Ordinance No. 51 of 28.04.2016 on Own Funds and Solvency Requirements for Insurers, Reinsurers and Groups

ORDINANCE No. 51 of 28.04.2016 on Own Funds and Solvency Requirements for Insurers, Reinsurers and Groups of Insurers and Reinsurers

Pub. - State Gazette, No. 38 of 20.05.2016, effective from 20.05.2016; amended, No. 6 of 19.01.2017, effective from 19.01.2017; amended, No. 101 of 20.12.2022, effective from 01.01.2023.

Adopted by Decision No. 158-N of 28.04.2016 of the Commission for Financial Supervision

PART ONE GENERAL PROVISIONS
Chapter One
SUBJECT MATTER, SCOPE AND GENERAL APPROVAL REGIME

Art. 1. This Ordinance determines:

1. the qualitative and quantitative requirements for determining the own funds of insurers with right of access to the single market and of reinsurers, as well as the requirements for the classification and eligibility of these own funds;
2. the standard formula and the procedure for calculating the Solvency Capital Requirement according to the standard formula for insurers with right of access to the single market and for reinsurers;
3. additional requirements for internal models;
4. the elements included in the calculation of the amount of own funds;
5. the solvency margin and the methods by which it is calculated for insurers and reinsurers without right of access to the single market;
6. the supervision of insurers and reinsurers that are part of a group, and the powers of the Commission for Financial Supervision (the Commission) and the Deputy Chairman heading the "Insurance Supervision" Directorate (the Deputy Chairman) in relation to group supervision;
7. the method for carrying out additional supervision regarding insurers that are part of a group of insurers without right of access to the single market and whose parent undertaking is an insurance holding company or a mixed financial holding company.

Art. 2. This Ordinance also applies to insurers and reinsurers from third countries carrying out insurance or reinsurance business under the Insurance Code (IC) through a branch on the territory of the Republic of Bulgaria.

Art. 3. (1) For the issuance of a permit or approval under Commission Regulation (EU) 2015/35 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) (OJ, L 12/1 of 17 January 2015), an application shall be submitted to the Commission, to which evidence of compliance with the relevant requirements shall be attached.

(2) Based on the submitted documents, the Commission, or respectively the Deputy Chairman, establishes the extent to which the requirements for the issuance of the requested permit or approval are met. If the submitted data or documents are incomplete or irregular, or if additional information or evidence is needed for the accuracy of the data, the Commission, or respectively the Deputy Chairman, sends a notice to the applicant regarding the identified incompleteness or discrepancies or regarding the requested additional information and documents and sets a deadline for their rectification.

(3) If the notice under para. 2 is not accepted at the address for correspondence indicated by the applicant, the deadline for submitting the data or documents runs from the placing of the notice in a specially designated place in the building of the Commission. The latter fact is certified by a protocol drawn up by officials designated by order of the Chairman of the Commission.

(4) The Commission, or respectively the Deputy Chairman, decides on the application within a period of up to 14 days from its receipt, and when additional data and documents have been requested - from their receipt. The Deputy Chairman notifies the applicant in writing of the decision taken within a 3-day period from its issuance.

(5) The provisions of this Article do not apply when this Ordinance provides for a special regime of supervisory approval or permit in connection with Regulation 2015/35.

PART TWO OWN FUNDS
TITLE ONE OWN FUNDS OF INSURERS WITH RIGHT OF ACCESS TO THE SINGLE MARKET AND OF REINSURERS
Chapter Two
GENERAL PROVISIONS

Art. 4. (1) The own funds of the insurer, or respectively the reinsurer, include the basic own funds and the additional own funds.

(2) Every insurer, or respectively reinsurer, shall at all times have eligible own funds at least equal to the Solvency Capital Requirement.

(3) Every insurer, or respectively reinsurer, shall at all times have eligible basic own funds at least equal to the Minimum Capital Requirement.

Art. 5. (1) The basic own funds include the following elements:

1. the excess of assets over liabilities, valued in accordance with Chapter Eleven of the IC;
2. subordinated liabilities.

(2) The excess under para. 1, item 1 shall be reduced by the value of the own shares held by the insurer, or respectively the reinsurer.

Art. 6. (1) The additional own funds include elements other than the basic own funds, which can be secured to cover losses.

(2) The additional own funds may cover the following elements, insofar as they do not constitute basic own funds:

1. letters of credit and guarantees;
2. any other legally binding claims arising in favor of the insurer, or respectively the reinsurer.

(3) In mutual insurance cooperatives, the additional own funds may also cover future claims that the cooperative might have against its members by virtue of a call for additional contributions within the next 12 months.

(4) If the additional own funds have been paid in or their payment has been required, they are treated as assets and cease to be part of the elements of additional own funds.

Art. 7. (1) Surplus funds are considered as retained profits that have not been distributed to policyholders and beneficiaries.

(2) In compliance with the criteria under Art. 9, the surplus of funds is not considered an insurance or reinsurance liability, unless otherwise provided by a normative act.

Chapter Three
CLASSIFICATION OF OWN FUNDS

Art. 8. (1) The elements of own funds are classified into three tiers. The classification of the elements of own funds depends on whether they are elements of basic own funds or of additional own funds, and the extent to which they possess the following characteristics:

1. the element is available (at disposal) or, if necessary, its payment can be required for the full coverage of losses both for an operating undertaking and in the event of liquidation (permanence of availability);
2. in the event of liquidation - the total value of the element is available for covering losses and the payment of the element to its holder is deferred until the satisfaction of all other liabilities, including insurance and reinsurance liabilities to policyholders and beneficiaries under insurance and reinsurance contracts (subordination).

(2) When assessing the extent to which the elements of own funds possess the characteristics under para. 1, items 1 and 2, at the time of assessment, as well as at any future moment, the duration of the element is taken into account, in particular whether the element of own funds has a fixed maturity. When the element of own funds has a fixed maturity, the relative duration of the element, compared with the duration of the insurance and reinsurance liabilities (sufficient duration), is taken into account.

(3) In addition to the requirements under para. 1 and 2, the following features are taken into account:

1. whether the element is free from requirements or incentives for redemption at nominal value (absence of redemption incentives);
2. whether the element is free from mandatory fixed charges (absence of mandatory servicing costs);
3. whether the element is free from burdens (absence of burdens).

Art. 9. (1) The elements of basic own funds are classified as Tier 1 capital when they possess to a sufficient extent the characteristics under Art. 8, para. 1, items 1 and 2, taking into account the features under Art. 8, para. 2 and 3.

(2) The elements of basic own funds are classified as Tier 2 capital when they possess to a sufficient extent the characteristic under Art. 8, para. 1, item 2, taking into account the features under Art. 8, para. 2 and 3.

(3) The elements of additional own funds are classified as Tier 2 capital when they possess to a sufficient extent the characteristics under Art. 8, para. 1, items 1 and 2, taking into account the features under Art. 8, para. 2 and 3.

(4) All elements of basic and additional own funds that do not meet the requirements under paras. 1 - 3 are classified as Tier 3 capital.

Art. 10. (1) The insurer, or respectively the reinsurer, classifies the elements of its own funds based on the criteria under Art. 9.

(2) The classification of the elements of own funds is determined, where applicable, in accordance with the lists under Regulation (EU) 2015/35 and in compliance with the Guidelines on the classification of own funds (EIOPA-BoS-14/168 BG), adopted by the European Insurance and Occupational Pensions Authority (the Authority).

(3) In the event that an element of own funds is not contained in the lists under para. 2, the insurer, or respectively the reinsurer, evaluates and classifies it in accordance with para. 1. This classification is subject to approval by the Commission upon proposal of the Deputy Chairman in accordance with Chapter Five, Section III.

Art. 11. (1) Without prejudice to the provisions of Art. 10, the following classifications apply to the listed elements of own funds:

1. surplus of funds under Art. 7 is classified as Tier 1 capital;
2. letters of credit and guarantees, opened at credit institutions and entrusted to an independent trustee under the conditions of a trust or analogous fiduciary relationships in favor of creditors having insurance claims against the insurer, are classified as Tier 2 capital;
3. any future claims that mutual aid (mutual insurance) associations or associations of mutual aid (mutual insurance) type of shipowners with variable contributions, insuring only the risks under items 6, 12 and 17 of Section II, letter "A" of Annex No. 1 to the IC, may have against their members by virtue of a call for additional contributions within the next 12 months, are classified as Tier 2 capital.

(2) In accordance with Art. 9, para. 3, all future claims that a mutual insurance cooperative may have against its members by virtue of a call for additional contributions within the next 12 months and which do not fall within the scope of item 3 of the previous paragraph, are classified as Tier 2 capital, when they possess to a sufficient extent the characteristics under Art. 8, para. 1, taking into account the features under Art. 8, para. 2 and 3.

Chapter Four
ELIGIBILITY OF OWN FUNDS

Art. 12. (1) Regarding the compliance with the Solvency Capital Requirement, the amount of eligible elements of Tier 2 and Tier 3 capital is subject to quantitative limits, which guarantee compliance with at least the following conditions:

1. the share of elements from eligible Tier 1 own funds is greater than one third of the total amount of eligible own funds;
2. the eligible amount of Tier 3 elements is less than one third of the total amount of eligible own funds.

(2) Regarding compliance with the Minimum Capital Requirement, the amount of basic own funds elements, eligible for covering the Minimum Capital Requirement, which are classified as Tier 2 capital, is subject to quantitative limits. The limits guarantee at least that the share of Tier 1 elements in eligible basic own funds is higher than half of the total amount of eligible basic own funds.

(3) The eligible amount of own funds for covering the Solvency Capital Requirement is equal to the sum of the total amount of Tier 1 capital, the eligible amount of Tier 2 capital and the eligible amount of Tier 3 capital.

(4) The eligible amount of basic own funds for covering the Minimum Capital Requirement under Art. 191 of the IC is equal to the sum of the total amount of Tier 1 capital and the eligible amount of basic own funds elements classified as Tier 2 capital.

Chapter Five
PROCEDURE FOR ISSUANCE OF PERMITS AND APPROVALS
Section I
Supervisory Approval of Additional Own Funds

Art. 13. The approvals of additional own funds under Art. 167, paras. 1, 3 and 4 of the IC are issued in accordance with Commission Implementing Regulation (EU) 2015/499 of 24 March 2015 laying down technical standards for implementation with regard to the procedures for supervisory approval of the use of elements of additional own funds in accordance with Directive 2009/138/EC of the European Parliament and of the Council (OJ, L 79/12 of 25 March 2015) and Art. 62 - 67 of Regulation (EU) 2015/35.

Art. 14. When applying the requirements of Art. 62, paragraph 1, letter "g" of Regulation (EU) 2015/35, in the assessment of the value of an element of additional own funds whether it continues to reflect its ability to cover losses, the Commission upon proposal of the Deputy Chairman takes into account including:

1. information obtained through on-site inspections;
2. information obtained or acquired as part of the supervisory review process;
3. information provided by other competent authorities within the college of supervisory authorities, if applicable;
4. other relevant information.

Section II
Supervisory Approvals Issued in Connection with the Classification of Own Funds

Art. 15. (1) To obtain supervisory approval for the redemption or repurchase of an element of basic own funds in accordance with Art. 71, paragraph 1, letter "z", Art. 73, paragraph 1, letter "g" and Art. 77, paragraph 1, letter "g" of Regulation (EU) 2015/35 or for a transaction that is not considered a redemption or repurchase in accordance with Art. 71, paragraph 2, Art. 73, paragraph 2 and Art. 77, paragraph 2 of Regulation (EU) 2015/35, the insurer, or respectively the reinsurer, submits an application to the Commission, to which an assessment of the redemption, repurchase or transaction is attached, taking into account:

1. the current impact, the short-to-medium term impact on the overall solvency of the insurer, or respectively the reinsurer, and the extent to which it is compatible with the medium-term capital management plan of the company and its own assessment of risk and solvency;
2. its ability to raise additional own funds, if necessary, taking into account economic conditions and its access to capital markets and other sources of additional own funds.

(2) When proposing a series of redemptions or repurchases in a short period of time, the insurer, or respectively the reinsurer, notifies the Commission in its application under para. 1. The Commission considers the series of transactions as a whole rather than individually.

(3) The insurer, or respectively the reinsurer, submits an application under para. 1 for supervisory approval three months before the earlier of the two dates:

1. the required contractual notice for redemption or repurchase to the holders of the element;
2. the proposed date for redemption or repurchase.

(4) The deadline for the Commission's decision on the application for redemption or repurchase is three months from the date of its receipt. The Commission notifies the applicant in writing within a 7-day period from taking the decision.

(5) Art. 3, paras. 2 and 3 apply respectively.

(6) After receiving supervisory approval from the Commission for redemption or repurchase, the insurer, or respectively the reinsurer:

1. may exercise any claim or other optional redemption or repurchase under the conditions of the contractual agreement governing the element of own funds;
2. reduces the corresponding category of own funds, without making corrections or recalculation of the equalization reserve (reserve for equalization), when excluding an element treated as redeemed or repurchased, as of the date of notice to its holders or if no notice is required - from the date of supervisory approval by the Commission;
3. continues to monitor its solvency for non-compliance or potential non-compliance with the Solvency Capital Requirement, which would cause the suspension of redemption or repurchase during the period until the date of redemption or repurchase;
4. suspends redemption or repurchase if this would lead to non-compliance with the Solvency Capital Requirement, even if notice for redemption or repurchase has been sent to the holders of the elements.

(7) In the cases under para. 6, item 4, when redemption or repurchase is temporarily prohibited under these circumstances, the insurer, or respectively the reinsurer, may reinstate the element as available own funds, in which case the supervisory approval under para. 1 for redemption or repurchase is revoked.

Art. 16. In the event of an application for supervisory approval under Art. 15, para. 1 in connection with Art. 71, paragraph 1, letter "zh" in connection with letter "z" of Regulation (EU) 2015/35, the Commission upon proposal of the Deputy Chairman takes into account:

1. the current and forecasted solvency of the insurer, or respectively the reinsurer, taking into account the proposed redemption or repurchase and any other proposed repurchases and redemptions or issuances;
2. the medium-term capital management plan of the insurer, or respectively the reinsurer, and its own assessment of risk and solvency;
3. the variability of the own funds and the Solvency Capital Requirement of the insurer, or respectively the reinsurer, taking into account the nature, scale and complexity of the risks inherent in its activity;
4. the extent to which the insurer, or respectively the reinsurer, has access to external sources of own funds, as well as the influence of market conditions on the ability of the insurer, or respectively the reinsurer, to raise own funds.

Art. 17. (1) For the exceptional issuance of approval for redemption or repurchase of an element of basic own funds in accordance with Art. 71, paragraph 1, letter "k", sub-item (i), Art. 73, paragraph 1, letter "y", sub-item (i) or Art. 77, paragraph 1, letter "z", sub-item (i) of Regulation (EU) 2015/35, the insurer, or respectively the reinsurer, submits an application to the Commission, in which it must:

1. describe the proposed exchange or transformation, as well as its impact on basic own funds, including how the exchange or transformation is regulated in the conditions of the contractual agreement governing the element of own funds;
2. demonstrate how the proposed exchange or transformation is or will be in compliance with the recovery plan under Art. 215, para. 1 of the IC;
3. seek prior supervisory approval of the transaction in accordance with Art. 15.

(2) The deadline for the Commission's decision on the application is 30 days from the date of its receipt, with the insurer, or respectively the reinsurer, being notified in writing of the decision taken within a 7-day period.

(3) Art. 3, paras. 2 and 3 apply respectively.

Art. 18. (1) For the exceptional issuance of approval for distributions in accordance with Art. 71, paragraph 1, letter m), sub-item (i) of Regulation (EU) 2015/35, or respectively exceptional approval for distributions in accordance with Art. 73, paragraph 1, letter "z", sub-item (i) of Regulation (EU) 2015/35, the insurer, or respectively the reinsurer, submits an application to the Commission, accompanied by a justification, with attached evidence. With the justification, the insurer, or respectively the reinsurer, proves that the distribution can be carried out without leading to a significant reduction in solvency while complying with the Minimum Capital Requirement.

(2) The Commission upon proposal of the Deputy Chairman decides within a period of one month from receipt of the application, with the insurer, or respectively the reinsurer, being notified in writing of the decision taken within a 7-day period.

(3) An insurer, or respectively reinsurer, seeking exceptional approval for distributions regarding redemption through an alternative coupon payment mechanism, takes into account the amount of ordinary share capital that must be issued, the extent to which the restoration of compliance with the Solvency Capital Requirement necessitates the raising of new own funds, and the likely impact of the issuance of shares for the purposes of the alternative coupon payment mechanism on the ability of the insurer, or respectively the reinsurer, to raise these own funds, and provides such information and analysis to the Commission.

(4) Art. 3, paras. 2 and 3 apply respectively.

Section III
Approval of the Assessment and Classification of Elements Not Included in the Lists

Art. 19. For approval in accordance with Art. 79 of Regulation (EU) 2015/35 of the assessment and classification of an element of own funds that is not contained in the lists under Art. 10, para. 2, the insurer, or respectively the reinsurer, submits a written application for approval of each element of own funds to the Commission. The application is submitted in Bulgarian, in the form of an accompanying letter, and to it are attached:

1. the decision of the management body of the insurer, or respectively the reinsurer, for approving the application;
2. accompanying evidence.

Art. 20. (1) In the application, the insurer, or respectively the reinsurer, must confirm that:

1. it considers the legal or contractual conditions governing the element of own funds, or any other related arrangement, to be unambiguous and clearly defined;
2. taking into account likely future developments, as well as circumstances applicable as of the date of the application, it considers that with regard to the legal form and the economic substance the element of basic own funds will be in compliance with the criteria provided in Art. 8 and 9, and will have the characteristics determining the classification under Art. 71, 73 and 77 of Regulation (EU) 2015/35;
3. no facts have been omitted which, if known to the Commission, could influence its decision whether to approve the assessment and classification of the element of own funds.

(2) In the application, the insurer, or respectively the reinsurer, indicates other applications submitted by it or which are currently planned within the next six months, for approval of elements together with the corresponding dates of the applications.

Art. 21. (1) The insurer, or respectively the reinsurer, must provide a description of the manner in which the criteria under Art. 8 and 9 and the characteristics determining the classification under Art. 71, 73 and 77 of Regulation (EU) 2015/35 are met, including how the element will contribute to the existing capital structure of the insurer, or respectively the reinsurer, and how the element may enable the insurer, or respectively the reinsurer, to meet current or future capital requirements.

(2) The insurer, or respectively the reinsurer, must provide a description of the element of basic own funds to a sufficient extent, which allows the Commission to make a