Circulaire NBB_2017_07 / Requirements for the use of the Duration-Based Equity risk sub-module

NBB_2017_07 – 1 March 2017 Circular – Page 1/4 boulevard de Berlaimont 14 – BE-1000 Brussels tel. +32 2 221 38 12 – fax + 32 2 221 31 04 company number: 0203.201.340 RPM Brussels www.bnb.be Circular Brussels, 1 March 2017 Reference: NBB_2017_07 your contact: Kajal Vandenput tel. +32 2 221 51 77 – fax +32 2 221 31 04 kajal.vandenput@nbb.be Requirements for the use of the "Duration-Based Equity risk sub-module" (Duration-Based Equity risk sub-module) within the framework of the SCR according to the standard formula and communication of information to the Bank as part of the approval application Scope Belgian insurance and reinsurance undertakings. Belgian insurance and reinsurance holdings. Belgian mixed financial holding companies. Summary/Objectives This circular provides information on the Bank's requirements concerning the use of the "Duration-Based Equity risk sub-module" (Duration-Based Equity risk sub-module - DBE) in the context of the calculation of the SCR according to the standard formula, as well as on the communication of information to the Bank as part of the approval application, as provided for in Article 162 of the Law of 23 March 2016 on the status and supervision of insurance or reinsurance undertakings. Structure I. Context II. Bank's requirements for the use of the "Duration-Based Equity risk sub-module" (Duration-Based Equity risk sub-module) III. Bank's assessment procedure and approval deadlines IV. Entry into force

Circular – Page 2/4 NBB_2017_07 – 1 March 2017 Madam, Sir, I. Context Directive 2009/138/EC, known as "Solvency II", provides (in Article 304), as a national option, the use of a SCR sub-module for duration-based equity risk (Duration-Based Equity risk sub-module - DBE), under certain conditions. The use of this DBE has the consequence that the undertaking may use a 22% SCR shock on equity. The Law of 23 March 2016 provides (in Article 162) for the possibility of using this DBE on the Belgian market, subject to approval by the Bank based on a properly prepared application file. In the context of the implementation of Solvency II, it is important to improve transparency and provide clarification regarding information communication requirements and procedures to be followed for the approval process related to different measures in accordance with Article 308 bis (phased introduction) of Directive 2009/138/EC. The Bank intends, in this circular, to specify the conditions and criteria for the use of the DBE as well as the transitional measure for the SCR regarding equity risk for a maximum period of 7 years (Article 666 of the Law). For the use of the DBE, the Bank must grant prior approval based on a complete application file submitted by the undertaking. The Bank's approval will only be granted on an individual basis, taking into account specific requirements and additional elements relevant to the assessment. This circular specifies the specific requirements for the communication of information to the Bank as well as the procedures to be followed for the approval process. II. Bank's requirements for the use of the "Duration-Based Equity risk sub-module" (Duration-Based Equity risk sub-module) In its assessment of the compliance and eligibility of the "Duration-Based Equity risk sub-module" (Duration-Based Equity risk sub-module - DBE) within the framework of the calculation of the SCR according to the standard formula, the Bank will take into account all elements comprising the application file as referred to in Article 162 of the Law of 23 March 2016 on the status and supervision of insurance or reinsurance undertakings. To ensure an equal assessment of an application file and uniform application of the "duration-based equity risk sub-module", the Bank specifies the following interpretation and eligibility criteria which the undertaking must take into account: a) Separate administrative and accounting management: The undertaking's activities for which the DBE is used are split on administrative and accounting levels. This must generally be interpreted differently from the notion of "identified, managed and organized separately" applicable to the equalisation adjustment. The transfer of assets and liabilities from the separate administrative and accounting management to or from other activities of the undertaking is only possible with the Bank's approval. b) Activities abroad: The part of activities carried out in a Member State other than the Member State where the authorization to carry out activities was granted is not eligible for the use of the DBE. The Bank's approval is given only for the portfolio of assets and liabilities in Belgium. c) Solvency position and impact on the SCR ratio: The undertaking must recalculate its SCR ratio assuming that neither the DBE nor the transitional measure for equity risk (Article 666 of the Law) applies. This implies the application of a 39% shock on equity risk to type 1 equities, with a maximum symmetric adjustment of +/- 10% on the SCR on equity, and a shock of 49% +/- 10% maximum symmetric adjustment to type 2 equities, instead of the 22% shock under the DBE. d) Impact on liquidity: The undertaking must carry out its own assessment of its liquidity after a liquidity stress test. The assumption made in this regard is an increased risk of liquidity problems if the undertaking is forced to sell its equity portfolio or other assets following a shock on the surrender of contracts to which the DBE applies. The undertaking must be able to justify its own assumptions regarding surrender behavior after the shock. e) Asset reallocation: The undertaking may only sell eligible equity investments for the DBE in exceptional circumstances resulting from a credit event linked to the issuer of the equities or market conditions related to the market on which the equities are traded, and the decision to sell the equities must be in line with approved risk tolerance limits, risk appetite, and the undertaking's internal investment policy. f) Prudent person: The undertaking invests, in accordance with the "prudent person" principle, in assets and instruments presenting risks that it can identify, measure, monitor, manage, control, and report adequately and that it can take into account appropriately in the assessment of its overall solvency need. All assets are invested in a way to guarantee the security, quality, liquidity, profitability, and congruence of the entire portfolio. Furthermore, the location of these assets is such that it guarantees their availability. Assets held for the purpose of covering technical provisions are also invested in a manner appropriate to the nature and duration of the insurance and reinsurance liabilities. The undertaking's investment policy must clearly indicate that equities held to cover the DBE liability portfolio are held for a period corresponding to the average duration of the liabilities. This policy is approved by the board of directors and is subject to regular monitoring. g) Collective investments and other investments presented in the form of funds: Undertakings are expected to apply the look-through approach for equity investments in collective investment undertakings and other investments presented in the form of funds. The undertaking must be able to demonstrate that the strategy and intention of the fund are to hold the underlying equity positions in accordance with the undertaking's asset-liability management and investment policy. This must be documented in the fund's investment mandate. If the undertaking is unable to identify the underlying equities using the look-through approach and it is not possible to rely on the target allocation of the fund's underlying assets in accordance with Art. 84§3 of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014, it must consider equity investments in collective investment undertakings and other investments presented in the form of funds as type 2 equities for the calculation of the SCR regarding equity risk. III. Bank's assessment procedure and approval limits Undertakings wishing to use the DBE are required to submit an application file to the Bank, taking into account the interpretations given by the Bank regarding eligible activities as described in points a) and b). In their application, undertakings must confirm the elements of points c) to h) and document compliance with these conditions. For the approval procedure regarding the use of the DBE, the data required by the Bank must be communicated to the Bank's case manager. The Bank will acknowledge receipt of the approval application by letter. The Bank intends to indicate, within 30 working days following the receipt of the application, whether it is complete. An approval application is considered complete if it contains all information required by the Bank. If the Bank finds that the application is incomplete, it immediately communicates to the undertaking that the approval period has not yet started to run and specifies the reason why the application was not considered complete. When the Bank confirms that the application is complete, it may still request additional information it deems necessary for the examination of the file. In this case, the Bank's request specifies and justifies the information sought. In the context of the assessment of the application, the Bank may ask the undertaking to make adjustments or modifications.

Circular – Page 3/4 NBB_2017_07 – 1 March 2017 The Bank ensures that a decision regarding the application is taken within a period of three months from the receipt of a complete application. The days between the date on which the Bank requests this information or adjustments and the date on which it receives them are not taken into account for the calculation of the aforementioned three-month period. The Bank further specifies that the transitional measure of the "equity risk sub-module" provided for in Article 666 can be applied optionally and without prior approval. The measure is applicable to the portfolio of type 1 or type 2 equities acquired by the undertaking before 1 January 2016 and for which the use of the "duration-based equity risk sub-module" is not applicable or for which there has been no approval. The equity portfolio to which this transitional measure applies must therefore be identifiable or verifiable and subject to separate reporting. Regarding the application of the transitional measure of the "equity risk sub-module" in accordance with Article 666 of the Law, reference should be made to Commission Implementing Regulation (EU) 2016/1630 of 9 September 2016, which describes the procedures to be followed for the identification and documentation of the relevant equity portfolio. It should be specified that, for the application of this transitional measure, the standard parameter to be used for the calculation of the "equity risk sub-module" according to the standard formula, without using the "duration-based equity risk sub-module", must include the symmetric adjustment of the capital requirement for equities as defined in Article 172 of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014. Thus, the at least linear transition from 22% for the year starting on 1 January 2016 to the standard parameter as of 1 January 2023 must be adapted according to the evolution of the symmetric adjustment of the capital requirement for equities. IV. Entry into force This circular enters into force on the day following its publication. A copy of this is sent to the auditors, approved auditors of your establishment. Please accept, Madam, Sir, our distinguished greetings. Jan Smets Governor