Delegated Regulation (EU) 2015/35 outlines the requirements for insurance and reinsurance companies regarding risk management, governance, and reporting. It emphasizes the importance of internal credit risk assessments while considering the principle of proportionality based on the companies' risk profile. Additionally, it establishes valuation standards compatible with international accounting standards to ensure…
The document is the Commission Delegated Regulation (EU) 2015/35, adopted on 10 October 2014, supplementing Directive 2009/138/EC known as Solvency II. It is a regulatory text of 797 pages, published in 2015, applicable to insurance and reinsurance undertakings in the European Economic Area (EEA). The scope covers prudential requirements related to the standard formula for calculating the Solvency Capital Requirement, the valuation of assets and liabilities, technical provisions, governance, reporting and transparency, as well as specific rules applicable to insurance groups and securitization vehicles. The document addresses the three pillars of Solvency II: first pillar (quantitative requirements), second pillar (enhanced governance), and third pillar (increased transparency). The application period is continuous since 2015, with planned updates. Only the first approximately 256 pages are provided here, mainly covering general provisions, valuation, technical provisions, own funds, the standard formula, internal models, the minimum capital requirement, governance, additional capital requirements, information disclosure, communication to supervisory authorities, and securitization vehicles (p. 1-256).
The Delegated Regulation (EU) 2015/35 supplements the Solvency II Directive by specifying technical rules for calculating the Solvency Capital Requirement, valuation of assets and liabilities, technical provisions, governance, reporting, and transparency of insurance and reinsurance undertakings in the EEA (p. 1-14). This regulation is fundamental as it establishes a harmonized framework ensuring insurers' financial stability, policyholders' protection, and market confidence. The main findings are:
- Valuation must comply with international accounting standards, prioritizing active market prices for reliable economic valuation (p. 6-7).
- Technical provisions must reflect the best estimate of future cash flows, including demographic, economic, and legal developments, without a zero floor or minimum surrender value (p. 6-7).
- The Solvency Capital Requirement is calculated according to a detailed standard formula covering underwriting, market, credit, operational risks, and considering risk mitigation techniques (p. 9-12).
- Internal models are permitted under strict conditions of adequacy, statistical quality, validation, and governance integration (p. 12-13).
- Governance requires clear separation of responsibilities, rigorous internal controls, competence and integrity requirements, as well as rules on remuneration and subcontracting (p. 13-14).
- Additional capital requirements may be imposed to cover specific risks not accounted for by the standard formula (p. 14).
- Transparency is enhanced by detailed obligations to publish financial information and regularly communicate with supervisory authorities (p. 14-15).
- The prudential treatment of securitization vehicles is regulated to ensure risk limitation and own funds protection (p. 11-13).
The conclusions emphasize the need for proportionate application according to the nature and complexity of risks, strong governance, and increased transparency to ensure sector resilience. Recommendations include rigorous adoption of valuation methods, development and appropriate use of internal models, establishment of a robust governance system, and compliance with reporting and communication obligations. These measures aim to guarantee insurance undertakings' solvency and policyholders' protection while promoting regulatory convergence within the European Union.
This regulation was developed to supplement Directive 2009/138/EC (Solvency II) by specifying the technical implementing rules necessary for harmonized application of prudential requirements within the European Union. It responds to the need to ensure the financial stability of insurance and reinsurance undertakings, policyholders' protection, and market confidence. The context is marked by the intention to integrate best international practices in valuation, risk management, and governance, while considering the principle of proportionality according to the nature, scale, and complexity of companies' risks (p. 5-6).
The main objectives are:
- Define valuation methods for assets and liabilities, notably technical provisions, in compliance with international accounting standards.
- Specify the modalities for calculating the Solvency Capital Requirement according to the standard formula and conditions for using internal models.
- Strengthen governance requirements, including separation of responsibilities, internal controls, and competence and integrity of key personnel.
- Harmonize reporting and transparency obligations towards supervisory authorities and the public.
- Regulate the prudential treatment of securitization vehicles and specific rules applicable to insurance groups.
The document's limitations concern partial coverage of provisions (only the first 256 pages are provided here) and focus on technical rules without detailing broader legislative or economic aspects.
Valuation of assets and liabilities:
- Valuation must follow international accounting standards adopted by the Commission (Regulation EC No 1606/2002) except for specific exceptions (p. 6).
- The valuation hierarchy prioritizes prices quoted on an active market for the same assets or liabilities, ensuring reliable economic valuation (p. 6).
- Technical provisions cover only existing commitments, excluding future business, and must incorporate relevant contractual options (p. 6).
- The best estimate is the probability-weighted average of future cash flows, considering demographic, economic, social, technological, and legal developments (p. 6-7).
- Technical provisions may be negative and are not subject to a zero floor nor minimum surrender values (p. 6).
Solvency Capital Requirement and standard formula:
- Capital is calculated according to a detailed standard formula covering underwriting risks (life, non-life, health), market, counterparty, intangible assets, and operational risks (p. 9-12).
- The formula includes specific modules and sub-modules with correlation coefficients, volatility adjustments, and consideration of risk mitigation techniques (p. 9-12).
- Calculation accounts for expected profits, future discretionary benefits, and diversification effects at the portfolio level (p. 6-7, 9).
Internal models:
- Internal models are authorized under strict conditions of adequacy to the activity, statistical quality, validation, documentation, and governance integration (p. 12-13).
- They must be used in risk management and decision-making processes, while recognizing their limitations (p. 12-13).
- Partial internal models may be integrated into the standard formula subject to approval (p. 12).
Governance:
- The governance system must ensure clear allocation of responsibilities, avoid conflicts of interest, and provide effective control (p. 13-14).
- Key functions must be independent, with the possibility to report directly to the management body (p. 13).
- Persons managing the undertaking must meet competence and integrity criteria, verified notably by supervisory authorities (p. 13).
- Subcontracting is regulated by strict requirements on selection, written agreement, and supervision (p. 13).
- Remuneration policies must avoid encouraging excessive risk-taking (p. 14).
Additional capital requirements:
- Supervisory authorities may impose additional requirements to cover specific risks not accounted for in the standard formula (p. 14).
- These requirements must be tailored to each undertaking and consistent among similar undertakings (p. 14).
Reporting and transparency:
- Undertakings must publish detailed information on their solvency and financial situation, adapted to their profile and proportionate (p. 14-15).
- They must regularly communicate reports to supervisory authorities, including the solvency and financial condition report and a regular report to the supervisor (p. 14-15).
- Supervisory authorities publish aggregated statistical data to ensure transparency and comparability (p. 15).
Securitization vehicles:
- The prudential treatment of securitization vehicles is regulated to ensure risk limitation and own funds protection (p. 11-13).
- Vehicles must be protected against the liquidation of a ceding insurance undertaking and meet competence and integrity criteria for their managers (p. 11-13).
- Investments in securitization positions require thorough knowledge and specific prudential treatment (p. 11-13).
Established facts:
- The valuation of assets and liabilities must comply with international accounting standards, with a clear hierarchy prioritizing active market prices (p. 6).
- Technical provisions cover only existing commitments and incorporate an improved probabilistic estimate of future cash flows (p. 6-7).
- The standard formula for calculating the Solvency Capital Requirement is detailed and covers all major risks, with specific modules (p. 9-12).
- Internal models are subject to strict quality, validation, and governance integration requirements (p. 12-13).
- The governance system imposes rigorous internal controls, competence and integrity criteria, and regulates subcontracting and remuneration (p. 13-14).
- Additional capital requirements may be imposed for specific risks (p. 14).
- Reporting and transparency obligations are detailed and proportionate (p. 14-15).
- The prudential treatment of securitization vehicles is regulated to limit risks (p. 11-13).
Assumptions:
- The best estimate of technical provisions is based on the probability-weighted average of future cash flows, incorporating various developments (p. 6-7).
- Risks are modeled according to specific assumptions, notably on the non-significance of certain mass accident or concentration risks (p. 9-10).
- The credit risk adjustment on risk-free interest rates is based on representative market rates, notably 3-month swaps (p. 6-7).
Interpretations:
- Proportionality is a key principle, allowing adaptation of the regulatory burden to the complexity and risk profile of undertakings (p. 5-6).
- Integration of internal models into governance aims to improve risk management while avoiding blind trust (p. 12-13).
- Enhanced governance is essential to ensure the solidity and transparency of insurance undertakings (p. 13-14).
Uncertainties:
- The evolution of internal models and correlation coefficients requires monitoring and regular revisions (p. 12).
- The complexity of calculations and scenarios may generate model errors difficult to quantify precisely (p. 6).
- The impact of credit risk adjustments and risk mitigation techniques depends on market conditions and future practices (p. 6-7, 11).
The regulation emphasizes that the implementation of prudential requirements must be proportionate to the nature, scale, and complexity of insurance and reinsurance undertakings' risks (p. 5). It recommends:
- Rigorous application of valuation methods compliant with international accounting standards, with a clear hierarchy prioritizing active market prices (p. 6).
- Calculation of technical provisions according to the best probabilistic estimate, incorporating all relevant uncertainties and developments, without a floor or minimum surrender value (p. 6-7).
- Use of the detailed standard formula for calculating the Solvency Capital Requirement, covering all major risks, considering risk mitigation techniques and expected profits (p. 9-12).
- Development and use of adapted, validated internal models integrated into governance, while recognizing their limitations (p. 12-13).
- Strengthening the governance system with separation of responsibilities, internal controls, competence and integrity criteria, subcontracting oversight, and prudent remuneration policy (p. 13-14).
- The possibility for supervisory authorities to impose additional capital requirements tailored to specific risks (p. 14).
- Compliance with reporting and transparency obligations, proportionate to the risk profile, to ensure market confidence and effective supervision (p. 14-15).
- Prudential regulation of securitization vehicles to limit risks and protect own funds (p. 11-13).
These measures aim to ensure solvency, financial stability, and policyholders' protection while promoting harmonized regulatory convergence within the European Union.
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