Commission Delegated 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) Text with EEA relevance

CHAPTER VI SOLVENCY CAPITAL REQUIREMENT — FULL AND PARTIAL INTERNAL MODELS

SECTION 1 Definitions

Article 222

Materiality

For the purposes of this Chapter, a change or error in the outputs of the internal model, including the Solvency Capital Requirement, or in the data used in the internal model shall be considered material where it could influence the decision-making or the judgement of the users of that information, including the supervisory authorities.

SECTION 2 Use test

Article 223

Use of the internal model

Insurance and reinsurance undertakings shall explain upon request of the supervisory authorities the different uses of their internal model and how they ensure consistency between the different outputs where the internal model is used for different purposes. Where insurance and reinsurance undertakings decide not to use the internal model for a part of the system of governance, particularly in the coverage of any material risks, they shall explain that decision.

Article 224

Fit to the business

Insurance and reinsurance undertakings shall ensure that the design of the internal model is aligned with their activities in the following manner:

• (a) the modelling approaches reflect the nature, scale and complexity of the risks inherent in the activities of the undertaking which are within the scope of the internal model;

• (b) the outputs of the internal model and the content of the internal and external reporting of the undertaking are consistent;

• (c) the internal model is capable of producing outputs that are sufficiently granular to play an important role in the relevant management decisions of the undertaking; as a minimum, the outputs of the internal model shall differentiate between lines of business, between risk categories and between major business units;

• (d) the policy for changing the internal model provides that the internal model is to be adjusted for changes in the scope or nature of the activities of the undertaking.

Article 225

Understanding of the internal model

• (a) the structure of the internal model and the way the model fits to the business and is integrated in the risk-management system of the insurance or reinsurance undertaking;

• (b) the scope and purposes of the internal model and the risks that are or are not covered by the internal model;

- (c) the general methodology applied in the internal model calculations;

• (d) the limitations of the internal model;

• (e) the diversification effects taken into account in the internal model.

Article 226

Support of decision-making and integration with risk management

An internal model shall only be considered to be widely used in and to play an important role in the system of governance of an insurance or reinsurance undertaking where it meets all of the following conditions:

- (a) the internal model supports the relevant decision-making processes in the undertaking, including the setting of the business strategy;

• (b) the internal model and its results are regularly discussed and reviewed in the administrative, management or supervisory body of the insurance or reinsurance undertaking;

• (c) all material quantifiable risks identified by the risk management system which are within the scope of the internal model are covered by the internal model;

• (d) the undertaking uses the internal model to assess, where material, the impact on its risk profile of potential decisions, including the impact on expected profit or loss and the variability of the profit or loss resulting from those decisions;

- (e) the outputs of the internal model, including the measurement of diversification effects, are taken into account in formulating risk strategies, including the development of risk tolerance limits and risk mitigation strategies;

• (f) the relevant outputs of the internal model are covered by the internal reporting procedures of the risk management system;

• (g) the quantifications of risks and the risk ranking produced by the internal model trigger risk management actions where relevant;

• (h) the insurance or reinsurance undertaking is required to change the internal model in accordance with Article 115 of Directive 2009/138/EC as soon as possible where the results of the model validation process in accordance with Article 124 of that Directive show that the internal model does not comply with the requirements set out in Articles 101, 113, 120 to 125 of that Directive, to ensure compliance with those requirements;

• (i) the policy for changing the internal model provides that the internal model is changed, where relevant, to reflect changes in the risk management system.

Article 227

Simplified calculation

SECTION 3 Statistical quality standards

Article 228

Probability distribution forecast

Article 229

Adequate, applicable and relevant actuarial techniques

Actuarial and statistical techniques shall only be considered adequate, applicable and relevant for the purposes of Article 121(2) of Directive 2009/138/EC where all of the following conditions are met:

• (a) the techniques are based on up to date information and progress in actuarial science and generally accepted market practice are taken into account in the choice of the techniques;

• (b) the insurance or reinsurance undertaking has a detailed understanding of the economic and actuarial theory and the assumptions underlying them.

• (c) the outputs of the internal model indicate relevant changes in the risk profile of the insurance or reinsurance undertaking;

• (d) the outputs of the internal model are stable in relation to changes in the input data that do not correspond to a relevant change of the risk profile of the insurance or reinsurance undertaking;

• (e) the internal model captures all the relevant characteristics of the risk profile of the insurance or reinsurance undertaking;

• (f) the techniques are adapted to the data used for the internal model;

• (g) the outputs of the internal model do not include a material model error or estimation error; wherever possible, the probability distribution forecast shall be adjusted to account for model and estimation errors;

• (h) the calculation of the outputs of the internal model can be set out in a transparent manner.

Article 230

Information and assumptions used for the calculation of the probability distribution forecast

• (a) insurance and reinsurance undertakings are able to explain and justify each of the assumptions, taking into account the significance of the assumption, the uncertainty involved in the assumption and why the relevant alternative assumptions are not used;

• (b) the circumstances under which the assumptions would be considered false can be clearly identified;

• (c) insurance and reinsurance undertakings establish and maintain a written explanation of the methodology used to set those assumptions.

Article 231

Data used in the internal model

• (a) the data are free from material errors;

• (b) data from different time periods used for the same estimation are consistent;

• (c) the data are recorded in a timely manner and consistently over time.

2. Data used in the internal model shall only be considered complete for the purposes of Article 121(3) of Directive 2009/138/EC where all of the following conditions are met:

• (a) data include sufficient historical information to assess the characteristics of the underlying risk, in particular to identify trends in the risks;

• (b) data that comply with point (a) of this paragraph are available for all relevant model parameters and no such relevant data are excluded from the use in the internal model without justification.

• (a) the data are consistent with the purposes for which it is to be used;

• (b) the amount and nature of the data ensure that the estimations made in the internal model on the basis of the data do not include a material estimation error;

• (c) the data are consistent with the assumptions underlying the actuarial and statistical techniques that are applied to them in the internal model;

• (d) the data reflect the relevant risks to which the insurance or reinsurance undertaking is exposed;

• (e) the data are collected, processed and applied in a transparent and structured manner, based on a specification of the following areas:
• (i) the definition and assessment of the quality of data, including specific qualitative and quantitative standards for different data sets;
• (ii) the use and setting of assumptions made in the collection, processing and application of data;
• (iii) the process for carrying out data updates, including the frequency of regular updates and the circumstances that trigger additional updates.

Article 232

Ability to rank risk

Article 233

Coverage of all material risks

• (a) the identification in the own risk and solvency assessment of risks other than those that are covered by the internal model;

• (b) the existence of a dedicated risk management process for risks other than those that are covered by the internal model;

• (c) the existence of dedicated risk mitigation techniques for risks other than those that are covered by the internal model.

• (a) the capital allocation in accordance with Article 120 of Directive 2009/138/EC;

• (b) the amount of profits and losses which cannot be explained by the risks covered by the internal model;

- (c) the results of stress testing and scenario analysis and any tool used in the model validation process.

Article 234

Diversification effects

The system used for measuring diversification effects referred to in Article 121(5) of Directive 2009/138/EC shall only be considered adequate where all of the following conditions are met:

• (a) the system used for measuring diversification effects identifies the key variables driving dependencies;

• (b) the system used for measuring diversification effects takes into account all of the following:
• (i) any non-linear dependence and any lack of diversification under extreme scenarios;
• (ii) any restrictions of diversification which arise from the existence of a ring-fenced fund;
• (iii) the characteristics of the risk measure used in the internal model;

• (c) the assumptions underlying the system used for measuring diversification effects are justified on an empirical basis.

Article 235

Risk-mitigation techniques and other techniques to reduce the Solvency Capital Requirement

• (a) the contractual arrangements relating to the risk-mitigation technique are, in any relevant jurisdiction, not legally effective and enforceable or does not ensure that the transfer of risk is clearly defined and incontrovertible;

• (b) insurance and reinsurance undertakings do not have a direct claim on the counterparty in the event of the default, insolvency or bankruptcy of the counterparty or other credit event set out in the transaction documentation to the arrangements relating to the risk-mitigation technique;

• (c) the legal arrangements underlying the risk-mitigation technique do not contain an explicit reference to a specific risk exposure clearly defining the extent of the cover provided by the risk-mitigation technique.

Article 236

Future management actions

• (a) the assumptions on future management actions used in the calculations for the internal model are determined in an objective manner;

• (b) assumed future management actions are realistic and consistent with the insurance or reinsurance undertaking's current business practice and business strategy, including the use of risk-mitigation techniques and, where there is sufficient evidence that the undertaking will change its practices or strategy, the assumed management actions are consistent with the changed practices or strategy;

- (c) assumed future management actions are consistent with each other;

• (d) assumed future management actions are not contrary to any obligations towards policy holders and beneficiaries or to legal provisions;

• (e) assumed future management actions take account of any public information or communication by the insurance or reinsurance undertaking as to the actions that it would expect to take or not take.

- (a) a comparison of assumed future management actions with management actions taken previously by the insurance or reinsurance undertaking;

- (b) a comparison of future management actions taken into account in the current and past calculations of the internal model.

Insurance and reinsurance undertakings shall be able to explain any relevant deviations in relation to points (a) and (b).

• (a) the identification of future management actions implemented in the internal model;

• (b) the identification of the specific circumstances in which the insurance or reinsurance undertaking would reasonably expect to carry out the future management actions identified pursuant to point (a);

• (c) the identification of the specific circumstances in which the insurance or reinsurance undertaking may not be able to carry out the future management actions identified pursuant to point (a), and a description of how those circumstances are reflected in the internal model;

• (d) the order in which future management actions would be carried out and the governance requirements applicable to those future management actions;

• (e) a description of any ongoing work required to ensure that the insurance or reinsurance undertaking is in a position to carry out the future management actions identified pursuant to point (a);

• (f) a description of how future management actions have been reflected in the calculation of the probability distribution forecast;

• (g) a description of the applicable internal reporting procedures, which shall include at least an annual communication to the administrative, supervisory or management body, that cover future management actions implemented in the internal model.

Article 237

Understanding of external models and data

Parts of the internal model obtained from a third party shall be subject to all of the same tests and standards as the parts developed by the undertaking. In addition, the parts obtained from a third part shall not be considered to be adequate unless the insurance or reinsurance undertaking is able to demonstrate a detailed understanding of those parts, including their limitations.

Data used in the internal model obtained from a third party shall not be considered to be appropriate unless the insurance or reinsurance undertaking is able to demonstrate a detailed understanding of those data, including their limitations.

SECTION 4 Calibration standards

Article 238

Where the approximations are based on the rescaling of modelled risks, the undertakings referred to in Article 122(3) of Directive 2009/138/EC shall demonstrate that the rescaling does not impair the outcome of the approximations.

Where the time period of the risk measure used is different from the one provided in Article 101(3) of Directive 2009/138/EC, the undertakings referred to in Article 122(3) of that Directive shall take into account all of the following:

• (a) whether events are equally distributed over time and if not, how it is reflected in the approximations;

- (b) whether all significant risks over a one year period are properly managed;

- (c) where the time period used is longer than that provided in Article 101(3) of Directive 2009/138/EC, whether due consideration to the solvency position during that time period has been given by the undertaking;

• (d) whether the time period used is appropriate taking into account the average duration of the liabilities of the insurance or reinsurance undertaking, the business of the undertaking and, where relevant, the uncertainties associated with long time periods;

• (e) any assumptions made in the approximations about the dependencies between risks over consecutive periods of time.

SECTION 5 Integration of partial internal models

Article 239

3. Where the insurance or reinsurance undertaking further demonstrates to the supervisory authorities that it would not be appropriate to use any of the integration techniques set out in Annex XVIII for any of the reasons referred to in paragraph 5, the insurance and reinsurance undertaking may use an alternative integration technique. The insurance or reinsurance undertaking shall demonstrate the appropriateness of the integration technique proposed.

4. The alternative integration technique used shall result in a Solvency Capital Requirement that complies with the principles set out in Title I, Chapter VI, Section 4, subsections 1 and 3 of Directive 2009/138/EC and which more appropriately reflects the risk profile of the insurance or reinsurance undertaking.

• (a) the resulting Solvency Capital Requirement would not comply with Article 101 of Directive 2009/138/EC;

• (b) the resulting Solvency Capital Requirement would not appropriately reflect the risk profile of the insurance or reinsurance undertaking;

• (c) the design of the partial internal model is consistent with the principles set out in Articles 101 and 102 of Directive 2009/138/EC but would not allow its integration into the solvency capital requirement standard formula.

SECTION 6 Profit and loss attribution

Article 240

• (a) the profit and loss;

• (b) the major business units of the undertaking;

• (c) the categorisation of risks chosen in the internal model;

• (d) the attribution of the overall profit or loss to the risk categories and major business units.

2. The specification of profit and loss shall be consistent with the increase and decrease of the monetary amount underlying the probability distribution forecast referred to in Article 228(1).

SECTION 7 Validation standards

Article 241

Model validation process

• (a) the processes and methods used to validate the internal model and their purposes;

- (b) for each part of the internal model, the frequency of regular validations and the circumstances which trigger additional validation;

- (c) the persons who are responsible for each validation task;

• (d) the procedure to be followed in the event that the model validation process identifies problems with the reliability of the internal model and the decision-making process to address those problems.

• (a) in case of an internal validation process, the responsibilities and reporting structure of the persons involved in the process,

• (b) in case of an external validation process, the remuneration structure of the persons, including where applicable their employees or other persons acting on their behalf, who are involved in the process and any other mandates of these persons relating to the insurance or reinsurance undertaking.

Article 242

Validation tools

• (a) current information, taking into account, where it is relevant and appropriate, developments in actuarial techniques and the generally accepted market practice;

• (b) a detailed understanding of the economic and actuarial theory and the assumptions underlying the methods to calculate the probability distribution forecast of the internal model.

SECTION 8 Documentation standards

Article 243

General provisions

Article 244

Minimum content of the documentation

The documentation of the internal model shall include all of the following information:

- (a) an inventory of all the documents which form part of the documentation;

• (b) the policy for changing the internal model as referred to in Article 115 of Directive 2009/138/EC;

• (c) a description of the policies, controls and procedures for the management of the internal model, including responsibilities assigned to staff members of the insurance or reinsurance undertaking;

• (d) a description of the information technology used in the internal model, including any contingency plans relating to the information technology used;

• (e) all relevant assumptions on which the internal model is based and their justification in accordance with Article 230(2);

• (f) the explanation of the methodology used to set assumptions referred to in point (c) of Article 230(2) which shall cover the following:
• (i) the inputs on which the choice of assumptions is based;
• (ii) the objectives of the choice of assumptions and the criteria used for determining the appropriateness of the choice;
• (iii) any limitations in the choice of assumptions made;

• (g) a directory of the data used in the internal model, specifying their source, characteristics and usage;

• (h) the specification for the collection, processing and application of data referred to in Article 231(3)(e);

• (i) where data are not used consistently over time in the internal model, a description of the inconsistent use and its justification;

• (j) the specification of the qualitative and quantitative indicators for the coverage of risks referred to in Article 233;

- (k) a description of the risk-mitigation techniques that are taken into account in the internal model as referred to in Article 235 and an explanation of how the risks arising from the use of risk-mitigation techniques are reflected in that internal model;

• (l) a description of the future management actions taken into account in the internal model as referred to in Article 236 and a description of the relevant deviations referred to in Article 236(2);

• (m) the specifications for the profit and loss attribution referred to in Article 240(1);

• (n) the specifications for the model validation process referred to in Article 241(3);

• (o) the results of the validation in relation to compliance with Article 101 of Directive 2009/138/EC;

• (p) in relation to external models and data:
• (i) the role of external models and data in the internal model;
• (ii) the reasons for preferring external models to internally developed models and external data to internal data;
• (iii) the alternatives to the use of external models and data considered by the insurance or reinsurance undertaking and an explanation of the decision in favour of a particular external model or a set of external data.

Article 245

Circumstances under which the internal model does not work effectively

When assessing and documenting circumstances under which the internal model does not work effectively, insurance and reinsurance undertakings shall take all of the following into account:

- (a) the risks which are not covered by the internal model;

- (b) the limitations in risk modelling used in the internal model;

• (c) the nature, degree and sources of uncertainty connected with the results of the internal model including the sensitivity of the results for the key assumptions underlying the internal model;

• (d) the deficiencies in data used in the internal model and the lack of data for the calculation of the internal model;

• (e) the risks arising out of the use of external models and external data in the internal model;

• (f) the limitations of information technology used in the internal model;

• (g) the limitations of internal model governance.

Article 246

Changes to the internal model

The documentation of the internal model shall include a record of minor and major changes to the internal model, including all of the following:

• (a) a description of the rationale for the minor and major changes;

• (b) a description of the implications of the major changes for the design and operations of the internal model;

• (c) where a major change or a combination of minor changes has a material impact on the outputs of the internal model, a quantitative and qualitative comparison of the outputs before and after the change relating to the same valuation date.

SECTION 9 External models and data

Article 247

Insurance and reinsurance undertakings shall monitor any potential limitations arising from the use of external models or external data in the internal model to the ongoing fulfilment of the requirements set out in Articles 101 and Articles 120 to 125 of Directive 2009/138/EC, and also in Article 113 of that Directive for partial internal models.

CHAPTER VII **MINIMUM CAPITAL REQUIREMENT**

Article 248

Minimum Capital Requirement

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where:

• (a) MCRcombined denotes the combined Minimum Capital Requirement;

• (b) AMCR denotes the absolute floor referred to in Article 129(1)(d) of Directive 2009/138/EC and in Article 253 of this Regulation.

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where:

• (a) MCRlinear denotes the linear Minimum Capital Requirement, calculated in accordance with Articles 249 to 251;

• (b) SCR denotes the Solvency Capital Requirement, calculated in accordance with Chapter V or in accordance with Chapter VI where approval for the use of full or partial internal model has been granted.

Article 249

Linear Minimum Capital Requirement

The linear Minimum Capital Requirement shall be equal to the following:

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where:

• (a) MCR(linear,nl) denotes the linear formula component for non-life insurance and reinsurance obligations;

- (b) MCR(linear,l) denotes the linear formula component for life insurance and reinsurance obligations.

Article 250

Linear formula component for non-life insurance and reinsurance obligations

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where:

• (a) the sum covers all segments set out in Annex XIX;

• (b) TP(nl,s) denotes the technical provisions without a risk margin for non-life insurance and reinsurance obligations in the segment s after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, with a floor equal to zero;

• (c) Ps denotes the premiums written for insurance and reinsurance obligations in the segment s during the last 12 months, after deduction of premiums for reinsurance contracts, with a floor equal to zero;

• (d) the factors αs and βs are set out in Annex XIX.

• (a) amounts recoverable from reinsurance contracts or special purpose vehicles that cannot be taken into account in accordance with of Article 41(3) and (5);

• (b) amounts recoverable from reinsurance contracts or special purpose vehicles, that do not comply with Articles 209, 210, 211 and 213 or with Article 235.

3. In the calculation of premiums written after deduction of premiums for reinsurance contracts referred to in point (c) of paragraph (1), the following premiums for reinsurance contracts shall not be deducted:

• (a) premiums in relation to non-insurance events or settled insurance claims that are not accounted for in the cash-flows referred to in Article 41(3);

• (b) premiums for reinsurance contracts that do not comply with Articles 209, 210, 211 and 213 or with Article 235.

Article 251

Linear formula component for life insurance and reinsurance obligations

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where:

• (a) TP(life,1) denotes the technical provisions without a risk margin in relation to guaranteed benefits for life insurance obligations with profit participation, after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, with a floor equal to zero, and technical provisions without a risk margin for reinsurance obligations where the underlying life insurance obligations include profit participation, after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, with a floor equal to zero;

• (b) TP(life,2) denotes the technical provisions without a risk margin in relation to future discretionary benefits for life insurance obligations with profit participation, after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, with a floor equal to zero;

• (c) TP(life,3) denotes the technical provisions without a risk margin for index-linked and unit-linked life insurance obligations and reinsurance obligations relating to such insurance obligations, after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, with a floor equal to zero;

• (d) TP(life,4) denotes the technical provisions without a risk margin for all other life insurance and reinsurance obligations, after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, with a floor equal to zero;

• (e) CAR denotes the total capital at risk, being the sum, in relation to each contract that give rise to life insurance or reinsurance obligations, of the capital at risk of the contracts, where the capital at risk of a contract means the higher of zero and the difference between the following two amounts:
• (i) the sum of all of the following:
• — the amount that the insurance or reinsurance undertaking would currently pay in the event of the death or disability of the persons insured under the contract after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles;
• — the expected present value of amounts not covered in the previous indent that the undertaking would pay in the future in the event of the immediate death or disability of the persons insured under the contract after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles;
• (ii) the best estimate of the corresponding obligations after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles.

• (a) amounts recoverable from reinsurance contracts or special purpose vehicles that cannot be taken into account in accordance with Article 41(3) and (5);

• (b) amounts recoverable from reinsurance contracts or special purpose vehicles that do not comply with Articles 209 to 215 or Article 235.

Article 252

Minimum Capital Requirement: composite insurance undertakings

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where:

• (a) NMCR(combined,nl) denotes the notional combined non-life Minimum Capital Requirement;

• (b) AMCRnl denotes the absolute floor prescribed in Article 129(1)(d)(i) of Directive 2009/138/EC and in Article 253 of this Regulation.

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where:

• (a) NMCR(linear,nl) denotes the notional linear Minimum Capital Requirement for non-life insurance or reinsurance activity;

• (b) NSCRnl denotes the notional Solvency Capital Requirement for non-life insurance or reinsurance activity;

• (c) Addonnl denotes the part of the capital add-ons, set by the supervisory authority in accordance with Article 37 of Directive 2009/138/EC, which has been apportioned by that supervisory authority to the non-life insurance or reinsurance activity of the insurance or reinsurance undertaking.

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where:

• (a) MCR(nl,nl) denotes the linear formula component for non-life insurance and reinsurance obligations relating to non-life insurance or reinsurance activity;

• (b) MCR(l,nl) denotes the linear formula component for life insurance and reinsurance obligations relating to non-life insurance or reinsurance activity.

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where:

• (a) SCR denotes the Solvency Capital Requirement calculated in accordance with Title I, Chapter VI, Section 4, Subsection 2 of Directive 2009/138/EC or with Title I, Chapter VI, Section 4, Subsection 3 of Directive 2009/138/EC, which shall for the purposes of this Article exclude any capital add-on imposed in accordance with Article 37 of that Directive;

• (b) NMCR(linear,nl) denotes the notional linear non-life Minimum Capital Requirement for non-life insurance or reinsurance activity;

• (c) NMCR(linear,l) denotes the notional linear Minimum Capital Requirement for life insurance or reinsurance activity.

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where:

• (a) NMCR(combined,l) denotes the notional combined life Minimum Capital Requirement;

• (b) AMCRl denotes the absolute floor prescribed in Article 129(1)(d)(ii) of Directive 2009/138/EC.

Image omitted; see official source

where:

• (a) NMCR(linear,l) denotes the notional linear Minimum Capital Requirement for life insurance or reinsurance activity;

• (b) NSCRl denotes the notional Solvency Capital Requirement for life insurance or reinsurance activity;

• (c) Addonl denotes the part of the capital add-ons, set by the supervisory authority in accordance with Article 37 of Directive 2009/138/EC, which has been apportioned by that supervisory authority to the life insurance or reinsurance activity of the insurance or reinsurance undertaking.

Image omitted; see official source

where:

• (a) MCR(nl,l) denotes the linear formula component for non-life insurance and reinsurance obligations relating to life insurance or reinsurance activity;

• (b) MCR(l,l) denotes the linear formula component for life insurance and reinsurance obligations relating to life insurance or reinsurance activity.

Image omitted; see official source

where:

- (a) SCR denotes the Solvency Capital Requirement calculated in accordance with Title I, Chapter VI, Section 4, Subsection 2 of Directive 2009/138/EC or with Title I, Chapter VI, Section 4, Subsection 3 of Directive 2009/138/EC, which shall for the purposes of this Article exclude any capital add-on imposed in accordance with Article 37 of that Directive;

- (b) NMCR(linear,nl) denotes the notional linear non-life Minimum Capital Requirement for non-life insurance or reinsurance activity;

- (c) NMCR(linear,l) denotes the notional linear Minimum Capital Requirement for life insurance or reinsurance activity.

Article 253

Absolute floor of the Minimum Capital Requirement

CHAPTER VIII **INVESTMENTS IN SECURITISATION POSITIONS**

Article 257

Requirements for investments in securitisation that no longer comply with the risk-retention and qualitative requirements

CHAPTER IX **SYSTEM OF GOVERNANCE**

SECTION 1 Elements of the system of governance

Article 258

General governance requirements

• (a) establish, implement and maintain effective cooperation, internal reporting and communication of information at all relevant levels of the undertaking;

• (b) establish, implement and maintain effective decision making procedures and an organisational structure which clearly specifies reporting lines, allocates functions and responsibilities, and takes into account the nature, scale and complexity of the risks inherent in that undertaking's business;

- (c) ensure that the members of the administrative, management or supervisory body collectively possess the necessary qualifications, competency, skills and professional experience in the relevant areas of the business in order to effectively manage and oversee the undertaking in a professional manner;

• (d) ensure that each individual member of the administrative, management or supervisory body has the necessary qualifications, competency, skills and professional experience to perform the tasks assigned;

• (e) employ personnel with the skills, knowledge and expertise necessary to carry out the responsibilities allocated to them properly;

• (f) ensure that all personnel are aware of the procedures for the proper carrying out of their responsibilities;

• (g) ensure that the assignment of multiple tasks to individuals and organisational units does not or is not likely to prevent the persons concerned from carrying out any particular function in a sound, honest and objective manner;

• (h) establish information systems which produce complete, reliable, clear, consistent, timely and relevant information concerning the business activities, the commitments assumed and the risks to which the undertaking is exposed;

• (i) maintain adequate and orderly records of the undertaking's business and internal organisation;

• (j) safeguard the security, integrity and confidentiality of information, taking into account the nature of the information in question;

• (k) introduce clear reporting lines that ensure the prompt transfer of information to all persons who need it in a way that enables them to recognise its importance as regards their respective responsibilities;

• (l) adopt a written remuneration policy.

2. Policies on risk management, internal control, internal audit and, where relevant, outsourcing, shall clearly set out the relevant responsibilities, objectives, processes and reporting procedures to be applied, all of which shall be consistent with the undertaking's overall business strategy.

The evaluation referred to in the first subparagraph shall include an assessment of the adequacy of the composition, including in terms of gender-balance and diversity, the effectiveness and the internal governance of the administrative, management or supervisory body. The evaluation shall also be commensurate to the nature, scale and complexity of the risks inherent in the business of the undertakings.

Article 259

Risk Management System

• (a) a clearly defined risk management strategy which is consistent with the undertaking's overall business strategy. The objectives and key principles of the strategy, the approved risk tolerance limits and the assignment of responsibilities across all the activities of the undertaking shall be documented;

• (b) a clearly defined procedure on the decision-making process;

• (c) written policies which effectively ensure the definition and categorisation of the material risks by type to which the undertaking is exposed, and the approved risk tolerance limits for each type of risk. Such policies shall implement the undertaking's risk strategy, facilitate control mechanisms and take into account the nature, scope and time periods of the business and the associated risks;

• (d) reporting procedures and processes which ensure that information on the material risks faced by the undertaking and the effectiveness of the risk management system are actively monitored and analysed and that appropriate modifications to the system are made where necessary.

Article 260

Risk management areas

• (a) Underwriting and reserving:
• (i) actions to be taken by the insurance or reinsurance undertaking to assess and manage the risk of loss or of adverse change in the values of insurance and reinsurance liabilities, resulting from inadequate pricing and provisioning assumptions due to internal or external factors, including sustainability risks;
• (ii) the sufficiency and quality of relevant data to be considered in the underwriting and reserving processes, as set out in Article 19 of this Regulation, and their consistency with the standards of sufficiency and quality;
• (iii) the adequacy of claims management procedures including the extent to which they cover the overall cycle of claims.

• (b) Asset-liability management:
• (i) the structural mismatch between assets and liabilities and in particular the duration mismatch of those assets and liabilities;
• (ii) any dependency between risks of different asset and liability classes;
• (iii) any dependency between the risks of different insurance or reinsurance obligations;
• (iv) any off-balance sheet exposures of the undertaking;
• (v) the effect of relevant risk-mitigating techniques on asset-liability management.

• (c) Investment risk management:
• (i) actions to be taken by the insurance or reinsurance undertaking to ensure that the undertaking's investments complies with the prudent person principle set out in Article 132 of Directive 2009/138/EC;
• (ii) actions to be taken by the insurance or reinsurance undertaking to ensure that the undertaking's investments take into account the nature of the undertaking's business, its approved risk tolerance limits, its solvency position and its long-term risk exposure;
• (iii) the insurance or reinsurance undertakings' own internal assessment of the credit risk of investment counterparties, including where the counterparties are central governments;
• (iv) where the insurance or reinsurance undertaking uses derivatives or any other financial instrument with similar characteristics or effects, the objectives of, and strategy underlying their use and the way in which they facilitate efficient portfolio management or contribute to a reduction of risks, as well as procedures to assess the risk of such instruments and the principles of risk management to be applied to them;
• (v) where appropriate in order to ensure effective risk-management, internal quantitative limits on assets and exposures, including off-balance sheet exposures;
• (vi) actions to be taken by the insurance or reinsurance undertaking to ensure that sustainability risks relating to the investment portfolio are properly identified, assessed and managed.

• (d) Liquidity risk management:
• (i) actions to be taken by the insurance or reinsurance undertaking to take into account both short term and long term liquidity risk;
• (ii) the appropriateness of the composition of the assets in terms of their nature, duration and liquidity in order to meet the undertaking's obligations as they fall due;
• (iii) a plan to deal with changes in expected cash in-flows and out-flows.

• (e) Concentration risk management: actions to be taken by the insurance or reinsurance undertaking to identify relevant sources of concentration risk to ensure that risk concentrations remain within established limits and actions to analyse possible risks of contagion between concentrated exposures.

- (f) Operational risk management: actions to be taken by the insurance or reinsurance undertaking to assign clear responsibilities to regularly identify, document and monitor relevant operational risk exposures.

• (g) Reinsurance and other insurance risk mitigation techniques:
• (i) actions to be taken by the insurance or reinsurance undertaking to ensure the selection of suitable reinsurance and other risk mitigation techniques;
• (ii) actions to be taken by the insurance or reinsurance undertaking to assess which types of risk mitigation techniques are appropriate according to the nature of the risks assumed and the capabilities of the undertaking to manage and control the risks associated with those techniques;
• (iii) the insurance or reinsurance undertakings' own assessment of the credit risk of the risk mitigation techniques.

• (h) Deferred taxes:
• (i) actions related to the insurance or reinsurance undertaking's selection of methods and assumptions to demonstrate the amount and recoverability of the loss-absorbing capacity of deferred taxes;
• (ii) involvement of the relevant key functions in the selection and assessment of methods and assumptions to demonstrate the amount and recoverability of the loss-absorbing capacity of deferred taxes, how the outcome of that assessment is reported to the administrative, management or supervisory body, including the assessment of the underlying assumptions applied for the projection of future taxable profit for the purposes of Articles 15 and 207, and an explanation of any concerns about those assumptions, which shall be carried out in each case by either the actuarial function or the risk management function;
• (iii) risks that the insurance or reinsurance undertaking is or could be exposed to, taking into account potential future changes in its risk profile due to its business strategy or the economic and financial environment, including operational risks and potential changes in its loss-absorbing capacity of deferred taxes. That assessment shall include the overall reliance of the solvency and financial condition on deferred taxes and its consistency with the risk management policy.

1a. The insurance and reinsurance undertakings shall integrate in their policies referred to in points (a) and (c) of paragraph 1, and where relevant, policies on the other areas referred to in paragraph 1, sustainability risks.

2a. The expected profit in future fees for servicing and management of funds for index-linked and unit-linked insurance shall be calculated as the difference between technical provisions without a risk margin calculated in accordance with Article 77 of Directive 2009/138/EC and technical provisions without a risk margin under the assumption that the future fees for servicing and management of funds that are expected to be received in the future are not received for any reason other than the insured event having occurred, regardless of the contractual rights of the policyholder to discontinue the policy.

Article 261

Risk management in undertakings providing loans and/or mortgage insurance or reinsurance

• (a) that credit-granting is based on sound and well-defined criteria and that the process for approving, amending, renewing and refinancing credits is clearly established;

• (b) that undertakings have internal methodologies that enable them to assess the credit risk of exposures to individual obligors and at the portfolio level;

• (c) that the ongoing administration and monitoring of the loan portfolios, including for identifying and managing problematic credits, and for making adequate value adjustments, is operated through effective systems;

• (d) that the diversification of the loan portfolios is adequate given the target markets and overall investment strategy of the undertaking.