The Standard Formula: A Guide to Solvency II – Chapter 8: Capital Requirements

Skadden Publication

Robert A. Chaplin William Adams

See all chapters of A Guide to Solvency II.

Introduction

“The supervisory regime should provide for a risk-sensitive requirement, which is based on a prospective calculation to ensure accurate and timely intervention by supervisory authorities (the Solvency Capital Requirement), and a minimum level of security below which the amount of financial resources should not fall (the Minimum Capital Requirement). Both capital requirements should be harmonised throughout the Community in order to achieve a uniform level of protection for policyholders. For the good functioning of this Directive, there should be an adequate ladder of intervention between the Solvency Capital Requirement and the Minimum Capital Requirement.”461

The Solvency Capital Requirement

The SCR is designed to protect policyholders by helping ensure that insurers can survive difficult periods and pay claims as they fall due. It prescribes a specific level of capital that an insurer is expected to hold, calculated after taking into account a diverse range of risks. Solvency II requires that the SCR is calculated at a “value-at-risk” that is subject to a 99.5% confidence level. In other words, the SCR should allow the insurer to be able to withstand, without its entire depletion, all but the most extreme risks that occur less than once every 200 years.

The SCR operates alongside the MCR, which is a significantly lower threshold than the SCR. If an insurer’s capital falls below the SCR, the PRA is able to intervene in the running of the insurer. If the level of capital falls below the MCR, the PRA has the right to withdraw authorisation and close the insurer to new business.

The SCR must be calculated at least annually and the result reported to the PRA. Insurers must continue to monitor their amount of capital and their SCR on an ongoing basis. If there is a significant change in an insurer’s risk profile, it must recalculate its SCR as soon as possible and report the new result to the PRA.462 The SCR may be calculated either by using the standard formula, prescribed by the PRA Rulebook and Solvency II, or by using a PRA-approved IM bespoke to the company concerned.Skadden | The Standard Formula Podcast - Click Here to Listen

The SCR and MCR are not to be confused with a (re)insurer’s technical provisions, being the assets required to meet its expected, ongoing obligations to policyholders. The SCR (and MCR) sits as a buffer on top of technical provisions to guard against adverse deviation in market, operating or other conditions on at least a 1 in 200 basis. Equally, the SCR and MCR are not to be confused with “own funds”, being the capital items with which a (re)insurer must cover its SCR/MCR (or the assets in which a (re)insurer may invest the proceeds of such own-fund items). These different concepts and regimes are covered in other chapters.

There are two main methods of calculating the SCR under Solvency II: the standard formula and internal model methods. This chapter will focus on the former, which must be used by all (re)insurers not using an approved internal model.

Following Brexit, the UK’s divergence from EU-derived rules includes liberalisation of the EU Solvency II regime towards a new Solvency UK, moving the UK back toward a less prescriptive and more principles-based regulatory rule set. To date, these changes have not touched directly on SCR and MCR, but we expect the PRA to continue to develop these areas of divergence in the coming years. The Amendments (discussed in previous chapters) do, however, affect the treatment of both long-term equities and the symmetric adjustment, detailed further below.

In this chapter, we summarise the Solvency II position, together with the UK approach (to the extent different or otherwise noteworthy).

1. Key Features of the Solvency Capital Requirement

Structure

The SCR calculated using the standard formula is made up of:

  • The basic SCR.
  • The capital requirement for operational risk.
  • An adjustment for the loss-absorbing capacity of technical provisions and deferred taxes.
  • A capital requirement for intangible asset risk.463

Principles

The key principles of the SCR are as follows:464

  • It must be calculated on the presumption that the undertaking will pursue its business as a going concern.
  • It must be calibrated so as to ensure that all quantifiable risks to which an undertaking is exposed are taken into account.
  • It must cover existing business as well as new business expected to be written over the following 12 months.

Diversification

Where appropriate, diversification effects must be taken into account in the design of each risk module.465 This assumes that the assets of a (re)insurer are fungible, i.e., they can be used generally to meet the liabilities of the (re)insurer wherever those liabilities arise.

Correlation matrices also apply within the underwriting and market risk modules. These allow for the recognition of “diversification effects” in the calculation — i.e., where a (re)insurer has diversified its risks and/or holds a diversified asset portfolio, not all risks/assets will respond in the same way to a given event. The overall SCR calculation should therefore not simply aggregate all individually calculated capital charges.

As an exception to this, adjustments should be made to reflect the absence of diversification in the case of assets and liabilities where restrictions exist.466 In these cases, a notional SCR should be calculated for (i) the RFF; and (ii) the remaining part of the undertaking, as though they were separate undertakings.

Risk Mitigation

The SCR must take account of the effect of risk mitigation techniques, provided that credit risk and other risks arising from the use of such techniques are properly reflected in the SCR. Risk mitigation techniques include collateral, guarantees and reinsurance.

We discuss these techniques, and their impact on SCR, in detail in Chapter 2: Reinsurance and Risk Transfer.

Look-Through Approach

The SCR must be calculated, where applicable, on the basis of the “look-through approach”. Where an undertaking has an indirect exposure to an asset, the SCR should be calculated with reference to that asset.

The EIOPA has published Level 3 Guidelines on how the look-through approach should be applied, including the application of the approach to money market funds, the number of iterations of the approach an undertaking should perform, the look-through treatment of real estate and the look-through treatment of catastrophe risk.

External Credit Ratings

The SCR standard formula provides for different risk charges depending on whether an external rating is available and what rating is assigned. (Re)insurers must evaluate the appropriateness of those external credit assessments as part of their risk management by using alternative credit assessments.467

There are references throughout the Level 2 Delegated Regulation to different credit ratings (or credit quality steps) measured in accordance with the Commission Implementing Regulation, which determine the relevant capital treatment.

2. Basic Solvency Capital Requirement468

The basic SCR figure is reached by aggregating the capital charges arising from each of the specified risk modules, in accordance with a formula and correlation matrix set out in the Solvency II Directive.

The specified risk modules are:

  • Underwriting risk, split into:
    • Non-life underwriting risk.
    • Life underwriting risk.
    • Health underwriting risk.
  • Market risk.
  • Counterparty default risk.

3. Underwriting Risk

Non-life Underwriting Risk Module

This must include at least:469

  • A non-life premium and reserve risk sub-module covering the risk of loss, or of adverse change in the value of insurance liabilities, resulting from fluctuations in the timing, frequency and severity of insured events, and in the timing and amount of claim settlements.
  • A non-life catastrophe risk sub-module covering the risk of loss, or of adverse change in the value of insurance liabilities, resulting from significant uncertainty of pricing and provisioning assumptions related to extreme or exceptional events.

The Level 2 Delegated Regulation also (i) adds a “non-life lapse risk sub-module” to the non-life underwriting risk module; and (ii) breaks up the non-life catastrophe risk sub-module into the following sub- and sub-sub-modules:470

  • A natural catastrophe risk sub-module, which is sub-divided into risk of windstorms, earthquakes, floods, hail and subsidence.
  • A man-made catastrophe risk sub-module, which is sub-divided into risk relating to motor vehicle liability, marine, aviation, fire, liability and credit and surety.

Life Underwriting Risk Module

This comprises sub-modules to cover the risk of loss, or of adverse change, in the value of insurance liabilities, resulting from:471

  • Mortality risk i.e., changes to the level, trend or volatility of mortality rates, where an increase in the mortality rate leads to an increase in the value of insurance liabilities.
  • Longevity risk i.e., changes to the level, trend or volatility of mortality rates, where a decrease in the mortality rate leads to an increase in the value of insurance liabilities.
  • Disability-morbidity risk i.e., changes to the level, trend or volatility of disability, sickness and morbidity rates.
  • Life expense risk i.e., changes to the level, trend or volatility of the expenses incurred in servicing contracts of (re)insurance contracts.
  • Revision risk i.e., changes to the level, trend or volatility of the revision rates applied to annuities, due to changes to the legal environment or to the state of health of the person insured.
  • Lapse risk i.e., changes to the level or volatility of the rates of policy lapses, terminations, renewals and surrenders.
  • Life-catastrophe risk i.e., significant uncertainty of pricing and provisioning assumptions related to extreme or irregular events.

Detailed calculations for each of these, together with the formula and correlation matrix for calculating the overall life underwriting risk capital requirement, are set out in the Level 2 Delegated Regulation.472

Health Underwriting Risk Module

This must cover at least the risk of loss, or of adverse change, in the value of insurance liabilities resulting from:

  • Changes to the level, trend or volatility of the expenses incurred in servicing contracts of (re)insurance contracts.
  • Fluctuations in the timing, frequency and severity of insured events, and in the timing and amount of claim settlements at the time of provisioning.
  • The significant uncertainty of pricing and provisioning assumptions related to outbreaks of major epidemics, as well as the unusual accumulation of risks under such extreme circumstances.

The Level 2 Delegated Regulation sets out further categories of risk sub-modules that must be covered in the health underwriting risk module and which treat the risk module with more granularity.

Undertaking Specific Parameters

Subject to approval by the relevant supervisory authority, an undertaking may replace a subset of parameters of the standard formula with parameters specific to the undertaking concerned when calculating the life, non-life or health underwriting risk modules.473

In addition, the supervisory authority may require this, where it is inappropriate for the (re)insurer to use the standard parameters where the risk profile of the undertaking deviates significantly from the assumptions underlying the standard formula calculation.474

In the UK (re)insurers wishing to use undertaking specific parameters (USPs) will need to apply to the PRA for approval in the form of a waiver. The PRA has been able to also use its powers under Section 55M of the FSMA where it wished to require a (re)insurer to use USPs; however, the PRA will no longer have this power effective from 31 December 2024.

4. Market Risk

Overview

The market risk module seeks to capture the risk of falls in the value of assets held by a (re)insurer and increases in the value of its non-insurance liabilities. It does this through a series of sub-modules addressing different market factors that may affect the value of assets and liabilities. In each case, a risk charge is calculated, which contributes towards the overall capital charge for market risk. The overall capital requirement for market risk is then calculated using the formula and correlation matrix set out in the Level 2 Delegated Regulation.475

The market risk module includes at least the following sub-modules.

Interest-Rate Risk Sub-Module476

The interest-rate risk sub-module covers the sensitivity of the values of assets, liabilities and financial instruments to changes in the term structure of interest rates, or in the volatility of interest rates.

Equity Risk Sub-Module

Overview

The equity risk sub-module covers the sensitivity of the values of assets, liabilities and financial instruments to changes to the level or to the volatility of market prices of equities.477

Equities are divided into type 1 equities, type 2 equities and qualifying infrastructure equities, with different risk charges applying to each category.

Type 1 and 2 Equities

Type 1 equities are:

  • Equities listed in regulated markets in countries that are members of the EEA or the Organisation for Economic Co-operation and Development (OECD).478
  • Equities held within or units or shares in:479
    • collective investment undertakings that are “qualifying social entrepreneurship funds”;
    • collective investment undertakings that are “qualifying venture capital funds”; or
    • closed-ended and unleveraged alternative investment funds established or marketed in the EU.

Type 2 equities are:

  • Equities listed on stock exchanges in countries that are not members of the EEA or OECD.
  • Non-listed equities.
  • Commodities and other alternative investments.
  • All assets (other than those covered in the interest rate risk sub-module, the property risk sub-module or the spread risk sub-module), including the assets and indirect exposures where a look-through approach is not possible.

The Standard Charges

The risk charge for equities depends not just on the type of equity but also on whether or not it constitutes a “strategic investment” (see below). The charges under the “standard” equity risk sub-module are:

Equity type480 Investment of a strategic nature in a related undertaking? Risk charge equal to the loss in BOF resulting from a decrease in the value of equities of: 
1 Yes 22%
1 No 39% + symmetric adjustment mechanism
2 Yes 22%
2 No 49% + symmetric adjustment mechanism
Holdings in qualifying infrastructure entities 481 482 483 Investment of a strategic nature in a related undertaking? Risk charge equal to the loss in BOF resulting from a decrease in the value of equities of: 
Qualifying infrastructure project entities Yes 22%
Qualifying infrastructure project entities No 30% + 77% of the symmetric adjustment mechanism
Qualifying infrastructure corporate entities Yes 22%
Qualifying infrastructure corporate entities No 36% + 92% of the symmetric adjustment mechanism


Strategic Investments

Equity investments are of a strategic nature where:

  • The value of the equity investment is likely to be materially less volatile for the following 12 months than the value of other equities over the same period.
  • The nature of the investment is strategic taking into account all relevant factors, including:
    • The existence of a clear decisive strategy to continue holding the participation for a long period.
    • The consistency of the strategy with the main policies guiding the actions of the undertaking and, where the undertaking is part of a group, the actions of the group.
    • The participating undertaking’s ability to continue holding the participation.
    • The existence of a “durable link”.484

The Symmetric Adjustment Mechanism

The symmetric adjustment mechanism is intended to mitigate undue potential pro-cyclical effects of the financial system, and to avoid a situation where (re)insurers are forced to raise additional capital or sell investments as a result of adverse movements in financial markets.485

The symmetric adjustment mechanism adjusts the standard charge, where applicable, by reference to the current level and a weighted average level of an “appropriate equity index”, to be determined by the EIOPA under an implementing technical standard (or by the PRA for UK purposes). The result of the adjustment must not result in a capital charge more than 10% higher or lower than the standard equity capital charge.486

In the 2020 Review, the European Commission proposed amending the parameters of the symmetric adjustment mechanism so that the adjustment must not result in a capital charge more than 17% higher or lower than the standard equity capital charge.

Long-Term Equity Investments

Long-term investments in equity benefit from the same capital charge as strategic investments, provided certain criteria relating to the asset-liability and investment management of the insurer are met. For example, such an investment must have an average holding period of five years or more and be able to be held under stressed conditions for a further 10 years.

In the 2020 Review, the European Commission proposed a series of updates to the qualifying criteria, including relaxing requirements around the ring-fencing and holding period of the assets, and introducing a differentiation between life firms (illiquidity of BEL and a duration of more than 10 years) and non-life firms (hold an amount of liquid assets larger than net BEL).

The Committee on Economic and Monetary Affairs has further proposed to elevate the allowance for long-term equities to the level of the Solvency II Directive, from the Level 2 Delegated Regulation, signalling the political significance of this change. The European Parliament also proposes to simplify the eligibility criteria by leaving to the insurers the onus of managing such investments via risk management, asset-liability management and investment policy tools.

Retirement Business

A “duration-based equity risk sub-module” may apply instead of the equity risk sub-module to (re)insurers writing specified types of retirement business, where the assets and liabilities corresponding to the relevant business are ring-fenced, and where the average duration of the relevant liabilities exceeds 12 years.487

Property (Real Estate) Risk Sub-Module

The property risk sub-module covers the sensitivity of the values of assets, liabilities and financial instruments to changes to the level or to the volatility of market prices of real estate. The EIOPA Level 3 Guidelines distinguish:

  • Direct investments in land, buildings and immovable property rights and property investment held for the own use of the undertaking, which should be dealt with under the property risk sub-module.
  • Equity investments in companies exclusively engaged in facility management, real estate administration, real estate project development or similar activities, which should be dealt with under the equity risk sub-module.
  • Investments in real estate through collective investment undertakings or other investments packaged as funds, which should have the look-through approach applied.

It provides that the capital requirement for real property risk is to be equal to the loss in the BOF that would result from a decrease of 25% in the value of immovable property.488

Spread Risk Sub-Module

The spread risk sub-module covers the sensitivity of the values of assets, liabilities and financial instruments to changes to the level or volatility of credit spreads over the RFR term structure.489

The capital charge for spread risk is made up of three components, as set out immediately below:

  • A Charge for Bonds and Loans. This is an amount equal to the loss in the BOF that would result from a decrease in the value of such bonds or loans calculated in accordance with a table set out in the Level 2 Delegated Regulation.490 The assumed decrease varies depending on the duration of the bond and the “credit quality” (i.e., rating) of the bond or loan. Longer-dated instruments and instruments with a lower credit quality will attract a higher capital charge. Separate figures apply where no rating is available, which vary depending on whether collateral has been posted by the debtor.491
  • A Charge for Securitisation Position. STS securitisations (both senior and non-senior)492 are allocated a relatively low capital charge. In contrast, non-STS securitisations are allocated a different charge.
  • A Charge for Credit Derivatives. This must be calculated under the methodology set out in the Level 2 Delegated Regulation493 except where: (i) the credit derivative is part of the undertaking’s risk mitigation policy; and (ii) the undertaking holds either the instruments underlying the credit derivative or another exposure, where the basis risk between the exposure held and the instruments underlying the credit derivative is not material.

Mortgage loans that meet the requirements set out in the Level 2 Delegated Regulation494 are not covered by the spread risk sub-module. Instead, such loans are dealt with under the counterparty default risk module.

Specific Exposures

Certain types of instrument that would otherwise attract a capital charge under the provisions above qualify for special treatment in the spread risk sub-module (as specified in each case). These include:

  • Highly rated covered bonds.
  • Bonds or loans issued by (i) the European Central Bank, member states’ central government and central banks (i.e., EU sovereign debt) or, in the case of the UK, the UK government or the Bank of England; or (ii) multilateral development banks and certain international organisations.
  • Bonds or loans issued by other governments and central banks.
  • Bonds or loans issued by a (re)insurance undertaking or a third country (re)insurance undertaking in an equivalent jurisdiction.
  • Bonds or loans issued by certain credit institutions and financial institutions.
  • Credit derivatives where the underlying financial instrument is a bond or loan issued by (i) the European Central Bank, member states’ central government and central banks (i.e., EU sovereign debt) or, in the case of the UK, the UK government or the Bank of England; or (ii) multilateral development banks and certain international organisations.
  • Exposures that relate to qualifying infrastructure investments (subject to certain conditions).

Market Risk Concentrations Sub-Module495

The market risk concentrations sub-module covers additional risks to a (re)insurer stemming either from lack of diversification in the asset portfolio or from large exposure to default risk by a single issuer of securities or a group of related issuers. It covers assets considered in the equity, interest, spread and property risk sub-modules of the market risk module. It does not apply to assets covered by the counterparty default risk module.

Currency Risk Sub-Module496

The currency risk sub-module covers the sensitivity of the values of assets, liabilities and financial instruments to changes in the level or in the volatility of currency exchange rates.

The market risk module design is intended to strip out currency effects in the calibration of the other sub-modules so that currency effects appear only in the currency risk sub-module.

5. Solvency Capital Requirement Standard Formula: Counterparty Default Risk Module497

Counterparty default risk covers the risk of possible losses due to the unexpected default or deterioration in the credit standing of certain counterparties and debtors. The capital charge for counterparty default risk is made up of a capital requirement for type 1 exposures and a capital requirement for type 2 exposures.

Where an instrument is subject to market risk, SCR charges for spread risk and concentration apply. Otherwise, SCR charges for counterparty default risk apply.

Type 1 and 2 Exposures

Type 1 exposures are:

  • Risk mitigation contracts including reinsurance arrangements, arrangements with SPVs, insurance securitisations and derivatives.498
  • Cash at bank.
  • Deposits with ceding undertakings where the number of single-name exposures (being exposures to undertakings belonging to the same corporate group) does not exceed 15.
  • Guarantees, letters of credit and similar arrangements provided by the undertaking where payment obligations depend on the credit standing/default of a counterparty.

In this case, the capital requirement for counterparty default risk is calculated based on the “loss-given default” and the “probability of default” for a given asset.

Type 2 exposures are all credit exposures that are not covered in the spread risk sub-module and that are not type 1 exposures, including:

  • Receivables from intermediaries.
  • Policyholder debtors.
  • Mortgage loans meeting requirements set out in Level 2 Delegated Regulation.499
  • Deposits with ceding undertakings where the number of single name exposures exceeds 15.
  • Commitments that are called up but unpaid where the number of single name exposures exceeds 15.

In this case, the capital requirement for counterparty default risk is calculated as the loss in BOF that would result from an instantaneous decrease in the value of type 2 exposures.500

6. Solvency Capital Requirement Standard Formula: Intangible Asset Module

Generally, intangible assets are valued at zero in the Solvency II balance sheet.

However, an intangible asset, other than goodwill (which is always valued at zero), can be ascribed a value (based on quoted market prices in active markets) if it can be sold separately and the undertaking can demonstrate that there is a value for the same or similar assets that has been derived in accordance with the Level 2 Delegated Regulation.501 Accordingly, the Level 2 Delegated Regulation sets out a capital charge in respect of the amount of intangible assets.502

7. Solvency Capital Requirement Standard Formula: Operational Risk Module

The Solvency II Directive503 requires the SCR (calculated under either the standard formula or using an IM) to cover operational risk to the extent not already reflected in the other risk modules. The capital requirement for operational risk is capped at 30% of the basic SCR (other than in respect of unit-linked business).504

The Level 2 Delegated Regulation sets out the calculation of the capital requirement for operational risk under the Standard Formula based on the level of earned premiums over a specified period and the amount of technical provisions (not including the risk margin and without deduction of recoverables from reinsurance contracts and SPVs).

8. Solvency Capital Requirement Standard Formula: Loss Absorbency

The calculation of the SCR under the Standard Formula includes an adjustment (where applicable) for the loss-absorbing capacity of technical provisions and deferred taxes.505

The purpose of the adjustment is to reflect the fact that in some circumstances where unexpected losses arise, the undertaking can partially  for these through: (i) reducing benefits payable on policies involving future discretionary benefits; and/or (ii) reducing future deferred tax liabilities.506

9. Look-Through Approach507

The “look-through approach” applies to:

  • Indirect exposures to market risk (including through collective investment undertakings and investments packaged as funds).
  • Indirect exposures to underwriting risk.
  • Indirect exposures to counterparty risk.

The Level 2 Delegated Regulation508 sets out the steps required where it is not possible to apply the look-through approach, in the case of collective investment undertakings and investments packaged as funds. Grouping of exposures are permitted when the target asset allocation is not available at the requisite level of granularity for all sub-modules, provided this is applied in a prudent manner.

Related Undertakings

Related undertakings, except for those whose main purpose is to hold or manage assets on behalf of the participating (re)insurance undertaking, are explicitly excluded from the look-through approach509 and are therefore treated under the equity risk sub-module.

10. The Minimum Capital Requirement510

In addition to the SCR, (re)insurers must also calculate the MCR and hold eligible own funds to cover it.

The MCR must be calibrated to a confidence level of 85% over a one-year period (in contrast to the 99.5% value-at-risk calibration for the SCR).

The MCR is subject to a cap and two separate floors:

  • The MCR must not exceed 40% of the (re)insurer’s SCR, including any capital add-on.
  • The MCR must not be less than 25% of the (re)insurer’s SCR, including any capital add-on.
  • The MCR has an absolute floor, set at a different amount for each of general insurers, long-term insurers, pure reinsurers and composite insurers.

(Re)insurers must calculate the MCR and report the results to the PRA at least quarterly.

_______________

461 Recital 60 of the Solvency II Directive as onshored by the EU (Withdrawal) Act 2018, implemented through the PRA Rulebook.

462 Article 102, ibid (transposed in Paragraphs 4.1 to 4.5, Solvency Capital Requirement — General Provisions Part of the PRA Rulebook).

463 Article 87 of the Level 2 Delegated Regulation.

464 Article 101(2) and 101(3) of the Solvency II Directive (transposed in Paragraphs 3.2 to 3.4, Solvency Capital Requirement — General Provisions Part of the PRA Rulebook).

465 Article 104(4), ibid (transposed in Paragraph 3.4, Solvency Capital Requirement — General Provisions Part of the PRA Rulebook).

466 Recitals 37 and 39 and Articles 216 and 217 of the Level 2 Delegated Regulation.

467 Article 44(4a) of the Solvency II Directive (transposed in Paragraph 3.6, Conditions on Governing Business Part of the PRA Rulebook).

468 Article 104(1) and Annex IV, point 1, ibid (transposed in Paragraph 3.1, Solvency Capital Requirement — Standard Formula Part of the PRA Rulebook).

469 Article 105(2), ibid (transposed in Paragraphs 3.5 and 3.6, Solvency Capital Requirement — Standard Formula Part of the PRA Rulebook.

470 Articles 114 to 135 of the Level 2 Delegated Regulation.

471 (1) Article 105(3) and Annex IV, point 3 of the Solvency II Directive (transposed in Paragraphs 3.7 to 3.9, Solvency Capital Requirement — Standard Formula Part of the PRA Rulebook); and (2) Articles 136 to 143 of the Level 2 Delegated Regulation.

472 Articles 136 to 143 of the Level 2 Delegated Regulation.

473 Article 104(7) of the Solvency II Directive (transposed in Regulation 47 of the Solvency 2 Regulations 2015).

474 Article 110, ibid (transposed in Paragraphs 2.2 and 2.3 of the PRA SS4/15 — please note paragraph 2.3 will no longer be in force effective from 31 December 2024).

475 Article 164(2) of the Level 2 Delegated Regulation.

476 Articles 165 to 167, ibid.

477 Articles 168 to 173, ibid.

478 Article 168(2), ibid.

479 Article 168(6), ibid.

480 Article 169(1)-(2), ibid.

481 Article 169(3), ibid (as added by Commission Delegated Regulation (EU) 2016/467).

482 These are entities or groups that derive the substantial majority of their revenues from owning, financing, developing or operating infrastructure assets split between: (i) infrastructure corporate entities (having a business object beyond a specific infrastructure project); and (ii) infrastructure project entities (being limited to one or more specific infrastructure projects).

483 Article 164a of the Level 2 Delegated Regulation (as added by Commission Delegated Regulation (EU) 2016/467) sets out criteria such as the creditworthiness of the entity and applicable contractual arrangements. An infrastructure corporate entity must also meet the criteria set out in Article 164b of the Level 2 Delegated Regulation (as added by Commission Delegated Regulation (EU) 2016/467), including that the majority of the entity’s revenues are derived from infrastructure assets located in the EEA or the OECD and other requirements regarding security on source and type of revenues.

484 Article 171 of the Level 2 Delegated Regulation.

485 Recital 61 of the Solvency II Directive.

486 Article 106, ibid (transposed in (i) Paragraph 4.1, Solvency Capital Requirement — Standard Formula Part of the PRA Rulebook; and (ii) Article 172 of the Level 2 Delegated Regulation).

487 (1) Article 304, ibid; and (2) Article 170 of the Level 2 Delegated Regulation.

488 Article 74 of the Level 2 Delegated Regulation.

489 Articles 175 to 181, ibid.

490 Article 176, ibid.

491 Reduced capital charges for unlisted debt are available in the case of an internal credit quality assessment by the (re)insurer itself, with either a step 2 or step 3 credit quality. These include requirements that the debt is issued by a corporate entity based in the EEA, that the corporate entity has operated for at least 10 years without a credit event and that the debt constitutes a senior exposure.

492 As defined in the Commission Delegated Regulation (EU) 2018/1221.

493 Articles 175 and 179 of the Level 2 Delegated Regulation.

494 Article 191, ibid.

495 Articles 182 to 187, ibid.

496 Article 188, ibid.

497 Articles 189 to 202, ibid.

498 Irrespective of whether they are held for hedging or speculation

499 Article 191 of the Level 2 Delegated Regulation. These must be retail loans secured on residential property, the exposure must be to a natural person(s) or a small or medium enterprise, the value of the property must not materially depend on the credit quality of the borrower and the risk of the borrower must not materially depend on the performance of the underlying property asset. Other types of mortgage loans will be covered by the spread risk sub-module.

500 Article 202 of the Level 2 Delegated Regulation.

501 Article 10(2), ibid.

502 Articles 12 and 201, ibid.

503 Article 107(1) of the Solvency II Directive (transposed in Paragraph 5.1, Solvency Capital Requirement — Standard Formula Part of the PRA Rulebook).

504 Article 204 of the Level 2 Delegated Regulation.

505 Article 108 of the Solvency II Directive (transposed in Paragraph 6.1 and 6.2, Solvency Capital Requirement — Standard Formula Part of the PRA Rulebook).

506 Articles 206 and 207 of the Level 2 Delegated Regulation.

507 Article 84, ibid.

508 Article 84(3), ibid.

509 Article 84(4), ibid.

510 (1) Article 129 of the Solvency II Directive (transposed in Paragraphs 3.1 to 3.13, Minimum Capital Requirement Part of the PRA Rulebook); and (2) Articles 248 to 254 of the Level 2 Delegated Regulation.

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