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
1.
Introduction
1.1.
Background
1.1. In its letter of 19 July 2007, the European Commission
requested CEIOPS to provide final, fully consulted advice on
Level 2 implementing measures by
October 2009 and recommended CEIOPS to develop
Level 3 guidance on certain areas to foster supervisory
convergence.
On 12 June
2009 the European Commission sent a letter with further guidance
regarding the Solvency II project, including the list of
implementing measures and timetable until implementation.
1.2.
This Consultation Paper provides advice for
the Level 2 implementing measures referred to in Article 232 of the
Solvency II Level 1 text1 (herein “Level 1 text”).
Article
232 refers to the technical principles and methods set out in
Article 218 to 227 and the application of Articles 228 to 231.
1.3. The
scope of this advice includes therefore elements related to the
scope considered to asses the group solvency
(219, 223, 224, 225, 226, 227) and the calculation methods of the
group solvency (217, 218, 220, 221,
222, 225, 228, 229, 230, 231).
The last set of articles include the
calculation of the group SCR, either with the accounting
consolidation based
method or the deduction and aggregation method, and the
assessment of available elements of own funds, including the
fungibility
and transferability of own funds.
The advice also addresses issues
related
to third country entities and/or groups.
1.2. Group solvency assessment in QIS 4
1.2.1. Approaches tested in QIS 4
1.4. From April to July 2008 CEIOPS conducted the fourth
Quantitative Impact
Study on Solvency II (QIS4).
Groups were extensively tested for the
first
time.
However, it should also be noted that the group data were in
general
subject to more caveats than the solo data.
1.2.2. Main findings regarding group solvency assessment in QIS4
1.5. The main findings regarding group solvency assessment in QIS4
can be summarized as follows:
• Diversification effects varied considerably from one group to
another and
depended strongly on the individual group structure.
However, with
an
average diversification effect of 21 percent,
the effect appeared
significant
nonetheless;
• Diversification effects were greater for larger groups than for
smaller
groups;
• The calculation of group excess own funds under the Solvency II
QIS 4
assumptions showed a
slight increase compared with Solvency I;
• The study found that
further work is needed on transferability of
assets,
especially in relation to diversification effects, elements stemming
from
third countries and the with-profits parts of insurance groups;
• Not enough groups reported data for group internal models to
compare
the group SCR assessed with the standard formula and a “current”
internal
model.
1.6. This paper takes into account the results and comments from the
QIS4
exercise in developing a Level 2 framework for group solvency.
It
also addresses some of the main valuation difficulties
that were
expressed on
particular areas of QIS 4.
2. Synopsis of Level 1 Text
2.1. The Level 1 text sets out in Article 232 that
The Commission shall adopt implementing measures specifying the
technical principles and methods set out in Articles 218 to 227 and
the
application of Articles 228 to 231 to ensure uniform application
within the
Community.
Those measures designed to amend non-essential elements of this
directive by supplementing it shall be adopted in accordance with
the
regulatory procedure with scrutiny referred to in Article 304(3).
2.2. These provisions should be read in connection with Recitals 64
to 76 of the
Level 1 text.
2.3. The following paragraphs provide a brief synopsis of the main
topics and
features covered by articles 218 to 231 that are addressed in
subsequent
chapters of this paper.
2.4. Article 218 details the choice of the calculation method for
the group
SCR.
The Accounting Consolidation-based method is the default
method.
The group supervisor shall be able to require the use of the
deduction aggregation
method or a combination of both methods when the default
method is not appropriate.
2.5. Article 219 deals with the interpretation of the concept of the
"proportional share" of related undertakings to be included in the
calculation.
This includes the
recognition of solo solvency deficits
at group
level and includes an explicit power for the group supervisor to set
the
proportional share in some cases (dominant or significant influence
determined by the supervisory authorities and absence of capital
ties).
The
absence of capital ties often refers to mutual undertakings.
2.6. Article 220 ensures there are
no double use of own funds and
addresses
the eligibility of own funds at group level taking into account
potential
availability constraints.
2.7. Article 221 ensures that the
intra-group creation of capital is
eliminated
when calculating group solvency.
2.8. Article 222 states that
the valuation principles that apply at
solo level
also apply at group level.
It allows Member States to
use the
solvency
figures calculated in other Member States.
2.9. Article 223 ensures that
all related (re)insurance undertakings
are
included in the group calculations.
2.10. Article 224 accounts for the
inclusion of intermediate
insurance holding
companies in the group calculations.
2.11. Article 225 details the
equivalence assessment
process for
third country
regimes for the purposes of the deduction and aggregation method.
2.12. Article 226 accounts for the
treatment of related credit
institutions,
investment firms and financial institutions when calculating group
solvency
and allows their inclusion (via methods 1 and 2 described in Annex 1
of
the financial conglomerates directive 2002/87/EC) unless their
deduction
is decided by the group supervisor.
2.13. Article 227 provides for the
possibility to deduct the book
value of a
related undertaking if the information necessary for calculating the
group
solvency of its participating undertaking is not available.
2.14. Article 228 describes the
default method for the group
calculations, the
Accounting consolidation-based method, including the minimum
consolidated group SCR.
2.15. Article 229 describes the
approval process for a group
internal model and
the application of a solo capital add-on in the context of a group
internal
model.
The approval process for a group internal model is covered by
the
advice in the addendum on CEIOPS-CP-37-09 Draft Level 2 Advice on
the
the approval of an internal model.
2.16. Article 230 deals with the application, when the consolidation
method is
used, of capital add-ons at group level.
That advice includes the
description of issues related to group specific risks.
The setting
of a capital
add-on at group level is covered by the advice in the CEIOPS
consultation
paper on capital add-ons (CEIOPS-CP-57/09).
2.17. Article 231 describes the
deduction and aggregation method for
the
group calculations, including the imposition of a capital add-on to
the
aggregated group SCR.
CEIOPS may complement its advice on this
provision to take into account the advice on the treatment of
participations
at solo level, which CEIOPS will consult on in autumn 2009.
3. Advice
3.1. Definition of group and consolidation
3.1. Some of the advice in this paper
may need to be adjusted or
refined to
take account of the reviews of other financial services directives.
For
example, this may affect CEIOPS advice on the entities that fall
within the
scope of group supervision.
3.1.1. Definition of group and scope of consolidation
The definition of a “group” for regulatory purposes
3.2. According to recital 65 of the level 1 text, group supervision
should take
into account insurance holding companies and mixed-activity
insurance
holding companies to the extent necessary.
However, it does not
imply
that Member States are required to apply supervision to those
undertakings considered individually.
3.3. According to Recital 66 of the level 1 text, whilst the
supervision of
individual insurance and reinsurance undertakings remains the
essential
principle of insurance supervision,
it is necessary to determine
which
undertakings fall under the scope of supervision at group level.
3.4. Article 233 states that
“where insurance and reinsurance undertakings are subsidiaries of an
insurance holding company, the group supervisor shall ensure that
the
calculation of the solvency of the group is carried out at the level
of the
insurance holding company applying Articles 218(2) to 231. ”
3.5. Article 218 states that:
“the calculation of the solvency at the level of the group of the
insurance
and reinsurance undertakings referred to in point (a) of Article
211(2)
shall be carried out in accordance with the technical principles and
one of
the methods set out in Articles 219 to 231.”
3.6. Therefore, CEIOPS considers it is important to clarify the
scope of group
supervision refered to in Article 211.
The definitions used in title
III of the
Level 1 text are found in Articles 13 and 210.
3.7. Article 210(1)(c)(i) states that:
“group” means a group of undertakings, that consists of a
participating
undertaking, its subsidiaries and the entities in which the
participating
undertaking or its subsidiaries hold a participation, as well as
undertakings linked to each other by a relationship as set out in
Article
12(1) of the Directive 83/349/EEC (see Annex 3).
3.8. Article 13(15) defines the notion of control according to the
consolidated
accounts Directive 83/349/EEC.
It also defines which entities should
be
taken into account when performing group supervision as:
• participating undertakings in the (re)insurance undertaking;
• related undertakings of the (re)insurance undertaking; and
• related undertakings of a participating undertaking in the
(re)insurance undertaking.
3.9. The level 1 text, like the Insurance Groups Directive 98/78/EC
(IGD),
specifically includes the concept of dominant influence.
3.10.
“Participation” means the ownership, direct or by way of
control, of 20 %
or more of the voting rights or capital of an undertaking (Article
13 (16)).
The supervisory authorities
shall also consider as participation the
holding,
directly or indirectly, of voting rights or capital in an
undertaking over
which a significant influence is effectively exercised.
3.11. The following graph illustrates
the entities that have to be
considered
when performing the group supervision:
3.12. For the purposes
of group supervision, the supervisory
authorities shall also consider as a parent undertaking any
undertaking which, in the opinion of the supervisory authorities,
effectively exercises a dominant influence over another undertaking.
They shall also
consider as subsidiary undertaking any undertaking over which a
parent undertaking effectively exercises a dominant influence
(Article 210(2)).
3.13. Moreover, Article 13 states that :
• (14)
“close links” means
o a situation in which two or more natural or legal persons are
linked by control or participation,
o or a situation in which two or more natural or legal persons are
permanently linked to one and the same person by a control
relationship;
• (15)
“control” means:
o the relationship between a parent undertaking and a subsidiary
undertaking, as set out in Article 1 of Directive 83/349/EEC,
o or a similar relationship between any natural or legal person and
an undertaking;
3.14. For the purpose of group solvency calculation, the regulatory
group could be composed by the (re)insurance undertaking or
insurance holding company at the top level of the group and by its
related insurance/reinsurance/financial undertakings.
Moreover, Article
212(2)
allows insurance supervisors to exclude entities from the
calculation.
3.15. Article 212(2) states that the group supervisor may decide
on
a case-by-case basis not to include a (re)insurance undertaking in
the group supervision referred to in Article 211 in the following
cases:
a) if the undertaking is situated in a third country where there are
legal impediments to the transfer of the necessary information,
without prejudice to the provisions of Article 227;
b) if the undertaking which should be included is of negligible
interest with respect to the objectives of group supervision;
c) if the inclusion of the undertaking would be inappropriate or
misleading with respect to the objectives of the group supervision.
However, where several
undertakings of the same group, taken individually, may be excluded
pursuant to point (b) of the first
subparagraph (of article 212) they must nevertheless be included
where, collectively, they are of non-negligible interest. (…)
3.16. CEIOPS considers that the principle established through the
different definitions and articles is that all parts of the group
necessary to ensure a proper understanding of the group and the
potential source of risks within the group have to be included
within the scope of group supervision.
3.17. CEIOPS notes that similar issues concerning the scope of the
group and the treatment of participations are being dealt with as
part of the Financial Conglomerates Directive (FCD) review being
undertaken by the Joint Committee on Financial Conglomerates (JCFC).
The FCD review focuses on definitions, scope and internal control
requirements, and how these areas and implementation may impact on
the fulfilment of the objectives of the FCD.2
CEIOPS’ advice
3.18. CEIOPS considers that all parts of the group necessary to
ensure a proper understanding of the group and the potential sources
of risks within the group have to be included within the scope of
group supervision.
Mutual or mutual-type associations
3.19. According to Recital 66(a), mutuals and mutual-type
associations, subject to Community and national law, are able to
come together by constituting concentrations or groups.
Those groups are
mostly not constituted with capital ties but through formalised
strong and sustainable relationships, based on contractual or other
material recognition that guarantees a financial solidarity between
the mutuals or mutual-type associations.
3.20. Article 210(1)(c)(ii) states that:
“group” means a group of undertakings
(ii) that is based on the establishment, contractually or otherwise,
of strong and sustainable financial relationships among those
undertakings, and that may include mutual or mutual-type
associations, provided that:
- one of those undertakings effectively exercises, through
centralised coordination, a dominant influence over the decisions,
including financial decisions, of the other undertakings that are
part of the group; and
- the establishment and dissolution of such relationships for the
purposes of this Title are subject to prior approval by the group
supervisor.
The undertaking exercising the centralised coordination shall be
considered as the parent undertaking, and the other undertakings
shall be considered as subsidiaries;
3.21. Where a significant or dominant influence
is exercised through
a centralised coordination, the mutuals and mutual-type associations
shall be supervised according to the same rules
as those provided
for groups constituted through capital ties in order to achieve an
adequate level of protection for policyholders and a level playing
field between groups.
3.22. CEIOPS views centralised coordination within the meaning of
Article 12(1) of the Directive 83/349/EEC.
3.23. Undertakings are usually part of the group by means of holding
voting rights or capital in the subsidiary.
However, for the
purposes of the Level 1 text, they are also part of the group under
the circumstances described in article 12 of the Consolidated
Accounts Directive.
3.1.2 Definition of dominant influence and significant influence
3.24. According to Article 219(2) :
“The group supervisor shall determine, after consultation with the
other supervisory authorities concerned and the group itself, the
proportional share which shall be taken into account in the
following cases:
(a) where there are no capital ties between some of the undertakings
in a group;
(b) where a supervisory authority has determined that the holding,
directly or indirectly, of voting rights or capital in an
undertaking
qualifies as a participation because, in its opinion, a significant
influence is effectively exercised over that undertaking;
(c) where a supervisory authority has determined that an undertaking
is a parent undertaking of another because, in the opinion of the
supervisory authority, it effectively exercises a dominant influence
over that other undertaking.”
3.25. For the purpose of group supervision,
the main characteristic
of a parent subsidiary relationship is control.
Undertakings are
usually controlled by means of a holding in voting rights or capital
in the subsidiary.
3.26. As mentioned above, Article 13(15)(a) of the level 1 text
states that
control means the relationship between a parent
undertaking and a subsidiary undertaking, as set out in Article 1 of
Directive 83/349/EEC, or a similar relationship between any natural
or legal person and an undertaking.
3.27. This Article includes a range of situations in which an
undertaking has a majority of the shareholders' voting rights in
another undertaking (a subsidiary undertaking), including the right
to exercise a dominant influence over the management on a unified
basis.
3.28. According to Article 210(2) an undertaking
should also be
considered as a subsidiary if, in the opinion of the supervisory
authorities, a dominant influence is effectively exercised by its
parent undertakings.
Under the same
article, an undertaking should also be considered as a related
undertaking if a significant influence is effectively exercised by
its parent undertakings.
3.29. According to the Article 33.1 of the Consolidated Accounts
Directive, “an undertaking shall be presumed to exercise a
significant influence over another undertaking
where it has 20 % or
more of the shareholders’ or members’ voting rights in that
undertaking.”
3.30. Therefore according to the Consolidated Accounts Directive
(see Annex 3), significant and dominant influence is defined as
follows:
• Significant influence is where an undertaking has 20% or more of
the shareholders’ or members’ voting rights in another undertaking.
That means the group has the power to participate in financial and
operational policy decisions, but not control them.
• Dominant influence is where an undertaking has more than 50% of
the shareholders’ or members’ voting rights in another
undertaking.
3.31.
Significant and dominant influences in the Level 1 text are
wider concepts than in the Consolidated Accounts Directive.
It refers not only to
the relationships among undertakings, but also to the relationships
between natural persons and undertakings.
This is the approach under
Article 2(13)(b) of the Financial Conglomerates Directive (FCD).
The Level 1 text lays
down quantitative thresholds for dominant and significant influence,
but also states that such an influence may be identified by
supervisors.
3.32. Therefore
there is a need for supervisors to check if the
concept of control used for the establishment of the statutory
consolidated accounts is consistent with the level 1 text.
A dominant influence
may exist for regulatory purposes, but not for the establishment of
the statutory consolidated accounts.
3.33. The
degree of
influence determines whether the entities are included within the
scope of group supervision.
It must be noted that
the assessment of dominant influence could have a direct impact on
the membership of the college of supervisors as in that case, the
entity will be treated as a subsidiary and the supervisory authority
responsible for the subsidiary will become a member of the College
in accordance with article 252(3) if the subsidiary is in the EEA.
3.34.
A holding of 20% or more of the voting rights (directly or
indirectly or through natural persons) will indicate significant
influence.
If the holding is less
than 20%, the investor will be presumed not to have significant
influence unless such influence can be clearly demonstrated.
This significant
influence has also to be assessed when there several intermediary
levels exist.
3.35. If two or more
entities are subject to the significant influence of a parent,
owner company, investor (including a natural person), or common
officers or directors, those entities shall be considered as
related parties with respect to each other.
3.36. Significant and dominant influence is usually evidenced in
one or more of the following ways:
• representation on the board of directors or equivalent governing
body of the investee;
• participation in the policy-making process;
• material transactions between the investor and the investee;
• interchange of managerial personnel;
• provision of essential technical information;
• managed on a unified basis;
• potential voting rights (e.g. exercise of warrants).
3.37. The loss of dominant influence, significant influence or
joint control represents a significant economic event that changes
the nature of an investment.
In the case of a loss
of dominant influence, the entity is no longer considered as a
subsidiary undertaking.
CEIOPS’ advice
3.38. Significant and dominant influences in the Level 1 text are
wider concepts than in the Consolidated Accounts Directive.
They refer not only to
the relationships between undertakings, but also to the
relationships between natural persons and undertakings.
Although the Level 1
text lays down quantitative thresholds, a dominant or a
significant influence may also be identified by supervisors.
3.39. CEIOPS considers that significant and dominant influence is
usually evidenced in one or more of the following ways:
• representation on the board of directors or equivalent governing
body of the investee;
• participation in the policy-making process;
• material transactions between the investor and the investee;
• interchange of managerial personnel; • provision of essential
technical information;
• managed on a unified basis;
• potential voting rights.
3.1.3 Treatment of
participations in the calculation of the group SCR
3.40. The treatment of participations at group level should be
based on the following criteria:
- The classification and method of the participation should be
based on economic principles and not merely on legal grounds.
Control and influence
should always be assessed firstly at group level to establish the
significance of the participations.
This ensures that
situations where several entities of a group have small
participations in the same undertaking are not overlooked.
- In line with the
principle above, the consolidation approach used for accounting
purposes should be used for solvency purposes to the extent they
are based on economic principles suitable for a solvency
assessment.
- The treatment of participated undertakings should be accompanied
by an appropriate treatment under Pillar II and Pillar III.
- The choice of the
method should be made under the proportionality principle as per
Article 28.
3.41. The consolidated accounts is the consolidation based on the
scope of the regulatory group for regulatory purposes (i.e with
the necessary adjustments referring to art 226 and art 227 and any
other measures taken by the group supervisor).
3.42. Regulated financial entities with capital requirements
should be included in the group calculation using the deduction
and aggregation method when it is not possible to include them
through the consolidated accounts.
This is to ensure
there is no circumvention of the sectoral rules.
3.43. One particular area of relevance in the review of the FCD
for insurance group supervision is the identification of
participations and the concept of ‘durable link’.
While ‘durable link’
is not a concept in the Level 1 text, the issue is related to the
identification of significant influence in determining a
parent-participation relationship.
The lack of a clear
definition of ‘durable link’ and its potential inconsistency with
IAS 28 guidelines on significant influence has resulted in MS
interpreting the concept differently, creating some variance in
the application of conglomerate supervision.
CEIOPS notes that the
JCFC is considering ways to promote a more consistent
cross-sectoral approach to the treatment of participations,
including the development of guidance material.
3.44. The JCFC is also assessing the impact of where the inclusion
of participations is a trigger for the identification of the group
as a financial conglomerate.
CEIOPS notes that this
work is relevant to the identification of a group under Solvency
II. Article 212(2) of the Level 1 text is consistent with Article
6(5) of the FCD in providing supervisory discretion in determining
the scope of the group.
The JCFC is also
analysing the impact of the different treatment of participations.
The experiences of the
different treatment of participations at group level for financial
conglomerates is relevant to CEIOPS as it develops its approach
for participations at both solo and group level.
Consolidation methods for (re)insurance undertakings
3.45. There are differences between the statutory accounting
balance sheet and the group regulatory balance sheet as the
reporting serve two different purposes.
For example,
prudential filters have to be developed for the regulatory balance
sheet.
This can make them
hard to compare.
3.46. CEIOPS considers that the statutory accounting balance sheet
should be used as the basis for consolidation.
The starting point for
solvency purposes, where International Financial Reporting
Standards apply, may have to be adjusted to account for changes in
international accounting standards.
Since 1 January 2005,
European listed companies have had to publish, as a minimum,
consolidated financial statements based on the new International
Financial Reporting Standards (IFRS) rules.
The IFRS accounting
developments constitutes one of the input to assess the magnitude,
the quality and volatility of institutions’ eligible own funds.
3.47. Entities which are part of the regulatory group but excluded
from the accounting group must be consolidated in any case for
regulatory purposes (method 1) or they should be taken into
account using the deduction aggregation method.
However, CEIOPS
recognises that often the accounting consolidation group is larger
than the regulatory one.
3.48. Where a participation in an EEA (re)insurer is regarded as a
dominant influence this will imply a full integration of the
participation in the accounts or a proportional integration (if
there is jointly shared control of the participation).
In the case of a fully
integrated participation, minority interests would in turn
contribute to cover part of the group SCR (see
section 3.4.3).
3.49. Where a participation in an (re)insurer is regarded as
significant influence, the contribution to the group SCR should be
calculated as the group’s share in the participation multiplied by
the solo SCR of this participation.
This is consistent with the equity method consolidation where such
participations are accounted for at equity value in the group's
consolidated accounts.
Participations where
significant influence is exercised shall contribute to the group
SCR in the sum of respective share's in each
individual SCR, calculated as referred above in this paragraph.
If the solo SCR of the
current year is not available, then as a proxy the previous SCR
should be used, adjusted for the annual movement in premiums.
3.50. When there is no significant or dominant influence, the
contribution to the group SCR in respect should be calculated by
applying the relevant risk charges in the same manner as in solo
calculations.
Related credit institutions, investment firms and financial
institutions
3.51. Article 226 states :
“When calculating the group solvency of an
insurance or reinsurance undertaking which is a participating
undertaking in a credit institution, investment firm or financial
institution, Member States shall allow their participating
insurance and reinsurance undertakings to apply mutatis mutandis
methods 1 or 2 set out in Annex I to Directive 2002/87/EC.
However, method 1 set out in that Annex shall be applied only if
the group supervisor is satisfied as to the level of integrated
management and internal control regarding the entities which would
be included in the scope of consolidation.
The
method chosen shall be applied in a consistent manner over time.
Member States shall however allow their supervisory authorities,
where they assume the role of group supervisor with regard to a
particular group, to decide, at the request of the participating
undertaking or on their own initiative, to deduct any
participation as referred to in the first paragraph from the own
funds eligible for the group solvency of the participating
undertaking.”
3.52. Regulated asset management companies are covered under
Article 226.
3.53. The treatment of the other financial regulated entities
should be consistent with the Financial Conglomerate Directive (FCD).
CEIOPS interpretation
of the text is that the group is in effect treated as if it were a
financial conglomerate for group solvency purposes.
3.54. The calculation methods set out in the annex 1 of the FCD do
not consider a possible diversification between sectors and
prescribe the use of sectoral rules.
The rationale behind
is that there are different solvency requirements for different
financial entities.
3.55. Therefore, the group solvency of the insurance group would
reflect the combination of the own funds and solvency requirements
of the insurance and non-insurance undertakings based on the
relevent sectoral rules (subject to the calculation method
applied).
3.56. In the case of financial non-regulated undertakings, a
notional capital requirement should be calculated.
Institution for occupational retirement provision (IORP)
3.57. According to recital 95.b of the level 1 text:
'Article 17(2) of Directive 2003/41/EC of the European Parliament
and of the Council of 3 June 2003 on the activities and
supervision of institutions for occupational retirement provision
refers to the existing legislative provisions on solvency margins.
Those references should be retained in order to maintain the
status quo’.
3.58. Similar to credit institutions, investment firms and
financial institutions, IORP undertakings are subject to the
relevant sectoral rules.
Therefore, potential
diversification benefits between IORP undertakings and other
entities within groups should not be considered.
Insurance holding companies and mixed activity insurance holding
companies
3.59. According to recital 65,
“Such group
supervision should take into account insurance holding companies
and mixed activity insurance holding companies to the extent
necessary.
However, this Directive should not in any way imply that Member
States are required to apply supervision to those undertakings
considered individually.”
3.60. CEIOPS considers that controlled insurance holding companies
should be consolidated, that is a full integration of the
participations in the intermediate insurance holding company and
in the insurance undertakings participated by the insurance
holding company.
3.61. An insurance holding company has to be included in the scope
of the regulatory group to prevent down streaming of lower quality
capital items as higher quality capital to regulated subsidiaries.
3.62. As insurance holding companies can be established in a
different jurisdiction than the parent undertaking, cooperation
between supervisors is of utmost importance.
Any material external
market and default risk in holding companies should be addressed.
Non-regulated non-financial entities
3.63. As a general principle, participations in entities outside
the banking and (re)insurance sectors (both dominant and
significant influence) should be consolidated.
However, they should
be included in the group SCR as at solo level.
3.64. Only the ancillary entities4 that are subject to a dominant
influence should be consolidated through a full integration of the
participation in the accounts.
Ancillary entities,
are entities, of which the principal activity consists in:
- owning or managing property;
- managing data-processing services;
- or any other similar activity which is ancillary to the
principal activity of an insurance undertaking
3.65. Non-regulated, non-financial and non ancillary entities in
the group are not subject to solo supervision as single entities.
CEIOPS’ advice
3.66. The treatment of
participations at group level should be based on the following
criteria:
- the classification and method of the participation should be
based on economic principles, not just on legal grounds.
Control and influence
should always be assessed at a group level to determine the
significance of participations.
This ensures that
situations where several entities of a group have small
participations in the same undertaking are not overlooked.
- In line with the
principle above, the consolidation approach used for accounting
purposes should be used for solvency purposes to the extent they
are based on economic principles suitable for a solvency
assessment.
- The treatment of participated undertakings should be accompanied
by an appropriate treatment in Pillar II and Pillar III.
3.67. Regulated
financial entities with capital requirements should be included in
the group calculation using the deduction aggregation method when
it is not possible to include them through the consolidated
method.
This is to ensure
there is no circumvention of the sectoral rules.
3.68. The choice of the method should be made under the
proportionality principle as per Article 28.
3.69. Nevertheless, the following principles may apply for (re)insurance
participations in accordance with IAS/IFRS and national general
accounting principles.
3.70. When the group’s participation in an EEA (re)insurer is
regarded as a dominant influence this will imply a full
integration of the participation in the accounts or a proportional
integration (if there is jointly shared control of the
participation). In the case of a fully integrated participation,
minority interests would in turn contribute to cover part of the
group SCR.
3.71. Where significant influence is exercised the contribution to
the group SCR in respect of the participation should be calculated
as the group’s share in the participation multiplied by the solo
SCR of this participation.
This is consistent
with the equity method consolidation where such participations are
accounted for at equity value in the group's consolidated
accounts.
The contribution of
these participations to the group SCR would be the sum of the
above-mentioned calculations.
3.72. When there is no significant or dominant influence, the
contribution to the group SCR in respect should be calculated by
applying the relevant risk charges in the same manner as in solo
calculations.
3.73. CEIOPS interpretation of Article 226 is that, where the
group supervisor gives permission to apply the FCD calculations,
the group is in effect treated as if it were a financial
conglomerate for group solvency purposes.
3.74. Related credit institutions, investment firms and financial
institutions shall, in accordance with the Financial Conglomerates
Directive, be included in the group calculation using sectoral
requirements and not allow for diversification.
3.75. In case of financial non-regulated undertakings a notional
capital requirement shall be calculated.
3.76. Institutions for occupational retirement provision shall be
included in the group calculation using sectoral requirements and
not allow for diversification.
3.77. As insurance holding companies or mixed activity insurance
holding companies can be established in a different jurisdiction
than the parent undertaking, cooperation between supervisors is of
utmost importance.
Any material external market and default risk in holding companies
shall be addressed.
3.78. Controlled
insurance holding companies or mixed activity insurance holding
companies shall be consolidated, that is a full integration of the
participations in the intermediate insurance holding company and
in the insurance undertakings participated by the intermediate
insurance holding company or mixed activity insurance holding
company is required.
3.79. As a general principle, participations in entities outside
the banking and (re)insurance sectors (both dominant and
significant influence) should be consolidated.
However, they shall be
included in the group SCR as at solo level.
3.80. Controlled ancillary entities should be consolidated, that
is a full integration of the participation in the accounts is
required.
As a general
principle, the capital charge shall be the same as at solo level.
3.81. As a general principle, the capital charge attributed to
entities outside the financial sector shall be the same as at solo
level.
3.82. The proposed accounting treatments for the regulatory
balance sheet (see table in Annex 5) are in line with the
international accounting standards.
CEIOPS welcome any comments on the practicability of those
treatments for the groups using national GAAPs.
Non-availability of the necessary information
3.83. Article 227 states:
Where the information necessary for calculating the group solvency
of an insurance or reinsurance undertaking, concerning a related
undertaking with its head office in a Member State or a
third-country, is not available to the supervisory authorities
concerned, the book value of that undertaking in the participating
insurance or reinsurance undertaking shall be deducted from the
own funds eligible for the group solvency.
In that case, the unrealised gains connected with such
participation shall not be recognised as own funds eligible for
the group solvency.
3.84. If the undertaking is situated in a third country there may
be legal impediments to the transfer of information. Information
concerns may also arise for EEA and third country related
undertakings for which there is only a significant and not a
dominant influence.
3.85. Information concerning a related undertaking available for
the statutory accounting consolidation (e.g. technical provisions
in local GAAP) may not necessarily be available for the regulatory
consolidated accounts.
On that basis, the
group should demonstrate that the information necessary for
calculating the group solvency is adequate. If supervisors are not
satisfied of the adequacy of the information, article 227 shall
apply and then the related undertaking should be deducted.
CEIOPS’
advice
3.86. Information concerning a related undertaking available for
the statutory accounting consolidation (e.g. technical provisions
in local GAAP) may not necessarily be available for the regulatory
consolidated accounts.
On that basis, the
group shall demonstrate that the information necessary for
calculating the group solvency is adequate. If supervisors are not
satisfied of the adequacy of the information, article 227 shall
apply and then the related undertaking should be deducted.
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
nonequivalent 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
thirdcountry
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
nonequivalent
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.
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.
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
viceversa.
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 ( ) j Contr is
calculated as follows
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