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

3.4.1 Fungibility and Transferability

3.135.This section provides advice on the treatment of certain elements of own funds.

It takes into account the potential restrictions on the fungibility and transferability of own funds that may exist as a consequence of the underlying nature of the capital elements and of the legal and regulatory environment in which the undertakings operate.

CEIOPS’ advice

3.136.In order to assess the available group own funds, CEIOPS interprets the term ‘effectively be made available’ in Article 220(3) to refer to two related concepts: fungibility and transferability.

3.137.CEIOPS considers that for the purposes of this advice:

• Fungibility means that an element of own funds can fully absorb any kind of losses within the group, regardless of the undertaking within which those own funds are held or where the commitments arise (in compliance with the local prudential and legal rules).

Fungible own funds in this sense are thus not dedicated to a certain purpose;

• Transferability is the actual ability of one entity to transfer assets and/or liabilities to another entity within the group.

Transferability leads to increase/decrease of own funds in a solo entity without increasing/decreasing the group own funds. The time and the costs of the transfer have to be taken into account.

3.138.These two steps are linked but distinct from each other.

Indeed, own funds may be transferable but not fungible in the context of Solvency II and vice versa.

3.139.In principle, eligible own funds at group level are assessed following a five steps approach for the default method (illustrated in Annex 2):

1. The solo balance sheets are consolidated according to the accounting consolidation rules (IGT and internal creation of capital are eliminated);

2. The regulatory consolidated balance sheet is calculated by applying prudential filters:

i. Adjustment of the scope of supervision (if different from the scope of accounting consolidation);

ii. Treatment of related credit institutions, investment firms and financial institutions (Article 226);

iii. Treatment of related undertakings for which the necessary information is unavailable (Article 227);

iv. Any other necessary adjustments or deductions.

At this stage, the group SCR is calculated on the regulatory consolidated balance sheet;

3. Assessment of the contribution of each undertaking to the group SCR:

The contribution to group own funds of an undertaking’s unavailable own funds is then limited by its contribution to the group SCR (see below for the calculation of that contribution).

For each entity included in the group calculation, the excess unavailable own funds is the difference, if positive, between its
unavailable own funds and its contribution to the group SCR.

4. The available group own funds (AGOF) to cover the group SCR is calculated by deducting from the regulatory group own funds the sum of excess unavailable own funds (determined for all entities of the group);

5. In order to be eligible to cover the group SCR the AGOF must comply with the tiers limits laid out in the directive.

3.140.For the deduction and aggregation method, only eligible elements at solo level can be considered as eligible at group level in accordance with Article

231. No adjustment for diversification effects is needed.

3.4.2 Limitation to the inclusion of solo excess non available own funds in the available group own funds

3.141.When using the accounting consolidation-based method, the extent to which the group excess can be increased by group diversification effects must be reduced by the amount of the diversification effect that is nonavailable (i.e. the own funds representing the increased excess that can not be used to meet solvency requirements in other parts of the group).

3.142.In order to assess availability, it is necessary to undertake a theoretical allocation of the diversification benefits to determine the contribution of each undertaking to the group SCR.

3.143.The contribution to Group SCR from entity j (Contr_j) is calculated as follows:

where the index (i) covers all entities of the group included in the calculation of the Group SCR . The second term is a proportional
adjustment due to diversification effects (see below).

Option B (only for group internal model):

The group may use a group specific assessment of the contributions of the related undertakings where a group internal model has been used for the assessment of the Group SCR .

In any case, the sum of all individual contributions shall be equal to the group SCR.

3.144.The allocated diversification effects (which do not affect the solo SCR) should then be assessed for any restrictions on its availability.

The sum of the excess of own funds identified as unavailable should then be deducted from group own funds.

3.145.Moreover, available eligible own funds within the group may increase as a result of an increased availability of capital within the group due to the internal reinsurance arrangement (cf. section on available own funds).

CEIOPS’ advice

3.146.When using the accounting consolidation-based method, the extent to which the group excess can be increased by group diversification effects must be reduced by the amount of the diversification effect that is nonavailable (i.e. the own funds representing the increased excess that can not be used to meet solvency requirements in other parts of the group).

3.147.In order to assess availability, it is necessary to undertake a theoretical allocation of the diversification benefits.

3.148.This shall by default be done by a proportional allocation when the standard formula is applied.

3.149.The group may use a group specific assessment of the contributions of the related undertakings where a group internal model has been used for the assessment of the group SCR.

In such a case, the sum of all individual contributions shall be equal to the group SCR as when using the proportional allocation when the standard formula is applied.

3.150.The allocated diversification effects (which do not affect the solo SCR) should then be assessed for any restrictions on its availability.

The sum of the excess of own funds identified as unavailable should then be deducted from group own funds.

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