Circular NBB_2016_09 on Auxiliary Own Funds

NBB_2016_09 – April 25, 2016 Circular – P. 1/5 14 Berlaimont Boulevard – 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, April 25, 2016 Reference: NBB_2016_09 your contact: Patricia Kaiser tel. +32 2 221 34 31 – fax +32 2 221 31 04 patricia.kaiser@nbb.be Circular on Auxiliary 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 entities 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 third-country companies 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 entities, "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 auxiliary own funds elements, the classification of auxiliary 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 – April 25, 2016 Structure I. Objectives II. Definitions III. Additional Information IV. Entry into Force V. Guidelines on Auxiliary 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. Auxiliary own funds are contingent elements in that they have not been paid up and are not recognized in the balance sheet. The need for approval of these elements by the Bank recognizes this contingent nature. If, at some future unspecified time, the auxiliary own funds are called, they will cease to be contingent elements and become basic own funds elements covered by assets in the balance sheet. Article 142 of the Law provides that auxiliary own funds may include any legally binding commitment received by the undertakings. This may encompass many agreements that do not fall under the specific categories of auxiliary 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 auxiliary own funds elements, the classification of auxiliary own funds elements, and the continuous compliance with approval criteria. The approval process for auxiliary own funds involves continuous communication between the Bank and the undertakings, including before an undertaking submits an official application for approval of an auxiliary own funds element. If the auxiliary own funds element likely to be called becomes an off-list 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. Under Article 367 of the Law, a group is authorized to request approval for an auxiliary 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 developed: 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) "off-list element": an own funds element not listed in Articles 69, 72 and 76 of Regulation 2015/35.

NBB_2016_09 – April 25, 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 referred to therein. III. Additional Information This circular is part 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 consult these guidelines for information at the following address: https://eiopa.europa.eu/publications/eiopa-guidelines IV. Entry into Force This circular applies from March 23, 2016. V. Guidelines on Auxiliary Own Funds Guideline 1 – Approval of auxiliary own funds elements which take, once called, the form of an off-list element If, once called, an auxiliary own funds element takes the form of an off-list element, undertakings should request approval for the classification of this element, as provided for in Article 79 of Regulation 2015/35, before submitting an application for approval of the auxiliary own funds element. Guideline 2 – Conclusion of the contract relating to an auxiliary 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 laying down implementing technical standards with regard to the procedures to be used for the approval, by supervisory authorities, of the use of auxiliary 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 15 working days from the granting of approval, unless it has agreed in advance, in writing, with the Bank for 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 any consent, agreement or incentive that would imply 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 timely recovery of amounts.

Circular – P. 4/5 NBB_2016_09 – April 25, 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 auxiliary own funds elements To determine the classification of an auxiliary 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 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 auxiliary own funds element becomes a callable own funds instrument, undertakings should classify the auxiliary own funds element by evaluating the characteristics of this own funds instrument and determine the level at which the own funds instrument would belong if it were called. Undertakings should ensure that, if the call of an auxiliary 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 a corresponding own funds instrument or liability, contingent or not, 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) 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 treatment in the balance sheet 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 auxiliary own funds. Undertakings should classify contractual agreements that, when implemented, reduce the undertaking's liabilities by compensating third parties in the same way 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 reimburse these compensations to the third party, as auxiliary own funds elements, subject to the Bank's approval.

NBB_2016_09 – April 25, 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 auxiliary own funds element is imminent or probable. Guideline 6 – Assessment of continuous compliance with criteria The Bank reserves the right to check at any time that the amount of an auxiliary own funds element continues to reflect its loss-absorption capacity in accordance with Regulation 2015/35. To do this, 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 supervisory college, 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