Qualitative requirements relating to insurance and reinsurance undertakings

1. Insurance and reinsurance undertakings investing in securitisation shall meet the requirements laid down in paragraphs 2 to 7.

2. Insurance and reinsurance undertakings shall conduct adequate due diligence prior to making the investment, which shall include an assessment of the commitment of the originator, sponsor or original lender to maintain a material net economic interest securitisation of no less than 5 % on an on-going basis and of the factors that could undermine that commitment to maintain that interest as disclosed in accordance with point (f) of paragraph 3.

3. Before investing in securitisation, and thereafter as appropriate, insurance and reinsurance undertakings shall ensure that the originator, the sponsor or the original lender has all of the following features:

(a) the originator, sponsor or original lender grants credit based on sound and well-defined criteria and clearly establishes the process for approving, amending, renewing and refinancing loans to be securitised as well as loans which it will not securitise;

(b) the originator, sponsor or original lender has in place effective systems to manage the ongoing administration and monitoring of their credit risk-bearing portfolios and exposures, including for identifying and managing problematic credits and for making adequate value adjustments and provisions;

(c) the originator, sponsor or original lender adequately diversifies each credit portfolio based on its target market and overall credit strategy;

(d) the originator, sponsor or original lender grants ready access to all relevant data necessary for the insurance or reinsurance undertaking to comply with the requirements set out in paragraphs 4 to 7;

(e) the originator, sponsor or original lender has a written policy on credit risk that includes their risk tolerance limits and provisioning policy and how it measures, monitors and controls that risk;

(f) the originator, sponsor or original lender discloses the level of the retained net economic interest as referred to in Article 254(1) as well as any factors that could undermine the maintenance of the minimum required net economic interest as set out in that paragraph.

4. Insurance or reinsurance undertakings investing in securitisation shall establish written monitoring procedures commensurate with the risk profile of their securitisation positions to monitor performance of the underlying exposures on an ongoing basis and in a timely manner.

5. Insurance or reinsurance undertakings investing in securitisation shall ensure that there is an adequate level of internal reporting to their administrative, management or supervisory body so that they are aware of material securitisation positions and that the risks from those investments are adequately managed.

6. Insurance and reinsurance undertakings investing in securitisation shall regularly perform stress tests on the cash flows and collateral values supporting the underlying exposures. Any stress test shall be commensurate with the nature, scale and complexity of the risk inherent in the securitisation position.

7. Insurance and reinsurance undertakings investing in securitisation shall be able to demonstrate to their supervisory authorities that for each of those investments they have a comprehensive and thorough understanding of the investment and its underlying exposures and that they have implemented written policies and procedures for their risk management.