Premium finance arrangements can have significant effect on the economics of the insurance contract, in particular in circumstances where the insurance broker provides premium financing to the policy-holders that is in turn used to finance premiums payable in respect of the insurance contracts underwritten by an insurer in the broker’s group. If the broker enters into an agreement with the insurer to pass on to the insurer 100% of the income the broker receives from the premium financing arrangements with policy-holders (such as interest and fees), it seems that the income would constitute “payments that result from premiums” within Article 28(d) of regulation 2015/35 as well as “payments between the insurance undertaking and intermediaries related to insurance obligations” within Article 28(e) of the same regulation and therefore constitute a cash flow that should be included within the best estimate calculation of the insurer. It would be useful if EIOPA could confirm that if the insurer is able to compel the payment of the premium finance income, the income should be included in the contract boundary of the insurance contract even though the insurer is not a direct party to the premium financing arrangement (which is entered into between the broker and the policy-holder and contingent on the policy underwritten by the insurer not being terminated). We understand that such an approach would appear to be consistent with the EIOPA guidance on the boundary of contract, which states that cash flows “arising from” the insurance contract (such as the premium finance income) belong to the contract boundary of the insurance contract.

The obligations related to the insurance contract referred to in Article 18 of the Commission Delegated Regulation (EU) 2015/35 are determined by the insurance policy and not influenced by the pre-financing arrangement. Therefore, the contract boundaries according to Article 18 Delegated Regulation should be determined without consideration of the pre-financing arrangement. The same applies to the dates of recognition and derecognition of the insurance obligations as determined in Article 17 of the Delegated Regulation.

Any income (in the form of fees and interest) payable by the policyholder to an insurance broker under a premium finance arrangement does not constitute a payment to the insurer and can therefore not be regarded as a cash in-flow for the insurer as referred to in Article 77(2) of the Solvency II Directive. Therefore, it cannot be considered as an additional cash flow within the meaning of Article 28(d) of the Delegated Regulation either.

In case the broker has entered into a binding agreement with the insurer to pass on the aforementioned income to the insurer, it could be considered whether such payments (from the broker to the insurance undertaking) are related to the insurance obligation in the sense of Article 28(e) Delegated Regulation, or can be regarded as cash flows resulting from premiums as referred to in Article 28(d) Delegated Regulation, and henceforth need to be taken into account in the cash flow projection used in the calculation of the best estimate. For this purpose, the terms and conditions of both contracts (i.e. the contract between policyholder and broker as well as the contract between broker and insurance company) should be carefully assessed. This assessment should also cover prudency in the sense of article 76(4) of the Solvency II Directive.

In practice, one of the key aspects of such an assessment is whether or not a link between, on the one hand, the income payments from the broker to the insurance company and, on the other hand, the premium obligation of the policyholder to the insurer or the nature and characteristics of the insurance obligations can be established.