Order on the Risk-Free Yield Curve, Matching Adjustment, and Volatility Adjustment for Group 1 Insurance Undertakings

Order on the Risk-Free Yield Curve, Matching Adjustment, and Volatility Adjustment for Group 1 Insurance Undertakings 1)

Pursuant to Section 158, paragraph 4, and Section 316, paragraph 1, of Act No. 718 of 13 June 2023 on Insurance Undertakings, it is hereby prescribed:

Scope of Application

Section 1. This Order applies to Group 1 insurance undertakings.

Paragraph 2. The approval and calculation of the matching adjustment, as well as the notification and calculation of the volatility adjustment, pursuant to Section 158, paragraphs 2 and 3, of the Act on Insurance Undertakings, shall, in addition to Articles 52-54 of Commission Delegated Regulation 2015/35/EU 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 (Solvency II), be carried out in accordance with the provisions of this Order.

The Risk-Free Yield Curve

Section 2. A Group 1 insurance undertaking shall regularly assess the sensitivity of the insurance technical provisions and the recognized solvency capital to changes in the assumptions underlying the extrapolation of the risk-free yield curve.

Paragraph 2. The risk-free yield curve, which is determined and published by the European Insurance and Occupational Pensions Authority (EIOPA), pursuant to Section 158, paragraph 1, of the Act on Insurance Undertakings, is determined by using information derived from relevant financial instruments and bonds for which the market is deep, liquid, and transparent. For financial instruments and bonds for which the market is not deep, liquid, and transparent, the risk-free yield curve is extrapolated.

Paragraph 3. The extrapolated part of the yield curve is based on forward rates, converging smoothly from one or more forward rates relative to the longest maturities for which an ultimate forward rate can be identified for the relevant financial instruments and bonds in a deep and liquid market.

Paragraph 4. The assessment pursuant to paragraph 1 shall be submitted annually to the Danish Financial Supervisory Authority (Finanstilsynet).

Approval of the Use of Matching Adjustment

Section 3. A Group 1 insurance undertaking may obtain permission to apply a matching adjustment to the risk-free yield curve on a portfolio of insurance liabilities selected by the undertaking, pursuant to Section 158, paragraph 2, of the Act on Insurance Undertakings, if the following conditions are met:

1. The undertaking has selected an asset portfolio consisting of bonds and other assets with cash flows corresponding to the best estimate of the selected portfolio of insurance liabilities, and intends to hold this asset portfolio until the maturity of the liabilities, unless the cash flows change significantly.

2. The cash flows of the selected asset portfolio are fixed and cannot be changed by the issuers of the assets or by third parties, subject to paragraphs 2 and 3.

3. The selected portfolio of insurance liabilities to which the matching adjustment is applied, and the selected asset portfolio, are classified, organized, and managed separately from the undertaking's other activities.

4. The selected asset portfolio may only be used to cover losses arising from the selected portfolio of insurance liabilities.

5. The expected cash flows of the selected asset portfolio must replicate each of the future cash flows of the selected portfolio of insurance liabilities in the same currency. Any deviations must not give rise to significant risks relative to the risks of the insurance business to which the matching adjustment is applied.

6. The selected portfolio of insurance liabilities does not give rise to future premium payments.

7. The only insurance risks associated with the selected portfolio of insurance liabilities are longevity risks, expense risks, lapse risks, and mortality risks.

8. If mortality risks are associated with the selected portfolio of insurance liabilities, the best estimate of the selected portfolio of insurance liabilities must not increase by more than 5 percent under a mortality stress test calculated in accordance with Article 52 of Commission Delegated Regulation 2015/35/EU 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 (Solvency II).

9. The selected portfolio of insurance liabilities contains no policyholder options. However, the selected portfolio of insurance liabilities may contain surrender options, provided that the surrender value does not exceed the value of the assets covering the insurance liabilities at the time the surrender option is exercised.

10. For the purpose of applying the matching adjustment, the insurance liabilities included in the selected portfolio of insurance liabilities must not be separated into different parts.

Paragraph 2. Notwithstanding paragraph 1, item 2, a Group 1 insurance undertaking may use assets whose cash flows depend on inflation developments, provided that these assets replicate the cash flows of the selected portfolio of insurance liabilities, which also depend on inflation developments.

Paragraph 3. Notwithstanding paragraph 1, item 2, the issuers of the assets or third parties may change an asset's cash flows if the Group 1 insurance undertaking receives sufficient compensation, enabling the undertaking to obtain equivalent cash flows by reinvesting in assets of equivalent or better credit quality.

Paragraph 4. A Group 1 insurance undertaking applying a matching adjustment to a selected portfolio of insurance liabilities must prepare a liquidity plan indicating the expected future cash flows for the selected portfolio of insurance liabilities and the selected asset portfolio.

Paragraph 5. A Group 1 insurance undertaking applying a matching adjustment to a selected portfolio of insurance liabilities must regularly assess:

1. the sensitivity of the insurance technical provisions and recognized solvency capital to changes in the assumptions underlying the calculation of the matching adjustment, including the calculation of the fundamental spread, pursuant to Section 4, paragraph 1, item 2, and the possible effects of a forced sale of assets on the recognized solvency capital;

2. the sensitivity of the insurance technical provisions and recognized solvency capital to changes in the composition of the selected asset portfolio; and

3. the consequences of reducing the matching adjustment to zero.

Paragraph 6. The assessment pursuant to paragraph 5 shall be submitted annually to the Danish Financial Supervisory Authority. If reducing the matching adjustment to zero results in the solvency capital requirement no longer being met, the Group 1 insurance undertaking must furthermore submit an analysis of the measures the undertaking can take in such a situation to restore the necessary recognized solvency capital to cover the solvency capital requirement or to reduce the risk profile so that the undertaking again meets the solvency capital requirement.

Paragraph 7. The board of directors of a Group 1 insurance undertaking applying a matching adjustment to a selected portfolio of insurance liabilities must, as part of the own risk and solvency assessment, evaluate compliance with the capital requirements with and without the use of the matching adjustment.

Paragraph 8. A Group 1 insurance undertaking applying a matching adjustment to a selected portfolio of insurance liabilities may not choose to cease using the matching adjustment. If a Group 1 insurance undertaking using the matching adjustment is no longer able to comply with the conditions set out in paragraphs 1 and 3 for a selected portfolio of insurance liabilities, the undertaking must immediately notify the Danish Financial Supervisory Authority and take the necessary measures to ensure compliance with these conditions again. If the Group 1 insurance undertaking cannot ensure compliance with these conditions within 2 months from the date of non-compliance, it must cease using the matching adjustment on the undertaking's insurance liabilities and may not use the matching adjustment for a further period of 24 months.

Calculation of Matching Adjustment

Section 4. The matching adjustment is calculated for each currency, in addition to Articles 53 and 54 of Commission Delegated Regulation 2015/35/EU 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 (Solvency II), in accordance with the following principles:

1. The matching adjustment shall be equal to the difference between:
   a) the annual effective interest rate, calculated as the discount rate that, when applied to the cash flows of the selected portfolio of insurance liabilities, yields a value corresponding to the selected asset portfolio calculated in accordance with the Order on Financial Reporting for Insurance Undertakings and Cross-Border Pension Funds; and b) the annual effective interest rate, calculated as the discount rate that, when applied to the cash flows of the selected portfolio of insurance liabilities, yields a value corresponding to the best estimate of the portfolio of insurance liabilities, using the risk-free yield curve pursuant to Section 158, paragraph 1, of the Act on Insurance Undertakings.

2. The matching adjustment shall be adjusted for the fundamental spread, which reflects the risks to which the Group 1 insurance undertaking is exposed in the selected asset portfolio.

3. The use of external credit assessments in the calculation of the matching adjustment shall be carried out in accordance with Articles 4-6 of Commission Delegated Regulation 2015/35/EU 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 (Solvency II).

Paragraph 2. Notwithstanding paragraph 1, item 1, the fundamental spread shall be increased when necessary to ensure that the matching adjustment for risky assets (credit quality below 'investment grade') does not exceed the matching adjustment for less risky assets (credit quality equivalent to 'investment grade') of the same duration and asset class.

Section 5. A Group 1 insurance undertaking must use the fundamental spread for each relevant duration, credit quality, and asset class in the calculation of the matching adjustment, as determined and published by EIOPA for each relevant currency at least every quarter in accordance with Article 77e, paragraph 1, point (b), of 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 (Solvency II).

Paragraph 2. If the Commission adopts the fundamental spread pursuant to the procedure in Article 77e, paragraph 2, of 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 (Solvency II), the insurance undertaking must use this in the calculation of the matching adjustment.

Paragraph 3. The fundamental spread shall be equal to the sum of:

1. the credit spread corresponding to the probability of default of the assets; and

2. the credit spread corresponding to the expected loss resulting from a downgrade of the asset.

Paragraph 4. The probability of default, pursuant to paragraph 3, item 1, must be based on long-term default statistics relevant to the asset in question relative to its duration, credit quality, and asset class. If a reliable credit spread cannot be derived from the default statistics, the fundamental spread shall be equal to the part of the long-term average of the spread over the risk-free yield curve referred to in paragraph 5.

Paragraph 5. With regard to exposures to central governments and central banks located within the European Union, the fundamental spread must not be less than 30 percent of the long-term average of the spread over the risk-free yield curve for assets with the same duration, credit quality, and asset class as observed in the financial markets. With regard to other assets, the fundamental spread must not be less than 35 percent of the long-term average of the spread over the risk-free yield curve for assets with the same duration, credit quality, and asset class as observed in the financial markets.

Notification of the Use of Volatility Adjustment

Section 6. A Group 1 insurance undertaking may, by notifying the Danish Financial Supervisory Authority, apply a volatility adjustment to the risk-free yield curve, pursuant to Section 158, paragraph 3, of the Act on Insurance Undertakings, if the undertaking meets the requirements in paragraphs 2-5.

Paragraph 2. A Group 1 insurance undertaking applying a volatility adjustment to the risk-free yield curve must prepare a liquidity plan containing the future cash flows of the assets and liabilities covered by the volatility adjustment.

Paragraph 3. A Group 1 insurance undertaking applying a volatility adjustment to the risk-free yield curve must regularly assess:

1. the sensitivity of the insurance technical provisions and recognized solvency capital to changes in the assumptions underlying the calculation of the volatility adjustment, and the possible effects of a forced sale of assets on their recognized solvency capital; and

2. the consequences of reducing the volatility adjustment to zero.

Paragraph 4. The assessment pursuant to paragraph 3 shall be submitted annually to the Danish Financial Supervisory Authority. If reducing the volatility adjustment to zero results in the solvency capital requirement no longer being met, the Group 1 insurance undertaking must furthermore submit an analysis of the measures the undertaking can take in such a situation to restore the necessary recognized solvency capital to cover the solvency capital requirement or to reduce the risk profile so that the undertaking again meets the solvency capital requirement.

Paragraph 5. A Group 1 insurance undertaking applying a volatility adjustment to the risk-free yield curve must, as part of its risk management policy, describe the criteria for the use of the volatility adjustment.

Paragraph 6. The board of directors of a Group 1 insurance undertaking applying a volatility adjustment to the risk-free yield curve must, as part of the own risk and solvency assessment, evaluate compliance with the capital requirements with and without the use of the volatility adjustment.

Section 7. A Group 1 insurance undertaking must use the volatility adjustment to the risk-free yield curve for each relevant national insurance market, as determined and published by EIOPA for each relevant currency at least every quarter in accordance with Article 77e, paragraph 1, point (c), of 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 (Solvency II).

Paragraph 2. If the Commission adopts the volatility adjustment pursuant to the procedure in Article 77e, paragraph 2, of 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 (Solvency II), the insurance undertaking must use this.

Penal Provisions

Section 8. Violation of Section 3, paragraphs 4-8, Section 5, Section 6, paragraphs 2-6, and Section 7 shall be punishable by a fine.

Paragraph 2. Companies and other legal entities may be subject to criminal liability pursuant to the rules in Chapter 5 of the Criminal Code.

Entry into Force

Section 9. This Order enters into force on 1 January 2025.

Paragraph 2. Order No. 886 of 27 August 2019 on the risk-free yield curve, matching adjustment, and volatility adjustment for Group 1 insurance undertakings is repealed.

Danish Financial Supervisory Authority, 5 December 2024

Louise Mogensen
/ Line Bergmann

1. The Order contains provisions implementing parts 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), OJ 2009, No. L 335, p. 1, and Directive 2014/51/EU of the European Parliament and of the Council of 16 April 2014 amending Directives 2003/71/EC and 2009/138/EC and Regulations (EC) No 1060/2009, (EU) No 1094/2010 and (EU) No 1095/2010 as regards the powers of the European Supervisory Authorities (the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority), OJ 2014, No. L 153, p. 1.

Official Gazette A
2024 Published on 11 December 2024
5 December 2024. No. 1482.
Ministry of Industry, Business and Financial Affairs, Danish Financial Supervisory Authority, file no. 24-019440 CQ003081