Duration based equity risk
Approval of the use of the duration based equity risk
Overview of the measure
The Solvency II prudential regime introduces a solvency capital requirement (SCR) for insurance and reinsurance undertakings based on their risk profile as a whole, including financial risk. To calculate the risk associated with long-term investments in equities, undertakings have the option, subject to authorisation, of applying to ring-fenced assets for some pensions business a reduced equity shock compared to that laid down in the standard formula, provided that the average duration of liabilities on such contracts exceeds 12 years and that the undertakings can guarantee that it will indeed be able to hold its equities investments over long periods.
The provisions on the calculation of equity risk based on the holding period are laid down in Article 304 of Directive 2009/138/EC, known as “Solvency II”. They are clarified in Article 170 of Delegated Regulation (EU) 2015/35, known as “Level 2”.
The terms of this authorisation are laid down in ACPR Instruction 2015-I-04 on requests for approval to use the provisions on duration-based equity risk and its annexes.
Content of the application
A full list of documents to be submitted is set out in the annex to the aforementioned instruction.
In summary, the application must contain the following:
- information on the relevant scope, including the following:
- a description of the planned scope and the liabilities concerned
- the average duration of those liabilities
- the method used to calculate this average duration
- a report summarising investments within the relevant scope
- quantitative information that can be used to assess the impact of this provision on the solvency capital requirement
- information on the undertaking’s ability to hold investments in equities within the relevant scope, including the following:
- the investment policy and investment rules applicable to the relevant scope
- any investment management agreements pertaining to investments within the relevant scope
- decisions made by the undertaking’s competent body during the past 12 months pertaining to the management of those investments
- a breakdown of incoming and outgoing financial flows within the relevant scope for the past five financial years
- projected incoming and outgoing financial flows within the relevant scope, first under a deterministic scenario representing normal operating conditions and second under a deterministic stress scenario
- for applications submitted before the date on which the first set of annual information is submitted, quantitative information concerning the prudential balance sheet, own funds and the solvency capital requirement for the institution as a whole and the relevant scope.
Applications should be sent by post to the following address, as well as by e-mail to the supervisory unit responsible for undertaking or the group:
Secrétariat général de l’Autorité de contrôle prudentiel et de résolution
Brigade de contrôle des organismes d’assurance n°...
61, rue Taitbout
75436 Paris Cedex 09
The ACPR will reach its decision within a maximum of three months from receipt of the completed application.
Consequences for the group
If an undertaking using this measure belongs to a group, the calculation of equity risk across the portfolio on a combined or consolidated basis takes into account the measure; the group needs not request the same authorisation. However, the group is subject to the reporting requirements in connection with the use of that measure.
Updated on: 02/01/2019 15:10