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European Insurance and Occupational Pensions Authority

1856

Q&A

Question ID: 1856

Regulation Reference: (EU) No 2009/138 - Solvency II Directive (Insurance and Reinsurance)

Topic: Other

Article: 84(2)(a)

Status: Final

Date of submission: 12 Feb 2019

Question

Assume an insurance company has a wholly owned subsidiary, which sole activity is to own and manage property. The insurance company has provided a loan to the subsidiary.

The delegated act’s (2015/35)[1] article 84 states that:

“1. The Solvency Capital Requirement shall be calculated on the basis of each of the underlying assets of collective investment undertakings and other investments packaged as funds (look-through approach).
2. The look-through approach referred to in paragraph 1 shall also apply to the following:
(a) indirect exposures to market risk other than collective investment undertakings and investments packaged as funds;
(b) indirect exposures to underwriting risk;
(c) indirect exposures to counterparty risk.
3. Where the look-through approach cannot be applied to collective investment undertakings or investments packaged as funds, the Solvency Capital Requirement may be calculated on the basis of the target underlying asset allocation of the collective investment undertaking or fund, provided such a target allocation is available to the undertaking at the level of granularity necessary for calculating all relevant sub-modules and scenarios of the standard formula, and the underlying assets are managed strictly according to this target allocation. For the purposes of that calculation, data groupings may be used, provided they are applied in a prudent manner, and that they do not apply to more than 20 % of the total value of the assets of the insurance or reinsurance undertaking.
4. Paragraph 2 shall not apply to investments in related undertakings within the meaning of Article 212(1)(b) and (2) of Directive 2009/138/EC.”
You could argue that the loan to the subsidiary is an indirect exposure to property risks and therefore subject to the look-through approach, cf. article 84 (2)(a). I have not been able to find any support for this view in the guidelines on look-through approach.

Should the insurance company make use of the look-through approach (i.e. apply the property risk module to the underlying properties)? 

EIOPA answer

Following recital 15 and 45 of the Directive 2009/138/EC (Solvency II) and when conditions of article 84(4) of the Commission Delegated Regulation (EU) 2015/35 are met, we confirm that, in the specific case described, the insurance company should make use of the look-through approach and apply the property risk module to the underlying properties. Indeed, the exposure to a subsidiary which only owns and manages property is, in substance, an “indirect exposure to market risk other than collective investment undertakings and investments packaged as funds”, and should therefore be subject to the look through approach via Article 84(2)(a) DA.
Please note that EIOPA intends to develop further the look-through guideline to consider a more general case than the one specifically described in this Q&A.