Question ID: 1055
Regulation Reference: (EU) No 2015/2450 - templates for the submission of information to the supervisory authorities
Article: 35, 72,75
Template: S.23.01
Status: Final
Date of submission: 31 Mar 2017
Question
We are seeking clarification on the treatment of accrued interest in the valuation of tier 2 subordinated debt.
Article 72 of the Delegated Acts states that subordinated debt should be valued in accordance with Article 75 of the Solvency II Directive – i.e. would be expected to include accrued interest. However accrued interest does not necessarily display the characteristics of tier 2 capital. For example regulatory approval is not required for its repayment and it is extremely short dated.
Can EIOPA please confirm that they are happy for accrued interest to be included in the fair value of own funds (i.e. that it is not separately assessed to ensure that it fulfils the necessary own fund characteristics).
If EIOPA believes that accrued interest is not necessarily Solvency II own funds then can it please explain how it can be excluded from S.23.01 while the same time satisfying Article 72 of the Delegated Acts.
EIOPA answer
The answer below concerns subordinated debt issued by an insurance / reinsurance undertaking rather than subordinated debt of another company which the insurer/reinsurer holds as an investment.
Subordinated debt should be valued in accordance with Article 75 of the Solvency II Directive. This Article and the associated delegated acts do not require that subordinated debt instruments are bifurcated into (1) an underlying instrument or principal and (2) accrued interest. An instrument would be recognised as a single own funds item. Where an instrument is publicly listed on a stock exchange, this would provide the valuation amount to be used.
Similarly, the requirements for Tier 2 own funds in Article 73 of the Solvency II delegated regulation, for example concerning regulatory approval or maturity, should be addressed from the perspective of a subordinated debt instrument as a single own funds item. These features determining classification do not address interest payments, except for the requirement in Article 73(1)(g)(ii) for these payments (distributions) to be deferred when there is non-compliance with the solvency capital requirement.
Therefore, accrued interest is not separately assessed, but the contractual provisions regarding the conditions under which interest payments or distributions can be made to holders of the instrument should be assessed as part of the overall assessment of the features of the own-fund item.