Commission Delegated Regulation (EU) 2019/981 of 8 March 2019 amending Delegated Regulation (EU) 2015/35 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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• (ii) point (a) is deleted;

• (b) paragraph 6 is amended as follows:

• (i) the formula is replaced by the following:

‘ WSI (flood,r,i) = Q (flood,r) · W (flood,r,i) · SI (flood,r,i) ’;

• (ii) the following point (c) is added:

• ‘(c) Q(flood,r) denotes the flood risk factor for region r as set out in Annex VII,’;

• (iii) the following subparagraph is added:

‘Where the amount determined for a particular risk zone in accordance with the first subparagraph exceeds an amount (referred to in this subparagraph as “the lower amount”) equal to the sum of the potential losses, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, that the insurance or reinsurance undertaking could suffer for flood risk in that risk zone, taking into account the terms and conditions of its specific policies, including any contractual payment limits, the insurance or reinsurance undertaking may, as an alternative calculation, determine the weighted sum insured for flood risk in that risk zone as the lower amount.’;

• (c) in paragraph 7, the introductory wording is replaced by the following:

‘For all regions set out in Annex VII and all risk zones of those regions set out in Annex IX, the sum insured for flood risk for a particular risk zone i of a particular region r shall be equal to the following:’;

• (26) Article 124 is amended as follows:

• (a) paragraph 5 is amended as follows:

• (i) the formula is replaced by the following:

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• (ii) point (a) is deleted;

• (b) paragraph 6 is amended as follows:

• (i) the formula is replaced by the following:

‘ WSI (hail,r,i) = Q (hail,r) · W (hail,r,i) · SI (hail,r,i) ’;

• (ii) the following point (c) is added:

• ‘(c) Q(hail,r) denotes the hail risk factor for region r as set out in Annex VIII.’;

• (iii) the following subparagraph is added:

‘Where the amount determined for a particular risk zone in accordance with the first subparagraph exceeds an amount (referred to in this subparagraph as “the lower amount”) equal to the sum of the potential losses, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, that the insurance or reinsurance undertaking could suffer for hail risk in that risk zone taking into account the terms and conditions of its specific policies, including any contractual payment limits, the insurance or reinsurance undertaking may, as an alternative calculation, determine the weighted sum insured for hail risk in that risk zone as the lower amount.’;

• (27) Article 125 is amended as follows:

• (a) in paragraph 1, the formula is replaced by the following:

‘ Image omitted; see official source ’;

• (b) paragraph 2 is amended as follows:

• (i) the formula is replaced by the following:

‘ WSI (subsidence,i) = 0,0005 · W (subsidence,i) · SI (subsidence,i) ’;

• (ii) the following subparagraph is added:

‘Where the amount determined for a particular risk zone in accordance with the first subparagraph exceeds an amount (referred to in this subparagraph as “the lower amount”) equal to the sum of the potential losses, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, that the insurance or reinsurance undertaking could suffer for subsidence risk in that risk zone, taking into account the terms and conditions of its specific policies, including any contractual payment limits, the insurance or reinsurance undertaking may, as an alternative calculation, determine the weighted sum insured for subsidence risk in that risk zone as the lower amount.’;

• (28) Article 130 is replaced by the following:

‘Article 130

Marine risk sub-module

1. The capital requirement for marine risk shall be equal to the following:

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where:

a) SCRvessel is the capital requirement for the risk of a vessel collision;

b) SCRplatform is the capital requirement for the risk of a platform explosion.

1. The capital requirement for the risk of a vessel collision shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous loss of an amount equal to the following:

L vessel = maxv(SI (hull,v) + SI (liab,v)+ SI (pollution,v))

where:

• (a) the maximum relates to all sea, lake, river and canal vessels insured by the insurance or reinsurance undertaking in respect of vessel collision in lines of business 6, 18 and 27 set out in Annex I where the insured value of the vessel is at least EUR 250 000;

• (b) SI(hull,v) is the sum insured by the insurance or reinsurance undertaking, after deduction of the amounts that the insurance or reinsurance undertaking can recover from reinsurance contracts and special purpose vehicles, for marine hull insurance and reinsurance in relation to vessel v;

• (c) SI(liab,v) is the sum insured by the insurance or reinsurance undertaking, after deduction of the amounts that the insurance or reinsurance undertaking can recover from reinsurance contracts and special purpose vehicles, for marine liability insurance and reinsurance in relation to vessel v;

• (d) SI(pollution,v) is the sum insured by the insurance or reinsurance undertaking, after deduction of the amounts that the insurance or reinsurance undertaking can recover from reinsurance contracts and special purpose vehicles, for oil pollution insurance and reinsurance in relation to vessel v.

For the purposes of determining SI(hull,v), SI(liab,v) and SI(pollution,v), insurance and reinsurance undertakings shall only take into account reinsurance contracts and special purpose vehicles that would pay out in the event of insurance claims related to vessel v. Reinsurance contracts and special purpose vehicles where payout is dependent on insurance claims not related to vessel v shall not be taken into account.

Where the deduction of amounts recoverable would lead to a capital requirement for the risk of a vessel collision that captures insufficiently the risk of a vessel collision that the insurance or reinsurance undertaking is exposed to, the insurance or reinsurance undertaking shall calculate SI(hull,v), SI(liab,v) or SI(pollution,v) without deduction of amounts recoverable.

1. The capital requirement for the risk of a platform explosion shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous loss of an amount equal to the following:

L platform = maxp(SI p)

where:

• (a) the maximum relates to all oil and gas offshore platforms insured by the insurance or reinsurance undertaking in respect of platform explosion in lines of business 6, 18 and 27 set out in Annex I;

• (b) SIp is the accumulated sum insured by the insurance or reinsurance undertaking, after deduction of the amounts that the insurance or reinsurance undertaking can recover from reinsurance contracts and special purpose vehicles, for the following insurance and reinsurance obligations in relation to platform p:

• (i) obligations to compensate for property damage;

• (ii) obligations to compensate for the expenses for the removal of wreckage;

• (iii) obligations to compensate for loss of production income;

• (iv) obligations to compensate for the expenses for capping of the well or making the well secure;

• (v) liability insurance and reinsurance obligations.

For the purposes of determining SIp, insurance and reinsurance undertakings shall only take into account reinsurance contracts and special purpose vehicles that would pay out in the event of insurance claims related to platform p. Reinsurance contracts and special purpose vehicles where payout is dependent on insurance claims that are not related to platform p shall not be taken into account.

Where the deduction of amounts recoverable would lead to a capital requirement for the risk of a platform explosion that captures insufficiently the risk of a platform explosion that the insurance or reinsurance undertaking is exposed to, the insurance or reinsurance undertaking shall calculate SIp without the deduction of amounts recoverable.’;

• (29) Article 131 is amended as follows:

• (a) the introductory wording is replaced by the following:

‘The capital requirement for aviation risk shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous loss of an amount that is equal to the following:’;

• (b) point (b) is replaced by the following:

• ‘(b) SIa is the sum insured by the insurance or reinsurance undertaking, after deduction of the amounts that the insurance or reinsurance undertaking can recover from reinsurance contracts and special purpose vehicles, for aviation hull insurance and reinsurance and aviation liability insurance and reinsurance in relation to aircraft a.

For the purposes of this Article, insurance and reinsurance undertakings shall only take into account reinsurance contracts and special purpose vehicles that would pay out in the event of insurance claims related to aircraft a. Reinsurance contracts and special purpose vehicles where payout is dependent on insurance claims that are not related to aircraft a shall not be taken into account.

Where the deduction of amounts recoverable would lead to a capital requirement for aviation risk that captures insufficiently the aviation risk that the insurance or reinsurance undertaking is exposed to, the insurance or reinsurance undertaking shall, calculate SIa without the deduction of amounts recoverable.’;

• (30) in Article 132, paragraphs 1 and 2 are replaced by the following:

‘1.   The capital requirement for fire risk shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous loss of an amount equal to the sum insured by the insurance or reinsurance undertaking with respect to the largest fire risk concentration.

1. The largest fire risk concentration of an insurance or reinsurance undertaking is the set of buildings with the largest sum insured, after deduction of the amounts that the insurance or reinsurance undertaking can recover from reinsurance contracts and special purpose vehicles, that meets all of the following conditions:

• (a) the insurance or reinsurance undertaking has insurance or reinsurance obligations in lines of business 7 and 19 set out in Annex I, in relation to each building which cover damage due to fire or explosion, including as a result of terrorist attacks;

• (b) all buildings are partly or fully located within a radius of 200 meters.

In determining the sum insured for a set of buildings, insurance and reinsurance undertakings shall only take into account reinsurance contracts and special purpose vehicles that would pay out in the event of insurance claims related to that set of buildings. Reinsurance contracts and special purpose vehicles where payout is dependent on insurance claims that are not related to that set of buildings shall not be taken into account.

Where the deduction of amounts recoverable would lead to a capital requirement for fire risk that captures insufficiently the fire risk that the insurance or reinsurance undertaking is exposed to, the insurance or reinsurance undertaking shall calculate the sum insured for a set of buildings without the deduction of amounts recoverable.’;

• (31) in Article 147(3), point (d) is replaced by the following:

• ‘(d) FP(future,s) denotes the following amount with respect to contracts where the initial recognition date falls in the following 12 months:

• (i) for all such contracts whose initial term is one year or less, the expected present value of premiums to be earned by the insurance or reinsurance undertaking in the segment s, but excluding the premiums to be earned during the 12 months after the initial recognition date;

• (ii) for all such contracts whose initial term is more than one year, the amount equal to 30 % of the expected present value of premiums to be earned by the insurance or reinsurance undertaking in the segment s after the following 12 months.’;

• (32) in Article 168, paragraph 6 is amended as follows:

• (a) in point (c), the introductory wording is replaced by the following:

‘as regards closed-ended alternative investment funds which are established in the Union or, if they are not established in the Union, which are marketed in the Union in accordance with Article 35 or 40 of Directive 2011/61/EU and which, in either case, have no leverage in accordance with the commitment method set out in Article 8 of Commission Delegated Regulation (EU) No 231/2013[^ntr*3-L_2019161EN.01000101-E0006]:

[^ntr*3-L_2019161EN.01000101-E0006]: Commission Delegated Regulation (EU) No 231/2013 of 19 December 2012 supplementing Directive 2011/61/EU of the European Parliament and of the Council with regard to exemptions, general operating conditions, depositaries, leverage, transparency and supervision (OJ L 83, 22.3.2013, p. 1).’;"

• (b) the following point (e) is added:

• ‘(e) qualifying unlisted equity portfolios as defined in Article 168a.’;

• (33) the following Article 168a is inserted:

‘Article 168a

Qualifying unlisted equity portfolios

1. For the purposes of point (e) of Article 168(6), a qualifying unlisted equity portfolio is a set of equity investments that meets all of the following requirements:

• (a) the set of investments consists solely of investments in the ordinary shares of companies;

• (b) the ordinary shares of each of the companies concerned are not listed in any regulated market;

• (c) each company has its head office in a country which is a member of the EEA;

• (d) more than 50 % of the annual revenue of each company is denominated in currencies of countries which are members of the EEA or the OECD;

• (e) more than 50 % of the staff employed by each company have their principal place of work in countries which are members of the EEA;

• (f) each company fulfils at least one of the following conditions for each of the last three financial years ending prior to the date on which the Solvency Capital Requirement is being calculated:

• (i) the annual turnover of the company exceeds EUR 10 000 000;

• (ii) the balance sheet total of the company exceeds EUR 10 000 000;

• (iii) the number of staff employed by the company exceeds 50;

• (g) the value of the investment in each company represents no more than 10 % of the total value of the set of investments;

• (h) none of the companies is an insurance or reinsurance undertaking, a credit institution, an investment firm, a financial institution, an alternative investment fund manager, a UCITS management company, an institution for occupational retirement provision or a non-regulated undertaking carrying out financial activities;

• (i) the beta of the set of investments does not exceed 0,796.

1. For the purposes of paragraph 1(i), the beta of a set of investments is the average of the betas for each of the investments in that set of investments, weighted by the book values of those investments. The beta of an investment in a company shall be determined as follows:

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where:

• (a) β is the beta of the equity investment in the company;

• (b) GM is the average gross margin for the company over the last five financial years ending prior to the date on which the Solvency Capital Requirement is being calculated;

• (c) Debt is the total debt of the company at the end of the most recent financial year for which figures are available;

• (d) CFO is the average net cash-flow for the company from operations over the last five financial years ending prior to the date on which the Solvency Capital Requirement is being calculated;

• (e) ROCE is the average return on common equity for the company over the last five financial years ending prior to the date on which the Solvency Capital Requirement is being calculated. Common equity shall be understood as capital and reserves as referred to in Annex III to Directive 2013/34/EU of the European Parliament and of the Council[^ntr*4-L_2019161EN.01000101-E0007] excluding preference shares and the related share premium account.

[^ntr*4-L_2019161EN.01000101-E0007]: Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC (OJ L 182, 29.6.2013, p. 19).’;"

• (34) Article 169 is replaced by the following:

‘Article 169

Standard equity risk sub-module

1. The capital requirement for type 1 equities referred to in Article 168 of this Regulation shall be equal to the loss in the basic own funds that would result from the following instantaneous decreases:

• (a) an instantaneous decrease equal to 22 % in the value of type 1 equity investments in related undertakings within the meaning of Article 212(1)(b) and 212(2) of Directive 2009/138/EC where these investments are of a strategic nature;

• (b) an instantaneous decrease equal to 22 % in the value of type 1 equity investments that are treated as long-term equity investments in accordance with Article 171a;

• (c) an instantaneous decrease equal to the sum of 39 % and the symmetric adjustment as referred to in Article 172 of this Regulation, in the value of type 1 equities other than those referred to in points (a) and (b).

1. The capital requirement for type 2 equities referred to in Article 168 of this Regulation shall be equal to the loss in the basic own funds that would result from the following instantaneous decreases:

• (a) an instantaneous decrease equal to 22 % in the value of type 2 equity investments in related undertakings within the meaning of Article 212(1)(b) and 212(2) of Directive 2009/138/EC where these investments are of a strategic nature;

• (b) an instantaneous decrease equal to 22 % in the value of type 2 equity investments that are treated as long-term equity investments in accordance with Article 171a;

• (c) an instantaneous decrease equal to the sum of 49 % and the symmetric adjustment as referred to in Article 172 of this Regulation, in the value of type 2 equities other than those referred to in points (a) and (b).

1. The capital requirement for qualifying infrastructure equities referred to in Article 168 of this Regulation shall be equal to the loss in the basic own funds that would result from the following instantaneous decreases:

• (a) an instantaneous decrease equal to 22 % in the value of qualifying infrastructure equity investments in related undertakings within the meaning of point (b) of Article 212(1) and Article 212(2) of Directive 2009/138/EC, where those investments are of a strategic nature;

• (b) an instantaneous decrease equal to 22 % in the value of qualifying infrastructure equity investments that are treated as long-term equity investments in accordance with Article 171a;

• (c) an instantaneous decrease equal to the sum of 30 % and 77 % of the symmetric adjustment as referred to in Article 172 of this Regulation, in the value of qualifying infrastructure equity investments other than those referred to in points (a) and (b).

1. The capital requirement for qualifying infrastructure corporate equities referred to in Article 168 of this Regulation shall be equal to the loss in the basic own funds that would result from the following instantaneous decreases:

• (a) an instantaneous decrease equal to 22 % in the value of qualifying infrastructure corporate equity investments in related undertakings within the meaning of point (b) of Article 212(1) and Article 212(2) of Directive 2009/138/EC where those investments are of a strategic nature;

• (b) an instantaneous decrease equal to 22 % in the value of qualifying infrastructure corporate equity investments that are treated as long-term equity investments in accordance with Article 171a;

• (c) an instantaneous decrease equal to the sum of 36 % and 92 % of the symmetric adjustment as referred to in Article 172 of this Regulation, in the value of qualifying infrastructure corporate equities other than those referred to in points (a) and (b).’;

• (35) the following Article 171a is inserted:

‘Article 171a

Long-term equity investments

1. For the purpose of this Regulation, a sub-set of equity investments may be treated as long-term equity investments if the insurance or reinsurance undertaking demonstrates, to the satisfaction of the supervisory authority, that all of the following conditions are met:

• (a) the sub-set of equity investments as well as the holding period of each equity investment within the sub-set are clearly identified;

• (b) the sub-set of equity investment is included within a portfolio of assets which is assigned to cover the best estimate of a portfolio of insurance or reinsurance obligations corresponding to one or several clearly identified businesses, and the undertaking maintains that assignment over the lifetime of the obligations;

• (c) the portfolio of insurance or reinsurance obligations, and the assigned portfolio of assets referred to in point (b) are identified, managed and organised separately from the other activities of the undertaking, and the assigned portfolio of assets cannot be used to cover losses arising from other activities of the undertaking;

• (d) the technical provisions within the portfolio of insurance or reinsurance obligations referred to in point (b) only represent a part of the total technical provisions of the insurance or reinsurance undertaking;

• (e) the average holding period of equity investments in the sub-set exceeds 5 years, or where the average holding period of the sub-set is lower than 5 years, the insurance or reinsurance undertaking does not sell any equity investments within the sub-set until the average holding period exceeds 5 years;

• (f) the sub-set of equity investments consists only of equities that are listed in the EEA or of unlisted equities of companies that have their head offices in countries that are members of the EEA;

• (g) the solvency and liquidity position of the insurance or reinsurance undertaking, as well as its strategies, processes and reporting procedures with respect to asset-liability management, are such as to ensure, on an ongoing basis and under stressed conditions, that it is able to avoid forced sales of each equity investments within the sub-set for at least 10 years;

• (h) the risk management, asset-liability management and investment policies of the insurance or reinsurance undertaking reflects the undertaking's intention to hold the sub-set of equity investments for a period that is compatible with the requirement of point (e) and its ability to meet the requirement of point (g).

1. Where equities are held within collective investment undertakings or within alternative investment funds referred to in points (a) to (d) of Article 168(6), the conditions set out in paragraph 1 of this Article may be assessed at the level of the funds and not of the underlying assets held within those funds.

1. Insurance or reinsurance undertakings that treat a sub-set of equity investments as long-term equity investments in accordance with paragraph 1 shall not revert back to an approach that does not include long-term equity investments. Where an insurance or reinsurance undertaking that treats a sub-set of equity investments as long-term equity investments is no longer able to comply with the conditions set out in paragraph 1, it shall immediately inform the supervisory authority and shall cease to apply Article 169(1)(b), (2)(b), (3)(b) and (4)(b) to any of its equity investments for a period of 36 months.’;

• (36) in Article 176, the following paragraph 4a is inserted:

‘4a.   Notwithstanding paragraph 4, bonds and loans that are assigned to a credit quality step in accordance with paragraph 1 or 2 of Article 176a or paragraph 1 of Article 176c shall be assigned a risk factor stressi depending on the credit quality step and the modified duration duri of the bond or loan i assigned in accordance with the table set out in paragraph 3 of this Article.’;

• (37) the following Articles 176a to 176c are inserted:

‘Article 176a

Internal assessment of credit quality steps of bonds and loans

1. A bond or loan for which a credit assessment by a nominated ECAI is not available and for which debtors have not posted collateral that meets the criteria set out in Article 214 may be assigned to credit quality step 2 if all of the criteria set out in paragraphs 3 and 4 are met with respect to the bond or loan.

1. A bond or loan for which a credit assessment by a nominated ECAI is not available and for which debtors have not posted collateral that meets the criteria set out in Article 214, other than a bond or loan assigned to credit quality step 2 under paragraph 1, may be assigned to credit quality step 3 if all of the criteria set out in paragraphs 3 and 5 are met with respect to the bond or loan.

1. The criteria in this paragraph are as follows:

a) the insurance or reinsurance undertaking's own internal credit assessment of the bond or loan meets the requirements listed in Article 176b;

b) the bond or loan is issued by a company which does not belong to the same corporate group as the insurance or reinsurance undertaking;

c) the bond or loan is not issued by a company which is an insurance or reinsurance undertaking, an infrastructure entity, a credit institution, an investment firm, a financial institution, an AIFM, a UCITS investment management company, an institution for occupational retirement provision or a non-regulated undertaking carrying out financial activities;

d) no claims on the issuing company of the bond or loan rank senior to the bond or loan, except for the following claims:

• (i) statutory claims and claims from liquidity facility providers provided that those statutory claims and claims from liquidity facility providers are in aggregate not material relative to the overall senior debt of the issuing company;

• (ii) claims from trustees;

• (iii) claims from derivatives counterparties;

e) the bond or loan provides a fixed redemption payment on or before the date of maturity, in addition to regular fixed or floating rate interest payments;

f) the contractual terms and conditions of the bond or loan provide for the following:

• (i) the borrower is obliged to provide audited financial data to the lender at least annually;

• (ii) the borrower is obliged to notify the lender of any events that could materially affect the credit risk of the bond or loan;

• (iii) the borrower is not entitled to change the terms and conditions of the bond or loan unilaterally, nor to make other changes to its business that would materially affect the credit risk of the bond or loan;

• (iv) the issuer is prohibited from issuing new debt without the prior agreement of the insurance or reinsurance undertaking;

• (v) what constitutes a default event is defined in a way that is specific to the issue and the issuer;

• (vi) what is to happen on a change of control;

g) the bond or loan is issued by a company that meets all of the following criteria:

• (i) the company is a limited liability company;

• (ii) the company has its head office in a country which is a member of the EEA;

• (iii) more than 50 % of the annual revenue of the company is denominated in currencies of countries which are members of the EEA or the OECD;

• (iv) the company has operated without any credit event over at least the last 10 years;

• (v) at least one of the following conditions is fulfilled with respect to each of the last three financial years ending prior to the date on which the Solvency Capital Requirement is being calculated:

— the annual turnover of the company exceeds EUR 10 000 000;

— the balance sheet total of the company exceeds EUR 10 000 000;

— the number of staff employed by the company exceeds 50;

• (vi) the sum of the company's annual earnings before interest, tax, depreciation and amortisation (“EBITDA”) over the last five financial years is larger than 0;

• (vii) the total debt of the company at the end of the most recent financial year for which figures are available is no higher than 6,5 times the average of the company's annual free cash flows over the last five financial years;

• (viii) the average of the company's EBITDA over the last five financial years is no lower than 6,5 times the company's interest expense for the most recent financial year for which figures are available;

• (ix) the net debt of the company at the end of the most recent financial year for which figures are available is no higher than 1,5 times the company's total equity at the end of that financial year.

1. The yield on the bond or loan, and the yield on any bonds and loans with similar contractual terms and conditions issued by the same company in the previous three financial years, is no higher than the higher of the following values:

a) the average of the yields on the two indices determined in accordance with paragraph 6;

b) the sum of 0,5 % and the yield on the index that meets the requirement in point (d) of that paragraph.

1. The yield on the bond or loan, and the yield on bonds and loans with similar contractual terms and conditions issued by the same company in the previous three financial years, is no higher than the higher of the following values:

a) the average of the yields on the two indices determined in accordance with paragraph 7;

b) the sum of 0,5 % and the yield on the index that meets the requirement in point (b) of that paragraph.

1. For the purposes of paragraph 4, the insurance or reinsurance undertaking shall determine, for the bond or loan referred to in paragraph 1, the yield, as at the time of issuance of that bond or loan, on two indices that meet all of the following requirements:

a) both indices are broad indexes of traded bonds for which an external credit assessment is available;

b) the constituent traded bonds in the two indices are denominated in the same currency as the bond or loan;

c) the constituent traded bonds in the two indices have a similar maturity date as the bond or loan;

d) one of the two indices consists of traded bonds of credit quality step 2;

e) one of the two indices consists of traded bonds of credit quality step 4.

1. For the purposes of paragraph 5, the insurance or reinsurance undertaking shall determine, for the bond or loan referred to in paragraph 2, the yield, as at the time of issuance of that bond or loan, on two indices that meet all of the following requirements:

a) both indices meet the requirements set out in points (a), (b) and (c) of paragraph 6;

b) one of the two indices consists of traded bonds of credit quality step 3;

c) one of the two indices consists of traded bonds of credit quality step 4.

1. For the purposes of paragraph 4, where the bond or loan referred to in paragraph 1 has features, other than those related to credit risk or illiquidity, which materially differ from the features of the constituent traded bonds in the two indices determined in accordance with paragraph 6, the insurance or reinsurance undertaking shall adjust the yield on the bond or loan to reflect those differences.

1. For the purposes of paragraph 5, where the bond or loan referred to in paragraph 2 has features, other than those related to credit risk or illiquidity, which materially differ from the features of the constituent traded bonds in the two indices determined in accordance with paragraph 7, the insurance or reinsurance undertaking shall adjust the yield on the bond or loan to reflect those differences.

Article 176b

Requirements for an undertaking's own internal credit assessment of bonds and loans

The requirements to be met for the purposes of point (a) of Article 176a(3) by an insurance or reinsurance undertaking's own internal credit assessment of a bond or loan shall be as follows:

• (b) the bond or loan is allocated a credit quality step on the basis of the own internal credit assessment;

• (c) the insurance or reinsurance undertaking is able to demonstrate to the supervisory authority's satisfaction that the own internal credit assessment, and the allocation of a credit quality step to the bond or loan on the basis of that assessment, are reliable and properly reflect the spread risk of the bond or loan contained in the sub-module specified in point (d) of the second subparagraph of Article 105(5) of Directive 2009/138/EC;

• (d) the own internal credit assessment takes into account all factors which could have a material effect on the credit risk associated with the bond or loan, including the following factors:

• (i) the competitive position of the issuer;

• (ii) the quality of the issuer's management;

• (iii) the financial policies of the issuer;

• (iv) country risk;

• (v) the effect of any covenants that are in place;

• (vi) the issuer's financial performance history, including the number of years that it has been operating;

• (vii) the issuer's size and the level of diversity in its activities;

• (viii) the quantitative impact on the issuer's risk profile and financial ratios of its having issued the bond or loan;

• (ix) the issuer's ownership structure;

• (x) the complexity of the issuer's business model;

• (e) the own internal credit assessment uses all relevant quantitative and qualitative information;

• (f) the own internal credit assessment, the allocation of a credit quality step on the basis of that assessment and the information used to support the own internal credit assessment is documented;

• (g) the own internal credit assessment takes into account the characteristics of comparable assets for which a credit assessment by a nominated ECAI is available;

• (h) the own internal credit assessment takes into account trends in the issuer's financial performance;

• (i) the own internal credit assessment is procedurally independent from the decision to underwrite;

• (j) the insurance or reinsurance undertaking regularly reviews the own internal credit assessment.

Article 176c

Assessment of credit quality steps of bonds and loans based on an approved internal model

1. This Article shall apply in the following circumstances:

a) an insurance or reinsurance undertaking has concluded an agreement (“co-investment agreement”) to invest in bonds and loans jointly with another entity;

b) that other entity (“the co-investor”) is one or other of the following:

• (i) an institution as defined in point (3) of Article 4(1) of Regulation (EU) No 575/2013 which uses the Internal Ratings Based Approach referred to in Article 143(1) of that Regulation;

• (ii) an insurance or reinsurance undertaking which uses an internal model in accordance with Article 100 of Directive 2009/138/EC;

c) pursuant to the co-investment agreement, the insurance or reinsurance undertaking and the co-investor invest jointly in bonds and loans for which a credit assessment by a nominated ECAI is not available and for which debtors have not posted collateral that meets the criteria set out in Article 214;

d) the co-investment agreement provides that the co-investor shares with the insurance or reinsurance undertaking the probabilities of default produced by its Internal Ratings Based Approach or, as applicable, the credit quality steps produced by its internal model for the bonds or loans referred to in point (c) for the purpose of using that information for the calculation of the Solvency Capital Requirement of the insurance or reinsurance undertaking.

1. If all of the criteria set out in paragraphs 3 to 6 are met, the bonds and loans referred to in point (c) of paragraph 1 shall be assigned to credit quality steps determined as follows:

a) in a case where the co-investor falls within point (i) of paragraph 1(b), credit quality steps shall be determined on the basis of the most recent probabilities of default that the Internal Ratings Based Approach has produced;

b) in a case where the co-investor falls within point (ii) of paragraph 1(b), credit quality steps shall be the credit quality steps produced by the internal model.

1. The criteria in this paragraph are as follows:

a) the issuer of each bond or loan does not belong to the same corporate group as the insurance or reinsurance undertaking;

b) the issuer is not an insurance or reinsurance undertaking, an infrastructure entity, a credit institution, an investment firm, a financial institution, an AIFM, a UCITS investment management company, an institution for occupational retirement provision or a non-regulated undertaking carrying out financial activities;

c) the issuer has its head office in a country which is a member of the EEA;

d) more than 50 % of the issuer's annual revenue is denominated in currencies of countries which are members of the EEA or the OECD;

e) at least one of the following conditions is met for each of the last three financial years ending prior to the date on which the Solvency Capital Requirement is being calculated:

— the annual turnover of the issuer exceeds EUR 10 000 000;

— the balance sheet total of the issuer exceeds EUR 10 000 000;

— the number of staff employed by the issuer exceeds 50.

1. The criteria in this paragraph are as follows:

a) the co-investment agreement defines the types of bonds and loans to be underwritten, and the applicable assessment criteria;

b) the co-investor provides the insurance or reinsurance undertaking with sufficient details of the underwriting process, including the criteria used, the organisational structure of the co-investor and the controls conducted by the co-investor;

c) the co-investor provides the insurance or reinsurance undertaking with data on all applications for bonds and loans to be underwritten;

d) the co-investor provides the insurance or reinsurance undertaking with details of all decisions to approve or reject applications for bonds and loans to be underwritten;

e) the co-investor retains an exposure of at least 20 % of the nominal value of each bond and loan;

f) the underwriting process is the same as the underwriting process followed by the co-investor for its other investments in comparable bonds and loans;

g) the insurance or reinsurance undertaking invests in all bonds and loans of the types referred to in point (a) for which the co-investor decides to approve the bond or loan application;

h) the co-investor provides the insurance or reinsurance undertaking with information that allows the undertaking to understand the Internal Ratings Based Approach or, as applicable, internal model and its limitations, as well as its adequacy and appropriateness, in particular:

• (i) a description of the Internal Ratings Based Approach or, as applicable, internal model, including the inputs and risk factors, the quantification of risk parameters and the underlying methods, and the general methodology applied;

• (ii) a description of the scope of the use of the Internal Ratings Based Approach or, as applicable, internal model;

• (iii) a description of the model validation process and of other processes which allow the model's performance to be monitored, the appropriateness of its specification to be reviewed over time, and the results of the Internal Ratings Based Approach or, as applicable, internal model to be tested against experience.

1. In a case where the co-investor falls within point (i) of paragraph 1(b):

a) the insurance or reinsurance undertaking clearly documents to which credit quality step the probability of default produced by the institution's Internal Ratings Based Approach corresponds;

b) the mapping of probabilities of default to credit quality steps carried out by the insurance or reinsurance undertaking ensures that, for the bond or loan in question, the resulting level of capital requirement for the spread risk sub-module referred to in point (d) of the second subparagraph of Article 105(5) of Directive 2009/138/EC is appropriate;

c) the mapping is based on Table 1 in Annex I to Commission Implementing Regulation (EU) 2016/1799[^ntr*5-L_2019161EN.01000101-E0008];

d) adjustments are made in a prudent manner to the probabilities of default before the mapping is carried out, taking into account the qualitative factors set out in Article 7 of Implementing Regulation (EU) 2016/1799;

e) an adjustment to the probabilities of default is made in either of the following situations:

• (i) the time horizon covered by the Internal Ratings Based Approach deviates significantly from the 3-year time horizon set out in Article 4(2) of Implementing Regulation (EU) 2016/1799;

• (ii) the definition of default used in the Internal Ratings Based Approach deviates significantly from the one set out in Article 4(4) of that Implementing Regulation.

1. In a case where the co-investor falls within point (ii) of paragraph 1(b), the internal model ensures that, for the bond or loan in question, the resulting level of capital requirement for the spread risk sub-module referred to in point (d) of the second subparagraph of Article 105(5) of Directive 2009/138/EC is appropriate.

[^ntr*5-L_2019161EN.01000101-E0008]: Commission Implementing Regulation (EU) 2016/1799 of 7 October 2016 laying down implementing technical standards with regard to the mapping of credit assessments of external credit assessment institutions for credit risk in accordance with Articles 136(1) and 136(3) of Regulation (EU) No 575/2013 of the European Parliament and of the Council (OJ L 275, 12.10.2016, p. 3)’;"

• (38) Article 180 is amended as follows:

• (a) in paragraph 2, the following subparagraph is added:

‘For the purposes of point (b) of the first subparagraph, exposures in the form of bonds and loans that are fully, unconditionally and irrevocably guaranteed by regional governments and local authorities listed in Article 1 of Commission Implementing Regulation (EU) 2015/2011[^ntr*6-L_2019161EN.01000101-E0009], where the guarantee meets the requirements set out in Article 215 of this Regulation, shall be treated as exposures to the central government.

[^ntr*6-L_2019161EN.01000101-E0009]: Commission Implementing Regulation (EU) 2015/2011 of 11 November 2015 laying down implementing technical standards with regard to the lists of regional governments and local authorities, exposures to whom are to be treated as exposures to the central government in accordance with Directive 2009/138/EC of the European Parliament and of the Council (OJ L 295, 12.11.2015, p. 3).’;"

• (b) the following paragraphs 3a and 3b are inserted:

‘3a.   Exposures in the form of bonds and loans to Member States' regional governments and local authorities not listed in Article 1 of Implementing Regulation (EU) 2015/2011 () shall be assigned a risk factor stressi* from the table in paragraph 3 corresponding to credit quality step 2.

3b.   Exposures in the form of bonds and loans that are fully, unconditionally and irrevocably guaranteed by a Member State's regional government or local authority that are not listed in Article 1 of Implementing Regulation (EU) 2015/2011, where the guarantee meets the requirements set out in Article 215 of this Regulation, shall be assigned a risk factor stressi from the table in paragraph 3 corresponding to credit quality step 2.’;

• (39) Article 182 is amended as follows:

• (a) in paragraph 5, the last sentence is deleted;

• (b) the following paragraphs 6 to 11 are added:

‘6.   For the purposes of paragraph 4, exposures to an insurance or reinsurance undertaking for which a credit assessment by a nominated ECAI is not available and where the undertaking meets its Minimum Capital Requirement shall be assigned to a credit quality step depending on the undertaking's solvency ratio using the following mapping between solvency ratios and credit quality steps:

Solvency Ratio	196 %	175 %	122 %	100 %	95 %
Credit quality step	1	2	3	3,82	5

Where the solvency ratio falls in between the solvency ratios set out in the table above, the credit quality step shall be linearly interpolated from the closest credit quality steps corresponding to the closest solvency ratios set out in the table above. Where the solvency ratio is lower than 95 %, the credit quality step shall be 5. Where the solvency ratio is higher than 196 %, the credit quality step shall be 1.

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.

1. For the purposes of paragraph 4, exposures to an insurance or reinsurance undertaking for which a credit assessment by a nominated ECAI is not available and where the undertaking does not meet its Minimum Capital Requirement shall be assigned to credit quality step 6.

1. Paragraphs 6 and 7 of this Article shall only apply as of the first date of public disclosure, by the undertaking corresponding to the exposure, of the report on its solvency and financial condition referred to in Article 51 of Directive 2009/138/EC. Before that date, the exposures shall be assigned to credit quality step 3,82.

1. For the purposes of paragraph 4, exposures to a third country insurance or reinsurance undertaking for which a credit assessment by a nominated ECAI is not available, situated in a country whose solvency regime is deemed equivalent to that laid down in Directive 2009/138/EC in accordance with Article 227 of that Directive, and which complies with the solvency requirements of that third country, shall be assigned to credit quality step 3,82.

1. For the purposes of paragraph 4, exposures to credit institutions and financial institutions, within the meaning of points (1) and (26) of Article 4(1) of Regulation (EU) No 575/2013 which comply with the solvency requirements set out in Directive 2013/36/EU and Regulation (EU) No 575/2013, for which a credit assessment by a nominated ECAI is not available, shall be assigned to credit quality step 3,82.

1. Exposures other than those to which a credit quality step is assigned under paragraphs 5 to 10 shall, for the purpose of paragraph 4, be assigned to credit quality step 5.’;

• (40) in Article 184, paragraph 3 is replaced by the following:

‘3.   The exposure at default on a single name exposure i shall be reduced by the amount of the exposure at default to counterparties belonging to that single name exposure and for which the risk factor for market risk concentration referred to in Articles 186 and 187 is 0 %.’;

• (41) in Article 186, paragraphs 2 to 6 are deleted;

• (42) Article 187 is amended as follows:

• (a) in paragraph 3, the following subparagraph is added:

‘For the purposes of point (b), exposures that are fully, unconditionally and irrevocably guaranteed by regional governments and local authorities listed in Article 1 of Implementing Regulation (EU) 2015/2011, where the guarantee meets the requirements set out in Article 215 of this Regulation, shall be treated as exposures to the central government.’;

• (b) the following paragraphs 4a and 4b are inserted:

‘4a.   Exposures to Member States' regional governments and local authorities not listed in Article 1 of Implementing Regulation (EU) 2015/2011 shall be assigned a risk factor gi for market risk concentration corresponding to weighted average credit quality step 2 in accordance with paragraph 4.

4b.   Exposures that are fully, unconditionally and irrevocably guaranteed by a Member State's regional government or local authority that is not listed in Article 1 of Implementing Regulation (EU) 2015/2011, where the guarantee meets the requirements set out in Article 215 of this Regulation, shall be assigned a risk factor gi for market risk concentration corresponding to weighted average credit quality step 2 in accordance with paragraph 4.’;

• (43) Article 189 is amended as follows:

• (a) paragraph 2 is amended as follows:

• (i) point (a) is replaced by the following:

• ‘(a) Risk-mitigation contracts including reinsurance arrangements, special purpose vehicles and insurance securitisations;’;

• (ii) the following point (f) is added:

• ‘(f) derivatives other than credit derivatives covered in the spread risk sub-module.’;

• (b) in paragraph 6, the following point (e) is added:

• ‘(e) the credit risk on assets posted as collateral to a CCP or a clearing member that are bankruptcy remote.’;

• (44) Article 192 is amended as follows:

• (a) in paragraph 1, the following subparagraph is added:

‘Where insurance and reinsurance undertakings have concluded contractual netting agreements covering several derivatives that represent credit exposure to the same counterparty, they may calculate the loss-given-default on those derivatives, as set out in paragraphs 3 to 3c, on the basis of the combined economic effect of all of those derivatives that are covered by the same contractual netting agreement, provided that Articles 209 and 210 are complied with in relation to the netting.’;

• (b) paragraph 3 is replaced by the following:

‘3.   The loss-given-default on a derivative falling within Article 192a(1) shall be equal to the following:

LGD = max(18 % · (Derivative + 50 % · RM fin) – 50 % · F′ · Value; 0)

where:

• (a) Derivative denotes the value of the derivative determined in accordance with Article 75 of Directive 2009/138/EC;

• (b) RMfin denotes the risk-mitigating effect on market risk of the derivative;

• (c) Value denotes the value of the assets held as collateral determined in accordance with Article 75 of Directive 2009/138/EC;

• (d) F′ denotes a factor to take into account the economic effect of the collateral arrangement in relation to the derivative in case of a credit event related to the counterparty.’;

• (c) the following paragraphs 3a to 3d are inserted:

‘3a.   Notwithstanding paragraph 3, the loss-given-default on a derivative falling within Article 192a(2) shall be equal to the following:

LGD = max(16 % · (Derivative + 50 % · RM fin) – 50 % · F′′ · Value; 0)

where:

• (a) Derivative denotes the value of the derivative in accordance with Article 75 of Directive 2009/138/EC;

• (b) RMfin denotes the risk-mitigating effect on market risk of the derivative;

• (c) Value denotes the value of the assets held as collateral in accordance with Article 75 of Directive 2009/138/EC;

• (d) F′′ denotes a factor to take into account the economic effect of the collateral arrangement in relation to the derivative in case of a credit event related to the counterparty.

3b.   The loss-given-default on derivatives other than those referred to in paragraphs 3 and 3a shall be equal to the following, provided that the derivative contract meets the requirements of Article 11 of Regulation (EU) 648/2012:

LGD = max(90 % · (Derivative + 50 % · RM fin) – 50 % · F′′′ · Value; 0)

where:

• (a) Derivative denotes the value of the derivative determined in accordance with Article 75 of Directive 2009/138/EC;

• (b) RMfin denotes the risk-mitigating effect on market risk of the derivative;

• (c) Value denotes the value of the assets held as collateral determined in accordance with Article 75 of Directive 2009/138/EC;

• (d) F′′′ denotes a factor to take into account the economic effect of the collateral arrangement in relation to the derivative in case of a credit event related to the counterparty.

3c.   The loss-given-default on derivatives not covered by paragraphs 3, 3a and 3b shall be equal to the following:

LGD = max(90 % · (Derivative + RM fin) – F′′′ · Collateral; 0)

where:

• (a) Derivative denotes the value of the derivative determined in accordance with Article 75 of Directive 2009/138/EC;

• (b) RMfin denotes risk-mitigating effect on market risk of the derivative;

• (c) Collateral denotes the risk-adjusted value of collateral in relation to the derivative;

• (d) F′′′ denotes a factor to take into account the economic effect of the collateral arrangement in relation to the derivative in case of a credit event related to the counterparty.

3d.   Where the loss-given-default on derivatives is to be calculated on the basis referred to in the second subparagraph of paragraph 1, the following rules shall apply for the purposes of paragraphs 3 to 3c:

• (a) the value of the derivative shall be the sum of the values of the derivatives covered by the contractual netting arrangement;

• (b) the risk-mitigating effect shall be determined at the level of the combination of derivatives covered by the contractual netting arrangement;

• (c) the risk-adjusted value of collateral shall be determined at the level of the combination of derivatives covered by the contractual netting arrangement.’;

• (d) paragraph 4 is replaced by the following:

‘4.   The loss-given-default on a mortgage loan shall be equal to the following:

LGD = max(Loan – (80 % × Mortgage + Guarantee); 0)

where:

a) Loan denotes the value of the mortgage loan determined in accordance with Article 75 of Directive 2009/138/EC;

b) Mortgage denotes the risk-adjusted value of the mortgage;

c) Guarantee denotes the amount that the guarantor would be required to pay to the insurance or reinsurance undertaking if the obligor of the mortgage loan were to default at a time when the value of the property held as mortgage were equal to 80 % of the risk-adjusted value of the mortgage.

For the purposes of point (c), a guarantee shall be recognised only if it is provided by a counterparty mentioned in points (a) to (d) of the first subparagraph of Article 180(2) and it complies with the requirements set out in Articles 209, 210 and points (a) to (e) of Article 215.’;

• (45) the following Article 192a is inserted:

‘Article 192a

Exposure to clearing members

1. For the purposes of Article 192(3), a derivative falls within this paragraph if the following requirements are met:

• (a) the derivative is a CCP-related transaction in which the insurance or reinsurance undertaking is the client;

• (b) the positions and assets of the insurance or reinsurance undertaking related to that transaction are distinguished and segregated, at the level of both the clearing member and the CCP, from the positions and assets of both the clearing member and the other clients of that clearing member and as a result of that distinction and segregation those positions and assets are bankruptcy remote in the event of the default or insolvency of the clearing member or one or more of its other clients;

• (c) the laws, regulations, rules and contractual arrangements applicable to or binding the insurance or reinsurance undertaking or the CCP facilitate the transfer of the client's positions relating to that transaction and of the corresponding collateral to another clearing member within the applicable margin period of risk in the event of default or insolvency of the original clearing member. In such circumstance, the client's positions and the collateral shall be transferred at market value, unless the client requests to close out the position at market value;

• (d) the insurance or reinsurance undertaking has available an independent, written and reasoned legal opinion that concludes that, in the event of legal challenge, the relevant courts and administrative authorities would find that the client would bear no losses on account of the insolvency of the clearing member or of any the clients of that clearing member under any of the following laws:

• (i) the laws of the jurisdiction of the insurance or reinsurance undertaking, its clearing member or the CCP;

• (ii) the law governing the transaction;

• (iii) the law governing the collateral;

• (iv) the law governing any contract or agreement necessary to meet the requirement set out in point (b);

• (e) the CCP is a qualifying central counterparty.

1. For the purposes of Article 192(3a), a derivative falls within this paragraph if the requirements set out in paragraph 1 are met, with the exception that the insurance or reinsurance undertaking is not required to be protected from losses in the event that the clearing member and another client of the clearing member jointly default.’;

• (46) Article 196 is replaced by the following:

‘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.’;

• (47) Article 197 is amended as follows:

• (a) in paragraph 1, the first sentence is replaced by the following:

‘Where the criteria set out in Article 214 of this Regulation are met, the risk-adjusted value of collateral provided by way of security, as referred to in point (b) of Article 1(26), shall be equal to the difference between the value of the assets held as collateral, valued 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, provided that both of the following requirements are fulfilled:’;

• (b) paragraph 7 is replaced by the following:

‘7.   Where, in case of insolvency of the counterparty, the determination of the insurance or reinsurance undertaking's proportional share of the counterparty's insolvency estate in excess of the collateral does not take into account that the undertaking receives the collateral, the factors F, F', F'' and F''' referred to in Article 192(2) to (3c) shall all be 100 %. In all other cases these factors shall be 50 %, 18 % 16 % and 90 % respectively.’;

• (48) in Article 199, the following paragraphs 12 and 13 are added:

‘12.   Notwithstanding paragraphs 2 to 11, exposures referred to Article 192(3) shall be assigned a probability of default equal to 0,002 %.

1. Notwithstanding paragraphs 2 to 12, exposures referred to Article 192(3a) shall be assigned a probability of default equal to 0,001 %.’;

• (49) in Article 201(2), point (a) is replaced by the following:

• ‘(a) the sum covers all possible combinations (j,k) of probabilities of default on single name exposures in accordance with Article 199;’;

• (50) Article 207 is amended as follows:

• (a) paragraph 2 is replaced by the following:

‘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.’;

• (b) the following paragraphs 2a to 2d are inserted:

‘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.’;

• (51) in Article 208, paragraph 2 is replaced by the following:

‘2.   Where insurance or reinsurance undertakings transfer underwriting risks using finite reinsurance contracts, as defined in Article 210(3) of Directive 2009/138/EC, that meet the requirements set out in Articles 209, 211 and 213 of this Regulation, those contracts shall be recognised in the scenario based calculations set out in Title I, Chapter V, Sections 2, 3 and 4 of this Regulation only to the extent underwriting risk is transferred to the counterparty of the contract. Notwithstanding the previous sentence, finite reinsurance, or similar arrangements where the effective risk transfer is comparable to that of finite reinsurance, shall not be taken into account for the purposes of determining the volume measures for premium and reserve risk in accordance with in Articles 116 and 147 of this Regulation, or for the purposes of calculating undertaking-specific parameters in accordance with Section 13 of this Chapter.’;

• (52) in Article 209, paragraph 3 is replaced by the following:

‘3.   Where contractual arrangements governing the risk-mitigation techniques will be in force for a period shorter than the next 12 months and the insurance or reinsurance undertaking intends to replace that risk-mitigation technique at the time of its expiry with a similar arrangement or where that risk-mitigation technique is subject to an adjustment to reflect changes in the exposure that it covers, the risk-mitigation technique shall be fully taken into account in the Basic Solvency Capital Requirement provided all of the following qualitative criteria are met:

• (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.’;

• (53) in Article 210, the following paragraph 5 is added:

‘5.   Where an insurance or reinsurance undertaking combines several contractual arrangements to transfer risk, each of the contractual arrangements shall meet the requirements set out in paragraphs 1 and 4 and the contractual arrangements in combination shall meet the requirements set out in paragraphs 2 and 3.’;

• (54) Article 211 is amended as follows:

• (a) in paragraph 2, point (c) is replaced by the following:

• ‘(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.’;

• (b) paragraph 3 is replaced by the following:

‘3.   Where a counterparty to a reinsurance contract is an insurance or reinsurance undertaking which ceases to comply with the Solvency Capital Requirement after the reinsurance contract has been entered into, the protection offered by the insurance risk-mitigation technique may be partially recognised for a period of no longer than six months after the counterparty ceases to comply with the Solvency Capital Requirement. In that case, the effect of the risk-mitigation technique shall be reduced by the percentage by which the Solvency Capital Requirement is breached. As soon as the counterparty has restored compliance with the Solvency Capital Requirement, the effect of the risk-mitigation technique shall no longer be reduced. Where the counterparty fails to restore compliance with the Solvency Capital Requirement within that period of six months, the effect of the risk-mitigation technique shall no longer be recognised. Where, before the end of the period of six months, the insurance or reinsurance undertaking becomes aware that it is unlikely that the counterparty will be able to restore compliance with the Solvency Capital Requirement within that period, the insurance or reinsurance undertaking shall no longer recognise the effect of the risk-mitigation technique in the Basic Solvency Capital Requirement.’;

• (c) the following paragraph 3a is inserted:

‘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.’;

• (55) in Article 212, paragraph 1 is replaced by the following: