Order on Valuation of Assets and Liabilities, Including Insurance Technical Provisions, for Group 1 Insurance Undertakings

Pursuant to Section 123, paragraph 2, Section 158, paragraph 5, and Section 316, paragraph 1, of Act No. 718 of 13 June 2023 on insurance business, the following is enacted pursuant to authorization:

Scope

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

Paragraph 2. The valuation of assets and liabilities, including insurance technical provisions, shall, in addition to the rules in Articles 7-61 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 the provisions of this Order.

Valuation of Assets and Liabilities

Section 2. A Group 1 insurance undertaking shall value its assets in accordance with Article 7-16 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), at the amount for which the assets could be exchanged between knowledgeable, willing parties in an arm's length transaction.

Paragraph 2. A Group 1 insurance undertaking shall value its liabilities in accordance with Article 7-16 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), at the amount for which the liabilities could be settled or transferred between knowledgeable, willing parties in an arm's length transaction.

Paragraph 3. In the valuation of liabilities, the Group 1 insurance undertaking shall not make an adjustment to take account of its own creditworthiness.

Valuation of Insurance Technical Provisions

Section 3. The value of the insurance technical provisions shall reflect the amount that the Group 1 insurance undertaking would have to pay if it were to transfer its insurance obligations to another insurance undertaking at the time of valuation.

Paragraph 2. The valuation of the insurance technical provisions shall be based on and consistent with information from financial markets and generally available information on insurance risks.

Paragraph 3. The insurance technical provisions shall be valued in a prudent, credible, and objective manner.

Section 4. The insurance technical provisions shall be valued as the sum of a best estimate and a risk margin, cf. paragraphs 2-6.

Paragraph 2. The best estimate shall, in accordance with Articles 17-18, 28-36, 43-54, and 60 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), reflect the probability-weighted average of future cash flows, taking into account the expected present value of the future cash flows calculated using the relevant risk-free interest rate curve.

Paragraph 3. The calculation of the best estimate shall be based on updated and credible information and realistic assumptions and shall be carried out using appropriate, applicable, and relevant actuarial and statistical methods in accordance with Articles 22-27 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 4. The projection of cash flows used in the calculation of the best estimate shall take into account the liquidity inflows and outflows necessary to meet the insurance obligations until maturity.

Paragraph 5. The best estimate shall be calculated gross, i.e., without deduction of amounts recoverable under reinsurance contracts and contracts with special purpose vehicles (SPVs). These amounts shall be calculated separately in accordance with Section 8.

Paragraph 6. The risk margin shall be calculated in accordance with Articles 37-39, 58, and 59 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 a manner that ensures that the value of the insurance technical provisions corresponds to the amount that a Group 1 insurance undertaking can be expected to demand to take over and meet the insurance obligations.

Paragraph 7. For future cash flows linked to the insurance obligations that can be replicated using financial instruments for which there is a reliable and observable market value, the value of the insurance technical provisions shall be determined based on the market value of these financial instruments, in accordance with Article 40 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 this case, the best estimate and risk margin shall not be calculated separately.

Paragraph 8. The risk margin shall be calculated based on the costs associated with providing a capital base equivalent to the calculated solvency capital requirement for the insurance obligations until maturity.

Paragraph 9. If the Danish Financial Supervisory Authority has imposed a requirement for a capital add-on pursuant to Section 278, paragraph 1, no. 1, of the Act on Insurance Business, the capital add-on shall not be included in the calculation of the risk margin.

Section 5. A Group 1 insurance undertaking shall, in the calculation of the best estimate, cf. Section 4, paragraph 2, use the risk-free interest rate curve without any matching adjustment or volatility adjustment, as determined and published by the European Insurance and Occupational Pensions Authority (EIOPA) for each relevant currency at least every quarter in accordance with Article 77e(1)(a) of 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). If the Group 1 insurance undertaking has obtained permission to use a matching adjustment or a volatility adjustment of the risk-free interest rate curve, cf. the Order on the risk-free interest rate curve, matching adjustment, and volatility adjustment for Group 1 insurance undertakings, the matching adjustment or volatility adjustment shall be included in the risk-free interest rate curve for the valuation of the best estimate.

Paragraph 2. If the Commission adopts the risk-free interest rate curve in accordance with the procedure in Article 77e(2) of 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 insurance undertaking shall use these technical parameters in the calculation of the best estimate.

Section 6. In addition to the provisions of Section 4, the Group 1 insurance undertaking shall take into account the following elements when valuing the insurance technical provisions:

1. All costs associated with meeting the insurance obligations.
2. Inflation, including the inflation effect on costs and claims.
3. All payments to policyholders and beneficiaries, including future discretionary bonus amounts that the Group 1 insurance undertaking expects to allocate, regardless of whether these payments are due to a contractual guarantee or not, unless the payments fall under the definition of surplus capital.

Section 7. In the valuation of the insurance technical provisions, the Group 1 insurance undertaking shall take into account the value of financial guarantees and any options contained in the insurance contracts.

Paragraph 2. All assumptions about the probability that policyholders will exercise their contractual options shall be realistic and based on current and credible information. The assumptions shall either explicitly or implicitly take into account the potential consequences of future changes in the financial and non-financial conditions for the exercise of these options.

Segmentation

Section 8. A Group 1 insurance undertaking shall, in the calculation of insurance technical provisions, segment the insurance obligations into homogeneous risk groups, which at least leads to a division by lines of business in accordance with Article 55 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).

Amounts Recoverable under Reinsurance Contracts and SPVs

Section 9. In the calculation of amounts recoverable under reinsurance contracts and contracts with SPVs, cf. Articles 41, 42, 57, and 61 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 Group 1 insurance undertaking shall comply with the provisions of Sections 2-8 and take into account the difference in the timing of repayments and the timing of direct payments.

Paragraph 2. The calculation pursuant to paragraph 1 shall be adjusted to take into account expected losses due to default by the counterparty. The adjustment shall be based on an assessment of the likelihood of default and the average loss resulting from default.

Data Quality and Use of Approximate Figures

Section 10. A Group 1 insurance undertaking shall have guidelines and procedures to ensure that the data used in the calculation of the insurance technical provisions are appropriate, complete, and accurate in accordance with Article 19 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).

Comparison with Past Experience

Section 11. A Group 1 insurance undertaking shall have guidelines and procedures to ensure that the best estimate and the assumptions underlying the calculation of the best estimate are regularly compared with past experience.

Paragraph 2. If a comparison between the best estimate and past experience shows systematic differences, the Group 1 insurance undertaking shall make the necessary adjustments to the actuarial methods and assumptions used.

Groups and Undertakings

Section 12. Sections 2-11 apply mutatis mutandis to undertakings covered by Section 166, paragraph 1 or 2, of the Act on Insurance Business when valuing assets and liabilities, including insurance technical provisions, for the group or undertaking.

Penal Provisions

Section 13. Violation of Sections 2-9, Section 10, paragraph 1, and Sections 11 and 12 shall be punishable by fine.

Paragraph 2. Companies and other legal persons may be subject to criminal liability in accordance with the rules in Chapter 5 of the Danish Criminal Code.

Entry into Force

Section 14. This Order shall enter into force on 1 January 2025.

Paragraph 2. Order No. 1279 of 29 November 2017 on the valuation of assets and liabilities, including insurance technical provisions, for Group 1 insurance undertakings is repealed.

Ministry of Industry, Business and Financial Affairs, 6 December 2024

Morten Bødskov / Julie Sonne