Question ID: 2549
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: 23; 83; 138; 176; 183
Status: Final
Date of submission: 03 Jan 2023
Question
The life insurance company grants loans against a life insurance policies, i.e. loans that are secured by the policy obligation that the insurance company owes to the insured/borrower.
Example.
The redemption value of the life insurance policy is 100, and the company gives a loan in the amount of 90 and uses the policy as an insurance instrument for the payment of the loan.
The amount of the approved loan can be a maximum of 90% of its cash value, whereby the lender ensures that in case of non-payment of the borrower's obligations under the given loan, there is no risk of non-payment, that is, no counterparty risk. In case of non-payment, the lender will "collect" the claims on the given loan by canceling the obligation (which is greater) towards the borrower.
It is clear from the above description of the job of granting a loan based on a life insurance policy that there is no possibility or risk that the lending company will suffer any loss or loss of basic own funds. A loan from the redemption value is essentially equal to a Lombard loan, i.e. a loan secured by a deposit.
Directive 2009/138 Art. 13, point 35 stipulates the following: "
‘concentration risk’ means all risk exposures with a loss potential which is large enough to threaten the solvency or the financial position of insurance and reinsurance undertakings ".
Delegated Regulation 2015/35 Art. 183, paragraph 2, stipulates the following:
" For each single name exposure i, the capital requirement for market risk concentration Conc i shall be equal to the loss in the basic own funds that would result from an instantaneous decrease in the value of the assets corresponding to the single name exposure ".
Given that the risk of loss or loss of basic own funds does not exist, and respecting the principle of substance over form, is it possible to exclude the loans in question from the calculation of the capital requirement for the market risk concentration submodule?
EIOPA answer
It is assumed that in the example provided the policyholder loan is a loan as referred to in Article 176 of Commission Delegated Regulation (EU) 2015/35 (DR). This loan should be taken into account in the calculation of the market risk concentration sub-module.
In order to take into account in that calculation that the lender can cancel the insurance obligation towards the policyholder, consideration should be given to all relevant contractual aspects and potential restrictions, especially regarding enforceability and timing of the cancelation. These considerations should include in accordance with Article 83(2)(a) DR the requirements on management actions set out in Article 23 DR.
Following the scenario in which there is an instantaneous decrease in the value of the loan, the market risk concentration sub-module should take into account any change in value of the obligation to the policyholder so long as those requirements on future management actions are complied with in relation to the cancellation of that obligation. Consideration should be given in particular to the enforceability of the cancellation of the obligation towards the borrower, for example, whether the cancellation will be accepted by the liquidator in situations where that is relevant.