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European Insurance and Occupational Pensions Authority

2262

Q&A

Question ID: 2262

Regulation Reference: (EU) No 2015/35 - supplementing Dir 2009/138/EC - taking up & pursuit of the business of Insurance and Reinsurance (SII)

Topic: Solvency Capital Requirement (SCR)

Article: Article 171a of the Delegated Regulation 2015/35; EIOPA guidelines on the treatment of market risk exposures in the standard formula; guideline 5 on investments with equity and debt instrument characteristics

Status: Final

Date of submission: 08 Mar 2021

Question

Are alternative investment funds investing in private equity both through ordinary shares and convertible bonds (which is very usual in private equity) eligible to "Long-Term Equity Investment" treatment, should all other criteria be met? More precisely, how should be treated convertible bonds in a private equity fund portfolio? Are they excluded from the"LTEI" treatment? Is there any document focusing on this point?

EIOPA answer

Based on EIOPA's guidelines on the treatment of market risk exposures in the standard formula, and more specifically on guideline 5 on investments with equity and debt instrument characteristics :
◦If the asset can be considered as the composite of discrete components, and if equity risk is one of the risks that applies to the asset for the calculation of the SCR (and all other conditions listed in Article 171a of the delegated regulation 2015/35 are met), then the part subjects to this risk is eligible to the LTE treatment;
◦If it is not possible to consider the asset as the composite of separate components, the determination of which of the standard formula risk sub-modules apply depends on whether the debt or equity characteristics predominate in an economic sense. If the equity risk predominates economically, and the asset respects all other conditions listed in Article 171a of the delegated regulation 2015/35, it is then eligible. However, if the bond risk predominates, the asset cannot be eligible.