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

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where:

• (a) PC denotes the counterparty member's share of the risk according to the terms of the pooling arrangement;

- (b) RRC is equal to:

• (i) 10 % if 60 % or more of the assets of the counterparty member are subject to collateral arrangements;
• (ii) 50 % otherwise;

• (c) BEU denotes the best estimate of the liability ceded to the pooling arrangement by the undertaking, net of any amounts reinsured with counterparties external to the pooling arrangement;

• (d) ΔRMC denotes the counterparty member's contribution to the risk-mitigating effect of the pooling arrangement on the underwriting risk of the undertaking;

• (e) Collateral denotes the risk-adjusted value of collateral held by the counterparty member of the pooling arrangement;

• (f) F denotes the factor to take into account the economic effect of the collateral held by the counterparty member, calculated in accordance with Article 197.

Article 195

Loss-given-default for pool exposures of type C

For pool exposures of type C which the undertaking considers as separate single name exposures in accordance with Article 190(2), the loss-given-default shall be calculated as follows:

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where:

• (a) PU denotes the undertaking's share of the risk according to the terms of the pooling arrangement;

• (b) RRCE is equal to:
• (i) 10 % if 60 % or more of the assets of the external counterparty are subject to collateral arrangements;
• (ii) 50 % otherwise;

• (c) BECE denotes the best estimate of the liability ceded to the external counterparty by the pooling arrangement as a whole;

• (d) ΔRMCE denotes the external counterparty's contribution to the risk-mitigating effect of the pooling arrangement on the underwriting risk of the undertaking;

• (e) Collateral denotes the risk-adjusted value of collateral held by the counterparty member of the pooling arrangement;

• (f) F denotes the factor to take into account the economic effect of the collateral held by the counterparty member, calculated in accordance with Article 197.

Article 196

Risk-mitigating effect

The risk-mitigating effect on underwriting or market risks of a reinsurance arrangement, securitisation or derivative shall be the larger of zero and the difference between the following capital requirements:

• (a) the hypothetical capital requirement for underwriting or market risk of the insurance or reinsurance undertaking, calculated in accordance with Sections 1 to 5 of this Chapter, that would apply if the reinsurance arrangement, securitisation or derivative did not exist;

• (b) the capital requirement for underwriting or market risk of the insurance or reinsurance undertaking.

Article 197

Risk-adjusted value of collateral

• (a) the insurance or reinsurance undertaking has (or is a beneficiary under a trust where the trustee has) the right to liquidate or retain, in a timely manner, the collateral in the event of a default, insolvency or bankruptcy or other credit event relating to the counterparty (the counterparty requirement);

• (b) the insurance or reinsurance undertaking has (or is a beneficiary under a trust where the trustee has) the right to liquidate or retain, in a timely manner, the collateral in the event of a default, insolvency or bankruptcy or other credit event relating to the custodian or other third party holding the collateral on behalf of the counterparty (the third party requirement).

2. Where the counterparty requirement is met and the criteria set out in Article 214 of this Regulation are met and the third party requirement is not met, the risk-adjusted value of a collateral provided by way of security, as referred to in Article 1(26)(b) of this Regulation, shall be equal to 90 % of the difference between the value of the assets held as collateral in accordance with Article 75 of Directive 2009/138/EC and the adjustment for market risk, as referred to in paragraph 5 of this Article.

3. Where either the counterparty requirement is not met or the requirements in Article 214 are not met, the risk-adjusted value of collateral provided by way of security, as referred to in Article 1(26)(b), shall be zero.

• (a) the hypothetical capital requirement for market risk of the insurance or reinsurance undertaking that would apply if the assets held as collateral were not included in the calculation;

• (b) the hypothetical capital requirement for market risk of the insurance or reinsurance undertaking that would apply if the assets held as collateral were included in the calculation.

Article 198

Risk-adjusted value of mortgage

• (a) the hypothetical capital requirement for market risk of the insurance or reinsurance undertaking that would apply if the residential property held as mortgage were not included in the calculation;

• (b) the hypothetical capital requirement for market risk of the insurance or reinsurance undertaking that would apply if the residential property held as mortgage were included in the calculation.

Subsection 2 Type 1 exposures

Article 199

Probability of default

2. Single name exposure i for which a credit assessment by a nominated ECAI is available shall be assigned a probability of default PDi in accordance with the following table.

Credit quality step	0	1	2	3	4	5	6
Probability of default PDi	0,002 %	0,01 %	0,05 %	0,24 %	1,20 %	4,2 %	4,2 %

Solvency ratio	196 %	175 %	150 %	125 %	122 %	100 %	95 %	75 %
Probability of default	0,01 %	0,05 %	0,1 %	0,2 %	0,24 %	0,5 %	1,2 %	4,2 %

Where the solvency ratio falls in between the solvency ratios specified in the table above, the value of the probability of default shall be linearly interpolated from the closest values of probabilities of default corresponding to the closest solvency ratios specified in the table above. Where the solvency ratio is lower than 75 %, the probability of default shall be 4,2 %. Where the solvency ratios is higher than 196 %, the probability of default shall be 0,01 %.

For the purposes of this paragraph, ‘solvency ratio’ denotes the ratio of the eligible amount of own funds to cover the Solvency Capital Requirement and the Solvency Capital Requirement, using the latest available values.

10. Where a letter of credit, a guarantee or an equivalent arrangement is provided to fully secure an exposure and this arrangement complies with Articles 209 to 215, the provider of that letter of credit, guarantee or equivalent arrangement may be considered as the counterparty on the secured exposure for the purposes of assessing the probability of default of a single name exposure.

Article 200

Type 1 exposures

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where σ denotes the standard deviation of the loss distribution of type 1 exposures, as defined in paragraph 4.

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where σ denotes the standard deviation of the loss distribution of type 1 exposures.

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where V denotes the variance of the loss distribution of type 1 exposures.

Article 201

Variance of the loss distribution of type 1 exposures

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where:

• (a) the sum covers all possible combinations (j,k) of probabilities of default on single name exposures as referred to in Article 199, except the case where PDj = PDk = 0;

• (b) TLGDj and TLGDk denote the sum of losses -given- default on type 1 exposures from counterparties bearing a probability of default PDj and PDk respectively.

3. Vintra shall be equal to the following:

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where:

• (a) the first sum covers all different probabilities of default on single name exposures in accordance with Article 199;

• (b) the second sum covers all single name exposures that have a probability of default equal to PDj;

- (c) LGDi denotes the loss-given-default on the single name exposure i.

Subsection 3 Type 2 exposures

Article 202

Type 2 exposures

The capital requirement for counterparty default risk on type 2 exposures shall be equal to the loss in the basic own funds that would result from an instantaneous decrease in value of type 2 exposures by the following amount:

90 % Image omitted; see official source LGDreceivables>3months + 100 %

Image omitted; see official source LGDdefaulted/forborne +

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where:

• (a) LGDreceivables>3months denotes the total losses-given-default on all receivables from intermediaries which have been due for more than three months;

• (b) LGDdefaulted/forborne denotes the total loss given default on all defaulted and forborne loans;

• (c) the sum is taken on all type 2 exposures other than receivables from intermediaries which have been due for more than three months, and other than defaulted and forborne loans;

• (d) LGDi denotes the loss-given-default on the type 2 exposure i.

SECTION 7 Intangible asset module

Article 203

The capital requirement for intangible asset risk shall be equal to the following:

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where Vintangibles denotes the amount of intangible assets as recognised and valued in accordance with point 2 of Article 12.

SECTION 8 Operational risk

Article 204

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where:

• (a) BSCR denotes the Basic Solvency Capital Requirement;

• (b) Op denotes the basic capital requirement for operational risk charge;

• (c) Expul denotes the amount of expenses incurred during the previous 12 months in respect of life insurance contracts where the investment risk is borne by policy holders.

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where:

• (a) Oppremiums denotes the capital requirement for operational risks based on earned premiums;

• (b) Opprovisions denotes the capital requirement for operational risks based on technical provisions.

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| --- | --- | | Oppremiums = | Image omitted; see official source 0,04 · (Earnlife – Earnlife–ul) + 0,03 · Earnnon–life + max(0;0,04 · (Earnlife – 1,2 · pEarnlife – (Earnlife–ul – 1,2 · pEarnlife–ul))) + max(0;0,03 · (Earnnon–life – 1,2 · pEarnnon–life)) |

where:

• (a) Earnlife denotes the premiums earned during the last 12 months for life insurance and reinsurance obligations, without deducting premiums for reinsurance contracts;

• (b) Earnlife-ul denotes the premiums earned during the last 12 months for life insurance and reinsurance obligations where the investment risk is borne by the policy holders without deducting premiums for reinsurance contracts;

• (c) Earnnon-life denotes the premiums earned during the last 12 months for non-life insurance and reinsurance obligations, without deducting premiums for reinsurance contracts;

• (d) pEarnlife denotes the premiums earned during the 12 months prior to the last 12 months for life insurance and reinsurance obligations, without deducting premiums for reinsurance contracts;

- (e) pEarnlife-ul denotes the premiums earned during the 12 months prior to the last 12 months for life insurance and reinsurance obligations where the investment risk is borne by the policy holders without deducting premiums for reinsurance contracts;

• (f) pEarnnon-life denotes the premium earned during the 12 months prior to the last 12 months for non-life insurance and reinsurance obligations, without deducting premiums for reinsurance contracts.

For the purposes of this paragraph, earned premiums shall be gross, without deduction of premiums for reinsurance contracts.

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where:

• (a) TPlife denotes the technical provisions for life insurance and reinsurance obligations;

• (b) TPlife-ul denotes the technical provisions for life insurance obligations where the investment risk is borne by the policy holders;

• (c) TPnon-life denotes the technical provisions for non-life insurance and reinsurance obligations.

For the purposes of this paragraph, technical provisions shall not include the risk margin, and shall be calculated without deduction of recoverables from reinsurance contracts and special purpose vehicles.

SECTION 9 Adjustment for the loss-absorbing capacity of technical provisions and deferred taxes

Article 205

General provisions

The adjustment referred to in Article 103(c) of Directive 2009/138/EC for the loss-absorbing capacity of technical provisions and deferred taxes shall be the sum of the following items:

- (a) the adjustment for the loss-absorbing capacity of technical provisions;

• (b) the adjustment for the loss-absorbing capacity of deferred taxes.

Article 206

Adjustment for the loss-absorbing capacity of technical provisions

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where:

• (a) BSCR denotes the Basic Solvency Capital Requirement referred to in Article 103(a) of Directive 2009/138/EC;

• (b) nBSCR denotes the net Basic Solvency Capital Requirement as referred to in paragraph 2 of this Article;

• (c) FDB denotes the technical provisions without risk margin in relation to future discretionary benefits

• (a) where the calculation of a module or sub-module of the Basic Solvency Capital Requirement is based on the impact of a scenario on the basic own funds of insurance and reinsurance undertakings, the scenario can change the value of the future discretionary benefits included in technical provisions;

• (b) the scenario based calculations of the life underwriting risk module, the SLT health underwriting risk sub-module, the health catastrophe risk sub-module, the market risk module and the counterparty default risk module as well as the scenario-based calculation set out in points (c) and (d) shall take into account the impact of the scenario on future discretionary benefits included in technical provisions; this shall be done on the basis of assumptions on future management actions that comply with Article 23;

• (c) instead of the capital requirement for counterparty default risk on type 1 exposures referred to in Article 189(1), the calculation shall be based on the capital requirement that is equal to the loss in basic own funds that would result from an instantaneous loss, due to default events relating to type 1 exposures, of the amount of the capital requirement for counterparty default risk on type 1 exposures referred to in Article 189(1);

• (d) where insurance and reinsurance undertakings use a simplified calculation for a specific capital requirement as set out in Articles 91, 92, 93, 94, 95(1), 95(2), 96, 101, 103(1)(a), 103(1)(b) or 104 the undertakings shall base the calculation on the capital requirement that is equal to the loss in basic own funds that would result from an instantaneous loss of the amount of the capital requirement referred to in the relevant Article and shall assume that the instantaneous loss is due to the risk that the capital requirement referred to in that Article captures.

Article 207

Adjustment for the loss-absorbing capacity of deferred taxes

• (a) the Basic Solvency Capital Requirement referred to in Article 103(a) of Directive 2009/138/EC;

• (b) the adjustment for the loss-absorbing capacity of technical provisions referred to in Article 206 of this Regulation;

- (c) the capital requirement for operational risk referred to in Article 103(b) of Directive 2009/138/EC.

2. For the purposes of paragraph 1, deferred taxes shall be valued in accordance with Article 15(1) and (2), without prejudice to paragraphs 2a, 2b and 2c of this Article.

2a. Where the loss referred to in paragraph 1 would result in an increase in the amount of deferred tax assets, insurance and reinsurance undertakings shall not utilise that increase for the purposes of the adjustment referred to in that paragraph unless they are able to demonstrate to the satisfaction of the supervisory authority that it is probable that future taxable profit will be available against which that increase can be utilised, taking into account all of the following:

• (a) any legal or regulatory requirements on the time limits relating to the carry-forward of unused tax losses or the carry-forward of unused tax credits;

• (b) the magnitude of the loss referred to in paragraph 1 and its impact on the undertaking's current and future financial situation and on insurance product pricing, market profitability, insurance demand, reinsurance coverage and other macro-economic variables;

- (c) the increased uncertainty in future profit following the loss referred to in paragraph 1, as well as the increasing degree of uncertainty relating to future taxable profit following that loss, as the projection horizon becomes longer.

2b. For the purposes of demonstrating that it is probable that future taxable profit will be available, insurance and reinsurance undertakings shall not apply assumptions that are more favourable than those used for the valuation and utilisation of deferred tax assets in accordance with Article 15.

2c. For the purposes of demonstrating that it is probable that future taxable profit will be available, the assumptions applied by insurance and reinsurance undertakings shall meet the following conditions:

• (a) new business sales in excess of those projected for the purposes of the insurance or reinsurance undertaking's business planning shall not be assumed;

• (b) new business sales beyond the horizon of the insurance or reinsurance undertaking's business planning and beyond a maximum of five years shall not be assumed;

• (c) the rates of return on the insurance or reinsurance undertaking's investments following the loss referred to in paragraph 1 shall be assumed to be equal to the implicit returns of the forward rates derived from the relevant risk-free interest rate term structure obtained after that loss, unless the insurance or reinsurance undertaking is able to provide credible evidence of likely returns in excess of those implicit returns;

• (d) where, without prejudice to point (a), the insurance or reinsurance undertaking sets a projection horizon for profits from new business that is longer than the horizon of its business planning, a finite projection horizon shall be set and appropriate haircuts shall be applied to the profits from new business projected beyond the horizon of the undertaking's business planning. Such haircuts shall be assumed to increase the further into the future the profits are projected.

2d. Insurance and reinsurance undertakings may assume the implementation of future management actions following the loss referred to in paragraph 1, provided that the provisions laid down in Article 23 are complied with.

SECTION 10 Risk mitigation techniques

Article 208

Methods and Assumptions

Article 209

Qualitative Criteria

- (a) the contractual arrangements and transfer of risk are legally effective and enforceable in all relevant jurisdictions;

• (b) the insurance or reinsurance undertaking has taken all appropriate steps to ensure the effectiveness of the arrangement and to address the risks related to that arrangement;

• (c) the insurance or reinsurance undertaking is able to monitor the effectiveness of the arrangement and the related risks on an ongoing basis;

• (d) the insurance or reinsurance undertaking has, in the event of a default, insolvency or bankruptcy of a counterparty or other credit event set out in the transaction documentation for the arrangement, a direct claim on that counterparty;

• (e) there is no double counting of risk-mitigation effects in own funds and in the calculation of the Solvency Capital Requirement or within the calculation of the Solvency Capital Requirement.

• (a) the insurance or reinsurance undertaking has a written policy on the replacement or adjustment of that risk-mitigation technique, covering situations including the situation where the insurance or reinsurance undertaking uses several contractual arrangements in combination to transfer risk as referred to in Article 210(5);

• (b) the replacement or adjustment of the risk-mitigation technique takes place more often than once per week only in cases where, without the replacement or adjustment, an event would have a material adverse impact on the solvency position of the insurance or reinsurance undertaking;

• (c) the replacement or adjustment of the risk-mitigation technique is not conditional on any future event which is outside of the control of the insurance or reinsurance undertaking and where the replacement or adjustment of the risk-mitigation technique is conditional on any future event that is within the control of the insurance or reinsurance undertaking, the conditions for such replacement or adjustment are clearly documented in the written policy referred to in point (a);

• (d) the replacement or adjustment of the risk-mitigation technique is realistically based on replacements and adjustments undertaken previously by the insurance or reinsurance undertaking and consistent with the undertaking's current business practice and business strategy;

• (e) there is no material risk that the risk-mitigation technique cannot be replaced or adjusted due to an absence of liquidity in the market;

• (f) the risk that the cost of replacing or adjusting the risk-mitigation technique increases during the following 12 months is reflected in the Solvency Capital Requirement;

• (g) the replacement or adjustment of the risk-mitigation technique would not be contrary to requirements that apply to future management actions set out in Article 23(5);

• (h) the initial contractual maturity is not shorter than one month in cases where the insurance or reinsurance undertaking transfers risks through the purchase or issuance of financial instruments;

• (i) the initial contractual maturity is not shorter than three months where the insurance or reinsurance undertaking transfers underwriting risks using reinsurance contracts or special purpose vehicles.

Article 210

Effective Transfer of Risk

3a. A risk-mitigation technique shall only be considered not to result in material basis risk where the insurance or reinsurance undertaking can demonstrate that both of the following conditions are met:

• (a) the exposure covered by the risk-mitigation technique is sufficiently similar in nature to the risk exposure of the undertaking; and

• (b) the changes in value of the exposure covered by the risk-mitigation technique closely mirror the changes in value of the risk exposure of the undertaking under a comprehensive set of relevant risk scenarios, including scenarios that are consistent with the confidence level set out in Article 101(3) of Directive 2009/138/EC.

• (a) whether the contractual arrangement is subject to any condition which could undermine the effective transfer of risk, the fulfilment of which is outside the direct control of the insurance or reinsurance undertaking;

• (b) whether there are any connected transactions which could undermine the effective transfer of risk.

The Solvency Capital Requirement and available basic own funds shall reflect the economic substance of the contractual arrangements governing the risk-mitigation techniques. When calculating the Basic Solvency Capital Requirement, insurance or reinsurance undertakings shall only take into account risk-mitigation techniques as referred to in Article 101(5) of Directive 2009/138/EC where the insurance or reinsurance undertaking can demonstrate that all of the following conditions are met:

• (a) the contractual arrangements governing the risk-mitigation technique result in an effective transfer of risk;

- (b) the reduction in the Solvency Capital Requirement is commensurate with the extent of transfer of risks stemming from the contractual arrangements; and

• (c) the Solvency Capital Requirement appropriately reflects any risk arising from the risk-transfer process.

Article 211

Risk-Mitigation techniques using reinsurance contracts or special purpose vehicles

• (a) an insurance or reinsurance undertaking which complies with the Solvency Capital Requirement;

- (b) a third-country insurance or reinsurance undertaking, situated in a country whose solvency regime is deemed equivalent or temporarily equivalent to that laid down in Directive 2009/138/EC in accordance with Article 172 of that Directive and which complies with the solvency requirements of that third-country;

• (c) a third country insurance or reinsurance undertaking that is not situated in a country whose solvency regime is deemed equivalent or temporarily equivalent in accordance with Article 172 of Directive 2009/138/EC that has been assigned to credit quality step 3 or better in accordance with Section 2 of Chapter I of this Title.

2a. Where insurance or reinsurance undertakings transfer underwriting risks to a scheme based on reinsurance conducted or fully guaranteed by the government of a Member State acting, for reasons of substantial public interest, in the capacity of reinsurer of last resort, the scheme shall be considered as a reinsurance counterparty within the meaning of paragraph 2 of this Article.

3a. Notwithstanding paragraph 3, where a counterparty to a reinsurance contract is an insurance or reinsurance undertaking which ceases to comply with the Minimum Capital Requirement after the reinsurance contract has been entered into, the effect of the risk-mitigation technique shall no longer be recognised in the Basic Solvency Capital Requirement.

4. Where risk is transferred to a special purpose vehicle the requirements referred to in Article 211(2) of Directive 2009/138/EC shall be met for the risk-mitigation technique to be taken into account in the Basic Solvency Capital Requirement; where the requirements for a special purpose vehicle to be fully-funded cease to be fully met after the arrangement has been entered into, the protection offered by the insurance risk-mitigation technique may be partially recognised, provided that the insurance or reinsurance undertaking can demonstrate that compliance with the fully-funded requirement will be restored within three months; for this purpose, the effect of the risk-mitigation technique shall be reduced by the percentage of the aggregated maximum risk exposure of the special purpose vehicle, referred to in Article 326 of this Regulation not covered by the assets of the special purpose vehicle or by an equivalent amount where Article 211(3) of Directive 2009/138/EC is applicable.

Article 212

Financial Risk-Mitigation techniques

1. Where insurance or reinsurance undertakings transfer risk, in order for the risk-mitigation technique to be taken into account in the Basic Solvency Capital Requirement, in other cases than in the cases referred to in Article 211(1), including transfers through the purchase or issuance of financial instruments, the qualitative criteria provided in paragraphs 2 to 5 shall be met, in addition to the qualitative criteria set out in Articles 209 and 210.

Article 212a

Contingent capital instruments and convertible bond instruments

The following contractual arrangements shall never be considered as meeting the requirements of effective transfer of risk set out in Article 210:

• (a) contractual arrangements concluded between an insurance or reinsurance undertaking and another counterparty, according to which upon the occurrence of pre-defined specific events, that counterparty is required to purchase new equity shares or subordinated debts issued by the insurance or reinsurance undertaking in accordance with a pre-defined price setting mechanism;

• (b) contractual arrangements concluded between an insurance or reinsurance undertaking and another counterparty according to which upon the occurrence of pre-defined specific events that counterparty is required to acquire debt instruments issued by the insurance or reinsurance undertaking which can be later converted into new equity shares of this undertaking, in accordance with a pre-defined price setting mechanism.

Article 213

Status of the counterparties

- (a) the risk-mitigation technique meets the qualitative criteria set out in Articles 209, 210 and Article 212(2) and (3) and collateral arrangements exist that meet the criteria provided in Article 214;

• (b) the risk-mitigation technique is accompanied by another risk-mitigation technique that, when viewed in combination with the first technique, meets the qualitative criteria set out in Articles 209 and 210 and Article 212(2) and (3), with the counterparties to that other technique meeting the criteria provided in Articles 211(1) and Article 212(4) and (5).

Article 214

Collateral Arrangements

• (a) the insurance or reinsurance undertaking transferring the risk shall have the right to liquidate or retain, in a timely manner, the collateral in the event of a default, insolvency or bankruptcy or other credit event of the counterparty;

• (b) there is sufficient certainty as to the protection achieved by the collateral because of either of the following:
• (i) it is of sufficient credit quality, is of sufficient liquidity and is sufficiently stable in value;
• (ii) it is guaranteed by a counterparty, other than a counterparty referred to in Article 187(5) and 184(2) who has been assigned a risk factor for concentration risk of 0 %;

• (c) there is no material positive correlation between the credit quality of the counterparty and the value of the collateral;

• (d) the collateral is not securities issued by the counterparty or a related undertaking of that counterparty.

• (a) the relevant custodian or other third party segregates the assets held as collateral from its own assets;

• (b) the segregated assets are held by a deposit-taking institution that has a credit quality which has been assigned to credit quality step 3 or better in accordance with Section 2, Chapter I of this Title;

- (c) the segregated assets are individually identifiable and can only be changed or substituted with the consent of the insurance or reinsurance undertaking or a person acting as a trustee in relation to the insurance or reinsurance undertaking's interest in such assets;

• (d) the insurance or reinsurance undertaking has (or is a beneficiary under a trust where the trustee has) the right to liquidate or retain, in a timely manner, the segregated assets in the event of a default, insolvency or bankruptcy or other credit event relating to the custodian or other third party holding the collateral on behalf of the counterparty;

• (e) the segregated assets shall not be used to pay, or to provide collateral in favour of, any person other than the insurance or reinsurance undertaking or as directed by the insurance or reinsurance undertaking.

Article 215

Guarantees

Subject to Article 215a(1), in the calculation of the Basic Solvency Capital Requirement, guarantees shall only be recognised where explicitly referred to in this Chapter, and where in addition to the qualitative criteria laid down in Articles 209 and 210, all of the following criteria are met:

• (a) the credit protection provided by the guarantee is direct;

- (b) the extent of the credit protection is clearly set out and incontrovertible;

- (c) the guarantee does not contain any clause, the fulfilment of which is outside the direct control of the lender, that:

• (i) would allow the protection provider to cancel or change the protection unilaterally;
• (ii) would increase the effective cost of protection as a result of a deterioration in the credit quality of the protected exposure;
• (iii) could prevent the protection provider from being obliged to pay out in a timely manner in the event that the original obligor fails to make any payments due;
• (iv) could allow the maturity of the credit protection to be reduced by the protection provider;

• (d) on the default, insolvency or bankruptcy or other credit event of the counterparty, the insurance or reinsurance undertaking has the right to pursue, in a timely manner, the guarantor for any monies due under the claim in respect of which the protection is provided and the payment by the guarantor shall not be subject to the insurance or reinsurance undertaking first having to pursue the obligor;

• (e) the guarantee is an explicitly documented obligation assumed by the guarantor;

• (f) the guarantee fully covers all types of regular payments the obligor is expected to make in respect of the claim.

In the case of a guarantee covering residential mortgage loans, the requirements in the first subparagraph, points (c)(iii) and (d), shall only be required to be satisfied within 24 months.

For the purposes of the first subparagraph, point (c), a clause in the guarantee contract providing that flawed due diligence or fraud by the lending institution cancels or diminishes the extent of the credit protection offered by the guarantor, shall not disqualify that guarantee from meeting the requirements of the first subparagraph, point (c).

For the purposes of the first subparagraph, point (c), the guarantor may make one lump sum payment of all monies due under the claim, or may assume the future payment obligations of the obligor covered by the credit protection contract.

For the purposes of the first subparagraph, an insurance or reinsurance undertaking shall be able to demonstrate to the satisfaction of the supervisory authority that it has in place systems to manage potential concentration of risk arising from its use of guarantees. An insurance or reinsurance undertaking shall be able to demonstrate to the satisfaction of the supervisory authority how its strategy in respect of its use of guarantees interacts with its management of its overall risk profile.

Article 215a

Sovereign and other public sector counter-guarantees

• (a) the counter-guarantee covers all credit risk elements of the claim;

• (b) both the original guarantee and the counter-guarantee meet the requirements for guarantees set out in Article 215, except that the counter-guarantee need not be direct;

• (c) the cover is robust and nothing in the historical evidence suggests that the coverage of the counter-guarantee is less than effectively equivalent to that of a direct guarantee by the entity in question.

SECTION 11 Ring fenced funds

Article 216

Calculation of the Solvency Capital Requirement in the case of ring-fenced funds

1. In the case of ring-fenced funds determined in accordance with Article 81(1), insurance and reinsurance undertakings shall adjust the calculation of the Solvency Capital Requirement following the method set out in Article 217.

Article 217

Solvency Capital Requirement calculation method for ring-fenced funds

• (a) where the calculation referred to in paragraph 3 would result in an increase in the basic own funds at the level of the ring-fenced fund, the estimated change in those basic own funds shall be adjusted to reflect the existence of profit participation arrangements in the ring-fenced fund in which case the adjustment to the change in the basic own funds of the ring-fenced fund shall be the amount by which technical provisions would increase due to the expected future distribution to policy holders or beneficiaries of that ring-fenced fund;

• (b) where the calculation referred to in paragraph 3 would result in a decrease in the basic own funds at the level of the ring-fenced fund, the estimated change in those basic own funds for the calculation of the net Basic Solvency Capital Requirement, as referred to in Article 206(2), shall be adjusted to reflect the reduction in future discretionary benefits payable to policy holders or beneficiaries of that ring-fenced fund, but such adjustment shall not exceed the amount of future discretionary benefits within the ring-fenced fund.

SECTION 12 Undertaking-specific parameters

Article 218

Subset of standard parameters that may be replaced by undertaking-specific parameters

• (a) in the non-life premium and reserve risk sub-module, for each segment set out in Annex II of this Regulation:
• (i) the standard deviation for non-life premium risk referred to in Article 117(2)(a) of this Regulation;
• (ii) the standard deviation for non-life gross premium risk referred to in Article 117(3) of this Regulation;
• (iii) the adjustment factor for non-proportional reinsurance referred to in Article 117(3) of this Regulation, provided that there is a recognisable excess of loss reinsurance contract or a recognisable stop loss reinsurance contract for that segment as set out in paragraph 2 of this Article;
• (iv) the standard deviation for non-life reserve risk referred to in Article 117(2)(b) of this Regulation;

• (b) in the life revision risk sub-module, the increase in the amount of annuity benefits referred to in Article 141 of this Regulation, provided that the annuities falling under that sub-module are not subject to material inflation risk;

• (c) in the NSLT health premium and reserve risk sub-module, for each segment set out in Annex XIV of this Regulation:
• (i) the standard deviation for NSLT health premium risk referred to in Article 148(2)(a) of this Regulation;
• (ii) the standard deviation for NSLT health gross premium risk referred to in Article 148(3) of this Regulation;
• (iii) the adjustment factor for non-proportional reinsurance referred to in Article 148(3) of this Regulation, provided that there is a recognisable excess of loss reinsurance contract or a recognisable stop loss reinsurance contract for that segment as set out in paragraph 2 of this Article;
• (iv) the standard deviation for NSLT health reserve risk referred to in Article 148(2)(b) of this Regulation;

• (d) in the health revision risk sub-module, the increase in the amount of annuity benefits referred to in Article 158 of this Regulation, provided that the annuities falling under that sub-module are not subject to material inflation risk.

Insurance and reinsurance undertakings shall not replace both the standard parameters referred to in point (a)(ii) and (iii) of the same segment or both the standard parameters referred to in point (c)(ii) and (iii) of the same segment.

• (a) where the contract is an excess of loss reinsurance contract, it provides for complete compensation up to a specified limit or without limit for losses of the ceding undertaking that relate either to single insurance claims, or to all insurance claims under the same policy during a specified time period, and that are larger than a specified retention;

• (aa) where the contract is a stop loss reinsurance contract, it provides for complete compensation specified limit or without limit for aggregated losses of the ceding undertaking that relate to all insurance claims in the segment or homogeneous risk groups within the segment during a specified time period and that are larger than a specified retention;

• (b) it covers all insurance claims that the insurance or reinsurance undertaking may incur in the segment or homogeneous risk groups within the segment during the following 12 months;

• (c) it allows for a sufficient number of reinstatements so as to ensure that all claims of multiple events incurred during the following 12 months are covered;

• (d) it complies with Articles 209, 210, 211 and 213.

For the purposes of this Article, ‘excess of loss reinsurance contract’ shall also denote arrangements with special purpose vehicles that provide risk transfer which is equivalent to that of an excess of loss reinsurance contract, and ‘stop loss reinsurance contract’ shall also denote arrangements with special purpose vehicles that provide risk transfer which is equivalent to that of a stop loss reinsurance contract.

3. Where an insurance or reinsurance undertaking has concluded several excess of loss reinsurance contracts, or several stop loss reinsurance contracts, that individually meet the requirement set out in point (d) of paragraph 2, and in combination meet the requirements set out in points (a), (b) and (c) of that paragraph, their combination shall be considered as one recognisable excess of loss reinsurance contract or, as applicable, one stop loss reinsurance contract.

Article 219

Data criteria

• (a) the data meet the conditions set out in Article 19(1), (2) and (3), and the insurance or reinsurance undertaking complies in relation to that data with the requirements set out in Article 19(4), where any reference to the calculation of technical provisions shall be understood as referring to the calculation of the undertaking-specific parameter;

• (b) the data are capable of being incorporated into the standardised methods;

• (c) the data do not prevent the insurance or reinsurance undertaking from complying with the requirements of Article 101(3) of Directive 2009/13/EC;

• (d) the data meet any additional data requirement necessary to use each standardised method.

- (e) the data and its production process are thoroughly documented, including:

• (i) the collection of data and analysis of its quality, where the documentation required includes a directory of the data, specifying their source, characteristics and usage and the specification for the collection, processing and application of the data;
• (ii) the choice of assumptions used in the production and adjustment of the data, including adjustments with regard to reinsurance and catastrophe claims and about the allocation of expenses, where the documentation required includes a directory of all relevant assumptions that the calculation of technical provisions is based upon and a justification for the choice of the assumptions;
• (iii) the selection and application of actuarial and statistical methods for the production and the adjustment of the data;
• (iv) the validation of the data.

2. Where external data are used, they shall satisfy the following additional criteria:

• (a) the process for collecting data is transparent, auditable and known by the insurance or reinsurance undertaking that uses the data to calculate undertaking-specific parameters on its basis;

• (b) where the data stem from different sources, the assumptions made in the collection, processing and application of data ensure that the data are comparable;

- (c) the data stem from insurance and reinsurance undertakings whose business and risk profile is similar to that of the insurance or reinsurance undertaking whose undertaking-specific parameter is calculated in the basis of those data;

- (d) undertakings using the external data are able to verify that there is sufficient statistical evidence that the probability distributions underlying their own data and that of the underlying external data have a high degree of similarity, in particular with respect to the level of volatility they reflect;

- (e) external data only comprises data from undertakings with a similar risk profile and this risk profile is similar to the risk profile of the undertaking using the data, in particular that the external data comprise data from undertakings whose business nature and risk profile with respect to the external data is similar and for which there is sufficient statistical evidence that the probability distributions underlying the external data will exhibit a high degree of homogeneity.

Article 220

Standardised methods to calculate the undertaking-specific parameters

1. Where insurance and reinsurance undertakings calculate undertaking-specific parameters they shall use, for each parameter, the standardised methods set out in Annex XVII as follows:

- (a) the premium risk method for undertaking-specific parameters replacing the standard parameters referred to in Article 218(1)(a)(i), (a)(ii), (c)(i) and (c)(ii);

• (b) the reserve risk method 1 or the reserve risk method 2 for undertaking-specific parameters replacing the standard parameters referred to in Article 218(1)(a)(iv), and (c)(iv);

• (c) where there is a recognisable excess of loss reinsurance contract, the non-proportional reinsurance method 1, or, where there is a recognisable stop loss reinsurance contract, the non-proportional reinsurance method 2 for undertaking-specific parameters replacing the standard parameters referred to in Article 218(1)(a)(iii) and (c)(iii);

- (d) the revision risk method for undertaking-specific parameters replacing the standard parameters referred to in Article 218(1)(b) and (d).

However, where an undertaking is not able to demonstrate the greater accuracy of the results of one standardised method over the other standardised methods to calculate an undertaking-specific parameter, the method providing the most conservative result shall be used.

SECTION 13 Procedure for updating correlation parameters

Article 221