Consultation Paper No. 60
Draft CEIOPS’ Advice for Level 2 Implementing Measures on Solvency II: Assessment of Group Solvency

3.3. Calculation method

3.3.1. The accounting consolidation-based method

Explanatory text

3.112.The accounting consolidation-based method provides for the calculation of group solvency based on a set of consolidated accounts.

The group solvency margin is the difference between the own funds eligible to cover the SCR and the SCR at group level calculated on the basis of consolidated data (the consolidated group SCR).

This method treats the group as a single economic unit and assumes that any liability in the group can be met with any asset.

3.113.Article 219 provides for the treatment of proportional shares in related undertakings when calculating the consolidated group SCR.

The proportional share is the percentages used for the establishment of the consolidated accounts.

However, where an undertaking is in deficit, the total solvency deficit of the subsidiary shall be taken into account unless the group supervisor is convinced that the parent undertaking’s responsibility is strictly limited to that share of the capital, whereby the deficit will be taken into account on a proportional basis.

In making such a decision, the group supervisor could consider the extent to which the parent undertaking may be obliged to provide additional capital to the undertaking.

3.114.A key issue for supervisors in determining group solvency based on consolidated data is the treatment of third country undertakings.

The issue from a supervisory perspective is the extent to which supervisors can assess the data to identify assets and liabilities originating from outside the EEA.

This assessment is important for any subsequent tests on the transferability of excess capital present in those entities.

Therefore, CEIOPS considers that groups should be able to identify the data relating to third country undertakings in the consolidated group SCR and own funds calculations.

This should also apply to credit institutions, investment firms and financial institutions.

The data should be assessed as part of the Pillar procedures.

CEIOPS’ advice

3.115.Groups shall be able to identify the data (e.g. the contribution of the own funds) relating to third country insurance and reinsurance undertakings, credit institutions, investment firms and financial institutions in the consolidated group SCR and own funds calculations.

The data shall be assessed as part of the supervisory review process.

3.3.2. The deduction and aggregation method

Explanatory text

3.116.The alternative method calculates the group solvency as the difference between the sum of the aggregated own funds in the group and the aggregated solvency capital requirements in the group.

Diversification effects are already recognised in solo calculations, but the deduction and aggregation method does not allow for additional diversication effects at group level as the group SCR represents the sum of the solo SCRs.

3.117.Article 219 provides for the treatment of the proportional share in related undertakings when calculating the aggregated group SCR.

The proportional share is the proportion of the subscribed capital that is held, directly or indirectly, by the parent undertaking. The approach described for the treatment of solvency deficits described under method 1 also applies for method 2.

The same principles should be used for the assessment of indirect ownership referred to in Article 231(4).

CEIOPS’ advice

3.118.The deduction and aggregation method does not provide for the recognition of diversification at group level.

3.119.CEIOPS will give further advice on the deduction and aggregation method to take account of the CEIOPS advice on the treatment of participations in (re)insurance undertakings in solo calculations.

3.3.3. Choice of method

Explanatory text

3.120.Article 218 states that the calculation of group solvency shall be carried out according to the accounting consolidation-based method (Method 1).

Therefore, unlike the IGD, the Level 1 text provides for a preferred method for the group calculation.

3.121.However, the text also states that the Member States shall allow their supervisory authorities, where they assume the role of the group supervisor, to decide in consultation with the supervisory authorities concerned, to apply the deduction and aggregation method (Method 2) or a combination of both methods, “where the exclusive application of method 1 would not be appropriate.”

3.122.Therefore, supervisors must consider the circumstances in which the group supervisor may wish to require a group to use method 2 or a combination of the two methods because the use of method 1 is inappropriate.

3.123.Any such decisions are important at group level because it will impact on the extent to which groups may recognise diversification and the level of complexity in the group calculations.

Supervisors have noted that the deduction and aggregation method is a transparent approach to calculating group solvency as the group solvency requirements and own funds reflect the sum of a group’s constituent parts.

This may be less complex than the accounting consolidation method.

In QIS4, supervisors noted that Method 2 is often a prudent approach and relatively fast and simple to carry out.

3.124.CEIOPS considers that the deduction and aggregation method can be a transparent approach for calculating group solvency. It can therefore be useful for dealing with specific group structures, for example, where the group has multiple entities outside the EEA.

3.125.CEIOPS considers that the group supervisor, after consultation with the other supervisors concerned, should assess, in particular:

• The quality and access to information on an undertaking;

• The nature or complexity of the group structure;

• The impact of new entities falling within the scope of group supervision (i.e. restructures, mergers and acquisitions);

• The use of group internal models;

• The level of complexity of the group calculation that would arise when requiring a combination of methods and the impact on
effective group supervision.

3.126.CEIOPS considers that Level 3 guidance is necessary to provide further details on the circumstances where the group supervisor may require the use of Method 2 or a combination of Methods 1 and 2.

CEIOPS’ advice

3.127.The deduction and aggregation method can be a transparent approach for calculating group solvency.

It can therefore be useful for dealing with specific group structures.

3.128.When making a decision pursuant to Article 218(2), the group supervisor, after consultation with the other supervisors concerned, shall assess, in particular:

• The quality and access to information on an undertaking;

• The nature or complexity of the group structure;

• The impact of new entities falling within the scope of group supervision (i.e. restructures, mergers and acquisitions);

• Entities that fall within the scope of a group internal model;

• The level of complexity of the group calculation that would arise when requiring a combination of methods and the impact on effective group supervision.

3.4. Eligible elements of own funds

3.129.The group solvency assessment must be based on the overall position of the group, in order to take into account the integrated nature of risk management and capital management within the group.

In addition, the composition of the group should also be taken into consideration, for example, the inclusions of third countries entities and non insurance entities.

3.130.In principle, excess own funds above their respective solo SCR in some legal entities can compensate for own funds shortage in other entities.

However, these excess own funds may not be available, due to local legal or prudential constraints on the capital.

3.131.When diversification benefits arise within a single entity, simply understanding how the various individual risks diversify and aggregate is sufficient for one to be able to assess the risk to the solvency of the entity.

However, when diversification benefits arise across multiple entities within the same group, consideration also needs to be given to the extent to which own funds can move between the different entities.

If own funds can not move between the different entities, then although the group has adequate own funds after allowing for diversification, at the time of stress the necessary own funds could not be delivered to a particular entity.

Therefore, consideration of the extent to which capital is truly mobile within a group is critically important to understanding group solvency.

3.132.As stated in Article 220(3) if the supervisory authorities find that certain own funds eligible for the SCR of a related (re)insurance undertaking other than those referred to in Article 220(2) cannot effectively be made available to cover the SCR of the participating insurance or reinsurance undertaking for which the group solvency is calculated, those own funds may be included in the calculation only in so far they are eligible for covering the SCR of the related undertaking.

CEIOPS’ advice

3.133.Therefore, for the calculation of group own funds it is necessary to:

• analyse the group own funds in order to identify the eligible group own funds;

• assess the eligible own funds within each entity that are not able to absorb losses in other entities within the group and, consequently, may be included in the calculation in so far as they are eligible for covering the SCR of the related undertaking.

3.134.Moreover, CEIOPS considers that the assessment of the availability of group own funds requires an analysis of other factors, including:

• the solvency position of the transferor after a possible transfer of own funds;

• the extent to which own funds can be transferred from an entity without prejudicing the ability of the entity to meet policyholder
claims or damaging its business;

• the liquidity/convertibility of the own funds within an entity into cash outside the entity (which can then be used to support other
entities within the group);

• the regulatory regime itself, which can create barriers to the movement of capital.

Consultation Paper No. 60
Draft CEIOPS’ Advice for Level 2 Implementing Measures on Solvency II: Assessment of Group Solvency

1. Assessment of Group Solvency - Introduction

2. Level 1 Text

3. Advice from CEIOPS

4. Third Countries

5. Calculation Method

6. Fungibility and Transferability

7. Transferability of Own Funds

8. Calculations

9. Annex 1 to Annex 5