The Solvency II regulations do not directly address the circumstance of when an insurance company has a participating interest in another insurance company that contains a ring fenced fund.  

The specific issue is whether the own funds restriction, reflected within the participation’s solo return, is also present within the parent’s solo return.

The participation’s solo balance sheet recognises assets and liabilities on a Solvency II basis (i.e. in accordance with Article 75 and rules relating to best estimate liabilities and risk margin) regardless of whether or not they are within a ring fenced fund.

However, the own funds statement restricts the value of net assets held within a ring fenced fund to the contribution to SCR plus any shareholder transfers.

This treatment enables the balance sheet to reflect the true value of assets and the own funds statement only shows the value to the extent that the underlying assets can support the business.

For the parent, especially in the absence of quoted market prices, its participating interest is recognised using the adjusted equity method which, we believe, is the value of net assets within the participation’s Solvency II balance sheet.  However, this value includes an amount that is restricted within the participation’s own funds schedule and could not effectively be used to support the parent’s business. One option might be to restrict the parent’s own funds in order to reflect that a portion of the subsidiary’s assets are unable to support the parent’s business. However, the parent itself might not contain ring fenced funds and the QRT S.23.04 only allows restrictions to be applied to net assets held directly within its own ring fenced funds (rather than the ring fenced fund being embedded within a participation).  Therefore it appears that assets, restricted within the participation’s solo return, are not also restricted within the parent return.

Please advise whether this understanding is correct and, if not, the mechanism by which only unrestricted own funds are included within the parent’s solo return.