LogoRegulatory Alerts
2024-12-05

Order on the Calculation of the Solvency Capital Requirement Using the Standard Formula for Group 1 Insurance Undertakings

Issued by the Danish Financial Supervisory Authority, this Order establishes the specific rules for calculating the Solvency Capital Requirement (SCR) using the Standard Formula for Group 1 insurance undertakings and groups under Danish insurance law. It mandates that calculations must adhere to both the Danish Insurance Business Act and specific articles of the EU Solvency II Delegated Regulation, covering risk modules for insurance, market, credit, and operational risks. The regulation supersedes previous orders, introduces transitional provisions for standard parameters regarding foreign currency exposures and equity risks, and sets an effective date of January 1, 2025.

Finanstilsynet Denmark logo

Denmark

Finanstilsynet Denmark

Click to view thumbnail

Order on the Calculation of the Solvency Capital Requirement Using the Standard Formula for Group 1 Insurance Undertakings etc.1)

Pursuant to Section 154, paragraph 6, Section 166, paragraph 10, and Section 316, paragraph 1, of Act No. 718 of 13 June 2023 on Insurance Undertakings, it is hereby stipulated:

Chapter 1 General Provisions Scope and Definitions

Section 1. This Order applies to Group 1 insurance undertakings and groups or groups covered by Section 166, paragraphs 1 and 2, of the Act on Insurance Undertakings.

Paragraph 2. The calculation of the solvency capital requirement by a Group 1 insurance undertaking using the standard formula shall, in addition to the rules in Articles 83-221 of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), be carried out in accordance with Sections 4-11, Section 15, and Section 16.

Paragraph 3. The calculation of the solvency capital requirement for the group or group using the standard formula shall, in addition to the rules in Articles 336-338 of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), be carried out in accordance with Section 12, Section 15, and Section 16.

Section 2. In this Order, the following definitions apply:

  1. Insurance risk: The risk of loss or an adverse development in the value of insurance liabilities as a result of inappropriate assumptions in connection with pricing and the establishment of provisions.

  2. Market risk: The risk of loss or adverse change in the financial situation as a direct or indirect consequence of movements in the level and volatility of market prices for assets, liabilities, and financial instruments.

  3. Credit risk: The risk of loss or adverse change in the financial situation as a result of movements in the creditworthiness of issuers of securities, counterparties, and debtors to which insurance undertakings are exposed in the form of counterparty risks, credit spread risks, or concentrations of market risks.

  4. Operational risk: The risk of loss resulting from inadequate or flawed internal processes, employee errors, or system failures, or as a result of external events.

  5. Concentration risk: All risk-bearing engagements with a potential loss large enough to threaten the insurance undertaking's solvency or financial position.

Chapter 2 Calculation of the Solvency Capital Requirement Using the Standard Formula

Section 3. The solvency capital requirement covers at least the following risks:

  1. Insurance risk within non-life insurance.
  2. Insurance risk within life insurance.
  3. Insurance risk within health insurance.
  4. Market risk.
  5. Credit risk.
  6. Operational risk.

Paragraph 2. Operational risk includes legal risk, but not risks arising from strategic decisions or reputation risk.

Section 4. A Group 1 insurance undertaking shall, when using the standard formula, calculate the solvency capital requirement as the sum of the following:

  1. The basic solvency capital requirement calculated in accordance with Section 5.
  2. The capital requirement to cover operational risk calculated in accordance with Article 204 of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II).
  3. The adjustment made to take into account the loss-absorbing capacity of insurance technical provisions and deferred taxes, calculated in accordance with Articles 205-207 of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II).

Paragraph 2. In calculating the solvency capital requirement, a Group 1 insurance undertaking must take into account the notified rules for the calculation and distribution of realized profit, cf. Section 30, paragraph 2, of the Act on Insurance Undertakings. The Group 1 insurance undertaking must also take into account the effect of risk-mitigating techniques, provided that credit risk and other risks associated with the use of such techniques are correctly reflected in the solvency capital requirement.

The Basic Solvency Capital Requirement

Section 5. A Group 1 insurance undertaking shall, in calculating the basic solvency capital requirement, use the risk modules in Sections 6-10 and Article 87 of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II).

Paragraph 2. Insurance risk included in the risk modules, cf. Sections 6-8, shall be allocated to the risk module that best reflects the technical nature of the underlying risks.

Calculation of the Risk Modules

Section 6. A Group 1 insurance undertaking shall calculate the module for non-life insurance risks, cf. Articles 114-135 of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II). The module shall reflect the risk arising from non-life insurance liabilities in relation to the risks covered and the processes used in connection with the conduct of this business, and take into account the uncertainty of the company's results associated with existing business and new business expected to be written within the following 12 months.

Section 7. A Group 1 insurance undertaking shall calculate the module for life insurance risks, cf. Articles 136-143 of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II). The module shall reflect the risk arising from life insurance liabilities in relation to the risks covered and the processes used in connection with the conduct of this business.

Section 8. A Group 1 insurance undertaking shall calculate the module for health insurance risks, cf. Articles 144-163 of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II). The module shall cover at least the following risks:

  1. Loss risk or risk of an adverse development in insurance liabilities as a result of changes in the level, trend, or volatility of costs for the settlement of insurance and reinsurance contracts.
  2. Loss risk or risk of an adverse development in insurance liabilities as a result of fluctuations in the timing, frequency, and extent of insurance events and in the timing and size of claim settlements at the time of provisioning.
  3. Loss risk or risk of an adverse development in insurance liabilities as a result of significant uncertainty regarding assumptions related to pricing and provisions associated with the outbreak of major epidemics and the unusual accumulation of risks under such extreme circumstances.

Paragraph 2. The module for health insurance risks shall reflect the risk arising from health insurance liabilities in relation to the risks covered and the processes used in connection with the conduct of this business, regardless of whether this business is conducted as part of non-life or life insurance business.

Section 9. A Group 1 insurance undertaking shall calculate the module for market risks, cf. Articles 164-188 of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II). The module shall reflect the risk arising from the volatility in the market price of financial instruments that influence the value of the company's assets and liabilities.

Section 10. A Group 1 insurance undertaking shall calculate the module for counterparty risks, cf. Articles 189-202 of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II). The module shall reflect potential losses resulting from the unexpected default or loss of creditworthiness of the insurance undertaking's counterparties and debtors over the following 12 months.

Section 11. The Danish Financial Supervisory Authority may order a Group 1 insurance undertaking to replace a subset of the standard parameters within the risk modules for non-life insurance, life insurance, and health insurance with company-specific parameters, if the company's risk profile deviates significantly from the assumptions underlying the calculation of the solvency capital requirement using the standard formula.

Chapter 3 Groups and Groups

Section 12. Sections 4-11 apply mutatis mutandis to undertakings covered by Section 166, paragraph 1 or 2, of the Act on Insurance Undertakings when using the standard formula to calculate the solvency capital requirement for the group.

Chapter 4 Penal Provisions

Section 13. Breach of Sections 3-10 is punishable by fine.

Paragraph 2. Companies etc. (legal persons) may be subject to criminal liability in accordance with the rules in Chapter 5 of the Criminal Code.

Chapter 5 Entry into Force and Transitional Provisions

Section 14. This Order enters into force on 1 January 2025.

Paragraph 2. Order No. 1164 of 31 October 2017 on the calculation of the solvency capital requirement using the standard formula for Group 1 insurance undertakings etc. is repealed.

Section 15. Until 31 December 2017, the standard parameters used to calculate the sub-module for credit spread risk, cf. Articles 175-181 of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), and the sub-module for concentration risk, cf. Articles 182-187 of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), in respect of exposures to central governments and central banks of Member States, denominated and funded in any other Member State's currency, correspond to those that would have to be used for exposures denominated and funded in the national currency.

Paragraph 2. In 2018, the standard parameters used to calculate the sub-modules in paragraph 1 shall be reduced by 80 percent, in respect of exposures to central governments and central banks of Member States, denominated and funded in any other Member State's currency.

Paragraph 3. In 2019, the standard parameters used to calculate the sub-modules in paragraph 1 shall be reduced by 50 percent, in respect of exposures to central governments and central banks of Member States, denominated and funded in any other Member State's currency.

Paragraph 4. From 1 January 2020, the standard parameters used to calculate the sub-modules in paragraph 1 shall not be reduced, in respect of exposures to central governments and central banks of Member States, denominated and funded in any other Member State's currency.

Section 16. For the calculation of the sub-module for equity risks, cf. Articles 168-173 of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), companies shall, for shares covered by Article 173 of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), apply a standard parameter calculated in accordance with paragraph 2 over a period.

Paragraph 2. The standard parameter according to paragraph 1 shall be calculated as a weighted average of the standard parameter used to calculate the sub-module in accordance with Article 304 of Directive 2009/138/EC of the European Parliament and of the Council, cf. Article 170 of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), and the standard parameter used to calculate the sub-module in accordance with the standard formula without the option set out in Article 304 of Directive 2009/138/EC of the European Parliament and of the Council. The weighting of the latter standard parameter shall increase linearly from 0 percent during the year beginning on 1 January 2016 to 100 percent on 1 January 2023 at the end of each year.

Danish Financial Supervisory Authority, 5 December 2024 Louise Mogensen / Line Bergmann

  1. The Order contains provisions implementing parts of Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), OJ 2009, No. L 335, p. 1, and Directive 2014/51/EU of the European Parliament and of the Council of 16 April 2014 amending Directives 2003/71/EC and 2009/138/EC and Regulations (EC) No 1060/2009, (EU) No 1094/2010 and (EU) No 1095/2010 as regards the powers conferred on the European Supervisory Authority (European Insurance and Occupational Pensions Authority) and the European Supervisory Authority (European Securities and Markets Authority), OJ 2014, No. L 153, p. 1.

Statutory Journal A 2024 Published on 18 December 2024 5 December 2024. No. 1578. Ministry of Industry, Business and Financial Affairs, Danish Financial Supervisory Authority, file no. 24-019579 CQ003075

Share