Circular NBB_2016_13 on Group Solvency

NBB_2016_13 – 11 April 2016 Circular – Page 1/9 14 Boulevard de Berlaimont – 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_13 your correspondent:
Geoffroy Herberigs tel. +32 2 221 56 61 – fax +32 2 221 31 04 geoffroy.herberigs@nbb.be

Circular on Group Solvency

Scope
Insurance or reinsurance undertakings that are part of a group under Belgian law 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 law undertakings that are part of a Belgian financial conglomerate within the meaning of Article 340, 1° of the aforementioned Law of 13 March 2016.
This circular applies to mutual insurance companies as 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 Mutualities Unions" 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.

Object
This circular provides information on the Bank's guidelines regarding group solvency within the framework of Solvency II.

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.

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Structure
I. Objectives
II. Definitions
III. Additional Information
IV. Entry into Force
V. Guidelines on Group Solvency

Madam,
Sir,

I. Objectives
This circular relates to Articles 338, 339, 343 to 381 and 447 to 449 of the Law, as well as Articles 328 to 342 of Regulation 2015/35.
The guidelines on the calculation of group solvency aim to define and harmonize the requirements regarding the calculation of group solvency.
Unless otherwise stated, the guidelines apply to all methods of calculating group solvency. Where applicable, the standard formula or internal model is specified in the guidelines.
The guidelines provide advice on the treatment of EEA groups in the context of Articles 351 to 357 of the Law.

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 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.

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V. Guidelines on Group Solvency

Guideline 1 - Scope of the group in the context of the calculation of group solvency The participating insurance or reinsurance undertaking, the insurance holding company or the mixed financial holding company responsible for calculating group solvency should ensure that it covers all risks and linked companies of the group, except where excluded under Article 349 of the Law.

Guideline 2 - Consolidation process
The participating insurance or reinsurance undertaking, the insurance holding company or the mixed financial holding company should provide advice to all linked companies regarding the preparation of data for calculating group solvency. It should communicate the necessary instructions for the preparation of consolidated, combined or aggregated data, depending on the calculation method used. It should ensure that its instructions are applied adequately and homogeneously within the group for the recognition and valuation of balance sheet items, as well as for the inclusion and treatment of linked companies.

Guideline 3 - Assessment of any significant and dominant influence When determining the scope of the group, the participating insurance or reinsurance undertaking, the insurance holding company or the mixed financial holding company should ensure that any decision taken by the group supervisor regarding the influence exercised by any company on another is implemented.

Guideline 4 - Parent company being a mixed insurance holding company If the parent company is a mixed insurance holding company, the calculation of group solvency should apply to any part of the group meeting the criteria of Article 343, paragraph 2, 1°, 2° and 3° of the Law rather than to the mixed insurance holding company itself.

Guideline 5 - Application of the calculation method In order to calculate group solvency, the participating insurance or reinsurance undertaking, the insurance holding company or the mixed financial holding company should take into account the scope of the group determined under Guideline 1, regardless of the calculation method used (No. 1, No. 2 or a combination of both).

Guideline 6 - Proportional share
If a linked company is linked to another company according to a relationship defined in Article 10 of the Companies Code, the participating insurance or reinsurance undertaking, the insurance holding company or the mixed financial holding company should calculate the proportional share to be used for the calculation of group solvency, regardless of the calculation method chosen. By default, a proportional share of 100% should be used. If a group wishes to use a different percentage, it should explain to the group supervisor why this choice is appropriate. After consulting the other relevant supervisory authorities and the group itself, the group supervisor should decide whether the proportional share chosen by the group is appropriate.

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When calculating group solvency according to Method No. 1, the participating insurance or reinsurance undertaking, the insurance holding company or the mixed financial holding company should calculate its proportional share in its linked companies, taking:
(a) 100% if a subsidiary is included in accordance with Article 335, paragraph 1, points a) and b), of Regulation 2015/35, unless otherwise stipulated in accordance with Guideline 7; (b) the percentage retained for the preparation of consolidated accounts if companies are included in accordance with Article 335, paragraph 1, point c), of Regulation 2015/35; (c) the share of subscribed capital held, directly or indirectly, by the participating insurance or reinsurance undertaking, the insurance holding company or the mixed financial holding company, if linked companies are included in accordance with Article 335, paragraph 1, point e), of Regulation 2015/35.

Guideline 7 - Criteria for recognizing a solvency deficit of a subsidiary on a proportional basis In order to prove that the liability of the parent company is strictly limited to its share in the capital of the insurance or reinsurance subsidiary, as determined in Article 362, §1, of the Law, the parent company should provide the group supervisor with proof that the following criteria are met:
(a) there are no loss and profit transfer agreements and no guarantee or no asset maintenance agreement or other agreement by the parent company or any other linked company providing financial support; (b) the investment in the subsidiary is not considered a strategic investment by the parent company; (c) the parent company derives no benefit from its participation in the subsidiary, which could take the form of intragroup transactions such as loans, reinsurance contracts or service agreements; (d) the subsidiary does not occupy a prominent position in the group's business model, particularly in terms of product range, customer base, underwriting, distribution, investment strategy and management, and furthermore does not operate under the same name or brand and has no joint responsibilities at the group's senior management level; (e) a written agreement concluded between the parent company and the subsidiary explicitly limits the support provided by the parent company in the event of a solvency deficit to the parent company's share in the capital of that subsidiary. Furthermore, the subsidiary should have put in place a strategy aimed at filling the solvency deficit, for example through guarantees from minority shareholders. If a subsidiary is within the scope of the internal model to calculate the group's Solvency Capital Requirement, the parent company should not include the subsidiary's solvency deficit on a proportional basis. The parent company and the subsidiary should communicate the favorable decision of the group supervisor allowing the recognition of the solvency deficit on a proportional basis to inform policyholders and investors, as important information in the section dedicated to capital management in the report on the solvency and financial situation of the group and individual undertakings.

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To establish consolidated data according to Method No. 1, the own funds and Solvency Capital Requirement of the subsidiary should be calculated on a proportional basis and not according to full consolidation.
To establish aggregated data according to Method No. 2, the own funds and Solvency Capital Requirement of the subsidiary should be calculated according to the proportional share of that subsidiary, as well as in the case of a solvency deficit.

Guideline 8 - Treatment of specific linked companies for the purposes of calculating group solvency If companies from other financial sectors form a group subject to a sectoral capital requirement, the participating insurance or reinsurance undertaking, the insurance holding company or the mixed financial holding company should consider using the solvency requirements of this group rather than the sum of the requirements of each individual company to calculate group solvency.

Guideline 9 - Contribution of a subsidiary to the group's Solvency Capital Requirement If Method No. 1 is used and the standard formula applied, the participating insurance or reinsurance undertaking, the insurance holding company or the mixed financial holding company should calculate the contribution of a subsidiary to the group's Solvency Capital Requirement in accordance with Technical Annex 1. Regarding insurance or reinsurance undertakings, intermediate insurance holding companies and intermediate mixed financial holding companies consolidated in accordance with Article 335 of Regulation 2015/35, the contribution of the Solvency Capital Requirement at the individual level should be calculated taking into account the proportional share used to establish consolidated data. If the group's Solvency Capital Requirement on a consolidated basis is calculated based on an internal model, the contribution of a subsidiary to the group's Solvency Capital Requirement should result from the Solvency Capital Requirement of that subsidiary and the percentage taking into account the diversification effects attributed to that subsidiary according to the internal model. If Method No. 2 is used, the contribution of a subsidiary to the group's Solvency Capital Requirement should be the proportional share of the individual Solvency Capital Requirement, as no diversification effects are taken into account at the group level.

Guideline 10 - Availability of own funds at the group level of linked companies that are not subsidiaries The participating insurance or reinsurance undertaking, the insurance holding company or the mixed financial holding company should assess the availability of own funds, in accordance with Article 363, §2, of the Law and Article 330 of Regulation 2015/35, of insurance or reinsurance undertakings, intermediate insurance holding companies and intermediate mixed financial holding companies that are linked but are not subsidiaries, as well as of insurance or reinsurance undertakings, intermediate insurance holding companies and intermediate mixed financial holding companies from third countries that are linked but are not subsidiaries, if the own fund items of these companies have a significant impact on the amount of group own funds or on group solvency. It should explain to the group supervisor how this assessment was carried out.

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Guideline 11 - Treatment of minority interests in the coverage of the group's Solvency Capital Requirement The participating insurance or reinsurance undertaking, the insurance holding company or the mixed financial holding company should calculate the amount of minority interests included in eligible own funds, to be deducted from the group's own funds, for each subsidiary, in the following order:

1. calculate the eligible own funds exceeding the subsidiary's contribution to the group's Solvency Capital Requirement;
2. identify and deduct from the eligible own funds calculated in the first step the amount of unavailable own funds exceeding the subsidiary's contribution to the group's Solvency Capital Requirement;
3. calculate the share of minority interests to be deducted from the group's own funds by multiplying the minority share by the result of the second step.

Guideline 12 - Treatment of ring-fenced funds and portfolios under the equalisation reserve in the coverage of the group's Solvency Capital Requirement For all companies included in the calculation of group solvency according to Method No. 1 and for non-equivalent third-country companies included in the calculation of group solvency according to Method No. 2, the participating insurance or reinsurance undertaking, the insurance holding company or the mixed financial holding company should apply the principles applicable to ring-fenced funds and portfolios under the equalisation reserve defined in Article 81 of Regulation 2015/35 and Article 217 of Regulation 2015/35. For equivalent third-country companies included in the calculation of group solvency according to Method No. 2, the participating insurance or reinsurance undertaking, the insurance holding company or the mixed financial holding company should identify any restriction imposed on the own funds of the company due to the ring-fencing of assets or liability items, or similar agreements, in accordance with the equivalent solvency regime. These restrictions should be taken into account when calculating group solvency, as part of the assessment of the availability of own funds at the group level. When calculating the group's Solvency Capital Requirement according to Method No. 1, the participating insurance or reinsurance undertaking, the insurance holding company or the mixed financial holding company should not eliminate intragroup transactions between assets and liabilities corresponding to each significant ring-fenced fund or portfolio under the equalisation reserve and the remaining consolidated data. The group's Solvency Capital Requirement calculated based on consolidated data should correspond to the sum of the following:
(a) the notional amount of the Solvency Capital Requirement for each significant ring-fenced fund and each portfolio under the equalisation reserve, both calculated with the assets and liabilities of the ring-fenced fund without deduction of intragroup transactions; and (b) the (diversified) Solvency Capital Requirement of the group for the remaining consolidated data (excluding assets and liabilities of all significant ring-fenced funds but including assets and liabilities of all ring-fenced funds that are not significant). When calculating the group's Solvency Capital Requirement for the remaining consolidated data, intragroup transactions should be eliminated, while intragroup transactions between the remaining consolidated data and significant ring-fenced funds should not be eliminated. If a group uses an internal model to calculate the group's Solvency Capital Requirement, it should follow the advice provided in Guideline 13 of the guidelines on ring-fenced funds.

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The consolidated data used to calculate the group's own funds should be net of intragroup transactions, as indicated in Article 335, paragraph 3, of Regulation 2015/35. For this reason, all intragroup transactions between significant ring-fenced funds and the remaining consolidated data should be eliminated to calculate the group's own funds. For each significant ring-fenced fund and for each portfolio under the equalisation reserve identified in the consolidated data according to Method No. 1, the participating insurance or reinsurance undertaking, the insurance holding company or the mixed financial holding company should calculate the restricted own fund items based on the assets and liabilities of the ring-fenced fund that were used to calculate the notional amount of its Solvency Capital Requirement or the portfolio under the equalisation reserve, as mentioned above, i.e., without deduction of intragroup transactions. Consequently, the total of restricted own funds within the ring-fenced fund or portfolio under the equalisation reserve to be deducted from the group's reconciliation reserve should correspond to the sum of all significant restricted own funds identified within insurance or reinsurance undertakings in the EEA and restricted own funds identified within any insurance and reinsurance undertaking outside the EEA falling within the scope of the consolidated data.

Guideline 13 - Adjustments related to own funds not available for the calculation of the group's eligible own funds If Method No. 1 is used, the participating insurance and reinsurance undertaking, the insurance holding company or the mixed financial holding company should deduct from the relevant own fund items and the relevant levels of the group's consolidated own funds the share of own funds of linked companies that are not available to cover the group's Solvency Capital Requirement. It should follow the process described below to calculate the group's eligible own funds that can cover the group's Solvency Capital Requirement and the group's Minimum Capital Requirement on a consolidated basis:
(a) the group's own funds are calculated based on consolidated data, as indicated in Article 335, points a) to f), of Regulation 2015/35, after deduction of any intragroup transaction; (b) the group's own funds are classified into different levels; (c) the group's available own funds are calculated after deduction of group adjustments coming into play at the group level; (d) the eligible own funds are subject to the same levels as those applied at the individual level for the coverage of the group's Solvency Capital Requirement and the group's Minimum Capital Requirement on a consolidated basis. If Method No. 2 is used, the participating insurance or reinsurance undertaking, the insurance holding company or the mixed financial holding company should use the sum of the eligible own funds of linked companies after deduction of unavailable own funds at the group level. In both methods, if unavailable own funds are classified into more than one level, the order in which they are deducted from the different levels should be explained to the group supervisor.

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Orientation 14 - Reconciliation reserve at group level The participating insurance or reinsurance undertaking, the insurance holding company, or the mixed financial holding company should ensure that the reconciliation reserve established at group level is in compliance with Article 70 of Regulation 2015/35. In particular, the participating insurance or reinsurance undertaking, the insurance holding company, or the mixed financial holding company, at group level, should take into account the following elements:
(a) the value of own shares held by the participating insurance or reinsurance undertaking, the insurance holding company, or the mixed financial holding company and affiliated undertakings; (b) the restricted own fund items exceeding the notional amount of the required solvency capital in the case of ring-fenced funds or portfolios under equalisation adjustment, at group level.

Orientation 15 - Determination of consolidated data for the calculation of group solvency Consolidated data should be calculated based on consolidated accounts assessed in accordance with the rules of the law concerning the determination and valuation of balance sheet items, as well as the inclusion and treatment of affiliated undertakings.

Orientation 16 - Determination of the currency to be used in the calculation of exchange rate risk The capital required to cover exchange rate risk should take into account any relevant risk mitigation technique meeting the criteria of Articles 209 to 215 of Regulation 2015/35. If the required solvency capital on a consolidated basis is calculated according to the standard formula, all investments denominated in a currency indexed to the currency of the consolidated accounts should also be taken into account in accordance with Article 188 of Regulation 2015/35 at group level.

Orientation 17 - Minimum solvency capital requirement of the group on a consolidated basis (minimum threshold of required solvency capital) When calculating the minimum solvency capital requirement of the group on a consolidated basis, if Method 1 is used exclusively or in combination with Method 2, the participating insurance or reinsurance undertaking, the insurance holding company, or the mixed financial holding company should use the following capital requirements:
(a) the minimum required capital of insurance and reinsurance undertakings authorized within the EEA included in the scope of Method 1; (b) the capital required at local level, to which authorization would be withdrawn, for insurance and reinsurance undertakings of third countries included in the scope of Method 1, regardless of any determination of equivalence.

Orientation 18 - Minimum solvency capital requirement of the group on a consolidated basis If Method 1 is used, exclusively or in combination with Method 2, if the minimum solvency capital requirement of the group on a consolidated basis is no longer respected or if a non-compliance is likely to occur within the following three months, the control measures defined in Article 511, §1, of the Act on non-compliance with the minimum required capital at individual level should be applied at group level.

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Orientation 19 - Treatment of group-specific risks The participating insurance or reinsurance undertaking, the insurance holding company, or the mixed financial holding company should calculate the required solvency capital of the group taking into account all quantifiable, significant, and specific risks existing at group level and likely to affect the solvency and financial situation of the latter. If group-specific risks are significant, the group should use parameters specific to it or a partial internal model to calculate the required solvency capital corresponding to its specific risks. These risks are:
(a) risks that also exist at individual level but whose impact is very different (i.e., that evolve differently) at group level; or (b) risks that exist only at group level.
The required solvency capital of the group corresponding to the quantifiable part of these risks should be calculated as follows:
(a) in example (a), by calibrating the concerned risk modules or sub-modules differently than they are calibrated at individual level, or by applying appropriate scenarios; (b) in example (b), by applying appropriate scenarios.
If the group is unable to reflect the risk profile in the required solvency capital of the group due to specific risks existing at group level, as mentioned above, the group supervisor, after consultation with other concerned supervisory authorities, should be able to impose an additional capital requirement, as provided for in Articles 376, paragraph 1, 1°, and 380 of the Act, where applicable.

Orientation 20 - Supplementary capital requirement in case of use of Method 2 If the total or part of the required solvency capital of the group is calculated according to Method 2, any supplementary capital requirement related to the risk profile imposed on an affiliated undertaking included by virtue of Method 2 should be added to the required solvency capital for the proportional share, as indicated in Article 362, §1, 2° of the Act. Care should be taken to avoid double counting (at individual level and at group level) the same deviation from the risk profile.

A copy of this circular is sent to the auditor(s), approved auditor(s) of your company.
We ask you to accept, Madam, Sir, the expression of our distinguished sentiments.

Jan Smets
Governor

Annex: 1