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

3.2. Third country

3.87. This section intends to provide CEIOPS initial views on the inclusion of third countries entities in the group calculations.

 

In early 2010, CEIOPS will publish a consultation paper on the criteria to assess:

• the equivalence of third country solvency regimes for the purposes of Article 225;

• the equivalence of third country prudential regimes for the purposes of Article 263 (where the head of the group is outside the EEA).

3.88. Nonetheless, CEIOPS considers it appropriate to outline its initial views on third countries to allow more time for discussion of the issues with groups and third country supervisors.

 

Therefore, this section reflects CEIOPS preliminary thoughts on what is a very important issue for group supervision under Solvency II.

Recognition of diversification with third country entities

3.89. While the Level 1 text provides for the inclusion of third country entities in the group calculations, the recognition of diversification from those entities may be challenging.

 

Issues such as professional secrecy, access to information and the fungibility or transferability of own funds may restrict the recognition of diversification.

 

These restrictions may lead the group supervisor to require the application of the deduction and aggregation method pursuant to Article 218 or a deduction pursuant to Article 227.

 

For these reasons, the equivalence of the third country regime is not the only issue to consider.

3.90. CEIOPS notes that the essential features to make possible the recognition of equivalence might be achieved both through the regulations of the third country and through certain supervisory arrangements, (for example, specific written agreements on confidentiality and transferability).

 

Provided all the necessary features are met, both ways would help the recognition of diversification, even where an undertaking is located in a non equivalent third country.

Consequence of equivalence decisions for the group calculation methods
3.91. This chapter outlines CEIOPS views on the consequences of equivalence decisions for the group calculations.

 

There are two cases to be considered:

1. the head office of the group is in EEA

2. the head office of the group is outside the EEA

3.92. The following tables outline a series of options depending on whether an equivalence decision has been made by the group supervisor or the European Commission.

 

 

 

3.2.2.1 The head of the group is within the EEA and the third country regime is not equivalent

3.93. Default method:

 

The group calculation will be done by the parent undertaking in the EU on consolidated accounts which includes the related
third-country (re)insurance undertakings.

 

As a result, diversification can be recognised on a worldwide level.

 

In this context the chapter on fungibility and transferability of own funds in this paper should be considered carefully.

3.94. The group should be able to demonstrate the availability and quality of the required data and information.

 

The value of the assets and liabilities of the related third-country insurance and reinsurance undertakings should be accurately included in the consolidated accounts to ensure an appropriate group SCR calculation.

 

The assessment of the accuracy of data should be included as part of the supervisory review process.

3.95. Alternative method: The group calculation will be done by the parent undertaking in the EU.

 

The SCR and the own funds of the related third country undertakings will be calculated under the Solvency II rules and added to the aggregated group SCR and own funds.

 

There will be no recognition of diversification.

 

The group should be able to demonstrate the availability and quality of the required data and information.

 

The value of the assets and liabilities of the related third-country (re)insurance undertakings should be accurately included to ensure an appropriate aggregated group SCR calculation.

 

The assessment of the accuracy of data should be included as part of the supervisory review process (SRP).

3.96. Internal model: Supervisors should scrutinise how related third-country undertaking are treated in a group internal model.

 

On-site inspections are important, but may be challenging and this may be an important issue when approving the group internal model.

 

Where there is no equivalence, this issue may be difficult to resolve.

3.2.2.2 The head of the group is within the EEA and the third country regime is equivalent

3.97. Default method:

 

The group calculation will be done by the parent undertaking in the EU on consolidated accounts which includes the related
third-country (re)insurance undertakings.

 

As a result, diversification can be recognised on a worldwide level.

 

In this context the chapter on fungibility and transferability of own funds in this paper should be considered carefully.

 

The group should be able to demonstrate the availability and quality of the required data and information.

 

The value of the assets and liabilities of the related third-country insurance and reinsurance undertakings should be accurately included in the consolidated accounts to ensure an appropriate group SCR calculation.

 

The assessment of the accuracy of data should be included as part of the supervisory review process.

3.98. Alternative method:

 

The group calculation will be done by the parent undertaking in the EU.

 

Where the third-country regime is found equivalent, the SCR and own funds calculated in accordance with the local rules may be included in the aggregated group calculations.

 

There will be no recognition of diversification.

3.99. The group should be able to demonstrate the availability and quality of the required data and information.

 

The value of the assets and liabilities of the related third-country insurance and reinsurance undertakings should be accurately included to ensure an appropriate aggregated group SCR calculation.

 

The assessment of the accuracy of data should be included as part of the SRP.

3.100.Internal model: The equivalence of the third country regime should help with the verification of a group internal model. However, there still may be challenges with respect to access to information and on-site inspections.

Therefore written agreements may be appropriate.

3.2.2.3 The head of the group is outside the EEA and the third country regime is not equivalent

3.101.The Solvency II rules on group supervision apply by analogy where the third country regime is found non-equivalent.

 

The group calculation should be done at the level of the parent undertaking outside the community based on the accounting consolidation method or the alternative method.

3.102.Article 264(2) provides for the use of other methods to ensure the appropriate treatment of undertakings in the group.

 

This provision provides supervisory authorities with the option to require the establishment of an insurance holding company which has its head office in the Community.

 

The group supervision rules of the Level 1 text can be applied at the level of this insurance holding company which would
establish an EEA subgroup.

 

This ensures that the parent undertaking at Community level is subject to Solvency II requirements.

3.103.Where this option is exercised, it is important that supervisors consult the ultimate parent undertaking in determining the location of the holding company.

 

This is to ensure that the outcome does not have any unintended consequences or generate unnecessary regulatory costs for
the firm.

3.2.2.4 The head of the group is outside the EEA and the third country regime is equivalent

3.104.Article 263(a) states that Member States shall rely on the equivalent group supervision exercised by the third-country supervisory authorities.

 

This highlights the importance of cooperation arrangements with third country supervisors as the third country group supervisor is responsible for consolidated supervision.

3.105.If a third Country is found to be equivalent, they should be subject to the same criteria by all CEIOPS Member States and the same solvency approach should be applied. Similarly, where a third country is found to be non equivalent, it would be sensible to apply that decision across all Member States.

CEIOPS’ advice

3.106.While the Level 1 text provides for the inclusion of third country entities in the group calculations, the recognition of diversification from those entities may be challenging.

 

Issues such as professional secrecy, access to information and the fungibility or transferability of own funds may restrict
the recognition of diversification.

 

These restrictions may lead the group supervisor to require the application of the deduction and aggregation method pursuant to Articles 218 or a deduction pursuant to Article 227.

For these reasons, the equivalence of the third country regime is not the only issue to consider.

3.107.CEIOPS notes that the essential features to make possible the recognition of equivalence might be achieved both through the regulations of the third country and through certain supervisory arrangements, (for example, specific written agreements on confidentiality and transferability).

 

Provided all the necessary features are met, both ways would help the recognition of diversification, even where an undertaking is located in a non equivalent third country.

3.108.CEIOPS considers that issues concerning third country entities should be assessed in conjunction with the chapter on transferability of capital in this paper.

3.109.The group shall be able to demonstrate the availability and quality of the required data and information.

 

This includes the accuracy of the information used to calculate the group SCR.

 

The assessment of the accuracy of data shall be included as part of the supervisory review process.

3.110.CEIOPS considers that MoUs may enhance access to information and promote concerted operations and practices.

3.111.CEIOPS considers that consistent equivalence decisions among Members states on equivalence are desirable.
 

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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

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