Solvency Assessment and Management: Steering Committee ...

Solvency Assessment and Management:

Steering Committee

Position Paper 271 (v 7)

Group Own Funds

1. INTRODUCTION AND PURPOSE

The calculation of group solvency requires on the one side the determination of the group

SCR and on the other side to ensuring that the group holds sufficient eligible own funds to

cover the group SCR. The purpose of this discussion document is to discuss the latter,

meaning a discussion of a methodology for assessing the group own funds eligible to cover

the SCR of insurance groups.

This discussion document must be read with the Insurance Group Task Group’s discussion

document for the interim measure on Insurance Groups (DD1) in order to understand group

structures, the Insurance Group Task Group’s discussion document on the assessment of

group solvency (DD92) and the Capital Resources Task Group’s discussion document on the

classification and eligibility of own funds (DD26).

a. Definitions

The following definitions as contained in the draft Insurance Laws Amendment Bill are

applicable to this discussion document and are used accordingly in the document.

“Controlling company” means a non-operating holding company of an insurance group that

is subject to this Chapter;

“Financial conglomerate” means an insurance group that includes -

(a) At least one person subject to registration under this Act; and

(b) At least one person subject to registration, licensing or approval under –

1 Position Paper 27 (v 7) was approved as a FINAL Position Paper by the Steering Committee on 9 December 2013.

Solvency Assessment and Management: Steering Committee Position Paper 27 (v 7) – Group Own Funds

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(i) The laws, other than this Act, referred to in the definition of ―financial institution‖ in section

1 of the Financial Institutions (Protection of Funds) Act,

2001 (Act 28 of 2001),

(ii) The Banks Act, 1990 (Act No. 94 of 1990), the Mutual Banks Act, 1993 (Act

No. 124 of 1993) or the Co-operative Banks Act, 2007 (Act No. 40 of 2007); or

(iii) The the National Credit Act, 2005 (Act No. 34 of 2005); or

(c) At least one person that issues a financial product as defined in the Financial Advisory and

Intermediary Services Act, 2002 (Act No. 37 of 2002) or furnishes advise or renders

intermediary services in respect of a financial product as defined in the Financial Advisory and

Intermediary Services Act, 2002, and the issuing of that financial product is not subject to

registration, licensing or approval under any Act of Parliament; and

(d) Their related and inter-related persons.

“Insurance group” means two or more persons -

(a) At least one of whom is subject to registration under this Act; and

(b) At least one of whom has a significant influence on the person referred to under

paragraph (a); and

(c) Their related and inter-related persons, but excludes any holding company of a person

referred to in paragraphs (a), (b) and (c) that is incorporated outside of the Republic;

“Insurance sub-group” means a subset of an insurance group consisting of, but not limited

to, all persons that are subject to registration under the Short/Long-term Insurance Acts;

“Inter-group transaction” means any arrangement or agreement in terms of which a

short/long-term insurer, directly or indirectly, relies on another person that is part of the

insurance group or a related or inter-related person of the aforementioned person, for the

fulfilment of an obligation;

“Inter-related person” has the meaning assigned in the Companies Act;

“Non-operating holding company” (NOHC) means a public company whose only business

is the acquiring, holding and managing of another company or other companies;

“Related person” has the meaning assigned in the Companies Act;


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“Regulatory authority” means any organ of state as defined in section 239 of the

Constitution of the Republic of South Africa, 1996, responsible for the supervision or

enforcement of legislation;

“Risk concentration” means any risk exposure that has a loss potential large enough to

threaten the financially sound condition of a short/long-term insurer that is part of an insurance

group; and

“Significant influence” has the meaning prescribed by the Registrar with reference to,

amongst others, –

(i) A related or inter-related person;

(ii) Inter-connectedness;

(iii) Risk exposure;

(iv) Risk concentration;

(v) Risk transfer;

(vi) Inter-group transactions;

(vii) Other transactions;

(viii) Contractual obligation; or

(vix) of any combination of subparagraphs (i) to (viii).

CEIOPS’ Level 2 advice on group solvency gave the following relevant definitions:

“Participating undertaking” means an undertaking which is

Either a parent undertaking or other undertaking which holds a participation

Or an undertaking linked with another undertaking by a relationship as set out in Directive

83/349/EEC.

“Parent undertaking” means a parent undertaking within the meaning of Directive

83/349/EEC29. [ A company that control subsidiaries through partial or full stock ownership or

some other financial or legal connection, or that in the opinion of the competent authorities,

effectively exercises a dominant influence over another undertaking. ]


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“Related undertaking” means:

Either a subsidiary undertaking or other undertaking in which a participation is held,

Or an undertaking linked with another undertaking by a relationship as set out in Directive

83/349/EEC

“Subsidiary undertaking” means any subsidiary undertaking within the meaning of Directive

83/349/EEC.

b. Scope and approach

The scope of the recommendations is applicable to Insurance Groups and Sub Insurance

Groups as defined by the draft ILAB.

Further; based on the Insurance Laws Amendment Bill and feedback from the FSB the

“deduction and aggregation” method will be presented in this document as the default method

although the document addresses other approaches.

c. The Insurance Laws Amendment Bill (ILAB) (Draft – 26 August 2011)

The following section from the ILAB is relevant to this document:

Maintenance of financially sound condition by insurance group:

65K. (1) A controlling company must at all times ensure that the insurance group maintains its

business in a financially sound condition by managing its affairs in such a way that the

aggregate of the capital of the insurance group does not at any time amount to less than the

aggregate of –

(a) The required capital determined, valued, calculated and aggregated in accordance with the

requirements prescribed by -

(i) The Registrar; and

(ii) Another regulatory authority; and

(b) Any additional capital required by the Registrar under section 65M.


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(2) A controlling company that fails to comply with subsection (1) must, without delay, notify

the Registrar of the failure and furnish the reasons therefore.

(3) A controlling company and any short/long-term insurer within the insurance group may not

declare or pay a dividend to its shareholders -

(a) While it fails or is likely to fail to comply with subsection (1);

(b) If the declaration or payment would result in the insurance group failing or being likely to

fail to comply with subsection (1).

2. INTERNATIONAL STANDARDS: IAIS ICPs

IAIS ICP 17: The supervisory regime establishes capital adequacy requirements for

solvency purposes so that insurers can absorb significant unforeseen losses and to

provide for degrees of supervisory intervention.

IAS ICP 23: The supervisory authority supervises its insurers on a legal entity and a group-

wide basis.

3. EU DIRECTIVE ON SOLVENCY II: PRINCIPLES (LEVEL 1)

The following paragraphs provide a brief synopsis of the main topics and features covered

by articles 220 to 233 in the Solvency II Directive that are relevant to this discussion

document:

Article 220 details the choice of the calculation method for the group SCR. The Accounting

Consolidation-based method is the default method. The group supervisor shall be able to

require, after consultation with the other supervisory authorities in the college and the

group itself, the use of the deduction-aggregation method or a combination of both

methods when the default method is not appropriate.

Article 221 deals with the interpretation of the concept of the "proportional share" of

related undertakings to be included in the calculation. This includes the recognition of solo

solvency deficits at group level and includes an explicit power for the group supervisor to

set the proportional share in some cases (dominant or significant influence determined by

the supervisory authorities and absence of capital ties). The absence of capital ties often

refers to mutual undertakings.

Article 222 ensures there are no double use of own funds and addresses the eligibility of


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own funds at group level taking into account potential availability constraints.

Article 223 ensures that the intra-group creation of capital is eliminated when calculating

group solvency.

Article 224 states that the valuation principles that apply at solo level also apply at group

level. It allows Member States to use the solvency figures calculated in other Member

States.

Article 225 ensures that all related (re)insurance undertakings are included in the group

calculations.

Article 226 accounts for the inclusion of intermediate insurance holding companies in the

group calculations.

Article 227 details the equivalence assessment process for third country regimes for the

purposes of the deduction and aggregation method.

Article 228 accounts for the treatment of related credit institutions, investment firms and

financial institutions when calculating group solvency and allows their inclusion (via

methods 1 and 2 described in Annex 1 of the financial conglomerates directive

2002/87/EC) unless their deduction is decided by the group supervisor.

Article 229 provides for the deduction of the book value of a related undertaking if the

information necessary for calculating the group solvency of its participating undertaking is

not available.

Article 230 describes the default method for the group calculations, the Accounting

consolidation-based method, including the minimum consolidated group SCR.

Article 231 describes the approval process for a group internal model and the application

of a solo capital add-on in the context of a group internal model. The approval process for a

group internal model is covered in the advice on the approval of an internal model.

Article 232 deals with the application, when the consolidation method is used, of capital


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add-ons at group level. That advice includes the description of issues related to group

specific risks. The setting of a capital add-on at group level is covered in CEIOPS advice

on capital add-ons.

Article 233 describes the deduction and aggregation method for the group calculations,

including the imposition of a capital add-on to the aggregated group SCR.

4. MAPPING ANY PRINCIPLE (LEVEL 1) DIFFERENCES BETWEEN IAIS ICP &

EU DIRECTIVE

The Solvency II Directive and the ICP principles are in agreement that Insurance Groups

should form part of the Regulator’s supervision and that the Insurance Groups must be solvent

as a whole.

5. STANDARDS AND GUIDANCE (LEVELS 2 & 3)

5.1 IAIS standards and guidance papers: ICP 17 Capital adequacy:

Specifics on Capital Resources with reference to Insurance Groups:

17.1 The supervisor requires that a total balance sheet approach is used in the

assessment of solvency to recognise the interdependence between assets, liabilities,

regulatory capital requirements and capital resources and to require that risks are

appropriately recognised.

Additional guidance for insurance groups and insurance legal entities that are members of

groups:

The capital adequacy assessment of an insurance legal entity which is a member of an

insurance group needs to consider the value of any holdings the insurance legal entity has in

affiliates. Consideration may be given, either at the level of the insurance legal entity or the

insurance group, to the risks attached to this value.

Where the value of holdings in affiliates is included in the capital adequacy assessment and

the insurance legal entity is the parent of the group, group-wide capital adequacy assessment

and legal entity assessment of the parent may be similar in outcome although the detail of the


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approach may be different. For example, a group-wide assessment may consolidate the

business of the parent and its subsidiaries and assess the capital adequacy for the combined

business while a legal entity assessment of the parent may consider its own business and its

investments in its subsidiaries.

There are various possible approaches for group-wide supervision. More specifically,

undertaking a capital adequacy assessment of an insurance group falls into two broad sets of

approaches:

level focus and

entity focus.

“Hybrid” or intermediate approaches which combine elements of approaches with a group and

a legal entity focus may also be used.

The choice of approach would depend on the preconditions in a jurisdiction, the legal

environment which may specify the level at which the group-wide capital requirements are set,

the structure of the group and the structure of the supervisory arrangements between the

supervisors.


groups - group level focus:

Under a group-wide capital adequacy assessment which takes a group level focus, the

insurance group is considered primarily as a single integrated entity for which a separate

assessment is made for the group as a whole on a consistent basis, including adjustments to

reflect constraints on the fungibility of capital and transferability of assets among group

members. Hence under this approach, a total balance sheet approach to solvency

assessment is followed which is (implicitly or explicitly) based on the balance sheet of the

insurance group as a whole. However, adjustments may be necessary appropriately to take

into account risks from non-insurance members of the insurance group, including cross-sector

regulated entities and non-regulated entities.

Methods used for approaches with a group level focus may vary in the way in which group

capital requirements are calculated. Either the group’s consolidated accounts may be used as

a basis or an aggregation method may be used. The former is already adjusted for intra-group


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holdings and further adjustments may then need to be made to reflect the fact that the group

may not behave or be allowed to behave as one single entity. This is particularly the case in

stressed conditions. The latter method may sum surpluses or deficits (i.e. the difference

between capital resources and capital requirements) for each insurance legal entity in

the group with relevant adjustments for intra-group holdings in order to measure an

overall surplus or deficit at group level. Alternatively, it may sum the insurance legal

entity capital requirements and insurance legal entity capital resources separately in

order to measure a group capital requirement and group capital resources. Where an

aggregation approach is used for a cross-border insurance group, consideration

should be given to consistency of valuation and capital adequacy requirements and of

their treatment of intra-group transactions.


groups - legal entity focus:

Under a group-wide capital adequacy assessment which takes a legal entity focus, the

insurance group is considered primarily as a set of interdependent legal entities. The focus is

on the capital adequacy of each of the parent and the other insurance legal entities in the

insurance group, taking into account risks arising from relationships within the group, including

those involving non-insurance members of the group. The regulatory capital requirements and

resources of the insurance legal entities in the group form a set of connected results but no

overall regulatory group capital requirement is used for regulatory purposes. This is still

consistent with a total balance sheet approach, but considers the balance sheets of the

individual group entities simultaneously rather than amalgamating them to a single balance

sheet for the group as a whole. Methods used for approaches with a legal entity focus may

vary in the extent to which there is a common basis for the solvency assessment for all group

members and the associated communication and co-ordination needed among supervisors.

For insurance legal entities that are members of groups and for insurance sub-groups that are

part of a wider insurance or other sector group, the additional reasonably foreseeable and

relevant material risks arising from being a part of the group should be taken into account in

capital adequacy assessment.

17.2 The supervisor establishes regulatory capital requirements at a sufficient level so

that, in adversity, an insurer’s obligations to policyholders will continue to be met as


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they fall due and requires that insurers maintain capital resources to meet the

regulatory capital requirements.


groups:

The supervisor should require insurance groups to maintain capital resources to meet

regulatory capital requirements. These requirements should take into account the non-

insurance activities of the insurance group. For supervisors that undertake group-wide

capital adequacy assessments with a group level focus this means maintaining

insurance group capital resources to meet insurance group capital requirements for

the group as a whole. For supervisors that undertake group-wide capital adequacy

assessments with a legal entity focus this means maintaining capital resources in each

insurance legal entity based on a set of connected regulatory capital requirements for the

group’s insurance legal entities which fully take the relationships and interactions between

these legal entities and other entities in the insurance group into account.

It is not the purpose of group-wide capital adequacy assessment to replace assessment of the

capital adequacy of the individual insurance legal entities in an insurance group. Its purpose

is to require that group risks are appropriately allowed for and the capital adequacy of

individual insurers is not overstated, e.g. as a result of multiple gearing and leverage of

the quality of capital or as a result of risks emanating from the wider group, and that

the overall impact of intra-group transactions is appropriately assessed.

Group-wide capital adequacy assessment considers whether the amount and quality of capital

resources relative to required capital is adequate and appropriate in the context of the balance

of risks and opportunities that group membership brings to the group as a whole and to

insurance legal entities which are members of the group. The assessment should satisfy

requirements relating to the structure of group-wide regulatory capital requirements and

eligible capital resources and should supplement the individual capital adequacy assessments

of insurance legal entities in the group. It should indicate whether there are sufficient capital

resources available in the group so that, in adversity, obligations to policyholders will continue

to be met as they fall due. If the assessment concludes that capital resources are

inadequate or inappropriate then corrective action may be triggered either at a group

(e.g. authorised holding or parent company level) or an insurance legal entity level.


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The quantitative assessment of group-wide capital adequacy is one of a number of

tools available to supervisors for group-wide supervision. If the overall financial position

of a group weakens it may create stress for its members either directly through financial

contagion and/or organisational effects or indirectly through reputational effects. Group-wide

capital adequacy assessment should be used together with other supervisory tools, including

in particular the capital adequacy assessment of insurance legal entities in the group. A

distinction should be drawn between regulated entities (insurance and other sector) and non-

regulated entities. It is necessary to understand the financial positions of both types of entities

and their implications for the capital adequacy of the insurance group but this does not

necessarily imply setting regulatory capital requirements for non-regulated entities. In addition,

supervisors should have regard to the complexity of intra-group relationships (between both

regulated and non-regulated entities), contingent assets and liabilities and the overall quality

of risk management in assessing whether the overall level of safety required by the supervisor

is being achieved.

For insurance legal entities that are members of groups and for insurance sub-groups that are

part of a wider insurance or other sector group, capital requirements and capital resources

should take into account all additional reasonably foreseeable and relevant material risks

arising from being a part of any of the groups.

17.10 The supervisor defines the approach to determining the capital resources eligible

to meet regulatory capital requirements and their value, consistent with a total balance

sheet approach for solvency assessment and having regard to the quality and

suitability of capital elements.

See Discussion Documents 26 (Classification of Own Funds) and 39 (Valuation of Assets

and Other Liabilities).

7.11 The supervisor establishes criteria for assessing the quality and suitability of

capital resources, having regard to their ability to absorb losses on both a going-

concern and wind-up basis.

In view of the two objectives of capital resources set out in Guidance 17.2.6, the following

questions need to be considered when establishing criteria to determine the suitability of

capital resources for regulatory purposes:


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To what extent can the capital element be used to absorb losses on a going-concern

basis or in run-off?

To what extent can the capital element be used to reduce the loss to policyholders in

the event of insolvency or winding-up?


groups:

The considerations set out in Discussion Document 26 (Classification and Eligibility of Own

Funds) apply equally to insurance legal entity and group-wide supervision.

The practical application of these considerations will differ according to whether a legal entity

focus or a group level focus is taken. Whichever approach is taken, key group-wide factors

to be addressed in the determination of group-wide capital resources include (Group Own

Funds Risks):

multiple gearing,

intra-group creation of capital and reciprocal financing,

leverage of the quality of capital and

fungibility of capital and free transferability of assets across group entities.

There may be particular concerns where such factors involve less transparent transactions

e.g. because they involve both regulated and non-regulated entities or where there is a

continuous sequence of internal financing within the group, or closed loops in the financing

of the group which raises the need for increased disclosures, transparency in group

structures and effective insurance group supervision.

Multiple gearing and intra-group creation of capital

Double gearing may occur if an insurer invests in a capital instrument that counts as

regulatory capital of its subsidiary, its parent or another group entity. Multiple gearing may

occur if a series of such transactions exist.

Intra-group creation of capital may arise from reciprocal financing between members of a

group. Reciprocal financing may occur if an insurance legal entity holds shares in or

makes loans to another legal entity (either an insurance legal entity or otherwise)


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which, directly or indirectly, holds a capital instrument that counts as regulatory capital

of the first insurance legal entity.

For group-wide capital adequacy assessment with a group level focus, a consolidated

accounts method would normally eliminate intra-group transactions and consequently multiple

gearing and other intra-group creation of capital whereas, without appropriate adjustment, a

legal entity focus may not. Whatever approach is used, multiple gearing and other intra-group

creation of capital should be identified and treated in a manner deemed appropriate by the

supervisor to largely prevent the duplicative use of capital.

Leverage

Leverage arises where a parent, either a regulated company or an unregulated holding

company, issues debt or other instruments which are ineligible as regulatory capital or the

eligibility of which is restricted and down-streams the proceeds as regulatory capital to a

subsidiary. Depending on the degree of leverage, this may give rise to the risk that

undue stress is placed on a regulated entity as a result of the obligation on the parent

to service its debt.

Fungibility and transferability

In the context of a group-wide solvency assessment, excess capital in an insurance legal

entity above the level needed to cover its own capital requirements may not always be

available to cover losses or capital requirements in other insurance legal entities in the group.

Free transfer of assets and capital may be restricted by either operational or legal limitations.

Some examples of such legal restrictions are exchange controls in some jurisdictions,

surpluses in with-profits funds of life insurers which are earmarked for the benefit of

policyholders, and rights that holders of certain instruments may have over the assets of the

legal entity. In normal conditions, surplus capital at the top of a group can be down-streamed

to cover losses in group entities lower down the chain. However in times of stress such

parental support may not always be forthcoming or permitted.

The group-wide capital adequacy assessment should identify and appropriately address

restrictions on the fungibility of capital and transferability of assets within the group in both

"normal" and "stress" conditions. A legal entity approach which identifies the location of

capital and takes into account legally enforceable intra-group risk and capital transfer

instruments may facilitate the accurate identification of, and provision for, restricted availability


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of funds. Conversely an approach with a consolidation focus using a consolidated accounts

method which starts by assuming that capital and assets are readily fungible/transferable

around the group will need to be adjusted to provide for the restricted availability of funds.

5.2 CEIOPS’s Advice for Level 2 Implementing Measures on Solvency II:

Assessment of Group Solvency (former CP 60)

This section summarises the sections of CEIOPS’ advice for the Level 2 Implementing

measures that are relevant for the determination of Group Own Funds. This advice is

contained in “CEIOPS’ Advice for Level 2 Implementing Measures on Solvency II:

Assessment of Group Solvency – former CP 60.”2

a) Eligible elements of own funds

Relevant articles from the Solvency II Directive:

Article 222(1) titled “Elimination of double use of eligible own funds” states:

The double use of own funds eligible for the Solvency Capital Requirement among the

different insurance or reinsurance undertakings taken into account in that calculation shall not

be allowed. For that purpose, when calculating the group solvency and where the methods

described in Subsection 4 do not provide for it, the following amounts shall be excluded:

(a) the value of any asset of the participating insurance or reinsurance undertaking which

represents the financing of own funds eligible for the Solvency Capital Requirement of one of

its related insurance or reinsurance undertakings;

(b) the value of any asset of a related insurance or reinsurance undertaking of the

participating insurance or reinsurance undertaking which represents the financing of own

funds eligible for the Solvency Capital Requirement of that participating insurance or

reinsurance undertaking;

(c) the value of any asset of a related insurance or reinsurance undertaking of the participating

insurance or reinsurance undertaking which represents the financing of own funds eligible for

the Solvency Capital Requirements of any other related insurance or reinsurance undertaking

of that participating insurance or reinsurance undertaking.

Article 222(3) states:

2 CEIOPS-DOC-52/09 (October 2009)


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Where the supervisory authorities consider that certain own funds eligible for the Solvency

Capital Requirement of a related insurance or reinsurance undertaking other than those

referred to in paragraph 2 cannot effectively be made available to cover the Solvency Capital

Requirement of the participating insurance or reinsurance undertaking for which the group

solvency is calculated, those own funds may be included in the calculation only in so far as

they are eligible for covering the Solvency Capital Requirement of the related undertaking.

Article 223 titled “Elimination of the intra-group creation of capital” states:

1. When calculating group solvency, no account shall be taken of any own funds eligible for

the solvency capital requirement arising out of reciprocal financing between the participating

insurance or reinsurance undertaking and any of the following:

(a) a related undertaking;

(b) a participating undertaking;

(c) another related undertaking of any of its participating undertakings.

2. When calculating group solvency, no account shall be taken of any own funds eligible for

the Solvency Capital Requirement of a related insurance or reinsurance undertaking of the

participating insurance or reinsurance undertaking for which the group solvency is calculated

when the own funds concerned arise out of reciprocal financing with any other related

undertaking of that participating insurance or reinsurance undertaking.

3. Reciprocal financing shall be deemed to exist at least when an insurance or reinsurance

undertaking, or any of its related undertakings, holds shares in, or makes loans to, another

undertaking which, directly or indirectly, holds own funds eligible for the Solvency Capital

Requirement of the first undertaking.

The group solvency assessment must be based on the overall position of the group in order to

take into account the integrated nature of risk management and capital management within

the group. In addition, the composition of the group should also be taken into consideration,

for example, the inclusion of third countries entities and non-insurance entities.

In order to assess the group solvency, it is necessary to determine the amount of group own

funds which are eligible for covering the group SCR; that assessment needs in particular to

take consideration of the availability of the own funds of each entity within the scope of

group solvency, but also of the tiers limits laid out in the directive.

For the aim of that document:


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the available group own funds (AGOF) are the group own funds after adjustment for

availability of excess solo own funds, and

eligible own funds are obtained after having applied tiers limits to available group own

funds.

In addition, solo own funds have to be treated in accordance with articles 222(1), especially to

cancel impact generated by double use of eligible own funds.

The wording “solo own funds” and “solo SCR” should be understood as solo adjusted own

funds and solo adjusted SCR.

Solo excess own funds above their respective solo SCR in some (re)insurance undertakings

can compensate for possible under coverage of SCR in other (re) insurance undertakings.

However, these solo excess own funds may not be always available, due to local legal or

prudential constraints on the own funds - (Transferability and Fungibility).

When diversification benefits arise at the level of a solo undertaking, simply understanding

how the various individual risks diversify and aggregate is sufficient for one to be able to

assess the risk to the solvency of the entity. However, when diversification benefits arise

across multiple entities within the same group, consideration also needs to be given to the

extent to which own funds can move between the different entities. If own funds cannot move

between different undertakings, then although the group has adequate own funds after

allowing for diversification, at the time of stress and also in on going concern the necessary

own funds could not be delivered to a particular entity. Therefore, consideration of the extent

to which own funds are truly mobile within a group is critically important to understand group

solvency.

If the supervisory authorities find that certain own funds eligible for the SCR of a related

(re)insurance undertaking other than those referred to in Article 222(2) cannot effectively be

made available to cover the SCR of the participating insurance or reinsurance undertaking for

which the group solvency is calculated, those own funds may be included in the calculation

only in so far they are eligible for covering the SCR of the related undertaking.

Group Own Funds Risks:


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b) Fungibility and transferability

There may exist potential restrictions on the fungibility and transferability of own fund as a

consequence of the underlying nature of own funds and of the legal and regulatory

environment in which the undertakings operate.

These two criteria are linked, but distinct from each other. Own funds may be:

Fungible at group level and transferable- own funds considered available for the group.

Not fungible at group level, but transferable- own funds are considered not available for the

group.

Fungible at group level but not transferable- own funds are considered not available for the

group.

For the deduction and aggregation method (D&A):

Only eligible elements at solo level can be considered as eligible at group level. The solo own

funds which cannot be considered available to cover the group SCR can only be included in so

far as they are eligible for covering the SCR of the solo undertaking.

For the accounting consolidation-based method:

Eligible own funds at group level are assessed following a 5-step process for the method:

Step 1. The SAM / Solvency II balance sheets of all entities belonging to the group are

consolidated according to the accounting consolidation rules (IGT and internal creation of

capital are eliminated).

Step 2. The regulatory consolidated balance sheet results from:

i. adjustment of the scope of supervision (if different from the scope of accounting

consolidation);

ii. treatment of related undertakings for which the necessary information is unavailable (Article

229);

iii. treatment of related credit institutions, investment firms and financial institutions (Article

228) and other regulated entities.


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At this stage, the group SCR is calculated on the regulatory consolidated balance sheet.

Step 3. Assessment of the contribution of each undertaking to available group own funds.

The contribution to available group own funds of an undertaking’s unavailable own funds are

limited by:

its contribution to the group SCR of each (re)insurance undertaking included in a) (see

previous page on fungibility and transferability);

its SCR for each undertaking included as-in the previous page on fungibility and

transferability

For each entity included in the regulatory consolidated balance sheet, the excess unavailable

own funds is the difference, if positive, between its unavailable own funds and the contribution

mentioned above.

Step 4. The AGOF to cover the group SCR are calculated by deducting from the regulatory

group own funds the sum of unavailable solo excess own funds (determined for each entity

included in the regulatory consolidated balance).

Step 5. In order to be eligible to cover the group SCR the AGOF must comply at group level

with the tiers limits laid out in the directive.

When using the accounting consolidation-based method, as stated in step 4 of the former

assessment, the extent to which group excess own funds can be increased by group

diversification effects – measured as the difference between the group SCR and the sum of

adjusted solo SCR - must be reduced by the amount of unavailable solo excess own funds. In

order to assess that availability, it has been chosen in step 3 to undertake a theoretical

allocation of diversification benefits to determine the contribution of each undertaking of the

group SCR.

The contribution to Group SCR* from entity abc will be calculated as follows:

Option A (Accounting consolidation method):


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( ) ( )

Index (i) covers all entities of the group included in the calculation of group SCR

SCR(i), SCR(abc) refer to the solo SCR adjusted for intra-group transactions

The ratio is a proportional adjustment due to diversification effects.

CEIOPS state that the theoretical assessment of contribution to the group SCR set out in

option A could produce an inequitable allocation where the effects of standard formula group

diversification are significantly different for different parts of a group.

Option B (Only for group internal model):

Where a group internal model has been used for the assessment of group SCR*, the group

may use a group specific assessment of the contributions. The sum of all individual

contributions shall be equal to the group SCR. The allocated diversification effects (which do

not affect the solo SCR) should then be assessed for any restrictions on the availability of solo

own funds. The sum of the excess of own funds identified as unavailable should then be

deducted from group own funds.

c) Minority Interests

Minority interest represents shares owned by third parties (or equity interest of outside

shareholders) in a consolidated subsidiary. It represents the portion of the profit or loss and

net assets of a subsidiary attributable to equity interests that are not owned, directly or

indirectly through subsidiaries, by the parent.

Minority interests and other shareholders of subsidiaries may affect the ability to transfer own

funds out of a subsidiary.

Minority interest shares in any excess of own funds (above the solo SCR) of the consolidated

entity are not available for use elsewhere in a group. Therefore a minority interest's share in

any excess own funds should only be included in group own funds up to the minority interest’s

proportional share in the SCR of the insurance entity belonging to the group. As a result, any

excess own funds over capital requirements relating to a minority interest is not available at

group level.


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d) Fungibility of own funds at group level

Non fungible own funds of a related undertaking cannot be fully included for group solvency

purposes, but may be included in the calculation only in so far as they are eligible for covering

the SCR of this related undertaking. This means that they can be considered available to

cover the group SCR of the participating undertaking up to the contribution of the SCR of the

related undertaking to the group SCR and after consideration of transferability constraints as

previously mentioned. For the calculation of eligible group own funds, it is necessary on a

case-by-case basis to split the solo own funds into fungible at group level and non-fungible at

group level.

Article 222 (2) states that the following may only be included in the calculation of group own

funds for covering the group SCR so far as they are eligible for covering the solo SCR of the

related undertaking concerned:

a) surplus funds falling under Article 90(2) [Ancillary Own Funds] arising in a related life

insurance or reinsurance undertaking of the participating insurance or reinsurance

undertaking for which the group solvency is calculated;

b) any subscribed but not paid-up capital of a related insurance or reinsurance undertaking of

the participating insurance or reinsurance undertaking for which the group solvency is

calculated.

CEIOPS indicated that further work may be useful in order to identify fungibility limits at level 3

in order to ensure a consistent implementation of Solvency II.

Off-balance-sheet commitments are all considered non fungible at group level.

e) Some types of with-profit business

According to the CEIOPS Level 2 advice some supervisors expressed concerns over the

inclusion of some type of with-profit business in the calculation of diversification effects at

group level. In their opinion for these types of with-profit business (type A with-profit business),

they should not be attributable to the group own funds. Other supervisors highlighted that the

treatment of with-profit business is not homogeneous across the EEA and that such

differences should be taken into account.


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CEIOPS provided a guide on the treatment of such products with some national guidance in

order to take into account the different features of with-profit business across the EEA.

Some type of with-profit businesses (type A with-profit business) contain items of eligible own

funds and/or profit sharing mechanisms within the technical provisions, which can only be

used to cover the liabilities for a limited set of policyholders. In this case, the own funds are

considered non-fungible.

The own funds related to with-profit business where the value of the policyholders’ benefit is

not based on the value of the assets assigned to the segregated fund (i.e. it is not “unitised”),

but on the return of the assigned assets, are calculated in accordance with specific rules. In

these types of with-profit business (type B with-profit) , the own funds can be considered

available to absorb losses of other entities of the group only when appropriate mechanisms

are triggered to avoid damaging the policyholders' contractual right to receive the return

expected in normal circumstances.

The own funds (generated by Type A with-profit business) may be included in the calculation

of the group own funds only in so far they are eligible for covering the SCR of the related

undertaking and up to the contribution of the related undertaking to the group SCR.

f) Ancillary Own Funds

Any ancillary own funds of a related (re)insurance undertaking may only be included in the

calculation in so far as the ancillary own funds have been duly authorised by the supervisory

authority.

CEIOPS considers that the group supervisor in cooperation with the College of supervisors

should assess the availability of ancillary own funds in a related (re)insurance undertaking,

and especially the delay and the cost of availability. Those ancillary own funds may be

included in the calculation only in so far they are eligible for covering the SCR of the related

undertaking and up to the contribution of the related undertaking to the group SCR.

Intra-group support measures are however a key component of any successful group capital

management programme and should be considered as part of a wider area in group

supervision.


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g) Hybrid Capital and subordinated liabilities

There is a broad spectrum of capital instruments that are potentially eligible in own funds at

solo level and group level. These include equity instruments with debt-like features and vice

versa. However the SA-QIS 1 revealed that hybrid capital usage are very low in the South

African Insurance market and would be treated as Tier 3 capital – as per Discussion

Document 26, based on FSB approval. However when Insurance Groups and Own Funds are

considered the final result might potentially be very different if hybrid capital’s usage is widely

more than in South Africa. In these cases if hybrid capital is allowed in other jurisdictions /

sector they should be allowed as part of eligible own funds but only to cover the SCR of the

insurer.

h) Own funds in undertakings located in non-EEA countries (In terms of South Africa

this would refer to own funds not located in South Africa)

All undertakings of the group are captured in the group SCR calculations, including any non-

EEA undertakings. Eligible own funds in non-EEA countries are available to meet the SCR of

the undertaking in which they are held but there may be situations where the own funds in

excess of the SCR are not available for use elsewhere in the group.

Factors that may impact the availability of excess of own funds:

Restrictions to fungibility and transferability of own funds

Equivalence of the third country regime.

In such cases eligible own funds in non-EEA are available to meet the SCR of the

participating undertaking only in so far they are admitted for covering the SCR of the non-EEA

undertaking and any excess own funds is not available at group level.

i) Transferability of own funds

CEIOPS defines transferability as the ability to transfer own funds from one entity to another

undertaking within the group. For the elements of own funds that are considered fungible,

supervisory authorities are required to asses in a second step whether the assets covering

those elements can be effectively transferred.

Undertakings may transfer their own funds provided that the regulatory and statutory

conditions are met. Basic own funds which are not required to be held in the subsidiary are

potentially transferable. However, they may not be transferable due to current or foreseen


Page 23 of 39

material practical or legal restrictions to the prompt transfer of own funds or repayment of

liabilities, particularly in crisis situations.

The restrictions on transferability should be assessed under the following considerations:

the likely costs that will be deducted from the transferable own funds at the point of the

transfer (e.g. tax obligations);

the likely restrictions on the transfer of own funds at the point of the transfer (e.g. company

law restrictions);

the timing needed to transfer own funds;

the lack of transferable assets to recover the financial position of another entity in difficulty;

in more extreme cases, the ability of a parent company to extract own funds from an entity

at all.

Transferability constraints may significantly decrease the amount of available own funds.

If the supervisory authority ascertains that the transfer produces or runs the risk of producing

negative effects on the undertaking’s solvency or can undermine the interests of the

policyholders, it shall require the undertaking to take the measures necessary to eliminate

such negative or detrimental consequences.

j) Transferability of own funds in crisis situations

The impediments to the transferability of own funds are particularly relevant in crisis situations

where the ability to act rapidly is critical.

While the mechanisms for transferring own funds may work well under normal conditions, as

soon as one or more undertakings in the group are in financial difficulty the transferability of

that own fund may become difficult.

The group must assess the transferability of own funds in stress scenarios, including the

timing and the costs with which the own funds can be allocated in those scenarios.

CEIOPS consider that these stress tests could be further developed under Pillar II and Pillar III

requirements under Level 3 guidance.


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When part of the group is stressed by adverse conditions, the liquidity of that part may come

under pressure and hence the transfer of own funds that may have been promptly transferable

under normal conditions, may require more time or additional cost.

This implies the following requirements on a group:

scenario analysis on the impact of stress events on the transferability of own funds in the

group. The analysis of stress scenarios should consider the impacts on all affected legal

entities;

a strategy on how the group would manage financial stress in one or several legal entities;

contingency plans in place on how to raise and allocate capital in the event of losses that

threaten the position of the group.

The supervisors concerned should assess the management of own funds under transferability

constraints at group and solo level. This should include an assessment of the own funds

under transferability constraints position of the group on going concern and under stressed

conditions.

5.3 EU Quantitative Impact Study 5

a) Calculation method

Groups were asked to test the methods envisaged in Solvency II to calculate their capital

requirements. In particular they were required:

1. To test both the accounting consolidation-based method and the deduction and

aggregation method (calculating it with both Solvency II and local rules for non-EEA

entities)

2. To provide data, if relevant, related to group solvency capital on the basis of a group

internal model.

3. To provide data, on an optional basis, on the application of a combination of the methods.

b) Availability of group own funds to cover the group SCR

The assessment of eligible group own funds is made after elimination of double usage of

eligible own funds and intra-group transactions among the different insurance and

reinsurance undertakings

The assessment of eligible group own funds is explicitly required to take into account the

availability of solo own funds at group level. Specifically, own funds that cannot be made


Page 25 of 39

both fungible and transferrable within a maximum period of 9 months are not considered

available at group level.

c) Accounting consolidation based method: consolidated group own funds and

availability of certain own funds for the group

The determination of group own funds and eligible group own funds under QIS 5 is identical to

the CEIOPS advice. For example QIS 5 also incorporates the following technical principles:

The contribution of non-available excess own funds of related undertaking to group own

funds is limited to the contribution of the solo SCR to the group SCR.

Available own funds to cover the group SCR are calculated by deducting from the group

own funds the sum of non-available solo excess own funds (determined for each entity in

the consolidated balance sheet).

In order to be eligible to cover the group SCR, the available group own funds must comply,

at group level, with the tier limits applied at solo level.

QIS 5 sets out the following criteria that groups should consider in determining whether own

funds available to cover the SCR at solo level cannot effectively be made available for the

group:

The legal and regulatory provisions applicable to those own funds are such that they are

dedicated to absorb only certain losses (i.e. no fungibility)

The legal or regulatory provisions applicable to the assets representing those own funds

are such that transferring those assets to another insurer or reinsurer is not allowed (i.e. no

transferability)

Making those own funds available to the group would not be possible within a maximum

period of 9 months.

QIS 5 unlike the CEIOPS advice stipulates a timeframe for the maximum period over which the

availability of own funds at group level is determined for the purposes of testing whether the

own funds can be effectively be made available to absorb losses.

QIS 5 also applies principles that are the same as CEIOPS advice in applying the own funds

group-level availability criteria to the following specific items:

Eligible own funds related to participating business and ring-fenced funds

Eligible ancillary own funds

Hybrid capital and subordinated liabilities


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Eligible own funds related to deferred tax assets

Participations in non-EEA insurance and reinsurance entities

Minority interests.

In summary, there are no fundamental differences between CEIOPS advice and QIS 5 apart

from the specification of a timeframe for testing the fungibility and availability of group own

funds.

d) Aggregated group own funds – Deduction and aggregation method

The determination of group own funds and eligible group own funds under QIS 5 is identical to

the CEIOPS advice. For example QIS 5 also incorporates the following technical principles:

The aggregated eligible group own funds is the sum of the own funds eligible to cover the

solo SCR of the participating undertaking plus the proportional share of the undertaking in

the own funds eligible for the covering the SCR of the related undertakings.

The own funds in each solo entity are adjusted to eliminate double use of eligible own

funds and intra-group creation of capital.

There are no adjustments to capital resources to reflect diversification benefits because the

group SCR calculation under this method does not allow for diversification benefits.

There are no differences between QIS 5 and CEIOPS advice for the deduction and

aggregation method.

5.4 Other relevant jurisdictions: APRA

In general, insurance groups are subject to the same capital adequacy requirements as

insurers. As a consequence of the key role played by capital in the financial strength of

insurance groups, every insurance group must maintain sufficient capital to enable the

obligations of the group to be met under a wide range of circumstances. This required level of

capital for regulatory purposes is referred to as the Minimum Capital Requirement (MCR).

The consolidated balance sheet of an insurance group may contain certain assets (such as

deferred tax assets, goodwill and other intangibles) that are acceptable from an accounting

perspective. However, for supervisory purposes, such assets are either generally not


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available, or of questionable value, should the group encounter difficulties. Insurance groups

are therefore required to deduct from their capital base any holdings in these types of assets.

Minority interests arising from consolidation of Tier 1 capital of controlled entities are treated

as Fundamental Tier 1 capital for the purposes of determining the capital base.

An insurance group must, at all times, maintain a capital base sufficient to enable its

obligations to be met under a range of circumstances. An insurance group must, at all times,

hold eligible capital in excess of its MCR. Where an insurance group proposes any reduction

in its capital base, it must obtain APRA’s prior written consent.

In determining its capital base, an insurance group must ensure that the category of capital

applied to each individual component of capital for each insurer is not upgraded to a higher

category of capital when that component of capital is captured in the measurement of the

insurance group’s capital base. Any such component of capital must be reclassified to the

appropriate lower category of capital when measured at group level.

An insurance group’s capital base must be adequate for the scale, nature and complexity of

the business and its risk profile. To this end, APRA established a risk-based approach to the

measurement of capital adequacy of an insurance group. The MCR is intended to be

commensurate with the full range of risks to which the group is exposed (including risks

relating to insurance claims, investments, counterparty default, asset-liability mismatches,

catastrophic events, and operational errors and problems).

APRA recognises that any measure of the adequacy of an insurance group’s capital base

involves judgement and estimation, and requires the quantification of risks that may be difficult

to quantify. As a result, APRA may adjust an insurance group’s MCR where it believes that

the amount determined using any of the methods does not adequately reflect the risk profile of

the group.

The MCR will be determined as the sum of the capital charges for insurance risk, investment

risk and concentration risk.


Page 28 of 39

APRA may require an insurance group to exclude from its capital base any component of

capital which APRA has reasonable grounds to believe does not represent a genuine

contribution to the financial strength.

In assessing the overall capital strength of an insurance group, APRA will have regard to the

ability of the parent entity to readily transfer capital from entities within the consolidated

insurance group should the need arise to recapitalise the parent entity or any group entity. In

the event that capital support from within the group is not available, APRA may require the

parent entity of the insurance group to adjust its MCR to reflect the lack of available capital.

The parent entity of an insurance group, in measuring the group’s capital, must exclude any

instrument issued by an entity in the insurance group where that instrument is guaranteed by

another member of the group.

For the purposes of calculating its capital base, an insurance group must deduct from its

capital base:

goodwill and any other intangible assets, net of adjustments to profit or loss, reflecting any

changes arising from impairment of goodwill;

deferred tax assets net of deferred tax liabilities;

any portion of current year earnings or retained earnings that represents any amount

deriving from the insurer’s share of undistributed profit or loss in an associate, under equity

accounting. This amount must be included in Upper Tier 2 capital;

any surplus, net of deferred tax liabilities, in any defined benefit superannuation fund of

which the insurer is an employer-sponsor, unless otherwise approved, in writing, by APRA.

Any excluded surplus must reverse any associated deferred tax liability from Tier 1 capital;

any deficit in a defined benefit superannuation fund of which the insurer is an employer-

sponsor and that is not already reflected in Tier 1 capital;

all holdings of own Tier 1 capital instruments;

any deficit after taking into account adjustments in the amount available in the respective

revaluation reserves for the following items, to the extent not already accounted for in

current year earnings or retained earnings:

o property not held at fair value;

o investments in subsidiaries not held at fair value; or


Page 29 of 39

o investments in associates, including any excess of the share of losses in associates

under equity accounting;

any identified impairment of an asset where the impairment has not already been taken

into account in profit or loss or the impairment has been incorporated in fair value changes

captured in an asset revaluation reserve included in Upper Tier 2 capital. This will include

the value of any deficit in asset revaluation reserves included in Upper Tier 2 capital after

taking into account all adjustments;

unrealised fair value gains (or, where applicable, adding back unrealised fair value losses)

arising from changes in an insurer’s own creditworthiness;

any amounts included in revaluation reserves in Upper Tier 2 capital that would otherwise

have been included in Tier 1 capital;

cumulative unrealised fair value gains and losses on effective cash flow hedges reflected in

retained earnings or reserves included in Tier 1 capital that do not offset gains or losses on

revaluations in reserves included in Tier 1 capital;F12

all reinsurance assets reported in relation to each reinsurance arrangement that does not

meet the reinsurance documentation test in paragraph ;

expected dividends.

Deductions relating to reinsurance and the premiums receivable deduction arising from the

operations of any consolidated entity within an insurance group carrying on insurance

business in a foreign jurisdiction, need not be made unless such a deduction is required in

that jurisdiction. In applying the capital deductions, the group must deduct any surplus, net of

deferred tax liabilities, in any defined benefit superannuation fund of which an insurer or other

group entity is an employer-sponsor unless otherwise approved by APRA. Any excluded

surplus must reverse any associated deferred tax liability from Tier 1 capital.

Equity exposures and other capital investments in non-consolidated subsidiaries or controlled

entities, whether regulated or unregulated, must be deducted 50 per cent from Tier 1 capital

and 50 per cent from Tier 2 capital subject to the materiality of the controlled entity (to be

determined in consultation with APRA). This deduction does not apply to a controlled entity,

where it acts as a holding company for pass-through of equity exposures and other capital

investments in insurers or equivalent overseas entities carrying on insurance business. In the

event that a controlled entity holds equity exposures and other capital investments in

controlled entities not eligible for consolidation, the insurance group must deduct its equity

exposures and other capital investments in the holding company net of the value of the


Page 30 of 39

holding company’s investment in any insurer or equivalent overseas entities carrying on

insurance business.

Goodwill and any other intangible component of the investments in non-consolidated

subsidiaries must be deducted from the group’s Tier 1 capital at Level 2.

5.5 Mapping of differences between above approaches (Level 2 and 3)

The IAIS principles and CEIOPS advice both include some important similarities. APRA’s

requirements also highlight these matters.

6. ASSESSMENT OF AVAILABLE APPROACHES GIVEN THE SOUTH AFRICAN

CONTEXT

6.1. Discussion of inherent advantages and disadvantages of each approach

Following the CEIOPS advice, including the timeframes set by QIS 5 would ensure that the

Group Own Funds remain similar to Solvency II and to other requirements and

recommendations made in other SAM Discussion Documents.

6.2 Impact of the approaches on EU 3rd country equivalence

None

6.3 Comparison of the approaches with the prevailing legislative framework

Not applicable as Insurance Group are not currently regulated

6.4 Conclusions on preferred approach

The Task Group recommends the adoption of the CEIOPS advice and the inclusion of the

timeframes set in QIS 5.

7. RECOMMENDATIONS

Framework:

It is not the purpose of group-wide capital adequacy assessment to replace assessment of

the capital adequacy of the individual insurance legal entities in an insurance group. Its


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purpose is to require that group risks are appropriately allowed for and the capital

adequacy of individual insurers is not overstated, e.g. as a result of multiple gearing and

leverage of the quality of capital or as a result of risks emanating from the wider group,

and that the overall impact of intra-group transactions is appropriately assessed.

The recommendation is to adopt the Deduction and Aggregation (D&A) method in

determining eligible group own funds. The additional complexities and risks of Insurance

Groups and Sub-Insurance Groups, such as contagion risk (financial, reputational, legal),

concentration risk, complexity risk and operational / organisational risks eliminate

diversification benefits. As these group risks cannot adequately be captured in a group

SCR it has to be addressed through group own funds and pillar II actions such as group

governance and group ORSA. The D&A method is also further recommended as the

default method because of simplicity and practical considerations.

The group own funds eligible under the D&A method are the sum of the following:

o the adjusted own funds eligible for the SCR of the participating undertaking;

o the proportional share of the participating undertaking in the own funds eligible for

the adjusted SCR of the related undertakings. In cases of dominance of significant

influence the regulator could decide what the proportional share.

The classification and eligibility rules and tiering limits as in discussion document 26 will

apply to these groups with exceptions listed below.

If the supervisory authority finds that some of the eligible own funds of a related

undertaking, are not effectively available for meeting commitments of the parent

undertaking, these own funds may also be taken into account as eligible own funds for

covering the group SCR only in so far as they are eligible for covering the SCR and up to

the contribution of the related undertaking to the group SCR

If a supervisory assessment concludes that own funds are inadequate or inappropriate

then corrective action, in line with the ladder of intervention, may be triggered either at a

group (e.g. authorised holding or parent company level) or an insurance legal entity level.

Valuation:

Where the deduction and aggregation method is used for a cross-border insurance group,

consideration should be given to consistency of valuation and capital adequacy

requirements and of their treatment of intra-group transactions


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Ring fenced funds:

Under the deduction & aggregation method the effects of adjustment due to the existence

of a ring-fenced fund will automatically be carried forward to the group calculations and no

further adjustments are required.

Under the deduction & aggregation methods however there will be a need to identify any

undertakings which do not have adjustment due to the existence of a ring-fenced fund at

solo level but for which restrictions on own funds of this kind exist at group level. This

might only arise where the whole of the business of the solo undertaking comprises one

ring fenced fund. If this situation were to apply in the case of a deduction and aggregation

calculation the amount of own funds in excess of the solo SCR would be excluded from

available group own funds.

Groups will need to ensure that they are aware of the nature of arrangements and the

national specificities which apply in the jurisdictions in which their related undertakings

operate and which might give rise to ring fenced funds in one jurisdiction even if they do

not have the same effect in the jurisdiction of the parent undertaking.

The proposals regarding ring fenced funds above are as at the time SA QIS 2 was

compiled. Final treatment of ring-fenced funds will be based on final requirements. Please

refer to the discussion document on ring-fenced funds for more information and clarity.

Restrictions:

A number of items that will be subject to restrictions when calculating eligible own funds

are listed, including among others:

o Reserves at the individual level subject to restricted availability (e.g., local statutory

limitations)

o Hybrid capital and subordinated liabilities

o Ancillary own funds

o Deferred tax assets

The assessment of eligible group own funds is made after elimination of multiple usage of

eligible own funds and intra-group transactions among the different insurance and

reinsurance undertakings.

Double gearing may occur if an insurer invests in a capital instrument that counts as

regulatory capital of its subsidiary, its parent or another group entity. Multiple gearing may

occur if a series of such transactions exist.

Intra-group creation of capital may arise from reciprocal financing between members of a


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group. Reciprocal financing may occur if an insurance legal entity holds shares in or

makes loans to another legal entity (either an insurance legal entity or otherwise) which,

directly or indirectly, holds a capital instrument that counts as regulatory capital of the first

insurance legal entity.

Multiple gearing and other intra-group creation of capital should be identified and

prevented from duplicative use as capital.

Leverage within a group should be considered as it may give rise to the risk that undue

stress is placed on a regulated entity as a result of the obligation on the parent to service

its debt.

Hybrid capital and subordinated liabilities:

o Hybrid capital and subordinated debts in principle should be considered as

available to cover the SCR of the participating undertaking if it is not issued or

guaranteed by the ultimate parent undertaking of the group.

o Hybrid capital instruments and subordinated liabilities issued by shall be admitted

to contribute to the coverage of the group SCR only in so far they are admitted for

covering the SCR of the related undertaking.

o The same instruments issued by an undertaking operating in another financial

sector can contribute to the coverage of the group SCR only in so far they are

eligible to meet capital adequacy requirements as established in applicable

sectoral legislation, and only within the limits provided therein.

Some types of with-profit business:

o When own funds related to some types of with-profit business are only available to

cover capital requirements in one undertaking of the group they should be included

in the calculation of the group own funds only in so far they are eligible for covering

the SCR of the related undertaking to the group SCR and up to the contribution of

the related undertaking to the group SCR.

Minority interests

o Any excess own funds over capital requirements relating to a minority interest is

not available at group level

Ancillary own funds

o The group supervisor in cooperation with the College of supervisors should assess

the availability of ancillary own funds in a related (re)insurance undertaking, and

especially the delay and the cost of availability. Those ancillary own funds that

might be delayed or not be available for group purposes may be included in the

calculation of the group own funds only in so far they are eligible for covering the


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SCR of the related undertaking and up to the contribution of the related

undertaking to the group SCR.

o Intra-group support measures, (see separate Discussion Document) within groups

should however be considered in stressed / unusual economic conditions. The

support measures are subject to regulatory review and approval.

Deferred tax assets

o It is unlikely that the assets will be effectively available for meeting group

commitments thus the own funds may only be taken into account as eligible own

funds for covering the group SCR only is so far as they are eligible for covering the

SCR of the undertaking.

Fungibility and transferability:

The group solvency assessment must be based on the overall capitalization of the group.

In this respect, only excess own funds above an individual SCR can compensate for

an own funds shortage in other entities, as long as there are no local legal constraints

on the capital. Therefore, both fungibility and transferability will be considered when

calculating group eligible own funds. Fungibility refers to the ability to absorb losses of any

kind within the group, as they are not dedicated to a specific purpose. Transferability

denotes the ability of one entity to transfer assets to another.

In order to assess the usage of excess group own funds, one should consider the two

concepts:

o Fungibility

o Transferability across group entities.

Fungibility

At group level means that an element of own funds can fully absorb any kind of losses

within the group, regardless of the undertaking within which those own funds are held or

where the commitments arise (in compliance with the prudential and legal rules).

Fungible own funds in this sense are thus not dedicated to a certain purpose.

Fungibility of own funds at solo level doesn’t automatically imply fungibility at group level

and should be considered during the assessment phase.

Transferability

This refers to the ability to transfer own funds from one undertaking to another within the

group.


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The assessment of the transferability of owns funds are not a simple nor a static

consideration. It is likely to change depending on the capital management of the group,

different risk scenarios and on market situations.

If the supervisory authority ascertains that the transfer of own funds produces or runs the

risk of producing negative effects on the undertaking’s solvency or can undermine the

interests of the policyholders, it shall require the undertaking to take the measures

necessary to eliminate such negative or detrimental consequences as mentioned above..

Impediments to the transferability of own funds are particularly relevant in crisis situations

where the ability to act rapidly is critical. While the mechanisms for the transferability of

own funds may work well under normal conditions, as soon as one or more undertakings

in the group are in financial difficulty the transferability of that own fund may become

difficult.

The supervisor should assess the management of own funds under transferability

constraints at group and solo level. This should include an assessment of the own funds

under transferability constraints on an going-concern basis.

The following should be considered as part of the transferability assessment:

o The likely costs that will be deducted from the transferable own funds at the point

of the transfer (e.g. tax obligations);

o The likely restrictions on the transfer of own funds at the point of the transfer (e.g.

company law restrictions);

o The timing needed to transfer own funds;

o The lack of transferable assets to recover the financial position of another entity in

difficulty;

o In more extreme cases, the ability of a parent company to extract own funds from

an entity at all.

These two (Fungibility and Transferability) are linked but distinct from each other. Own

funds may be transferable but not fungible and vice versa.

The assessment of eligible group own funds is explicitly required to take into account the

availability of solo own funds at group level. Specifically, own funds that cannot be made

both fungible, transferrable and has then the ability to be moved within a maximum period

of 9 months are not considered available at group level.


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Own funds in undertakings located in foreign countries:

Where there are restrictions on the fungibility or transferability of the excess own funds

over the capital requirement in foreign (re)insurance undertakings, the own funds (in

excess of the contribution of that undertaking to the group SCR) should not be included in

the calculation of group own funds.

If the supervisory authorities finds that some of the own funds of a related (re)insurance

undertaking located in foreign countries are not effectively available for meeting

commitments of the parent undertaking, these own funds should be taken into account as

own funds for covering the group SCR only in so far as they are eligible for covering the

SCR of that related undertaking and up to the contribution of the related undertaking to the

group SCR

Limitation to the inclusion of solo excess non available own funds in the available

group own funds:

When using the accounting consolidation-based method, (if allowed) the extent to

which the group excess, calculated as the difference between eligible group own funds

and group SCR, can be increased by group diversification effects must be reduced by the

amount of unavailable solo excess own funds (i.e. solo own funds that cannot be used to

meet solvency requirements in other parts of the group).

In order to assess the amount of solo own funds that are available at the group level, it is

necessary to undertake a theoretical allocation of the diversification benefits.

This shall by default be done by a proportional allocation when the standard formula is

applied.

The group may use a group specific assessment of the contributions of the related

undertakings where a group internal model has been used for the assessment of the

group SCR. In such a case, the sum of all individual contributions shall be equal to the

group SCR as when using the proportional allocation when the standard formula is

applied.

The allocated diversification effects (which do not affect the solo SCR) should then be

assessed for any restrictions on the availability of solo own funds. The sum of the excess

of own funds identified as unavailable should then be deducted from group own funds.


Page 37 of 39

LISTED BELOW ARE EXTRACTS FROM DD 85 (V5) RELEVANT TO THIS

DOCUMENT:

RECOMMENDED APPROACH: FOR THE TREATMENT OF INSURANCE OPERATIONS (IN “NON-EQUIVALENT” JURISDICTIONS) UNDER THE FINAL MEASURES TO REGULATE THE SOLVENCY OF SOUTH AFRICAN INSURANCE GROUPS (“GROUPS”)

The approach proposed in the draft discussion document only applies to group solvency

calculations for SA insurance groups. For the solo solvency calculations of insurance

companies (within a group), their participations in related strategic insurers are incorporated

at fair value (of its proportional share) added to own funds together with an allowance in the

SCR calculation as to be determined later during the development of SAM.

SA SAM calculations will not be required for insurance operations of SA “Insurance Groups”

in non-equivalent jurisdictions in the following cases:

a) The particular operation is not regarded as strategically important (as defined

in Appendix A), or

b) The SA parent is prepared to include the particular operation at nil value in the

calculation of the SA parent’s group own funds (and SCR) and the particular

operation is solvent based on the local statutory solvency rules3, or

c) The particular operation is subject to a local risk-based regulatory capital

adequacy regime. Should this regime not be deemed to have third country

equivalence with either SAM or Solvency II, the SA Group can apply to the

FSB to use the local capital requirement for group purposes by demonstrating

that the risk based capital requirements of the particular regime are sound

compared to that of SA SAM.

It has therefore been suggested that the new act should give the SA

insurance-regulator the power to exempt certain jurisdictions from having to

perform SA SAM calculations (potentially as a transitional arrangement).

Such exemption could be given on a blanket basis (e.g. Namibia and

Mauritius, say) or on a case-by-case basis as and when the SA regulator

receives applications.

3 This alternative applies the Proportionality principle by providing the option to not perform SAM Pillar I calculations

by excluding the particular participation even if the participation contributes towards the group’s solvency.


Page 38 of 39

SA SAM calculations will be required for all other insurance operations of SA “Insurance

Groups” in non-equivalent jurisdictions.

For the sake of clarity and the avoidance of doubt it is noted explicitly that SA SAM

calculations will be required in the following cases (note that this list only points out

specific relevant cases and is not exhaustive, the primary test is described under

point 6.1 of DD85):

a) The SA parent wants to include excess capital held by the relevant operation

in its own funds, or

b) The particular operation is in financial distress and there is a contagion risk.

The treatment of “participations in related strategic insurers” held by SA insurance

companies (under the solo-supervision rules) is compared to the treatment of insurance

operations in non-equivalent jurisdictions in.


Page 39 of 39

APPENDIX A

Tests to establish whether an operation is regarded as strategically important

An operation in a non-equivalent jurisdiction will be regarded as strategically important if: a) The particular operation uses the brand/name of the SA parent or a brand/name that is

closely associated with the SA parent, or

b) The SA parent has provided explicit guarantees, commitments, letters of comfort or cross-

default commitments to the particular operation, or

c) The SA parent has management and/or board control over the particular operation; or

d) The SA parent consolidates the financial results of the particular operation in its accounts.

Date post:	21-Mar-2022
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