Question ID: 2363
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: 191(4)
Status: Final
Date of submission: 26 Nov 2021
Question
According to Paragraph 4 the balances of a regular mortgage for a newly purchased property and a bridge loan* on an unsold property should be added together to compare against the threshold of EUR 1 million, if they are funded by the same insurance undertaking. One could argue that given the temporary nature of the bridge loans, it does not seem practical to temporarily not classify these loans as type 2 and then to classify the regular mortgage as type 2 again after repayment of the bridge loan. For this reason, a separate assessment in the case of bridge loans seems reasonable, provided that this practice remains limited in a material sense and any risk that this arises from this is properly monitored.
This assumes that the regular mortgage loan for a newly purchased property remains below EUR 1 million.
Can you please confirm if you share this view as well?
* Bridge Loan: A bridge loan is used to temporarily finance the purchase of a new property. It uses part of the equity built up in an unsold previous property as collateral. The initial maturity of a bridge loan is 12 months and can be extended for another 12 months. Typically the duration is < 6 months
Background of the question
Article 191 of REGULATION (EU) 2015/35, states that residential mortgages shall be treated under the “Counterparty default risk", provided that mortgages fulfil requirements stipulated in Article 191 Paragraphs (2) to (13). Paragraph 4 states:
The total amount owed to the insurance or reinsurance undertaking and, where relevant, to all related undertakings within the meaning of Article 212(1)(b) and (2) of Directive 2009/138/EC, including any exposure in default, by the counterparty or other connected third party, shall not, to the knowledge of the insurance or reinsurance undertaking, exceed EUR 1 million. The insurance or reinsurance undertaking shall take reasonable steps to acquire this knowledge.
We interpret that the EUR 1 million threshold, refers to the maximum exposure an insurance undertaking is allowed on a borrower, in order to satisfy the requirement of Paragraph 4 and that this threshold does not refer to the total amount owed on a mortgage and/or other loans by the borrower, including amounts owed to any other funders.
EIOPA answer
Article 191(4) of the Commission Delegated Regulation (EU) 2015/35 states that the threshold of EUR 1 million includes all exposures to the counterparty or other connected third party (in the example regular mortgage and bridge loan). Temporary deviations from this threshold are not provided for.