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European Insurance and Occupational Pensions Authority

625

Q&A

Question ID: 625

Regulation Reference: Guidelines on group solvency

Article: 233, 248, 230, 129

Status: Final

Date of submission: 18 Mar 2016

Question

Guideline 21 of the guidelines on group solvency calculation provide that in order to calculate the minimum group capital requirement, the participating undertaking should use in the calculation “ the following capital requirements:
a.    The minimum capital requirements of the EEA authorized insurance and reinsurance undertakings included in the scope of method 1 ;
b.    The local capital requirements, at which the authorization would be withdrawn, for third country insurance and reinsurance undertakings included in the scope of method 1, independently of any equivalence finding.

Guideline 21 thus includes a reference to third-country insurance and reinsurance undertakings.

As a result, there is a need for clarification about the scope of calculation of the minimum consolidated group SCR.
There are indeed several instances in the Solvency II directive where although there is no explicit reference to third country insurance or reinsurance undertakings, the provision also applies in practice to them (e.g. article 233, article 248, etc.).

That is why we would like EIOPA to confirm that the reference to third-country insurance and reinsurance undertakings in the guideline is fully consistent with article 230(2) of the solvency II directive, and that a capital requirement from third-country insurance or reinsurance undertakings should be included in the calculation of the minimum consolidated group SCR.

REGARDING THE PRACTICAL CALCULATION OF SOLO MCR (OR EQUIVALENT LOCAL CAPITAL REQUIREMENT):
In cases where there is a participation in a European or third-country insurance or reinsurance undertaking, the fact that the solo MCR of the participating undertaking might be increased due to the corridor effect as defined in article 129(3) of the Solvency II directive suggests that the risks stemming from the participation (be it European or from a third-country) might (at least partially) be taken into account when calculating the solo SCR of the participating undertaking.

As a result, we would like EIOPA to precise whether the solo MCRs and third-country solo capital requirements referred to in the calculation of the minimum consolidated group SCR, should be “retreated” in order to avoid double counting of the same risks, or whether the group should use the solo MCRs (including potential corridor effects) with no retreatment, in compliance with article 129 of the directive?

EIOPA answer

As regards the first question (consistency with the directive), the minimum consolidated group SCR is the minimum amount of consolidated group own-funds, net of intra-group transactions, which is necessary to ensure that all insurance and reinsurance undertakings and third-country insurance and reinsurance undertakings included through method 1 keep their authorization.
As a result, although the Solvency II Directive does not explicitly refer to third-country undertakings, the minimum consolidated group SCR should include the local capital requirement at which the authorization would be withdrawn for the third-country insurance and reinsurance undertakings included in the scope of method 1, independently of whether the third country has been determined as equivalent according to Article 227 of the Directive or not. The final report on Public consultation No. 14/036 on Guidelines on group solvency confirms (2.65) that groups are expected to use the local capital requirement (which may be considered as a proxy for the notional minimum capital requirement at individual entity level).
This is consistent with the treatment of third-country insurance and reinsurance undertakings included in the group solvency calculation through method 1, which are included in the same way as EEA insurance and reinsurance undertakings in the calculation of the consolidated group SCR (cf. Article 335 and 336 of the Delegated Regulation 2015/35), although Article 230 of the Directive does not refer to them.

As regards the second question (practical calculation of solo MCR or equivalent capital requirement),  the Directive makes no reference to any retreatment regarding the solo MCRs to be included in the calculation of the minimum consolidated group SCR. As a result, the solo MCRs and local capital requirements to be used for the purpose of calculating the minimum consolidated group SCR should not be subject to any “retreatment”.