Question ID: 1329
Regulation Reference: (EU) No 2015/35 - supplementing Dir 2009/138/EC - taking up & pursuit of the business of Insurance and Reinsurance (SII)
Article: 62
Status: Final
Date of submission: 14 Nov 2017
Question
Situation
Insurer A enters a contract with Firm B (not necessarily an insurance or a regulated entity).
The contract stipulates that, if any of the three events defined below occur at any time within the next 3 years, Firm B is committed to buying for €10 million new shares of Insurer A (conducting to a capital increase for Insurer A); the new shares are generally issued with a discount (e.g. 5%) on the average market price recorded on the trading days following the event. In such case, Firm B has to provide the cash to Insurer A within a predefined timeline (e.g. 10 days).
Event 1: Firm A occurs a technical loss above a threshold (e.g. € 1m) for a specific event (e.g. NatCat).
Event 2: The loss ratio of a given LoB is higher than 120% for 2 consecutive semesters.
Event 3: The share price of Insurer A falls below a given value.
Question : Should this contingent capital operation :
(i) be included in the own funds as an AOF, after supervisory approval ?
(ii) be accounted for in the Standard Formula or Internal Model as a way to decrease the SCR?
EIOPA answer
Part 1: The described contract does not meet the requirements for a recognition as ancillary own funds as it is not callable on demand.
Part 2: The instrument does not transfer risk and the application of such instrument in reduction of the SCR is not appropriate. This applies for both internal model and standard formula users.