foreseeable at the time of its issuance;

(ii) there is a change in the applicable tax treatment of the basic own-fund item which the undertaking demonstrates to the satisfaction of the supervisory authority is material and was not reasonably foreseeable at the time of its issuance.

▼B

Article 72

Tier 2 Basic own-funds — List of own-fund items

The following basic own-fund items shall be deemed to substantially possess the characteristics set out in Article 93(1)(b) of Directive 2009/138/EC, taking into consideration the features set out in Article 93(2) of that Directive, and shall be classified as Tier 2 where the following items display all of the features set out in Article 73:

(a) the part excess of assets over liabilities, valued in accordance with Article 75 and Section 2 of Chapter VI of Directive 2009/138/EC, comprising the following items:

(i) ordinary share capital and the related share premium account;

(ii) initial funds, members' contributions or the equivalent basic own-fund item for mutual and mutual-type undertakings;

(iii) subordinated mutual member accounts;

(iv) preference shares and the related share premium account;

(b) subordinated liabilities valued in accordance with Article 75 of Directive 2009/138/EC.

Article 73

Tier 2 Basic own-funds — Features determining classification

1.   ►M1  The features referred to in Article 72 shall be either those set out in points (a) to (i) or those set out in point (j): ◄

(a) the basic own-fund item ranks after the claims of all policy holders and beneficiaries and non-subordinated creditors;

(b) the basic own-fund item does not include features which may cause the insolvency of the insurance or reinsurance undertaking or may accelerate the process of the undertaking becoming insolvent;

(c) the basic own-fund item is undated or has an original maturity of at least 10 years; the first contractual opportunity to repay or redeem the basic own-fund item does not occur before 5 years from the date of issuance;

(d) the basic own-fund item is only repayable or redeemable at the option of the insurance or reinsurance undertaking and the repayment or redemption of the basic own-fund item is subject to prior supervisory approval;

(e) the basic own-fund item may include limited incentives to repay or redeem that basic own-fund item, provided that these do not occur before 10 years from the date of issuance;

(f) the basic own-fund item provides for the suspension of repayment or redemption of that item where there is non-compliance with the Solvency Capital Requirement or repayment or redemption would lead to such non-compliance until the undertaking complies with the Solvency Capital Requirement and the repayment or redemption would not lead to non-compliance with the Solvency Capital Requirement;

(g) the basic own-fund item meets one of the following criteria:

(i) in the case of items referred to in points (a)(i) and (ii) of Article 72, either the legal or contractual arrangements governing the basic own-fund item or national legislation allow for the distributions in relation to that item to be deferred where there is non-compliance with the Solvency Capital Requirement or the distribution would lead to such non-compliance until the undertaking complies with the Solvency Capital Requirement and the distribution would not lead to non-compliance with the Solvency Capital Requirement;

(ii) in the case of items referred to in points (a)(iii) and (iv) and point (b) of Article 72 the terms of the contractual arrangement governing the basic own-fund item provide for the distributions in relation to that item to be deferred where there is non-compliance with the Solvency Capital Requirement or the distribution would lead to such non-compliance until the undertaking complies with the Solvency Capital Requirement and the distribution would not lead to non-compliance with the Solvency Capital Requirement;

(h) the basic own-fund item may only allow for a distribution to be made where there is non-compliance with the Solvency Capital Requirement or the distribution on a basic-own fund item would lead to such non-compliance, where all of the following conditions are met:

(i) the supervisory authority has exceptionally waived the deferral of distributions;

(ii) the payment does not further weaken the solvency position of the insurance or reinsurance undertaking;

(iii) the Minimum Capital Requirement is complied with after the distribution is made.

(i) the basic own-fund item is free from encumbrances and is not connected with any other transaction, which when considered with the basic own-fund item, could result in that basic own-fund item not complying with the first subparagraph of Article 94(2) of Directive 2009/138/EC.

(j) the basic own-fund item displays the features set out in Article 71 that are relevant for basic own-fund items referred to in points (a)(iii), (v) and (b) of Article 69, but exceeds the limit set out in Article 82(3).

Notwithstanding point (f), the basic own-fund item may only allow for the repayment or redemption of that item where there is non-compliance with the Solvency Capital Requirement or repayment or redemption would lead to such non-compliance, where all of the following conditions are met:

(i) the supervisory authority has exceptionally waived the suspension of repayment or redemption of that item;

(ii) the item is exchanged for or converted into another Tier 1 or Tier 2 basic own-fund item of at least the same quality;

(iii) the Minimum Capital Requirement is complied with after the repayment or redemption.

2.  For the purposes of this Article, the exchange or conversion of a basic own-fund item into another Tier 1 or Tier 2 basic own-fund item or the repayment or redemption of a Tier 2 basic own-fund item out of the proceeds of a new basic own-fund item of at least the same quality shall not be deemed to be a repayment or redemption, provided that the exchange, conversion, repayment or redemption is subject to the approval of the supervisory authority.

3.  For the purposes of points (f) and (g) of paragraph 1, references to the Solvency Capital Requirement shall be read as references to the Minimum Capital Requirement where non-compliance with the Minimum Capital Requirement occurs before non-compliance with the Solvency Capital Requirement.

4.  For the purposes of point (e) of paragraph 1, undertakings shall consider incentives to redeem in the form of an interest rate step-up associated with a call option as limited where the step-up takes the form of a single increase in the coupon rate and results in an increase in the initial rate that is no greater than the higher of the following amounts:

(a) 100 basis points, less the swap spread between the initial index basis and the stepped-up index basis;

(b) 50 % of the initial credit spread, less the swap spread between the initial index basis and the stepped-up index basis.

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5.  Notwithstanding the requirement in point (c) of paragraph 1, the basic own-fund item may allow for repayment or redemption before 5 years where all of the following conditions are met:

(a) the undertaking's Solvency Capital Requirement, after the repayment or redemption, will be exceeded by an appropriate margin, taking into account the solvency position of the undertaking, including the undertaking's medium-term capital management plan;

(b) the circumstances are as described in point (i) or point (ii):

(i) there is a change in the regulatory classification of the basic own-fund item which would be likely to result in its exclusion from own funds or reclassification as a lower tier of own funds, and both of the following conditions are met:

 the supervisory authority considers such a change to be sufficiently certain;

 the undertaking demonstrates to the satisfaction of the supervisory authority that the regulatory reclassification of the basic own-fund item was not reasonably foreseeable at the time of its issuance;

(ii) there is a change in the applicable tax treatment of the basic own-fund item which the undertaking demonstrates to the satisfaction of the supervisory authority is material and was not reasonably foreseeable at the time of its issuance.

▼B

Article 74

Tier 2 Ancillary own-funds — List of own-fund items

Without prejudice to Article 96 of Directive 2009/138/EC, the following ancillary own-fund items shall be deemed to substantially possess the characteristics set out in Article 93(1)(b) of Directive 2009/138/EC, taking into consideration the features set out in Article 93(2) of that Directive, and shall be classified as Tier 2, where the following items display all of the features set out in Article 75:

(a) unpaid and uncalled ordinary share capital callable on demand;

(b) unpaid and uncalled initial funds, members' contributions or the equivalent basic own-fund item for mutual and mutual-type undertakings, callable on demand;

(c) unpaid and uncalled preference shares callable on demand;

(d) a legally binding commitment to subscribe and pay for subordinated liabilities on demand;

(e) letters of credit and guarantees which are held in trust for the benefit of insurance creditors by an independent trustee and provided by credit institutions authorised in accordance with Article 8 of Directive 2013/36/EU;

(f) letters of credit and guarantees provided that the items can be called up on demand and are clear of encumbrances;

(g) any future claims which mutual or mutual-type associations of shipowners with variable contributions solely insuring risks listed in classes 6, 12 and 17 in Part A of Annex 1 of Directive 2009/138/EC may have against their members by way of a call for supplementary contributions, within the following 12 months;

(h) any future claims which mutual or mutual-type associations may have against their members by way of a call for supplementary contributions, within the following 12 months, provided that a call can be made on demand and is clear of encumbrances;

(i) other legally binding commitments received by the insurance or reinsurance undertaking, provided that the item can be called up on demand and is clear of encumbrances.

Article 75

Tier 2 Ancillary own-funds — Features determining classification

In order to be classified as Tier 2, the ancillary own-fund items listed in Article 74 shall display the features of a basic own fund item classified in Tier 1 in accordance with Articles 69 and 71 once that item has been called up and paid in.

Article 76

Tier 3 Basic own-funds– List of own-fund items

The following basic own-fund items shall be deemed to possess the characteristics set out in Article 93(1)(b) of Directive 2009/138/EC, taking into consideration the features set out in Article 93(2) of that Directive, and shall be classified as Tier 3 where the following items display all of the features set out in Article 77:

(a) the part excess of assets over liabilities, valued in accordance with Sections 1 and 2 of Chapter VI of Directive 2009/138/EC, comprising the following items:

(i) subordinated mutual member accounts;

(ii) preference shares and the related share premium account;

(iii) an amount equal to the value of net deferred tax assets;

(b) subordinated liabilities valued in accordance with Article 75 of Directive 2009/138/EC.

Article 77

Tier 3 Basic own-funds– Features determining classification

1.  The features referred to in Article 76 shall be the following:

(a) the basic own-fund item, in the case of items referred to in points (a)(i) and (ii) and point (b) of Article 76, ranks after the claims of all policy holders and beneficiaries and non-subordinated creditors;

(b) the basic own-fund item does not include features which may cause the insolvency of the insurance or reinsurance undertaking or may accelerate the process of the undertaking becoming insolvent;

(c) the basic own-fund item, in the case of items referred to in points (a)(i) and (ii) and point (b) of Article 76, is undated or has an original maturity of at least 5 years, where the maturity date is the first contractual opportunity to repay or redeem the basic own-fund item;

(d) the basic own-fund item, in the case of items referred to in points (a)(i) and (ii) and point (b) of Article 76, is only repayable or redeemable at the option of the insurance or reinsurance undertaking and the repayment or redemption of the basic own-fund item is subject to prior supervisory approval;

(e) the basic own-fund item, in the case of items referred to in points (a)(i) and (ii) and point (b) of Article 76, may include limited incentives to repay or redeem that basic own-fund item;

(f) the basic own-fund item, in the case of items referred to in points (a)(i) and (ii) and point (b) of Article 76, provides for the suspension of repayment or redemption where there is non-compliance with the Solvency Capital Requirement or repayment or redemption would lead to such non-compliance until the undertaking complies with the Solvency Capital Requirement and the repayment or redemption would not lead to non-compliance with the Solvency Capital Requirement;

(g) the basic own-fund item, in the case of items referred to in points (a)(i) and (ii) and point (b) of Article 76, provides for the deferral of distributions where there is non-compliance with the Minimum Capital Requirement or the distribution would lead to such non-compliance until the undertaking complies with the Minimum Capital Requirement and the distribution would not lead to non-compliance with the Minimum Capital Requirement;

(h) the basic own-fund item is free from encumbrances and is not connected with any other transaction, which could undermine the features that the item is required to possess in accordance with this Article.

Notwithstanding point (f), the basic own-fund item may only allow for the repayment or redemption of that item where there is non-compliance with the Solvency Capital Requirement or repayment or redemption would lead to such non-compliance, where all the following conditions are met:

(i) the supervisory authority has exceptionally waived the suspension of repayment or redemption of that item;

(ii) the item is exchanged for or converted into another Tier 1, Tier 2 basic own-fund item or Tier 3 basic own-fund item of at least the same quality;

(iii) the Minimum Capital Requirement is complied with after the repayment or redemption.

2.  For the purposes of this Article, the exchange or conversion of a basic own-fund item into another Tier 1, Tier 2 basic own-fund item or Tier 3 basic own-fund item or the repayment or redemption of a Tier 3 basic own-fund item out of the proceeds of a new basic own-fund item of at least the same quality shall not be deemed to be a repayment or redemption, provided that the exchange, conversion, repayment or redemption is subject to the approval of the supervisory authority.

3.  For the purposes of point (f) of paragraph 1, references to the Solvency Capital Requirement shall be read as references to the Minimum Capital Requirement where non-compliance with the Minimum Capital Requirement occurs before non-compliance with the Solvency Capital Requirement.

4.  For the purposes of point (e) of paragraph 1, undertakings shall consider incentives to redeem in the form of an interest rate step-up associated with a call option as limited where the step-up takes the form of a single increase in the coupon rate and results in an increase in the initial rate that is no greater than the higher of the following amounts:

(a) 100 basis points, less the swap spread between the initial index basis and the stepped-up index basis;

(b) 50 % of the initial credit spread, less the swap spread between the initial index basis and the stepped-up index basis.

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5.  Notwithstanding the requirement in point (c) of paragraph 1, the basic own-fund item may allow for repayment or redemption sooner than 5 years after the date of issuance where all of the following conditions are met:

(a) the undertaking's Solvency Capital Requirement, after the repayment or redemption, will be exceeded by an appropriate margin, taking into account the solvency position of the undertaking, including the undertaking's medium-term capital management plan;

(b) the circumstances are as described in point (i) or point (ii):

(i) there is a change in the regulatory classification of the basic own-fund item which would be likely to result in its exclusion from own funds, and both of the following conditions are met:

 the supervisory authority considers such a change to be sufficiently certain;

 the undertaking demonstrates to the satisfaction of the supervisory authority that the regulatory reclassification of the basic own-fund item was not reasonably foreseeable at the time of its issuance;

(ii) there is a change in the applicable tax treatment of the basic own-fund item which the undertaking demonstrates to the satisfaction of the supervisory authority is material and was not reasonably foreseeable at the time of its issuance.

▼B

Article 78

Tier 3 Ancillary own-funds– List of own-funds items

Ancillary own-fund items that have been approved by the supervisory authority in accordance with Article 90 of Directive 2009/138/EC, and which do not display all of the features set out in Article 75 shall be classified as Tier 3 ancillary own funds.

Article 79

Supervisory Authorities approval of the assessment and classification of own-fund items

1.  Without prejudice to Article 90 of Directive 2009/138/EC, where an own-fund item is not included in the list of own-funds items set out in Articles 69, 72, 74, 76 and 78, insurance or reinsurance undertakings shall only consider that item as own funds where an approval of the item's assessment and classification has been received from the supervisory authority.

2.  The supervisory authority shall assess the following, on the basis of documents submitted by the insurance or reinsurance undertaking, when approving the assessment and classification of own-fund items not included in the list of own-fund items set out in Articles 69, 72, 74, 76 and 78:

(a) where the undertaking is applying for approval for classification as Tier 1, whether the basic own-fund item substantially possesses the characteristics set out in Article 93(1)(a) and (b) of Directive 2009/138/EC, taking into consideration the features set out in Article 93(2) of that Directive;

(b) where the undertaking is applying for classification as Tier 2 basic own funds, whether the basic own-fund item substantially possesses the characteristics set out in Article 93(1)(b) of Directive 2009/138/EC, taking into consideration the features set out in Article 93(2) of that Directive;

(c) where the undertaking is applying for classification as Tier 2 ancillary own funds, whether the ancillary own-fund item substantially possesses the characteristics in Article 93(1)(a) and (b) of Directive 2009/138/EC, taking into consideration the features set out in Article 93(2) of that Directive;

(d) where the undertaking is applying for classification as Tier 3 basic own funds, whether the basic own-fund item possesses the characteristics set out in Article 93(1)(b) of Directive 2009/138/EC, taking into consideration the features set out in Article 93(2) of that Directive;

(e) the legal enforceability of the contractual terms of the own-fund item in all relevant jurisdictions;

(f) whether the own-fund item has been fully paid-in.

3.  Basic own-fund items not included in the list of own-fund items set out in Articles 69, 72 and 76 shall only be classified as Tier 1 basic own funds where they are fully paid-in.

4.  The inclusion of own-fund items approved by the supervisory authority in accordance with this Article shall be subject to quantitative limits set out in Article 82.



SECTION 3

Eligibility of own funds



Subsection 1

Ring-fenced funds

Article 80

Ring-fenced funds requiring adjustments

1.  A reduction of the reconciliation reserve referred to in Article 70(1)(e) shall be required where own-fund items within a ring-fenced fund have a reduced capacity to fully absorb losses on a going-concern basis due to their lack of transferability within the insurance or reinsurance undertaking for any of the following reasons:

(a) the items can only be used to cover losses on a defined portion of the insurance or reinsurance undertaking's insurance or reinsurance contracts;

(b) the items can only be used to cover losses in respect of certain policy holders or beneficiaries;

(c) the items can only be used to cover losses arising from particular risks or liabilities.

2.  The own-fund items referred to in paragraph 1, (hereinafter referred to as ‘restricted own-fund items’), shall not include the value of future transfers attributable to shareholders.

Article 81

Adjustment for ring-fenced funds and matching adjustment portfolios

1.  For the purposes of calculating the reconciliation reserve, insurance and reinsurance undertakings shall reduce the excess of assets over liabilities referred to in Article 70 by comparing the following amounts:

(a) the restricted own-fund items within the ring-fenced fund or matching adjustment portfolio;

(b) the notional Solvency Capital Requirement for the ring-fenced fund or matching adjustment portfolio.

Where the insurance or reinsurance undertaking calculates the Solvency Capital Requirement using the standard formula, the notional Solvency Capital Requirement shall be calculated in accordance with Article 217.

Where the undertaking calculates the Solvency Capital Requirement using an internal model, the notional Solvency Capital Requirement shall be calculated using that internal model, as if the undertaking pursued only the business included in the ring-fenced fund or matching adjustment portfolio.

2.  By way of derogation from paragraph 1, where the assets, the liabilities and the risk within a ring-fenced fund are not material, insurance and reinsurance undertakings may reduce the reconciliation reserve by the total amount of restricted own-fund items.



Subsection 2

Quantitative limits

Article 82

Eligibility and limits applicable to Tiers 1, 2 and 3

1.  As far as compliance with the Solvency Capital Requirement is concerned, the eligible amounts of Tier 2 and Tier 3 items shall be subject to all of the following quantitative limits:

(a) the eligible amount of Tier 1 items shall be at least one half of the Solvency Capital Requirement;

(b) the eligible amount of Tier 3 items shall be less than 15 % of the Solvency Capital Requirement;

(c) the sum of the eligible amounts of Tier 2 and Tier 3 items shall not exceed 50 % of the Solvency Capital Requirement.

2.  As far as compliance with the Minimum Capital Requirements is concerned, the eligible amounts of Tier 2 items shall be subject to all of the following quantitative limits:

(a) the eligible amount of Tier 1 items shall be at least 80 % of the Minimum Capital Requirement;

(b) the eligible amounts of Tier 2 items shall not exceed 20 % of the Minimum Capital Requirement.

3.  Within the limit referred to in point (a) of paragraph 1 and point (a) of paragraph 2, the sum of the following basic own-fund items shall make up less than 20 % of the total amount of Tier 1 items:

(a) items referred to in point (a)(iii) of Article 69;

(b) items referred to in point (a)(v) of Article 69;

(c) items referred to in point (b) of Article 69;

(d) items that are included in Tier 1 basic own funds under the transitional arrangement set out in Article 308b(9) of Directive 2009/138/EC.



CHAPTER V

SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULA



SECTION 1

General provisions



Subsection 1

Scenario based calculations

Article 83

1.  Where the calculation of a module or sub-module of the Basic Solvency Capital Requirement is based on the impact of a scenario on the basic own funds of insurance and reinsurance undertakings, all of the following assumptions shall be made in that calculation:

(a) the scenario does not change the amount of the risk margin included in technical provisions;

(b) the scenario does not change the value of deferred tax assets and liabilities;

(c) the scenario does not change the value of future discretionary benefits included in technical provisions;

(d) no management actions are taken by the undertaking during the scenario.

2.  The calculation of technical provisions arising as a result of determining the impact of a scenario on the basic own funds of insurance and reinsurance undertakings as referred to in paragraph 1 shall not change the value of future discretionary benefits, and shall take account of all of the following:

(a) without prejudice to point (d) of paragraph 1, future management actions following the scenario, provided they comply with Article 23;

(b) any material adverse impact of the scenario or the management actions referred to in point (a) on the likelihood that policy holders will exercise contractual options.

3.  Insurance and reinsurance undertakings may use simplified methods to calculate the technical provisions arising as a result of determining the impact of a scenario as referred to in paragraph 1, provided that the simplified method does not lead to a misstatement of the Solvency Capital Requirement that could influence the decision-making or the judgement of the user of the information relating to the Solvency Capital Requirement, unless the simplified calculation leads to a Solvency Capital Requirement which exceeds the Solvency Capital Requirement that results from the calculation according to the standard formula.

4.  The calculation of assets and liabilities arising as a result of determining the impact of a scenario as referred to in paragraph 1 shall take account of the impact of the scenario on the value of any relevant risk mitigation instruments held by the undertaking which comply with Articles 209 to 215.

5.  Where the scenario would result in an increase in the basic own funds of insurance and reinsurance undertakings, the calculation of the module or sub-module shall be based on the assumption that the scenario has no impact on the basic own funds.



Subsection 2

Look-through approach

Article 84

1.  The Solvency Capital Requirement shall be calculated on the basis of each of the underlying assets of collective investment undertakings and other investments packaged as funds (look-through approach).

2.  The look-through approach referred to in paragraph 1 shall also apply to the following:

(a) indirect exposures to market risk other than collective investment undertakings and investments packaged as funds;

(b) indirect exposures to underwriting risk;

(c) indirect exposures to counterparty risk.

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3.  Where Article 88 is complied with and the look-through approach cannot be applied to collective investment undertakings or investments packaged as funds, the Solvency Capital Requirement may be calculated on the basis of the target underlying asset allocation or, if the target underlying asset allocation is not available to the undertaking, on the basis of the last reported asset allocation, of the collective investment undertaking or fund, provided that, in either case, the underlying assets are managed in accordance with that target allocation or last reported asset allocation, as applicable, and that exposures and risks are not expected to vary materially over a short period of time.

For the purposes of that calculation, data groupings may be used provided they enable all relevant sub-modules and scenarios of the standard formula to be calculated in a prudent manner, and that they do not apply to more than 20 % of the total value of the insurance or reinsurance undertaking's assets.

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3a.  For the purposes of determining the percentage of assets where data groupings are used as referred to in paragraph 3, insurance or reinsurance undertakings shall not take into account underlying assets of the collective investment undertaking, or the investments packaged as funds, backing unit-linked or index-linked obligations for which the market risk is borne by the policyholders.

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4.  Paragraphs 1 and 2 shall not apply to investments in related undertakings, other than investments in respect of which all of the following conditions are met:

(a) the main purpose of the related undertaking is to hold and manage assets on behalf of the participating undertaking;

(b) the related undertaking supports the operations of the participating undertaking related to investment activities, following a specific and documented investment mandate;

(c) the related undertaking does not carry on any significant business other than investing for the benefit of the participating undertaking.

For the purposes of this paragraph, ‘related undertaking’ and ‘participating undertaking’ shall have the meaning given to those terms in Article 212(1) and (2) of Directive 2009/138/EC.

▼B



Subsection 3

Regional governments and local authorities

Article 85

The conditions for a categorisation of regional governments and local authorities shall be that there is no difference in risk between exposures to these and exposures to the central government, because of the specific revenue-raising power of the former, and specific institutional arrangements exist, the effect of which is to reduce the risk of default.



Subsection 4

Material basis risk

Article 86

Notwithstanding Article 210(2), where insurance or reinsurance undertakings transfer underwriting risk using reinsurance contracts or special purpose vehicles that are subject to material basis risk from a currency mismatch between underwriting risk and the risk-mitigation technique, insurance or reinsurance undertakings may take into account the risk-mitigation technique in the calculation of the Solvency Capital Requirement according to the standard formula, provided that the risk-mitigation technique complies with Article 209, Article 210(1), (3) and (4) and Article 211, and the calculation is carried out as follows:

(a) the basis risk stemming from a currency mismatch between underwriting risk and the risk-mitigation technique shall be taken into account in the relevant underwriting risk module, sub-module or scenario of the standard formula at the most granular level by adding 25 % of the difference between the following to the capital requirement calculated in accordance with the relevant module, sub-module or scenario:

(i) the hypothetical capital requirement for the relevant underwriting risk module, sub-module or scenario that would result from a simultaneous occurrence of the scenario set out in Article 188;

(ii) the capital requirement for the relevant underwriting risk module, sub-module or scenario.

(b) where the risk-mitigation technique covers more than one module, sub-module or scenario, the calculation referred to in point (a) shall be carried out for each of those modules, sub-modules and scenarios. The capital requirement resulting from those calculations shall not exceed 25 % of the capacity of the non-proportional reinsurance contract or special purpose vehicle.



Subsection 5

Calculation of the basic solvency capital requirement

Article 87

The Basic Solvency Capital Requirement shall include a risk module for intangible asset risk. and shall be equal to the following:

image

where:

(a) the summation, Corri,j , SCRi and SCRj are specified as set out in point (1) of Annex IV to Directive 2009/138/EC;

(b)  SCRintangibles denotes the capital requirement for intangible asset risk referred to in Article 203.



Subsection 6

Proportionality and simplifications

Article 88

Proportionality

1.   ►M6  For the purposes of Article 109 of Directive 2009/138/EC, insurance and reinsurance undertakings shall determine whether the simplified calculation is proportionate to the nature, scale and complexity of the risks by carrying out an assessment which shall include all of the following: ◄

(a) an assessment of the nature, scale and complexity of the risks of the undertaking falling within the relevant module or sub-module;

(b) an evaluation in qualitative or quantitative terms, as appropriate, of the error introduced in the results of the simplified calculation due to any deviation between the following:

(i) the assumptions underlying the simplified calculation in relation to the risk;

(ii) the results of the assessment referred to in point (a).

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2.  A simplified calculation shall not be considered to be proportionate to the nature, scale and complexity of the risks where the error referred to in point (b) of paragraph 1 leads to a misstatement of the Solvency Capital Requirement that could influence the decision-making or the judgement of the user of the information relating to the Solvency Capital Requirement, unless the simplified calculation leads to a Solvency Capital Requirement which exceeds the Solvency Capital Requirement that results from the standard calculation.

▼B

Article 89

General provisions for simplifications for captives

Captive insurance undertakings and captive reinsurance undertakings as defined in points (2) and (5) of Article 13 of Directive 2009/138/EC may use the simplified calculations set out in Articles 90, 103, 105 and 106 of this Regulation where Article 88 of this Regulation is complied with and all of the following requirements are met:

(a) in relation to the insurance obligations of the captive insurance undertaking or captive reinsurance undertaking, all insured persons and beneficiaries are legal entities of the group of which the captive insurance or captive reinsurance undertaking is part;

(b) in relation to the reinsurance obligations of the captive insurance or captive reinsurance undertaking, all insured persons and beneficiaries of the insurance contracts underlying the reinsurance obligations are legal entities of the group of which the captive insurance or captive reinsurance undertaking is part;

(c) the insurance obligations and the insurance contracts underlying the reinsurance obligations of the captive insurance or captive reinsurance undertaking do not relate to any compulsory third party liability insurance.

Article 90

Simplified calculation for captive insurance and reinsurance undertakings of the capital requirement for non-life premium and reserve risk

1.  Where Articles 88 and 89 are complied with, captive insurance and captive reinsurance undertakings may calculate the capital requirement for non-life premium and reserve risk as follows:

image

,

where the s covers all segments set out in Annex II.

2.  For the purposes of paragraph 1, the capital requirement for non-life premium and reserve risk of a particular segment s set out in Annex II shall be equal to the following:

image

where:

(a)  V(prem,s) denotes the volume measure for premium risk of segment s calculated in accordance with paragraph 3 of Article 116;

(b)  V(res,s) denotes the volume measure for reserve risk of a segment calculated in accordance with paragraph 6 of Article 116.

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Article 90a

Simplified calculation for discontinuance of insurance policies in the non-life lapse risk sub-module

For the purposes of point (a) of Article 118(1), where Article 88 is complied with, insurance and reinsurance undertakings may determine the insurance policies for which discontinuance would result in an increase of technical provisions without the risk margin on the basis of groups of policies, provided that the grouping complies with the requirements laid down in points (a), (b) and (c) of Article 35.

Article 90b

Simplified calculation of the sum insured for natural catastrophe risks

1.  Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the sum insured for windstorm risk referred to in point (b) of paragraph 6, and in paragraph 7, of Article 121 on the basis of groups of risk zones. Each of the risk zones within a group shall be situated within one and the same particular region set out in Annex V. Where the sum insured for windstorm risk referred to in point (b) of Article 121(6) is calculated on the basis of a group of risk zones, the risk weight for windstorm risk referred to in point (a) of Article 121(6) shall be the risk weight for windstorm risk in the risk zone within that group with the highest risk weight for windstorm risk set out in Annex X.

2.  Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the sum insured for earthquake risk referred to in point (b) of paragraph 3, and in paragraph 4, of Article 122 on the basis of groups of risk zones. Each of the risk zones within a group shall be situated within one and the same particular region set out in Annex VI. Where the sum insured for earthquake risk referred to in point (b) of Article 122(3) is calculated on the basis of a group of risk zones, the risk weight for earthquake risk referred to in point (a) of Article 122(3) shall be the risk weight for earthquake risk in the risk zone within that group with the highest risk weight for earthquake risk as set out in Annex X.

3.  Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the sum insured for flood risk referred to in point (b) of paragraph 6, and in paragraph 7, of Article 123 on the basis of groups of risk zones. Each of the risk zones within a group shall be situated within one and the same particular region set out in Annex VII. Where the sum insured for flood risk referred to in point (b) of Article 123(6) is calculated on the basis of a group of risk zones, the risk weight for flood risk referred to in point (a) of Article 123(6) shall be the risk weight for flood risk in the risk zone within that group with the highest risk weight for flood risk as set out in Annex X.

4.  Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the sum insured for hail risk referred to in point (b) of paragraph 6, and in paragraph 7, of Article 124 on the basis of groups of risk zones. Each of the risk zones within a group shall be situated within one and the same particular region set out in Annex VIII. Where the sum insured for hail risk referred to in point (b) of Article 124(6) is calculated on the basis of a group of risk zones, the risk weight for hail risk referred to in point (a) of Article 124(6) shall be the risk weight for hail risk in the risk zone within that group with the highest risk weight for hail risk as set out in Annex X.

5.  Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the weighted sum insured for subsidence risk referred to in Article 125(2) on the basis of groups of risk zones. Where the weighted sum insured referred to in Article 125(2) is calculated on the basis of a group of risk zones, the risk weight for subsidence risk referred to in point (a) of Article 125(2) shall be the risk weight for subsidence risk in the risk zone within that group with the highest risk weight for subsidence risk as set out in Annex X.

Article 90c

Simplified calculation of the capital requirement for fire risk

1.  Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the capital requirement for fire risk referred to in Article 132(1) as follows:

SCRfire = max(SCRfirei ; SCRfirec ; SCRfirer )

where:

a)  SCRfirei denotes the largest industrial fire risk concentration;

b)  SCRfirec denotes the largest commercial fire risk concentration;

c)  SCRfirer denotes the largest residential fire risk concentration.

2.  The largest industrial fire risk concentration of an insurance or reinsurance undertaking shall be equal to the following:

SCRfirei = max(E 1,i ; E 2,i ; E 3,i ; E 4,i ; E 5,i )

where Ek,i denotes the total exposure within the perimeter of the k-th largest industrial fire risk exposure.

3.  The largest commercial fire risk concentration of an insurance or reinsurance undertaking shall be equal to the following:

SCRfirec = max(E 1,c ; E 2,c ; E 3,c ; E 4,c ; E 5,c )

where Ek,c denotes the total exposure within the perimeter of the k-th largest commercial fire risk exposure.

4.  The largest residential fire risk concentration of an insurance or reinsurance undertaking shall be equal to the following:

SCRfirer = max(E 1,r ; E 2,r ; E 3,r ; E 4,r ; E 5,r ; θ)

where:

(a)  Ek,r denotes the total exposure within the perimeter of the k-th largest residential fire risk exposure;

(b)  θ denotes the market share based residential fire risk exposure.

5.  For the purpose of paragraphs 2, 3 and 4, the total exposure within the perimeter of the k-th largest industrial, commercial or residential fire risk exposure of an insurance or reinsurance undertaking is the sum insured by the insurance or reinsurance undertaking with respect to a set of buildings that meets all of the following conditions:

(a) in relation to each building, the insurance or reinsurance undertaking has obligations in lines of business 7 and 19 set out in Annex I which cover damage due to fire or explosion, including as a result of terrorist attacks;

(b) each building is partly or fully located within a radius of 200 meters around the industrial, commercial or residential building with the k-th largest sum insured after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles.

For the purposes of determining the sum insured with respect to a building, insurance and reinsurance undertakings shall take into account all reinsurance contracts and special purpose vehicles that would pay out in case of insurance claims related to that building. Reinsurance contracts and special purpose vehicles that are subject to conditions not related to that building shall not be taken into account.

6.  The market share based residential fire risk exposure shall be equal to the following:

θ = SIav · 500 · max(0,05; maxc(marketSharec ))

where:

(a)  SIav is the average sum insured by the insurance or reinsurance undertaking with respect to residential property;

(b)  c denotes all countries where the insurance or reinsurance undertaking has obligations in lines of business 7 and 19 set out in Annex I covering residential property;

(c)  marketSharec is the market share of the insurance or reinsurance undertaking in country c related to obligations in those lines of business covering residential property.

▼B

Article 91

Simplified calculation of the capital requirement for life mortality risk

Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the capital requirement for life mortality risk as follows:

▼M6

image

▼B

where, with respect to insurance and reinsurance policies with a positive capital at risk:

▼M6

(a)  CARk denotes the total capital at risk in year k, meaning the sum over all contracts of the higher of zero and the difference, in relation to each contract, between the following amounts:

(i) the sum of:

 the amount that the insurance or reinsurance undertaking would pay in year k in the event of the death of the persons insured under the contract after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles;

 the expected present value of amounts not covered in the previous indent that the insurance or reinsurance undertaking would pay after year k in the event of the immediate death of the persons insured under the contract after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles;

(ii) the best estimate of the corresponding obligations in year k after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles;

(b)  q denotes the expected average mortality rate over all the insured persons and over all future years weighted by the sum insured;

▼B

(c)  n denotes the modified duration in years of payments payable on death included in the best estimate;

(d)  ik denotes the annualized spot rate for maturity k of the relevant risk-free term structure as referred to in Article 43.

Article 92

Simplified calculation of the capital requirement for life longevity risk

Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the capital requirement for life longevity risk calculated as follows:

image

where, with respect to the policies referred to in Article 138(2):

(a)  q denotes the expected average mortality rate of the insured persons during the following 12 months weighted by the sum insured;

(b)  n denotes the modified duration in years of the payments to beneficiaries included in the best estimate;

(c)  BElong denotes the best estimate of the obligations subject to longevity risk.

Article 93

Simplified calculation of the capital requirement for life disability-morbidity risk

Where 88 is complied with, insurance and reinsurance undertakings may calculate the capital requirement for life disability-morbidity risk as follows:



SCRdisability-morbidity =

left accolade 0,35 · CAR 1 · d 1 + 0,25 · 1,1 (n – 3)/2 · (n – 1) · CAR 2 · d 2 + 0,2 · 1,1 (n –1)/2 · t · n · BEdis

where with respect to insurance and reinsurance policies with a positive capital at risk:

(a)  CAR1 denotes the total capital at risk, meaning the sum over all contracts of the higher of zero and the difference between the following amounts:

(i) the sum of:

 the amount that the insurance or reinsurance undertaking would currently pay in the event of the death or disability of the persons insured under the contract after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles;

 the expected present value of amounts not covered in the previous indent that the insurance or reinsurance undertaking would pay in the future in the event of the immediate death or disability of the persons insured under the contract after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles;

(ii) the best estimate of the corresponding obligations after deduction of the amounts recoverable form reinsurance contracts and special purpose vehicles;

(b)  CAR2 denotes the total capital at risk as defined in point (a) after 12 months;

(c)  d1 denotes the expected average disability-morbidity rate during the following 12 months weighted by the sum insured;

(d)  d2 denotes the expected average disability-morbidity rate in the 12 months after the following 12 months weighted by the sum insured;

(e)  n denotes the modified duration of the payments on disability-morbidity included in the best estimate;

(f)  t denotes the expected termination rates during the following 12 months;

(g)  BEdis denotes the best estimate of obligations subject to disability-morbidity risk.

Article 94

Simplified calculation of the capital requirement for life-expense risk

Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the capital requirement for life-expense risk as follows:

image

where:

(a)  EI denotes the amount of expenses incurred in servicing life insurance or reinsurance obligations other than health insurance and reinsurance obligations during the last year;

(b)  n denotes the modified duration in years of the cash flows included in the best estimate of those obligations;

(c)  i denotes the weighted average inflation rate included in the calculation of the best estimate of those obligations, where the weights are based on the present value of expenses included in the calculation of the best estimate for servicing existing life obligations.

Article 95

Simplified calculation of the capital requirement for permanent changes in lapse rates

1.  Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the capital requirement for the risk of a permanent increase in lapse rates as follows:

image

where:

(a)  lup denotes the higher of the average lapse rate of the policies with positive surrender strains and 67 %;

(b)  nup denotes the average period in years over which the policies with a positive surrender strains run off;

(c)  Sup denotes the sum of positive surrender strains.

2.  Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the capital requirement for the risk of a permanent decrease in lapse rates as follows:

image

where:

(a)  ldown denotes the higher of the average lapse rate of the policies with negative surrender strains and 40 %;

(b)  ndown denotes the average period in years over which the policies with a negative surrender strains runs off;

(c)  Sdown denotes the sum of negative surrender strains.

3.  The surrender strain of an insurance policy referred to in paragraphs 1 and 2 is the difference between the following:

(a) the amount currently payable by the insurance undertaking on discontinuance by the policy holder, net of any amounts recoverable from policy holders or intermediaries;

(b) the amount of technical provisions without the risk margin.

▼M6

Article 95a

Simplified calculation of the capital requirement for risks in the life lapse risk sub-module

Where Article 88 is complied with, insurance and reinsurance undertakings may calculate each of the following capital requirements on the basis of groups of policies, provided that the grouping complies with the requirements laid down in points (a), (b) and (c) of Article 35:

(a) the capital requirement for the risk of a permanent increase in lapse rates referred to in Article 142(2);

(b) the capital requirement for the risk of a permanent decrease in lapse rates referred to in Article 142(3);

(c) the capital requirement for mass lapse risk referred to in Article 142(6).

▼B

Article 96

Simplified calculation of the capital requirement for life-catastrophe risk

Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the capital requirement for life-catastrophe risk calculated as follows:

image

where:

(a) the sum includes all policies with a positive capital at risk;

(b)  CARi denotes the capital at risk of the policy i, meaning the higher of zero and the difference between the following amounts:

(i) the sum of:

 the amount that the insurance or reinsurance undertaking would currently pay in the event of the death of the persons insured under the contract after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles;

 the expected present value of amounts not covered in the previous indent that the insurance or reinsurance undertaking would pay in the future in the event of the immediate death of the persons insured under the contract after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles;

(ii) the best estimate of the corresponding obligations after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles.

▼M6

Article 96a

Simplified calculation for discontinuance of insurance policies in the NSLT health lapse risk sub-module

For the purposes of point (a) of Article 150(1), where Article 88 is complied with, insurance and reinsurance undertakings may determine the insurance policies for which discontinuance would result in an increase of technical provisions without the risk margin on the basis of groups of policies, provided that the grouping complies with the requirements laid down in points (a), (b) and (c) of Article 35.

▼B

Article 97

Simplified calculation of the capital requirement for health mortality risk

Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the capital requirement for health mortality risk as follows:

▼M6

image

▼B

where with respect to insurance and reinsurance policies with a positive capital at risk:

▼M6

(a)  CARk denotes the total capital at risk in year k, meaning the sum over all contracts of the higher of zero and the difference, in relation to each contract, between the following amounts:

(i) the sum of:

 the amount that the insurance or reinsurance undertaking would pay in year k in the event of the death of the persons insured under the contract after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles;

 the expected present value of amounts not covered in the previous indent that the insurance or reinsurance undertaking would pay after year k in the event of the immediate death of the persons insured under the contract after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles;

(ii) the best estimate of the corresponding obligations in year k after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles;

(b)  q denotes the expected average mortality rate over all insured persons and over all future years weighted by the sum insured;

▼B

(c)  n denotes the modified duration in years of payments payable on death included in the best estimate;

(d)  ik denotes the annualized spot rate for maturity k of the relevant risk-free term structure as referred to in Article 43.

Article 98

Simplified calculation of the capital requirement for health longevity risk

Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the capital requirement for health longevity risk as follows:

image

where, with respect to the policies referred to in Article 138(2):

(a)  q denotes the expected average mortality rate of the insured persons during the following 12 months weighted by the sum insured;

(b)  n denotes the modified duration in years of the payments to beneficiaries included in the best estimate;

(c)  BElong denotes the best estimate of the obligations subject to longevity risk.

Article 99

Simplified calculation of the capital requirement for medical expense disability-morbidity risk

Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the capital requirement for medical expense disability-morbidity risk as follows:

image

where:

(a)  MP denotes the amount of medical payments during the last year on medical expense insurance or reinsurance obligations during the last year;

(b)  n denotes the modified duration in years of the cash flows included in the best estimate of those obligations;

(c)  i denotes the average rate of inflation on medical payments included in the calculation of the best estimate of those obligations, where the weights are based on the present value of medical payments included in the calculation of the best estimate of those obligations.

Article 100

Simplified calculation of the capital requirement for income protection disability-morbidity risk

Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the capital requirement for income protection disability-morbidity risk as follows:



SCRincome-protection-disability-morbidity =

left accolade 0,35 · CAR 1 · d 1 + 0,25 · 1,1 (n – 3)/2 · (n – 1) · CAR 2 · d 2 + 0,2 · 1,1 (n –1)/2 · t · n · BEdis

where with respect to insurance and reinsurance policies with a positive capital at risk:

(a)  CAR 1 denotes the total capital at risk, meaning the sum over all contracts of the higher of zero and the difference between the following amounts:

(i) the sum of:

 the amount that the insurance or reinsurance undertaking would currently pay in the event of the death or disability of the persons insured under the contract after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles;

 the expected present value of amounts not covered in the previous indent that the undertaking would pay in the future in the event of the immediate death or disability of the persons insured under the contract after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles;

(ii) the best estimate of the corresponding obligations after deduction of the amounts recoverable form reinsurance contracts and special purpose vehicles;

(b)  CAR 2 denotes the total capital at risk as defined in point (a) after 12 months;

(c)  d 1 denotes the expected average disability-morbidity rate during the following 12 months weighted by the sum insured;

(d)  d 2 denotes the expected average disability-morbidity rate in the 12 months after the following 12 months weighted by the sum insured;

(e)  n denotes the modified duration of the payments on disability-morbidity included in the best estimate;

(f)  t denotes the expected termination rates during the following 12 months;

(g)  BEdis denotes the best estimate of obligations subject to disability-morbidity risk.

Article 101

Simplified calculation of the capital requirement for health expense risk

Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the capital requirement for health expense risk as follows:

image

where:

(1)  EI denotes the amount of expenses incurred in servicing health insurance and reinsurance obligations during the last year;

(2)  n denotes the modified duration in years of the cash flows included in the best estimate of those obligations;

(3)  i denotes the weighted average inflation rate included in the calculation of the best estimate of these obligations, weighted by the present value of expenses included in the calculation of the best estimate for servicing existing health obligations.

Article 102

Simplified calculation of the capital requirement for SLT health lapse risk

1.  Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the capital requirement for the risk of a permanent increase in lapse rates referred to in Article 159(1)(a) as follows:

image

where:

(a)  lup denotes the higher of the average lapse rate of the policies with positive surrender strains and 83 %;

(b)  nup denotes the average period in years over which the policies with a positive surrender strains run off;

(c)  Sup denotes the sum of positive surrender strains.

2.  Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the capital requirement for the risk of a permanent decrease in lapse rates referred to in 159(1)(b) as follows:

image

where:

(a)  ldown denotes the average lapse rate of the policies with negative surrender strains;

(b)  ndown denotes the average period in years over which the policies with a negative surrender strains runs off;

(c)  Sdown denotes the sum of negative surrender strains.

3.  The surrender strain of an insurance policy referred to in paragraphs (1) and (2) is the difference between the following:

(a) the amount currently payable by the insurance undertaking on discontinuance by the policy holder, net of any amounts recoverable from policy holders or intermediaries;

(b) the amount of technical provisions without the risk margin.

▼M6

Article 102a

Simplified calculation of the capital requirement for risks in the SLT health lapse risk sub-module

Where Article 88 is complied with, insurance and reinsurance undertakings may calculate each of the following capital requirements on the basis of groups of policies, provided that the grouping complies with the requirements laid down in points (a), (b) and (c) of Article 35:

(a) the capital requirement for the risk of a permanent increase in SLT health lapse rates referred to in Article 159(2);

(b) the capital requirement for the risk of a permanent decrease in SLT health lapse rates referred to in Article 159(3);

(c) the capital requirement for SLT health mass lapse risk referred to in Article 159(6).

▼B

Article 103

Simplified calculation of the capital requirement for interest rate risk for captive insurance or reinsurance undertakings

1.  Where Articles 88 and 89 are complied with, captive insurance or captive reinsurance undertakings may calculate the capital requirement for interest rate risk referred to in Article 165 as follows:

(a) the sum, for each currency, of the capital requirements for the risk of an increase in the term structure of interest rates as set out in paragraph 2 of this Article;

(b) the sum, for each currency, of the capital requirements for the risk of a decrease in the term structure of interest rates as set out in paragraph 3 of this Article.

2.  For the purposes of point (a) of paragraph 1 of this Article, the capital requirement for the risk of an increase in the term structure of interest rates for a given currency shall be equal to the following:

image

where:

(a) the first sum covers all maturity intervals i set out in paragraph 4 of this Article;

(b)  MVALi denotes the value in accordance with Article 75 of Directive 2009/138/EC of assets less liabilities other than technical provisions for maturity interval i;

(c)  duri denotes the simplified duration of maturity interval i;

(d)  ratei denotes the relevant risk-free rate for the simplified duration of maturity interval i;

(e)  stress(i,up) denotes the relative upward stress of interest rate for simplified duration of maturity interval i;

(f) the second sum covers all lines of business set out in Annex I of this Regulation;

(g)  BElob denotes the best estimate for line of business lob;

(h)  durlob denotes the modified duration of the best estimate in line of business lob;

(i)  ratelob denotes the relevant risk-free rate for modified duration in line of business lob;

(j)  stress(lob,up) denotes the relative upward stress of interest rate for the modified duration durlob .

3.  For the purposes of point (b) of paragraph 1 of this Article, the capital requirement for the risk of a decrease in the term structure of interest rates for a given currency shall be equal to the following:

image

where:

(a) the first sum covers all maturity intervals i set out in paragraph 4;

(b)  MVALi denotes the value in accordance with Article 75 of Directive 2009/138/EC of assets less liabilities other than technical provisions for maturity interval i;

(c)  duri denotes the simplified duration of maturity interval i;

(d)  ratei denotes the relevant risk-free rate for the simplified duration of maturity interval i;

(e)  stress(i,down) denotes the relative downward stress of interest rate for simplified duration of maturity interval i;

(f) the second sum covers all lines of business set out in Annex I of this Regulation;

(g)  BElob denotes the best estimate for line of business lob;

(h)  durlob denotes the modified duration of the best estimate in line of business lob;

(i)  ratelob denotes the relevant risk-free rate for modified duration in line of business lob;

(j)  stress(lob, down) denote the relative downward stress of interest rate for modified duration durlob .

4.  The maturity intervals i and the simplified duration duri referred to in points (a) and (c)of paragraph 2 and in point (a) and (c) of paragraph 3 shall be as follows:

(a) up to the maturity of one year, the simplified duration shall be 0.5 years;

(b) between maturities of 1 and 3 years, the simplified duration shall be 2 years;

(c) between maturities of 3 and 5 years, the simplified duration shall be 4 years;

(d) between maturities of 5 and 10 years, the simplified duration shall be 7 years;

(e) from the maturity of 10 years onwards, the simplified duration shall be 12 years.

Article 104

Simplified calculation for spread risk on bonds and loans

1.  Where Article 88 is complied with, insurance or reinsurance undertakings may calculate the capital requirement for spread risk referred to in Article 176 of this Regulation as follows:

image

where:

(a)  SCRbonds denotes the capital requirement for spread risk on bonds and loans;

(b)  MVbonds denotes the value in accordance with Article 75 of Directive 2009/138/EC of the assets subject to capital requirements for spread risk on bonds and loans;

(c) %MVi bonds denotes the proportion of the portfolio of the assets subject to a capital requirement for spread risk on bonds and loans with credit quality step i, where a credit assessment by a nominated ECAI is available for those assets;

(d) %MVbonds norating denotes the proportion of the portfolio of the assets subject to a capital requirement for spread risk on bonds and loans for which no credit assessment by a nominated ECAI is available;

(e)  duri and durnorating denote the modified duration denominated in years of the assets subject to a capital requirement for spread risk on bonds and loans where no credit assessment by a nominated ECAI is available;

(f)  stressi denotes a function of the credit quality step i and of the modified duration denominated in years of the assets subject to a capital requirement for spread risk on bonds and loans with credit quality step i, set out in paragraph 2;

(g)  ΔLiabul denotes the increase in the technical provisions less risk margin for policies where the policyholders bear the investment risk with embedded options and guarantees that would result from an instantaneous decrease in the value of the assets subject to the capital requirement for spread risk on bonds of:
image

2.  stressi referred to in point (f) of paragraph 1, for each credit quality step i, shall be equal to:
image , where duri is the modified duration denominated in years of the assets subject to a capital requirement for spread risk on bonds and loans with credit quality step i, and bi is determined in accordance with the following table:



Credit quality step i

0

1

2

3

4

5

6

bi

0,9 %

1,1 %

1,4 %

2,5 %

4,5 %

7,5 %

7,5 %

3.  durnorating referred to in point (e) of paragraph 1 and duri referred to in paragraph 2 shall not be lower than 1 year.

Article 105

Simplified calculation for captive insurance or reinsurance undertakings of the capital requirement for spread risk on bonds and loans

Where Articles 88 and 89 are complied with, captive insurance or captive reinsurance undertakings may base the calculation of the capital requirement for spread risk to in Article 176 on the assumption that all assets are assigned to credit quality step 3.

▼M6

Article 105a

Simplified calculation for the risk factor in the spread risk sub-module and the market risk concentration sub-module

Where Article 88 is complied with, insurance and reinsurance undertakings may assign a bond other than those to be included in the calculations under paragraphs (2) to (16) of Article 180 a risk factor stressi equivalent to credit quality step 3 for the purposes of Articles 176(3) and assign the bond to credit quality step 3 for the purpose of calculating the weighted average credit quality step in accordance with 182(4), provided that all of the following conditions are met:

(a) credit assessments from a nominated ECAI are available for at least 80 % of the total value of the bonds other than those to be included in the calculations under paragraphs (2) to (16) of Article 180;

(b) a credit assessment by a nominated ECAI is not available for the bond in question;

(c) the bond in question provides a fixed redemption payment on or before the date of maturity, in addition to regular fixed or floating rate interest payments;

(d) the bond in question is not a structured note or collateralised security as referred to in Annex VI to Commission Implementing Regulation (EU) 2015/2450 ( 10 );

(e) the bond in question does not cover liabilities that provide profit participation arrangements, nor does it cover unit-linked or index-linked liabilities, nor liabilities where a matching adjustment is applied.

▼B

Article 106

Simplified calculation of the capital requirement for market risk concentration for captive insurance or reinsurance undertakings

Where Articles 88 and 89 are complied with, captive insurance or captive reinsurance undertakings may use all of the following assumptions for the calculation of the capital requirement for concentration risk:

(1) intra-group asset pooling arrangements of captive insurance or reinsurance undertakings may be exempted from the calculation base referred to in Article 184(2) to the extent that there exist legally enforceable contractual terms which ensure that the liabilities of the captive insurance or reinsurance undertaking will be offset by the intra-group exposures it holds against other entities of the group.

(2) the relative excess exposure threshold referred to in Article 184(1)(c) shall be equal to 15 % for the following single name exposures:

(a) exposures to credit institutions that do not belong to the same group and that have been assigned to the credit quality step 2;

(b) exposures to entities of the group that manages the cash of the captive insurance or reinsurance undertaking that have been assigned to the credit quality step 2.

Article 107

Simplified calculation of the risk mitigating effect for reinsurance arrangements or securitisation

1.   ►M6  Where both Article 88 is complied with and the best estimate of amounts recoverable from a reinsurance arrangement or securitisation and the corresponding debtors is not negative, insurance and reinsurance undertakings may calculate the risk-mitigating effect on underwriting risk of that reinsurance arrangement or securitisation referred to in Article 196 as follows: ◄

image

where

(a)  RMre,all denotes the risk mitigating effect on underwriting risk of the reinsurance arrangements and securitisations for all counterparties calculated in accordance with paragraph 2;

(b)  Recoverablesi denotes the best estimate of amounts recoverable from the reinsurance arrangement or securitisation and the corresponding debtors for counterparty i and Recoverablesall denotes the best estimate of amounts recoverable from the reinsurance arrangements and securitisations and the corresponding debtors for all counterparties.

2.  The risk mitigating effect on underwriting risk of the reinsurance arrangements and securitisations for all counterparties referred to in paragraph 1 is the difference between the following capital requirements:

(a) the hypothetical capital requirement for underwriting risk of the insurance or reinsurance undertaking if none of the reinsurance arrangements and securitisations exist;

(b) the capital requirements for underwriting risk of the insurance or reinsurance undertaking.

Article 108

Simplified calculation of the risk mitigating effect for proportional reinsurance arrangements

▼M6

Where both Article 88 is complied with and the best estimate of amounts recoverable from a proportional reinsurance arrangement and the corresponding debtors for a counterparty i is not negative, insurance and reinsurance undertakings may calculate the risk-mitigating effect on underwriting risk j of the proportional reinsurance arrangement for counterparty i referred to Article 196 as follows:

▼B

image

where

(a)  BE denotes the best estimate of obligations gross of the amounts recoverable,

(b)  Recoverablesi denotes the best estimate of amounts recoverable from the proportional reinsurance arrangement and the corresponding debtors for counterparty i,

(c)  Recoverablesall denotes the best estimate of amounts recoverable from the proportional reinsurance arrangements and the corresponding debtors for all counterparties

(d)  SCRj denotes the capital requirements for underwriting risk j of the insurance or reinsurance undertaking.

Article 109

Simplified calculations for pooling arrangements

Where Article 88 is complied with, insurance or reinsurance undertakings may use the following simplified calculations for the purposes of Articles 193, 194 and 195:

(a) The best estimate referred to in Article 194(1)(d) may be calculated as follows:

image

where BEU denotes the best estimate of the liability ceded to the pooling arrangement by the undertaking to the pooling arrangement, net of any amounts reinsured with counterparties external to the pooling arrangement.

(b) The best estimate referred to in Article 195(c) may be calculated as follows:

image

where BECEP denotes the best estimate of the liability ceded to the external counterparty by the pool, in relation to risk ceded to the pool by the undertaking.

(c) The risk mitigating effect referred to in Article 195(d) may be calculated as follows:

image

where:

(i)  BECE denotes the best estimate of the liability ceded to the external counterparty by the pooling arrangement as a whole;

(ii) ΔRMCEP denotes the contribution of all external counterparties to the risk mitigating effect of the pooling arrangement on the underwriting risk of the undertaking;

(d) The counterparty pool members and the counterparties external to the pool may be grouped according to the credit assessment by a nominated ECAI, provided there are separate groupings for pooling exposures of type A, type B and type C.

▼M6

Article 110

Simplified calculation — grouping of single name exposures

Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the loss-given-default set out in Article 192, including the risk-mitigating effect on underwriting and market risks and the risk-adjusted value of collateral, for a group of single name exposures. In that case, the group of single name exposures shall be assigned the highest probability of default assigned to single name exposures included in the group in accordance with Article 199.

▼B

Article 111

Simplified calculation of the risk mitigating effect

Where Article 88 is complied with, insurance or reinsurance undertakings may calculate the risk-mitigating effect on underwriting and market risk of a reinsurance arrangement, securitisation or derivative referred to in Article 196 as the difference between the following capital requirements:

▼M6

(a) the sum of the hypothetical capital requirement for the sub-modules of the underwriting and market risk modules of the insurance or reinsurance undertaking affected by the risk-mitigating technique, calculated in accordance with this Section and Sections 2 to 5 of this Chapter but as if the reinsurance arrangement, securitisation or derivative did not exist;

▼B

(b) the sum of the capital requirements for the sub-modules of the underwriting and market risk modules of the insurance or reinsurance undertaking affected by the risk-mitigating technique.

▼M6

Article 111a

Simplified calculation of the risk-mitigating effect on underwriting risk

For the purposes of Article 196, where Article 88 is complied with and the reinsurance arrangement, securitisation or derivative covers obligations from only one of the segments (segment s) set out in Annex II or, as applicable, Annex XIV, insurance and reinsurance undertakings may calculate the risk-mitigating effect of that reinsurance arrangement, securitisation or derivative on their underwriting risk as follows:

image

where:

a)  SCRCAT hyp denotes the hypothetical capital requirement for the non-life catastrophe underwriting risk module referred to in Article 119(2), or, as applicable, the hypothetical capital requirement for the health catastrophe risk sub-module referred to in Article 160, that would apply if the reinsurance arrangement, securitisation or derivative did not exist;

b)  SCRCAT without denotes the capital requirement for the non-life catastrophe underwriting risk module referred to in Article 119(2) or, as applicable, the capital requirement for the health catastrophe risk sub-module referred to in Article 160;

c)  σs denotes the standard deviation for non-life premium risk of segment s determined in accordance with Article 117(3) or, as applicable, the standard deviation for the NSLT health premium risk of segment s determined in accordance with Article 148(3);

d)  Ps hyp denotes the hypothetical volume measure for premium risk of segment s determined in accordance with Article 116(3) or (4), or, as applicable, Article 147(3) or (4), that would apply if the reinsurance arrangement, securitisation or derivative did not exist;

e)  Ps without denotes the volume measure for premium risk of segment s determined in accordance with Article 116(3) or (4) or, as applicable, Article 147(3) or (4);

f)  Recoverables denotes the best estimate of amounts recoverable from the reinsurance arrangement, securitisation or derivative and the corresponding debtors.

▼B

Article 112

Simplified calculation of the risk adjusted value of collateral to take into account the economic effect of the collateral

1.  Where Article 88 of this Regulation is complied with, and where the counterparty requirement and the third party requirement referred to in Article 197(1) are both met, insurance or reinsurance undertakings may, for the purposes of Article 197, calculate the risk-adjusted value of a collateral provided by way of security as referred to in Article 1(26)(b), as 85 % of the value of the assets held as collateral, valued in accordance with Article 75 of Directive 2009/138/EC.

2.  Where Articles 88 and 214 of this Regulation are complied with, and where the counterparty requirement referred to in Article 197(1) is met and the third party requirement referred to in Article 197(1) is not met, insurance or reinsurance undertakings may, for the purposes of Article 197, calculate the risk-adjusted value of a collateral provided by way of security as referred to in Article 1(26)(b), as 75 % of the value of the assets held as collateral, valued in accordance with Article 75 of Directive 2009/138/EC.

▼M6

Article 112a

Simplified calculation of the loss-given-default for reinsurance

Where Article 88 is complied with, insurance or reinsurance undertakings may calculate the loss-given-default on a reinsurance arrangement or insurance securitisation referred to in the first subparagraph of Article 192(2) as follows:

LGD = max[90 % · (Recoverables + 50 % · RM re ) – F · Collateral; 0]

where:

a)  Recoverables denotes the best estimate of amounts recoverable from the reinsurance arrangement or insurance securitisation and the corresponding debtors;

b)  RMre denotes the risk mitigating effect on underwriting risk of the reinsurance arrangement or securitisation;

c)  Collateral denotes the risk-adjusted value of collateral in relation to the reinsurance arrangement or securitisation;

d)  F denotes a factor to take into account the economic effect of the collateral arrangement in relation to the reinsurance arrangement or securitisation in case of any credit event related to the counterparty.

Article 112b

Simplified calculation of the capital requirement for counterparty default risk on type 1 exposures

Where Article 88 is complied with and the standard deviation of the loss distribution of type 1 exposures, as determined in accordance with Article 200(4), is lower than or equal to 20 % of the total losses-given default on all type 1 exposures, insurance and reinsurance undertakings may calculate the capital requirement for counterparty default risk referred to in Article 200(1) as follows:

SCR def,1 = 5 · σ

where σ denotes the standard deviation of the loss distribution of type 1 exposures as determined in accordance with Article 200(4).

▼B



Subsection 7

Scope of the underwriting risk modules

Article 113

For the calculation of the capital requirements for non-life underwriting risk, life underwriting risk and health underwriting risk, insurance and reinsurance undertakings shall apply:

(a) the non-life underwriting risk module to non-life insurance and reinsurance obligations other than health insurance and reinsurance obligations;

(b) the life underwriting risk module to life insurance and reinsurance obligations other than health insurance and reinsurance obligations;

(c) the health underwriting risk module to health insurance and reinsurance obligations.



SECTION 2

Non-life underwriting risk module

Article 114

Non-life underwriting risk module

1.  The non-life underwriting risk module shall consist of all of the following sub-modules:

(a) the non-life premium and reserve risk sub-module referred to in point (a) of the third subparagraph of Article 105(2) of Directive 2009/138/EC;

(b) the non-life catastrophe risk sub-module referred to in point (b) of the third subparagraph of Article 105(2) of Directive 2009/138/EC;

(c) the non-life lapse risk sub-module.

2.  The capital requirement for non-life underwriting risk shall be equal to the following:

image

where:

(a) the sum covers all possible combinations (i,j) of the sub-modules set out in paragraph 1;

(b)  CorrNL(i,j) denotes the correlation parameter for non-life underwriting risk for sub-modules i and j;

(c)  SCRi and SCRj denote the capital requirements for risk sub-module i and j respectively.

3.  The correlation parameter CorrNL(i,j) referred to in paragraph 2 denotes the item set out in row i and in column j of the following correlation matrix:



j

i

Non-life premium and reserve

Non-life catastrophe

Non-life lapse

Non-life premium and reserve

1

0,25

0

Non-life catastrophe

0,25

1

0

Non-life lapse

0

0

1

Article 115

Non-life premium and reserve risk sub-module

The capital requirement for non-life premium and reserve risk shall be equal to the following:

image

where:

(a)  σnl denotes the standard deviation for non-life premium and reserve risk determined in accordance with Article 117;

(b)  Vnl denotes the volume measure for non-life premium and reserve risk determined in accordance with Article 116.

Article 116

Volume measure for non-life premium and reserve risk

1.  The volume measure for non-life premium and reserve risk shall be equal to the sum of the volume measures for premium and reserve risk of the segments set out in Annex II.

2.  For all segments set out in Annex II, the volume measure of a particular segment s shall be equal to the following:

image

where:

(a)  V(prem,s) denotes the volume measure for premium risk of segment s;

(b)  V(res,s) denotes the volume measure for reserve risk of segment s;

(c)  DIVs denotes the factor for geographical diversification of segment s.

3.  For all segments set out in Annex II, the volume measure for premium risk of a particular segment s shall be equal to the following:

image

where:

(a)  Ps denotes an estimate of the premiums to be earned by the insurance or reinsurance undertaking in the segment s during the following 12 months;

(b)  P(last,s) denotes the premiums earned by the insurance or reinsurance undertaking in the segment s during the last 12 months;

(c)  FP(existing,s) denotes the expected present value of premiums to be earned by the insurance or reinsurance undertaking in the segment s after the following 12 months for existing contracts;

▼M6

(d)  FP(future,s) denotes the following amount with respect to contracts where the initial recognition date falls in the following 12 months:

(i) for all such contracts whose initial term is one year or less, the expected present value of premiums to be earned by the insurance or reinsurance undertaking in the segment s, but excluding the premiums to be earned during the 12 months after the initial recognition date;

(ii) for all such contracts whose initial term is more than one year, the amount equal to 30 % of the expected present value of premiums to be earned by the insurance or reinsurance undertaking in the segment s after the following 12 months.

▼B

4.  For all segments set out in Annex II, insurance and reinsurance undertakings may, as an alternative to the calculation set out in paragraph 3 of this Article, choose to calculate the volume measure for premium risk of a particular segment s in accordance with the following formula:

image

provided that the all of following conditions are met:

(a) the administrative, management or supervisory body of the insurance or reinsurance undertaking has decided that its earned premiums in the segment s during the following 12 months will not exceed Ps ;

(b) the insurance or reinsurance undertaking has established effective control mechanisms to ensure that the limits on earned premiums referred to in point (a) will be met;

(c) the insurance or reinsurance undertaking has informed its supervisory authority about the decision referred to in point (a) and the reasons for it.

For the purposes of this calculation, the terms Ps , FP(existing,s) and FP(future,s) shall be denoted in accordance with points (a), (c) and (d) of paragraph 3.

5.  For the purposes of the calculations set out in paragraphs 3 and 4, premiums shall be net, after deduction of premiums for reinsurance contracts. The following premiums for reinsurance contracts shall not be deducted:

(a) premiums in relation to non-insurance events or settled insurance claims that are not accounted for in the cash-flows referred to in Article 41(3);

(b) premiums for reinsurance contracts that do not comply with Articles 209, 210, 211 and 213.

6.  For all segments set out in Annex II, the volume measure for reserve risk of a particular segment shall be equal to the best estimate of the provisions for claims outstanding for the segment, after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, provided that the reinsurance contracts or special purpose vehicles comply with Articles 209, 210, 211 and 213. The volume measure shall not be a negative amount.

7.  For all segments set out in Annex II, the default factor for geographical diversification of a particular segment shall be either 1 or calculated in accordance with Annex III.

Article 117

Standard deviation for non-life premium and reserve risk

1.  The standard deviation for non-life premium and reserve risk shall be equal to the following:

image

where:

(a)  Vnl denotes the volume measure for non-life premium and reserve risk;

(b) the sum covers all possible combinations (s,t) of the segments set out in Annex II;

(c)  CorrS(s,t) denotes the correlation parameter for non-life premium and reserve risk for segment s and segment t set out in Annex IV;

(d)  σs and σt denote standard deviations for non-life premium and reserve risk of segments s and t respectively;

(e)  Vs and Vt denote volume measures for premium and reserve risk of segments s and t, referred to in Article 116, respectively.

2.  For all segments set out in Annex II, the standard deviation for non-life premium and reserve risk of a particular segment s shall be equal to the following:

image

where:

(a)  σ(prem,s) denotes the standard deviation for non-life premium risk of segment s determined in accordance with paragraph 3;

(b)  σ(res,s) denotes the standard deviation for non-life reserve risk of segment s as set out in Annex II;

(c)  V(prem,s) denotes the volume measure for premium risk of segment s referred to in Article 116;

(d)  V(res,s) denotes the volume measure for reserve risk of segment s referred to in Article 116.

3.  For all segments set out in Annex II, the standard deviation for non-life premium risk of a particular segment shall be equal to the product of the standard deviation for non-life gross premium risk of the segment set out in Annex II and the adjustment factor for non-proportional reinsurance. For segments 1, 4 and 5 set out in Annex II the adjustment factor for non-proportional reinsurance shall be equal to 80 %. For all other segments set out in Annex the adjustment factor for non-proportional reinsurance shall be equal to 100 %.

Article 118

Non-life lapse risk sub-module

1.  The capital requirement for the non-life lapse risk sub-module referred to in 114(1)(c) shall be equal to the loss in basic own funds of the insurance or reinsurance undertaking resulting from a combination of the following instantaneous events:

(a) the discontinuance of 40 % of the insurance policies for which discontinuance would result in an increase of technical provisions without the risk margin;

(b) where reinsurance contracts cover insurance or reinsurance contracts that will be written in the future, the decrease of 40 % of the number of those future insurance or reinsurance contracts used in the calculation of technical provisions.

2.  The events referred to in paragraph 1 shall apply uniformly to all insurance and reinsurance contracts concerned. In relation to reinsurance contracts the event referred to in point (a) of paragraph 1 shall apply to the underlying insurance contracts.

3.  For the purposes of determining the loss in basic own funds of the insurance or reinsurance undertaking under the event referred to in point (a) of paragraph 1, the undertaking shall base the calculation on the type of discontinuance which most negatively affects the basic own funds of the undertaking on a per policy basis.

Article 119

Non-life catastrophe risk sub-module

1.  The non-life catastrophe risk sub-module shall consist of all of the following sub-modules:

(a) the natural catastrophe risk sub-module;

(b) the sub-module for catastrophe risk of non-proportional property reinsurance;

(c) the man-made catastrophe risk sub-module;

(d) the sub-module for other non-life catastrophe risk.

2.  The capital requirement for the non-life catastrophe underwriting risk module shall be equal to the following:

image

where:

(a)  SCRnatCAT denotes the capital requirement for natural catastrophe risk;

(b)  SCRnpproperty denotes the capital requirement for the catastrophe risk of non-proportional property reinsurance;

(c)  SCRmmCAT denotes the capital requirement for man-made catastrophe risk;

(d)  SCRCATother denotes the capital requirement for other non-life catastrophe risk.

Article 120

Natural catastrophe risk sub-module

1.  The natural catastrophe risk sub-module shall consist of all of the following sub-modules:

(a) the windstorm risk sub-module;

(b) the earthquake risk sub-module;

(c) the flood risk sub-module;

(d) the hail risk sub-module;

(e) the subsidence risk sub-module.

2.  The capital requirement for natural catastrophe risk shall be equal to the following:

image

where:

(a) the sum includes all possible combinations of the sub-modules i set out in paragraph 1;

(b)  SCRi denotes the capital requirement for sub-module i.

Article 121

Windstorm risk sub-module

1.  The capital requirement for windstorm risk shall be equal to the following:

image

where:

(a) the sum includes all possible combinations (r,s) of the regions set out in Annex V;

(b)  CorrWS(r,s) denotes the correlation coefficient for windstorm risk for region r and region s as set out in Annex V;

(c)  SCR(windstorm,r) and SCR(windstorm,s) denote the capital requirements for windstorm risk in region r and s respectively;

(d)  SCR(windstorm,other) denotes the capital requirement for windstorm risk in regions other than those set out in Annex XIII.

2.  For all regions set out in Annex V the capital requirement for windstorm risk in a particular region r shall be the larger of the following two capital requirements:

(a) the capital requirement for windstorm risk in region r according to scenario A as set out in paragraph 3;

(b) the capital requirement for windstorm risk in region r according to scenario B as set out in paragraph 4.

3.  For all regions set out in Annex V the capital requirement for windstorm risk in a particular region r according to scenario A shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from the following sequence of events:

(a) an instantaneous loss of an amount that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, is equal to 80 % of the specified windstorm loss in region r;

(b) a loss of an amount that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, is equal to 40 % of the specified windstorm loss in region r.

4.  For all regions set out in Annex V the capital requirement for windstorm risk in a particular region r according to scenario B shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from the following sequence of events:

(a) an instantaneous loss of an amount that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, is equal to 100 % of the specified windstorm loss in region r;

(b) a loss of an amount that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, is equal to 20 % of the specified windstorm loss in region r.

5.  For all regions set out in Annex V, the specified windstorm loss in a particular region r shall be equal to the following amount:

▼M6

image

▼B

where:

▼M6 —————

▼B

(b) the sum includes all possible combinations of risk zones (i,j) of region r set out in Annex IX;

(c)  Corr(windstorm,r,i,j) denotes the correlation coefficient for windstorm risk in risk zones i and j of region r set out in Annex XXII;

(d)  WSI(windstorm,r,i) and WSI(windstorm,r,j) denote the weighted sums insured for windstorm risk in risk zones i and j of region r set out in Annex IX.

6.  For all regions set out in Annex V and all risk zones of those regions set out in Annex IX the weighted sum insured for windstorm risk in a particular windstorm zone i of a particular region r shall be equal to the following:

▼M6

WSI (windstorm,r,i) = Q (windstorm,r) · W (windstorm,r,i) · SI (windstorm,r,i)

▼B

where:

(a)  W(windstorm,r,i) denotes the risk weight for windstorm risk in risk zone i of region r set out in Annex X;

(b)  SI(windstorm,r,i) denotes the sum insured for windstorm risk in windstorm zone i of region r;

▼M6

(c)  Q(windstorm,r) denotes the windstorm risk factor for region r as set out in Annex V.

Where the amount determined for a particular risk zone in accordance with the first subparagraph exceeds an amount (referred to in this subparagraph as ‘the lower amount’) equal to the sum of the potential losses without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, that the insurance or reinsurance undertaking could suffer for windstorm risk in that risk zone, taking into account the terms and conditions of its specific policies, including any contractual payment limits, the insurance or reinsurance undertaking may, as an alternative calculation, determine the weighted sum insured for windstorm risk in that risk zone as the lower amount.

▼B

7.  For all regions set out in Annex V and all risk zones of those regions set out in Annex IX, the sum insured for windstorm risk in a particular windstorm zone i of a particular region r shall be equal to the following:

image

where:

(a)  SI(property,r,i) denotes the sum insured by the insurance or reinsurance undertaking for lines of business 7 and 19 set out in Annex I in relation to contracts that cover windstorm risk and where the risk is situated in risk zone i of region r;

(b)  SI(onshore-property,r,i) denotes the sum insured by the insurance or reinsurance undertaking for lines of business 6 and 18 set out in Annex I in relation to contracts that cover onshore property damage by windstorm and where the risk is situated in risk zone i of region r.

8.  The capital requirement for windstorm risk in regions other than those set out in Annex XIII shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous loss in relation to each insurance and reinsurance contract that covers any of the following insurance or reinsurance obligations:

(a) obligations of lines of business 7 or 19 set out in Annex I that cover windstorm risk and where the risk is not situated in one of the regions set out in Annex XIII;

(b) obligations of lines of business 6 or 18 set out in Annex I in relation to onshore property damage by windstorm and where the risk is not situated in one of the regions set out in Annex XIII.

9.  The amount of the instantaneous loss, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, referred to in paragraph 8 shall be equal to the following amount:

image

where:

(a)  DIVwindstorm is calculated in accordance with Annex III, but based on the premiums in relation to the obligations referred to in paragraph 8 and restricted to the regions 5 to 18 set out in point (8) of Annex III;

(b)  Pwindstorm is an estimate of the premiums to be earned by insurance and reinsurance undertakings for each contract that covers the obligations referred to in paragraph 8 during the following 12 months: for this purpose premiums shall be gross, without deduction of premiums for reinsurance contracts.

Article 122

Earthquake risk sub-module

1.  The capital requirement for earthquake risk shall be equal to the following:

image

where:

(a) the sum includes all possible combinations (r,s) of the regions set out in Annex VI;

(b)  CorrEQ(r,s) denotes the correlation coefficient for earthquake risk for region r and region s as set out in Annex VI;

(c)  SCR(earthquake,r) and SCR(earthquake,s) denote the capital requirements for earthquake risk in region r and s respectively;

(d)  SCR(earthquake,other) denotes the capital requirement for earthquake risk in regions other than those set out in Annex XIII.

2.   ►M6  For all regions set out in Annex VI, the capital requirement for earthquake risk in a particular region r shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous loss of an amount that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, is equal to the following amount: ◄

▼M6

image

▼B

where:

▼M6 —————

▼B

(b) the sum includes all possible combinations of risk zones (i,j) of region r set out in Annex IX;

(c)  Corr(earthquake,r,i,j) denotes the correlation coefficient for earthquake risk in risk zones i and j of region r set out in Annex XXIII;

(d)  WSI(earthquake,r,i) and WSI(earthquake,r,j) denote the weighted sums insured for earthquake risk in risk zones i and j of region r set out in Annex IX.

3.  For all regions set out in Annex VI and all risk zones of those regions set out in Annex IX, the weighted sum insured for earthquake risk in a particular earthquake zone i of a particular region r shall be equal to the following:

▼M6

WSI (earthquake,r,i) = Q (earthquake,r) · W (earthquake,r,i) · SI (earthquake,r,i)

▼B

where:

(a)  W(earthquake,r,i) denotes the risk weight for earthquake risk in risk zone i of region r set out in Annex X;

(b)  SI(earthquake,r,i) denotes the sum insured for earthquake risk in earthquake zone i of region r;

▼M6

(c)  Q(earthquake,r) denotes the earthquake risk factor for region r as set out in Annex VI.

Where the amount determined for a particular risk zone in accordance with the first subparagraph exceeds an amount (referred to in this subparagraph as ‘the lower amount’) equal to the sum of the potential losses, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, that the insurance or reinsurance undertaking could suffer for earthquake risk in that risk zone, taking into account the terms and conditions of its specific policies, including any contractual payment limits, the insurance or reinsurance undertaking may, as an alternative calculation, determine the weighted sum insured for earthquake risk in that risk zone as the lower amount.

▼B

4.  For all regions set out in Annex VI and all risk zones of those regions set out in Annex IX, the sum insured for earthquake risk in a particular earthquake zone i of a particular region r shall be equal to the following:

image

where:

(a)  SI(property,r,i) denotes the sum insured of the insurance or reinsurance undertaking for lines of business 7 and 19 as set out in Annex I in relation to contracts that cover earthquake risk and where the risk is situated in risk zone i of region r;

(b)  SI(onshore-property,r,i) denotes the sum insured of the insurance or reinsurance undertaking for lines of business 6 and 18 as set out in Annex I in relation to contracts that cover onshore property damage by earthquake and where the risk is situated in risk zone i of region r.

5.  The capital requirement for earthquake risk in regions other than those set out in Annex XIII shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous loss in relation to each insurance and reinsurance contract that covers one or both of the following insurance or reinsurance obligations:

(a) obligations of lines of business 7 or 19 as set out in Annex I that cover earthquake risk, where the risk is not situated in one of the regions set out in Annex XIII;

(b) obligations of lines of business 6 or 18 as set out in Annex I in relation to onshore property damage by earthquake, where the risk is not situated in one of the regions set out in Annex XIII.

6.  The amount of the instantaneous loss, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, referred to in paragraph 5 shall be equal to the following amount:

image

where:

(a)  DIVearthquake is calculated in accordance with Annex III, but based on the premiums in relation to the obligations referred to in points (a) and (b) of paragraph 5 and restricted to the regions 5 to 18 set out in Annex III;

(b)  Pearthquake is an estimate of the premiums to be earned by insurance and reinsurance undertakings for each contract that covers the obligations referred to in points (a) and (b) of paragraph 5 during the following 12 months: for this purpose premiums shall be gross, without deduction of premiums for reinsurance contracts.

Article 123

Flood risk sub-module

1.  The capital requirement for flood risk shall be equal to the following:

image

where:

(a) the sum includes all possible combinations (r,s) of the regions set out in Annex VII;

(b)  CorrFL(r,s) denotes the correlation coefficient for flood risk for region r and region s as set out in Annex VII;

(c)  SCR(flood,r) and SCR(flood,s) denote the capital requirements for flood risk in region r and s respectively;

(d)  SCR(flood,other) denotes the capital requirement for flood risk in regions other than those set out in Annex XIII.

2.  For all regions set out in Annex VII, the capital requirement for flood risk in a particular region r shall be the larger of the following capital requirements:

(a) the capital requirement for flood risk in region r according to scenario A as set out in paragraph 3;

(b) the capital requirement for flood risk in region r according to scenario B as set out in paragraph 4.

3.  For all regions set out in Annex VII, the capital requirement for flood risk in a particular region r according to scenario A shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from the following sequence of events:

(a) an instantaneous loss of an amount that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, is equal to 65 % of the specified flood loss in region r;

(b) a loss of an amount that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, is equal to 45 % of the specified flood loss in region r.

4.  For all regions set out in Annex VII, the capital requirement for flood risk in a particular region r according to scenario B shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from the following sequence of events:

(a) an instantaneous loss of an amount that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, is equal to 100 % of the specified flood loss in region r;

(b) a loss of an amount that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, is equal to 10 % of the specified flood loss in region r.

5.  For all regions set out in Annex VII, the specified flood loss in a particular region r shall be equal to the following amount:

▼M6

image

▼B

where:

▼M6 —————

▼B

(b) the sum includes all possible combinations of risk zones (i,j) of region r set out in Annex IX;

(c)  Corr(flood,r,i,j) denotes the correlation coefficient for flood risk in flood zones i and j of region r set out in Annex XXIV;

(d)  WSI(flood,r,i) and WSI(flood,r,j) denote the weighted sums insured for flood risk in risk zones i and j of region r set out in Annex IX.

6.  For all regions set out in Annex VII and all risk zones of those regions set out in Annex IX, the weighted sum insured for flood risk in a particular flood zone i of a particular region r shall be equal to the following:

▼M6

WSI (flood,r,i) = Q (flood,r) · W (flood,r,i) · SI (flood,r,i)

▼B

where:

(a)  W(flood,r,i) denotes the risk weight for flood risk in risk zone i of region r set out in Annex X;

(b)  SI(flood,r,i) denotes the sum insured for flood risk in flood zone i of region r;

▼M6

(c)  Q(flood,r) denotes the flood risk factor for region r as set out in Annex VII.

Where the amount determined for a particular risk zone in accordance with the first subparagraph exceeds an amount (referred to in this subparagraph as ‘the lower amount’) equal to the sum of the potential losses, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, that the insurance or reinsurance undertaking could suffer for flood risk in that risk zone, taking into account the terms and conditions of its specific policies, including any contractual payment limits, the insurance or reinsurance undertaking may, as an alternative calculation, determine the weighted sum insured for flood risk in that risk zone as the lower amount.

▼B

7.   ►M6  For all regions set out in Annex VII and all risk zones of those regions set out in Annex IX, the sum insured for flood risk for a particular risk zone i of a particular region r shall be equal to the following: ◄

image

where:

(a)  SI(property,r,i) denotes the sum insured by the insurance or reinsurance undertaking for lines of business 7 and 19 as set out in Annex I in relation to contracts that cover flood risk, where the risk is situated in risk zone i of region r;

(b)  SI(onshore-property,r,i) denotes the sum insured by the insurance or reinsurance undertaking for lines of business 6 and 18 as set out in Annex I in relation to contracts that cover onshore property damage by flood and where the risk is situated in risk zone i of region r;

(c)  SI(motor,r,i) denotes the sum insured by the insurance or reinsurance undertaking for lines of business 5 and 17 as set out in Annex I in relation to contracts that cover flood risk, where the risk is situated in risk zone i of region r.

8.  The capital requirement for flood risk in regions other than those set out in Annex XIII, shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous loss in relation to each insurance and reinsurance contract that covers any of the following insurance or reinsurance obligations:

(a) obligations of lines of business 7 or 19 as set out in Annex I that cover flood risk, where the risk is not situated in one of the regions set out in Annex XIII;

(b) obligations of lines of business 6 or 18 as set out in Annex I in relation to onshore property damage by flood, where the risk is not situated in one of the regions set out in Annex XIII;

(c) obligations of lines of business 5 or 17 as set out in Annex I that cover flood risk, where the risk is not situated in one of the regions set out in Annex XIII.

9.  The amount of the instantaneous loss, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, referred to in paragraph 8 shall be equal to the following amount:

image

where:

(a)  DIVflood is calculated in accordance with Annex III, but based on the premiums in relation to the obligations referred to in points (a), (b) and (c) of paragraph 8 and restricted to the regions 5 to 18 set out in point (8) of Annex III;

(b)  Pflood is an estimate of the premiums to be earned by the insurance or reinsurance undertaking for each contract that covers the obligations referred to in points (a), (b) and (c) of paragraph 8 during the following 12 months: for this purpose, premiums shall be gross, without deduction of premiums for reinsurance contracts.

Article 124

Hail risk sub-module

1.  The capital requirement for hail risk shall be equal to the following:

image

where:

(a) the sum includes all possible combinations (r,s) of the regions set out in Annex VIII;

(b)  CorrHL(r,s) denotes the correlation coefficient for hail risk for region r and region s as set out in Annex VIII;

(c)  SCR(hail,r) and SCR(hail,s) denote the capital requirements for hail risk in regions r and s respectively;

(d)  SCR(hail,other) denotes the capital requirement for hail risk in regions other than those set out in Annex XIII.

2.  For all regions set out in Annex VIII, the capital requirement for hail risk in a particular region r shall be the larger of the following capital requirements:

(a) the capital requirement for hail risk in region r according to scenario A;

(b) the capital requirement for hail risk in region r according to scenario B.

3.  For all regions set out in Annex VIII, the capital requirement for hail risk in a particular region r according to scenario A shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from the following sequence of events:

(a) an instantaneous loss of an amount that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, is equal to 70 % of the specified hail loss in region r;

(b) a loss of an amount that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, is equal to 50 % of the specified hail loss in region r.

4.  For all regions set out in Annex VIII, the capital requirement for hail risk in a particular region r according to scenario B shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from the following sequence of events:

(a) an instantaneous loss of an amount that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, is equal to 100 % of the specified hail loss in region r;

(b) a loss of an amount that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, is equal to 20 % of the specified hail loss in region r.

5.  For all regions set out in Annex VIII, the specified hail loss in a particular region r shall be equal to the following amount:

▼M6

image

▼B

where:

▼M6 —————

▼B

(b) the sum includes all possible combinations of risk zones (i,j) of region r set out in Annex IX;

(c)  Corr(hail,r,i,j) denotes the correlation coefficient for hail risk in risk zones i and j of region r set out in Annex XXV;

(d)  WSI(hail,r,i) and WSI(hail,r,j) denote the weighted sums insured for hail risk in risk zones i and j of region r set out in Annex IX.

6.  For all regions set out in Annex VIII and all risk zones of those regions set out in Annex IX, the weighted sum insured for hail risk in a particular hail zone i of a particular region r shall be equal to the following:

▼M6

WSI (hail,r,i) = Q (hail,r) · W (hail,r,i) · SI (hail,r,i)

▼B

where:

(a)  W(hail,r,i) denotes the risk weight for hail risk in risk zone i of region r set out in Annex X;

(b)  SI(hail,r,i) denotes the sum insured for hail risk in hail zone i of region r;

▼M6

(c)  Q(hail,r) denotes the hail risk factor for region r as set out in Annex VIII.

Where the amount determined for a particular risk zone in accordance with the first subparagraph exceeds an amount (referred to in this subparagraph as ‘the lower amount’) equal to the sum of the potential losses, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, that the insurance or reinsurance undertaking could suffer for hail risk in that risk zone taking into account the terms and conditions of its specific policies, including any contractual payment limits, the insurance or reinsurance undertaking may, as an alternative calculation, determine the weighted sum insured for hail risk in that risk zone as the lower amount.

▼B

7.  For all regions set out in Annex VIII and all hail zones, the sum insured for hail risk in a particular hail zone i of a particular region r shall be equal to the following:

image

where:

(a)  SI(property,r,i) denotes the sum insured by the insurance or reinsurance undertaking for lines of business 7 and 19 as set out in Annex I in relation to contracts that cover hail risk, where the risk is situated in risk zone i of region r;

(b)  SI(onshore-property,r,i) denotes the sum insured by the insurance or reinsurance undertaking for lines of business 6 and 18 as set out in Annex I in relation to contracts that cover onshore property damage by hail, where the risk is situated in risk zone i of region r;

(c)  SI(motor,r,i) denotes the sum insured by the insurance or reinsurance undertaking for insurance or reinsurance obligations for lines of business 5 and 17 as set out in Annex I in relation to contracts that cover hail risk, where the risk is situated in risk zone i of region r.

8.  The capital requirement for hail risk in regions other than those set out in Annex XIII, shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous loss in relation to each insurance and reinsurance contract that covers one or more of the following insurance or reinsurance obligations:

(a) obligations of lines of business 7 or 19 as set out in Annex I that cover hail risk, where the risk is not situated in one of the regions set out in Annex XIII;

(b) obligations of lines of business 6 or 18 as set out in Annex I in relation to onshore property damage by hail, where the risk is not situated in one of the regions set out in Annex XIII;

(c) obligations of lines of business 5 or 17 as set out in Annex I that cover hail risk, where the risk is not situated in one of the regions set out in Annex XIII.

9.  The amount of the instantaneous loss, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, referred to in paragraph 8 shall be equal to the following amount:

image

where:

(a)  DIVhail is calculated in accordance with Annex III, but based on the premiums in relation to the obligations referred to in points (a), (b) and (c) of paragraph 8 and restricted to the regions 5 to 18 set out in Annex III;

(b)  Phail is an estimate of the premiums to be earned by the insurance or reinsurance undertaking for each contract that covers the obligations referred to in points (a), (b) and (c) of paragraph 8 during the following 12 months: for this purpose premiums shall be gross, without deduction of premiums for reinsurance contracts.

Article 125

Subsidence risk sub-module

1.  The capital requirement for subsidence risk shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous loss of an amount that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, is equal to the following:

▼M6

image

▼B

where:

(a) the sum includes all possible combinations of risk zones (i,j) of France set out in Annex IX;

(b)  Corr(subsidence,i,j) denotes the correlation coefficient for subsidence risk in risk zones i and j set out in Annex XXVI;

(c)  WSI(subsidence,i) and WSI(subsidence,j) denote the weighted sums insured for subsidence risk in risk zones i and j of France set out in Annex IX.

2.  For all subsidence zones the weighted sum insured for subsidence risk in a particular risk zone i of France set out in the Annex IX shall be equal to the following:

▼M6

WSI (subsidence,i) = 0,0005 · W (subsidence,i) · SI (subsidence,i)

▼B

where:

(a)  W(subsidence,i) denotes the risk weight for subsidence risk in risk zone i set out in Annex X;

(b)  SI(subsidence,i) denotes the sum insured of the insurance or reinsurance undertaking for lines of business 7 and 19 as set out in Annex I in relation to contracts that cover subsidence risk of residential buildings in subsidence zone i.

▼M6

Where the amount determined for a particular risk zone in accordance with the first subparagraph exceeds an amount (referred to in this subparagraph as ‘the lower amount’) equal to the sum of the potential losses, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, that the insurance or reinsurance undertaking could suffer for subsidence risk in that risk zone, taking into account the terms and conditions of its specific policies, including any contractual payment limits, the insurance or reinsurance undertaking may, as an alternative calculation, determine the weighted sum insured for subsidence risk in that risk zone as the lower amount.

▼B

Article 126

Interpretation of catastrophe scenarios

1.  For the purposes of Article 121(3) and (4), Article 123(3) and (4) and Article 124(3) and (4), insurance and reinsurance undertakings shall base the calculation of the capital requirement on the following assumptions:

(a) the two consecutive events referred to in those Articles are independent;

(b) insurance and reinsurance undertakings do not enter into new insurance risk mitigation techniques between the two events.

2.  Notwithstanding point (d) of Article 83(1), where current reinsurance contracts allow for reinstatements, insurance and reinsurance undertakings shall take into account future management actions in relation to the reinstatements between the first and the second event. The assumptions about future management actions shall be realistic, objective and verifiable.

Article 127

Sub-module for catastrophe risk of non-proportional property reinsurance

1.  The capital requirement for catastrophe risk of non-proportional property reinsurance shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous loss in relation to each reinsurance contract that covers reinsurance obligations of line of business 28 as set out in Annex I other than non-proportional reinsurance obligations relating to insurance obligations included in lines of business 9 and 21 set out in Annex I.

2.  The amount of the instantaneous loss, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, referred to in paragraph 1 shall be equal to the following:

image

where:

(a)  DIVnpproperty is calculated in accordance with Annex III, but based on the premiums earned by the insurance and reinsurance undertaking in line of business 28 as set out in Annex I, other than non-proportional reinsurance obligations relating to insurance obligations included in lines of business 9 and 21 as set out in Annex I;

(b)  Pproperty is an estimate of the premiums to be earned by the insurance or reinsurance undertaking during the following 12 months for each contract that covers the reinsurance obligations of line of business 28 as set out in Annex I other than non-proportional reinsurance obligations relating to insurance obligations included in lines of business 9 and 21 as set out in Annex I: for this purpose premiums shall be gross, without deduction of premiums for reinsurance contracts.

Article 128

Man-made catastrophe risk sub-module

1.  The man-made catastrophe risk sub-module shall consist of all of the following sub-modules:

(a) the motor vehicle liability risk sub-module;

(b) the marine risk sub-module;

(c) the aviation risk sub-module;

(d) the fire risk sub-module;

(e) the liability risk sub-module;

(f) the credit and suretyship risk sub-module.

2.  The capital requirement for the man-made catastrophe risk shall be equal to the following:

image

where:

(a) the sum includes all sub-modules set out in paragraph 1;

(b)  SCRi denotes the capital requirements for sub-module i.

Article 129

Motor vehicle liability risk sub-module

1.  The capital requirement for motor vehicle liability risk shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous loss that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, is equal to the following amount in euro:

image

where:

(a)  Na is the number of vehicles insured by the insurance or reinsurance undertaking in lines of business 4 and 16 as set out in Annex I with a deemed policy limit above EUR 24 000 000 ;

(b)  Nb is the number of vehicles insured by the insurance or reinsurance undertaking in lines of business 4 and 16 as set out in Annex I with a deemed policy limit below or equal to EUR 24 000 000 .

The number of motor vehicles covered by the proportional reinsurance obligations of the insurance or reinsurance undertaking shall be weighted by the relative share of the undertaking's obligations in respect of the sum insured of the motor vehicles.

2.  The deemed policy limit referred to in paragraph 1 shall be the overall limit of the motor vehicle liability insurance policy or, where no such overall limit is specified in the terms and conditions of the policy, the sum of the limits for damage to property and for personal injury. Where the policy limit is specified as a maximum per victim, the deemed policy limit shall be based on the assumption of ten victims.

▼M6

Article 130

Marine risk sub-module

1.  The capital requirement for marine risk shall be equal to the following:

image

where:

a)  SCRvessel is the capital requirement for the risk of a vessel collision;

b)  SCRplatform is the capital requirement for the risk of a platform explosion.

2.  The capital requirement for the risk of a vessel collision shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous loss of an amount equal to the following:

L vessel = max v (SI (hull,v) + SI (liab,v)+ SI (pollution,v))

where:

(a) the maximum relates to all sea, lake, river and canal vessels insured by the insurance or reinsurance undertaking in respect of vessel collision in lines of business 6, 18 and 27 set out in Annex I where the insured value of the vessel is at least EUR 250 000 ;

(b)  SI(hull,v) is the sum insured by the insurance or reinsurance undertaking, after deduction of the amounts that the insurance or reinsurance undertaking can recover from reinsurance contracts and special purpose vehicles, for marine hull insurance and reinsurance in relation to vessel v;

(c)  SI(liab,v) is the sum insured by the insurance or reinsurance undertaking, after deduction of the amounts that the insurance or reinsurance undertaking can recover from reinsurance contracts and special purpose vehicles, for marine liability insurance and reinsurance in relation to vessel v;

(d)  SI(pollution,v) is the sum insured by the insurance or reinsurance undertaking, after deduction of the amounts that the insurance or reinsurance undertaking can recover from reinsurance contracts and special purpose vehicles, for oil pollution insurance and reinsurance in relation to vessel v.

For the purposes of determining SI(hull,v) , SI(liab,v) and SI(pollution,v) , insurance and reinsurance undertakings shall only take into account reinsurance contracts and special purpose vehicles that would pay out in the event of insurance claims related to vessel v. Reinsurance contracts and special purpose vehicles where payout is dependent on insurance claims not related to vessel v shall not be taken into account.

Where the deduction of amounts recoverable would lead to a capital requirement for the risk of a vessel collision that captures insufficiently the risk of a vessel collision that the insurance or reinsurance undertaking is exposed to, the insurance or reinsurance undertaking shall calculate SI(hull,v) , SI(liab,v) or SI(pollution,v) without deduction of amounts recoverable.

3.  The capital requirement for the risk of a platform explosion shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous loss of an amount equal to the following:

L platform = max p (SI p )

where:

(a) the maximum relates to all oil and gas offshore platforms insured by the insurance or reinsurance undertaking in respect of platform explosion in lines of business 6, 18 and 27 set out in Annex I;

(b)  SIp is the accumulated sum insured by the insurance or reinsurance undertaking, after deduction of the amounts that the insurance or reinsurance undertaking can recover from reinsurance contracts and special purpose vehicles, for the following insurance and reinsurance obligations in relation to platform p:

(i) obligations to compensate for property damage;

(ii) obligations to compensate for the expenses for the removal of wreckage;

(iii) obligations to compensate for loss of production income;

(iv) obligations to compensate for the expenses for capping of the well or making the well secure;

(v) liability insurance and reinsurance obligations.

For the purposes of determining SIp , insurance and reinsurance undertakings shall only take into account reinsurance contracts and special purpose vehicles that would pay out in the event of insurance claims related to platform p. Reinsurance contracts and special purpose vehicles where payout is dependent on insurance claims that are not related to platform p shall not be taken into account.

Where the deduction of amounts recoverable would lead to a capital requirement for the risk of a platform explosion that captures insufficiently the risk of a platform explosion that the insurance or reinsurance undertaking is exposed to, the insurance or reinsurance undertaking shall calculate SIp without the deduction of amounts recoverable.

▼B

Article 131

Aviation risk sub-module

▼M6

The capital requirement for aviation risk shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous loss of an amount that is equal to the following:

▼B

image

where:

(a) the maximum relates to all aircrafts insured by the insurance or reinsurance undertaking in lines of business 6, 18 and 27 set out in Annex I;

▼M6

(b)  SIa is the sum insured by the insurance or reinsurance undertaking, after deduction of the amounts that the insurance or reinsurance undertaking can recover from reinsurance contracts and special purpose vehicles, for aviation hull insurance and reinsurance and aviation liability insurance and reinsurance in relation to aircraft a.

For the purposes of this Article, insurance and reinsurance undertakings shall only take into account reinsurance contracts and special purpose vehicles that would pay out in the event of insurance claims related to aircraft a. Reinsurance contracts and special purpose vehicles where payout is dependent on insurance claims that are not related to aircraft a shall not be taken into account.

Where the deduction of amounts recoverable would lead to a capital requirement for aviation risk that captures insufficiently the aviation risk that the insurance or reinsurance undertaking is exposed to, the insurance or reinsurance undertaking shall, calculate SIa without the deduction of amounts recoverable.

▼B

Article 132

Fire risk sub-module

▼M6

1.  The capital requirement for fire risk shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous loss of an amount equal to the sum insured by the insurance or reinsurance undertaking with respect to the largest fire risk concentration.

2.  The largest fire risk concentration of an insurance or reinsurance undertaking is the set of buildings with the largest sum insured, after deduction of the amounts that the insurance or reinsurance undertaking can recover from reinsurance contracts and special purpose vehicles, that meets all of the following conditions:

(a) the insurance or reinsurance undertaking has insurance or reinsurance obligations in lines of business 7 and 19 set out in Annex I, in relation to each building which cover damage due to fire or explosion, including as a result of terrorist attacks;

(b) all buildings are partly or fully located within a radius of 200 meters.

In determining the sum insured for a set of buildings, insurance and reinsurance undertakings shall only take into account reinsurance contracts and special purpose vehicles that would pay out in the event of insurance claims related to that set of buildings. Reinsurance contracts and special purpose vehicles where payout is dependent on insurance claims that are not related to that set of buildings shall not be taken into account.

Where the deduction of amounts recoverable would lead to a capital requirement for fire risk that captures insufficiently the fire risk that the insurance or reinsurance undertaking is exposed to, the insurance or reinsurance undertaking shall calculate the sum insured for a set of buildings without the deduction of amounts recoverable.

▼B

3.  For the purposes of paragraph 2, the set of buildings may be covered by one or several insurance or reinsurance contracts.

Article 133

Liability risk sub-module

1.  The capital requirement for liability risk shall be equal to the following:

image

where:

(a) the sum includes all possible combinations of liability risk groups (i,j) as set out in Annex XI;

(b)  Corr(liability,i,j) denotes the correlation coefficient for liability risk of liability risk groups i and j as set out in Annex XI;

(c)  SCR(liability,i) denotes the capital requirement for liability risk of liability risk group i.

2.  For all liability risk groups set out in Annex XI the capital requirement for liability risk of a particular liability risk group i shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous loss of an amount that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, is equal to the following:

image

where:

(a)  f(liability,i) denotes the risk factor for liability risk group i as set out in Annex XI;

(b)  P(liability,i) denotes the premiums earned by the insurance or reinsurance undertaking during the following 12 months in relation to insurance and reinsurance obligations in liability risk group i; for this purpose premiums shall be gross, without deduction of premiums for reinsurance contracts.

3.  The calculation of the loss in basic own funds referred to in paragraph 2 shall be based on the following assumptions:

(a) the loss of liability risk group i is caused by ni claims and the losses caused by these claims are representative for the business of the insurance or reinsurance undertaking in liability risk group i and sum up to the loss of liability risk group i;

(b) the number of claims ni is equal to the lowest integer that exceeds the following amount:

image

where:

(i)  f(liability,i) and P(liability,i) are defined as in paragraph 2;

(ii)  Lim(i,1) denotes the largest liability limit of indemnity provided by the insurance or reinsurance undertaking in liability risk group i;

(c) where the insurance or reinsurance undertaking provides unlimited cover in liability risk group i, the number of claims ni is equal to one.

Article 134

Credit and suretyship risk sub-module

1.  The capital requirement for credit and suretyship risk shall be equal to the following:

image

where:

(a)  SCRdefault is the capital requirement for the risk of a large credit default;

(b)  SCRrecession is the capital requirement for recession risk.

2.  The capital requirement for the risk of a large credit default shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous default of the two largest exposures relating to obligations included in the lines of business 9 and 21of an insurance or reinsurance undertaking. The calculation of the capital requirement shall be based on the assumption that the loss-given-default, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, of each exposure is 10 % of the sum insured in relation to the exposure.

3.  The two largest credit insurance exposures referred to in paragraph 2 shall be determined based on a comparison of the net loss-given-default of the credit insurance exposures, being the loss-given-default after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles.

4.  The capital requirement for recession risk shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous loss of an amount that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, is equal to 100 % of the premiums earned by the insurance or reinsurance undertaking during the following 12 months in lines of business 9 and 21.

Article 135

Sub-module for other non-life catastrophe risk

The capital requirement for other non-life catastrophe risk shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous loss, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, that is equal to the following amount:

image

where:

(a)  P 1, P 2, P 3, P 4 and P 5 denote estimates of the gross premium, without deduction of the amounts recoverable from reinsurance contracts, expected to be earned by the insurance or reinsurance undertaking during the following 12 months in relation to the groups of insurance and reinsurance obligations 1 to 5 set out in Annex XII;

(b)  c 1, c 2, c 3, c 4 and c 5 denote the risk factors for the groups of insurance and reinsurance obligations 1 to 5 set out in Annex XII.



SECTION 3

Life underwriting risk module

Article 136

Correlation coefficients

1.  The life underwriting risk module shall consist of all of the following sub-modules:

(a) the mortality risk sub-module referred to in point (a) of subparagraph 2 of Article 105(3) of Directive 2009/138/EC;

(b) the longevity risk sub-module referred to in point (b) of subparagraph 2 of Article 105(3) of Directive 2009/138/EC;

(c) the disability-morbidity risk sub-module referred to in point (c) of subparagraph 2 of Article 105(3) of Directive 2009/138/EC;

(d) the life-expense risk sub-module referred to in point (d) of subparagraph 2 of Article 105(3) of Directive 2009/138/EC;

(e) the revision risk sub-module referred to in point (e) of subparagraph 2 of Article 105(3) of Directive 2009/138/EC;

(f) the lapse risk sub-module referred to in point (f) of subparagraph 2 of Article 105(3) of Directive 2009/138/EC;

(g) the life-catastrophe risk sub-module referred to in point (g) of subparagraph 2 of Article 105(3) of Directive 2009/138/EC.

2.  The capital requirement for life underwriting risk shall be equal to the following:

image

where:

(a) the sum covers all possible combinations (i,j) of the sub-modules set out in paragraph 1;

(b)  CorrNL(i,j) denotes the correlation parameter for life underwriting risk for sub-modules i and j;

(c)  SCRi and SCRj denote the capital requirements for risk sub-module i and j respectively.

3.  The correlation coefficient Corri,j referred to in point 3 of Annex IV of Directive 2009/138/EC shall be equal to the item set out in row i and in column j of the following correlation matrix:



j

i

Mortality

Longevity

Disability

Life expense

Revision

Lapse

Life catastrophe

Mortality

1

– 0,25

0,25

0,25

0

0

0,25

Longevity

– 0,25

1

0

0,25

0,25

0,25

0

Disability

0,25

0

1

0,5

0

0

0,25

Life expense

0,25

0,25

0,5

1

0,5

0,5

0,25

Revision

0

0,25

0

0,5

1

0

0

Lapse

0

0,25

0

0,5

0

1

0,25

Life catastrophe

0,25

0

0,25

0,25

0

0,25

1

Article 137

Mortality risk sub-module

1.  The capital requirement for mortality risk referred to in Article 105(3)(a) of Directive 2009/138/EC shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous permanent increase of 15 % in the mortality rates used for the calculation of technical provisions

2.  The increase in mortality rates referred to in paragraph 1 shall only apply to those insurance policies for which an increase in mortality rates leads to an increase in technical provisions without the risk margin. The identification of insurance policies for which an increase in mortality rates leads to an increase in technical provisions without the risk margin may be based on the following assumptions:

(a) multiple insurance policies in respect of the same insured person may be treated as if they were one insurance policy;

(b) where the calculation of technical provisions is based on groups of policies as referred to in Article 35, the identification of the policies for which technical provisions increase under an increase of mortality rates may also be based on those groups of policies instead of single policies, provided that it yields a result which is not materially different.

3.  With regard to reinsurance obligations, the identification of the policies for which technical provisions increase under an increase of mortality rates shall apply to the underlying insurance policies only and shall be carried out in accordance with paragraph 2.

Article 138

Longevity risk sub-module

1.  The capital requirement for longevity risk referred to in Article 105(3)(b) of Directive 2009/138/EC shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous permanent decrease of 20 % in the mortality rates used for the calculation of technical provisions.

2.  The decrease in mortality rates referred to in paragraph 1 shall only apply to those insurance policies for which a decrease in mortality rates leads to an increase in technical provisions without the risk margin. The identification of insurance policies for which a decrease in mortality rates leads to an increase in technical provisions without the risk margin may be based on the following assumptions:

(a) multiple insurance policies in respect of the same insured person may be treated as if they were one insurance policy;

(b) where the calculation of technical provisions is based on groups of policies as referred to in Article 35, the identification of the policies for which technical provisions increase under a decrease of mortality rates may also be based on those groups of policies instead of single policies, provided that it yields a result which is not materially different.

3.  With regard to reinsurance obligations, the identification of the policies for which technical provisions increase under a decrease of mortality rates shall apply to the underlying insurance policies only and shall be carried out in accordance with paragraph 2.

Article 139

Disability-morbidity risk sub-module

The capital requirement for disability-morbidity risk referred to in Article 105(3)(c) of Directive 2009/138/EC shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from the combination of the following instantaneous permanent changes:

(a) an increase of 35 % in the disability and morbidity rates which are used in the calculation of technical provisions to reflect the disability and morbidity experience in the following 12 months;

(b) an increase of 25 % in the disability and morbidity rates which are used in the calculation of technical provisions to reflect the disability and morbidity experience for all months after the following 12 months;

(c) a decrease of 20 % in the disability and morbidity recovery rates used in the calculation of technical provisions in respect of the following 12 months and for all years thereafter.

Article 140

Life-expense risk sub-module

The capital requirement for life-expense risk referred to in Article 105(3)(d) of Directive 2009/138/EC shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from the combination of the following instantaneous permanent changes:

(a) an increase of 10 % in the amount of expenses taken into account in the calculation of technical provisions;

(b) an increase of 1 percentage point to the expense inflation rate (expressed as a percentage) used for the calculation of technical provisions.

With regard to reinsurance obligations, insurance and reinsurance undertakings shall apply those changes to their own expenses and, where relevant, to the expenses of the ceding undertakings.

Article 141

Revision risk sub-module

The capital requirement for revision risk referred to in Article 105(3)(e) of Directive 2009/138/EC shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous permanent increase of 3 % in the amount of annuity benefits only on annuity insurance and reinsurance obligations where the benefits payable under the underlying insurance policies could increase as a result of changes in the legal environment or in the state of health of the person insured.

Article 142

Lapse risk sub-module

1.  The capital requirement for lapse risk referred to in Article 105(3)(f) of Directive 2009/138/EC shall be equal to the largest of the following capital requirements:

(a) the capital requirement for the risk of a permanent increase in lapse rates;

(b) the capital requirement for the risk of a permanent decrease in lapse rates;

(c) the capital requirement for mass lapse risk.

2.  The capital requirement for the risk of a permanent increase in lapse rates shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous permanent increase of 50 % in the option exercise rates of the relevant options set out in paragraphs 4 and 5. Nevertheless, the increased option exercise rates shall not exceed 100 % and the increase in option exercise rates shall only apply to those relevant options for which the exercise of the option would result in an increase of technical provisions without the risk margin.

3.  The capital requirement for the risk of a permanent decrease in lapse rates shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous permanent decrease of 50 % in the option exercise rates of the relevant options set out in paragraph 4 and 5. Nevertheless, the decrease in option exercise rates shall not exceed 20 percentage points and the decrease in option exercise rates shall only apply to those relevant options for which the exercise of the option would result in a decrease of technical provisions without the risk margin.

4.  The relevant options for the purposes of paragraphs 2 and 3 shall be the following:

(a) all legal or contractual policyholder rights to fully or partly terminate, surrender, decrease, restrict or suspend insurance cover or permit the insurance policy to lapse;

(b) all legal or contractual policyholder rights to fully or partially establish, renew, increase, extend or resume the insurance or reinsurance cover.

For the purposes of point (b), the change in the option exercise rate referred to in paragraphs 2 and 3 shall be applied to the rate reflecting that the relevant option is not exercised.

5.  In relation to reinsurance contracts the relevant options for the purposes of paragraph 2 and 3 shall be the following:

(a) the rights referred to in paragraph 4 of the policy holders of the reinsurance contracts;

(b) the rights referred to in paragraph 4 of the policy holders of the insurance contracts underlying the reinsurance contracts;

(c) where the reinsurance contracts covers insurance or reinsurance contracts that will be written in the future, the right of the potential policy holders not to conclude those insurance or reinsurance contracts.

6.  The capital requirement for mass lapse risk shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from a combination of the following instantaneous events:

(a) the discontinuance of 70 % of the insurance policies falling within the scope of operations referred to with Article 2(3)(b)(iii) and (iv) of Directive 2009/138/EC, for which discontinuance would result in an increase of technical provisions without the risk margin and where one of the following conditions are met:

(i) the policyholder is not a natural person and discontinuance of the policy is not subject to approval by the beneficiaries of the pension fund;

(ii) the policyholder is a natural person acting for the benefit of the beneficiaries of the policy, except where there is a family relationship between that natural person and the beneficiaries, or where the policy is effected for private estate planning or inheritance purposes and the number of beneficiaries under the policy does not exceed 20;

(b) the discontinuance of 40 % of the insurance policies other than those falling within point (a) for which discontinuance would result in an increase of technical provisions without the risk margin;

(c) where reinsurance contracts cover insurance or reinsurance contracts that will be written in the future, the decrease of 40 % of the number of those future insurance or reinsurance contracts used in the calculation of technical provisions.

The events referred to in the first subparagraph shall apply uniformly to all insurance and reinsurance contracts concerned. In relation to reinsurance contracts, the event referred to in point (a) shall apply to the underlying insurance contracts.

For the purposes of determining the loss in basic own funds of the insurance or reinsurance undertaking under the events referred to in points (a) and (b) the undertaking shall base the calculation on the type of discontinuance which most negatively affects the basic own funds of the undertaking on a per policy basis.

7.  Where the largest of the capital requirements referred to in points (a), (b) and (c) of paragraph 1 of this Article and the largest of the corresponding capital requirements calculated in accordance with Article 206(2) of this Regulation are not based on the same scenario, the capital requirement for lapse risk referred to in Article 105(3)(f) of Directive 2009/138/EC shall be the capital requirement referred to in points (a), (b) and (c) of paragraph 1 of this Article for which the underlying scenario results in the largest corresponding capital requirement calculated in accordance with Article 206(2) of this Regulations.

Article 143

Life-catastrophe risk sub-module

1.  The capital requirement for life-catastrophe risk referred to in Article 105(3)(g) of Directive 2009/138/EC shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous increase of 0.15 percentage points to the mortality rates (expressed as percentages) which are used in the calculation of technical provisions to reflect the mortality experience in the following 12 months.

2.  The increase in mortality rates referred to in paragraph 1 shall only apply to those insurance policies for which an increase in mortality rates which are used to reflect the mortality experience in the following 12 months leads to an increase in technical provisions. The identification of insurance policies for which an increase in mortality rates leads to an increase in technical provisions without the risk margin may be based on the following assumptions:

(a) multiple insurance policies in respect of the same insured person may be treated as if they were one insurance policy;

(b) where the calculation of technical provisions is based on groups of policies as referred to in Article 35, the identification of the policies for which technical provisions increase under an increase of mortality rates may also be based on those groups of policies instead of single policies, provided that it yields a result which is not materially different.

3.  With regard to reinsurance policies, the identification of the policies for which technical provisions increase under an increase of mortality rates shall apply to the underlying insurance policies only and shall be carried out in accordance with paragraph 2.



SECTION 4

Health underwriting risk module

Article 144

Health underwriting risk module

1.  The health underwriting risk module shall consist of all of the following sub-modules:

(a) the NSLT health insurance underwriting risk sub-module;

(b) the SLT health insurance underwriting risk sub-module;

(c) the health catastrophe risk sub-module.

2.  The capital requirement for health underwriting risk shall be equal to the following:

image

where:

(a) the sum covers all possible combinations (i,j) of the sub-modules set out in paragraph 1;

(b)  CorrH(i,j) denotes the correlation parameter for health underwriting risk for sub-modules i and j;

(c)  SCRi and SCRj denote the capital requirements for risk sub-module i and j respectively.

3.  The correlation coefficient CorrH(i,j) referred to in paragraph 2 denotes the item set out in row i and in column j of the following correlation matrix:



j

i

NSLT health underwriting

SLT health underwriting

Health catastrophe

NSLT health underwriting

1

0,5

0,25

SLT health underwriting

0,5

1

0,25

Health catastrophe

0,25

0,25

1

4.  Insurance and reinsurance undertakings shall apply:

(a) the NSLT health underwriting risk sub-module to health insurance and reinsurance obligations included in lines of business 1, 2, 3, 13, 14, 15 and 25 as set out in Annex I;

(b) the SLT health underwriting risk sub-module to health insurance and reinsurance obligations included in lines of business 29, 33 and 35 as set out in Annex I;

(c) the health catastrophe risk sub-module to health insurance and reinsurance obligations.

Article 145

NSLT health underwriting risk sub-module

1.  The NSLT health underwriting risk sub-module shall consist of the following sub- modules:

(a) the NSLT health premium and reserve risk sub-module;

(b) the NSLT health lapse risk sub-module.

2.  The capital requirement for NSLT health underwriting risk shall be equal to the following:

image

where:

(a)  SCR(NSLTh,pr) denotes the capital requirement for NSLT health premium and reserve risk;

(b)  SCR(NSLTh,lapse) denotes the capital requirement for NSLT health lapse risk.

Article 146

NSLT health premium and reserve risk sub-module

The capital requirement for NSLT health premium and reserve risk shall be equal to the following:

image

where:

(a)  σNSLTh denotes the standard deviation for NSLT health premium and reserve risk determined in accordance with Article 148;

(b)  VNSLTh denotes the volume measure for NSLT health premium and reserve risk determined in accordance with Article 147.

Article 147

Volume measure for NSLT health premium and reserve risk

1.  The volume measure for NSLT health premium and reserve risk shall be equal to the sum of the volume measures for premium and reserve risk of the segments set out in Annex XIV.

2.  For all segments set out in Annex XIV, the volume measure of a particular segment s shall be equal to the following:

image

where:

(a)  V(prem,s) denotes the volume measure for premium risk of segment s;

(b)  V(res,s) denotes the volume measure for reserve risk of segment s;

(c)  DIVs denotes the factor for geographical diversification of segment s.

3.  For all segments set out in Annex XIV, the volume measure for premium risk of a particular segment s shall be equal to the following:

image

where:

(a)  Ps denotes an estimate of the premiums to be earned by the insurance or reinsurance undertaking in the segment s during the following 12 months;

(b)  P(last,s) denotes the premiums earned by the insurance and reinsurance undertaking in the segment s during the last 12 months;

(c)  FP(existing,s) denotes the expected present value of premiums to be earned by the insurance and reinsurance undertaking in the segment s after the following 12 months for existing contracts;

▼M6

(d)  FP(future,s) denotes the following amount with respect to contracts where the initial recognition date falls in the following 12 months:

(i) for all such contracts whose initial term is one year or less, the expected present value of premiums to be earned by the insurance or reinsurance undertaking in the segment s, but excluding the premiums to be earned during the 12 months after the initial recognition date;

(ii) for all such contracts whose initial term is more than one year, the amount equal to 30 % of the expected present value of premiums to be earned by the insurance or reinsurance undertaking in the segment s after the following 12 months.

▼B

4.  For all segments set out in Annex XIV, insurance and reinsurance undertakings may, as an alternative to the calculation set out in paragraph 3, choose to calculate the volume measure for premium risk of a particular segment s in accordance with the following formula:

image

provided that all of the following conditions are met:

(a) the administrative, management or supervisory body of the insurance or reinsurance undertaking has decided that its earned premiums in the segment s during the following 12 months will not exceed Ps ;

(b) the insurance or reinsurance undertaking has established effective control mechanisms to ensure that the limits on earned premiums referred to in point (a) will be met;

(c) the insurance or reinsurance undertaking has informed its supervisory authority about the decision referred to in point (a) and the reasons for it.

For the purposes of this paragraph, the terms Ps , FP(existing,s) and FP(future,s) shall be denoted in accordance with points (a), (c) and (d) of paragraph 3.

5.  For the purposes of the calculations set out in paragraphs 3 and 4, premiums shall be net, after deduction of premiums for reinsurance contracts. The following premiums for reinsurance contracts shall not be deducted:

(a) premiums in relation to non-insurance events or settled insurance claims that are not accounted for in the cash-flows referred to in Article 41(3);

(b) premiums for reinsurance contracts that do not comply with Articles 209, 210, 211 and 213.

6.  For all segments set out in Annex XIV, the volume measure for reserve risk of a particular segment shall be equal to the best estimate for the provision for claims outstanding for the segment, after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, provided that the reinsurance contracts or special purpose vehicles comply with Articles 209, 210, 211 and 213. The volume measure shall not be a negative amount.

7.  For all segments set out in Annex XIV, the default factor for geographical diversification shall be either equal to 1 or calculated in accordance with Annex III.

Article 148

Standard deviation for NSLT health premium and reserve risk

1.  The standard deviation for NSLT health premium and reserve risk shall be equal to the following:

image

where:

(a)  VNSLTh denotes the volume measure for NSLT health premium and reserve risk;

(b) the sum covers all possible combinations (s,t) of the segments set out in Annex XIV;

(c)  CorrHS(s,t) denotes the correlation coefficient for NSLT health premium and reserve risk for segment s and segment t set out in Annex XV;

(d)  σs and σt denote standard deviations for NSLT health premium and reserve risk of segments s and t respectively;

(e)  Vs and Vt denote volume measures for premium and reserve risk of segments s and t, referred to in Annex XIV, respectively.

2.  For all segments set out in Annex XIV, the standard deviation for NSLT health premium and reserve risk of a particular segment s shall be equal to the following:

image

where:

(a)  σ(prem,s) denotes the standard deviation for NSLT health premium risk of segment s determined in accordance with paragraph 3;

(b)  σ(res,s) denotes the standard deviation for NSLT health reserve risk of segment s as set out in Annex XIV;

(c)  V(prem,s) denotes the volume measure for premium risk of segment s referred to in Article 147;

(d)  V(res,s) denotes the volume measure for reserve risk of segment s referred to in Article 147.

3.  For all segments set out in Annex XIV, the standard deviation for NSLT health premium risk of a particular segment shall be equal to the product of the standard deviation for NSLT health gross premium risk of the segment set out in Annex XIV and the adjustment factor for non-proportional reinsurance. For all segments set out in Annex XIV the adjustment factor for non-proportional reinsurance shall be equal to 100 %.

Article 149

Health risk equalisation systems

1.  For the purposes of Article 109a(4) of Directive 2009/138/EC, health insurance obligations subject to the health risk equalisation systems (‘HRES’) shall be identified, managed and organised separately from the other activities of the insurance undertakings, without any possibility of transfer to health insurance obligations that are not subject to HRES.

2.  The standard deviations for NSLT health premium and reserve risk of segments 1, 2 and 3 in Annex XIV for business that is subject to a HRES shall meet all of the following requirements:

(a) the standard deviations are determined separately for each of the segments 1, 2 and 3, as set out in Annex XIV, and separately for premium and reserve risk;

(b) for each of the segments set out in Annex XIV, the standard deviation for premium risk is the lower of the following amounts:

(i) the standard deviation for NSLT health premium risk of that segment set out in Annex XIV;

(ii) the higher of the following amounts:

A. a third of the standard deviation for NSLT health premium risk of that segment set out in Annex XIV;

B. an estimate of the representative standard deviation of an insurance undertaking's combined ratio, being the ratio of the following annual amounts:

 the sum of the payments, including the relating expenses, and technical provisions set up for claims incurred during the year for the business subject to the HRES, including any changes due to the HRES;

 the earned premium of the year for the business subject to the HRES;

(c) for each of the segments set out in Annex XIV, the standard deviation for reserve risk is the lower of the following amounts:

(i) the standard deviation for NSLT health reserve risk of that segment set out in Annex XIV;

(ii) the higher of the following amounts;

A. a third of the standard deviation for NSLT health reserve risk of that segment set out in Annex XIV:

B. an estimate of the representative standard deviation of an insurance undertaking's run-off ratio, being the ratio of the following annual amounts:

 the sum of the best estimate provision at the end of the year for claims that were outstanding at the beginning of the year and any claims and expense payments made during the year for claims that were outstanding at the beginning of the year: both amounts include any amendments due to the HRES;

 the best estimate provision at the beginning of the year for claims outstanding of the business subject to the HRES, including any amendments due to the HRES;

(d) the determination of the standard deviation is based on adequate, applicable and relevant actuarial and statistical techniques;

(e) the determination of the standard deviation is based on complete, accurate and appropriate data that is directly relevant for the business subject to the HRES and reflects the average degree of diversification at the level of insurance undertakings;

(f) the determination of the standard deviation is based on current and credible information and realistic assumptions;

(g) the determination of the standard deviation also takes into account any risks which are not mitigated by the HRES, in particular the risk referred to in Article 105(4)(a) of Directive 2009/138/EC and risks which are not reflected in the health catastrophe risk sub-module and that could affect a larger number of insurance undertakings subject to the HRES at the same time;

(h) the methodology for the calculation of the standard deviation and the calculation of the standard deviation is publicly available.

3.  Where the implementing act adopted pursuant to Article 109a(4) of Directive 2009/138/EC determine a standard deviation for NSLT health insurance premium risk for business subject to a HRES that meet the requirements set out in paragraph 2 of this Article, insurance undertakings shall use this standard deviation instead of the standard deviation for NSLT health premium risk of the segment set out in Annex XIV of this Regulation for the calculation of the standard deviation for NSLT health premium and reserve risk referred to in Article 148(1) of this Regulation.

Where only a part of an insurance undertaking's business in a segment s is subject to the HRES, the undertaking shall use a standard deviation for NSLT health premium risk of the segment in the calculation of the standard deviation for NSLT health premium and reserve risk referred to in Article 148(1) that is equal to the following:

image

where:

(a)  σ(prem,s) denotes the standard deviation for NSLT health premium risk segment s set out in Annex XIV;

(b)  V(prem,s,nHRES) denotes the volume measure for NSLT health premium risk of the business in segment s that is not subject to the HRES;

(c)  σ(prem,s,HRES) denotes the standard deviation for NSLT health premium risk of segment s for business subject to the HRES calculated in accordance with paragraph 2;

(d)  V(prem,s,HRES) denotes the volume measure for NSLT health premium risk of business in segment s that is subject to the HRES.

V(prem,s,HRES) and V(prem,s,nHRES) shall be calculated in the same way as the volume measure for NSLT health premium risk of segment s referred to in Article 147, but V(prem,s,HRES) shall only take into account the insurance and reinsurance obligations subject to HRES and V(prem,s,nHRES) shall only take into account the insurance and reinsurance obligations not subject to the HRES.

4.  Where the implementing act adopted pursuant to Article 109a(4) of Directive 2009/138/EC determine a standard deviation for NSLT health insurance reserve risk for business subject to a HRES that fulfill the requirements set out in paragraph 2 of this Article, insurance undertakings shall use this standard deviation instead of the standard deviation for NSLT health reserve risk of the segment set out in Annex XIV of this Regulation for the calculation of the standard deviation for NSLT health premium and reserve risk referred to in Article 148(1) of this Regulation.

Where only a part of an insurance undertaking's business in a segment s is subject to the HRES, the undertaking shall use a standard deviation for NSLT health premium risk of the segment in the calculation of the standard deviation for NSLT health premium and reserve risk referred to in Article 148(1) that is equal to the following:

image

where:

(a)  σ(res,s) denotes the standard deviation for NSLT health reserve risk segment s as set out in Annex XIV;

(b)  V(res,s,nHRES) denotes the volume measure for NSLT health reserve risk of the business in segment s that is not subject to the HRES;

(c)  σ(res,s,HRES) denotes the standard deviation for NSLT health reserve risk of segment s for business subject to the HRES calculated in accordance with paragraph 2;

(d)  V(res,s,HRES) denotes the volume measure for NSLT health reserve risk of business in segment s that is subject to the HRES.

V(res,s,nHRES) and V(res,s,HRES) shall be calculated in the same way as the volume measure for NSLT health reserve risk of segment s referred to in Article 147, but V(res,s,HRES) shall only take into account the insurance and reinsurance obligations subject to the HRES and V(res,s,nHRES) shall only take into account the insurance and reinsurance obligations not subject to the HRES.

5.  Insurance and reinsurance undertakings may replace the standard deviations for NSLT health premium and reserve risk for business subject to a HRES with parameters specific to the insurance and reinsurance undertaking in accordance with Article 104(7) of Directive 2009/138/EC. Supervisory authorities may require insurance and reinsurance undertakings to replace those standard deviations with parameters specific to the undertaking in accordance with Article 110 of that Directive 2009/138/EC.

Article 150

NSLT health lapse risk sub-module

1.  The capital requirement for NSLT health lapse risk referred to in Article 145(1)(b) shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from the combination of the following instantaneous events:

(a) the discontinuance of 40 % of the insurance policies for which discontinuance would result in an increase of technical provisions without the risk margin;

(b) where reinsurance contracts cover insurance or reinsurance contracts that will be written in the future, the decrease of 40 % of the number of those future insurance or reinsurance contracts used in the calculation of technical provisions.

2.  The events referred to in paragraph 1 shall apply uniformly to all insurance and reinsurance contracts concerned. In relation to reinsurance contracts the event referred to in point (a) of paragraph 1 shall apply to the underlying insurance contracts.

3.  For the purposes of determining the loss in basic own funds of the insurance or reinsurance undertaking under the event referred to in point (a) of paragraph 1, the undertaking shall base the calculation on the type of discontinuance which most negatively affects the basic own funds of the undertaking on a per policy basis.

Article 151

SLT health underwriting risk sub-module

1.  The SLT health underwriting risk module shall consist of all of the following sub-modules:

(a) the health mortality risk sub-module;

(b) the health longevity risk sub-module;

(c) the health disability-morbidity risk sub-module;

(d) the health expense risk sub-module;

(e) the health revision risk sub-module;

(f) the SLT health lapse risk sub-module.

2.  The capital requirement for SLT health underwriting risk shall be equal to the following:

image

where:

(a) the sum denotes all possible combinations (i,j) of the sub-modules set out in paragraph 1;

(b)  CorrSLTH(i,j) denotes the correlation parameter for SLT health underwriting risk for sub-modules i and j;

(c)  SCRi and SCRj denote the capital requirements for risk sub-module i and j respectively.

3.  The correlation coefficient CorrSLTH(i,j) referred to in paragraph 2 shall be equal to the item set out in row i and in column j of the following correlation matrix:



j

i

Health mortality

Health longevity

Health disability-morbidity

Health expense

Health revision

SLT health lapse

Health mortality

1

– 0,25

0,25

0,25

0

0

Health longevity

– 0,25

1

0

0,25

0,25

0,25

Health disability-morbidity

0,25

0

1

0,5

0

0

Health expense

0,25

0,25

0,5

1

0,5

0,5

Health revision

0

0,25

0

0,5

1

0

SLT health lapse

0

0,25

0

0,5

0

1

Article 152

Health mortality risk sub-module

1.  The capital requirement for health mortality risk shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous permanent increase of 15 % in the mortality rates used for the calculation of technical provisions.

2.  The increase in mortality rates referred to in paragraph 1 shall only apply to those insurance policies for which an increase in mortality rates leads to an increase in technical provisions without the risk margin. The identification of insurance policies for which an increase in mortality rates leads to an increase in technical provisions without the risk margin may be based on the following:

(a) multiple insurance policies in respect of the same insured person may be treated as if they were one insurance policy;

(b) where the calculation of technical provisions is based on groups of policies as referred to in Article 35, the identification of the policies for which technical provisions increase under an increase of mortality rates may also be based on those groups of policies instead of single policies, provided that it yields a result which is not materially different.

3.  With regard to reinsurance obligations, the identification of the policies for which technical provisions increase under an increase of mortality rates shall apply to the underlying insurance policies only and shall be carried out in accordance with paragraph 2.

Article 153

Health longevity risk sub-module

1.  The capital requirement for health longevity risk shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous permanent decrease of 20 % in the mortality rates used for the calculation of technical provisions.

2.  The decrease in mortality rates referred to in paragraph 1 shall only apply to those insurance policies for which a decrease in mortality rates leads to an increase in technical provisions without the risk margin. The identification of insurance policies for which a decrease in mortality rates leads to an increase in technical provisions without the risk margin may be based on the following assumptions:

(a) multiple insurance policies in respect of the same insured person may be treated as if they were one insurance policy;

(b) where the calculation of technical provisions is based on groups of policies as referred to in Article 35, the identification of the policies for which technical provisions increase under an decrease of mortality rates may also be based on those groups of policies instead of single policies, provided that it yields a result which is not materially different.

3.  With regard to reinsurance obligations, the identification of the policies for which technical provisions increase under an decrease of mortality rates shall apply only to the underlying insurance policies and shall be carried out in accordance with paragraph 2.

Article 154

Health disability-morbidity risk sub-module

1.  The capital requirement for health disability-morbidity risk shall be equal to the sum of the following:

(a) the capital requirement for medical expense disability-morbidity risk;

(b) the capital requirement for income protection disability-morbidity risk.

2.  Insurance and reinsurance undertakings shall apply:

(a) the scenarios underlying the calculation of the capital requirement for medical expense disability-morbidity risk only to medical expense insurance and reinsurance obligations where the underlying business is pursued on a similar technical basis to that of life insurance;

(b) the scenarios underlying the calculation of the capital requirement for income protection disability-morbidity risk only to income protection insurance and reinsurance obligations where the underlying business is pursued on a similar technical basis to that of life insurance.

Article 155

Capital requirement for medical expense disability-morbidity risk

1.  The capital requirement for medical expense disability-morbidity risk shall be equal to the larger of the following capital requirements:

(a) the capital requirement for the increase of medical payments;

(b) the capital requirement for the decrease of medical payments.

2.  The capital requirement for the increase of medical payments shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from the following combination of instantaneous permanent changes:

(a) an increase of 5 % in the amount of medical payments taken into account in the calculation of technical provisions;

(b) an increase by 1 percentage point to the inflation rate of medical payments (expressed as a percentage) used for the calculation of technical provisions.

3.  The capital requirement for the decrease of medical payments shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from the following combination of instantaneous permanent changes:

(a) a decrease of 5 % in the amount of medical payments taken into account in the calculation of technical provisions;

(b) a decrease by 1 percentage point from the inflation rate of medical payments (expressed as a percentage) used for the calculation of technical provisions.

Article 156

Capital requirement for income protection disability-morbidity risk

The capital requirement for income protection disability-morbidity risk shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from the following combination of instantaneous permanent changes:

(a) an increase of 35 % in the disability and morbidity rates which are used in the calculation of technical provisions to reflect the disability and morbidity in the following 12 months;

(b) an increase of 25 % in the disability and morbidity rates which are used in the calculation of technical provisions to reflect the disability and morbidity in the years after the following 12 months;

(c) where the disability and morbidity recovery rates used in the calculation of technical provisions are lower than 50 %, a decrease of 20 % in those rates;

(d) where the disability and morbidity persistency rates used in the calculation of technical provisions are equal or lower than 50 %, an increase of 20 % in those rates.

Article 157

Health expense risk sub-module

The capital requirement for health expense risk shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from the following combination of instantaneous permanent changes:

(a) an increase of 10 % in the amount of expenses taken into account in the calculation of technical provisions;

(b) an increase by 1 percentage point to the expense inflation rate (expressed as a percentage) used for the calculation of technical provisions.

With regard to reinsurance obligations, insurance and reinsurance undertakings shall apply those changes to their own expenses and, where relevant, to the expenses of the ceding undertakings.

Article 158

Health revision risk sub-module

The capital requirement for health revision risk shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous permanent increase of 4 % in the amount of annuity benefits, only on annuity insurance and reinsurance obligations where the benefits payable under the underlying insurance policies could increase as a result of changes in inflation, the legal environment or the state of health of the person insured.

Article 159

SLT health lapse risk sub-module

1.  The capital requirement for SLT health lapse risk referred to in Article 151(1)(f) shall be equal to the largest of the following capital requirements:

(a) capital requirement for the risk of a permanent increase in SLT health lapse rates;

(b) capital requirement for the risk of a permanent decrease in SLT health lapse rates;

(c) capital requirement for SLT health mass lapse risk.

2.  The capital requirement for the risk of a permanent increase in SLT health lapse rates shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous permanent increase of 50 % in the exercise rates of the relevant options set out in paragraph 4 and 5. Nevertheless, the increased option exercise rates shall not exceed 100 % and the increase in option exercise rates shall only apply to those relevant options for which the exercise would result in an increase of technical provisions without the risk margin.

3.  The capital requirement for the risk of a permanent decrease in SLT health lapse rates shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous permanent decrease of 50 % in the option exercise rates of the relevant options set out in paragraph 4 and 5. Nevertheless, the decrease in option exercise rates shall not exceed 20 percentage points and the decrease in option exercise rates shall only apply to those relevant options for which the exercise would result in a decrease of technical provisions without the risk margin.

4.  The relevant options for the purposes of paragraphs 2 and 3 shall be the following:

(a) all legal or contractual policyholder rights to fully or partly terminate, surrender, decrease, restrict or suspend the insurance or reinsurance cover or permit the insurance policy to lapse;

(b) all legal or contractual policyholder rights to fully or partially establish, renew, increase, extend or resume the insurance or reinsurance cover.

For the purposes of point (b), the change in the option exercise rate referred to in paragraphs 2 and 3 should be applied to the rate reflecting that the relevant option is not exercised.

5.  In relation to reinsurance contracts, the relevant options for the purposes of paragraphs 2 and 3 shall be the following:

(a) the rights referred to in paragraph 4 of the policy holders of the reinsurance contracts;

(b) the rights set out in paragraph 4 of the policy holders of the insurance contracts underlying the reinsurance contracts;

(c) where reinsurance contracts cover insurance or reinsurance contracts that will be written in the future, the right of the potential policy holders not to conclude those insurance or reinsurance contracts.

6.  The capital requirement for SLT health mass lapse risk shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from a combination of the following instantaneous events:

(a) the discontinuance of 40 % of the insurance policies for which discontinuance would result in an increase of technical provisions without the risk margin;

(b) where reinsurance contract covers insurance or reinsurance contracts that will be written in the future, the decrease of 40 % of the number of those future insurance or reinsurance contracts used in the calculation of the technical provisions.

The events referred to in the first subparagraph shall apply uniformly to all insurance and reinsurance contracts concerned. In relation to reinsurance contracts the event referred to in point (a) shall apply to the underlying insurance contracts.

For the purposes of determining the loss in basic own funds of the insurance or reinsurance undertaking under the event referred to in point (a), the undertaking shall base the calculation on the type of discontinuance which most negatively affects the basic own funds of the undertaking on a per policy basis.

7.  Where the largest of the capital requirements referred to in points (a) (b), and (c) of paragraph 1 of this Article and the largest of the corresponding capital requirements calculated in accordance with Article 206(2) of this Regulation are not based on the same scenario, the capital requirement for lapse risk referred to in Article 105(3)(f) of Directive 2009/138/EC shall be the capital requirement referred to in points (a), (b) or (c) of paragraph 1 of this Article for which the underlying scenario results in the largest corresponding capital requirement calculated in accordance with Article 206(2) of this Regulation.

Article 160

Health catastrophe risk sub-module

1.  The capital requirement for the health catastrophe risk sub-module shall be equal to the following:

image

where:

(a)  SCRma denotes the capital requirement of the mass accident risk sub-module;

(b)  SCRac denotes the capital requirement of the accident concentration risk sub-module;

(c)  SCRp denotes the capital requirement of the pandemic risk sub-module.

2.  Insurance and reinsurance undertakings shall apply:

(a) the mass accident risk sub-module to health insurance and reinsurance obligations other than workers' compensation insurance and reinsurance obligations;

(b) the accident concentration risk sub-module to workers' compensation insurance and reinsurance obligations and to group income protection insurance and reinsurance obligations;

(c) the pandemic risk sub-module to health insurance and reinsurance obligations other than workers' compensation insurance and reinsurance obligations.

Article 161

Mass accident risk sub-module

1.  The capital requirement for the mass accident risk sub-module shall be equal to the following:

image

where:

(a) the sum includes all countries set out in Annex XVI;

(b)  SCR(ma,s) denotes the capital requirement for mass accident risk of country s.

2.  For all countries set out in Annex XVI, the capital requirement for mass accident risk of a particular country s shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous loss of an amount that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles is calculated as follows:

image

where:

(a)  rs denotes the ratio of persons affected by the mass accident in country s as set out in Annex XVI;

(b) the sum includes the event types e set out in Annex XVI;

(c)  xe denotes the ratio of persons who will receive benefits of event type e as a result of the accident as set out in Annex XVI;

(d)  E(e,s) denotes the total value of benefits payable by insurance and reinsurance undertakings for event type e in country s.

3.  For all event types set out in Annex XVI and all countries set out in Annex XVI, the sum insured of an insurance or reinsurance undertaking for a particular event type e in a particular country s shall be equal to the following:

image

where:

(a) the sum includes all insured persons i of the insurance or reinsurance undertaking who are insured against event type e and are inhabitants of country s;

(b)  SI(e,i) denotes the value of the benefits payable by the insurance or reinsurance undertaking for the insured person i in case of event type e.

The value of the benefits shall be the sum insured or where the insurance contract provides for recurring benefit payments the best estimate of the benefit payments in case of event type e. Where the benefits of an insurance contract depend on the nature or extent of any injury resulting from event e, the calculation of the value of the benefits shall be based on the maximum benefits obtainable under the contract which are consistent with the event. For medical expense insurance and reinsurance obligations the value of the benefits shall be based on an estimate of the average amounts paid in case of event e, assuming the insured person is disabled for the duration specified and taking into account the specific guarantees the obligations include.

4.  Where Article 88 is complied with, insurance or reinsurance undertakings may calculate the value of benefits payable to insured person referred to in paragraph 3 based on homogenous risk groups, provided that the grouping of policies complies with Article 35.

Article 162

Accident concentration risk sub-module

1.  The capital requirement for the accident concentration risk sub-module shall be equal to the following:

image

where:

(a) the sum includes all countries c;

(b)  SCR(ac,c) denotes the capital requirement for accident concentration risk of country c.

2.  For all countries the capital requirement for accident concentration risk of country c shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous loss of an amount that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, is calculated as follows:

image

where:

(a)  Cc denotes the largest accident risk concentration of insurance and reinsurance undertakings in country c;

(b) the sum includes the event types e set out in Annex XVI;

(c)  xe denotes the ratio of persons which will receive benefits of event type e as a result of the accident as set out in Annex XVI;

(d)  CE(e,c) denotes the average value of benefits payable by insurance and reinsurance undertakings for event type e for the largest accident risk concentration in country c.

3.  For all countries, the largest accident risk concentration of an insurance or reinsurance undertaking in a country c shall be equal to the largest number of persons for which all of the following conditions are met:

(a) the insurance or reinsurance undertaking has a workers' compensation insurance or reinsurance obligation or an group income protection insurance or reinsurance obligation in relation to each of the persons;

(b) the obligations in relation to each of the persons cover at least one of the events set out in Annex XVI;

(c) the persons are working in the same building which is situated in country c.

4.  For all event types and countries, the average sum insured of an insurance or reinsurance undertaking for event type e for the largest accident risk concentration in country c shall be equal to the following:

image

where:

(a)  Ne denotes the number of insured persons of the insurance or reinsurance undertaking which are insured against event type e and which belong to the largest accident risk concentration of the insurance or reinsurance undertaking in country c;

(b) the sum includes all the insured persons referred to in point (a);

(c)  SI(e,i) denotes the value of the benefits payable by the insurance or reinsurance undertaking for the insured person i in case of event type e.

The value of the benefits referred to in point (c) shall be the sum insured or where the contract provides for recurring benefit payments the best estimate of the benefit payments in case of event type e. Where the benefits of an insurance policy depend on the nature or extent of the injury resulting from event e, the calculation of the value of the benefits shall be based on the maximum benefits obtainable under the policy, which are consistent with the event. For medical expense insurance and reinsurance obligations the value of the benefits shall be based on an estimate of the average amounts paid in case of event e, assuming the insured person is disabled for the duration specified and taking into account the specific guarantees the obligations include.

5.  Where Article 88 is complied with, insurance or reinsurance undertakings may calculate the value of the benefits payable by the insurance or reinsurance undertaking for the insured person referred to in paragraph 4 based on homogenous risk groups, provided that the grouping of policies complies with the requirements set out in Article 35.

Article 163

Pandemic risk sub-module

1.  The capital requirement for the pandemic risk sub-module shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous loss of an amount that, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, is calculated as follows:

image

where:

(a)  E denotes the income protection pandemic exposure of insurance and reinsurance undertakings;

(b) the sum includes all countries c;

(c)  Nc denotes the number of insured persons of insurance and reinsurance undertakings which meet all of the following conditions:

(i) the insured persons are inhabitants of country c,

(ii) the insured persons are covered by medical expense insurance or reinsurance obligations, other than workers' compensation insurance or reinsurance obligations, that cover medical expenses resulting from an infectious disease;

(d)  Mc denotes the expected average amount payable by insurance or reinsurance undertakings per insured person of country c in case of a pandemic.

2.  The income protection pandemic exposure of an insurance or reinsurance undertaking shall be equal to the following:

image

where:

(a) the sum includes all insured persons i covered by the income protection insurance or reinsurance obligations other than workers' compensation insurance or reinsurance obligations;

(b)  Ei denotes the value of the benefits payable by the insurance or reinsurance undertaking, for the insured person i in case of a permanent work disability caused by an infectious disease. The value of the benefits shall be the sum insured or where the contract provides for recurring benefit payments the best estimate of the benefit payments assuming that the insured person is permanently disabled and will not recover.

3.  For all countries, the expected average amount payable by insurance or reinsurance undertakings per insured person of a particular country c in case of a pandemic shall be equal to the following:

image

where:

(a) the sum includes the types of healthcare utilisation h set out in Annex XVI;

(b)  Hh denotes the ratio of insured persons with clinical symptoms utilising healthcare h as set out in Annex XVI;

(c)  CH(h,c) denotes the best estimate of the amounts payable by insurance and reinsurance undertakings for an insured person in country c in relation to medical expense insurance or reinsurance obligations, other than workers' compensation insurance or reinsurance obligations, for healthcare utilisation h in the event of a pandemic.



SECTION 5

Market risk module



Subsection 1

Correlation coefficients

Article 164

1.  The market risk module shall consist of all of the following sub-modules:

(a) the interest rate risk sub-module referred to in point (a) of subparagraph 2 of Article 105(5) of Directive 2009/138/EC;

(b) the equity risk sub-module referred to in point (b) of subparagraph 2 of Article 105(5) of Directive 2009/138/EC;

(c) the property risk sub-module referred to in point (c) of subparagraph 2 of Article 105(5) of Directive 2009/138/EC;

(d) the spread risk sub-module referred to in point (d) of subparagraph 2 of Article 105(5) of Directive 2009/138/EC;

(e) the currency risk sub-module referred to in point (e) of subparagraph 2 of Article 105(5) of Directive 2009/138/EC;

(f) the market risk concentrations sub-module referred to in point (f) of subparagraph 2 of Article 105(5) of Directive 2009/138/EC.

2.  The capital requirement for market risk referred to in Article 105(5) of Directive 2009/138/EC shall be equal to the following:

image

where:

(a) the sum covers all possible combinations i,j of sub-modules of the market risk module;

(b) Corr(i,j) denotes the correlation parameter for market risk for sub-modules i and j;

(c) SCRi and SCRj denote the capital requirements for sub-modules i and j respectively.

3.  The correlation parameter Corr(i,j) referred to in paragraph 2 shall be equal to the item set out in row i and in column j of the following correlation matrix:



j

i

Interest rate

Equity

Property

Spread

Concentration

Currency

Interest rate

1

A

A

A

0

0,25

Equity

A

1

0,75

0,75

0

0,25

Property

A

0,75

1

0,5

0

0,25

Spread

A

0,75

0,5

1

0

0,25

Concentration

0

0

0

0

1

0

Currency

0,25

0,25

0,25

0,25

0

1

The parameter A shall be equal to 0 where the capital requirement for interest rate risk set out in Article 165 is the capital requirement referred to in point (a) of that Article. In all other cases, the parameter A shall be equal to 0,5.

▼M1



Subsection 1a

Qualifying infrastructure investments

Article 164a

Qualifying infrastructure investments

▼M4

1.  For the purposes of this Regulation, qualifying infrastructure investment shall include investment in an infrastructure entity that meets the following criteria:

(a) the cash flows generated by the infrastructure assets allow for all financial obligations to be met under sustained stresses that are relevant for the risks of the project;

(b) the cash flows that the infrastructure entity generates for debt providers and equity investors are predictable;

(c) the infrastructure assets and infrastructure entity are governed by a regulatory or contractual framework that provides debt providers and equity investors with a high degree of protection including the following:

(a) the contractual framework shall include provisions that effectively protect debt providers and equity investors against losses resulting from the termination of the project by the party which agrees to purchase the goods or services provided by the infrastructure project, unless one of the following conditions is met:

(i) the revenues of the infrastructure entity are funded by payments from a large number of users; or

(ii) the revenues are subject to a rate-of-return regulation;

(b) the infrastructure entity has sufficient reserve funds or other financial arrangements to cover the contingency funding and working capital requirements of the project;

Where investments are in bonds or loans, this contractual framework shall also include the following:

(i) debt providers have security or the benefit of security to the extent permitted by applicable law in all assets and contracts that are critical to the operation of the project;

(ii) the use of net operating cash flows after mandatory payments from the project for purposes other than servicing debt obligations is restricted;

(iii) restrictions on activities that may be detrimental to debt providers, including that new debt cannot be issued without the consent of existing debt providers in the form agreed with them, unless such new debt issuance is permitted under the documentation for the existing debt;

Notwithstanding point (i) of the second subparagraph, for investments in bonds or loans, where undertakings can demonstrate that security in all assets and contracts is not essential for debt providers to effectively protect or recover the vast majority of their investment, other security mechanisms may be used. In that case, the other security mechanisms shall comprise at least one of the following:

(i) pledge of shares;

(ii) step-in rights;

(iii) lien over bank accounts;

(iv) control over cash flows;

(v) provisions for assignment of contracts;

(d) where investments are in bonds or loans, the insurance or reinsurance undertaking can demonstrate to the supervisor that it is able to hold the investment to maturity;

(e) where investments are in bonds or loans for which a credit assessment by a nominated ECAI is not available, the investment instrument and other pari passu instruments are senior to all other claims other than statutory claims and claims from liquidity facility providers, trustees and derivatives counterparties;

(f) where investments are in equities, or bonds or loans for which a credit assessment by a nominated ECAI is not available, the following criteria are met:

(i) the infrastructure assets and infrastructure entity are located in the EEA or in the OECD;

(ii) where the infrastructure project is in the construction phase the following criteria shall be fulfilled by the equity investor, or where there is more than one equity investor, the following criteria shall be fulfilled by a group of equity investors as a whole:

 the equity investors have a history of successfully overseeing infrastructure projects and the relevant expertise,

 the equity investors have a low risk of default, or there is a low risk of material losses for the infrastructure entity as a result of the their default,

 the equity investors are incentivised to protect the interests of investors;

(iii) where there are construction risks, safeguards to ensure completion of the project according to the agreed specification, budget or completion date;

(iv) where operating risks are material, they are properly managed;

(v) the infrastructure entity uses tested technology and design;

(vi) the capital structure of the infrastructure entity allows it to service its debt;

(vii) the refinancing risk for the infrastructure entity is low;

(viii) the infrastructure entity uses derivatives only for risk-mitigation purposes.

▼M1

2.  For the purposes of paragraph 1(b), the cash flows generated for debt providers and equity investors shall not be considered predictable unless all except an immaterial part of the revenues satisfies the following conditions:

(a) one of the following criteria is met:

(i) the revenues are availability-based;

(ii) the revenues are subject to a rate-of-return regulation;

(iii) the revenues are subject to a take-or-pay contract;

(iv) the level of output or the usage and the price shall independently meet one of the following criteria:

 it is regulated,

 it is contractually fixed,

 it is sufficiently predictable as a result of low demand risk;

(b) where the revenues of the infrastructure project entity are not funded by payments from a large number of users, the party which agrees to purchase the goods or services provided by the infrastructure project entity shall be one of the following:

(i) an entity listed in Article 180(2) of this Regulation;

(ii) a regional government or local authority listed in the Regulation adopted pursuant to Article 109a(2)(a) of Directive 2009/138/EC;

(iii) an entity with an ECAI rating with a credit quality step of at least 3;

(iv) an entity that is replaceable without a significant change in the level and timing of revenues.

▼M4

Article 164b

Qualifying infrastructure corporate investments

For the purpose of this Regulation, qualifying infrastructure corporate investment shall include investment in an infrastructure entity that meets the following criteria:

(1) The substantial majority of the infrastructure entity's revenues is derived from owning, financing, developing or operating infrastructure assets located in the EEA or the OECD;

(2) The revenues generated by the infrastructure assets satisfy one of the criteria set out in Article 164a(2)(a);

(3) Where the revenues of the infrastructure entity are not funded by payments from a large number of users, the party which agrees to purchase the goods or services provided by the infrastructure entity shall be one of the entities listed in Article 164a(2)(b);

(4) The revenues shall be diversified in terms of activities, location, or payers, unless the revenues are subject to a rate-of-return regulation in accordance with Article 164a(1)(c)(a)(ii) or a take-or-pay contract or the revenues are availability based;

(5) Where investments are in bonds or loans, the insurance or reinsurance undertaking can demonstrate to the supervisor that it is able to hold the investment to maturity;

(6) Where no credit assessment from a nominated ECAI is available for the infrastructure entity:

(a) the capital structure of the infrastructure corporate shall allow it to service all its debt under conservative assumptions based on an analysis of the relevant financial ratios;

(b) the infrastructure entity shall have been active for at least three years or, in the case of an acquired business, it shall have been in operation for at least three years;

(7) Where a credit assessment from a nominated ECAI is available for the infrastructure entity, such credit assessment has a credit quality step between 0 and 3.

▼B



Subsection 2

Interest rate risk sub-module

Article 165

General provisions

1.  The capital requirement for interest rate risk referred to in point (a) of the second subparagraph Article 105(5) of Directive 2009/138/EC shall be equal to the larger of the following:

(a) the sum, over all currencies, of the capital requirements for the risk of an increase in the term structure of interest rates as set out in Article 166 of this Regulation;

(b) the sum, over all currencies, of the capital requirements for the risk of a decrease in the term structure of interest rates as set out in Article 167 of this Regulation.

2.  Where the larger of the capital requirements referred to in points (a) and (b) of paragraph 1 and the larger of the corresponding capital requirements calculated in accordance with Article 206(2) are not based on the same scenario, the capital requirement for interest rate risk shall be the capital requirement referred to in points (a) or (b) of paragraph 1 for which the underlying scenario results in the largest corresponding capital requirement calculated in accordance with Article 206(2).

Article 166

Increase in the term structure of interest rates

1.  The capital requirement for the risk of an increase in the term structure of interest rates for a given currency shall be equal to the loss in the basic own funds that would result from an instantaneous increase in basic risk-free interest rates for that currency at different maturities in accordance with the following table:



Maturity

(in years)

Increase

1

70 %

2

70 %

3

64 %

4

59 %

5

55 %

6

52 %

7

49 %

8

47 %

9

44 %

10

42 %

11

39 %

12

37 %

13

35 %

14

34 %

15

33 %

16

31 %

17

30 %

18

29 %

19

27 %

20

26 %

90

20 %

For maturities not specified in the table above, the value of the increase shall be linearly interpolated. For maturities shorter than 1 year, the increase shall be 70 %. For maturities longer than 90 years, the increase shall be 20 %.

2.  In any case, the increase of basic-risk-free interest rates at any maturity shall be at least one percentage point.

3.  The impact of the increase in the term structure of basic risk-free interest rates on the value of participations as referred to in Article 92(2) of Directive 2009/138/EC in financial and credit institutions shall be considered only on the value of the participations that are not deducted from own funds pursuant to Article 68 of this Regulation. The part deducted from own funds shall be considered only to the extent that such impact increases the basic own funds.

Article 167

Decrease in the term structure of interest rates

1.  The capital requirement for the risk of a decrease in the term structure of interest rates for a given currency shall be equal to the loss in the basic own funds that would result from an instantaneous decrease in basic risk-free interest rates for that currency at different maturities in accordance with the following table:



Maturity

(in years)

Decrease

1

75 %

2

65 %

3

56 %

4

50 %

5

46 %

6

42 %

7

39 %

8

36 %

9

33 %

10

31 %

11

30 %

12

29 %

13

28 %

14

28 %

15

27 %

16

28 %

17

28 %

18

28 %

19

29 %

20

29 %

90

20 %

For maturities not specified in the table above, the value of the decrease shall be linearly interpolated. For maturities shorter than 1 year, the decrease shall be 75 %. For maturities longer than 90 years, the decrease shall be 20 %.

2.  Notwithstanding paragraph 1, for negative basic risk-free interest rates the decrease shall be nil.

3.  The impact on the value of participations as referred to in Article 92(2) of Directive 2009/138/EC in financial and credit institutions of the decrease in the term structure of basic risk-free interest rates shall be considered only on the value of the participations that are not deducted from own funds pursuant to Article 68 of this Regulation. The part deducted from own funds shall be considered only to the extent that such impact increases the basic own funds.



Subsection 3

Equity risk sub-module

Article 168

General provisions

▼M4

1.  The equity risk sub-module referred to in point (b) of the second subparagraph of Article 105(5) of Directive 2009/138/EC shall include a risk sub-module for type 1 equities, a risk sub-module for type 2 equities, a risk sub-module for qualifying infrastructure equities and a risk sub-module for qualifying infrastructure corporate equities.

▼M1

2.  Type 1 equities shall comprise equities listed in regulated markets in countries which are members of the European Economic Area (EEA) or the Organisation for Economic Cooperation and Development (OECD), or traded on multilateral trading facilities, as referred to in Article 4(1)(22) of Directive 2014/65/EU, whose registered office or head office is in EU Member States.

3.  Type 2 equities shall comprise equities other than those referred to in paragraph 2, commodities and other alternative investments. They shall also comprise all assets other than those covered in the interest rate risk sub-module, the property risk sub-module or the spread risk sub-module, including the assets and indirect exposures referred to in Article 84(1) and (2) where a look-through approach is not possible and the insurance or reinsurance undertaking does not make use of the provisions in Article 84(3).

▼M1

3a.  Qualifying infrastructure equities shall comprise equity investments in infrastructure project entities that meet the criteria set out in Article 164a.

▼M4

3b.  Qualifying infrastructure corporate equities shall comprise equity investments in infrastructure entities that meet the criteria set out in Article 164b.

▼M4

4.  The capital requirement for equity risk shall be equal to the following:

▼C2

image

▼M4

where:

(a)  SCRequ1 denotes the capital requirement for type 1 equities;

(b)  SCRequ2 denotes the capital requirement for type 2 equities;

(c)  SCRquinf denotes the capital requirement for qualifying infrastructure equities;

(d)  SCRquinfc denotes the capital requirement for qualifying infrastructure corporate equities.

▼B

5.  The impact of the instantaneous decreases set out in Articles 169 and 170 on the value of participations as referred to in Article 92(2) of Directive 2009/138/EC in financial and credit institutions shall be considered only on the value of the participations that are not deducted from own funds pursuant to Article 68 of this Regulation.

6.  The following equities shall in any case be considered as type 1:

▼M4

(a) equities, other than qualifying infrastructure equities or qualifying infrastructure corporate equities, held within collective investment undertakings which are qualifying social entrepreneurship funds as referred to in Article 3(b) of Regulation (EU) No 346/2013 of the European Parliament and of the Council ( 11 ) where the look-through approach set out in Article 84 of this Regulation is possible for all exposures within the collective investment undertaking, or units or shares of those funds where the look through approach is not possible for all exposures within the collective investment undertaking;

(b) equities, other than qualifying infrastructure equities or qualifying infrastructure corporate equities, held within collective investment undertakings which are qualifying venture capital funds as referred to in Article 3(b) of Regulation (EU) No 345/2013 of the European Parliament and of the Council ( 12 ) where the look-through approach set out in Article 84 of this Regulation is possible for all exposures within the collective investment undertaking, or units or shares of those funds where the look through approach is not possible for all exposures within the collective investment undertaking;

▼B

(c)  ►M6  as regards closed-ended alternative investment funds which are established in the Union or, if they are not established in the Union, which are marketed in the Union in accordance with Article 35 or 40 of Directive 2011/61/EU and which, in either case, have no leverage in accordance with the commitment method set out in Article 8 of Commission Delegated Regulation (EU) No 231/2013 ( 13 ): ◄

▼M4

(i) equities, other than qualifying infrastructure equities or qualifying infrastructure corporate equities, held within such funds where the look-through approach set out in Article 84 of this Regulation is possible for all exposures within the alternative investment fund;

▼B

(ii) units or shares of such funds where the look-through approach is not possible for all exposures within the alternative investment fund;

▼M4

(d) equities, other than qualifying infrastructure equities or qualifying infrastructure corporate equities, held within collective investment undertakings which are authorised as European long-term investment funds pursuant to Regulation (EU) 2015/760 where the look through approach set out in Article 84 of this Regulation is possible for all exposures within the collective investment undertaking, or units or shares of those funds where the look through approach is not possible for all exposures within the collective investment undertaking;

▼M6

(e) qualifying unlisted equity portfolios as defined in Article 168a.

Article 168a

Qualifying unlisted equity portfolios

1.  For the purposes of point (e) of Article 168(6), a qualifying unlisted equity portfolio is a set of equity investments that meets all of the following requirements:

(a) the set of investments consists solely of investments in the ordinary shares of companies;

(b) the ordinary shares of each of the companies concerned are not listed in any regulated market;

(c) each company has its head office in a country which is a member of the EEA;

(d) more than 50 % of the annual revenue of each company is denominated in currencies of countries which are members of the EEA or the OECD;

(e) more than 50 % of the staff employed by each company have their principal place of work in countries which are members of the EEA;

(f) each company fulfils at least one of the following conditions for each of the last three financial years ending prior to the date on which the Solvency Capital Requirement is being calculated:

(i) the annual turnover of the company exceeds EUR 10 000 000 ;

(ii) the balance sheet total of the company exceeds EUR 10 000 000 ;

(iii) the number of staff employed by the company exceeds 50;

(g) the value of the investment in each company represents no more than 10 % of the total value of the set of investments;

(h) none of the companies is an insurance or reinsurance undertaking, a credit institution, an investment firm, a financial institution, an alternative investment fund manager, a UCITS management company, an institution for occupational retirement provision or a non-regulated undertaking carrying out financial activities;

(i) the beta of the set of investments does not exceed 0,796.

2.  For the purposes of paragraph 1(i), the beta of a set of investments is the average of the betas for each of the investments in that set of investments, weighted by the book values of those investments. The beta of an investment in a company shall be determined as follows:

image

where:

(a)  β is the beta of the equity investment in the company;

(b)  GM is the average gross margin for the company over the last five financial years ending prior to the date on which the Solvency Capital Requirement is being calculated;

(c)  Debt is the total debt of the company at the end of the most recent financial year for which figures are available;

(d)  CFO is the average net cash-flow for the company from operations over the last five financial years ending prior to the date on which the Solvency Capital Requirement is being calculated;

(e)  ROCE is the average return on common equity for the company over the last five financial years ending prior to the date on which the Solvency Capital Requirement is being calculated. Common equity shall be understood as capital and reserves as referred to in Annex III to Directive 2013/34/EU of the European Parliament and of the Council ( 14 ) excluding preference shares and the related share premium account.

▼M6

Article 169

Standard equity risk sub-module

1.  The capital requirement for type 1 equities referred to in Article 168 of this Regulation shall be equal to the loss in the basic own funds that would result from the following instantaneous decreases:

(a) an instantaneous decrease equal to 22 % in the value of type 1 equity investments in related undertakings within the meaning of Article 212(1)(b) and 212(2) of Directive 2009/138/EC where these investments are of a strategic nature;

(b) an instantaneous decrease equal to 22 % in the value of type 1 equity investments that are treated as long-term equity investments in accordance with Article 171a;

(c) an instantaneous decrease equal to the sum of 39 % and the symmetric adjustment as referred to in Article 172 of this Regulation, in the value of type 1 equities other than those referred to in points (a) and (b).

2.  The capital requirement for type 2 equities referred to in Article 168 of this Regulation shall be equal to the loss in the basic own funds that would result from the following instantaneous decreases:

(a) an instantaneous decrease equal to 22 % in the value of type 2 equity investments in related undertakings within the meaning of Article 212(1)(b) and 212(2) of Directive 2009/138/EC where these investments are of a strategic nature;

(b) an instantaneous decrease equal to 22 % in the value of type 2 equity investments that are treated as long-term equity investments in accordance with Article 171a;

(c) an instantaneous decrease equal to the sum of 49 % and the symmetric adjustment as referred to in Article 172 of this Regulation, in the value of type 2 equities other than those referred to in points (a) and (b).

3.  The capital requirement for qualifying infrastructure equities referred to in Article 168 of this Regulation shall be equal to the loss in the basic own funds that would result from the following instantaneous decreases:

(a) an instantaneous decrease equal to 22 % in the value of qualifying infrastructure equity investments in related undertakings within the meaning of point (b) of Article 212(1) and Article 212(2) of Directive 2009/138/EC, where those investments are of a strategic nature;

(b) an instantaneous decrease equal to 22 % in the value of qualifying infrastructure equity investments that are treated as long-term equity investments in accordance with Article 171a;

(c) an instantaneous decrease equal to the sum of 30 % and 77 % of the symmetric adjustment as referred to in Article 172 of this Regulation, in the value of qualifying infrastructure equity investments other than those referred to in points (a) and (b).

4.  The capital requirement for qualifying infrastructure corporate equities referred to in Article 168 of this Regulation shall be equal to the loss in the basic own funds that would result from the following instantaneous decreases:

(a) an instantaneous decrease equal to 22 % in the value of qualifying infrastructure corporate equity investments in related undertakings within the meaning of point (b) of Article 212(1) and Article 212(2) of Directive 2009/138/EC where those investments are of a strategic nature;

(b) an instantaneous decrease equal to 22 % in the value of qualifying infrastructure corporate equity investments that are treated as long-term equity investments in accordance with Article 171a;

(c) an instantaneous decrease equal to the sum of 36 % and 92 % of the symmetric adjustment as referred to in Article 172 of this Regulation, in the value of qualifying infrastructure corporate equities other than those referred to in points (a) and (b).

▼B

Article 170

Duration-based equity risk sub-module

1.  Where an insurance or reinsurance undertaking has received supervisory approval to apply the provisions set out in Article 304 of Directive 2009/138/EC, the capital requirement for type 1 equities shall be equal to the loss in the basic own funds that would result from the following instantaneous decreases:

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(a) an instantaneous decrease equal to 22 % in the value of the type 1 equities corresponding to the business referred to in point (i) of Article 304(1) of Directive 2009/138/EC;

▼B

(b) an instantaneous decrease equal to 22 % in the value of type 1 equity investments in related undertakings within the meaning of Article 212(1)(b) and 212(2) of Directive 2009/138/EC where these investments are of a strategic nature;

(c) an instantaneous decrease equal to the sum of 39 % and the symmetric adjustment as referred to in Article 172 of this Regulation, in the value of type 1 equities, other than those referred to in points (a) or (b).

2.  Where an insurance or reinsurance undertaking has received supervisory approval to apply the provisions set out in Article 304 of Directive 2009/138/EC, the capital requirement for type 2 equities shall be equal to the loss in the basic own funds that would result from an instantaneous decrease:

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(a) equal to 22 % in the value of the type 2 equities corresponding to the business referred to in point (i) of Article 304(1) of Directive 2009/138/EC;

▼B

(b) equal to 22 % in the value of type 2 equity investments in related undertakings within the meaning of Article 212(1)(b) and (2) of Directive 2009/138/EC, where these investments are of a strategic nature;

(c) equal to the sum of 49 % and the symmetric adjustment as referred to in Article 172 of this Regulation, in the value of type 2 equities, other than those referred to in points (a) or (b).

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3.  Where an insurance or reinsurance undertaking has received supervisory approval to apply the provisions set out in Article 304 of Directive 2009/138/EC, the capital requirement for qualifying infrastructure equities shall be equal to the loss in the basic own funds that would result from an instantaneous decrease:

(a) equal to 22 % in the value of the qualifying infrastructure equity corresponding to the business referred to in point (i) of Article 304(1) of Directive 2009/138/EC;

(b) equal to 22 % in the value of qualifying infrastructure equity investments in related undertakings within the meaning of Article 212(1)(b) and (2) of Directive 2009/138/EC, where these investments are of a strategic nature;

(c) equal to the sum of 30 % and 77 % of the symmetric adjustment as referred to in Article 172 of this Regulation in the value of qualifying infrastructure equities other than those referred to in points (a) or (b).

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4.  Where an insurance or reinsurance undertaking has received supervisory approval to apply the provisions set out in Article 304 of Directive 2009/138/EC, the capital requirement for qualifying infrastructure corporate equities shall be equal to the loss in the basic own funds that would result from an instantaneous decrease:

(a) equal to 22 % in the value of the qualifying infrastructure corporate equity corresponding to the business referred to in point (i) of Article 304(1)(b) of Directive 2009/138/EC;

(b) equal to 22 % in the value of qualifying infrastructure corporate equity investments in related undertakings within the meaning of Article 212(1)(b) and (2) of Directive 2009/138/EC, where these investments are of a strategic nature;

(c) equal to the sum of 36 % and 92 % of the symmetric adjustment as referred to in Article 172 of this Regulation in the value of qualifying infrastructure corporate equities other than those referred to in points (a) or (b).

▼B

Article 171

Strategic equity investments

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For the purposes of Article 169(1)(a), (2)(a), (3)(a) and (4)(a) and of Article 170(1)(b), (2)(b), (3)(b) and (4)(b), equity investments of a strategic nature shall mean equity investments for which the participating insurance or reinsurance undertaking demonstrates the following:

▼B

(a) that the value of the equity investment is likely to be materially less volatile for the following 12 months than the value of other equities over the same period as a result of both the nature of the investment and the influence exercised by the participating undertaking in the related undertaking;

(b) that the nature of the investment is strategic, taking into account all relevant factors, including:

(i) the existence of a clear decisive strategy to continue holding the participation for long period;

(ii) the consistency of the strategy referred to in point (a) with the main policies guiding or limiting the actions of the undertaking;

(iii) the participating undertaking's ability to continue holding the participation in the related undertaking;

(iv) the existence of a durable link;

(v) where the insurance or reinsurance participating company is part of a group, the consistency of such strategy with the main policies guiding or limiting the actions of the group.

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Article 171a

Long-term equity investments

1.  For the purpose of this Regulation, a sub-set of equity investments may be treated as long-term equity investments if the insurance or reinsurance undertaking demonstrates, to the satisfaction of the supervisory authority, that all of the following conditions are met:

(a) the sub-set of equity investments as well as the holding period of each equity investment within the sub-set are clearly identified;

(b) the sub-set of equity investment is included within a portfolio of assets which is assigned to cover the best estimate of a portfolio of insurance or reinsurance obligations corresponding to one or several clearly identified businesses, and the undertaking maintains that assignment over the lifetime of the obligations;

(c) the portfolio of insurance or reinsurance obligations, and the assigned portfolio of assets referred to in point (b) are identified, managed and organised separately from the other activities of the undertaking, and the assigned portfolio of assets cannot be used to cover losses arising from other activities of the undertaking;

(d) the technical provisions within the portfolio of insurance or reinsurance obligations referred to in point (b) only represent a part of the total technical provisions of the insurance or reinsurance undertaking;

(e) the average holding period of equity investments in the sub-set exceeds 5 years, or where the average holding period of the sub-set is lower than 5 years, the insurance or reinsurance undertaking does not sell any equity investments within the sub-set until the average holding period exceeds 5 years;

(f) the sub-set of equity investments consists only of equities that are listed in the EEA or of unlisted equities of companies that have their head offices in countries that are members of the EEA;

(g) the solvency and liquidity position of the insurance or reinsurance undertaking, as well as its strategies, processes and reporting procedures with respect to asset-liability management, are such as to ensure, on an ongoing basis and under stressed conditions, that it is able to avoid forced sales of each equity investments within the sub-set for at least 10 years;

(h) the risk management, asset-liability management and investment policies of the insurance or reinsurance undertaking reflects the undertaking's intention to hold the sub-set of equity investments for a period that is compatible with the requirement of point (e) and its ability to meet the requirement of point (g).

2.  Where equities are held within collective investment undertakings or within alternative investment funds referred to in points (a) to (d) of Article 168(6), the conditions set out in paragraph 1 of this Article may be assessed at the level of the funds and not of the underlying assets held within those funds.

3.  Insurance or reinsurance undertakings that treat a sub-set of equity investments as long-term equity investments in accordance with paragraph 1 shall not revert back to an approach that does not include long-term equity investments. Where an insurance or reinsurance undertaking that treats a sub-set of equity investments as long-term equity investments is no longer able to comply with the conditions set out in paragraph 1, it shall immediately inform the supervisory authority and shall cease to apply Article 169(1)(b), (2)(b), (3)(b) and (4)(b) to any of its equity investments for a period of 36 months.

▼B

Article 172

Symmetric adjustment of the equity capital charge

1.  The equity index referred to in Article 106(2) of Directive 2009/138/EC shall comply with all of the following requirements:

(a) the equity index measures the market price of a diversified portfolio of equities which is representative of the nature of equities typically held by insurance and reinsurance undertakings;

(b) the level of the equity index is publicly available;

(c) the frequency of published levels of the equity index is sufficient to enable the current level of the index and its average value over the last 36 months to be determined.

2.  Subject to paragraph 4, the symmetric adjustment shall be equal to the following:

image

where:

(a)  CI denotes the current level of the equity index;

(b) AI denotes the weighted average of the daily levels of the equity index over the last 36 months.

3.  For the purposes of calculating the weighted average of the daily levels of the equity index, the weights for all daily levels shall be equal. The days during the last 36 months in respect of which the index was not determined shall not be included in the average.

4.  The symmetric adjustment shall not be lower than – 10 % or higher than 10 %.

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Article 173

Criteria for the use of transitional measure for standard equity risk

1.  The transitional measure for standard equity risk set out in Article 308b(13) of Directive 2009/138/EC shall only apply to equities that were purchased on or before 1 January 2016 and which are not subject to the duration-based equity risk pursuant to Article 304 of that Directive.

2.  Where equities are held within an collective investment undertaking or other investments packaged as funds, and where the look-through approach is not possible, the transitional measure set out in Article 308b(13) of Directive 2009/138/EC shall be applied to the proportion of equities held within the collective investment undertaking or investment packaged as funds in accordance with the target underlying asset allocation on 1 January 2016, provided the target allocation is available to the undertaking. The proportion of equities to which the transitional is applied shall be reduced annually in proportion to the asset turnover ratio of the collective investment undertaking or investment packaged as funds. Where the target allocation for equity investments of the collective investment undertaking or investment packaged as funds increases, the proportion of equities the transitional is applied to shall not increase.

▼B



Subsection 4

Property risk sub-module

Article 174

The capital requirement for property risk referred to in point (c) of the second subparagraph of Article 105(5) of Directive 2009/138/EC shall be equal to the loss in the basic own funds that would result from an instantaneous decrease of 25 % in the value of immovable property.



Subsection 5

Spread risk sub-module

Article 175

Scope of the spread risk sub-module

The capital requirement for spread risk referred to in point (d) of the second subparagraph of Article 105(5) of Directive 2009/138/EC shall be equal to the following:

image

where

(a)  SCRbonds denotes the capital requirement for spread risk on bonds and loans;

(b)  SCRsecuritisation denotes the capital requirement for spread risk on securitisation positions;

(c)  SCRcd denotes the capital requirement for spread risk on credit derivatives.

Article 176

Spread risk on bonds and loans

1.  The capital requirement for spread risk on bonds and loans SCRbonds shall be equal to the loss in the basic own funds that would result from an instantaneous relative decrease of stressi in the value of each bond or loan i other than mortgage loans that meet the requirements in Article 191, including bank deposits other than cash at bank referred to in Article 189(2)(b).

2.  The risk factor stressi shall depend on the modified duration of the bond or loan i denominated in years (duri ). duri shall never be lower than 1. For variable interest rate bonds or loans, duri shall be equivalent to the modified duration of a fixed interest rate bond or loan of the same maturity and with coupon payments equal to the forward interest rate.

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3.  Bonds or loans for which a credit assessment by a nominated ECAI is available shall be assigned a risk factor stressi depending on the credit quality step and the modified duration duri of the bond or loan i according to the following table.



Credit quality step

0

1

2

3

4

5 and 6

Duration

(duri )

stressi

ai

bi

ai

bi

ai

bi

ai

bi

ai

bi

ai

bi

up to 5

bi · duri

0,9 %

1,1 %

1,4 %

2,5 %

4,5 %

7,5 %

More than 5 and up to 10

ai + bi · (duri – 5)

4,5 %

0,5 %

5,5 %

0,6 %

7,0 %

0,7 %

12,5 %

1,5 %

22,5 %

2,5 %

37,5 %

4,2 %

More than 10 and up to 15

ai + bi · (duri – 10)

7,0 %

0,5 %

8,5 %

0,5 %

10,5 %

0,5 %

20,0 %

1,0 %

35,0 %

1,8 %

58,5 %

0,5 %

More than 15 and up to 20

ai + bi · (duri – 15)

9,5 %

0,5 %

11 %

0,5 %

13,0 %

0,5 %

25,0 %

1,0 %

44,0 %

0,5 %

61,0 %

0,5 %

More than 20

min[ai + bi · (duri – 20);1]

12,0 %

0,5 %

13,5 %

0,5 %

15,5 %

0,5 %

30,0 %

0,5 %

46,6 %

0,5 %

63,5 %

0,5 %

4.  Bonds and loans for which a credit assessment by a nominated ECAI is not available and for which debtors have not posted collateral that meets the criteria set out in Article 214 shall be assigned a risk factor stressi depending on the duration duri of the bond or loan i according to the following table:



Duration (duri )

stressi

up to 5

3 % · duri

More than 5 and up to 10

15 % + 1,7 % · (duri – 5)

More than 10 and up to 20

23,5 % + 1,2 % · (duri – 10)

More than 20

min(35,5 % + 0,5 % · (duri – 20); 1)

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4a.  Notwithstanding paragraph 4, bonds and loans that are assigned to a credit quality step in accordance with paragraph 1 or 2 of Article 176a or paragraph 1 of Article 176c shall be assigned a risk factor stressi depending on the credit quality step and the modified duration duri of the bond or loan i assigned in accordance with the table set out in paragraph 3 of this Article.

▼B

5.  Bonds and loans for which a credit assessment by a nominated ECAI is not available and for which debtors have posted collateral, where the collateral of those bonds and loans meet the criteria set out in Article 214, shall be assigned a risk factor stressi according to the following:

(a) where the risk-adjusted value of collateral is higher than or equal to the value of the bond or loan i, stressi shall be equal to half of the risk factor that would be determined in accordance with paragraph 4;

(b) where the risk-adjusted value of collateral is lower than the value of the bond or loan i, and where the risk factor determined in accordance with paragraph 4 would result in a value of the bond or loan i that is lower than the risk-adjusted value of the collateral, stressi shall be equal to the average of the following:

(i) the risk factor determined in accordance with paragraph 4;

(ii) the difference between the value of the bond or loan i and the risk-adjusted value of the collateral, divided by the value of the bond or loan i;

(c) where the risk-adjusted value of collateral is lower than the value of the bond or loan i, and where the risk factor determined in accordance with paragraph 4 would result in a value of the bond or loan i that is higher than or equal to the risk-adjusted value of the collateral, stressi shall be determined in accordance with paragraph 4.

The risk-adjusted value of the collateral shall be calculated in accordance with Articles 112, 197, 198.

6.  The impact of the instantaneous decrease in the value of participations, as referred to in Article 92(2) of Directive 2009/138/EC, in financial and credit institutions shall be considered only on the value of the participations that are not deducted from own funds pursuant to Article 68 of this Regulation.

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Article 176a

Internal assessment of credit quality steps of bonds and loans

1.  A bond or loan for which a credit assessment by a nominated ECAI is not available and for which debtors have not posted collateral that meets the criteria set out in Article 214 may be assigned to credit quality step 2 if all of the criteria set out in paragraphs 3 and 4 are met with respect to the bond or loan.

2.  A bond or loan for which a credit assessment by a nominated ECAI is not available and for which debtors have not posted collateral that meets the criteria set out in Article 214, other than a bond or loan assigned to credit quality step 2 under paragraph 1, may be assigned to credit quality step 3 if all of the criteria set out in paragraphs 3 and 5 are met with respect to the bond or loan.

3.  The criteria in this paragraph are as follows:

a) the insurance or reinsurance undertaking's own internal credit assessment of the bond or loan meets the requirements listed in Article 176b;

b) the bond or loan is issued by a company which does not belong to the same corporate group as the insurance or reinsurance undertaking;

c) the bond or loan is not issued by a company which is an insurance or reinsurance undertaking, an infrastructure entity, a credit institution, an investment firm, a financial institution, an AIFM, a UCITS investment management company, an institution for occupational retirement provision or a non-regulated undertaking carrying out financial activities;

d) no claims on the issuing company of the bond or loan rank senior to the bond or loan, except for the following claims:

(i) statutory claims and claims from liquidity facility providers provided that those statutory claims and claims from liquidity facility providers are in aggregate not material relative to the overall senior debt of the issuing company;

(ii) claims from trustees;

(iii) claims from derivatives counterparties;

e) the bond or loan provides a fixed redemption payment on or before the date of maturity, in addition to regular fixed or floating rate interest payments;

f) the contractual terms and conditions of the bond or loan provide for the following:

(i) the borrower is obliged to provide audited financial data to the lender at least annually;

(ii) the borrower is obliged to notify the lender of any events that could materially affect the credit risk of the bond or loan;

(iii) the borrower is not entitled to change the terms and conditions of the bond or loan unilaterally, nor to make other changes to its business that would materially affect the credit risk of the bond or loan;

(iv) the issuer is prohibited from issuing new debt without the prior agreement of the insurance or reinsurance undertaking;

(v) what constitutes a default event is defined in a way that is specific to the issue and the issuer;

(vi) what is to happen on a change of control;

g) the bond or loan is issued by a company that meets all of the following criteria:

(i) the company is a limited liability company;

(ii) the company has its head office in a country which is a member of the EEA;

(iii) more than 50 % of the annual revenue of the company is denominated in currencies of countries which are members of the EEA or the OECD;

(iv) the company has operated without any credit event over at least the last 10 years;

(v) at least one of the following conditions is fulfilled with respect to each of the last three financial years ending prior to the date on which the Solvency Capital Requirement is being calculated:

 the annual turnover of the company exceeds EUR 10 000 000 ;

 the balance sheet total of the company exceeds EUR 10 000 000 ;

 the number of staff employed by the company exceeds 50;

(vi) the sum of the company's annual earnings before interest, tax, depreciation and amortisation (‘EBITDA’) over the last five financial years is larger than 0;

(vii) the total debt of the company at the end of the most recent financial year for which figures are available is no higher than 6,5 times the average of the company's annual free cash flows over the last five financial years;

(viii) the average of the company's EBITDA over the last five financial years is no lower than 6,5 times the company's interest expense for the most recent financial year for which figures are available;

(ix) the net debt of the company at the end of the most recent financial year for which figures are available is no higher than 1,5 times the company's total equity at the end of that financial year.

4.  The yield on the bond or loan, and the yield on any bonds and loans with similar contractual terms and conditions issued by the same company in the previous three financial years, is no higher than the higher of the following values:

a) the average of the yields on the two indices determined in accordance with paragraph 6;

b) the sum of 0,5 % and the yield on the index that meets the requirement in point (d) of that paragraph.

5.  The yield on the bond or loan, and the yield on bonds and loans with similar contractual terms and conditions issued by the same company in the previous three financial years, is no higher than the higher of the following values:

a) the average of the yields on the two indices determined in accordance with paragraph 7;

b) the sum of 0,5 % and the yield on the index that meets the requirement in point (b) of that paragraph.

6.  For the purposes of paragraph 4, the insurance or reinsurance undertaking shall determine, for the bond or loan referred to in paragraph 1, the yield, as at the time of issuance of that bond or loan, on two indices that meet all of the following requirements:

a) both indices are broad indexes of traded bonds for which an external credit assessment is available;

b) the constituent traded bonds in the two indices are denominated in the same currency as the bond or loan;

c) the constituent traded bonds in the two indices have a similar maturity date as the bond or loan;

d) one of the two indices consists of traded bonds of credit quality step 2;

e) one of the two indices consists of traded bonds of credit quality step 4.

7.  For the purposes of paragraph 5, the insurance or reinsurance undertaking shall determine, for the bond or loan referred to in paragraph 2, the yield, as at the time of issuance of that bond or loan, on two indices that meet all of the following requirements:

a) both indices meet the requirements set out in points (a), (b) and (c) of paragraph 6;

b) one of the two indices consists of traded bonds of credit quality step 3;

c) one of the two indices consists of traded bonds of credit quality step 4.

8.  For the purposes of paragraph 4, where the bond or loan referred to in paragraph 1 has features, other than those related to credit risk or illiquidity, which materially differ from the features of the constituent traded bonds in the two indices determined in accordance with paragraph 6, the insurance or reinsurance undertaking shall adjust the yield on the bond or loan to reflect those differences.

9.  For the purposes of paragraph 5, where the bond or loan referred to in paragraph 2 has features, other than those related to credit risk or illiquidity, which materially differ from the features of the constituent traded bonds in the two indices determined in accordance with paragraph 7, the insurance or reinsurance undertaking shall adjust the yield on the bond or loan to reflect those differences.

Article 176b

Requirements for an undertaking's own internal credit assessment of bonds and loans

The requirements to be met for the purposes of point (a) of Article 176a(3) by an insurance or reinsurance undertaking's own internal credit assessment of a bond or loan shall be as follows:

(b) the bond or loan is allocated a credit quality step on the basis of the own internal credit assessment;

(c) the insurance or reinsurance undertaking is able to demonstrate to the supervisory authority's satisfaction that the own internal credit assessment, and the allocation of a credit quality step to the bond or loan on the basis of that assessment, are reliable and properly reflect the spread risk of the bond or loan contained in the sub-module specified in point (d) of the second subparagraph of Article 105(5) of Directive 2009/138/EC;

(d) the own internal credit assessment takes into account all factors which could have a material effect on the credit risk associated with the bond or loan, including the following factors:

(i) the competitive position of the issuer;

(ii) the quality of the issuer's management;

(iii) the financial policies of the issuer;

(iv) country risk;

(v) the effect of any covenants that are in place;

(vi) the issuer's financial performance history, including the number of years that it has been operating;

(vii) the issuer's size and the level of diversity in its activities;

(viii) the quantitative impact on the issuer's risk profile and financial ratios of its having issued the bond or loan;

(ix) the issuer's ownership structure;

(x) the complexity of the issuer's business model;

(e) the own internal credit assessment uses all relevant quantitative and qualitative information;

(f) the own internal credit assessment, the allocation of a credit quality step on the basis of that assessment and the information used to support the own internal credit assessment is documented;

(g) the own internal credit assessment takes into account the characteristics of comparable assets for which a credit assessment by a nominated ECAI is available;

(h) the own internal credit assessment takes into account trends in the issuer's financial performance;

(i) the own internal credit assessment is procedurally independent from the decision to underwrite;

(j) the insurance or reinsurance undertaking regularly reviews the own internal credit assessment.

Article 176c

Assessment of credit quality steps of bonds and loans based on an approved internal model

1.  This Article shall apply in the following circumstances:

a) an insurance or reinsurance undertaking has concluded an agreement (‘co-investment agreement’) to invest in bonds and loans jointly with another entity;

b) that other entity (‘the co-investor’) is one or other of the following:

(i) an institution as defined in point (3) of Article 4(1) of Regulation (EU) No 575/2013 which uses the Internal Ratings Based Approach referred to in Article 143(1) of that Regulation;

(ii) an insurance or reinsurance undertaking which uses an internal model in accordance with Article 100 of Directive 2009/138/EC;

c) pursuant to the co-investment agreement, the insurance or reinsurance undertaking and the co-investor invest jointly in bonds and loans for which a credit assessment by a nominated ECAI is not available and for which debtors have not posted collateral that meets the criteria set out in Article 214;

d) the co-investment agreement provides that the co-investor shares with the insurance or reinsurance undertaking the probabilities of default produced by its Internal Ratings Based Approach or, as applicable, the credit quality steps produced by its internal model for the bonds or loans referred to in point (c) for the purpose of using that information for the calculation of the Solvency Capital Requirement of the insurance or reinsurance undertaking.

2.  If all of the criteria set out in paragraphs 3 to 6 are met, the bonds and loans referred to in point (c) of paragraph 1 shall be assigned to credit quality steps determined as follows:

a) in a case where the co-investor falls within point (i) of paragraph 1(b), credit quality steps shall be determined on the basis of the most recent probabilities of default that the Internal Ratings Based Approach has produced;

b) in a case where the co-investor falls within point (ii) of paragraph 1(b), credit quality steps shall be the credit quality steps produced by the internal model.

3.  The criteria in this paragraph are as follows:

a) the issuer of each bond or loan does not belong to the same corporate group as the insurance or reinsurance undertaking;

b) the issuer is not an insurance or reinsurance undertaking, an infrastructure entity, a credit institution, an investment firm, a financial institution, an AIFM, a UCITS investment management company, an institution for occupational retirement provision or a non-regulated undertaking carrying out financial activities;

c) the issuer has its head office in a country which is a member of the EEA;

d) more than 50 % of the issuer's annual revenue is denominated in currencies of countries which are members of the EEA or the OECD;

e) at least one of the following conditions is met for each of the last three financial years ending prior to the date on which the Solvency Capital Requirement is being calculated:

 the annual turnover of the issuer exceeds EUR 10 000 000 ;

 the balance sheet total of the issuer exceeds EUR 10 000 000 ;

 the number of staff employed by the issuer exceeds 50.

4.  The criteria in this paragraph are as follows:

a) the co-investment agreement defines the types of bonds and loans to be underwritten, and the applicable assessment criteria;

b) the co-investor provides the insurance or reinsurance undertaking with sufficient details of the underwriting process, including the criteria used, the organisational structure of the co-investor and the controls conducted by the co-investor;

c) the co-investor provides the insurance or reinsurance undertaking with data on all applications for bonds and loans to be underwritten;

d) the co-investor provides the insurance or reinsurance undertaking with details of all decisions to approve or reject applications for bonds and loans to be underwritten;

e) the co-investor retains an exposure of at least 20 % of the nominal value of each bond and loan;

f) the underwriting process is the same as the underwriting process followed by the co-investor for its other investments in comparable bonds and loans;

g) the insurance or reinsurance undertaking invests in all bonds and loans of the types referred to in point (a) for which the co-investor decides to approve the bond or loan application;

h) the co-investor provides the insurance or reinsurance undertaking with information that allows the undertaking to understand the Internal Ratings Based Approach or, as applicable, internal model and its limitations, as well as its adequacy and appropriateness, in particular:

(i) a description of the Internal Ratings Based Approach or, as applicable, internal model, including the inputs and risk factors, the quantification of risk parameters and the underlying methods, and the general methodology applied;

(ii) a description of the scope of the use of the Internal Ratings Based Approach or, as applicable, internal model;

(iii) a description of the model validation process and of other processes which allow the model's performance to be monitored, the appropriateness of its specification to be reviewed over time, and the results of the Internal Ratings Based Approach or, as applicable, internal model to be tested against experience.

5.  In a case where the co-investor falls within point (i) of paragraph 1(b):

a) the insurance or reinsurance undertaking clearly documents to which credit quality step the probability of default produced by the institution's Internal Ratings Based Approach corresponds;

b) the mapping of probabilities of default to credit quality steps carried out by the insurance or reinsurance undertaking ensures that, for the bond or loan in question, the resulting level of capital requirement for the spread risk sub-module referred to in point (d) of the second subparagraph of Article 105(5) of Directive 2009/138/EC is appropriate;

c) the mapping is based on Table 1 in Annex I to Commission Implementing Regulation (EU) 2016/1799 ( 15 );

d) adjustments are made in a prudent manner to the probabilities of default before the mapping is carried out, taking into account the qualitative factors set out in Article 7 of Implementing Regulation (EU) 2016/1799;

e) an adjustment to the probabilities of default is made in either of the following situations:

(i) the time horizon covered by the Internal Ratings Based Approach deviates significantly from the 3-year time horizon set out in Article 4(2) of Implementing Regulation (EU) 2016/1799;

(ii) the definition of default used in the Internal Ratings Based Approach deviates significantly from the one set out in Article 4(4) of that Implementing Regulation.

6.  In a case where the co-investor falls within point (ii) of paragraph 1(b), the internal model ensures that, for the bond or loan in question, the resulting level of capital requirement for the spread risk sub-module referred to in point (d) of the second subparagraph of Article 105(5) of Directive 2009/138/EC is appropriate.

▼M5 —————

▼M5

Article 178

Spread risk on securitisation positions: calculation of the capital requirement

1.  The capital requirement SCRsecuritisation for spread risk on securitisation positions shall be equal to the loss in the basic own funds that would result from an instantaneous relative decrease of stressi in the value of each securitisation position i.

2.  The risk factor stressi shall depend on the modified duration denominated in years (duri ). duri shall not be lower than 1 year.

3.  Senior STS securitisation positions which fulfil the requirements set out in Article 243 of Regulation (EU) No 575/2013 and for which a credit assessment by a nominated ECAI is available shall be assigned a risk factor stressi depending on the credit quality step and the modified duration of the securitisation position i, as set out in the following table:



Credit quality step

0

1

2

3

4

5 and 6

Duration

stress i

ai

bi

ai

bi

ai

bi

ai

bi

ai

bi

ai

bi

(duri )

up to 5

bi · duri

1,0 %

1,2 %

1,6 %

2,8 %

5,6 %

9,4 %

More than 5 and up to 10

ai + bi · (duri – 5)

5,0 %

0,6 %

6,0 %

0,7 %

8,0 %

0,8 %

14,0 %

1,7 %

28,0 %

3,1 %

47,0 %

5,3 %

More than 10 and up to 15

ai + bi · (duri – 10)

8,0 %

0,6 %

9,5 %

0,5 %

12,0 %

0,6 %

22,5 %

1,1 %

43,5 %

2,2 %

73,5 %

0,6 %

More than 15 and up to 20

ai + bi · (duri – 15)

11,0 %

0,6 %

12,0 %

0,5 %

15,0 %

0,6 %

28,0 %

1,1 %

54,5 %

0,6 %

76,5 %

0,6 %

More than 20

min[ai + bi · (duri – 20);1]

14,0 %

0,6 %

14,5 %

0,5 %

18,0 %

0,6 %

33,5 %

0,6 %

57,5 %

0,6 %

79,5 %

0,6 %

4.  Non-senior STS securitisation positions which fulfil the requirements set out in Article 243 of Regulation (EU) No 575/2013 and for which a credit assessment by a nominated ECAI is available shall be assigned a risk factor stressi depending on the credit quality step and the modified duration of the securitisation position i, as set out in the following table:



Credit quality step

0

1

2

3

4

5 and 6

Duration

stress i

ai

bi

ai

bi

ai

bi

ai

bi

ai

bi

ai

bi

(duri )

up to 5

min[bi · duri ;1]

2,8 %

3,4 %

4,6 %

7,9 %

15,8 %

26,7 %

More than 5 and up to 10

min[ai + bi · (duri – 5);1]

14,0 %

1,6 %

17,0 %

1,9 %

23,0 %

2,3 %

39,5 %

4,7 %

79,0 %

8,8 %

100,0 %

0,0 %

More than 10 and up to 15

a i + bi · (duri – 10)

22,0 %

1,6 %

26,5 %

1,5 %

34,5 %

1,6 %

63,0 %

3,2 %

100,0 %

0,0 %

100,0 %

0,0 %

More than 15 and up to 20

ai + bi · (duri – 15)

30,0 %

1,6 %

34,0 %

1,5 %

42,5 %

1,6 %

79,0 %

3,2 %

100,0 %

0,0 %

100,0 %

0,0 %

More than 20

min[ai + bi · (duri – 20);1]

38,0 %

1,6 %

41,5 %

1,5 %

50,5 %

1,6 %

95,0 %

1,6 %

100,0 %

0,0 %

100,0 %

0,0 %

5.  Senior STS securitisation positions which fulfil the criteria set out in Article 243 of Regulation (EU) No 575/2013 and for which no credit assessment by a nominated ECAI is available shall be assigned a risk factor stressi depending on the modified duration of the securitisation position i, as set out in the following table:



Duration

stress i

ai

bi

(duri )

up to 5

bi · duri

4,6 %

More than 5 and up to 10

ai + bi · (duri – 5)

23 %

2,5 %

More than 10 and up to 15

ai + bi · (duri – 10)

35,5 %

1,8 %

More than 15 and up to 20

ai + bi · (duri – 15)

44,5 %

0,5 %

More than 20

min[ai + bi · (duri – 20);1]

47 %

0,5 %

6.  Non-senior STS securitisation positions which fulfil the criteria set out in Article 243 of Regulation (EU) No 575/2013 and for which no credit assessment by a nominated ECAI is available shall be assigned a risk factor stressi equivalent to credit quality step 5 and depending on the modified duration of the exposure, as set out in the table in paragraph 3.

7.  Re-securitisation positions for which a credit assessment by a nominated ECAI is available shall be assigned a risk factor stressi equal to the following formula:

stressi = min(bi · duri ;1)

where bi shall be assigned depending on the credit quality step of re-securitisation position i, as set out in the following table:



Credit quality step

0

1

2

3

4

5

6

bi

33 %

40 %

51 %

91 %

100 %

100 %

100 %

8.  Securitisation positions not covered by paragraphs 3 to 7, for which a credit assessment by a nominated ECAI is available shall be assigned a risk factor stressi equal to the following formula:

stressi = min(bi · duri ;1)

where bi shall be assigned depending on the credit quality step of securitisation position i, as set out in the following table:



Credit quality step

0

1

2

3

4

5

6

bi

12,5 %

13,4 %

16,6 %

19,7 %

82 %

100 %

100 %

9.  Securitisation positions not covered by paragraphs 3 to 8, shall be assigned a risk factor stressi of 100 %.

▼M5

Article 178a

Spread risk on securitisation positions: transitional provisions

1.  Notwithstanding Article 178(3), securitisations issued before 1 January 2019 that qualify as type 1 securitisations in accordance with Article 177(2) in the version in force on 31 December 2018 shall be assigned a risk factor stressi in accordance with Article 178(3) even where those securitisations are not STS securitisations which fulfil the requirements set out in Article 243 of Regulation (EU) No 575/2013.

2.  Paragraph 1 shall apply only in circumstances where no new underlying exposures were added or substituted after 31 December 2018.

3.  Notwithstanding Article 178(3), securitisations issued before 18 January 2015 that qualify as type 1 securitisations in accordance with Article 177(4) in the version in force on 31 December 2018 shall be assigned a risk factor stressi in accordance with Articles 177 and 178 in the version in force on 31 December 2018.

4.  Notwithstanding Article 178(3), securitisations issued before 1 January 2019 that qualify as type 1 securitisations in accordance with Article 177(5) in the version in force on 31 December 2018 shall, until 31 December 2025, be assigned a risk factor stressi in accordance with Articles 177 and 178 in the version in force on 31 December 2018.

▼B

Article 179

Spread risk on credit derivatives

1.   ►M1  The capital requirement SCRcd for spread risk on credit derivatives other than those referred to in paragraph 3 shall be equal to the higher of the following capital requirements: ◄

▼M1

(a) the loss in the basic own funds that would result from an instantaneous increase in absolute terms of the credit spread of the instruments underlying the credit derivatives;

▼B

(b) the loss in the basic own funds that would result from an instantaneous relative decrease of the credit spread of the instruments underlying the credit derivatives by 75 %.

For the purposes of point (a), the instantaneous increase of the credit spread of the instruments underlying the credit derivatives for which a credit assessment by a nominated ECAI is available shall be calculated according to the following table.



Credit quality step

0

1

2

3

4

5

6

Instantaneous increase in spread (in percentage points)

1,3

1,5

2,6

4,5

8,4

16,20

16,20

2.  For the purposes of point (a) of paragraph 1, the instantaneous increase of the credit spread of the instruments underlying the credit derivatives for which a credit assessment by a nominated ECAI is not available shall be 5 percentage points.

3.  Credit derivatives which are part of the undertaking's risk mitigation policy shall not be subject to a capital requirement for spread risk, as long as the undertaking holds either the instruments underlying the credit derivative or another exposure with respect to which the basis risk between that exposure and the instruments underlying the credit derivative is not material in any circumstances.

4.  Where the larger of the capital requirements referred to in points (a) and (b) of paragraph 1 and the larger of the corresponding capital requirements calculated in accordance with Article 206(2) are not based on the same scenario, the capital requirement for spread risk on credit derivatives shall be the capital requirement referred to in paragraph 1 for which the underlying scenario results in the largest corresponding capital requirement calculated in accordance with Article 206(2).

Article 180

Specific exposures

1.  Exposures in the form of bonds referred to Article 52(4) of Directive 2009/65/EC (covered bonds) which have been assigned to credit quality step 0 or 1 shall be assigned a risk factor stressi according to the following table.



Credit quality step

Duration (dur i)

0

1

up to 5

0,7 %. duri

0,9 %. duri

More than 5 years

image

image

2.  Exposures in the form of bonds and loans to the following shall be assigned a risk factor stressi of 0 %:

(a) the European Central Bank;

(b) Member States' central government and central banks denominated and funded in the domestic currency of that central government and the central bank;

(c) multilateral development banks referred to in paragraph 2 of Article 117 of Regulation (EU) No 575/2013;

(d) international organisations referred to in Article 118 of Regulation (EU) No 575/2013;

Exposures in the form of bonds and loans that are fully, unconditionally and irrevocably guaranteed by one of the counterparties mentioned in points (a) to (d), where the guarantee meets the requirements set out in Article 215, shall also be assigned a risk factor stressi of 0 %.

▼M6

For the purposes of point (b) of the first subparagraph, exposures in the form of bonds and loans that are fully, unconditionally and irrevocably guaranteed by regional governments and local authorities listed in Article 1 of Commission Implementing Regulation (EU) 2015/2011 ( 16 ), where the guarantee meets the requirements set out in Article 215 of this Regulation, shall be treated as exposures to the central government.

▼B

3.  Exposures in the form of bonds and loans to central governments and central banks other than those referred to in point (b) of paragraph 2, denominated and funded in the domestic currency of that central government and central bank, and for which a credit assessment by a nominated ECAI is available shall be assigned a risk factor stressi depending on the credit quality step and the duration of the exposure according to the following table:



Credit quality step

0 and 1

2

3

4

5 and 6

Duration

(duri )

stressi

ai

bi

ai

bi

ai

bi

ai

bi

ai

bi

up to 5

image

0,0 %

1,1 %

1,4 %

2,5 %

4,5 %

More than 5 and up to 10

image

0,0 %

0,0 %

5,5 %

0,6 %

7,0 %

0,7 %

12,5 %

1,5 %

22,5 %

2,5 %

More than 10 and up to 15

image

0,0 %

0,0 %

8,4 %

0,5 %

10,5 %

0,5 %

20,0 %

1,0 %

35,0 %

1,8 %

More than 15 and up to 20

image

0,0 %

0,0 %

10,9 %

0,5 %

13,0 %

0,5 %

25,0 %

1,0 %

44,0 %

0,5 %

More than 20

image

0,0 %

0,0 %

13,4 %

0,5 %

15,5 %

0,5 %

30,0 %

0,5 %

46,5 %

0,5 %

▼M6

3a.  Exposures in the form of bonds and loans to Member States' regional governments and local authorities not listed in Article 1 of Implementing Regulation (EU) 2015/2011 (*) shall be assigned a risk factor stressi from the table in paragraph 3 corresponding to credit quality step 2.

3b.  Exposures in the form of bonds and loans that are fully, unconditionally and irrevocably guaranteed by a Member State's regional government or local authority that are not listed in Article 1 of Implementing Regulation (EU) 2015/2011, where the guarantee meets the requirements set out in Article 215 of this Regulation, shall be assigned a risk factor stressi from the table in paragraph 3 corresponding to credit quality step 2.

▼B

4.  Exposures in the form of bonds and loans to an insurance or reinsurance undertaking for which a credit assessment by a nominated ECAI is not available and where this undertaking meets its Minimum Capital Requirement, shall be assigned a risk factor stressi from the table in Article 176(3) depending on the undertaking's solvency ratio, using the following mapping between solvency ratios and credit quality steps:



Solvency ratio

196 %

175 %

122 %

95 %

75 %

75 %

Credit quality step

1

2

3

4

5

6

Where the solvency ratio falls in between the solvency ratios set out in the table above, the value of stressi shall be linearly interpolated from the closest values of stressi corresponding to the closest solvency ratios set out in the table above. Where the solvency ratio is lower than 75 %, stressi shall be equal to the factor corresponding to the credit quality steps 5 and 6. Where the solvency ratio is higher than 196 %, stressi shall be the same as the factor corresponding to the credit quality step 1.

For the purposes of this paragraph, ‘solvency ratio’ denotes the ratio of the eligible amount of own funds to cover the Solvency Capital Requirement and the Solvency Capital Requirement, using the latest available values.

5.  Exposures in the form of bonds and loans to an insurance or reinsurance undertaking which does not meet its Minimum Capital Requirement shall be assigned a risk factor stressi according to the following table:



Duration (duri )

risk factor stressi

up to 5

7,5 %. duri

More than 5 and up to 10

37,50 % + 4,20 %. (duri – 5)

More than 10 and up to 15

58,50 % + 0,50 %. (duri – 10)

More than 15 and up to 20

61 % + 0,50 %. (duri – 15)

More than 20

image

6.  Paragraphs 4 and 5 of this Article shall only apply as of the first date of public disclosure, by the undertaking corresponding to the exposure, of the report on its solvency and financial condition referred to in Article 51 of Directive 2009/138/EC. Before that date, if a credit assessment by a nominated ECAI is available for the exposures, Article 176 of this Regulation shall apply, otherwise, the exposures shall be assigned the same risk factor as the ones that would result from the application of paragraph 4 of this Article to exposures to an insurance or reinsurance undertaking whose solvency ratio is 100 %.

7.  Exposures in the form of bonds and loans to a third country insurance or reinsurance undertaking for which a credit assessment by a nominated ECAI is not available, situated in a country whose solvency regime is deemed equivalent to that laid down in Directive 2009/138/EC in accordance with Article 227 of Directive 2009/138/EC, and which complies with the solvency requirements of that third-country, shall be assigned the same risk factor as the ones that would result from the application of paragraph 4 of this Article to exposures to an insurance or reinsurance undertaking whose solvency ratio is 100 %.

8.  Exposures in the form of bonds and loans to credit institutions and financial institutions within the meaning of points (1) and (26) of Article 4(1) of Regulation (EU) No 575/2013 which comply with the solvency requirements set out in Directive 2013/36/EU and Regulation (EU) No 575/2013, for which a credit assessment by a nominated ECAI is not available, shall be assigned the same risk factor as the ones that would result from the application of paragraph 4 of this Article to exposures to an insurance or reinsurance undertaking whose solvency ratio is 100 %.

9.  The capital requirement for spread risk on credit derivatives where the underlying financial instrument is a bond or a loan to any exposure listed in paragraph 2 shall be nil.

▼M5

10.  STS securitisation positions which fulfil the criteria set out in Article 243 of Regulation (EU) No 575/2013 and which are fully, unconditionally and irrevocably guaranteed by the European Investment Fund or the European Investment Bank, where the guarantee meets the requirements set out in Article 215, shall be assigned a risk factor stressi of 0 %.

▼M5

10a.  Notwithstanding paragraph 10, securitisations issued before 1 January 2019 that qualify as type 1 securitisations in accordance with paragraph 10 in the version in force on 31 December 2018 shall be assigned a risk factor stressi of 0 % even where those securitisations are not STS securitisations which fulfil the requirements set out in Article 243 of Regulation (EU) No 575/2013.

▼M1

11.  Exposures in the form of bonds and loans that fulfil the criteria set out in paragraph 12 shall be assigned a risk factor stressi depending on the credit quality step and the duration of the exposure according to the following table:



Credit quality step

0

1

2

3

Duration

(duri )

stressi

ai

bi

ai

bi

ai

bi

ai

bi

up to 5

bi · duri

0,64 %

0,78 %

1,0 %

1,67 %

More than 5 and up to 10

ai + bi · (duri – 5)

3,2 %

0,36 %

3,9 %

0,43 %

5,0 %

0,5 %

8,35 %

1,0 %

More than 10 and up to 15

ai + bi · (duri – 10)

5,0 %

0,36 %

6,05 %

0,36 %

7,5 %

0,36 %

13,35 %

0,67 %

More than 15 and up to 20

ai + bi · (duri – 15)

6,8 %

0,36 %

7,85 %

0,36 %

9,3 %

0,36 %

16,7 %

0,67 %

More than 20

min[ai + bi · (duri – 20);1]

8,6 %

0,36 %

9,65 %

0,36 %

11,1 %

0,36 %

20,05 %

0,36 %

12.  The criteria for exposures that are assigned a risk factor in accordance with paragraph 11 shall be:

(a) the exposure relates to a qualifying infrastructure investment that meets the criteria set out in Article 164a;

(b) the exposure is not an asset that fulfils the following conditions:

 it is assigned to a matching adjustment portfolio in accordance with Article 77b(2) of Directive 2009/138/EC,

 it has been assigned a credit quality step between 0 and 2;

(c) a credit assessment by a nominated ECAI is available for the exposure;

(d) the exposure has been assigned a credit quality step between 0 and 3.

13.  Exposures in the form of bonds and loans that meet the criteria set out in paragraph 12(a) and (b), but do not meet the criteria set out in paragraph 12(c), shall be assigned a risk factor stressi equivalent to credit quality step 3 and the duration of the exposure in accordance with the table set out in paragraph 11.

▼M4

14.  Exposures in the form of bonds and loans that fulfil the criteria set out in paragraph 15 shall be assigned a risk factor stress i depending on the credit quality step and the duration of the exposure according to the following table:



Credit quality step

0

1

2

3

Duration

(duri )

stress i

ai

bi

ai

bi

ai

bi

ai

bi

up to 5

bi · duri

0,68 %

0,83 %

1,05 %

1,88 %

More than 5 and up to 10

ai + bi · (duri – 5)

3,38 %

0,38 %

4,13 %

0,45 %

5,25 %

0,53 %

9,38 %

1,13 %

More than 10 and up to 15

ai + bi · (duri – 10)

5,25 %

0,38 %

6,38 %

0,38 %

7,88 %

0,38 %

15,0 %

0,75 %

More than 15 and up to 20

ai + bi · (duri – 15)

7,13 %

0,38 %

8,25 %

0,38 %

9,75 %

0,38 %

18,75 %

0,75 %

More than 20

min[ai + bi · (duri – 20);1]

9,0 %

0,38 %

10,13 %

0,38 %

11,63 %

0,38 %

22,50 %

0,38 %

15.  The criteria for exposures that are assigned a risk factor in accordance with paragraph 14 shall be:

(a) the exposure relates to a qualifying infrastructure corporate investment that meets the criteria set out in Article 164b;

(b) the exposure is not an asset that fulfils the following conditions:

 it is assigned to a matching adjustment portfolio in accordance with Article 77b(2) of Directive 2009/138/EC,

 it has been assigned a credit quality step between 0 and 2;

(c) a credit assessment by a nominated ECAI is available for the infrastructure entity.

(d) the exposure has been assigned a credit quality step between 0 and 3.

16.  Exposures in the form of bonds and loans that meet the criteria set out in paragraph 15(a) and (b), but do not meet the criteria set out in paragraph 15(c), shall be assigned a risk factor stressi equivalent to credit quality step 3 and the duration of the exposure in accordance with the table set out in paragraph 14.

▼B

Article 181

Application of the spread risk scenarios to matching adjustment portfolios

Where insurance undertakings apply the matching adjustment referred to in Article 77b of Directive 2009/138/EC, they shall carry out the scenario based calculation for spread risk as follows:

(a) the assets in the assigned portfolio shall be subject to the instantaneous decrease in value for spread risk set out in Articles 176, 178 and 180 of this Regulation;

(b) the technical provisions shall be recalculated to take into account the impact on the amount of the matching adjustment of the instantaneous decrease in value of the assigned portfolio of assets. In particular, the fundamental spread shall increase, by an absolute amount that is calculated as the product of the following:

(i) the absolute increase in spread that, multiplied by the modified duration of the relevant asset, would result in the relevant risk factor stressi , referred to in Articles 176, 178 and 180 of this Regulation;

(ii) a reduction factor, depending on the credit quality as set out in the following table:



Credit quality step

0

1

2

3

4

5

6

Reduction factor

45 %

50 %

60 %

75 %

100 %

100 %

100 %

▼M4

For assets in the assigned portfolio for which no credit assessment by a nominated ECAI is available, and for qualifying infrastructure assets and for qualifying infrastructure corporate assets that have been assigned credit quality step 3, the reduction factor shall be 100 %.

▼B



Subsection 6

Market risk concentrations sub-module

Article 182

Single name exposure

1.  The capital requirement for market risk concentration shall be calculated on the basis of single name exposures. For this purpose exposures to undertakings which belong to the same corporate group shall be treated as a single name exposure. Similarly, immovable properties which are located in the same building shall be considered as a single immovable property.

2.  The exposure at default to a counterparty shall be the sum of the exposures to this counterparty.

3.  The exposure at default to a single name exposure shall be the sum of the exposures at default to all counterparties that belong to the single name exposure.

4.  The weighted average credit quality step on a single name exposure shall be equal to the rounded-up average of the credit quality steps of all exposures to all counterparties that belong to the single name exposure, weighted by the value of each exposure.

5.  For the purposes of paragraph 4, exposures for which a credit assessment by a nominated ECAI is available, shall be assigned a credit quality step in accordance with Chapter 1 Section 2 of this Title. ►M6  ————— ◄

▼M6

6.  For the purposes of paragraph 4, exposures to an insurance or reinsurance undertaking for which a credit assessment by a nominated ECAI is not available and where the undertaking meets its Minimum Capital Requirement shall be assigned to a credit quality step depending on the undertaking's solvency ratio using the following mapping between solvency ratios and credit quality steps:



Solvency Ratio

196 %

175 %

122 %

100 %

95 %

Credit quality step

1

2

3

3,82

5

Where the solvency ratio falls in between the solvency ratios set out in the table above, the credit quality step shall be linearly interpolated from the closest credit quality steps corresponding to the closest solvency ratios set out in the table above. Where the solvency ratio is lower than 95 %, the credit quality step shall be 5. Where the solvency ratio is higher than 196 %, the credit quality step shall be 1.

For the purposes of this paragraph, ‘solvency ratio’ denotes the ratio of the eligible amount of own funds to cover the Solvency Capital Requirement and the Solvency Capital Requirement, using the latest available values.

7.  For the purposes of paragraph 4, exposures to an insurance or reinsurance undertaking for which a credit assessment by a nominated ECAI is not available and where the undertaking does not meet its Minimum Capital Requirement shall be assigned to credit quality step 6.

8.  Paragraphs 6 and 7 of this Article shall only apply as of the first date of public disclosure, by the undertaking corresponding to the exposure, of the report on its solvency and financial condition referred to in Article 51 of Directive 2009/138/EC. Before that date, the exposures shall be assigned to credit quality step 3,82.

9.  For the purposes of paragraph 4, exposures to a third country insurance or reinsurance undertaking for which a credit assessment by a nominated ECAI is not available, situated in a country whose solvency regime is deemed equivalent to that laid down in Directive 2009/138/EC in accordance with Article 227 of that Directive, and which complies with the solvency requirements of that third country, shall be assigned to credit quality step 3,82.

10.  For the purposes of paragraph 4, exposures to credit institutions and financial institutions, within the meaning of points (1) and (26) of Article 4(1) of Regulation (EU) No 575/2013 which comply with the solvency requirements set out in Directive 2013/36/EU and Regulation (EU) No 575/2013, for which a credit assessment by a nominated ECAI is not available, shall be assigned to credit quality step 3,82.

11.  Exposures other than those to which a credit quality step is assigned under paragraphs 5 to 10 shall, for the purpose of paragraph 4, be assigned to credit quality step 5.

▼B

Article 183

Calculation of the capital requirement for market risk concentration

1.  The capital requirement for market risk concentration shall be equal to the following:

image

where:

(a) the sum covers all single name exposures i;

(b)  Conci denotes the capital requirement for market risk concentration on a single name exposure i.

2.  For each single name exposure i, the capital requirement for market risk concentration Conci shall be equal to the loss in the basic own funds that would result from an instantaneous decrease in the value of the assets corresponding to the single name exposure i equal to the following:

image

where:

(a)  XSi is the excess exposure referred to in Article 184;

(b)  gi is the risk factor for market risk concentration referred to in Articles 186 and 187;

Article 184

Excess exposure

1.  The excess exposure on a single name exposure i shall be equal to the following:

image

where:

(a)  Ei denotes the exposure at default to single name exposure i that is included in the calculation base of the market risk concentrations sub-module;

(b)  Assets denotes the calculation base of the market risk concentrations sub-module;

(c)  CTi denotes the relative excess exposure threshold referred to in Article 185.

2.  The calculation base of the market risk concentration sub-module Assets shall be equal to the value of all assets held by an insurance or reinsurance undertaking, excluding the following:

(a) assets held in respect of life insurance contracts where the investment risk is fully borne by the policy holders;

(b) exposures to a counterparty which belongs to the same group as the insurance or reinsurance undertaking, provided that all of the following conditions are met:

(i) the counterparty is an insurance or reinsurance undertaking, an insurance holding company, a mixed financial holding company or an ancillary services undertaking;

(ii) the counterparty is fully consolidated in accordance with Article 335(1)(a);

(iii) the counterparty is subject to the same risk evaluation, measurement and control procedures as the insurance or reinsurance undertaking;

(iv) the counterparty is established in the Union;

(v) there is no current or foreseen material practical or legal impediment to the prompt transfer of own funds or repayment of liabilities from the counterparty to the insurance or reinsurance undertaking;

(c) the value of the participations as referred to in Article 92(2) of Directive 2009/138/EC in financial and credit institutions that is deducted from own funds pursuant to Article 68 of this Regulation;

(d) exposures included in the scope of the counterparty default risk module;

(e) deferred tax assets;

(f) intangible assets.

▼M6

3.  The exposure at default on a single name exposure i shall be reduced by the amount of the exposure at default to counterparties belonging to that single name exposure and for which the risk factor for market risk concentration referred to in Articles 186 and 187 is 0 %.

▼B

Article 185

Relative excess exposure thresholds

Each single name exposure i shall be assigned, in accordance with the following table, a relative excess exposure threshold depending on the weighted average credit quality step of the single name exposure i, calculated in accordance with Article 182(4).



Weighted average credit quality step of single name exposure i

0

1

2

3

4

5

6

Relative excess exposure threshold CT i

3 %

3 %

3 %

1,5 %

1,5 %

1,5 %

1,5 %

Article 186

Risk factor for market risk concentration

1.  Each single name exposure i shall be assigned, in accordance with the following table, a risk factor gi for market risk concentration depending on the weighted average credit quality step of the single name exposure i, calculated in accordance with Article 182(4).



Weighted average credit quality step of single name exposure i

0

1

2

3

4

5

6

Risk factor gi

12 %

12 %

21 %

27 %

73 %

73 %

73 %

▼M6 —————

▼B

Article 187

Specific exposures

1.  Exposures in the form of bonds as referred to Article 52(4) of Directive 2009/65/EC (covered bonds) shall be assigned a relative excess exposure threshold CTi of 15 %, provided that the corresponding exposures in the form of covered bonds have been assigned to credit quality step 0 or 1. Exposures in the form of covered bonds shall be considered as single name exposures, regardless of other exposures to the same counterparty as the issuer of the covered bonds, which constitute a distinct single name exposure.

2.  Exposures to a single immovable property shall be assigned a relative excess exposure threshold CTi of 10 % and a risk factor gi for market risk concentration of 12 %.

3.  Exposures to the following shall be assigned a risk factor gi for market risk concentration of 0 %:

(a) the European Central Bank;

(b) Member States' central government and central banks denominated and funded in the domestic currency of that central government and central bank;

(c) multilateral development banks referred to in Article 117(2) of Regulation (EU) No 575/2013;

(d) international organisations referred to in Article 118 of Regulation (EU) No 575/2013.

Exposures that are fully, unconditionally and irrevocably guaranteed by one of the counterparties mentioned in points (a) to (d), where the guarantee meets the requirements set out in Article 215, shall also be assigned a risk factor gi for market risk concentration of 0 %.

▼M6

For the purposes of point (b), exposures that are fully, unconditionally and irrevocably guaranteed by regional governments and local authorities listed in Article 1 of Implementing Regulation (EU) 2015/2011, where the guarantee meets the requirements set out in Article 215 of this Regulation, shall be treated as exposures to the central government.

▼B

4.  Exposures to central governments and central banks other than those referred to in point (b) of paragraph 3, denominated and funded in the domestic currency of that central government and central bank, shall be assigned a risk factor gi for market risk concentration depending on their weighted average credit quality steps, in accordance with the following table.



Weighted average credit quality step of single name exposure i

0

1

2

3

4

5

6

Risk factor gi

0 %

0 %

12 %

21 %

27 %

73 %

73 %

▼M6

4a.  Exposures to Member States' regional governments and local authorities not listed in Article 1 of Implementing Regulation (EU) 2015/2011 shall be assigned a risk factor gi for market risk concentration corresponding to weighted average credit quality step 2 in accordance with paragraph 4.

4b.  Exposures that are fully, unconditionally and irrevocably guaranteed by a Member State's regional government or local authority that is not listed in Article 1 of Implementing Regulation (EU) 2015/2011, where the guarantee meets the requirements set out in Article 215 of this Regulation, shall be assigned a risk factor gi for market risk concentration corresponding to weighted average credit quality step 2 in accordance with paragraph 4.

▼B

5.  Exposures in the form of bank deposits shall be assigned a risk factor gi for market risk concentration of 0 %, provided they meet all of the following requirements:

(a) the full value of the exposure is covered by a government guarantee scheme in the Union;

(b) the guarantee covers the insurance or reinsurance undertaking without any restriction;

(c) there is no double counting of such guarantee in the calculation of the Solvency Capital Requirement.



Subsection 7

Currency risk sub-module

Article 188

1.  The capital requirement for currency risk referred to in point (e) of the second subparagraph of Article 105(5) of Directive 2009/138/EC shall be equal to the sum of the capital requirements for currency risk for each foreign currency. Investments in type 1 equities referred to in Article 168(2) and type 2 equities referred to in Article 168(3) which are listed in stock exchanges operating with different currencies shall be assumed to be sensitive to the currency of its main listing. Type 2 equities referred to in Article 168(3) which are not listed shall be assumed to be sensitive to the currency of the country in which the issuer has its main operations. Immovable property shall be assumed to be sensitive to the currency of the country in which it is located.

For the purposes of this Article, foreign currencies shall be currencies other than the currency used for the preparation of the insurance or reinsurance undertaking's financial statements (‘the local currency’).

2.  For each foreign currency, the capital requirement for currency risk shall be equal to the larger of the following capital requirements:

(a) the capital requirement for the risk of an increase in value of the foreign currency against the local currency;

(b) the capital requirement for the risk of a decrease in value of the foreign currency against the local currency.

3.  The capital requirement for the risk of an increase in value of a foreign currency against the local currency shall be equal to the loss in the basic own funds that would result from an instantaneous increase of 25 % in the value of the foreign currency against the local currency.

4.  The capital requirement for the risk of a decrease in value of a foreign currency against the local currency shall be equal to the loss in the basic own funds that would result from an instantaneous decrease of 25 % in the value of the foreign currency against the local currency.

5.  For currencies which are pegged to the euro, the 25 % factor referred to in paragraphs 3 and 4 of this Article may be adjusted in accordance with the implementing act adopted pursuant to point (d) of Article 109a(2) of Directive 2009/138/EC, provided that all of the following conditions are met:

(a) the pegging arrangement shall ensure that the relative changes in the exchange rate over a one-year period do not exceed the relative adjustments to the 25 % factor, in the event of extreme market events, that correspond to the confidence level set out in Article 101(3) of Directive 2009/138/EC;

(b) one of the following criteria is complied with:

(i) participation of the currency in the European Exchange Rate Mechanism (ERM II);

(ii) existence of a decision from the Council which recognises pegging arrangements between this currency and the euro;

(iii) establishment of the pegging arrangement by the law of country establishing the country's currency.

For the purposes of point (a), the financial resources of the parties that guarantee the pegging shall be taken into account.

6.  The impact of an increase or a decrease in the value of a foreign currency against the local currency on the value of participations as defined in Article 92(2) of Directive 2009/138/EC in financial and credit institutions, shall be considered only on the value of the participations that are not deducted from own funds pursuant to Article 68 of this Regulation. The part deducted from own funds shall be considered only to the extent such impact increases the basic own funds.

7.  Where the larger of the capital requirements referred to in points (a) and (b) of paragraph 2 and the largest of the corresponding capital requirements calculated in accordance with Article 206(2) are not based on the same scenario, the capital requirement for currency risk on a given currency shall be the capital requirement referred to in points (a) or (b) of paragraph 2 for which the underlying scenario results in the largest corresponding capital requirement calculated in accordance with Article 206(2).



SECTION 6

Counterparty default risk module



Subsection 1

General provisions

Article 189

Scope

1.  The capital requirement for counterparty default risk shall be equal to the following:

image

where:

(a)  SCRdef,1 denotes the capital requirement for counterparty default risk on type 1 exposures as set out in paragraph 2;

(b)  SCRdef,2 denotes the capital requirement for counterparty default risk on type 2 exposures as set out in paragraph 3.

2.  Type 1 exposures shall consist of exposures in relation to the following:

▼M6

(a) Risk-mitigation contracts including reinsurance arrangements, special purpose vehicles and insurance securitisations;

▼B

(b) Cash at bank as defined in Article 6 item F of Council Directive 91/674/EEC ( 17 );

(c) Deposits with ceding undertakings, where the number of single name exposures does not exceed 15;

(d) Commitments received by an insurance or reinsurance undertaking which have been called up but are unpaid, where the number of single name exposures does not exceed 15, including called up but unpaid ordinary share capital and preference shares, called up but unpaid legally binding commitments to subscribe and pay for subordinated liabilities, called up but unpaid initial funds, members' contributions or the equivalent basic own-fund item for mutual and mutual-type undertakings, called up but unpaid guarantees, called up but unpaid letters of credit, called up but unpaid claims which mutual or mutual-type associations may have against their members by way of a call for supplementary contributions;

(e) Legally binding commitments which the undertaking has provided or arranged and which may create payment obligations depending on the credit standing or default on a counterparty including guarantees, letters of credit, letters of comfort which the undertaking has provided;

▼M6

(f) derivatives other than credit derivatives covered in the spread risk sub-module.

▼B

3.  Type 2 exposures shall consist of all credit exposures which are not covered in the spread risk sub-module and which are not type 1 exposures, including the following:

(a) Receivables from intermediaries;

(b) Policyholder debtors;

(c) mortgage loans which meet the requirements in Article 191(2) to (13);

(d) Deposits with ceding undertakings, where the number of single name exposures exceeds 15;

(e) Commitments received by an insurance or reinsurance undertaking which have been called up but are unpaid as referred to in paragraph 2(d), where the number of single name exposures exceeds 15.

4.  Insurance and reinsurance undertakings may, at their discretion, consider all exposures referred to in points (d) and (e) of paragraph 3 as type 1 exposures, regardless of the number of single name exposures.

5.  Where a letter of credit, a guarantee or an equivalent risk mitigation technique has been provided to fully secure an exposure and this risk mitigation technique complies with the requirements of Articles 209 to 215, then the provider of that letter of credit, guarantee or equivalent risk mitigation technique may be considered as the counterparty on the secured exposure for the purposes of assessing the number of single name exposures.

6.  The following credit risks shall not be covered in the counterparty default risk module:

(a) the credit risk transferred by a credit derivative;

(b) the credit risk on debt issuance by special purpose vehicles, whether as defined in Article 13(26) of Directive 2009/138/EC or not;

(c) the underwriting risk of credit and suretyship insurance or reinsurance as referred to in lines of business 9, 21 and 28 of Annex I of this Regulation;

(d) the credit risk on mortgage loans which do not meet the requirements in Article 191(2) to (9);

▼M6

(e) the credit risk on assets posted as collateral to a CCP or a clearing member that are bankruptcy remote.

▼B

7.  Investment guarantees on insurance contracts provided to policy holders by a third party and for which the insurance or reinsurance undertaking would be liable should the third party default shall be treated as derivatives in the counterparty default risk module.

Article 190

Single name exposures

1.  The capital requirement for counterparty default risk shall be calculated on the basis of single name exposures. For that purpose exposures to undertakings which belong to the same corporate group shall be treated as a single name exposure.

2.  The insurance or reinsurance undertaking may consider exposures which belong to different members of the same legal or contractual pooling arrangement as different single name exposures where the probability of default of the single name exposure is calculated in accordance with Article 199 and the loss-given-default is calculated in accordance with Article 193 if it is a pool exposure of type A, in accordance with Article 194 if it is a pool exposure of type B and in accordance with Article 195 if it is a pool exposure of type C. Alternatively exposures to the undertakings which belong to the same pooling arrangement shall be treated as a single name exposure.

Article 191

Mortgage loans

1.  Retail loans secured by mortgages on residential property (mortgage loans) shall be treated as type 2 exposures under the counterparty default risk provided the requirements in paragraphs 2 to 13 are met.

2.  The exposure shall be either to a natural person or persons or to a small or medium sized enterprise.

3.  The exposure shall be one of a significant number of exposures with similar characteristics such that the risks associated with such lending are substantially reduced.

4.  The total amount owed to the insurance or reinsurance undertaking and, where relevant, to all related undertakings within the meaning of Article 212(1)(b) and (2) of Directive 2009/138/EC, including any exposure in default, by the counterparty or other connected third party, shall not, to the knowledge of the insurance or reinsurance undertaking, exceed EUR 1 million. The insurance or reinsurance undertaking shall take reasonable steps to acquire this knowledge.

5.  The residential property is or will be occupied or let by the owner.

6.  The value of the property does not materially depend upon the credit quality of the borrower.

7.  The risk of the borrower does not materially depend upon the performance of the underlying property, but on the underlying capacity of the borrower to repay the debt from other sources, and as a consequence, the repayment of the facility does not materially depend on any cash flow generated by the underlying property serving as collateral. For those other sources, the insurance or reinsurance undertaking shall determine maximum loan-to-income ratio as part of its lending policy and obtain suitable evidence of the relevant income when granting the loan.

8.  All of the following requirements on legal certainty shall be met:

(a) a mortgage or charge is enforceable in all jurisdictions which are relevant at the time of the conclusion of the credit agreement and shall be properly filed on a timely basis;

(b) all legal requirements for establishing the pledge have been fulfilled;

(c) the protection agreement and the legal process underpinning it enable the insurance or reinsurance undertaking to realise the value of the protection within a reasonable timeframe.

9.  All of the following requirements on the monitoring of property values and on property valuation shall be met:

(a) the insurance or reinsurance undertaking monitors the value of the property on a frequent basis and at a minimum once every three years. The insurance or reinsurance undertaking carries out more frequent monitoring where the market is subject to significant changes in conditions;

(b) the property valuation is reviewed when information available to the insurance or reinsurance undertaking indicates that the value of the property may have declined materially relative to general market prices and that review is external and independent and carried out by a valuer who possesses the necessary qualifications, ability and experience to execute a valuation and who is independent from the credit decision process.

10.  For the purposes of paragraph 9, insurance or reinsurance undertakings may use statistical methods to monitor the value of the property and to identify property that needs revaluation.

11.  The insurance or reinsurance undertaking shall clearly document the types of residential property they accept as collateral and their lending policies in this regard. The insurance or reinsurance undertaking shall require the independent valuer of the market value of the property, as referred to in Article 198(2), to document that market value in a transparent and clear manner.

12.  The insurance or reinsurance undertaking shall have in place procedures to monitor that the property taken as credit protection is adequately insured against the risk of damage.

13.  The insurance or reinsurance undertaking shall report all of the following data on losses stemming from mortgage loans to the supervisory authority:

(a) losses stemming from loans that has been classified as type 2 exposures according with Article 189(3) in any given year;

(b) overall losses in any given year.

14.  The supervisory authorities shall publish annually on an aggregated basis the data specified in points (a) and (b) of paragraph 13, together with historical data, where available. A supervisory authority shall, upon the request of another supervisory authority in a Member State, the EBA or the EIOPA provide to that supervisory authority, the EBA or the EIOPA more detailed information on the condition of the residential immovable property markets in that Member State.

Article 192

Loss-given-default

1.  The loss-given-default on a single name exposure shall be equal to the sum of the loss-given-default on each of the exposures to counterparties belonging to the single name exposure. The loss-given-default shall be net of the liabilities towards counterparties belonging to the single name exposure provided that those liabilities and exposures are set off in the case of default of the counterparties and provided that Articles 209 and 210 are complied with in relation to that right of set-off. No offsetting shall be allowed for if the liabilities are expected to be met before the credit exposure is cleared.

▼M6

Where insurance and reinsurance undertakings have concluded contractual netting agreements covering several derivatives that represent credit exposure to the same counterparty, they may calculate the loss-given-default on those derivatives, as set out in paragraphs 3 to 3c, on the basis of the combined economic effect of all of those derivatives that are covered by the same contractual netting agreement, provided that Articles 209 and 210 are complied with in relation to the netting.

▼B

2.  The loss-given-default on a reinsurance arrangement or insurance securitisation shall be equal to the following:

image

where:

(a)  Recoverables denotes the best estimate of amounts recoverable from the reinsurance arrangement or insurance securitisation and the corresponding debtors;

(b)  RMre denotes the risk mitigating effect on underwriting risk of the reinsurance arrangement or securitisation;

(c)  Collateral denotes the risk-adjusted value of collateral in relation to the reinsurance arrangement or securitisation;

(d)  F denotes a factor to take into account the economic effect of the collateral arrangement in relation to the reinsurance arrangement or securitisation in case of any credit event related to the counterparty.

Where the reinsurance arrangement is with an insurance or reinsurance undertaking or a third country insurance or reinsurance undertaking and 60 % or more of that counterparty's assets are subject to collateral arrangements, the loss-given-default shall be equal to the following:

▼M1

image

▼B

where:

F' denotes a factor to take into account the economic effect of the collateral arrangement in relation to the reinsurance arrangement or securitisation in the case of a credit event related to the counterparty.

▼M6

3.  The loss-given-default on a derivative falling within Article 192a(1) shall be equal to the following:

LGD = max(18 % · (Derivative + 50 % · RM fin ) – 50 % · F′ · Value; 0)

where:

(a)  Derivative denotes the value of the derivative determined in accordance with Article 75 of Directive 2009/138/EC;

(b)  RMfin denotes the risk-mitigating effect on market risk of the derivative;

(c)  Value denotes the value of the assets held as collateral determined in accordance with Article 75 of Directive 2009/138/EC;

(d)  F′ denotes a factor to take into account the economic effect of the collateral arrangement in relation to the derivative in case of a credit event related to the counterparty.

▼M6

3a.  Notwithstanding paragraph 3, the loss-given-default on a derivative falling within Article 192a(2) shall be equal to the following:

LGD = max(16 % · (Derivative + 50 % · RM fin ) – 50 % · F′′ · Value; 0)

where:

(a)  Derivative denotes the value of the derivative in accordance with Article 75 of Directive 2009/138/EC;

(b)  RMfin denotes the risk-mitigating effect on market risk of the derivative;

(c)  Value denotes the value of the assets held as collateral in accordance with Article 75 of Directive 2009/138/EC;

(d)  F′′ denotes a factor to take into account the economic effect of the collateral arrangement in relation to the derivative in case of a credit event related to the counterparty.

3b.  The loss-given-default on derivatives other than those referred to in paragraphs 3 and 3a shall be equal to the following, provided that the derivative contract meets the requirements of Article 11 of Regulation (EU) 648/2012:

LGD = max(90 % · (Derivative + 50 % · RM fin ) – 50 % · F′′′ · Value; 0)

where:

(a)  Derivative denotes the value of the derivative determined in accordance with Article 75 of Directive 2009/138/EC;

(b)  RMfin denotes the risk-mitigating effect on market risk of the derivative;

(c)  Value denotes the value of the assets held as collateral determined in accordance with Article 75 of Directive 2009/138/EC;

(d)  F′′′ denotes a factor to take into account the economic effect of the collateral arrangement in relation to the derivative in case of a credit event related to the counterparty.

3c.  The loss-given-default on derivatives not covered by paragraphs 3, 3a and 3b shall be equal to the following:

LGD = max(90 % · (Derivative + RM fin ) – F′′′ · Collateral; 0)

where:

(a)  Derivative denotes the value of the derivative determined in accordance with Article 75 of Directive 2009/138/EC;

(b)  RMfin denotes risk-mitigating effect on market risk of the derivative;

(c)  Collateral denotes the risk-adjusted value of collateral in relation to the derivative;

(d)  F′′′ denotes a factor to take into account the economic effect of the collateral arrangement in relation to the derivative in case of a credit event related to the counterparty.

3d.  Where the loss-given-default on derivatives is to be calculated on the basis referred to in the second subparagraph of paragraph 1, the following rules shall apply for the purposes of paragraphs 3 to 3c:

(a) the value of the derivative shall be the sum of the values of the derivatives covered by the contractual netting arrangement;

(b) the risk-mitigating effect shall be determined at the level of the combination of derivatives covered by the contractual netting arrangement;

(c) the risk-adjusted value of collateral shall be determined at the level of the combination of derivatives covered by the contractual netting arrangement.

▼M6

4.  The loss-given-default on a mortgage loan shall be equal to the following:

LGD = max(Loan – (80 % × Mortgage + Guarantee); 0)

where:

a)  Loan denotes the value of the mortgage loan determined in accordance with Article 75 of Directive 2009/138/EC;

b)  Mortgage denotes the risk-adjusted value of the mortgage;

c)  Guarantee denotes the amount that the guarantor would be required to pay to the insurance or reinsurance undertaking if the obligor of the mortgage loan were to default at a time when the value of the property held as mortgage were equal to 80 % of the risk-adjusted value of the mortgage.

For the purposes of point (c), a guarantee shall be recognised only if it is provided by a counterparty mentioned in points (a) to (d) of the first subparagraph of Article 180(2) and it complies with the requirements set out in Articles 209, 210 and points (a) to (e) of Article 215.

▼B

5.  The loss-given-default on a legally binding commitment as referred to in Article 189(2)(e) of this Regulation shall be equal to the difference between its nominal value and its value in accordance with Article 75 of Directive 2009/138/EC.

6.  The loss-given-default on cash at bank as defined in Article 6 item F of Council Directive 91/674/EEC, of a deposit with a ceding undertaking, of an item listed in Article 189(2)(d) or Article 189(3)(e) of this Regulation, or of a receivable from an intermediary or policyholder debtor, as well as any other exposure not listed elsewhere in this Article shall be equal to its value in accordance with Article 75 of Directive 2009/138/EC.

▼M6

Article 192a

Exposure to clearing members

1.  For the purposes of Article 192(3), a derivative falls within this paragraph if the following requirements are met:

(a) the derivative is a CCP-related transaction in which the insurance or reinsurance undertaking is the client;

(b) the positions and assets of the insurance or reinsurance undertaking related to that transaction are distinguished and segregated, at the level of both the clearing member and the CCP, from the positions and assets of both the clearing member and the other clients of that clearing member and as a result of that distinction and segregation those positions and assets are bankruptcy remote in the event of the default or insolvency of the clearing member or one or more of its other clients;

(c) the laws, regulations, rules and contractual arrangements applicable to or binding the insurance or reinsurance undertaking or the CCP facilitate the transfer of the client's positions relating to that transaction and of the corresponding collateral to another clearing member within the applicable margin period of risk in the event of default or insolvency of the original clearing member. In such circumstance, the client's positions and the collateral shall be transferred at market value, unless the client requests to close out the position at market value;

(d) the insurance or reinsurance undertaking has available an independent, written and reasoned legal opinion that concludes that, in the event of legal challenge, the relevant courts and administrative authorities would find that the client would bear no losses on account of the insolvency of the clearing member or of any the clients of that clearing member under any of the following laws:

(i) the laws of the jurisdiction of the insurance or reinsurance undertaking, its clearing member or the CCP;

(ii) the law governing the transaction;

(iii) the law governing the collateral;

(iv) the law governing any contract or agreement necessary to meet the requirement set out in point (b);

(e) the CCP is a qualifying central counterparty.

2.  For the purposes of Article 192(3a), a derivative falls within this paragraph if the requirements set out in paragraph 1 are met, with the exception that the insurance or reinsurance undertaking is not required to be protected from losses in the event that the clearing member and another client of the clearing member jointly default.

▼B

Article 193

Loss-given-default for pool exposures of type A

1.  For pool exposures of type A which the undertaking considers as separate single name exposures in accordance with Article 190(2), where members are each only liable up to their respective portion of the obligation covered by the pooling arrangement, the loss-given-default shall be calculated in accordance with Article 192.

For pool exposures of type A which the undertaking considers as separate single name exposures in accordance with Article 190(2), where members are each liable up to the full amount of the obligation covered by the pooling arrangement, the loss-given-default calculated in accordance with Article 192 shall be multiplied by the risk-share factor, calculated as follows:

image

where:

(a) 
image ;

(b)  i denotes all pool members falling within the scope defined in Article 2 of Directive 2009/138/EC and j denotes all pool members excluded from the scope of Article 2 of that Directive;

(c) 
image ;

(d)  Pj denotes the share of the total risk of the pooling arrangement undertaken by pool member j;

(e) for pool members for which a credit assessment by a nominated ECAI is available, SRi and SRj shall be assigned in accordance with the following table:



Credit quality step

0

1

2

3

4

5

6

SRi

196 %

196 %

175 %

122 %

95 %

75 %

75 %

(f) for pool members which fall within the scope of Directive 2009/138/EC and for which a credit assessment by a nominated ECAI is not available, SRi and SRj shall be the latest available solvency ratio;

(g) for pool members situated in a third country and for which a credit assessment by a nominated ECAI is not available:

(i)  SRi and SRj shall be equal to 100 % where the pool member is situated in a country whose solvency regime is deemed equivalent pursuant to Article 172 of Directive 2009/138/EC;

(ii)  SRi and SRj shall be equal to 75 % where the pool member is situated in a country whose solvency regime is not deemed equivalent pursuant to Article 172 of Directive 2009/138/EC.

2.  Where the undertaking is ceding risk to a pooling arrangement by the intermediary of a central undertaking, the central undertaking shall be considered as part of the pooling arrangement and its share of the risk calculated accordingly.

Article 194

Loss-given-default for pool exposures of type B

1.  For pool exposures of type B which the undertaking considers as separate single name exposures in accordance with Article 190(2), where members are each liable up to the full amount of the obligation covered by the pooling arrangement, the loss-given-default shall be calculated as follows:

image

where:

(a)  PU denotes the undertaking's share of the risk according to the terms of the pooling arrangement;

(b)  PC denotes the counterparty member's share of the risk according to the terms of the pooling arrangement;

(c)  RRC is equal to:

(i) 10 % if 60 % or more of the assets of the counterparty member are subject to collateral arrangements;

(ii) 50 % otherwise;

(d)  BEC denotes the best estimate of the liability ceded to the counterparty member by the undertaking, net of any amounts reinsured with counterparties external to the pooling arrangement;

(e) ΔRMC denotes the counterparty member's contribution to the risk-mitigating effect of the pooling arrangement on the underwriting risk of the undertaking;

(f)  Collateral denotes the risk-adjusted value of collateral held by the counterparty member of the pooling arrangement;

(g)  F denotes the factor to take into account the economic effect of the collateral held by the counterparty member, calculated in accordance with Article 197.

2.  For pool exposures of type B which the undertaking considers as separate single name exposures in accordance with Article 190(2), where members are each only liable up to their respective portion of the obligation covered by the pooling arrangement, the loss-given-default shall be calculated as follows:

image

where:

(a)  PC denotes the counterparty member's share of the risk according to the terms of the pooling arrangement;

(b)  RRC is equal to:

(i) 10 % if 60 % or more of the assets of the counterparty member are subject to collateral arrangements;

(ii) 50 % otherwise;

(c)  BEU denotes the best estimate of the liability ceded to the pooling arrangement by the undertaking, net of any amounts reinsured with counterparties external to the pooling arrangement;

(d) ΔRMC denotes the counterparty member's contribution to the risk-mitigating effect of the pooling arrangement on the underwriting risk of the undertaking;

(e)  Collateral denotes the risk-adjusted value of collateral held by the counterparty member of the pooling arrangement;

(f)  F denotes the factor to take into account the economic effect of the collateral held by the counterparty member, calculated in accordance with Article 197.

Article 195

Loss-given-default for pool exposures of type C

For pool exposures of type C which the undertaking considers as separate single name exposures in accordance with Article 190(2), the loss-given-default shall be calculated as follows:

image

where:

(a)  PU denotes the undertaking's share of the risk according to the terms of the pooling arrangement;

(b)  RRCE is equal to: