|
  
Group Support Regime and Group Supervision
from the Solvency ii
Association, the largest Association of Solvency ii Professionals
in the world
Consultation
Paper No. 60
Draft CEIOPS’ Advice for Level 2 Implementing
Measures on Solvency II: Assessment of Group Solvency
3.4.3 Fungibility of own funds
3.151.According to the Level 1
text, own funds of a related undertaking with limited fungibility
cannot be fully included for group solvency purposes,
but
may be
included in the calculation only in so far as they are eligible for
covering the SCR of the related undertaking.
3.152.This means that
they can
be considered available to cover the SCR of the participating
undertaking up to the contribution of the SCR of the related
undertaking to the group SCR.
3.153.Without prejudice to the
elimination of the double use of eligible own funds and intra-group
creation of capital, group own funds are limited to the own funds
(fungible or not) covering the local SCR and local excess own funds
which are able for meeting any commitments of the group.
3.154.Deducting non-fungible
own funds in excess of the contribution to the group SCR of the SCR
of the undertaking where they are located from the group own funds
allows identification and transparent management of the impact of
own funds fungibility with regards to the management of own at group
level.
It also provides supervisors
with a better understanding of the diversification effect.
3.155. As a result, for the
calculation of group own funds, it is necessary on a case-by-case
basis to split the own funds into fungible and non fungible own
funds.
3.156.Article 220 (2) states
that the following may only be included in the calculation of group
own funds for covering the group SCR so far as they are eligible for
covering the solo SCR of the related undertaking concerned:
a) surplus funds falling under
Article 90(2) arising in a related life insurance or reinsurance
undertaking of the participating
insurance or reinsurance undertaking for which the group solvency is
calculated;
b) any subscribed but not
paid-up capital of a related insurance or reinsurance undertaking of
the participating insurance or
reinsurance undertaking for which the group solvency is calculated.
3.157.CEIOPS notes that in QIS
4 and in ongoing discussions with stakeholders, that both groups and
supervisors consider it is useful to identify a list of fungibility
and transferability constraints, including their impact on the
calculation of group own funds, in order to ensure a consistent
implementation of Solvency II.
CEIOPS’
advice
3.158.CEIOPS considers that the following
items may only be included in the assessment of group solvency in so
far as they are eligible for covering the solo SCR of the related
undertaking concerned:
•
reserves at solo level subject to restricted availability
• own
funds at solo level with restricted availability
• some
types of with-profit business
• own
funds in ring-fenced funds
•
hybrid capital and subordinated liabilities
•
minority interests
•
ancillary own funds
•
deferred tax assets
3.159.CEIOPS considers that if the supervisory
authority finds that some of the eligible own funds of a related
undertaking, other than those indicated in the previous paragraphs,
are not effectively available for commitments of the parent
undertaking, these own funds may also be taken into account as
eligible own funds for covering the group SCR only to cover the SCR
of the related undertaking.
3.160.The necessity of the assessment of the fungibility of elements
of own funds will depend on their recognition in the prudential
balance sheet (cf CEIOPS advice on the valuation of assets and other
liabilities CEIOPS-CP-35/09).
With-profit business
3.161.In
QIS4, some supervisors expressed concerns over
the inclusion of with profit business in the calculation of
diversification effects at group level.
In their
opinion, they should not be attributable to
the group own funds.
Other
supervisors highlighted that the treatment of
with-profit business is not homogeneous across the EEA and
that such differences should be taken into account.
3.162.As
a result, the straight application of the standard formula to the
consolidated accounts might be quite complicated and difficult to
interpret.
In its
paper “Background paper for cross-border insurance groups on the
treatment of with-profit business in QIS4”7, CEIOPS provided - for
the purposes of the QIS4 - a guide on the treatment of such products
with some national guidance in order to take into account the
different features of with-profit business across the EEA.
3.163.Certain with-profit businesses contain items of eligible own
funds and/or profit sharing mechanisms within the technical
provisions, which can only be used to cover
the liabilities for a limited set of policyholders.
In this
case, the parent undertaking may not be able to extract own funds,
including own funds in excess of the SCR attributable to the
relevant business, and hence the own funds are non-fungible.
3.164.The owns funds in the related undertaking relating to other
types of with profit business will only be capable of being
extracted by the parent undertaking under certain conditions.
In
this case the own funds are considered not fully fungible and any
restrictions have to be taken into account.
3.165.The own funds related to with-profit business where the value
of the policyholders’ benefit is not based on the value of the
assets assigned to the segregated fund (i.e. it is not “unitised”),
but on the return of the assigned assets, are calculated in
accordance with specific rules.
The own
funds can be considered available to absorb losses of other entities
of the group only when appropriate mechanisms are triggered
to avoid damaging the policyholders'
contractual right to receive the return expected in normal
circumstances.
3.166.Moreover, the contribution of the with-profit to the group SCR
has to take into account a reduction due to the recognition of
diversification benefits (as tested in QIS3 and QIS4).
CEIOPS’
advice
3.167.When
own funds related to with-profits are only available to cover
capital requirements in one undertaking of the group they should be
included in the calculation of the group own funds only in so far
they are eligible for covering the contribution to the SCR of the
related undertaking to the group SCR.
3.168.Moreover, the contribution of the with-profit to the group SCR
has to take into account a reduction due to the recognition of
diversification benefits (as tested in QIS3 and QIS4).
Ring-fenced funds
3.169.The consolidated
calculation of group solvency assumes that all own funds/losses
within undertakings can be pooled in a group like within a single
entity.
However there are cases
where
own funds held within a ring fenced fund can only be used to cover
the losses associated with the ringfenced fund.
3.170.CEIOPS considers that in
principle own-funds within a ring-fenced fund can only contribute up
to the proportional contribution of the ring-fenced fund capital
requirement in the undertaking’s SCR.
CEIOPS’ advice
3.171.CEIOPS considers that
the treatment of ring fenced funds at group level should follow the
treatment at solo level.
3.172.CEIOPS considers that in
principle own-funds within a ring-fenced fund can only contribute up
to the proportional contribution of the ring-fenced fund capital
requirement in the undertaking’s SCR.
Ancillary Own Funds
3.173.Under Article 220(5),
any ancillary own funds (AOF) of a related (re)insurance undertaking
for which the group solvency is calculated may only be included in
the calculation in so far as the AOF have been duly authorised by
the supervisory authority responsible for the supervision of that
related undertaking.
3.174.Without prejudice of
Article 220(2), CEIOPS consider that the group supervisor in
cooperation with the College of supervisors should assess the
availability of AOF, and especially the delay and the cost of
availability, to cover the SCR of the participating (re)insurance
undertaking for which the group solvency is calculated.
Those AOF may be included in
the calculation only in so far they are eligible for covering the
SCR of the undertaking.
Hybrid capital and
subordinated liabilities
3.175.As noted in QIS4,
there
is a broad spectrum of capital instruments that are potentially
eligible in own funds at solo level and group level.
These include equity
instruments with debt-like features and debt instruments with
equity-like features.
3.176.The industry,
international rating agencies, and supervisors commonly refer to
these instruments as “hybrid capital”, that is, capital instruments
which combine features of both debt and equity.
3.177.There is
some divergence
in the approach to subordinated liabilities.
Some Member States consider
subordinated liabilities to be hybrid capital instrument while
others consider subordinated liabilities to be distinct from hybrid
capital instruments.
3.178.QIS4 found that the
proportion of hybrid capital instruments and subordinated
liabilities is on average 13% at group level compared to an average
of 2% at solo level.
3.179.This higher percentage
at group level was expected as often undertakings raise capital at
the parent company or holding level and down-stream and/or lend it
to subsidiaries in the form of higher quality capital.
3.180.CEIOPS considers that
hybrid capital and subordinated debts cannot, in principle, be
considered as available to cover the SCR of the participating
undertaking if it is not issued or by the ultimate parent
undertaking of the group.
This depends on the rights of
the subscribers on the revenues of these instruments.
In particular, subordinated
liabilities issued by group undertakings are normally only available
to support the business of the
issuing undertaking because of its legal liability to subscribers to
those debts.
3.181.Consequently,
CEIOPS
considers that hybrid capital instruments and subordinated
liabilities issued by undertakings other than the ultimate parent
undertaking should be admitted to contribute to the coverage of the
group SCR only in so far they are admitted for covering the SCR of
the related undertaking.
3.182.Moreover, the
contribution of the hybrid capital and subordinated liabilities to
the group SCR has to take into account a reduction due to the
recognition of diversification benefits (as tested in QIS3 and
QIS4).
3.183.The same instruments
issued by an undertaking operating in another financial sector can
contribute to the coverage of the group SCR only in so far they are
eligible to meet the capital adequacy requirements as provided for
in applicable sectoral legislation, within the limits provided
therein.
3.184.In order to make this
assessment, the cooperation and exchange of information among the
supervisory authorities in the colleges of supervisors is essential.
CEIOPS’ advice
3.185.CEIOPS considers that
hybrid capital and subordinated debts cannot, in principle, be
considered as available to cover the SCR of the participating
undertaking if it is not issued or by the ultimate parent
undertaking of the group.
This depends on the rights of
the subscribers on the revenues of these instruments.
In particular, subordinated
liabilities issued by group undertakings are normally only available
to support the business of the
issuing undertaking because of its legal liability to subscribers to
those debts.
3.186.CEIOPS considers that
hybrid capital instruments and subordinated liabilities issued by
undertakings other than the ultimate parent undertaking shall be
admitted to contribute to the coverage of the group SCR only in so
far they are admitted for covering the SCR of the related
undertaking.
Moreover the contribution of
the hybrid capital and subordinated liabilities to the group SCR has
to take into account of a
reduction due to the recognition of diversification benefits (as
tested in QIS3 and QIS4).
3.187.The same instruments
issued by an undertaking operating in another financial sector can
contribute to the coverage of the group SCR only in so far they are
eligible to meet the capital adequacy requirements as provided for
in applicable sectoral legislation, within the limits provided
therein.
Minority interests
3.188.Minority interests and other shareholders of subsidiaries
may
affect the ability to transfer own funds out of a subsidiary.
3.189.Minority interest
represents shares owned by third parties (or equity interest of
outside shareholders) in a consolidated subsidiary.
It represents
the portion of
the profit or loss and net assets of a subsidiary attributable to
equity interests that are not owned, directly or indirectly through
subsidiaries, by the parent.
3.190.Minority interest shares
in any excess of own funds (above the solo SCR) of the consolidated
entity are not available for use elsewhere in a group.
Therefore
a minority
interest's share in any excess own funds should only be included in
group own funds up to the minority interest’s proportional share in
the SCR of the insurance entity belonging to the group.
3.191.As a result, any excess own
funds over capital requirements relating to a minority interest is
not available at group level.
3.192.Moreover, the contribution of the minority interests to the
group SCR has to take into account of a reduction due to the
diversification benefits (see Annex 1, as tested in QIS3 and QIS4).
CEIOPS’ advice
3.193. A minority interest's share
in any excess own funds should only be included in group own funds
up to the minority interest’s proportional share in the SCR of the (re)insurance
entity belonging to the group.
Moreover, the contribution of the
minority interests to the group SCR has to take into account of a
reduction due to the diversification benefits.
3.194. Any excess own funds over capital requirements relating to a
minority interest is not available at group level.
Own funds in non-EEA countries
3.195. All (re)insurance undertakings of the group are captured in
the group SCR calculations, including any non-EEA (re)insurance
undertakings.
3.196.Eligible own funds in non-EEA countries are available to
meet
the SCR of the undertaking in which they are held
but there may be
situations where the own funds in excess of the SCR are not
available for use elsewhere in the group.
3.197.In such cases eligible own funds in non-EEA are available to
meet the SCR of the participating undertaking only in so far they
are admitted for covering the SCR of the non-EEA undertaking and any
excess own funds is not available at group level.
3.198. In particular, these situations may arise
when there are
restrictions to the fungibility and transferability of own funds.
The equivalence of the third
country regime may also impact on the availability of excess own
funds in the undertaking.
3.199.Where such restrictions arise, CEIOPS considers it appropriate
that any excess own funds over capital requirements relating to the
third country (re) insurance undertaking are considered unavailable
at group level.
3.200.Moreover, the contribution of the excess of non-EEA entities
to the group SCR has to take into account a reduction due to the
recognition of diversification benefits (as tested in QIS3 and
QIS4).
CEIOPS’ advice
3.201. Where there are restrictions on the fungibility or
transferability of the excess own funds over the capital requirement
in non-EEA (re)insurance undertakings, the own funds (in excess of
the contribution of that undertaking to the group SCR) should not be
included in the calculation of group own funds.
3.202.Moreover, the contribution of the excess of non-EEA entities
to the group SCR has to take into account a reduction due to the
recognition of diversification benefits (as tested in QIS3 and
QIS4).
3.4.4 Transferability of own funds
3.203.For the elements of own funds that are considered fungible,
supervisory authorities have to assess in a second step whether the
assets covering those elements can effectively be transferred.
Transferability is the actual
ability of one entity to transfer assets and/or liabilities to
another entity within the group.
3.204.Undertakings may transfer their own funds provided that the
regulatory and statutory conditions are met.
Basic own funds (BOF)
cannot be transferred from an undertaking if
the transfer would cause the undertaking to (cumulative
conditions):
• no longer cover its SCR,
• no longer respect the own funds tier limits (especially no longer
have enough BOF to cover the MCR).
3.205.BOF which are not required to be held in the subsidiary (above
the regulatory requirements) are potentially transferable.
However, they may not be
transferable due to current or foreseen material, practical or legal
restrictions to the prompt transfer of own funds or repayment of
liabilities, particularly in crisis situations.
3.206.These restrictions may affect, inter alia:
• the likely costs that will be deducted from the transferable own
funds at the point of the transfer (e.g. tax obligations);
• the likely restrictions on the
transfer of own funds at the point of the transfer (e.g. company law
restrictions);
• the timing needed to transfer own funds;
• the lack of transferable assets to recover the financial position
of another entity in difficulty;
• in more extreme cases, the
ability of a parent company to extract own funds from an entity at
all.
3.207.Transferability constraints may significantly decrease the
amount of available own funds (or cancel the interest of the
operation) that was supposed available to cover the SCR of the
participating undertaking.
3.208.The assessment of transferability across the legal entities of
the group, is essential in order to evaluate the available group own
funds.
A sound understanding of the
transferability of own funds should also improve the management of
crisis situations.
3.209.When assessing the group eligible own funds, the supervisors
concerned will need to consider the extent to which own funds may be
considered transferable between entities within the group without
jeopardising the financial and solvency position of the transferor.
3.210.Moreover, a conflict of interest can arise between the use of
assets to provide financial support to the policyholders of an
entity which is in financial difficulty and the possible threat this
may cause to the policyholders of the entity providing the support.
3.211.If the supervisory authority
ascertains that the transfer produces or runs the risk of producing
negative effects on the undertaking’s solvency or can undermine the
interests of the policyholders, it shall require the undertaking to
take the measures necessary to eliminate such negative or
detrimental consequences.
Transferability of own funds in crisis situations
3.212.The impediments to the transferability of own funds are
particularly relevant in crisis situations where
the ability to act
rapidly is critical.
While the mechanisms for
transferring own funds may work well under normal conditions, as
soon as one or more undertakings in the group are in financial
difficulty the transferability of that capital may become difficult
(e.g. due to legal restrictions, etc).
3.213.The group must assess the transferability of own funds in
stress scenarios, including the timing and the costs with which the
own funds can be allocated in those scenarios.
3.214.When part of the group is stressed by adverse conditions, the
liquidity of that part may come under pressure and hence the
transfer of assets that may have been promptly transferable under
normal conditions, may require more time or additional cost.
For example, it may take an
undertaking time to sell some fixed assets, like land or buildings,
before it can realize their value and this may make the transfer of
capital far less straightforward that would normally be the case.
3.215.This implies the following requirements on a group:
• scenario analysis on the impact of stress events on the
transferability of own funds in the group. The analysis of stress
scenarios should consider the impacts on all affected legal
entities;
• a strategy on how the group would manage financial stress in one
or several legal entities;
• contingency plans in place on how to raise and allocate capital in
the event of losses that threaten the position of the group.
3.216.The supervisors concerned should assess the management of
liquidity at group and solo level.
This should include an assessment
of the liquidity position of the group and solo under stressed
conditions.
CEIOPS’ advice
3.217.The assessment of the transferability of own funds is not a
simple nor a static consideration. It is likely to change depending
on the capital management of the group, different risk scenarios and
on market situations.
3.218.If the supervisory authority ascertains that the transfer of
own funds produces or runs the risk of producing negative effects on
the undertaking’s solvency or can undermine the interests of the
policyholders, it shall require the undertaking to take the measures
necessary to eliminate such negative or detrimental consequences.
3.219.Impediments to the transferability of own funds are
particularly relevant in crisis situations where the ability to act
rapidly is critical.
While the mechanisms for the
transferability of own funds may work well under normal conditions,
as soon as one or more undertakings in the group are in financial
difficulty the transferability of that capital may become difficult.
3.220.The supervisors concerned should assess the management of
liquidity at group and solo level.
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
Return to
Index
| 
