Q1:

The statement in the question is not absolutely clear.

Consider for illustration the following highly stylised example:

An insurer invests in a corporate bond fund and wants to include the fund in the calculation of the capital requirement for spread risk. For simplicity it is assumed that all bonds in the fund have modified durations of 5.

If the look-through can be applied then the insurer has for each bond its value and credit quality step (and of course the modified duration – see above).

Next case is that the look-through cannot be applied but the fund has the following target allocation (figures provide the share in overall value of the fund):

CQS            Percentage  
  2                   20 %
  3                   40 %
  4                   40 %
Based on the overall value of the bonds in the fund it is possible to calculate the spread risk charge.

As a last case consider that the fund has a target allocation of 60 % to investment grade bonds (corresponding to CQS 0 to 3) and 40 % to non-investment grade (CQS 4 and higher). A prudent grouping can be performed by assigning 60 % to CQS 3 and 40 % to CQS 6.

Q2:

When calculating the 20 % the denominator is equal to the total value of the assets of the insurance or reinsurance undertaking. The numerator is the sum of the value of the investments for which data groupings are used.

Q3:

Article 84(3) of the Delegated Regulation requires that the underlying assets are managed strictly according to the target allocation. The insurer has to check whether this requirement is met. Possibly relevant documents in this respect include prospectuses, offering documents and statutes as well as information on the actual holdings of the fund (e.g. from the annual reporting).