Solvency II,
Supervision of Risk Concentration and
Intra-Group Transactions
Welcome to the July 2010 edition of the Solvency ii
Association newsletter
Dear Members,
Everybody speaks about diversification these
days. It is our big opportunity to reduce
regulatory capital. It is even an obligation under the "prudent
person principle" in Solvency ii. Diversification is the
opposite of concentration. Risk concentrations reduce
diversification effects.
Two years before a
previous market confidence crisis caused by Enron, WorldCom,
Arthur Andersen etc., we had an interesting paper from the Joint
Forum, (Basel, December 1999). This paper was about "Risk
Concentrations Principles". Most countries ignored most of these
principles. Now it is going to be different.
CEIOPS is building on these principles,
and gives us more concrete and detailed guidelines (not only
principles).
In the "Risk Concentrations
Principles" we read:
"A risk
concentration refers to an exposure with the potential to
produce losses large enough to threaten a financial
institution’s health or ability to maintain its core
operations."
In the insurance sector,
concentrations can arise from an insurance company’s assets,
liabilities, and off-balance sheet exposures, including
exposures to future insurance claims.
Reporting is an integral part of the
monitoring process by most insurance supervisors, and some
supervisors require additional or more frequent reporting when
insurance companies approach statutory limits.
Supervisors also require insurers to have in place policies and
procedures to prudently manage and control risk concentrations.
We will see today that CEIOPS has
developed a paper based on these principles, but it is much more
detailed.
What about
Intra-group transactions?
Intra-group transactions
occur where legal entities (like
subsidiaries) within a group depend on the parent and/or
other subsidiaries to perform a particular obligation.
Firms love this
opportunity, as these transactions allow the insurance group and
its subsidiaries to maximise efficiencies in capital
utilisation.
These transactions can
also be sourses of risk, or can be
used to mislead.
For example, they can be used to
generate capital or to
inflate the solvency position through
double gearing.
[double gearing = double counting. This is
the art of creating own funds in a
subsidiary, without reducing the parent's own funds.
For example, both a parent and a subsidiary
insurance undertakings are using the same
amount of own funds to meet their regulatory capital
requirements.
A parent invests in a subsidiary, we have an
increase in the own funds of the subsidiary, but the parent
company's investment appears as part of the parent's own funds].
Let's study the paper carefully
CEIOPS Advice for Level 2 Implementing
Measures on Solvency II: Supervision of Risk Concentration and
Intra-Group Transactions
Membership of an insurance group creates
a number of potential benefits for a solo
entity.
This includes the
pooling and diversification of risk, intra group financing and
integrated governance structures.
However, group
membership also presents a range of risks
to a solo entity.
This includes, for example,
direct or indirect risk exposures to other
group entities, conflicts of interest and inadequate risk
assessment.
Risk
Concentration (RC) and Intra-group Transactions (IGT) are
examples of intra-group relationships that can influence the
risk profile of a solo entity.
For prudential purposes,
an understanding of RC and IGT is
important in assessing the benefits and risks to an insurer via
its membership of a group and its relationships with other
entities inside and outside the group.
RC and IGT
also provide a mechanism for assessing risks arising at the
level of the group (e.g. contagion risk).
The issue from a supervisory perspective is
how RC and IGT are captured and managed
within a group supervision framework in order to enhance
supervision at solo and group level.
In particular, an assessment of how RC and IGT are addressed and
reported within the broader Pillar II framework.
The
financial crisis has highlighted the high
impact RC and IGT can have on the financial well-being of
groups.
As a result, CEIOPS decided that there is
merit in an own initiative paper to develop its initial views on
the supervision of RC and IGT under Solvency II.
This
paper sets out CEIOPS’ advice for the purposes of facilitating
Level 3 guidance and, potentially, the development of Level 2
implementing measures if requested by the European Commission.
2. Extract from
Level 1 Text
Recital 109
Risk concentrations and intra group transactions
can affect the financial position of
insurance or reinsurance undertakings.
The
supervisory authorities should therefore be able to exercise
supervision over such risk concentrations and intra group
transactions, taking into account the nature of relationships
between regulated entities as well as non regulated entities,
including insurance holding companies and mixed activity
insurance holding companies, and take appropriate measures at
the level of the insurance or reinsurance undertaking where its
solvency is or may
be jeopardised
Article 13(19)
'intra-group
transaction' means any transaction by which an insurance or
reinsurance undertaking relies either directly or indirectly on
other undertakings within the same group or on any natural or
legal person linked to the undertakings within that group by
close links, for the fulfilment of an obligation, whether or not
contractual, and whether or not for payment.
Article 244 (Supervision of risk
concentration)
The Member States shall require
insurance and reinsurance undertakings or insurance holding
companies to report on a regular
basis and at least annually to the group supervisor any
significant risk concentration at the level of the group.
The necessary information shall be
submitted to the group supervisor by the insurance or
reinsurance undertaking which is at the head of the group or,
where the group is not headed by a insurance or reinsurance
undertaking, by the insurance holding company or by the
insurance or reinsurance undertaking in the group identified by
the group supervisor after consultation with the other
supervisory authorities concerned and with the group.
The risk concentrations shall be subject
to supervisory review by the group supervisor.
The
group supervisor, after consultation with
the other supervisory authorities concerned and the group, shall
identify the type of risks insurance and reinsurance
undertakings in a particular group shall report in all
circumstances.
When defining or giving their opinion about the type of
risks, the group supervisor and the other
supervisory authorities concerned shall take into account the
specific group and risk management structure of the group.
In order to identify significant risk
concentration to be reported, the group supervisor, after
consultation of the other supervisory authorities concerned and
the group, shall impose appropriate thresholds based on solvency
capital or technical provisions or both.
When reviewing
the risk concentrations, the group
supervisor shall in particular monitor the possible risk
of contagion in the group, the risk of a conflict of interests,
and the level or volume of risks.
The Commission may
adopt implementing measures, as regards the
definition and
identification of a significant risk concentration and the
reporting on such a risk concentration, for the purposes of
paragraphs 2 and 3.
Those measures designed to amend
non-essential elements of this Directive by supplementing it
shall be adopted in accordance with the regulatory procedure
with scrutiny referred to in Article 301(3).
Article 245 (Supervision of intra-group
transactions)
Supervision of intra-group
transactions shall be exercised in accordance with paragraphs 2
and 3, Article 246 and Chapter III.
The Member States
shall require insurance and reinsurance undertakings or
insurance holding companies to report
on a regular basis and at least annually to the group supervisor
all significant intra-group transactions by insurance and
reinsurance undertakings within a group, including those
performed with any natural person linked to any undertaking
within the group by close links.
In addition, Member
States shall require reporting of very
significant intra-group transactions as soon as is practicable.
The necessary information shall be
submitted to the group supervisor
by the insurance or reinsurance undertaking which is at the head
of the group or, where the group is not headed by an insurance
or reinsurance undertaking, by the insurance holding company or
by the insurance or reinsurance undertaking in the group
identified by the group supervisor after consultation with the
other supervisory authorities concerned and with the group.
The intra-group transactions shall be
subject to supervisory review by the group supervisor.
The group supervisor, after consultation with the other
supervisory authorities concerned and the group,
shall identify the type of intra-group transactions insurance
and reinsurance undertakings in a particular group
must
report in all circumstances.
Article 244(3) shall
apply by analogy.
The Commission may adopt implementing
measures, as regards the definition and identification of a
significant intra-group transaction and the reporting on such an
intragroup transaction, for the purposes of paragraphs 2 and 3.
Those measures designed to amend non-essential elements
of this Directive by supplementing it shall be adopted in
accordance with the regulatory procedure with scrutiny referred
to in Article 301(3).
Article
246(1)(2)(3) (Supervision of the system of governance)
The requirements set out in TITLE 1, Chapter IV, Section 2
shall apply mutatis mutandis at the level
of the group.
Without prejudice to the first
subparagraph, the risk management and
internal control systems and reporting procedures shall be
implemented consistently in all the undertakings included in the
scope of group supervision pursuant to points
(a)
and (b) of Article 213(2) so that those systems and reporting
procedures can be controlled at the level of the groups.
Without prejudice to paragraph 1, the group internal control
mechanisms shall include at least the
following:
• adequate
mechanisms as regards group solvency to identify and measure all
material risks incurred and to appropriately relate eligible own
funds to risks;
• sound reporting and accounting
procedures to monitor and manage the intra-group transactions
and the risk concentration
The systems and
reporting procedures referred to in paragraph 1 and 2 shall be
subject to supervisory review by the group supervisor, in
accordance with the rules laid down in Chapter III.
Advice
CEIOPS considers that
the supervision of RC and IGT should be built on the principles
of the Insurance Groups Directive (IGD) and be
consistent with the Financial
Conglomerates Directive (FCD).
However, there are
some key differences between the Level 1
text and the IGD.
For example:
• The scope of transactions is not specified in the Level 1
text;
• The Level 1 text states that the supervisors
shall monitor in particular three specifics issues (contagion,
conflicts of interest and the level or volume of risks);
• The Level 1 text distinguishes between “significant” RC and
IGT and “very significant” IGT, which raises the issue of how
and where these concepts should be defined;
• The
supervision of RC and IGT is subject to Level 1 requirements on
the system of governance, including the supervisory review
process.
Therefore, supervisors need to consider
how RC and IGT are captured in the group governance framework;
• The Level 1 text states that the
group supervisor, in consultation with other supervisors,
“shall” identify the specific types of RC
and IGT that must be reported. In addition, the group
supervisor, in consultation with
other supervisors, “shall”
impose appropriate thresholds based on solvency capital or
technical provisions or both.
Therefore, the Level
1 text places a clear obligation on supervisory authorities to
work together in developing the supervision of RC and IGT in
accordance with Article 248(1)(c).
CEIOPS considers that
the supervision of RC and IGT under Solvency II is designed to
be more comprehensive than the current regime under the IGD (RC
is not referred to in the IGD).
This demands an enhanced
RC and IGT framework for insurance group supervision. In saying
that, CEIOPS considers that any advice should take into account
the findings and recommendations of the FCD Review.
Intra-group transactions
Definition,
Scope and Types of IGT
IGT
are defined in Article 13(19) of the Level 1 text as:
“'intra-group transaction' means any transaction by which an
insurance or reinsurance undertaking relies either directly or
indirectly on other undertakings within the same group or on any
natural or legal person linked to the undertakings within that
group by close links, for the fulfilment of an obligation,
whether or not contractual, and whether or not for payment.”
CEIOPS notes that this is consistent on a cross-sectoral
basis with Article 8 of the FCD.
The Level 1 text does
not define the scope of IGT. However, under Article 8(1) of the
IGD, the scope of supervision includes transactions between:
a) a (re)insurance undertaking and:
• a related undertaking of the (re)insurance undertaking;
• a participating undertaking in the (re)insurance
undertaking;
• a related undertaking of a participating
undertaking in the (re)insurance undertaking;
b) a
(re)insurance undertaking and a natural person who holds a
participation in:
• the insurance undertaking, the
reinsurance undertaking or any of its related undertakings;
• a participating undertaking in the (re)insurance
undertaking;
• a related undertaking of a participating
undertaking in the (re)insurance undertaking.
CEIOPS considers that the scope of IGT referred to in Article
8(1) of the IGD should continue under Solvency II. Consistent
with Recital 72, CEIOPS considers that the type of entities that
may fall within the scope of a
related undertaking include,
in particular:
• Third country
(re)insurance undertakings;
• Other regulated entities
(e.g. credit institutions);
• Unregulated entities (e.g.
holding companies).
The enlarged scope reflects
the desire to consider a wider range of transactions that may
exist within the group.
The reference to other regulated
entities and unregulated entities recognises the potential
importance that transactions involving these entities may have
on the financial position of insurance undertakings.
However, CEIOPS recognises the importance of the proportionality
principle in establishing the scope of a group’s reporting
requirements for RC and IGT.
This is particularly
relevant for large groups that have numerous separate legal
entities.
The IGD also lays out the specific types of
transactions that are subject to supervision. CEIOPS proposes
that the types of IGT referred to in Article 8(1) of the IGD
should apply in the application of Article 245.
In the
IGD, they include in particular (non exhaustive list):
• Loans;
• Guarantees and off-balance sheet
transactions;
• Elements eligible for the solvency
margin;
• Investments;
• Reinsurance and
retrocession operations;
• Agreements to share costs.
CEIOPS considers that supervisors should also pay particular
attention to the following types of IGT (non exhaustive list):
• Dividends, coupons and interest payments;
• The
transfer of own funds from undertakings to parent undertakings;
• The transfer of own funds from parent undertakings to
undertakings;
• The payment of fees and commissions;
• The costs associated with IGT (e.g. reinsurance costs);
• Transactions involving intra-group special purpose
vehicles;
• Agreements for the centralised management of
assets and liquidity in the group.
CEIOPS
considers that the reporting of IGT should account for the
impact of a winding up of each relevant entity of the group on
the viability of the group and the effect on policyholders.
CEIOPS considers IGT should be carried out
at arms length
consistent with the principles in the Level 1 text for the
protection of policyholders.
Without prejudice to Member
State treatment of IGT, CEIOPS considers that in exceptional
circumstances where IGT are not carried out at arms length,
those transactions shall be reported to the group supervisor at
least annually.
IGT and Governance
The assessment of IGT under the IGD is focussed on financial
transactions between entities in a group (e.g. inter-company
loans).
CEIOPS considers that this should remain the
focus under Solvency II and that, as noted above,
the range of
financial transactions that may be reported could be enlarged,
particularly in light of some of the lessons learnt from the
financial crisis.
However, the supervision of IGT is also
placed firmly within the group Pillar II
requirements on systems of governance.
Article
249 states that the supervision of IGT shall be exercised in
accordance with paragraphs 2 and 3 of Article 246 and chapter
III.
The reference to Article 250 refers to the
monitoring and management of RC and IGT within a group’s
internal control mechanisms and measures to facilitate group
supervision.
CEIOPS interprets the reference to the group
governance requirements to mean that the
supervision of IGT encompasses a wider set of issues than just
the reporting of financial data. Indeed, it implies that RC and
IGT
must be assessed within the broader Pillar II framework.
CEIOPS notes that information on IGT may be
sourced from other existing requirements, for example, the group
systems of governance.
Therefore,
information on IGT may already exist and need not be replicated
or necessarily reported separately (see section on reporting).
To take account of this, CEIOPS considers that the reporting
of IGT should capture the qualitative inter-linkages between
group entities, particularly between parent and subsidiary
undertakings.
Therefore, the supervision of IGT can be
seen as one tool that can be used in the
broader assessment of intra-group relationships and their impact
on the financial position of different entities.
To that end, CEIOPS considers that a
description of how a
group’s governance systems account for IGT should be included in
the annual reporting at group level.
This is consistent
with Article 250(2)(b) which refers to the reporting and
accounting procedures to monitor and manage IGT and RC.
Similarly, CEIOPS notes that this qualitative information may be
sourced from other existing Pillar II requirements.
Information on the governance of IGT may assist supervisors to
better understand a regulated entity’s risk exposures to other
parts of the group through intra-group relationships.
It
may also enhance the group supervisor’s ability to identify
group-specific risk that may be difficult to recognise through
the reporting of purely financial transactions.
Risk concentration
Definition, Scope and Types of RC
The Level 1 text defines
‘Concentration risk’ in Article 13(35) as:
“…all risk
exposures with a loss potential which is large enough to
threaten the solvency or the financial position of insurance and
reinsurance undertakings”.
CEIOPS notes that this
definition is consistent with the
definition of ‘Risk concentration’ in Article 2(19) of the FCD7.
However, the FCD definition goes on to state:
“such
exposures may be caused by counterparty risk/credit risk,
investment risk, insurance risk, market risk, other risks, or a
combination or interaction of these risks.”
As
there is no specific definition of ‘risk
concentration’ in the level 1 text, the FCD definition is useful
for the purpose of developing this advice.
CEIOPS
acknowledges that further detail is required on the concept of
RC and its application in practice. CEIOPS considers that
further work may be done at level 3 and should take into account
any future CEIOPS work on
stress testing and the findings of
the FCD Review.
CEIOPS considers it
useful to explain the difference between RC and concentration
risk.
‘Risk concentration’ is a broad term that covers
single risk exposures and combinations of risk exposures that
may arise in a group. RC within a specific risk category are
usually referred to as “concentration risk”.
For
example, concentrated exposures may arise with reference to
specific counterparties or specific industry sectors or
countries.
RC requires an assessment of the
interrelationships and interdependencies between different risk
categories.
They can have an
important impact on the assessment of risk at group level, but
as noted by the Joint Committee on Financial Conglomerates
(JCFC), this is often a difficult and complex task.
The Financial Stability Forum also noted that some financial
conglomerates are striving to assess RC across risk categories
(“horizontal view”).
CEIOPS considers that this should be
taken into account when developing the RC framework for
insurance groups.
CEIOPS also notes
that modelling may play a useful role in understanding the
interrelationships between different risk types.
By
combining business lines, financial
conglomerates offer the potential for broad diversification.
However, new risk
concentrations may arise at group level.
In
particular, different entities within the conglomerate could be
exposed to the same or similar risk factors, or to apparently
unrelated risk factors that may interact under some unusually
stressful circumstances.
There is no requirement to
supervise RC in the IGD.
Therefore, there is no current
supervisory approach in which to compare the Solvency II
requirements.
However, CEIOPS considers that the scope
of entities referred to in relation to IGT, should apply also to
Article 244.
CEIOPS considers that
the supervision of RC should also include the impact on the
group of risks from outside the group, that is, that the
assessment of an undertaking’s exposures is not limited to
exposures to another entity within the group.
This is important in ensuring the correct assessment of the
undertaking’s risk profile.
Reporting of RC & IGT
Articles 244 and 245 state that all significant RC and IGT shall
be reported to the group supervisor on a regular basis and at
least annually.
CEIOPS considers that the reporting of
RC and IGT should be consistent with the
principles established for the solo and group Solvency and
Financial Condition Report (SFCR) and the Report to Supervisors
(RTS).
CEIOPS considers that groups should include
information on RC and IGT in the annual RTS. It is important to
note that the reporting of RC and IGT shall be done at the level
of the group, not at the level of the solo
undertaking (i.e.
the group RTS).
As referred to in the above section on
governance, CEIOPS considers that the reporting of RC and IGT
should contain quantitative and qualitative elements.
Requiring a
combination of quantitative and
qualitative reporting better captures the notion of RC and IGT
as part of the Pillar II framework and places an onus on firms
and management to explain the risks associated with different
types of transactions or risk concentration.
The
reporting of significant RC should contain information on the
probability of those risks. For example, this may be captured by
scenario analysis.
However, Articles 244 and 245 also
refer to “regular” reporting and to the types of significant RC
and IGT that must be reported “in all circumstances”.
CEIOPS interprets this to mean that
in certain circumstances it
is appropriate for groups to report certain significant RC and
IGT more frequently than in the annual RTS.
Indeed, this
may be very important from a supervisory perspective as the
timeliness of reporting may have a high impact on the assessment
of the risk profile of a solo undertaking and the group.
However, the timeliness of the reporting will be dependent
on the materiality of the transaction or exposure and hence
reporting should be proportionate to the risks involved.
Ex-ante reporting of IGT
CEIOPS interpretation of the Level 1 text is that Article 245
refers to expost IGT (i.e. transactions that have taken place
and are subsequently reported).
However, CEIOPS
considers that there can be circumstances in which the ex-ante
reporting of significant IGT may be appropriate.
This is
designed to allow the group supervisor to engage with the group
on the impact of the transaction.
Hence, the development
of any ex-ante reporting must be done in consultation with the
group taking into account the group’s own assessment and
reporting IGT framework.
The advantage of ex-ante
reporting is that it provides a period to assess the transaction
and discuss with the group any risks that may jeopardise the
solvency or financial position of an undertaking, especially
where the
transaction is particularly complex. CEIOPS may
prepare Level 3 guidance on this issue.
Thresholds on RC and IGT
CEIOPS considers that the purpose of establishing thresholds is
to set certain measurable limits that would trigger reporting
requirements at group level.
The information reported
may be used to inform subsequent supervisory actions designed to
protect the solvency and financial position of the undertaking
or group.
The Level 1 text states that the development of
appropriate thresholds on the reporting of RC and IGT shall be
“based on solvency capital or technical provisions or both”.
CEIOPS considers that “solvency
capital” refers to the solvency capital requirement (SCR).
Establishing thresholds based on the solvency capital
requirement is consistent with the FCD.
CEIOPS considers
that supervisors should be able to establish thresholds based on
the group SCR/technical provisions and solo SCR/technical
provisions.
This is in order to assess the impact of RC
and IGT on the solvency position of individual undertakings as
well as at group level (i.e. the aggregate impact of RC and
IGT).
Thresholds based purely on the group SCR may not
be sensitive enough to account for the impact of RC and IGT on
solo undertakings, particularly where they have a
disproportionate impact on individual undertakings.
CEIOPS notes that while thresholds may be set at both solo and
group level, the reporting itself is only required at the level
of the group.
CEIOPS considers that applying absolute
thresholds to all groups may not be appropriate.
However, CEIOPS considers that there should be a common
methodology for determining thresholds to promote the
harmonization of thresholds across the EEA. CEIOPS considers
that further
Level 3 guidance is needed to promote this
harmonization.
CEIOPS considers that the development of
thresholds must take account of the
materiality principle,
namely in defining the meaning of “significant” RC and IGT and
“very significant intra-group transactions”.
This is
necessary to ensure the reporting framework is proportionate to
the risks of the group.
It is important that material RC
and IGT are reported to ensure the group supervisor receives
only relevant and timely information and to ensure groups are
not required to report unnecessary or duplicated
information.
In order to clarify the meaning of materiality for both
undertakings and supervisors, CEIOPS proposes using as a
reference the definition of materiality used in International
Accounting Standards (IAS) as CEIOPS considers that by using
this definition undertakings should be familiar with this
concept.
This definition states that:
“Information is material if its omission or misstatement
could influence the economic decisions of users taken on the
basis of the financial statements.
Materiality depends on
the size of the item or error judged in the particular
circumstances of its omission or misstatement.
Thus, materiality provides a threshold or cut-off point rather
than being a primary qualitative characteristic which
information must have if it is to be useful”.
For the
purposes of establishing thresholds, this means “significance”
relates to the impact of the RC or IGT on the solvency and
financial position of the undertaking.
The
nominal size
of the exposure or transaction in relation to the SCR or
technical provisions is one way to measure significance.
However, an exposure or transaction could also be
significant if it has a large impact on the business model or
capital structure of the undertaking or group. CEIOPS considers
that further detail on the materiality of RC and IGT may be
included in Level 3 guidance.
When developing thresholds,
it will be important to understand how the governance
requirements can help to identify, monitor and manage RC and
IGT. CEIOPS considers that this should include analysis of a
group’s
own risk management structure and internal control
systems.
The materiality concept should be consistent
with the undertaking’s approach to materiality in other areas of
solvency assessment and reporting, and should be reflected in
the undertaking’s own risk and solvency assessment
(ORSA).
Clearly, the group’s own views on what RC and IGT it considers
to be “significant” in relation to its own business model should
be taken into account when defining materiality.
Supervisors are particularly interested in the extent to which
centralised group functions review and challenge the information
they receive on RC and IGT from entities within the group.
The recent market events have highlighted the failure of
some of these central functions in addressing risks.
Therefore, CEIOPS recommends a strong focus on the governance
structure of a group when developing thresholds on RC and IGT.
This also highlights the importance of the consistency
of reporting within the group.
CEIOPS considers that
supervisors should pay particular attention to
scenarios where
multiple transactions are linked to each other in terms of time,
function and planning.
Assessing the totality of multiple
transactions may help supervisors to better understand the risks
at group level.
In assessing these links, supervisors
should also take into account the continuous or periodic
relationships of the transactions and the connections of a
functional and causal nature that may exist between the
transactions.
RC and IGT and the
College of Supervisors
Article 248 states that the
coordination arrangements of the college of supervisors may
specify the consultation among the supervisors concerned with
respect to Articles 244 and 245. CEIOPS considers this essential
given
the potential scale and complexity of supervising RC
and IGT, particularly for large insurance groups.
The
college of supervisors plays an important role in
establishing
the thresholds that may apply at solo and group level and the
types of RC and IGT that supervisors will expect in the RTS.
Under a risk-based system, it is important that supervisors
have the flexibility to determine the most appropriate framework
for each group.
Article 244(3) states that supervisors
must take into account the specific group and the risk
management structure of the group.
A pre-determined
standard reporting approach may not be adequate in identifying
the risks generated by RC and IGT, particularly where risks are
dynamic and change over time.
Therefore, cooperation and
information sharing between supervisors within the college is
essential.
CEIOPS considers that the
reporting
requirements developed in the college should take into account
the principle of proportionality.
However, CEIOPS
considers that Level 3 guidance is necessary to promote the
harmonisation of the supervision of RC and IGT and may further
develop some of the principles and concepts established in this
paper.
CEIOPS’ advice
The principles for the supervision of RC and IGT under
Solvency II should be consistent with the current IGD and FCD.
Any future Level 2 advice or Level 3 guidance should
take into account the findings of the FCD Review.
Intra-group Transactions
The
scope of IGT referred to in Article 8(1) of the IGD should apply
in the application of Article 245:
a)
A (re)insurance undertaking and:
• a related undertaking of the (re)insurance undertaking;
• a participating undertaking in the (re)insurance
undertaking;
• a related undertaking of a participating
undertaking in the (re)insurance undertaking.
b)
A (re)insurance undertaking and a natural
person who holds a participation in:
• the
insurance undertaking, the reinsurance undertaking or any of its
related undertakings;
• a participating undertaking in
the (re)insurance undertaking;
• a related undertaking of
a participating undertaking in the (re)insurance undertaking.
The scope of IGT may include:
• Third country (re)insurance undertakings;
• Other
regulated entities;
• Unregulated entities.
The
types of IGT referred to in Article 8(1) of the IGD
should be taken into account in the
application of Article 249:
• loans;
•
guarantees and off-balance sheet transactions;
• elements
eligible for the solvency margin;
• investments;
•
reinsurance and retrocession operations;
• agreements to
share costs.
CEIOPS considers that
the supervision of IGT should pay particular attention to:
• Dividends, coupons and interest payments;
• The
transfer of own funds from undertakings to parent undertakings;
• The transfer of own funds from parent undertakings to
undertakings;
• The payment of fees and commissions;
• The costs associated with IGT;
• Transactions
involving intra-group special purpose vehicles;
•
Agreements for the centralised management of assets and
liquidity in the group.
CEIOPS
considers that IGT that are not carried out at-arms length
should be reported annually.
Risk Concentration
The FCD
definition of RC is useful for the purpose of developing level 2
measures for insurance groups.
The concept of RC
may be
elaborated in Level 3 guidance.
The scope of RC should be
consistent with the scope of IGT.
The reporting of RC
should include specific risk categories and, where possible, the
interrelationships between risk categories.
The reporting
of RC should include exposures arising from inside and outside
the group.
The reporting of RC should include information
on the probability of risks.
For example, this may be
captured by scenario analysis.
Reporting, Thresholds and
the College of Supervisors
The reporting of RC and IGT
should be contained in the annual group Report to Supervisors
(RTS).
The reporting should cover quantitative and
qualitative aspects of RC and IGT and take into account existing
sources of information under the Pillar II framework.
CEIOPS considers that applying absolute thresholds to all groups
may not be appropriate.
However, CEIOPS considers that
there should be a common methodology for determining thresholds
to promote the harmonization of thresholds across the EEA.
CEIOPS considers that further Level 3 guidance is needed to
promote this harmonization.
Appropriate thresholds on RC
and IGT should be based on quantitative and qualitative
elements.
The development of reporting requirements and
appropriate thresholds should take account of a group’s own
internal risk management and internal control procedures.
To ensure supervisors receive relevant and timely
information, reporting may be more frequent than the annual
reporting in the group RTS depending on the risks associated
with the RC and IGT.
Supervisors should
pay particular
attention to scenarios where multiple transactions are linked to
each other in terms of time, function and planning, even if each
individual transaction value is below a given threshold.
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Contents
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Risk
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2.
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3.
Sarbanes
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4.
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ii
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5.
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6.
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7. Members of the
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Dear members,
The Solvency ii Association develops and maintains a
compendium of Solvency ii related risk and compliance topics.
Subject matter experts review and update this body of knowledge.
The Solvency ii Association offers two Solvency ii
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A. Certified Solvency ii Professional
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B.
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T: + 44 207 060 3312, F: + 44 207 681 3317
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