Circular NBB_2016_09 / Circular on Ancillary Own Funds

NBB_2016_09 – 25 April 2016 Circular – P. 1/5 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, 25 April 2016 Reference: NBB_2016_09 your correspondent:
Patricia Kaiser tel. +32 2 221 34 31 – fax +32 2 221 31 04 patricia.kaiser@nbb.be Circular on Ancillary Own Funds Scope Belgian insurance or reinsurance undertakings.
Insurance or reinsurance undertakings that are part of a Belgian group within the meaning of Article 339, 2° of the Law of 13 March 2016 on the status and supervision of insurance or reinsurance undertakings.
Belgian undertakings that are part of a Belgian financial conglomerate within the meaning of Article 340, 1° of the aforementioned Law of 13 March 2016.
Branches of undertakings from third countries carrying on insurance [or reinsurance] activities in Belgium.
This circular applies to mutual insurance companies defined in Article 15, 79° of the aforementioned Law of 13 March 2016. For these undertakings, 'the Bank' should be replaced by 'the Office for the Supervision of Mutualities and National Unions of Mutualities' as defined in Article 15, 84° of the same Law. This circular does not apply to insurance undertakings referred to in Articles 275, 276 or 294 of the aforementioned Law of 13 March 2016. Subject This circular aims to explain the considerations relating to the Bank's approval process for ancillary own funds elements, the classification of ancillary own funds elements, and the continuous compliance with approval criteria. Legal References The Law: The Law of 13 March 2016 on the status and supervision of insurance or reinsurance undertakings. Regulation 2015/35: Delegated Regulation (EU) 2015/35 of the Commission 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.

Circular – P. 2/5 NBB_2016_09 – 25 April 2016
Structure
I. Objectives
II. Definitions
III. Supplementary Information
IV. Entry into Force
V. Guidelines on Ancillary Own Funds
Madam,
Sir,

I. Objectives
These guidelines relate to Articles 142, 143, 146 to 149, 367 and 381 of the Law as well as Articles 62 to 67, 74, 75, 78 and 79 of Regulation 2015/35.
Ancillary own funds are contingent elements in that they have not been paid up and are not recognized in the balance sheet. The necessity for approval of these elements by the Bank recognizes this contingent nature. If, at some future unspecified time, the ancillary own funds are called, they will cease to be contingent elements and will become basic own funds elements covered by assets in the balance sheet.
Article 142 of the Law provides that ancillary own funds may include any legally binding commitment received by undertakings. This may encompass many agreements not falling under the specific categories of ancillary own funds elements referred to in the Law, provided they can be called to absorb losses.
. These guidelines describe the considerations relating to the Bank's approval process for ancillary own funds elements, the classification of ancillary own funds elements, and the continuous compliance with approval criteria.
The ancillary own funds approval process involves continuous communication between the Bank and undertakings, including before an undertaking submits an official application for approval of an ancillary own funds element. If the ancillary own funds element that may be called becomes an unlisted element (see below) and, consequently, two approvals are required from the Bank, this communication should include the procedural approach to be adopted regarding these two necessary approvals. Pursuant to Article 367 of the Law, a group is authorized to apply for approval of an ancillary own funds element concerning an intermediate insurance holding company or an intermediate mixed financial holding company. In these cases, these guidelines apply as if the intermediate insurance holding company or the intermediate mixed financial holding company were an insurance or reinsurance undertaking. The same applies when a group is directed by an insurance holding company or a mixed financial holding company in accordance with Article 381 of the Law. For the purposes of these guidelines, the following definitions have been established:
a) 'own funds instrument': an instrument that generates, if called, an asset, often in the form of cash, while creating corresponding interests in the insurance or reinsurance undertaking in the case of shares, or corresponding subordinated liabilities in the undertaking; b) 'unlisted element': an own funds element not listed in Articles 69, 72 and 76 of Regulation 2015/35.

NBB_2016_09 – 25 April 2016 Circular – P. 3/5
II. Definitions
In the absence of a definition in this circular, terms have the meaning defined in the legislative and regulatory acts referenced therein.
III Supplementary Information
This circular falls within the framework of the harmonized implementation of the principles of 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), as this implementation was determined by the guidelines of the European Insurance and Occupational Pensions Authority. Undertakings may, for information purposes, consult these guidelines at the following address: https://eiopa.europa.eu/publications/eiopa-guidelines IV Entry into Force This circular applies from 23 March 2016. V Guidelines on Ancillary Own Funds Guideline 1 – Approval of ancillary own funds elements which take, once called, the form of an unlisted element If, once called, an ancillary own funds element takes the form of an unlisted element, undertakings should apply for approval of the classification of this element, as provided for in Article 79 of Regulation 2015/35, before submitting an application for approval of the ancillary own funds element. Guideline 2 – Conclusion of the contract relating to an ancillary own funds element If the Bank's approval was granted on the condition that the contract be concluded, in accordance with Article 7, paragraph 3, of Commission Implementing Regulation (EU) 2015/499 of 24 March 2015 defining implementing technical standards with regard to the procedures to be used for the approval, by supervisory authorities, of the use of ancillary own funds elements in accordance with Directive 2009/138/EC of the European Parliament and of the Council (hereinafter 'Regulation 2015/499'), the undertaking should formally conclude the contract no later than within 15 working days from the granting of approval, unless it has previously agreed in writing with the Bank on a longer period. Guideline 3 – Callable on demand For the elements referred to in Article 74, points a), b), c), d), f) and i), of Regulation 2015/35 to be callable on demand, undertakings should ensure that the call:
a) does not depend on the occurrence of an event or the fulfillment of criteria; b) is not subject to the consent of the counterparty or any third party; c) is not subject to a consent, agreement, or incentive implying that the undertaking is not authorized to call the element or is not likely to call it; or d) is not subject to any other agreement or any other combination of agreements having the same effect as those referred to in points a) to c). Regarding the assessment of future claims of a mutual insurance association with variable contributions for the purposes of Article 143 of the Law, the Bank will examine whether there are obstacles to the use of claims to cover losses when they arise, and to the recovery of amounts in a timely manner.

Circular – P. 4/5 NBB_2016_09 – 25 April 2016
In particular, regarding the possible recall of contributions, the Bank will require the undertaking to demonstrate that the cost of the recall operation remains proportional to the amount of the possible recall and that the undertaking provides relevant information regarding the possibility of actually carrying out the recall operation. Guideline 4 – Classification of ancillary own funds elements To determine the classification of an ancillary own funds element, the Bank will not rely solely on the form in which this element is presented or described but also on the economic substance of the element and on the extent to which it satisfies the characteristics and factors referred to in Articles 146 to 149 of the Law, and Articles 74, 75 and 78 of Regulation 2015/35. If an ancillary own funds element becomes a callable own funds instrument, undertakings should classify the ancillary own funds element by evaluating the characteristics of this own funds instrument and determining the level at which the own funds instrument would belong if it were called. Undertakings should ensure that, if the call of an ancillary own funds element results in the receipt of cash or other assets, this basic own funds element is treated only as a contribution if it does not give rise to an own funds instrument or a corresponding liability, contingent or otherwise, of the undertaking. Undertakings should treat elements as contributions:
a) when they take the form of an unconditional donation or gift of own funds; b) regardless of whether they originate from a parent company or any other party, or whether they take the form of additional contributions from the members of mutual insurance associations; c) regardless of the treatment of the element for accounting purposes as contributing to profits or losses or as contributing directly to reserves. Since the balance sheet treatment of contributions that satisfy the factors and characteristics used to classify own funds into levels represents an increase in the undertaking's assets accompanied by a corresponding increase in the reconciliation reserve, and since the contribution does not give rise to an own funds instrument or a liability or any other basic own funds element, undertakings should classify the element as Level 2 ancillary own funds. Undertakings should classify contractual agreements that, when implemented, reduce the undertaking's liabilities by compensating third parties in the same manner as contributions:
a) if they generate an asset for a third-party creditor of the undertaking; b) if they do not create corresponding liabilities for the undertaking.
Undertakings should treat indemnity contracts, which oblige a third party to pay compensation to the undertaking's creditor without obliging the undertaking to repay these compensations to the third party, as ancillary own funds elements, subject to the Bank's approval.

NBB_2016_09 – 25 April 2016 Circular – P. 5/5
Guideline 5 – Continuous compliance with criteria Undertakings should consult with the Bank as soon as possible if they have reason to believe that a significant modification of the loss-absorption capacity of an ancillary own funds element is imminent or probable. Guideline 6 – Assessment of continuous compliance with criteria The Bank reserves the right to monitor at any time that the amount of an ancillary own funds element continues to reflect its loss-absorption capacity under Regulation 2015/35. To this end, the Bank will use all available information and in particular:
a) information obtained through on-site inspections; b) ad hoc information received or obtained as part of the prudential supervision process; c) information provided by other supervisory authorities within the college of supervisors, where applicable. A copy of this circular is sent to the auditor(s), approved auditor(s) of your undertaking. We ask you to accept, Madam, Sir, the expression of our distinguished sentiments. Jan Smets Governor