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Solvency II: Subordinated Tier 1, Tier 2 and Tier 3 instruments
Published: 02 February 2016
In accordance with Article 88 of the Solvency II Directive, insurance companies are allowed under certain conditions to include paid-in subordinated liabilities in their actual own funds. Are insurance companies required to submit these subordinated loans to the supervisory authority for assessment beforehand?
No, there is no need for institutions to have the supervisory authority assess these subordinated liabilities beforehand, in order for them to be designated as Tier 1, Tier 2 or Tier 3 capital. Instruments may be assessed retrospectively, however. The supervisor may, however, conclude in retrospect that an institution has incorrectly designated an instrument as own funds, and may order it to remove the instrument from its own funds. The conditions that must be met are included in Article 71 (for Tier 1), Article 73 (for Tier 2) and Article 77 (for Tier 3) of the Commission Delegated Regulation (EU) 2015/35 and the EIOPA guidelines governing the classification of own funds (EIOPA-BoS-14/168). Additional stipulations apply to insurance groups, including those contained in Articles 330, 331 and 333 of the Delegated Regulation.
Insurers may present an intended share issue to the supervisory authority in order to determine whether the instrument qualifies as envisaged core capital. DNB encourages institutions to do this, in order to prevent surprises.
We want to emphasise that a preliminary assessment does not automatically result in formal approval from the supervisory authority, however. The latter will only inform the institution that the instrument has been assessed, and - in case of a positive assessment - that there is no reason at that point to assume the instrument would not qualify as AT1 or T2 capital. The instrument may still be disqualified in retrospect, however.
If institutions opt to discuss planned share issues with the supervisory authority beforehand, they will be asked to perform a self-assessment and to present documentation, allowing the supervisor to assess whether the instrument qualifies as Tier 1, Tier 2 or Tier 3 capital. The self-assessment framework can be downloaded from this page. The framework also lists the documents to be provided, which include a description showing that the instrument fits the institution's capital management and capital policy.
We would advise you to notify your supervisory officer at an early stage of your plans for submitting a request for assessment. The usual turnaround time for assessment is four weeks, depending on the complexity of the request.
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