EIOPA
EUROPEAN INSURANCE
AND OCCUPATIONAL PENSIONS AUTHORITY

EIOPA-BoS-14/170 HR

Guidelines on treatment of related undertakings, including participations

EIOPA – Westhafen Tower, Westhafenplatz 1 - 60327 Frankfurt – Germany - Tel. + 49 69-951119-20; Fax. + 49 69-951119-19; email: info@eiopa.europa.eu site: https://eiopa.europa.eu/

Introduction

1.1. In accordance with Article 16 of Regulation (EU) No 1094/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (hereinafter: “EIOPA Regulation”)1 EIOPA prepares Guidelines on treatment of related undertakings, including participations.

1.2. The Guidelines relate to Article 92(1)(b) and Article 111(1)(m) 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 (hereinafter: “Solvency II Directive”)2, as well as to Articles 68, 168 and 171, without prejudice to Article 84 of Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC (hereinafter: Commission Delegated Regulation 2015/35)3.

1.3. These Guidelines are addressed to supervisory authorities under the Solvency II Directive.

1.4. The purpose of these Guidelines is to provide guidance on the identification and treatment of related undertakings and participations in order to ensure a consistent approach across Member States.

1.5. For the purposes of these Guidelines, a participating undertaking is an undertaking which calculates its solvency position. The term related undertaking refers to any related undertaking of the participating undertaking. The term participation is used to denote one type of related undertaking. Annex A of the final report provides an overview of the different terms used in Solvency II when referring to the relationship between two or more undertakings.

1.6. These Guidelines cover the treatment of all related undertakings in the calculation of the Solvency Capital Requirement (hereinafter: “SCR”) and include guidelines on the identification of own funds in the case of participations in financial and credit institutions. The meaning of financial and credit institutions is explained in Annex B of the Final Report.

1.7. The Guidelines follow a holistic approach. They primarily describe the identification of different types of related undertakings, including participations. They then cover the treatment of the different types of related undertakings, in particular participations in financial and credit institutions and strategic participations. Finally, they include guidelines on the treatment of related undertakings in the standard formula and in internal models for the calculation of the SCR.

1.8. Where these Guidelines refer to the valuation or value of a related undertaking, reference should be made to Article 13 of Commission Delegated Regulation 2015/35.

1.9. The Guidelines relate to the treatment of related undertakings, including participations on a solo basis. In most cases the identification

[1] OJ L 331, 15.12.2010, p. 48-83.

[2] OJ L 335, 17.12.2009, p. 1-155.

[3] OJ L 12, 17.01.2015, p. 1-797.

of a related undertaking will be the same from the perspective of the participating undertaking as a single entity and for group purposes. However, in certain cases there will be differences: the business of the related undertaking may be such that the participating undertaking and the related undertaking are not subject to group supervision in accordance with Article 213 of Solvency II. In addition, there may be a case where several entities within a group hold voting rights or capital in an undertaking, which when added together amount to 20% or more of the voting rights or capital of the undertaking. Accordingly, such an undertaking would be identified as a related undertaking at group level. However, if the investment of each individual entity within the group is less than 20%, none of those entities within the group at the level of the individual entity would identify that undertaking as a related undertaking.

1.10. In certain circumstances the solo entity provisions for related undertakings are used to calculate the contribution of those undertakings to the group SCR. Those circumstances are set out in Commission Delegated Regulation 2015/35 and EIOPA Guidelines for the calculation of group solvency.

1.11. Annex C of the Final Report sets out in the form of a decision tree the methodology for the treatment of all types of related undertakings. Further analysis and calculations will be needed for financial and credit participations held indirectly as set out in Guideline 4 and Guideline 7. In some cases the treatment of participations is the same as the treatment that would result from the application of the standard formula where there are no participations.

1.12. Terms not defined in these Guidelines shall have the meaning defined in the legal acts referred to in the introduction.

1.13. The Guidelines apply from 1 April 2015.

Guideline 1 – Identification

1.14. Participating undertakings should identify their related undertakings and participations based on an assessment from their perspective as a single entity.

1.15. When identifying a related undertaking on the basis of a direct holding of shares or a holding of shares through control, the participating undertaking should determine:

(a) its share of voting rights as a percentage of the voting rights of the undertaking;

(b) its share of all types of share capital issued by an undertaking as a percentage of the issued share capital of that undertaking, irrespective of voting rights.

Where (a) or (b) amount to 20% or more, participating undertakings should treat their investment in the undertaking as a participation.

Where the participation in an insurance and reinsurance undertaking is subject to Solvency II, the assessment under (a) will generally relate to the paid-up ordinary share capital referred to in Article 69(a)(i) of Commission Delegated Regulation 2015/35, and under (b) to the paid-up ordinary share capital and the paid-up preference shares referred to in Article 69(a)(v) of Commission Delegated Regulation 2015/35.

1.16. The participating undertaking should ensure that it can determine the effect of changes in the share capital of related undertakings on the basis of the assessment described in the previous paragraph each time the participating undertaking calculates its SCR in accordance with Article 102 of Solvency II.

1.17. When determining a related undertaking in accordance with Article 212(2) of Solvency II on the basis that the participating undertaking can exercise a dominant or significant influence over another undertaking, supervisory authorities should consider:

(a) the participating undertaking's current shareholdings in the undertaking and the potential increase due to holdings of options, warrants or similar instruments;

(b) the participating undertaking's membership rights in a mutual insurance undertaking or an undertaking operating on a mutual basis and potential increases of such rights;

(c) the participating undertaking's representation on the administrative, management or supervisory body of the undertaking;

(d) the participating undertaking's participation in the undertaking's policy-making processes, including decisions on dividends or other distributions;

(e) material transactions between the participating undertaking and the undertaking;

(f) the exchange of persons who effectively manage the participating undertaking and the undertaking;

(g) the provision of key technical information to the undertaking;

(h) the management of the participating undertaking and the undertaking on a single basis.

Supervisory authorities should consider all of the participating undertaking's initial assessments in accordance with points (a) to (h) of this paragraph.

Guideline 2 – Determination of participating holdings in financial and credit institutions

1.18. The participating undertaking should treat a related undertaking as a financial or credit institution, according to which it is an institution listed or described in accordance with Article 4(1) and (5) of Directive 2013/36/EU or with Article 4(1) of Directive 2004/39/EC. These descriptions cover all institutions that perform the functions or carry out the activities described in accordance with those Articles, irrespective of the fact that the institution may not be subject to those Directives.

1.19. Participating undertakings should ensure that all participating holdings in financial or credit institutions where voting rights or capital are held indirectly are treated in the same way as participating holdings in a financial or credit institution where voting rights or capital are held directly.

Guideline 3 – Determination of strategic participating holdings

1.20. The participating undertaking should determine strategic participating holdings in accordance with Article 171 of Commission Delegated Regulation 2015/35 as follows:

(a) participating undertakings using the standard formula to calculate the SCR should determine strategic participating holdings

irrespective of whether they participate in an insurance undertaking or a reinsurance undertaking, in a financial or credit institution or in any other related undertaking;

(b) participating undertakings using an internal model to calculate the SCR should determine strategic participating holdings in financial and credit institutions only for the purposes of assessing whether Article 68(3) of Commission Delegated Regulation 2015/35 applies.

1.21. For the purposes of demonstrating their compliance with the requirements of Article 171 of Commission Delegated Regulation 2015/35, participating undertakings should not split participating holdings into different parts and treat some parts as strategic and others not. When a particular participating holding is determined to be strategic:

(a) in the case of a participating holding in a financial or credit institution, all investments in own funds are strategic;

(b) in the case of any other related undertaking, all capital investments in the participating holding are strategic.

1.22. When demonstrating that the value of capital investments is likely to be significantly less variable, in accordance with Article 171(a) of Commission Delegated Regulation 2015/35, participating undertakings should ensure that:

(a) they apply consistent and appropriate valuations over time to both the participating holding and other equity securities selected as a basis for comparison;

(b) they consider the effect of their influence on the value of the participating holding.

1.23. When demonstrating that the nature of the investment is strategic, in accordance with Article 171(b)(i) to (iii) of Commission Delegated Regulation 2015/35, participating undertakings should:

(a) indicate the period in which the strategy of holding the participating holding is intended to be applied;

(b) consider the impact of market conditions on the main policies;

(c) identify all significant factors affecting the participating undertaking's ability to maintain its strategy or limitations on it and identify how they can be mitigated or how they will be mitigated.

1.24. When demonstrating the existence of a lasting connection, in accordance with Article 171(b)(iv) of Commission Delegated Regulation 2015/35, participating undertakings should consider the following criteria:

(a) whether there is a stable relationship between the two undertakings over time;

(b) whether the stable relationship leads to a close economic connection, sharing of risks and benefits between the undertakings or exposures to risks from one to the other;

(c) the type of relationship between the two undertakings, which may include ownership, joint products or distribution lines, cross-selling, the creation of

joint undertakings or other long-term operational or financial links.

1.25. In accordance with Article 171(b)(v) of Commission Delegated Regulation 2015/35, a participating undertaking that is part of a group should consider the main policies that direct or restrict the actions of the group as those established by the ultimate parent undertaking or, if different, the undertaking that establishes the main policies for the group as a whole.

1.26. Participating undertakings should record their considerations of the matters set out in Article 171 of Commission Delegated Regulation 2015/35 and paragraphs 1.21 to 1.25, including any other important factors together with important supporting material.

Guideline 4 – Scope of calculation for Article 68 of Commission Delegated Regulation 2015/35

1.27. When determining the value of participating interests in financial and credit institutions for the purposes of Article 68 of Commission Delegated Regulation 2015/35, participating undertakings should also include investments in capital and all other items of own funds, whether held directly or indirectly.

1.28. Participating undertakings should apply the following approaches:

(a) for direct investments, the value of participating interests in financial and credit institutions, as determined by the participating undertaking in accordance with the Solvency II valuation principles, should be used for the purposes of Article 68 of Commission Delegated Regulation 2015/35, as set out in Guideline 5;

(b) participating interests in financial and credit institutions held indirectly through another participating interest in a financial or credit institution should not be taken into account under Article 68 of Commission Delegated Regulation 2015/35 because their value should already be included in the value of participating interests held directly in a financial or credit institution in accordance with point (a);

(c) a deduction for a participating interest in a financial or credit institution held indirectly should arise only if the related undertakings between the participating undertaking and the financial and credit participating interest are different from the financial and credit participating interests;

(d) for other indirect investments in financial or credit institutions, the value of the participating interest, as determined by the related undertaking in accordance with Article 13 of Commission Delegated Regulation 2015/35, should be used for the purposes of Article 68 of Commission Delegated Regulation 2015/35;

(e) the values used for the purposes of Article 68 of Commission Delegated Regulation 2015/35 should represent the proportionate ownership of the participating undertaking, held directly or indirectly, of the participating interest in the financial or credit institution.

Guideline 5 – Calculations for the purposes of Article 68 of Commission Delegated Regulation 2015/35

1.29. When calculating 10% of the items covered by Article 69(a)(i), (ii), (iv) and (vi) of Commission Delegated Regulation 2015/35 for the purposes of Article 68 of Commission Delegated Regulation 2015/35, participating undertakings should use the amount of basic own funds before deduction in accordance with Article 68 of Commission Delegated Regulation 2015/35 in relation to participating interests in financial and credit institutions.

1.30. Where the value of all participating interests in financial and credit institutions, other than participating interests referred to in Article 68(1) of Commission Delegated Regulation 2015/35, does not exceed 10% of the items covered by Article 69(a)(i), (ii), (iv) and (vi) of Commission Delegated Regulation 2015/35 for the purposes of Article 68(2) of Commission Delegated Regulation 2015/35, then no deduction occurs and Guidelines 8 or 9 apply.

1.31. Participating undertakings should apply Article 68(3) of Commission Delegated Regulation 2015/35 only in cases where they are:

(a) demonstrated in accordance with Guideline 3 that the participating interest meets the criteria for a strategic participating interest;

(b) participating undertakings and the participating interest included in the calculations based on method 1 in accordance with Directive 2002/87/EC for the financial conglomerate to which they belong or based on method 1 under Solvency II.

Guideline 6 – Deductions in relation to participating interests in financial and credit institutions

1.32. Where deductions in accordance with Article 68(1) and (2) of Commission Delegated Regulation 2015/35 cannot be made in the corresponding tier as set out in Article 68(5) of Commission Delegated Regulation 2015/35, undertakings should adopt the following approaches:

(a) where the items to be deducted are not classified into tiers set out in Article 68(5) of Commission Delegated Regulation 2015/35, all deductions should be made from the amount of items covered by Article 69(a)(i), (ii), (iv) and (vi) of Commission Delegated Regulation 2015/35;

(b) where the amount of the deduction exceeds the amount from which it is to be deducted in accordance with Article 68(5) of Commission Delegated Regulation 2015/35, the excess should be deducted as follows:

(i) shares of additional tier 1 capital instruments that exceed the items covered by Article 69(a)(iii), (v) and (b) of Commission Delegated Regulation 2015/35 are deducted from the items covered by Article 69(a)(i), (ii), (iv) and (vi) of Commission Delegated Regulation 2015/35;

(ii) shares of tier 2 capital instruments that exceed the basic own funds covered by Article 72 of Commission Delegated Regulation 2015/35 are first deducted from the items covered by Article 69(a)(iii), (v) and (b) of Commission Delegated Regulation 2015/35, and then from the items covered by Article 69(a)(i), (ii), (iv) and (vi) of Commission Delegated Regulation 2015/35 until a full deduction is made.

Guideline 7 – Adjustments due to deductions of indirectly held participating interests in financial and credit institutions

1.33. Where a full or partial deduction of the value of a participating interest in a financial or credit institution held indirectly is required, in accordance with Article 68 of Commission Delegated Regulation 2015/35, participating undertakings should, solely for the purposes of calculating the SCR:

(a) reduce by the amount of that deduction the value of the directly held related undertaking, which is the asset of the participating undertaking through which the participating interest in the financial or credit institution is held indirectly;

(b) for the adjustment described in point (a), follow the approach set out in Article 68(5) of Commission Delegated Regulation 2015/35 and Guideline 6.

Guideline 8 – Application of the standard formula to related undertakings

1.34. These Guidelines apply to participating undertakings using the standard formula to calculate the SCR in relation to the risks arising from related undertakings directly held by the participating undertaking.

1.35. When a participating undertaking holds as assets the own funds of a related undertaking and their value is not fully deducted or is not deducted at all from the own funds of the participating undertaking as a result of the application of Article 68 of Commission Delegated Regulation 2015/35, the risk costs for the remaining value of such holdings should be calculated in accordance with the standard formula.

1.36. The participating undertaking should apply the standard formula as follows:

(a) holdings in ordinary or preference share capital of the related undertaking should be treated as equity securities, applying the equity risk sub-module as appropriate;

(b) holdings in subordinated liabilities issued by the related undertaking should be treated as a financial instrument taking into account the contractual terms and applying market stresses as appropriate, including interest rate, yield, currency, concentration and other risk sub-modules as appropriate;

(c) the above holdings that exhibit features of both a business participation and a bond should be treated in accordance with Guideline 5. Guideline on the treatment of market and counterparty risk exposures in the standard formula.

Guideline 9 – Application of internal models to related undertakings

1.37. These Guidelines apply to participating undertakings using a full or partial internal model to calculate the SCR in relation to risks arising from related undertakings.

1.38. When a participating undertaking holds as assets the own funds of a related undertaking and their value is not fully deducted or is not deducted at all from the own funds of the participating undertaking as a result of the application of Article 68 of Commission Delegated Regulation 2015/35, the risks arising from the remaining value of such holdings should be recorded as part of the internal model.

1.39. The participating undertaking should include in the internal model all materially quantifiable risks arising from its related undertakings, taking into account exposures to related undertakings, including investments in capital and subordinated liabilities. Appropriate measures of these risks should be reflected in the model.

1.40. When the participating undertaking calculates the required solvency capital at the level of the individual entity for a participating interest or related undertaking in a manner that takes into account risks to the value of the underlying assets and liabilities of the related undertaking concerned, it should be ensured that this is an appropriate calculation at the level of the individual entity and this calculation should not be replaced with a consolidated calculation as if the participating undertaking and its related undertakings were a Solvency II group.

Compliance and reporting rules

1.41. This document contains Guidelines issued within the meaning of Article 16 of the EIOPA Regulation. In accordance with Article 16(3) of the EIOPA Regulation, competent authorities and financial institutions make every effort to comply with the guidelines and recommendations.

1.42. Competent authorities that comply or intend to comply with these Guidelines should incorporate them into their regulatory or supervisory framework in an appropriate manner.

1.43. Competent authorities shall confirm to EIOPA whether they comply or intend to comply with these Guidelines, with reasons for non-compliance, within two months after the issuance of the translated versions.

1.44. In the event that competent authorities do not submit a response within the specified period, they shall be deemed not to comply with the reporting and shall be reported as such.

Final provision on reviews

1.45. These Guidelines are subject to review by EIOPA.