Circular NBB_2016_25 on long-term guarantee measures application

NBB_2016_25 – 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_25 your contact: Stany Zabinski tel. +32 2 221 34 67 – fax +32 2 221 31 04 stany.zabinski@nbb.be Circular regarding the guidelines on the application of long-term guarantee measures 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] activity 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 Bank's guidelines regarding the application of long-term guarantee measures. 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_25 – 25 April 2016 Structure I. Objectives II. Definitions III. Additional Information IV. Entry into Force V. Guidelines on the application of long-term guarantee measures Madam, Sir, I. Objectives This circular relates to Articles 129, 131, 668 and 669 of the Law. These guidelines aim to promote the consistent application of the volatility adjustment, the equalisation reserve, the transitional measure on risk-free interest rates and the transitional measure on technical provisions (collectively referred to as "long-term guarantee adjustments and transitional measures"). These guidelines are divided into two sections: Section 1 deals with the valuation of technical provisions with long-term guarantee measures. These measures concern all insurance and reinsurance undertakings. Section 2 deals with the determination of the Solvency Capital Requirement (SCR) for users of the standard formula and the Minimum Capital Requirement (MCR). The guidelines on the interaction of long-term guarantee measures with the SCR and MCR assume that the SCR and MCR are calculated based on technical provisions valued with long-term guarantee measures. II. Definitions For the purposes of these guidelines, the term "long-term guarantee measures" refers to the adjustments and transitional measures set out in Articles 129, 131, 668 and 669 of the Law. 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 harmonised 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 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.

NBB_2016_25 – 25 April 2016 Circular – P. 3/5 V. Guidelines on the application of long-term guarantee measures Section 1: Valuation of technical provisions with long-term guarantee measures Guideline 1 – Effects on policyholder behaviour of the volatility adjustment, the equalisation reserve and the transitional measure on risk-free interest rates Insurance and reinsurance undertakings should avoid creating an unrealistic or distorted link between assumptions on policyholder behaviour referred to in Article 26 of Regulation 2015/35 and the use of the equalisation reserve, the volatility adjustment or the transitional measure on risk-free interest rates. In particular, when the probability that policyholders exercise contractual options is modelled dynamically using reference rates (e.g. market rates), insurance and reinsurance undertakings should ensure that reference rates are set consistently with the risk-free term structure applied to calculate technical provisions. Guideline 2 – Interaction of long-term guarantee measures with the calculation of the risk margin For the calculation of the risk margin in accordance with Article 38 of Regulation 2015/35, insurance and reinsurance undertakings applying the equalisation reserve, the volatility adjustment, the transitional measure on risk-free interest rates or the transitional measure on technical provisions should assume that the reference undertaking applies none of these measures. Guideline 3 – Combination of the equalisation reserve and the transitional measure on technical provisions When insurance and reinsurance undertakings request to use both the equalisation reserve and the transitional measure on technical provisions for the same insurance or reinsurance commitments, in accordance with Article 129 and Article 669 of the Law, the amount referred to in Article 669, paragraph 1, second subparagraph, 1°, of the Law should be calculated with the equalisation reserve. Guideline 4 – Scope of the transitional measure on risk-free interest rates Insurance and reinsurance undertakings should apply the transitional measure on risk-free interest rates to all eligible commitments. Section 2: Determination of the standard formula for calculating the MCR and SCR when long-term guarantee measures are used Guideline 5 – Interaction between the volatility adjustment, the equalisation reserve and the transitional measure on risk-free interest rates and the "interest rate risk" sub-module of the standard formula for calculating the SCR Insurance and reinsurance undertakings using the volatility adjustment, the equalisation reserve or the transitional measure on risk-free interest rates should ensure that the amounts of these adjustments and the transitional adjustment referred to in Article 668 of the Law remain unchanged following the application of shocks to the basic risk-free interest rate term structure referred to in Articles 166 and 167 of Regulation 2015/35.

Circular – P. 4/5 NBB_2016_25 – 25 April 2016 Guideline 6 – Interaction between the volatility adjustment and/or the transitional measure on risk-free interest rates with the "spread risk" sub-module of the standard formula for calculating the SCR When calculating the "spread risk" sub-module, insurance and reinsurance undertakings applying the volatility adjustment and/or the transitional measure on risk-free interest rates should ensure that the amounts of the volatility adjustment and/or the transitional adjustment referred to in Article 668 of the Law remain unchanged following the stress tests applied under the "spread risk" sub-module referred to in Article 176, paragraph 1, Article 178, paragraph 1, and Article 179, paragraph 1, of Regulation 2015/35. Guideline 7 – Interaction between the transitional measure on technical provisions and the calculation of the standard formula for calculating the SCR Insurance and reinsurance undertakings applying the transitional measure on technical provisions should ensure that the amount of the transitional deduction referred to in Article 669, paragraph 1, of the Law remains unchanged in calculations based on scenarios of the standard formula for calculating the SCR. Guideline 8 – Interaction between the transitional measure on technical provisions and the operational risk capital requirement of the standard formula for calculating the SCR When calculating the operational risk capital requirement, insurance and reinsurance undertakings applying the transitional measure on technical provisions should use, for the volume measures TP_life, TP_life-ul and TP_non-life referred to in Article 204, paragraph 4, of Regulation 2015/35, the amount of technical provisions before the application of the transitional measure minus the higher of the risk margin and the transitional deduction. When the amount of the transitional deduction is greater than the risk margin, the difference between the transitional deduction and the risk margin should be allocated among TP_life, TP_life-ul and TP_non-life according to the contribution of each component to the total amount of the transitional deduction. Guideline 9 – Interaction between the transitional measure on technical provisions and the calculation of the MCR When calculating the linear Minimum Capital Requirement, insurance and reinsurance undertakings applying the transitional measure on technical provisions should use, for the volume measures TP(nl,s), TP(life,1), TP(life,2), TP(life,3) and TP(life,4) referred to in Article 250, paragraph 1, and Article 251, paragraph 1, of Regulation 2015/35, the amount of technical provisions before the application of the transitional measure minus the higher of the risk margin and the transitional deduction.

NBB_2016_25 – 25 April 2016 Circular – P. 5/5 When the amount of the transitional deduction is greater than the risk margin, the difference between the transitional deduction and the risk margin should be allocated among TP(nl,s), TP(life,1), TP(life,2), TP(life,3) and TP(life,4) and according to the contribution of each component to the total amount of the transitional deduction. A copy of this circular is sent to the commissioner(s), approved auditor(s) of your establishment. We ask you to accept, Madam, Sir, the expression of our distinguished sentiments. Jan Smets Governor