Transitional measure on technical provisions

Approval of the use of the transitional measure on technical provisions

Overview of the measure

The Solvency II prudential regime provides for transitional measures to allow insurance and reinsurance institutions time to adapt before having to fully comply with the new provisions, and to smooth the financial effects of the changes over time. These measures require prior approval from the supervisory authority.

The transitional measure concerning technical provisions enables institutions to spread the impact of the change from the calculation of technical provisions based on “Solvency I” standards to a calculation based on “Solvency II” standards over 16 years.

It is based on the difference between Solvency II technical provisions, including the best estimate of liabilities and the risk margin, and Solvency I technical provisions (including in particular mathematical provisions, the PTS (special technical provision) and the PTSC (additional special technical provision) for class 26, the policyholder surplus reserve, the provision for guaranteed minimum benefits, overall management provisions and the provision for financial risks. The transitional deduction, which is calculated by multiplying this difference by a coefficient that decreases in a straight line over time, is then deducted from technical provisions calculated in accordance with the Solvency II prudential regime. This reduces net deferred tax assets by a corresponding amount.

The transitional measure can be applied to each homogeneous risk group. It is therefore possible to apply it to only one part of the portfolio or one business line. This transitional measure, across a given scope, is not compatible with the application of the transitional measure on interest rates, but is compatible with the use of the volatility adjustment and the matching adjustment.

The amounts of technical provisions included in the calculation of the transitional deduction may be recalculated:

  • every two years, by authorisation of the ACPR;
  • at any time in the event of a significant change in the portfolio risk profile, by authorisation of or at the initiative of the ACPR.

Since the purpose of the transitional measure is to smooth any overall additional cost arising from the switch to Solvency II, the ACPR is authorised to cap the effect of the transitional measure such that the quantitative requirements (i.e. the sum of technical provisions on the balance sheet and the capital requirement) arising from the new regime are at least equal to those prevailing under Solvency I. Institutions must therefore make sure they take this cap into account when performing their calculations.

The use and impact of the transitional measure must be documented in the Solvency and Financial Condition Report.

Furthermore, institutions making use of this transitional measure and which would not cover their capital requirement without it must submit a phased implementation plan to the ACPR detailing how they intend to achieve compliance with the new regime at the end of the transitional period.

 

Regulatory references

The transitional measure on technical provisions is laid down in Articles L.351-5 and R.351-17 of the Insurance Code, applicable to institutions covered by each of the three codes, which transpose point 5 of Article 308 of Directive 2009/138/EC, known as “Solvency II”.

The terms of this authorisation are laid down in ACPR Instruction 2015-I-06 on requests for approval to use the transitional measure on technical provisions and its annexes. These are available via the following links:

Instruction 2015-I-06 on requests for approval to use the transitional measure on technical provisions

Annex 1: Content of the application for approval to use the transitional measure on technical provisions

Annex 2: Report detailing the calculation of the transitional measure on technical provisions

 

Content of the application

A full list of documents to be submitted is laid down in the annex to the aforementioned instruction. In summary, the application must contain the following:

  • documentation supporting the calculation or recalculation of this transitional measure, including the following:
    • a description of the planned scope and the liabilities concerned by the initial application or, in the case of an application for recalculation, changes in that scope and those liabilities
    • future regulatory report S22.05.b, as described in the draft Implementing Technical Standard published by EIOPA, which details how the transitional measure is to be calculated
  • documentation supporting the calculation or recalculation of Solvency II technical provisions, together with the conclusions of the validation report
  • documentation supporting the calculation or recalculation of Solvency I technical provisions
  • the solvency capital requirement coverage ratio with and without applying the transitional measure
  • where the solvency capital requirement is not covered without applying the transitional measure, a phased implementation plan setting out measures planned by the institution to ensure that it complies with the solvency capital requirement by the end of the transitional period

 

Procedure

Applications should be sent by post to the following address, as well as by e-mail to the inspection team responsible for the group:

Secrétariat général de l’Autorité de contrôle prudentiel et de résolution
Brigade de contrôle des organismes d’assurance
61 Rue Taitbout
75436 Paris Cedex 09

For applications filed on or after 1 January 2016, the ACPR will reach its decision within a maximum of three months from receipt of the completed application.

For applications filed before 30 September 2015, the maximum response period is six months.

For applications filed between 1 October and 31 December 2015, the ACPR will reach its decision by 31 March 2016.

 

Consequences for the group

If an institution using this procedure belongs to a group, the group’s combined or consolidated financial statements are prepared on the basis of the individual financial statements after applying the measure; the group need not request the same authorisation. However, the group is subject to the reporting requirements in connection with the use of that measure.

Updated on: 06/07/2018 15:12