How does an insurance-led mixed financial holding company take into account the capital position of a credit institution (and entities from other financial sectors) in the group in its calculation of group solvency?
Consolidation of credit institutions in Solvency II reports of an insurance- led mixed financial holding company
The Solvency II Regulation has been in force since 2016 and additional rules apply for the treatment of entities in the group that fall under a different sectoral supervision regime (referred to as entities from ‘other financial sectors’). DNB has observed that the calculation method it has adopted does not sufficiently reflect the binding regulations as included in Article 329 of the Solvency II Regulation (EU) 2015/35. Under this Article, the calculation of group solvency takes account of capital requirements and, more specifically, own funds items, from for example related undertakings, including credit institutions, and this is reflected in the group's solvency ratio. The capital requirement for the credit institution that is used as a basis for determining the group capital requirement is further described in Article 9 of the Financial Conglomerates Regulation (EU) 342/2014 (see also EIOPA Q&A 1344).
Treatment of intra-group relationships
In this respect, special attention should be devoted to the elimination of intra-group transactions and positions between related insurance undertakings (and/or the mixed financial holding) and entities from ‘other financial sectors’ in the same group (Article 335 of the Solvency II Regulation). The elimination of intra-group positions is not possible in the usual manner, as the related undertaking’s own funds are included in the group balance sheet (and not all assets and liabilities separately).
Under this specific form of elimination, there is an adjustment (elimination) to the qualifying own funds of the company from the 'other financial sector' (and hence the participation value) in order to remove the effect of an intragroup transaction(s) only if the intragroup transaction(s) had a direct or indirect impact on the equity of the insurance group when initially or subsequently recorded. As a result, this valuation is no longer consistent with the own funds calculated in accordance with the relevant sectoral rules. This difference can then be explained in the regular supervisory report (RSR) and the solvency financial condition report (SFCR).
Implementation deadline
This approach is in line with the standard methodology of reporting group solvency in the reporting statements (Method A in QRT S.23.01). Insurance undertakings are expected to apply this method at the latest in their annual and quarterly statements for 2020 Q4.
Relevant provisions:
Article 228, Solvency II Directive
Article 329, Solvency II Regulation
Article 335, Solvency II Regulation
Article 336, Solvency II Regulation
Article 9, Financial Conglomerates Regulation
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