Circulaire NBB_2016_39 / Dispensation from the obligation to set up supplementary provisions

NBB_2016_39 – 5 October 2016 Circular – Page 1/2 14 Berlaimont Boulevard – BE-1000 Brussels Tel. +32 2 221 38 12 – Fax +32 2 221 31 04 Company number: 0203.201.340 Brussels RPM www.bnb.be Circular Brussels, 5 October 2016 Reference: NBB_2016_39 Your correspondents: Stany Zabinski Tel. +32 2 221 34 67 – Fax +32 2 221 31 04 stany.zabinski@nbb.be Dispensation from the obligation to set up supplementary provisions Scope Insurance companies subject to the law of 13 March 2016 on the status and supervision of insurance and reinsurance companies and active in the life and work accident branches. Summary/Objectives This circular concerns the dispensation from the obligation to set up supplementary provisions, commonly referred to as "flashing provisions". Madam, Sir, Under the Solvency I prudential regime, insurance companies were required, pursuant to Article 31, §3, second paragraph of the Royal Decree of 14 November 2003 on life insurance activity and point 1, a, second paragraph, second dash, 1° of Annex VI to the Royal Decree of 22 February 1991 laying down the general regulation on the supervision of insurance companies, to set up "supplementary provisions" (commonly called "flashing provisions") at the statutory level to cover the interest rate risk they incurred for certain types of contracts. Following the entry into force of the law of 13 March 2016 on the status and supervision of insurance and reinsurance companies (hereinafter the Control Law), which transposes 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), it was decided to maintain the Solvency I prudential provisions regarding supplementary provisions within the accounting framework. Thus, the Royal Decree of 1 June 2016 amending the Royal Decree of 17 November 1994 on the annual accounts of insurance and reinsurance companies (hereinafter the "Annual Accounts RD") provides, in the interest of prudence and continuity, that supplementary provisions set up under the Solvency I regime are maintained in the statutory accounts upon the transition to the Solvency II regime and continue to be funded subsequently, as long as the interest rate risk persists. Given that the new Solvency II prudential framework provides specific regulatory own-funds requirements to cover interest rate risk, this new Annual Accounts RD contains simplified provisions regarding the dispensation from the obligation to set up supplementary provisions.

Circular – Page 2/2 NBB_2016_39 – 5 October 2016 The simplification mentioned above results in an adaptation of the dispensation mechanism from the obligation to set up supplementary provisions, which is more appropriate for Solvency II (Annual Accounts RD art. 34quinquies §4): "By way of derogation from paragraph 3, the National Bank of Belgium dispenses an insurance company, at its request, from the obligation to set up the supplementary provision, calculated according to the method referred to above, on condition that it satisfies the solvency capital requirements provided for by or pursuant to the law of 13 March 2016 on the status and supervision of insurance and reinsurance companies, without relying on the transitional measures provided for in Articles 668 and 669 of said law. The National Bank of Belgium imposes additional conditions for granting or maintaining this dispensation when these are rendered necessary by the company's situation and market conditions." The coverage of all regulatory own-funds requirements without relying on transitional measures as referred to in Articles 668 and 669 of the Control Law is a necessary condition to be exempted from the obligation to set up supplementary provisions. For companies that have conducted stress tests regarding exposure to interest rate risk (low yield) in accordance with Article 322 of the Control Law, the benefit of this dispensation is - pursuant to Article 34quinquies, §4, of the Annual Accounts RD - also conditional upon the existence of sufficient results in said stress tests. Based on this analysis, the Bank reserves the right not to grant a dispensation if the company's situation and market conditions so require. This circular replaces and repeals the following three circulars:

• Circular D.252 of 15 December 2004 on the dispensation from the constitution of the flashing provision;
• Circular 2006-2 of 19 September 2006 on the criteria used to assess applications for dispensation from the constitution of the flashing provision;
• Circular 2013-13 of 23 October 2013 in which the Bank indicated that, until further notice, it was no longer appropriate to grant dispensations from the constitution of the flashing provision. A copy of this circular is sent to the auditor(s) and approved auditor(s) of your establishment. Please accept, Madam, Sir, our distinguished salutations. Jan Smets Governor