Question ID: 2513
Regulation Reference: (EU) No 2015/35 - supplementing Dir 2009/138/EC - taking up & pursuit of the business of Insurance and Reinsurance (SII), (EU) No 2015/2450 - templates for the submission of information to the supervisory authorities
Topic: Own Funds (OF), Reporting Templates
Article: 76(1)a(iii)(1)(a(iii))
Template: S.23.01
Status: Final
Date of submission: 12 Oct 2022
Question
Please can you provide further clarification on the own fund disclosure (i.e. the value disclosed in R0160, C050 S.23.01) of deferred tax (DT) assets that sit within a firms ring fenced funds. In particular the scenario where the deferred tax asset is greater than 15% of the SCR and there is a substantial ring fenced fund restriction. Please can you confirm whether or not the ring fenced fund restriction can be assumed to apply first to the DT asset and then to overall excess assets within the fund.
Background of the question
The combined effect of the ring fenced fund restriction and that tier 3 own funds are eligible to a maximum of 15% of SCR can mean that, a firm which recognises a deferred tax (DT) asset within its ring fenced fund can have lower own funds eligible to meet the SCR than a firm which does not have a DT asset. For example a ring fenced fund with net actuarial liabilities of nil (i.e. it is 100% reinsured), financial assets of €12m and an SCR of €10m will, after the ring fenced fund restriction of €2m, recognise €10m of tier 1 own funds and will be subject to no further eligibility restriction. But if this fund also recognises a DT asset of €7m, it will have net assets of €19m and therefore needs to recognise a ring fenced fund restriction of €9m. If the ring fenced fund restriction is applied first against the tier 1 own funds, then it will have tier 1 own funds of €3m and tier 3 own funds of €7m (i.e. it will still recognise a maximum of €10m own funds but this will now be split between tier 1 and tier 3). Tier 3 own funds are eligible up to a maximum of 15% of SCR (in this case €1.5m) and so the own funds eligible to meet the SCR (i.e. in R0540) will be reduced to €4.5m (€3m+€1.5m). This scenario not only results in firms with lower eligible regulatory capital than had the DT asset not been recognised but also eligible own funds that are less than its SCR.
EIOPA answer
EIOPA agrees that an undertaking is not required to show the full amount of the available Tier III DTAs from a RFF in R0160/C0050 if it does not want to rely on these Tier III own funds and they are not needed to meet the nSCR and consequently reduce the adjustment reported in R0740/C0060 by the same amount. In cases as the one described, the undertaking could just report no RFF Tier III DTAs from the RFF in R0160/C0050 of S.23.01, thus reporting only a €2m "Adjustment for restricted own fund items in respect of matching adjustment portfolios and ring fenced funds" in R0740/C0060.
Consequently, where available Tier III DTAs from a RFF are partially needed to cover the nSCR, the undertaking may report only the needed amount in R0160/C0050 and consequently adjust R0740/C0060 to exclude the part of the DTAs not needed to cover the nSCR.
This second simplified example complements the one in the original question to illustrate the cases where some RFF-DTAs need to be shown in R0160/C0050:
RFF DTAs: €1m
RFF nSCR = €10m
The excess of Tier III RFF OF (net DTAs) over the nSCR is 10.6m – 10m = €0.6m
Therefore, R0160/C0050 (and R0740/C0060) could just not show the €0.6m, i.e. R0160/C0050 = 1m – 0.6m = €0.4m.