GFSC Guidance Note on Insurance Group Supervision

Version: 2 Publication Date: 28/03/2025 www.gfsc.gi GFSC Guidance Note Insurance Group Supervision

Gibraltar Financial Services Commission Guidance Note on Insurance Group Supervision 2 Table of Contents 1.Introduction............................................................................................................................................... 3 1A Insurance holding company assessment................................................................................................. 3 2 Entities excluded from the scope of group supervision............................................................................ 5 3 Choice of calculation method.................................................................................................................... 5 4 Group capital add-on................................................................................................................................. 5 5A Availability of group own funds .............................................................................................................. 6 5B Regulatory determination on the availability of group own funds......................................................... 8 6 Single own risk and solvency assessment report ...................................................................................... 9 7 Single solvency and financial condition report (SFCR) ............................................................................ 10 8 Responsibilities of the relevant insurance group undertaking................................................................ 10 9 Supervision in the absence of third-country equivalence....................................................................... 10

Gibraltar Financial Services Commission Guidance Note on Insurance Group Supervision 3

1. Introduction 1.1 The guidance is addressed to all Gibraltar insurers, as defined in the Financial Services (Insurance Companies) Regulations 2020 (the ‘Insurance Companies Regulations’). It sets out the GFSC’s expectations in respect of the groups provisions within the Insurance Companies Regulations. 1.2 Firms should note that if the group supervisor is a supervisory authority other than the GFSC, the GFSC still expects Gibraltar insurers to comply with Gibraltar law and GFSC Guidance relating to group supervision (if they are part of a group). The GFSC expects firms to behave in a way that contributes to effective group supervision irrespective of which supervisory authority is acting as group supervisor. 1.3 This guidance should be read in conjunction with the relevant European legislation (as it forms part of retained EU law in Gibraltar), the relevant provisions of the Financial Services (Insurance Companies) Regulations1 (the Regulations), the European Insurance and Occupational Pension Authority’s (EIOPA) Guidelines on group solvency (as at IP completion day)2, the GFSC’s ’Approach to Insurance Regulation’ document3 and the relevant provisions of the Financial Services Act 20194 (FSA). 1.4 This guidance expands on the GFSC’s general approach as set out in its ’Approach to Insurance Regulation’ document. By clearly and consistently explaining its expectations of firms in relation to the particular areas addressed, the GFSC seeks to advance its statutory objectives of protecting consumers, reducing systemic risk and protecting the good reputation of Gibraltar. The GFSC also considers that this guidance is compatible with the discharge of its responsibilities as set out in Section 23(1) of the FSA. 1.5 Firms should also refer to the GFSC’s ‘Policy Statement on the Interpretation of EU Guidelines and Recommendations following Gibraltar’s Withdrawal from the EU’5. 1.6 Any reference to any provision of direct EU legislation is a reference to it as it forms part of retained EU law.
2. 2 Insurance holding company assessment 2.1 Where a group for which the GFSC is the group supervisor, wishes to demonstrate that a holding company is a mixed-activity insurance holding company, the group’s assets, revenue, and capital requirements derived from insurance or reinsurance undertakings, including ancillary insurance services undertakings, should be assessed by the firm as follows: 1 Financial Services (Insurance Companies) Regulations: https://www.gibraltarlaws.gov.gi/legislations/financial￾services-insurance-companies-regulations-2020-4808 2 EIOPA Guidelines on Group Solvency: https://www.eiopa.europa.eu/document-library/guidelines/guidelines￾group-solvency_en 3 GFSC Approach to Insurance Regulation: https://www.fsc.gi/publications/2019/05/Approach%20to%20Insurance%20Regulation.pdf 4 Financial Services Act 2019: https://www.gibraltarlaws.gov.gi/legislations/financial-services-act-2019-4690 5 GFSC Policy Statement on the Interpretation of EU Guidelines and Recommendations following Gibraltar’s Withdrawal from the EU: https://www.fsc.gi/uploads/GFSC%20Policy%20Statement%20on%20EU%20Guidelines%20and%20Recommendati ons.pdf

Gibraltar Financial Services Commission Guidance Note on Insurance Group Supervision 4 • Assets: Gross assets would be considered by the GFSC in the first instance. In cases where gross figures are below the 50% threshold whereas net figures are above the 50% threshold or vice versa, firms should calculate the proportion of group assets on both gross and net basis and refer each to the 50% threshold. The GFSC would apply discretion in choosing the most appropriate measure, taking into consideration a group’s specific circumstances. A Solvency II basis of valuation would be considered in the first instance. An IFRS/UK GAAP basis of valuation may be acceptable as an alternative, provided that there is a consistent basis of measurement. • Revenues: Gross revenues would be considered by the GFSC in the first instance. Gross revenue refers to total revenue; net revenue is the revenue after factoring in outward reinsurance. In cases where gross figures are below the 50% threshold whereas net figures are above the 50% threshold or vice versa, firms should calculate the proportion of group revenues on both gross and net basis and refer each to the 50% threshold. The GFSC would apply discretion in choosing the most appropriate measure, taking into consideration a group’s specific circumstances. Revenues should be based on the consolidated financial statements. If none are available, the statutory accounts under IFRS/UK GAAP may be acceptable provided that there is a consistent basis of measurement. • Capital requirements: Solvency Capital Requirements (SCR) should be based on the contribution to the consolidated group SCR6 or based on local solvency capital requirements if the GFSC decides that Method 2 should be applied to the group in accordance with Regulation 199(3) of the Insurance Companies Regulations. • Where there are material intra-group transactions, firms should calculate assets and revenue both gross and net of intra-group transactions. 2.2 The calculations above should be demonstrated using the latest full year reference period, or a three-year average of the past three years where there is material year-on-year volatility in the figures. Where the period under consideration does not fully reflect the normal business mix of the group, a different reference period would be used at the GFSC’s discretion. 2.3 The GFSC may reassess a holding company’s classification where it considers it appropriate to do so, including following events that might alter a group’s structure. The key here is to identify any event that might change one or more of the financial measures (assets, revenue and capital requirements), such that one or more of these measures could rise above (or fall below) the 50% threshold and thereby change the classification of the holding company. These events could include, but are not limited to: organic growth, acquisitions, disposals or changes in control applications whereby the financial measures of assets, revenue and capital requirements are impacted in such a manner that it changes a holding company’s classification from a mixed-activity insurance holding company to an insurance holding company, or vice versa. 2.4 The GFSC expects firms to provide any relevant information, where requested, to support the GFSC’s assessment on whether a holding company is an insurance holding company or a mixed activity holding company. 6 Article 336 of the Commission Delegated Regulation (EU) 2015/35 of 10 October 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) Text with EEA relevance

Gibraltar Financial Services Commission Guidance Note on Insurance Group Supervision 5 2.5 Firms wishing to apply for a modification to relevant aspects of the revised definition of an insurance holding company may do so by submitting a formal application to the GFSC. The relevant aspects of the definition that the GFSC may consider a waiver or modification in relation to include: a. the application of one or more of the three measures (assets, revenue and capital requirements); or b. the inclusion of ancillary insurance services undertakings in the insurance part of a group. 2.6 Firms would need to make a formal application to the GFSC. The GFSC will assess such applications on a case-by-case basis in accordance with the usual statutory tests, taking into account the objectives of group supervision. 3 Entities excluded from the scope of group supervision 3.1 The GFSC may decide on a case-by-case basis not to include an undertaking in group supervision where one or more of the conditions set out in Regulation 193(2) of the Regulations are met. Where a group, for which the GFSC is the group supervisor, wishes to exclude entities from the scope of group supervision, it will be expected to make a formal application to the GFSC. The GFSC expects such applications to articulate the way in which the firm believes that the conditions set out in Regulation 193 of the Regulations are met. 4 Choice of calculation method 4.1 Where the GFSC is the group supervisor the GFSC may decide, after consulting other concerned supervisory authorities, where relevant, and the group, to apply to the group either Method 2 (deduction and aggregation method) or a combination of Methods 1 and 2, where the exclusive application of Method 1 (accounting consolidation-based method) would not be appropriate, having considered the provisions of Article 328(1) of the Delegated Regulation7 . 4.2 Where a group for which the GFSC is the group supervisor wishes to use Method 2 or a combination of Methods 1 and 2, the GFSC expects it to make a formal application to the GFSC. 4.3 The GFSC expects this application to articulate the way in which the firm believes that the elements in Article 328(1) of the Delegated Regulation should be considered in the context of the firm’s application. 5 Group capital add-on 5.1 Where the GFSC is the group supervisor, the GFSC may impose a capital add-on for a group where the risk profile of the group is not adequately reflected in the consolidated group SCR. 7 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) Text with EEA relevance

Gibraltar Financial Services Commission Guidance Note on Insurance Group Supervision 6 5.2 In determining whether the risk profile of the group is not adequately reflected in the consolidated group SCR, the GFSC will pay particular attention to any case where the circumstances referred to in Regulation 39 may arise at group level, in particular where a - a. specific risk at group level is not sufficiently covered by the standard formula or an internal model, because it is difficult to quantify; b. capital add-on to the SCR of the related insurance or reinsurance undertaking is imposed in accordance with Regulations 39 and 210(7). 6 Availability of group own funds 6.1 Regulation 201(5) of the Regulations and Article 330 of the Delegated Regulation place limits on the own funds which can be included in the group solvency calculation, depending on their availability to absorb losses anywhere in the group. 6.2 Groups are required to set out their own assessment of any items which might be deducted from own funds due to any significant restriction affecting the availability, fungibility or transferability of own funds within the undertaking. Unless a formal determination is made by the GFSC in respect of a particular own funds item, firms should report own funds items as available (notwithstanding their own assessment) except where the treatment of that own fund item is specifically referenced under Regulation 201 of the Regulations and Article 330 of the Delegated Regulation. The GFSC expects firms to provide the appropriate level of detail in these assessments, either in the solvency and financial condition report (SFCR), in the regular supervisory report (RSR), or in another form of written report as agreed by the GFSC, depending on the confidentiality of the information. These assessments would subsequently be updated by the firm if there are material changes in the group or as agreed with the supervisor. Firms are expected to comply with the EIOPA Group Solvency Guideline 138 when making their own assessment of availability of own funds at group level of related undertakings that are not subsidiaries. 6.3 The GFSC assesses availability of own funds to cover the group solvency capital requirement (SCR) on the same basis for different types of groups. In particular, the GFSC notes that the scope of the assessment, elements of availability and assumptions as to the availability of different types of own funds under Article 330 of the Delegated Regulation do not differ depending on structure of the group or the type of entity at its head. Furthermore, where a firm faces legal or other restrictions from issuing other types of own funds as a result of being a mutual or company limited by guarantee, it may place greater reliance on own funds issued by other group undertakings. The GFSC considers that it is important that such groups demonstrate that these own funds are not restricted in meeting all types of losses arising anywhere in the group. 6.4 Since the current Gibraltar group solvency regime indicates that the group SCR is intended to represent a diversified risk standard, the GFSC makes the assumption that diversification benefits are intended to be preserved when the valuation basis and quality of capital used to meet that standard correspond with Gibraltar group solvency principles. The consequence of this is that, where standards that are not built on the same principles as, and are not similar in outcome to, those applicable under the Gibraltar group solvency regime are applied to the valuation basis and quality of capital, the GFSC will not assume that diversification benefits are intended to be preserved. 8 EIOPA Guidelines on Group Solvency: https://eiopa.europa.eu/publications/eiopa-guidelines/guidelines-on￾group-solvency

Gibraltar Financial Services Commission Guidance Note on Insurance Group Supervision 7 6.5 Therefore, in principle, firms should not consider the solo SCR as restricting the availability of own fund items or assets at the level of the group, in the meaning of Article 330 of the Delegated Regulation. However, this does not prevent the GFSC from challenging the availability and transferability of own funds as assessed by groups. In the case where the GFSC deems that own fund items are unavailable, under Article 330 of the Delegated Regulation the GFSC may require the group to make a deduction from group own funds. Groups should engage from an early stage with their group supervisor should there be any doubt as to the availability and transferability of group own fund items. 6.6 The assumption made concerning the solo SCR as a restriction for the purposes of calculating the group SCR does not alter the operation of the solo SCR as a requirement for solo own funds. 6.7 Firms should note that solo regulatory requirements applied under regimes which are not built on the same principles as, or not similar in outcome to, the Gibraltar solvency regime do not necessarily apply the same basis for valuing assets and liabilities, and therefore the availability of capital contributed to the group solvency position and the transferability of assets from those regimes may be different. In these cases the GFSC will presume that solo regulatory requirements do restrict the availability of capital or assets at the level of the group and so the GFSC expects firms to provide details on how such own funds would be made available considering the elements set out in Article 330 of the Delegated Regulation. For the purposes of this guidance, the GFSC only considers regimes that are equivalent to Solvency II (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) to be built on the same principles as, and similar in outcome to, the Gibraltar solvency regime. 6.8 Not only could the different valuation bases and quality of capital permitted for the purpose of local regulatory requirements affect the availability of capital which represents the difference between the contribution to the group SCR and the solo SCR, but also the availability of any surplus capital in excess of the local solo regulatory requirement. The GFSC expects firms to take this into account when providing it with information on which the GFSC will base its judgements as to the point at which other regulators would intervene to restrict flows of capital out of their jurisdiction. 6.9 Firms will also need to classify separately own funds at group level in accordance with Articles 331 to 334 of the Delegated Regulation including those own funds contributed by third-country insurance or reinsurance undertakings. The quality of capital will be one of the factors taken into account by the GFSC when determining when and at which level supervisors from jurisdictions that do not have a solvency framework similar to that applicable in Gibraltar may raise regulatory barriers to reduce own funds availability at group level. 6.10 When firms are providing details of how own funds could be made available to the group, the GFSC notes that these may include actions to transfer own funds around the group, for instance through paying dividends, or selling the assets of an undertaking or insurance holding company to recapitalise group companies in difficulty. The GFSC will consider these actions when reviewing a group’s assessment of transferability. In respect of parts of the group subject to requirements which are not similar in outcome to those applicable under the Gibraltar group solvency regime, the GFSC expects groups to provide robust and credible evidence that the apparent availability of own funds at the group level is not compromised or effectively undermined by any legal or regulatory restrictions on transferability, and that the suggested action resulting in the transfer of the own funds does not jeopardise an orderly resolution of the group. In particular, the GFSC expects the evidence to cover, as a minimum, the likely scenarios under which the actions could be taken, and

Gibraltar Financial Services Commission Guidance Note on Insurance Group Supervision 8 the time that would be required to execute the actions. For the own funds considered available at group level, the GFSC expects groups to evidence that these own funds can be made available to the group within a maximum of nine months. 6.11 Under the current group solvency framework, the GFSC may decide to apply to a group the deduction and aggregation method (Method 2) for calculation of its solvency requirements, which would allow a firm to use local solvency rules when determining the requirements placed on (equivalent) third-country related undertakings. However, the assessment of the availability at a group level of an own funds item of such a related undertaking needs to be carried out by reference to the Gibraltar groups provisions, not only local rules. 6.12 To illustrate this point further, the assessment of availability should demonstrate that both the solo undertaking third-country rules and the Gibraltar group provisions have been considered. For example, this might mean that for an own funds item to be considered available at the level of the group, the firm should be able to defer coupon payments both in the event of non-compliance with the solo undertaking’s third-country capital requirement and the Gibraltar group SCR. 7 Regulatory determination on the availability of group own funds 7.1 Article 330 in the Delegated Regulation sets out how own fund items of: a related insurance or reinsurance undertaking; insurance holding company; or mixed financial holding company should be assessed when considering their availability at the group level. The Article identifies and describes the treatment of specific own fund items where those own fund items are either: a. presumed to be unavailable unless the firm can demonstrate to the group supervisor that this assumption is inappropriate; or b. not considered to be available in any case. 7.2 Subordinated liabilities and preference shares are among own fund items treated as in point (a) above. These instruments create legal obligations on the issuing entity to their holders. At the same time, the issuing entity would not ordinarily have legal obligations in relation to losses arising in another group undertaking. This restricts the ability of these instruments to absorb losses in other group undertakings. 7.3 Where the GFSC is the group supervisor, for a firm to satisfy the GFSC that the own fund items are available to cover the group SCR, the firm needs to demonstrate that these own fund items are available to absorb losses anywhere in the group. The GFSC considers that a firm may demonstrate this as follows: • Each insurance and reinsurance undertaking in the Solvency II group has the right to claim against the issuing entity if that insurance or reinsurance undertaking is wound up and there is a shortfall for its policyholders and beneficiaries. This includes any insurance and reinsurance undertakings acquired by the group after the issuance of the subordinated liabilities or preference shares. Furthermore, the right of the group insurance and reinsurance undertakings to claim on the issuing entity does not significantly increase group risks, including the level of complexity when winding up and contagion risk for issuing entities that are insurance or reinsurance undertakings.

Gibraltar Financial Services Commission Guidance Note on Insurance Group Supervision 9 • The legal obligations of the issuing entity to the holders of the instruments, including coupon payments, are subordinated to any claims made by group insurance and reinsurance undertakings that are being wound up. 7.4 The GFSC considers that intra-group guarantees used for this purpose increase certain risks in a group. The GFSC would assess the level and volume of risks and the possible risks of contagion in the group due to the intra-group guarantees. The GFSC would expect a firm to demonstrate that the intra-group guarantees do not significantly increase the level of complexity when winding up the group. The GFSC would also expect a firm to demonstrate that the intra-group guarantees do not significantly increase contagion risk for issuing entities that are insurance or reinsurance undertakings by exposing the solvency of the issuing entity to losses in the other insurance and reinsurance undertakings in the group. 7.5 The GFSC considers that features that increase the impact of intra-group guarantees on these risks include, but are not limited to, the following: a. the issuing entity is an insurance or reinsurance undertaking; b. there are multiple insurance and reinsurance undertakings in the group; c. the issuing entity is a subsidiary of an entity that either has related insurance or reinsurance undertakings, or is an insurance or reinsurance undertaking; and d. there are significant intra-group transactions, both in terms of volume and value. 7.6 As these features are present in most groups, the GFSC expects that for most groups it will not be appropriate to use intra-group guarantees to make subordinated liabilities and preference shares effectively available to absorb losses anywhere in the group. Furthermore, the GFSC would expect a firm to consider any other relevant group-specific factors that increase group complexity. The GFSC is receptive to other approaches that firms may wish to propose when seeking to demonstrate availability of subordinated liabilities and preference shares but these must address the legal restrictions derived from with such instruments. The GFSC will assess such proposals on a case-by￾case basis. 7.7 Where own fund items are not specifically identified in Article 330 of the Delegated Regulation, the firm should assume that these own fund items are available to cover the group SCR. The GFSC may require the firm to provide an assessment of availability of the own fund items which the GFSC will consider to determine whether the GFSC agrees with the analysis. 7.8 The GFSC will communicate clearly to the firm the GFSC’s determination as to whether an own fund item should be considered available or unavailable. 7.9 Where the firm has not appropriately assessed any own fund items as being not available to meet the group SCR, and the GFSC has not assessed any items as not available, then the GFSC considers that no determination has been made. 7.10 If the GFSC has not provided a determination on the availability of an own fund item and a firm has nevertheless assessed an item as unavailable, the GFSC recommends that the firm discusses this with the GFSC, in order to obtain a formal determination of the GFSC’s position. 8 Single own risk and solvency assessment report

Gibraltar Financial Services Commission Guidance Note on Insurance Group Supervision 10 8.1 A group, for which the GFSC is the group supervisor, may apply to produce a single document covering its own risk and solvency assessments (ORSAs) at the level of the group and at the level of any subsidiary in the group at the same time (Regulation 223(6) of the Regulations). 8.2 In addition to the ORSA conducted at group level, the GFSC expects the group ORSA document to include sufficient details on the solo firms included within the scope of the group ORSA such that Regulation 46 of the Regulations is satisfied in respect of each of those firms. 9 Single solvency and financial condition report (SFCR) 9.1 A group, for which the GFSC is the group supervisor, may apply to produce a single report on its SFCR at the level of the group, and at the level of any subsidiary in the group which must be individually identifiable (Regulation 233(3) of the Regulations). 9.2 The GFSC expects the single document produced to cover the same level of detail on the solo subsidiary firms as is required in the solo SFCR. 10 Responsibilities of the relevant insurance group undertaking 10.1 For a group, for which the GFSC is the group supervisor, it is sufficient (although not mandatory) for one relevant insurance group undertaking within an insurance group to undertake the following activities on behalf of the group, (although this entity and its management may not be responsible for group matters): a. to submit the relevant data for and the results of the group eligible own funds and the group SCR to the GFSC, as referred to in Regulation 198(2) of the Regulations; b. to ensure ongoing compliance with the conditions for the prudent management of subsidiaries, where the GFSC has agreed to the use of a single document, the production of the single document covering all relevant ORSAs and the production of the single SFCR; c. to inform the GFSC in an event of non-compliance with the group or solo SCR within the appropriate timeframes, as referred to in Regulation 122 of the Regulations; and d. to either submit a realistic recovery plan and take measures to ensure compliance with the group SCR in an event of non-compliance with the group SCR within the appropriate timeframes, as referred to in Regulation 122 of the Regulations, or notify the relevant individual parties to do so. 11 Supervision in the absence of third-country equivalence 11.1 In the absence of equivalent group supervision, in accordance with Regulation 239 of the Regulations, the relevant Gibraltar regulatory requirements will apply to the worldwide group, unless the GFSC has specified ‘other methods’ to achieve the objectives of group supervision in accordance with Article 262(2) of Directive 2009/138/EC (the Solvency II Directive). In the absence of a decision by the GFSC to specify ‘other methods’ for the group, then firms in that group are required to apply the relevant Gibraltar regulatory requirements to the worldwide group. 11.2 Firms will be expected to make a formal application to the GFSC, where they wish the GFSC to specify ‘other methods’ for the purposes of Regulation 239(4) of the Regulations. In its application,

Gibraltar Financial Services Commission Guidance Note on Insurance Group Supervision 11 the GFSC expects a firm to propose other methods for the GFSC to consider. The GFSC will assess such applications on a case-by-case basis, taking into account the objectives of group supervision. 11.3 If firms wish to submit an application before a relevant equivalence decision is made, they may do so stating the assumptions made with regard to equivalence. Where appropriate, the GFSC may refrain from making a decision until an equivalence decision has been finalised.

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