Question ID: 2408
Regulation Reference: (EU) No 2015/35 - supplementing Dir 2009/138/EC - taking up & pursuit of the business of Insurance and Reinsurance (SII)
Topic: Risk concentration
Article: 187(4)
Status: Final
Date of submission: 04 May 2023
Question
In the context of the market risk concentration sub-module and in particular Article 187(4) of Delegated Regulation (EU) 2015/35 and its interaction with other articles, how should an insurance or reinsurance undertaking calculate the risk factor gi for a single name exposure relating to a central government of a non EEA country, which has one bond issued in the local currency and one bond issued in a foreign currency. In an example, an insurance or reinsurance undertaking could
hold two bonds issued by the same central government of a non-EEA country. The first bond “B1” is denominated and funded in the domestic currency of that central government, while the second bond “B2” is denominated in another currency. Both bonds are assigned to credit quality step 3. The insurance or reinsurance undertaking has no other exposures to that central government. How can the insurance or reinsurance undertaking calculate the excess exposure on the single name exposure relating to that central government?
EIOPA answer
The answer to this question is provided by the European Commission.
Delegated Regulation (EU) 2019/981 amended Delegated Regulation (EU) 2015/35, among others, to clarify the sequence of the calculation in the market risk concentration sub-module, namely that “[individual] exposures should […] first be mapped to credit quality steps and relative excess exposure thresholds, and risk factors should subsequently be applied at the level of single name exposures.” (see recital 31 of that Regulation). Where insurance and reinsurance undertakings have exposures of the types referred to in Article 187(4), (4a) or (4b) as well as other exposures not in the scope of the same paragraph to the same counterparty, they should derive an implied credit quality step in order to be able to follow the sequence for the calculation explained above. The implied credit quality step for a specific exposure in the scope of Article 187(4), (4a) or (4b) should be the credit quality step which would produce the same risk factor g i for a single name exposure pursuant to Article 186(1) as the risk factor g i for the specific exposure determined in accordance with Article 187(4), (4a) or, as applicable, (4b).
In the example referred to in the question, the risk factor of 21 % pursuant to Article 187(4) of Delegated Regulation (EU) 2015/35 for bond B1 translates into an implied credit quality step of 2 (as according to Article 186 a credit quality step of 2 for a bond or loan not in the scope of Article 187 results in a risk weight of 21 %). That implied credit quality step for bond B1 and the credit quality step of 3 for Bond B2 form the basis for the calculation of the weighted average credit quality step for the single name exposure in accordance with Article 182 (4) and the determination of the relative excess exposure thresholds and risk factor for the single name exposure pursuant to Articles 185 and 186 respectively.
Disclaimer provided by the European Commission:
The answers clarify provisions already contained in the applicable legislation. They do not extend in any way the rights and obligations deriving from such legislation nor do they introduce any additional requirements for the concerned operators and competent authorities. The answers are merely intended to assist natural or legal persons, including competent authorities and Union institutions and bodies, in clarifying the application or implementation of the relevant legal provisions. Only the Court of Justice of the European Union is competent to authoritatively interpret Union law. The views expressed in the internal Commission Decision cannot prejudge the position that the European Commission might take before the Union and national courts.