Question ID: 3522
Regulation Reference: (EU) No 2015/35 - supplementing Dir 2009/138/EC - taking up & pursuit of the business of Insurance and Reinsurance (SII)
Article: 55(2)
Status: Final
Date of submission: 05 Mar 2026
Question
We have a captive client in Europe, writing a single inwards property policy, covering a single insured (its parent). The policy covers the primary layer above a local deductible. This policy is a standard commercial property policy, equivalent to what could be purchased directly from an insurer. A policy is issued to the insured via a highly-rated fronter. The captive then issues a policy to the fronter, whereby 100% of the risk is then ceded to the captive so that no underwriting risk is retained by the fronter. Therefore, the legal form of the captive's policy to the fronter is that of a proportional reinsurance contract. However, the economic substance remains the direct commercial risk of the parent entity. We have consistently allocated this to SII LoB in line with the economic risk (in line with Article 55 of the Delegated Acts), i.e. to the direct LoB 7 (Fire & other damage to property insurance) and not to LoB 19 for proportional reinsurance contracts. Would you agree with this approach? For similar cases, where a captive writes a policy for a single insured, but less than 100% of the business is ceded, we would also consider the allocation to the direct LoBs in line with the economic substance of the risk. Would you also agree with this approach? Question 3180 discusses only the allocation of treaty reinsurance policies to LoB, however does not elaborate on the specific circumstance of captives writing a direct commercial risk via a fronting arrangement. Therefore, we don't feel that this question is relevant for our specific circumstance.
Background of the question
Paragraph 2 of Article 55 of the EU 2015/35 Delegated Acts state the following: "The assignment of an insurance or reinsurance obligation to a line of business shall reflect the nature of the risks relating to the obligation. The legal form of the obligation shall not necessarily be determinative of the nature of the risk."
EIOPA answer
Article 55(2) of the Delegated Regulation (EU) 2015/35 reads:
“The assignment of an insurance or reinsurance obligation to a line of business shall reflect the nature of the risks relating to the obligation. The legal form of the obligation shall not necessarily be determinative of the nature of the risk.”
The question recognizes that the assignment of an insurance or reinsurance obligation shall reflect the nature of the risks as outlined in the first sentence of Article 55(2) of the Delegated Regulation. However, the second sentence of Article 55(2) by referring to “not necessarily” introduces the possibility to allocate obligations differently when the nature of the risks and legal form of the obligations do not match. This possibility to derogate from the standard assignment procedure, nevertheless, underlines that in most cases the legal form of the obligation and the nature of the risk overlap.
From the description presented in the question, it is assumed that the captive's policy to the fronter is that of a proportional reinsurance contract.
Moreover, as it refers to other policies where business is ceded from the fronter, reinsurance activities of the captive are assumed.
Annex I of the Delegated Regulation defines in Sections B and C the relevant Lines of Business for Proportional non-life reinsurance obligations and Non-proportional non-life reinsurance obligations. Consequently, the reinsurance obligations mentioned in the question should be allocated to LoBs 13 to 24 and not to the LoBs for direct business.
Such an interpretation is in line with Q&A 3180.
For the practical reporting of such contracts in the Solvency II QRTs, instead of reporting the premiums of such contracts under R0110/C0070 (Gross direct business in Fire and other damage to property insurance) in S.05.01.01, they should be reported under R0120/C0070 (Gross proportional reinsurance accepted in Fire and other damage to property insurance) in S.05.01.01.