Circular NBB_2016_39 / Exemption from the obligation to set up supplementary provisions

NBB_2016_39 – 5 October 2016 Circular – Page 1/2 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, 5 October 2016
Reference: NBB_2016_39 your correspondents:
Stany Zabinski tel. +32 2 221 34 67 – fax +32 2 221 31 04 stany.zabinski@nbb.be

Exemption from the obligation to set up supplementary provisions

Scope
Insurance companies subject to the Law of 13 March 2016 on the status and supervision of insurance and reinsurance companies and active in the life and work accident branches.

Summary/Objectives
This circular concerns the exemption from the obligation to set up supplementary provisions, commonly referred to as "flashing provisions".

Madam, Sir,

Under the Solvency I prudential regime, insurance companies were required, in application of Article 31, §3, paragraph 2 of the Royal Decree of 14 November 2003 on life insurance activity and point 1, a, 2nd paragraph, 2nd dash, 1° of Annex VI to the Royal Decree of 22 February 1991 establishing the general regulation on the supervision of insurance companies, to set up "supplementary" provisions (commonly called "flashing provisions") at the statutory level to cover the interest rate risk they incurred for certain types of contracts.

Following the entry into force of the Law of 13 March 2016 on the status and supervision of insurance and reinsurance companies (hereinafter the Supervision Law), which transposes 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), it was decided to maintain the Solvency I prudential provisions regarding supplementary provisions within the accounting framework.

Thus, the Royal Decree of 1 June 2016 amending the Royal Decree of 17 November 1994 on the annual accounts of insurance and reinsurance companies (hereinafter "AR Annual Accounts") provides, in the interest of prudence and continuity, that supplementary provisions established under the Solvency I regime are maintained in the statutory accounts during the transition to the Solvency II regime and continue to be funded subsequently, as long as the interest rate risk persists.

Given that the new Solvency II prudential framework provides specific regulatory own-funds requirements to cover interest rate risk, this new AR Annual Accounts contains simplified provisions regarding the exemption from the obligation to set up supplementary provisions.

Circular – Page 2/2 NBB_2016_39 – 5 October 2016

The simplification mentioned above results in an adaptation of the mechanism for exempting the obligation to set up supplementary provisions, more appropriate for Solvency II (AR Annual Accounts art. 34quinquies §4):

"By way of derogation from paragraph 3, the National Bank of Belgium exempts an insurance company, upon its request, from the obligation to set up the supplementary provision, calculated according to the method referred to above, on condition that it meets the solvency capital requirements provided for by or in application of the Law of 13 March 2016 on the status and supervision of insurance and reinsurance companies, without recourse to the transitional measures provided for in Articles 668 and 669 of said Law. The National Bank of Belgium imposes additional conditions for granting or maintaining this exemption when these are rendered necessary by the company's situation and market conditions."

The coverage of all regulatory own-funds requirements without recourse to transitional measures as referred to in Articles 668 and 669 of the Supervision Law is a necessary condition for being exempted from the obligation to set up supplementary provisions.

For companies that have conducted stress tests regarding exposure to interest rate risk (low yield) in accordance with Article 322 of the Supervision Law, the benefit of this exemption is – in application of Article 34quinquies, §4, of the AR Annual Accounts – also subject to the existence of sufficient results in said stress tests. Based on this analysis, the Bank reserves the right not to grant an exemption if the company's situation and market conditions so require.

This circular replaces and repeals the following three circulars:

• Circular D.252 of 15 December 2004 on the exemption from the establishment of the flashing provision;
• Circular 2006-2 of 19 September 2006 on the criteria used to assess requests for exemption from the establishment of the flashing provision;
• Circular 2013-13 of 23 October 2013 in which the Bank indicated that, until further notice, it was no longer appropriate to grant exemptions from the establishment of the flashing provision.

A copy of this is sent to the auditor(s), approved auditor(s) of your establishment.

Please accept, Madam, Sir, our distinguished greetings.

Jan Smets
Governor