Question ID: 61
Regulation Reference: Guidelines on submission of information to NCAs (Preparatory phase)
Article: 72
Status: Final
Date of submission: 14 Aug 2014
Question
I believe the formula C50=MAX(0,(MIN(B50*0.25, C46))) is incorrect. According to L2 Article 72 EOF1, it should be C50=MAX(0,(MIN((B46+C46)*0.20, C46). Ie restricted Tier 1 "shall make up less than 20 % of the total amount of Tier 1 items".
There was a query sent to EIOPA questioning the 25% instead of the 20% as per L2; it was published in "EIOPA_13_415_Final_Report_on_CP10" as question 1004. The answer was: "Disagree. The formula references unrestricted Tier 1, where the limit is equivalent to 25%. As opposed to total Tier 1, where the limit is 20%.". Trying to understand the thinking behind the "equivalent" word, I believe EIOPA may have followed the following logic:
C50 <= 20% * (B50 + C50)
80% * C50 <= 20% * B50
C50 <= (20%/80%) * B50
C50 <= 25% * B50
The problem is that the first equation is not correct. B50 equals B46 but C50 is not necessarily equal to C46.
EIOPA answer
The formula in in fact correct.
C50=MAX(0,(MIN(B50*0.25, C46)))
The objective is to define the amount of eligible restricted Tier 1 to cover the SCR.
The relevant cells are:
C50 - Total eligible own funds to meet the SCR – tier 1 restricted items
B50 - Total eligible own funds to meet the SCR – tier 1 unrestricted items
C46 - Total available own funds to meet the SCR – tier 1 restricted items
Article 72 of the draft delegated acts defines how certain Tier 1 items are restricted in relation to the total amount of eligible Tier 1 own funds, (up to a maximum of 20%).
The formula for C50 is derived from B50 and not from total amount of eligible Tier 1 items, which is why it is not 20%.
So to define the amount of restricted eligible Tier 1 items we need to assess the relationship between the restricted and unrestricted Tier 1 items. This lead us to the formula C50 <= 25% * B50 (restricted T1 <= 25% of unrestricted T1).
So C50 has a maximum (B50 * 0.25) even if C46 is higher due to the operation of the limit in Article 72. C50 would equal C46 where C46 is lower than (B50 * 0.25).