Skip to main content
European Insurance and Occupational Pensions Authority

2321

Q&A

Question ID: 2321

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 84

Status: Final

Date of submission: 30 Jul 2021

Question

Please can you confirm whether an insurer holding a repackaged fixed income asset would be considered as indirect exposure to market risk and should therefore apply look-through approach (article 84(2) of the Delegated Acts) for assessing the market SCR of the asset. For example, a default-remote investment repackaging vehicle purchases a US treasury. The vehicle then enters a cross-currency swap with a highly rated bank to transform the future cashflows of the bond into Euros. The vehicle also issues a single fixed income secured note (with no credit tranching) that is purchased by the insurer. This note pays these fixed Euro cashflows to the insurer.

Background of the question

Insurers are purchasing investment notes issued by repacking investment entities such as SPIRE. This entity issues (untranched) secured notes which are purchased by an investor. The issuance proceeds are invested in underlying collateral assets, such as US Treasuries. The entity also can enter derivatives to transform the cashflows of the asset (such as a cross-currency swap). The issued note is a secured, limited recourse obligation to the assets of the entity. The note pays out the combined cashflow profile of the asset & derivative. The entity does not engage in any other business besides investing in assets, transforming the cashflows with derivatives and issuing notes to investors.

EIOPA answer

The look-through approach should be applied to the notes issued by the entity in the following situations:
◦Special purpose entity issues untranched, secured, limited recourse obligation to the assets of the entity. 
◦The issuance proceeds are invested in underlying collateral assets (such as US treasuries) that represent exposures to market risk. 
◦The entity may enter into a derivative transaction to transform the cash flows of the assets. 
◦The entity does not engage in any other business other than investing in the assets, transforming the cashflows with derivatives and issuing notes to investors.
◦The notes pay out the combined cash flows produced by the collateral assets and the derivative transaction.