GFSC Guidance Note Solvency 2: Applying EIOPA's Set 1 Guidelines

www.gfsc.gi GFSC Guidance Note Solvency 2: Applying EIOPA’s Set 1 Guidelines 1 Month 2017 Version: 1 Publication Date: 3 October 2025

Gibraltar Financial Services Commission Guidance Note – Applying EIOPA’s Set 1 Guidelines 2 Contents

1. Introduction .......................................................................................................... 3
2. Compliance with Guidelines .................................................................................... 3
3. Ancillary own-funds (Guidelines 1-6) ........................................................................ 4
4. Classification of own-funds (Guidelines 1-26)............................................................. 4
5. Ring-fenced funds (Guidelines 1-17) ......................................................................... 5
6. Treatment of related undertakings, including participations (Guidelines 1-9) ................ 6
7. Group solvency (Guidelines 1–27) ............................................................................ 8

Gibraltar Financial Services Commission Guidance Note – Applying EIOPA’s Set 1 Guidelines 3

1. Introduction 1.1. This Guidance Note is addressed to all insurance undertakings1 and reinsurance undertakings2 (collectively referred to as ‘firms’) in relation to the European Insurance and Occupational Pensions Authority’s (‘EIOPA’) Set 1 Solvency II Guidelines3 (the ‘Guidelines’) published on 2 February 2015. 1.2. This Guidance Note expands on the GFSC’s general approach set out in its ‘Approach to Insurance Regulation’ document. 4 1.3. It sets out the GFSC’s expectation that firms comply with the EIOPA Guidelines and provides further commentary on certain Guidelines where additional considerations should be taken into account by firms. 1.4. This Guidance Note is intended to complement existing legislation, policies and guidance and is not intended to conflict with, amend or supersede them.
2. Compliance with Guidelines 2.1. As set out in the GFSC’s Policy Statement on the Interpretation of EU Guidelines and Recommendations following Gibraltar’s Withdrawal from the EU5 , the GFSC expects firms to continue to make every effort to comply with EU Guidelines that were applicable as at the end of the transition period, to the extent that these remain relevant. The GFSC expects firms to comply with all of the Guidelines that apply to them in a proportionate manner. 2.2. The Guidelines on which further commentary is provided are: • ancillary own-funds; • classification of own-funds; • ring-fenced funds; • treatment of related undertakings, including participations; and • group solvency calculation. 1 Financial Services (Insurance Companies) Regulations 2020 (ICRs 2020), reg 3. 2 ibid. 3 EIOPA Set 1 Guidelines 4 GFSC Guidance Note on Approach to Insurance Regulation 5GFSC Policy Statement on The Interpretation of EU Guidelines and Recommendations following Gibraltar's Withdrawal from the EU

Gibraltar Financial Services Commission Guidance Note – Applying EIOPA’s Set 1 Guidelines 4 3. Ancillary own-funds (Guidelines 1-6) 3.1. These Guidelines complement Chapter 2 of Part 6 of the Insurance Companies Regulations, Chapter 4 of Part 1 of the Solvency 2 Technical Standards and the GFSC’s Guidance Note on the Approach to Insurance Own Funds Approvals6 in respect of the criteria for the approval of and the application procedures for ancillary own-funds (‘AOF’). Firms should refer to regulation 84 of the Insurance Companies Regulations in particular. 3.2. Guidelines 5 and 6 identify the need for firms and the GFSC to monitor on an ongoing basis the ability of an AOF item to satisfy the criteria for approval. Firms should engage with their usual supervisory contact at an early stage where any changes might affect the status or loss￾absorbing characteristics of an approved AOF Item. 4. Classification of own-funds (Guidelines 1-26) Guidelines relevant to specific tiers (Guidelines 1–11) 4.1. Sections 1 to 3 set out considerations relating to items and features determining classification for Tier 1, Tier 2 and Tier 3 respectively. 4.2. Firms should follow these Guidelines when designing and classifying their capital instruments and the GFSC expects this to be reflected in firms’ submissions of pre-issuance notifications. Guidelines relevant to all tiers (Guidelines 12–20) 4.3. Section 4 contains Guidelines relevant to all tiers. Firms should follow the approach set out in these Guidelines in order to ensure compliance with Chapter 2 of Part 6 of the Insurance Companies Regulations and Chapter 4 of Part 1 of the Solvency 2 Technical Standards. Guidelines 12, 18, 21-23 and 25-26 have all been restated in the GFSC’s Guidance Note ‘Solvency 2: Own funds approvals’. 4.4. In Chapter 2 of the GFSC Guidance Note ‘Solvency 2: The quality of capital instruments’, 7 the GFSC sets out its expectation regarding a broad scope for the term ‘redemption’ in line with paragraph 1.4 of the GFSC’s Guidance Note ‘Solvency 2: Own Funds Approvals’. (Previously Guideline 12.) 4.5. Guideline 13 sets out the considerations relevant to encumbrance. Firms should identify the substance and not simply the form of arrangements and connected transactions when considering the potential impact on the quality of capital. Firms should consider the GFSC’s 6 GFSC Guidance Note Solvency 2: Own funds approvals 7 GFSC Guidance Note Solvency 2: the quality of capital instruments

Gibraltar Financial Services Commission Guidance Note – Applying EIOPA’s Set 1 Guidelines 5 Guidance Note ‘Solvency 2: Subordinated guarantees and the quality of capital for insurers’ 8 on subordinated guarantees in the light of Guideline 13. 4.6. The GFSC’s approach to its review of potential redemptions, including the information to be provided and when it should be submitted is set out in the GFSC Guidance Note ‘Solvency 2: Own Funds Approvals’. (Previously Guideline 18.) 4.7. In considering whether an instrument includes an incentive to redeem as described in Guideline 19, firms should provide a reasoned basis for the choice of coupon structure and any other provision that might suggest an incentive to redeem. Firms should include this information as part of their pre-issuance notification. Guidelines relating to items not on the lists of own fund items (Guidelines 21–26) 4.8. Section 5 covers the approach to the approval of items not on the lists of own-funds in Chapter 2 of Part 6 of the Insurance Companies Regulations and Chapter 4 of Part 1 of the Solvency 2 Technical Standards. Guidelines 21 – 23, 25 and 26 have been restated in GFSC Guidance Note ‘Solvency 2: Own Funds Approvals’. Firms should engage with their usual supervisory contact at an early stage if they are considering development of an own-fund item not on the lists. 5. Ring-fenced funds (Guidelines 1-17) 5.1. These Guidelines complement the Insurance Companies Regulations and the Solvency 2 Technical Standards regarding ring-fenced funds (‘RFF’). Identification of RFF (Guidelines 1–4) 5.2. Guidelines 1 to 4 describe the characteristics of RFF together with details of arrangements, restrictions and types of business which are generally inside or outside the scope of the RFF regime. Firms should follow the approaches set out in these Guidelines in determining whether they need to recognise RFF. In particular, the GFSC draws firms’ attention to paragraph 1.13 of Guideline 3 which makes clear that all restrictions in place at the time of calculation of the Solvency Capital Requirement (‘SCR’) should be taken into account, irrespective of the time period for which those restrictions apply. Materiality (Guideline 5) 5.3. Firms should follow Guideline 5 paragraph 1.17 when assessing whether a RFF is not material and documenting their assessment. Firms should send such assessments to their usual supervisory contact. 8 GFSC Guidance Note Solvency 2: Subordinated guarantees and the quality of capital for insurers

Gibraltar Financial Services Commission Guidance Note – Applying EIOPA’s Set 1 Guidelines 6 5.4. Where a RFF is not material, firms should apply paragraph 1.16 of Guideline 5. Identification of assets and liabilities in RFF (Guidelines 6–8) 5.5. Firms should follow Guidelines 6 to 8 in determining the assets and liabilities within the scope of RFF. Calculations and reporting in respect of RFF (Guidelines 9–15, and 17) 5.6. Firms should follow Guidelines 9 to 13, and 17 in carrying out the calculations required by the Insurance Companies Regulations and the Solvency 2 Technical Standards in respect of the: • notional SCR for the purpose of calculating any required adjustment to own-funds; • notional SCRs to be aggregated for the purpose of standard formula calculations for RFF and matching adjustment portfolios; • calculation of the SCR as a whole for internal model firms; and • reporting of the SCR by risk module by standard formula firms. 5.7. On Guideline 14, firms should engage with their usual supervisory contact at an early stage in order to discuss what evidence the GFSC would need in order to be satisfied with the proposed methodology. 6. Treatment of related undertakings, including participations (Guidelines 1-9) 6.1. These Guidelines complement the Insurance Companies Regulations and the Solvency 2 Technical Standardsin respect of related undertakings, including participations. They cover the identification of related undertakings and their treatment both for capital resources and capital requirements purposes. Identification (Guidelines 1–2) 6.2. Guidelines 1 and 2 address the identification of related undertakings and participations. Firms should consider both shareholdings and the existence of dominant or significant influence when identifying related undertakings. This should not be considered a static assessment; firms should have in place procedures to identify and update their position where there are changes to shareholdings or the relationship between the firm and other entities, which might lead to the creation, or removal of, dominant or significant influence. 6.3. Firms should consider both direct and indirect holdings when identifying related undertakings.

Gibraltar Financial Services Commission Guidance Note – Applying EIOPA’s Set 1 Guidelines 7 Strategic participations (Guideline 3) 6.4. Article 171 of the Solvency 2 Technical Standards sets out tests a firm must be able to meet before an equity investment in a related undertaking can be considered strategic. Firms should follow Guideline 3 when seeking to demonstrate that these tests are met and be able to provide credible supporting evidence set out in paragraph 1.26 of the Guideline. In particular, the GFSC draws firms’ attention to the need to demonstrate that the value of the equity investment is likely to be materially less volatile than other equities. Firms should justify the selection of equities used for comparison. Adjustment to own-funds to reflect value of holdings in financial and credit institutions (Guidelines 4–6) 6.5. Firms should observe Guidelines 4 and 5 which support the carrying out of the calculations required by Article 68 of the Solvency 2 Technical Standards. Where a deduction from own￾funds is necessary, and where a straightforward application of Article 68(5) of the Solvency 2 Technical Standards is not possible, firms should follow Guideline 6 to identify the tier of own￾funds to which the adjustment should apply. SCR calculations in respect of related undertakings (Guidelines 7–9) 6.6. Guidelines 7 to 9 set out how firms should reflect related undertakings in their SCR calculations, whether those calculations are performed using the standard formula or an internal model. When applying the standard formula to related undertakings and participations, firms should have regard to the relevant assumptions underlying the standard formula.9 The GFSC regards the assumption that the value of an equity investment cannot fall below zero as particularly relevant where a related undertaking is valued on the adjusted equity method; or where any commitment by a firm to provide support to a related undertaking is not captured by the counterparty default module. In addition, when a firm has identified a related undertaking where it does not hold an equity investment or its holding is a relatively small percentage, firms should consider whether the equity investment is representative of its exposure to that related undertaking. 6.7. In relation to paragraph 1.40 of Guideline 9, firms should also refer to the GFSC’s Guidance Note ‘Solvency 2: The Internal Model Treatment of Applications’10 where the firm calculates its solo-level SCR using an internal model. 9 Published by EIOPA 30 July 2014: https://register.eiopa.europa.eu/Publications/Standards/EIOPA-14- 322_Underlying_Assumptions.pdf 10 GFSC Guidance Note Solvency 2: The Internal Model Treatment of Participations

Gibraltar Financial Services Commission Guidance Note – Applying EIOPA’s Set 1 Guidelines 8 7. Group solvency (Guidelines 1–27) 7.1. These Guidelines are aimed at clarifying the requirements on the calculation of group solvency, including the scope of group supervision, the level(s) at which groups are supervised and the approach to calculating group solvency. 7.2. The GFSC has additional commentary in respect of the following Guidelines on the scope of group supervision and the level of which groups are supervised (Guidelines 1–5 and paragraph 5.1 of the GFSC Guidance Note ‘Solvency 2: Group Supervision’11 which restates Guideline 6). 7.3. Firms are responsible for providing guidance to related undertakings and ensuring the accuracy and completeness of information from related undertakings. Where the ultimate parent is not an authorised firm, the parent entity should nonetheless take responsibility for these matters. If necessary, the GFSC will use its general supervisory powers set out in the Insurance Companies Regulations12 over the ultimate parent to ensure that this occurs. Parent insurance or reinsurance undertaking, insurance holding company or mixed financial holding company headquartered in a third country (Guideline 5) 7.4. Guideline 5 applies such that the GFSC is not always required to apply group supervision at the level of the ultimate undertaking in Gibraltar. Instead, group supervision can be applied solely at the level of the ultimate parent located in a third country if it has a group supervision regime determined as equivalent in accordance with regulation 237 of the Insurance Companies Regulations. The GFSC may, however, undertake group supervision at a lower level in accordance with regulation 240 of the Insurance Companies Regulations. 11 GFSC Guidance Note on Solvency 2: Group Supervision 12 Insurance Companies Regulations, reg 32, 37 and 192.

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