S.I. No. 485/2015 - European Union (Insurance and Reinsurance) Regulations 2015

• (c) a natural or legal person who controls an insurance undertaking, reinsurance undertaking, credit institution, investment firm or management company authorised in another Member State or in a sector other than that in which the acquisition is proposed.

• (2) In paragraph (1) “management company” has the meaning given by point 2 of Article 1a of Directive 85/611/EEC.

• (3) In a case to which paragraph (1) applies, the Bank shall, without undue delay, provide any other supervisory authority concerned with any information that is essential or relevant for the assessment of a proposed acquisition and, in this regard, the Bank shall communicate to each such other supervisory authority all relevant information upon request and all essential information on its own initiative.

• (4) A decision by the Bank, in the case of a proposed acquisition in an insurance undertaking or reinsurance undertaking, shall indicate any views or reservations expressed by the supervisory authority responsible for the proposed acquirer.

Bank may fix period for completion of acquisition

Notice of Bank’s decision

• (2) Subject to any other law, the Bank shall publish an appropriate statement of the reasons for the decision if the proposed acquirer concerned so requests.

• (3) The Bank may in its discretion publish such a statement even without any request by the proposed acquirer.

• (4) If the Bank does not give notice in writing within the assessment period in relation to a proposed acquisition that it opposes the acquisition, the acquisition is deemed to have been approved.

Bank may oppose certain acquisitions

• (a) there are reasonable grounds for doing so on the basis of the criteria in paragraphs (1) and (2) of Regulation 64,

• (b) the information provided by the proposed acquirer concerned in its notification under paragraph (1) or (2) of Regulation 60 is incomplete, or

• (c) the proposed acquirer has not provided information in response to a request under paragraph (5) or (9) of Regulation 63.

Decision to oppose proposed acquisition to be appealable

Circumstances in which proposed acquisition may not be completed

• (a) the proposed acquirer has notified the Bank of the acquisition in accordance with Regulation 60,

• (b) the Bank has acknowledged that notification in accordance with Regulation 63, and

• (c) either—

• (i) the assessment period in relation to the acquisition has ended and the Bank has not notified the proposed acquirer that it opposes the acquisition, or

• (ii) the Bank has notified the proposed acquirer that it does not oppose the acquisition.

• (2) If a proposed acquirer purports to complete a proposed acquisition in contravention of paragraph (1)—

• (a) the purported acquisition is of no effect to pass title to any share or any other interest, and

• (b) any exercise of powers based on the purported acquisition of the holding concerned is void.

Effect of Companies Act 2014

Insurance and reinsurance undertakings to provide information about shareholdings etc

Power of Court to make certain orders

• (2) In making an application under paragraph (1), the Bank shall serve a copy of the application on the person to whom the application relates and on being served with the notice, that person becomes the respondent to the application.

• (3) On the hearing of an application under paragraph (1), the Court may, on being satisfied that the Bank’s belief is substantiated, make all or any of the following orders:

• (a) an order directing the respondent to dispose of the holding or a specified part of it;

• (b) an order suspending the exercise of the voting rights attached to the relevant shares;

• (c) an order invalidating votes already exercised by holders of those shares.

Determination of voting rights for certain purposes

• (a) is a qualifying holding, or

• (b) has reached or exceeded or will reach or exceed a prescribed percentage of the capital of or voting rights in the undertaking,

the rules regarding the calculation of voting rights referred to in Articles 9 and 10 of Directive 2004/109/EC and the conditions regarding aggregation of voting rights set out in Article 12(4) and (5) of that Directive shall be taken into account.

• (2) For that purpose, voting rights or shares that an investment firm or credit institution holds as a result of providing the underwriting of financial instruments or placing of financial instruments on a firm commitment basis included under point 6 of Section A of Annex 1 to Directive 2004/39/EC shall not be taken into account if those rights or shares are not exercised or otherwise used to intervene in the management of the issuer and are disposed of within one year of acquisition.

Notifications submitted before 1 January 2016

Part 5 EXCHANGE OF INFORMATION AND PROMOTION OF SUPERVISORY CONVERGENCE

Co-operation with EIOPA

Exchange of information with other authorities

Part 6 DUTIES OF AUDITORS

Duties of auditors

• (a) a material breach of the laws, regulations or administrative provisions which lay down the conditions governing authorisation or which specifically govern pursuit of the activities of insurance undertakings and reinsurance undertakings;

• (b) the impairment of the continuous functioning of the insurance undertaking or reinsurance undertaking;

• (c) a refusal to certify the accounts or the expression of reservations;

• (d) non-compliance with the Solvency Capital Requirement;

• (e) non-compliance with the Minimum Capital Requirement.

• (2) The auditors of an insurance undertaking or reinsurance undertaking shall also report any facts or decisions such as are mentioned in paragraph (1) of which they have become aware in the course of carrying out an audit of an undertaking which has close links with the insurance undertaking or reinsurance undertaking resulting from a control relationship.

• (3) Any communication by an auditor under paragraph (1) or (2), made in good faith, shall not constitute a breach of any restriction on disclosure of information imposed by contract or by any law or administrative provision and shall not involve the auditor in liability of any kind.

• (4) In this Regulation, “auditor” means any person authorised in accordance with Directive 84/253/EEC and performing the tasks described in—

• (a) Article 51 of Directive 78/660/EEC,

• (b) Article 37 of Directive 83/349/EEC, or

• (c) Article 31 of Directive 85/611/EEC,

or any other statutory task.

Part 7 PURSUIT OF LIFE AND NON-LIFE ACTIVITY

Pursuit of life and non-life insurance activity

• (2) If an insurance undertaking is so authorised the business of life insurance and the business of non-life insurance shall be managed separately in accordance with Regulation 80.

• (3) An insurance undertaking authorised to carry on both life insurance and non-life insurance shall comply with the accounting rules governing life insurance for both.

• (4) Activities relating to non-life insurance activities in classes 1 and 2 in Part 1 of Schedule 1 carried on by an insurance undertaking authorised to carry on both life insurance and non-life insurance shall be subject to the rules applicable to life insurance in the event of a winding up or reorganisation of the insurance undertaking.

• (5) An insurance undertaking that has obtained an authorisation in accordance with paragraph (1) is prohibited from carrying on health insurance business as defined in section 2 (1) of the Health Insurance Act 1994 (No. 16 of 1994).

Separation of life and non-life insurance management

• (2) Without prejudice to Regulations 113 and 139, an insurance undertaking authorised in accordance with Regulation 79 shall calculate—

• (a) a notional life Minimum Capital Requirement with respect to its activities relating to life insurance or reinsurance, calculated as if the undertaking concerned only pursued those activities, on the basis of the separate accounts referred to in paragraph (7), and

• (b) a notional non-life Minimum Capital Requirement with respect to its activities relating to non-life insurance or reinsurance, calculated as if the undertaking concerned only pursued those activities, on the basis of the separate accounts referred to in paragraph (7).

• (3) As a minimum, a life insurance undertaking authorised in accordance with Regulation 79 shall cover the following by an equivalent amount of eligible basic own-fund items:

• (a) the notional life Minimum Capital Requirement, in respect of its activities relating to life insurance;

• (b) the notional non-life Minimum Capital Requirement, in respect of its activities relating to non-life insurance.

• (4) The minimum financial obligations specified in paragraph (3) in respect of activities relating to life insurance or activities relating to non-life insurance activity shall not be borne by the other activities.

• (5) As long as the minimum financial obligations specified in paragraph (3) are fulfilled and provided the Bank is informed, the undertaking may use to cover the Solvency Capital Requirement referred to in Regulation 113 the explicit eligible own-fund items which are still available for one or the other activities.

• (6) The Bank shall analyse the results in activities relating to life insurance and activities relating to non-life insurance so as to ensure that the requirements of paragraphs (1) to (5) are fulfilled.

• (7) A life insurance undertaking authorised in accordance with Regulation 79 shall draw up accounts—

• (a) showing separately the sources of the results for life insurance and non-life insurance, including a breakdown of the origin of—

• (i) all income (in particular premiums, payments by reinsurers and investment income), and

• (ii) all expenditure (in particular, insurance settlements, additions to technical provisions, reinsurance premiums and operating expenses in respect of insurance business), and

• (b) showing items common to both sorts of activities entered in accordance with methods of apportionment accepted by the Bank.

• (8) An insurance undertaking shall, on the basis of the accounts referred to in paragraph (7), prepare a statement in which the eligible basic own-fund items covering each notional Minimum Capital Requirement as referred to in paragraph (2) are clearly identified, in accordance with Regulation 112(6).

• (9) If the amount of eligible basic own-fund items with respect to one of the activities is insufficient to cover the minimum financial obligations referred to in paragraph (3), the Bank shall apply to the deficient activity the measures provided for in these Regulations, whatever the results in the other activity.

• (10) By way of derogation from paragraph (4), those measures may involve the authorisation of a transfer of explicit eligible basic own-fund items from one sort of activities to the other.

Linked life insurance and non-life insurance undertakings

• (a) an insurance undertaking which carries on life insurance business has financial, commercial or administrative links with an insurance undertaking which carries on non-life insurance business, or

• (b) an insurance undertaking which carries on non-life insurance business has financial, commercial or administrative links with an insurance undertaking which carries on life insurance business,

it shall provide the Bank, in such form as the Bank sees fit, with information relating to the arrangements under which any apportionment of expenses of management and income has been made between the insurance undertakings and the basis for such arrangements, and shall provide the Bank on request with copies of any agreement or other documents relevant to any such arrangements to ensure that the accounts of those undertakings are not distorted by the arrangements between those undertakings.

Part 8 VALUATION OF ASSETS AND LIABILITIES, TECHNICAL PROVISIONS, OWN FUNDS, SOLVENCY CAPITAL REQUIREMENT, MINIMUM CAPITAL REQUIREMENT AND INVESTMENT RULES

Chapter 1 Valuation of assets and liabilities

Valuation of assets and liabilities

• (a) assets shall be valued at the amount for which they could be exchanged between knowledgeable and willing parties in an arm’s length transaction;

• (b) liabilities shall be valued at the amount for which they could be transferred, or settled, between knowledgeable and willing parties in an arm’s length transaction.

• (2) When valuing liabilities under paragraph (1)(b), no adjustment shall be made to take account of the own credit standing of the undertaking.

Chapter 2 Technical provisions

General provisions

• (2) The value of technical provisions shall correspond to the current amount an undertaking would have to pay if it were to transfer its insurance and reinsurance obligations immediately to another insurance undertaking or reinsurance undertaking.

• (3) The calculation of technical provisions shall make use of and be consistent with information provided by the financial markets and generally available data on underwriting risks (market consistency).

• (4) Technical provisions shall be calculated in a prudent, reliable and objective manner.

• (5) Following the principles set out in paragraphs (2), (3) and (4) and taking into account the principles set out in Regulation 82, the calculation of technical provisions shall be carried out in accordance with Regulations 84 to 95.

Calculation of technical provisions

• (2) The best estimate shall correspond to the probability-weighted average of future cash flows, taking account of the time value of money (expected present value of future cash flows), using the relevant risk-free interest rate term structure.

• (3) The calculation of the best estimate shall be based upon up-to-date and credible information and realistic assumptions and be performed using adequate, applicable and relevant actuarial and statistical methods.

• (4) The cash-flow projection used in the calculation of the best estimate shall take account of all the cash in-flows and out-flows required to settle the insurance and reinsurance obligations over their lifetime.

• (5) The best estimate shall be calculated gross, without deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles which shall be calculated separately, in accordance with Regulation 94.

• (6) The risk margin shall be such as to ensure that the value of the technical provisions is equivalent to the amount that an insurance undertaking or reinsurance undertaking would be expected to require in order to take over and meet the insurance and reinsurance obligations.

• (7) An insurance undertaking or reinsurance undertaking shall value the best estimate and the risk margin separately.

• (8) However, where future cash flows associated with insurance or reinsurance obligations can be replicated reliably using financial instruments for which a reliable market value is observable, the value of technical provisions associated with those future cash flows shall be determined on the basis of the market value of those financial instruments and separate calculations of the best estimate and the risk margin shall not be required.

• (9) Where an insurance undertaking or reinsurance undertaking values the best estimate and the risk margin separately, the risk margin shall be calculated by determining the cost of providing an amount of eligible own funds equal to the Solvency Capital Requirement necessary to support the insurance and reinsurance obligations over their lifetime.

• (10) The rate used in the determination of the cost of providing that amount of eligible own funds (referred to in this Regulation as the “Cost-of-Capital rate”) shall be the same for all insurance undertakings and reinsurance undertakings as reviewed periodically by EIOPA.

• (11) The Cost-of-Capital rate used shall be equal to the additional rate, above the relevant risk-free interest rate, that an insurance undertaking or reinsurance undertaking would incur holding an amount of eligible own funds, as set out in Regulations 102 to 112, equal to the Solvency Capital Requirement necessary to support insurance and reinsurance obligations over the lifetime of those obligations.

Extrapolation of relevant risk-free interest rate term structure

• (2) The determination referred to in paragraph (1) shall take into account relevant financial instruments of those maturities where the markets for those financial instruments as well as for bonds are deep, liquid and transparent.

• (3) For maturities where the markets for the relevant financial instruments or for bonds are no longer deep, liquid and transparent, the relevant risk-free interest rate term structure shall be extrapolated.

• (4) The extrapolated part of the relevant risk-free interest rate term structure shall be based on forward rates converging smoothly from one or a set of forward rates in relation to the longest maturities for which the relevant financial instrument and the bonds can be observed in a deep, liquid and transparent market to an ultimate forward rate.

Matching adjustment to relevant risk-free interest rate term structure

• (a) the undertaking has assigned a portfolio of assets, consisting of bonds and other assets with similar cash-flow characteristics, to cover the best estimate of the portfolio of insurance or reinsurance obligations and maintains that assignment over the lifetime of the obligations, except for the purpose of maintaining the replication of expected cash flows between assets and liabilities where the cash flows have materially changed;

• (b) the portfolio of insurance or reinsurance obligations to which the matching adjustment is applied and the assigned portfolio of assets are identified, organised and managed separately from other activities of the undertaking, and the assigned portfolio of assets cannot be used to cover losses arising from other activities of the undertaking;

• (c) the expected cash flows of the assigned portfolio of assets replicate each of the expected cash flows of the portfolio of insurance or reinsurance obligations in the same currency and any mismatch does not give rise to risks which are material in relation to the risks inherent in the insurance or reinsurance business to which the matching adjustment is applied;

• (d) the contracts underlying the portfolio of insurance or reinsurance obligations do not give rise to future premium payments;

• (e) the only underwriting risks connected to the portfolio of insurance or reinsurance obligations are longevity risk, expense risk, revision risk and mortality risk;

• (f) where the underwriting risk connected to the portfolio of insurance or reinsurance obligations includes mortality risk, the best estimate of the portfolio of insurance or reinsurance obligations does not increase by more than 5% under a mortality risk stress that is calibrated in accordance with Regulation 114;

• (g) the contracts underlying the portfolio of insurance or reinsurance obligations include no options for the policy holder or only a surrender option where the surrender value does not exceed the value of the assets, valued in accordance with Regulation 82, covering the insurance or reinsurance obligations at the time the surrender option is exercised;

• (h) the cash flows of the assigned portfolio of assets are fixed and cannot be changed by the issuers of the assets or any third parties;

• (i) the insurance or reinsurance obligations of an insurance or reinsurance contract are not split into different parts when composing the portfolio of insurance or reinsurance obligations for the purpose of this paragraph.

• (2) Despite paragraph (1)(h), an insurance undertaking or reinsurance undertaking may use assets where the cash flows are fixed except for a dependence on inflation, provided that those assets replicate the cash flows of the portfolio of insurance or reinsurance obligations that depend on inflation.

• (3) In the event that issuers or third parties have the right to change the cash flows of an asset in such a manner that the investor receives sufficient compensation to allow it to obtain the same cash flows by re-investing in assets of an equivalent or better credit quality, the right to change the cash flows shall not disqualify the asset for admissibility to the assigned portfolio in accordance with paragraph (1)(h).

• (4) An insurance undertaking or reinsurance undertaking that applies the matching adjustment to a portfolio of insurance or reinsurance obligations shall not revert back to an approach that does not include a matching adjustment.

• (5) Where an insurance undertaking or reinsurance undertaking that applies the matching adjustment is no longer able to comply with the conditions set out in paragraph (1), it shall immediately inform the Bank and take the necessary measures to restore compliance with those conditions.

• (6) Where the undertaking is not able to restore compliance with those conditions within 2 months of the date of non-compliance, it shall cease to apply the matching adjustment to any of its insurance or reinsurance obligations and shall not apply the matching adjustment for a period of a further 24 months.

• (7) The matching adjustment shall not be applied with respect to insurance or reinsurance obligations where the relevant risk-free interest rate term structure to calculate the best estimate for those obligations includes a volatility adjustment under Regulation 88 or transitional measure on the risk-free interest rates under Regulation 99.

Calculation of matching adjustment

• (a) the matching adjustment shall be equal to the difference between—

• (i) the annual effective rate, calculated as the single discount rate that, where applied to the cash flows of the portfolio of insurance or reinsurance obligations, results in a value that is equal to the value in accordance with Regulation 82 of the portfolio of assigned assets, and

• (ii) the annual effective rate, calculated as the single discount rate that, where applied to the cash flows of the portfolio of insurance or reinsurance obligations, results in a value that is equal to the value of the best estimate of the portfolio of insurance or reinsurance obligations where the time value of money is taken into account using the basic risk-free interest rate term structure;

• (b) the matching adjustment must not include the fundamental spread reflecting the risks retained by the insurance undertaking or reinsurance undertaking;

• (c) despite subparagraph (a), the fundamental spread must be increased where necessary to ensure that the matching adjustment for assets with sub-investment grade credit quality does not exceed the matching adjustments for assets of investment grade credit quality and the same duration and asset class;

• (d) the use of external credit assessments in the calculation of the matching adjustment must be in accordance with Commission Delegated Regulation (EU) 2015/35.

• (2) For the purposes of paragraph (1)(b), the fundamental spread shall be—

• (a) equal to the sum of—

• (i) the credit spread corresponding to the probability of default of the assets, and

• (ii) the credit spread corresponding to the expected loss resulting from downgrading of the assets,

• (b) for exposures to Member States’ central governments and central banks, no lower than 30% of the long-term average of the spread over the risk-free interest rate of assets of the same duration, credit quality and asset class, as observed in financial markets, and

• (c) for assets other than exposures to Member States’ central governments and central banks, no lower than 35% of the long-term average of the spread over the risk-free interest rate of assets of the same duration, credit quality and asset class, as observed in financial markets.

• (3) The probability of default referred to in paragraph (2)(a)(i) shall be based on long-term default statistics that are relevant for the asset in relation to its duration, credit quality and asset class.

• (4) Where no reliable credit spread can be derived from the default statistics referred to in paragraph (3), the fundamental spread shall be equal to the portion of the long-term average of the spread over the risk-free interest rate set out in paragraph (2)(b) and (c).

Volatility adjustment to relevant risk-free interest rate term structure

• (2) For each relevant currency, the volatility adjustment to the relevant risk-free interest rate term structure shall be based on the spread between the interest rate that could be earned from assets included in a reference portfolio for that currency and the rates of the relevant basic risk-free interest rate term structure for that currency.

• (3) The reference portfolio for a currency shall be representative for the assets which are denominated in that currency and which insurance undertakings or reinsurance undertakings are invested in to cover the best estimate for insurance and reinsurance obligations denominated in that currency.

• (4) The amount of the volatility adjustment to risk-free interest rates shall correspond to 65% of the risk-corrected currency spread.

• (5) The risk-corrected currency spread shall be calculated as the difference between—

• (a) the spread referred to in paragraphs (2) and (3), and

• (b) the portion of that spread that is attributable to a realistic assessment of expected losses or unexpected credit or other risk of the assets.

• (6) The volatility adjustment shall apply only to the relevant risk-free interest rates of the term structure that are not derived by means of extrapolation in accordance with Regulation 85.

• (7) The extrapolation of the relevant risk-free interest rate term structure shall be based on those adjusted risk-free interest rates.

• (8) For each relevant country, the volatility adjustment to the risk-free interest rates for the currency of that country shall, before application of the 65% factor, be increased by the difference between the risk-corrected country spread and twice the risk corrected currency spread, whenever that difference is positive and the risk-corrected country spread is higher than 100 basis points.

• (9) The increased volatility adjustment shall be applied to the calculation of the best estimate for insurance and reinsurance obligations of products sold in the insurance market of that country.

• (10) The risk-corrected country spread is calculated in the same way as the risk-corrected currency spread for the currency of that country, but based on a reference portfolio that is representative for the assets which insurance undertakings and reinsurance undertakings are invested in to cover the best estimate for insurance and reinsurance obligations of products sold in the insurance market of that country and denominated in the currency of that country.

• (11) The volatility adjustment shall not be applied with respect to insurance obligations where the relevant risk-free interest rate term structure to calculate the best estimate for those obligations includes a matching adjustment under Regulation 86.

• (12) By way of derogation from Regulation 114, the Solvency Capital Requirement shall not cover the risk of loss of basic own funds resulting from changes of the volatility adjustment.

Technical information produced by EIOPA

• (a) the best estimate in accordance with Regulation 84,

• (b) the matching adjustment in accordance with Regulation 87, and

• (c) the volatility adjustment in accordance with Regulation 88,

where that information has been adopted by the Commission in accordance with Article 77e(2) of the Directive.

• (2) With respect to currencies and national markets where the adjustment referred to in Article 77e(1)(c) of the Directive is not included in the technical information adopted by the Commission, no volatility adjustment shall be applied to the relevant risk-free interest rate term structure to calculate the best estimate.

Review of long-term guarantee measures and measures on equity risk

• (a) the availability of long-term guarantees in insurance products in the national market and the behaviour of insurance undertakings and reinsurance undertakings as long-term investors;

• (b) the number of insurance undertakings and reinsurance undertakings applying the matching adjustment, the volatility adjustment, the extension of the recovery period in accordance with Regulation 146(5), and the transitional measures set out in Regulations 99 and 100;

• (c) the impact on the financial position of insurance undertakings and reinsurance undertakings of the matching adjustment, the volatility adjustment, the symmetric adjustment mechanism to the equity capital charge, and the transitional measures set out in Regulations 99 and 100 at national level and in an anonymised way for each undertaking;

• (d) the effect of the matching adjustment, the volatility adjustment and the symmetric adjustment mechanism to the equity capital charge on the investment behaviour of insurance undertakings and reinsurance undertakings and whether they provide undue capital relief;

• (e) the effect of any extension of the recovery period in accordance with Regulation 146(5) on the efforts of insurance undertakings and reinsurance undertakings to re-establish the level of eligible own funds covering the Solvency Capital Requirement or to reduce the risk profile in order to ensure compliance with the Solvency Capital Requirement;

• (f) where insurance undertakings and reinsurance undertakings apply the transitional measures set out in Regulations 99 and 100, whether they comply with the phasing-in plans referred to in Regulation 101 and the prospects for a reduced dependency on these transitional measures, including measures that have been taken or are expected to be taken by the undertakings and the Bank, taking into account the regulatory environment of the State.

Other elements to be taken into account in calculation of technical provisions

• (a) all expenses that will be incurred in servicing insurance and reinsurance obligations;

• (b) inflation, including expenses and claims inflation;

• (c) all payments to policy holders and beneficiaries, including future discretionary bonuses, which the undertaking expects to make, whether or not those payments are contractually guaranteed, unless those payments fall under Regulation 106(2).

Valuation of financial guarantees and contractual options included in insurance and reinsurance contracts

• (2) Any assumptions made by an undertaking with respect to the likelihood that policy holders will exercise contractual options, including lapses and surrenders—

• (a) shall be realistic and based on current and credible information, and

• (b) shall take account, either explicitly or implicitly, of the impact that future changes in financial and non-financial conditions may have on the exercise of those options.

Segmentation

Recoverables from reinsurance contracts and special purpose vehicles

• (2) When calculating amounts recoverable from reinsurance contracts and special purpose vehicles, the undertaking shall take account of the time difference between recoveries and direct payments.

• (3) The result from that calculation shall be adjusted to take account of expected losses due to default of the counterparty.

• (4) That adjustment shall be based on an assessment of the probability of default of the counterparty and the average loss resulting from it (loss-given-default).

Data quality and application of approximations, including case-by-case approaches, for technical provisions

• (2) Where, in specific circumstances, an undertaking has insufficient data of appropriate quality to apply a reliable actuarial method to a set or subset of its insurance and reinsurance obligations, or amounts recoverable from reinsurance contracts and special purpose vehicles, appropriate approximations, including case-by-case approaches, may be used in the calculation of the best estimate.

Comparison against experience

• (2) Where the comparison identifies systematic deviation between experience and the best estimate calculations of the undertaking, the undertaking shall make appropriate adjustments to the actuarial methods being used or the assumptions being made (or both).

Appropriateness of level of technical provisions

Increase of technical provisions

Transitional measure on risk-free interest rates

• (2) For each currency the adjustment shall be calculated as a portion of the difference between—

• (a) the interest rate as determined using the methods used by the insurance undertaking or reinsurance undertaking at 31 December 2015, and

• (b) the annual effective rate, calculated as the single discount rate that, where applied to the cash flows of the portfolio of admissible insurance and reinsurance obligations, results in a value that is equal to the value of the best estimate of the portfolio of admissible insurance and reinsurance obligations where the time value of money is taken into account using the relevant risk-free interest rate term structure referred to in Regulation 84(2).

• (3) The portion referred to in paragraph (2) shall decrease linearly at the end of each year from 100% during the year starting from 1 January 2016 to 0% on 1 January 2032.

• (4) Where an insurance undertaking or reinsurance undertaking applies the volatility adjustment referred to in Regulation 88, the relevant risk-free interest rate term structure referred to in paragraph (2)(b) shall be the adjusted relevant risk-free interest rate term structure set out in that Regulation.

• (5) The admissible insurance and reinsurance obligations shall comprise only insurance or reinsurance obligations that meet the following requirements:

• (a) the contracts that give rise to the insurance and reinsurance obligations were concluded before 1 January 2016, excluding contract renewals on or after that date;

• (b) technical provisions for the insurance and reinsurance obligations were determined in accordance with the laws, regulations and administrative provisions adopted pursuant to Article 20 of Directive 2002/83/EC until 31 December 2015;

• (c) Regulation 86 is not applied to the insurance and reinsurance obligations.

• (6) An insurance undertaking or reinsurance undertaking applying paragraph (1) shall—

• (a) not include the admissible insurance and reinsurance obligations in the calculation of the volatility adjustment set out in Regulation 88,

• (b) not apply Regulation 100, and

• (c) as part of their report on their solvency and financial condition referred to in Regulation 52, publicly disclose that they apply the transitional risk-free interest rate term structure, and the quantification of the impact of not applying this transitional measure on their financial position.

Transitional deduction

• (2) The transitional deduction shall correspond to a portion of the difference between the following 2 amounts:

• (a) the technical provisions after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles, calculated in accordance with Regulation 83 at 1 January 2016;

• (b) the technical provisions after deduction of the amounts recoverable from reinsurance contracts calculated in accordance with the laws, regulations and administrative provisions adopted pursuant to Article 15 of Directive 73/239/EEC, Article 20 of Directive 2002/83/EC and Article 32 of Directive 2005/68/EC on 31 December 2015.

• (3) The maximum portion deductible shall decrease linearly at the end of each year from 100% during the year starting from 1 January 2016 to 0% on 1 January 2032.

• (4) Where an insurance undertaking or reinsurance undertaking applies at 1 January 2016 the volatility adjustment referred to in Regulation 88, the amount referred to in paragraph (2)(a) shall be calculated with the volatility adjustment at that date.

• (5) Subject to prior approval by, or on the initiative of, the Bank, the amounts of technical provisions, including where applicable the amount of the volatility adjustment, used to calculate the transitional deduction referred to in paragraph (2)(a) and (b) may be recalculated every 24 months, or more frequently where the risk profile of the undertaking has materially changed.

• (6) The deduction referred to in paragraph (2) may be limited by the Bank if its application could result in a reduction of the financial resources requirements that apply to the undertaking when compared with those calculated in accordance with the laws and administrative provisions adopted pursuant to Directive 73/239/EEC, Directive 2002/83/EC and Directive 2005/68/EC on 31 December 2015.

• (7) An insurance undertaking or reinsurance undertaking applying paragraph (1) shall—

• (a) not apply Regulation 99,

• (b) when it would not comply with the Solvency Capital Requirement without application of the transitional deduction, submit annually a report to the Bank setting out measures taken and the progress made to re-establish at the end of the transitional period set out in paragraph (3) a level of eligible own funds covering the Solvency Capital Requirement or to reduce their risk profile to restore compliance with the Solvency Capital Requirement, and

• (c) as part of its report on its solvency and financial condition referred to in Regulation 52, publicly disclose that it applies the transitional deduction to the technical provisions, and the quantification of the impact of not applying that transitional deduction on its financial position.

Phasing-in plan on transitional measures

• (2) The Bank shall require the insurance undertaking or reinsurance undertaking concerned to take the necessary measures to ensure compliance with the Solvency Capital Requirement at the end of the transitional period.

• (3) Within 2 months from observation of non-compliance with the Solvency Capital Requirement without application of these transitional measures, the insurance undertaking or reinsurance undertaking concerned shall submit to the Bank a phasing-in plan setting out the planned measures to establish the level of eligible own funds covering the Solvency Capital Requirement or to reduce its risk profile to ensure compliance with the Solvency Capital Requirement at the end of the transitional period.

• (4) The insurance undertaking or reinsurance undertaking may update the phasing-in plan during the transitional period.

• (5) The insurance undertaking or reinsurance undertaking shall submit annually a report to the Bank setting out the measures taken and the progress made to ensure compliance with the Solvency Capital Requirement at the end of the transitional period.

• (6) The Bank shall revoke the approval for the application of the transitional measure where that progress report shows that compliance with the Solvency Capital Requirement at the end of the transitional period is unrealistic.

Chapter 3 Own funds

Determination of own funds

Own funds

• (a) basic own funds referred to in Regulation 103, and

• (b) ancillary own funds referred to in Regulation 104.

Basic own funds

• (a) the excess of assets over liabilities, valued in accordance with Chapters 1 and 2 of this Part;

• (b) subordinated liabilities.

• (2) The excess amount referred to in paragraph (1)(a) shall be reduced by the amount of own shares held by the insurance undertaking or reinsurance undertaking.

Ancillary own funds

• (2) Ancillary own funds may comprise the following items to the extent that they are not basic own-fund items:

• (a) unpaid share capital or initial fund that has not been called up;

• (b) letters of credit and guarantees;

• (c) any other legally binding commitments received by insurance undertakings and reinsurance undertakings.

• (3) In the case of a mutual or mutual-type association with variable contributions, ancillary own funds may also comprise any future claims which that association may have against its members by way of a call for supplementary contribution, within the following 12 months.

• (4) Where an ancillary own-fund item has been paid in or called up, it shall be treated as an asset and cease to form part of ancillary own-fund items.

Supervisory approval of ancillary own funds

• (2) The amount ascribed to each ancillary own-fund item shall reflect the loss absorbency of the item and shall be based upon prudent and realistic assumptions and, where an ancillary own-fund item has a fixed nominal value, the amount of that item shall be equal to its nominal value, where it appropriately reflects its loss absorbency.

• (3) The Bank shall approve either of the following:

• (a) a monetary amount for each ancillary own-fund item;

• (b) a method by which to determine the amount of each ancillary own-fund item, in which case approval by the Bank of the amount determined in accordance with that method shall be granted for a specified period of time.

• (4) The Bank shall base its approval for each ancillary own-fund item on an assessment of the following:

• (a) the status of the counterparties concerned, in relation to their ability and willingness to pay;

• (b) the recoverability of the funds, taking account of the legal form of the item, as well as any conditions which would prevent the item from being successfully paid in or called up;

• (c) any information on the outcome of past calls which insurance undertakings and reinsurance undertakings have made for such ancillary own funds, to the extent that information can be reliably used to assess the expected outcome of future calls.

Surplus funds

• (2) Surplus funds shall not be considered as insurance and reinsurance liabilities to the extent that they fulfil the criteria set out in Regulation 108(1).

Classification of own funds

Characteristics and features used to classify own funds into tiers

• (2) The classification of those items shall depend upon whether they are basic own fund or ancillary own-fund items and the extent to which they possess the following characteristics:

• (a) the item is available, or can be called up on demand, to fully absorb losses on a going concern basis, as well as in the case of winding up (permanent availability);

• (b) in the case of winding-up, the total amount of the item is available to absorb losses and the repayment of the item is refused to its holder until all other obligations, including insurance and reinsurance obligations towards policy holders and beneficiaries of insurance and reinsurance contracts, have been met (subordination).

• (3) When assessing the extent to which own-fund items possess the characteristics set out in paragraph (2)(a) and (b), currently and in the future, due consideration shall be given to the duration of the item, in particular whether the item is dated or not and, where an own-fund item is dated, the relative duration of the item as compared to the duration of the insurance and reinsurance obligations of the undertaking shall be considered (sufficient duration).

• (4) In addition, the following features shall be considered:

• (a) whether the item is free from requirements or incentives to redeem the nominal sum (absence of incentives to redeem);

• (b) whether the item is free from mandatory fixed charges (absence of mandatory servicing costs);

• (c) whether the item is clear of encumbrances (absence of encumbrances).

Main criteria for classification into tiers

• (2) Basic own-fund items shall be classified in Tier 2 where they substantially possess the characteristic set out in Regulation 107(2)(b), taking into consideration the features set out in Regulation 107(3) and (4).

• (3) Ancillary own-fund items shall be classified in Tier 2 where they substantially possess the characteristics set out in Regulation 107(2)(a) and (b), taking into consideration the features set out in Regulation 107(3) and (4).

• (4) Any basic and ancillary own-fund items which do not fall within paragraphs (1) to (3) shall be classified in Tier 3.

Transitional provision for own funds

• (a) were issued before 18 January 2015,

• (b) on 31 December 2015 could be used to meet the available solvency margin up to 50% of the solvency margin according to the laws and administrative provisions which are adopted pursuant to Article 16(3) of Directive 73/239/EEC, Article 1 of Directive 2002/13/EC, Article 27(3) of Directive 2002/83/EC and Article 36(3) of Directive 2005/68/EC, and

• (c) would not otherwise be classified in Tier 1 or Tier 2 in accordance with Regulation 108.

• (2) Despite Regulation 108, basic own-fund items shall be included in Tier 2 basic own funds for up to 10 years after 1 January 2016, provided that those items—

• (a) were issued before 18 January 2015, and

• (b) on 31 December 2015 could be used to meet the available solvency margin up to 25% of the solvency margin according to the laws and administrative provisions which are adopted pursuant to Article 16(3) of Directive 73/239/EEC, Article 1 of Directive 2002/13/EC, Article 27(3) of Directive 2002/83/EC and Article 36(3) of Directive 2005/68/EC.

Classification of own funds into tiers

• (2) For that purpose, the undertaking shall refer to the list of own-fund items referred to in Commission Delegated Regulation (EU) 2015/35, where applicable.

• (3) Where an own-fund item is not covered by that list, it shall be assessed and classified by the undertaking, in accordance with paragraph (1).

• (4) Classification under paragraph (3) is subject to approval by the Bank.

Classification of specific insurance own-fund items

• (a) surplus funds falling under Regulation 106(2) shall be classified in Tier 1;

• (b) letters of credit and guarantees which are held in trust for the benefit of insurance creditors by an independent trustee and provided by credit institutions authorised in accordance with Directive 2006/48/EC shall be classified in Tier 2;

• (c) any future claims which mutual or mutual-type associations of shipowners with variable contributions solely insuring risks classified under classes 6, 12 and 17 in Part 1 of Schedule 1 may have against their members by way of a call for supplementary contributions, within the following 12 months, shall be classified in Tier 2.

• (2) In accordance with Regulation 108(3), any future claims which mutual or mutual type associations with variable contributions may have against their members by way of a call for supplementary contributions, within the following 12 months, not falling under paragraph (1)(c) shall be classified in Tier 2 where they substantially possess the characteristics set out in Regulation 107(2), taking into consideration the features set out in Regulation 107(3) and (4).

Eligibility of own funds

Eligibility and limits applicable to Tiers 1, 2 and 3

• (2) Those limits shall be such as to ensure that at least the following conditions are met:

• (a) the proportion of Tier 1 items in the eligible own funds is higher than one third of the total amount of eligible own funds;

• (b) the eligible amount of Tier 3 items is less than one third of the total amount of eligible own funds.

• (3) The amount of basic own-fund items eligible to cover the Minimum Capital Requirement which are classified in Tier 2 shall be subject to quantitative limits.

• (4) Those limits shall be such as to ensure, as a minimum, that the proportion of Tier 1 items in the eligible basic own funds is higher than one half of the total amount of eligible basic own funds.

• (5) The eligible amount of own funds to cover the Solvency Capital Requirement set out in Regulation 113 shall be equal to the sum of the amount of Tier 1, the eligible amount of Tier 2 and the eligible amount of Tier 3.

• (6) The eligible amount of basic own funds to cover the Minimum Capital Requirement set out in Regulation 139 shall be equal to the sum of the amount of Tier 1 and the eligible amount of basic own-fund items classified in Tier 2.

Chapter 4 Solvency Capital Requirement

General provisions

General

• (2) The undertaking shall calculate its Solvency Capital Requirement in accordance with the standard formula (as set out in Regulations 116 to 124) or by using an internal model (as set out in Regulations 125 to 138).

Calculation of Solvency Capital Requirement

• (2) The Solvency Capital Requirement shall be calculated on the presumption that the undertaking will pursue its business as a going concern.

• (3) The Solvency Capital Requirement shall be calibrated so as to ensure that all quantifiable risks to which an insurance undertaking or reinsurance undertaking is exposed are taken into account.

• (4) The Solvency Capital Requirement shall—

• (a) cover existing business, as well as the new business expected to be written over the following 12 months, and

• (b) with respect to existing business, cover only unexpected losses.

• (5) The Solvency Capital Requirement shall correspond to the Value-at-Risk of the basic own funds of the undertaking subject to a confidence level of 99.5 % over a one year period.

• (6) The Solvency Capital Requirement shall cover at least the following risks:

• (a) non-life underwriting risk;

• (b) life underwriting risk;

• (c) health underwriting risk;

• (d) market risk;

• (e) credit risk;

• (f) operational risk.

• (7) Operational risk as referred to in paragraph (6)(f) shall include legal risks, and exclude risks arising from strategic decisions, as well as reputation risks.

• (8) When calculating the Solvency Capital Requirement, an undertaking shall take account of the effect of risk-mitigation techniques, provided that credit risk and other risks arising from the use of such techniques are properly reflected in the Solvency Capital Requirement.

Frequency of calculation etc

• (a) it shall calculate the Solvency Capital Requirement at least once a year and report the result of that calculation to the Bank;

• (b) it shall hold eligible own funds which cover the last reported Solvency Capital Requirement;

• (c) it shall monitor the amount of eligible own funds and the Solvency Capital Requirement on an ongoing basis;

• (d) if its risk profile deviates significantly from the assumptions underlying the last reported Solvency Capital Requirement, it shall recalculate the Solvency Capital Requirement without delay and report it to the Bank.

• (2) Where there is evidence to suggest that the risk profile of the undertaking has altered significantly since the date on which the Solvency Capital Requirement was last reported, the Bank may require the undertaking to recalculate the Solvency Capital Requirement.

Standard formula

Structure of standard formula

• (a) the Basic Solvency Capital Requirement, as laid down in Regulation 117;

• (b) the capital requirement for operational risk, as laid down in Regulation 121;

• (c) the adjustment for the loss-absorbing capacity of technical provisions and deferred taxes, as laid down in Regulation 122.

Design of Basic Solvency Capital Requirement

• (2) It shall consist of at least the following risk modules:

• (a) non-life underwriting risk;

• (b) life underwriting risk;

• (c) health underwriting risk;

• (d) market risk;

• (e) counterparty default risk.

• (3) An insurance undertaking or reinsurance undertaking shall for the purposes of paragraph (2)(a), (b) and (c), allocate its insurance or reinsurance operations to the underwriting risk module that best reflects the technical nature of the underlying risks.

• (4) The correlation coefficients for the aggregation of the risk modules referred to in paragraph (2), as well as the calibration of the capital requirements for each risk module, shall result in an overall Solvency Capital Requirement which complies with the principles set out in Regulation 114.

• (5) Each of the risk modules referred to in paragraph (2) shall be calibrated using a Value at Risk measure, with a 99.5% confidence level, over a one year period and, where appropriate, diversification effects shall be taken into account in the design of each risk module.

• (6) The same design and specifications for the risk modules shall be used for all insurance undertakings and reinsurance undertakings, both with respect to the Basic Solvency Capital Requirement and to any simplified calculations as laid down in Regulation 123.

• (7) With regard to risks arising from catastrophes, an undertaking may, where appropriate, use geographical specifications for the calculation of the life, non-life and health underwriting risk modules.

• (8) Subject to approval by the Bank, an insurance undertaking or reinsurance undertaking may, within the design of the standard formula, replace a subset of its parameters with parameters specific to the undertaking when calculating the life, non-life and health underwriting risk modules.

• (9) Such parameters shall be calibrated on the basis of the internal data of the undertaking, or of data which is directly relevant for the operations of that undertaking using standardised methods.

• (10) When granting approval, the Bank shall verify the completeness, accuracy and appropriateness of the data used.

Transitional provisions on standard parameters

• (a) until 31 December 2017, the standard parameters to be used when calculating the concentration risk sub-module and the spread risk sub-module in accordance with the standard formula shall be the same in relation to exposures to Member States’ central governments or central banks denominated and funded in the domestic currency of any Member State as those that would be applied to such exposures denominated and funded in their domestic currency,

• (b) in 2018, the standard parameters to be used when calculating the concentration risk sub-module and the spread risk sub-module in accordance with the standard formula shall be reduced by 80% in relation to exposures to Member States’ central governments or central banks denominated and funded in the domestic currency of any other Member State,

• (c) in 2019, the standard parameters to be used when calculating the concentration risk sub-module and the spread risk sub-module in accordance with the standard formula shall be reduced by 50% in relation to exposures to Member States’ central governments or central banks denominated and funded in the domestic currency of any other Member State, and

• (d) from 1 January 2020, the standard parameters to be used when calculating the concentration risk sub-module and the spread risk sub-module in accordance with the standard formula shall be not be reduced in relation to exposures to Member States’ central governments or central banks denominated and funded in the domestic currency of any other Member State.

• (2) Despite Regulations 113, 114(3) to (5) and 117 the standard parameters to be used for equities that the undertaking purchased on or before 1 January 2016, when calculating the equity risk sub-module in accordance with the standard formula without the option set out in Article 304 of the Directive, shall be calculated as the weighted averages of—

• (a) the standard parameter to be used when calculating the equity risk sub-module in accordance with Article 304 of the Directive, and

• (b) the standard parameter to be used when calculating the equity risk sub-module in accordance with the standard formula without the option set out in Article 304 of the Directive.

• (3) The weight for the parameter expressed in sub-paragraph (2)(b) shall increase at least linearly at the end of each year from 0% during the year starting on 1 January 2016 to 100% on 1 January 2023.

Calculation of Basic Solvency Capital Requirement

• (2) The non-life underwriting risk module—

• (a) shall reflect the risk arising from non-life insurance obligations, in relation to the perils covered and the processes used in the conduct of business,

• (b) shall take account of the uncertainty in the results of the undertaking related to its existing insurance or reinsurance obligations as well as to the new business the undertaking expects to write over the following 12 months, and

• (c) shall be calculated, in accordance with Part 2 of Schedule 3, as a combination of the capital requirements for at least the following sub modules:

• (i) the risk of loss, or of adverse change in the value of insurance liabilities, resulting from fluctuations in the timing, frequency and severity of insured events, and in the timing and amount of claim settlements (non-life premium and reserve risk);

• (ii) the risk of loss, or of adverse change in the value of insurance liabilities, resulting from significant uncertainty of pricing and provisioning assumptions related to extreme or exceptional events (non-life catastrophe risk).

• (3) The life underwriting risk module—

• (a) shall reflect the risk arising from life insurance obligations, in relation to the perils covered and the processes used in the conduct of business, and

• (b) shall be calculated, in accordance with Part 3 of Schedule 3, as a combination of the capital requirements for at least the following sub modules:

• (i) the risk of loss, or of adverse change in the value of insurance liabilities, resulting from changes in the level, trend, or volatility of mortality rates, where an increase in the mortality rate leads to an increase in the value of insurance liabilities (mortality risk);

• (ii) the risk of loss, or of adverse change in the value of insurance liabilities, resulting from changes in the level, trend, or volatility of mortality rates, where a decrease in the mortality rate leads to an increase in the value of insurance liabilities (longevity risk);

• (iii) the risk of loss, or of adverse change in the value of insurance liabilities, resulting from changes in the level, trend or volatility of disability, sickness and morbidity rates (disability — morbidity risk);

• (iv) the risk of loss, or of adverse change in the value of insurance liabilities, resulting from changes in the level, trend, or volatility of the expenses incurred in servicing insurance or reinsurance contracts (life expense risk);

• (v) the risk of loss, or of adverse change in the value of insurance liabilities, resulting from fluctuations in the level, trend, or volatility of the revision rates applied to annuities, due to changes in the legal environment or in the state of health of the person insured (revision risk);

• (vi) the risk of loss, or of adverse change in the value of insurance liabilities, resulting from changes in the level or volatility of the rates of policy lapses, terminations, renewals and surrenders (lapse risk);

• (vii) the risk of loss, or of adverse change in the value of insurance liabilities, resulting from the significant uncertainty of pricing and provisioning assumptions related to extreme or irregular events (life catastrophe risk).

• (4) The health underwriting risk module—