GFSC Guidance Note Solvency 2: The Internal Model Treatment of Participations

www.gfsc.gi GFSC Guidance Note Solvency 2: The Internal Model Treatment of Participations 1 Month 2017 Version: 1 Publication Date: 3October 2025

Gibraltar Financial Services Commission Guidance Note – The Internal Model Treatment of Participations 2 Contents

1. Introduction .......................................................................................................... 3
2. Risks posed by participations in insurance and reinsurance undertakings ..................... 3
3. Solvency capital requirement................................................................................... 4

Gibraltar Financial Services Commission Guidance Note – The Internal Model Treatment of Participations 3

1. Introduction 1.1. This Guidance Note is relevant to all insurance firms within the scope of the Financial Services (Insurance Companies) Regulations 20201 (the ‘Insurance Companies Regulations’). It sets out the GFSC’s expectations of firms in relation to how participations in insurance and reinsurance undertakings are treated when the solvency capital requirement (‘SCR’) is determined at the solo level using an approved internal model. 1.2. The GFSC expects that, by clarifying its expectation that capital requirements should reflect the economic reality of exposure to the risks associated with such participations, the resulting benefits will support the continued maintenance of policyholder protection. 1.3. This Guidance Note sets out issues that the GFSC expects firms to have considered when calibrating their internal models to ensure that they adequately address the risks posed by those participations. 1.4. This Guidance Note does not have any direct or indirect discriminatory impact under existing Gibraltarlaw. It complements and should be read in conjunction with the Insurance Companies Regulations and the Financial Services (Solvency 2) (Technical Standards) Regulations 20252 .
2. Risks posed by participations in insurance and reinsurance undertakings 2.1. Where a firm owns a participation in an insurance or reinsurance undertaking, this will appear as an investment on the firm’s balance sheet. This will generally pose a risk to the firm as if the undertaking in which the participation is held suffers a loss, this will impact the participating firm’s balance sheet. This risk should be reflected in the solo SCR for the participating firm. 2.2. When considering how to reflect this risk in an internal model, firms may consider it appropriate to examine the characteristics of the assets and liabilities of the undertaking in which the participation is held and the risks arising from these. Firms may also consider the extent to which the risks of the assets and liabilities of the participant might diversify with the assets and liabilities of the participation. 2.3. Firms should also consider the risks posed by any obstacles to covering losses with resources currently held in the form of a participation in related undertakings. These obstacles might arise from any barriers to moving resources between entities, taking into account reduced scope for diversification under extreme scenarios. 2.4. As well as requiring that internal models should take account of all material risks, the assumptions underlying the system used for measuring diversification effects should be justified on an empirical basis. Firms will therefore need to demonstrate that any allowance for inter-entity diversification in the calculation of the solo SCR appropriately takes account of restrictions on transferring resources between the participant and the participation. 1 Financial Services (Insurance Companies) Regulations 2020 2 Financial Services (Solvency 2) (Technical Standards) Regulations 2025

Gibraltar Financial Services Commission Guidance Note – The Internal Model Treatment of Participations 4 2.5. Firms’ attention is drawn to the European Insurance and Occupational Pensions Authority (EIOPA) Guidelines on group solvency3 which provide that the calculation of the solo SCR should not be replaced with a consolidated calculation as though the participating undertaking and its related undertaking were an insurance group. 3. Solvency capital requirement 3.1. For the avoidance of doubt, this Guidance Note does not relate to the calculation of the group SCR. The calculation of group own funds takes account of obstacles to transferring resources between entities,4 meaning that these obstacles do not need to be reflected in the group SCR. 3.2. This Guidance Note relates only to the calculation of the solo SCR. Since the determination of own funds at a solo level does not consider obstacles to transferring resources between entities, it is the GFSC’s view that any such obstacles should be reflected in the calculation of the solo SCR. 3 EIOPA Guidelines on group solvency 4 See regulation 201(5) of the Insurance Companies Regulations and Article 330(3) to (7) of the Solvency 2 Technical Standards, and paragraphs 3.12 to 3.14 of the GFSC’s Guidance Note on the GFSC’s Approach to Insurance Group Supervision which set out the GFSC’s policy on modifications to Article 330(3) of the Solvency 2 Technical Standards. Further guidance is also contained within paragraph 7.1 of the GFSC’s Guidance Note on Group Supervision.

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