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

Skadden Publication

Robert A. Chaplin George D. Belcher William Adams

See all chapters of A Guide to Solvency II.

“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 policy holders. 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.”247

Introduction

The Solvency Capital Requirement

The Solvency Capital Requirement (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 Minimum Capital Requirement (MCR), which is a significantly lower threshold than the SCR. If an insurer’s capital falls below the SCR, the (Prudential Regulatory Authority) 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.

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The SCR must be calculated annually, and the result must be 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.248 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 internal model bespoke to the company concerned.

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) sit 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 funds 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 the UK’s departure from the European Union on 31 December 2020, the UK’s divergence from EU-derived rules includes liberalisation of the EU Solvency II regime toward 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 European Union has, however, as part of its 2020 review of Solvency II (the 2020 review), proposed amendments to treatment of both long-term equities and the symmetric adjustment, detailed further below. The commission, council and Parliament will conclude negotiations to finalise these aspects with a view to adoption by member states by June 2025.

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 SCR

Structure

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

  • The Basic Solvency Capital Requirement.
  • 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.249

Principles

The key principles of the SCR are as follows:250

  • 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.251 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 (so-called “ring-fenced funds”).252 In these cases, a notional SCR should be calculated for (i) the ring-fenced fund; 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.253 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.”254 Where an undertaking has an indirect exposure to an asset, the SCR should be calculated with reference to that asset.

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.255

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 (EU) 2016/1800, which determine the relevant capital treatment.

2. Basic Solvency Capital Requirement (Basic SCR)

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 Article 104(1) and Annex IV point (1) of the Solvency II Directive.

The specified risk modules are:

  • Underwriting risk, split into:
    • non-life underwriting risk;
    • life underwriting risk; and
    • health underwriting risk;
  • Market risk.
  • Counterparty default risk.

3. Underwriting Risk

Non-life Underwriting Risk Module

This must include at least:256

  • 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:

  • A natural catastrophe risk sub-module, which is sub-divided into risk of windstorms, earthquakes, floods, hail risk 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: 257

  • Mortality risk. i.e., changes in 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 in 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 in the level, trend or volatility of disability, sickness and morbidity rates.
  • Life expense risk. i.e., changes in the level, trend or volatility of the expenses incurred in servicing contracts of insurance or reinsurance contracts.
  • Revision risk. i.e., changes in the level, trend or volatility of the revision rates applied to annuities, due to changes in the legal environment or in the state of health of the person insured.
  • Lapse risk. i.e., changes in 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 Articles 136 to 143 of the Level 2 Delegated Regulation.

Health Underwriting Risk Module258

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

  • Changes in the level, trend or volatility of the expenses incurred in servicing contracts of insurance or reinsurance 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 (Articles 144 to 163) 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 (USPs)

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.259

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.260

In the UK261 (re)insurers wishing to use USPs will need to apply to the PRA for approval in the form of a waiver. The PRA may also use its powers under Section 55M of Financial Services and Markets Act 2000 where it wishes to require a (re)insurer to use USPs.

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

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

Interest Rate Risk Sub-module262

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 in the level or in the volatility of market prices of equities.263

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 which are members of the EEA or the OECD (Article 168(2)).
  • Equities held within or units or shares in:
    • collective investment undertakings that are “qualifying social entrepreneurship funds” (Article 168(6)(a));
    • collective investment undertakings that are “qualifying venture capital funds” (Article 168(6)(b)); or
    • closed-ended and unleveraged alternative investment funds established or marketed in the EU (Article 168(6)(c)).

Type 2 equities comprise:

  • 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 type264 Investment of a strategic nature in a related undertaking? Risk charge equal to the loss in basic own funds 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 entities265 266 267 Investment of a strategic nature in a related undertaking? Risk charge equal to the loss in basic own funds 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; and
    • the existence of a “durable link.”268

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.269

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 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.270

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 (illiquidity of best estimate of liabilities (BEL) and a duration of more than 10 years) and non-life firms (hold an amount of liquid assets larger than net BEL).

The ECON has further proposed to elevate the allowance for long-term equities to the directive level (from the Level 2 Delegated Regulation), signaling 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 by (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. 271

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 in the level or in the volatility of market prices of real estate. 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 basic own funds that would result from a decrease of 25% in the value of immovable property.272

Spread Risk Sub-module

The spread risk sub-module covers the sensitivity of the values of assets, liabilities and financial instruments to changes in the level or volatility of credit spreads over the risk-free interest-rate term structure.273

The capital charge for spread risk is made up of three components:

  • A charge for bonds and loans. This is an amount equal to the loss in the basic own funds that would result from a decrease in the value of such bonds or loans calculated in accordance with a table set out in Article 176 of the Level 2 Delegated Regulation. 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.274
  • A charge for securitisation position. Simple, transparent and standardised (STS) securitisations (both senior and non-senior)275 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 Articles 175 and 179 of the Level 2 Delegated Regulation 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 Article 191 of the Level 2 Delegated Regulation 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 central banks (i.e., EU sovereign debt) or, in the case of the UK, the UK central government or the Bank of England; or (ii) multilateral development banks and certain international organisations.
  • Bonds or loans issued by other central 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 central 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-module

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.276

Currency Risk Sub-module

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.277

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. SCR Standard Formula: Counterparty Default Risk Module

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.278

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 Type 2 Exposures

Type 1 exposures are:

  • Risk mitigation contracts including reinsurance arrangements, arrangements with special purpose vehicles, insurance securitisations and derivatives279
  • 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 Article 191 of the Level 2 Delegated Regulation.280
  • 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 basic own funds which would result from an instantaneous decrease in the value of type 2 exposures.281

6. SCR 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 Article 10(2) of the Level 2 Delegated Regulation. Accordingly, Article 201 of the Level 2 Delegated Regulation sets out a capital charge in respect of the amount of intangible assets valued in accordance with Article 12 of the Level 2 Delegated Regulation.

7. SCR Standard Formula: Operational Risk Module

Article 101(4) of the Solvency II Directive requires the SCR (calculated under either the standard formula or using an internal model) to cover operational risk to the extent not already reflected in the other risk modules. Article 204 of the Level 2 Delegated Regulation caps the capital requirement for operational risk at 30% of the Basic SCR (other than in respect of unit-linked business).

Article 204 of 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. SCR Standard Formula: Loss Absorbency, Credit Ratings and Correlation Matrices

Adjustments for the Loss-Absorbing Capacity of Technical Provisions and Deferred Taxes

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.282

The purpose of the adjustment is to reflect the fact that in some circumstances where unexpected losses arise, the undertaking can partially compensate for these through: (i) reducing benefits payable on policies involving future discretionary benefits; and/or (ii) reducing future deferred tax liabilities.283

9. Look-Through Approach284

The “look-through approach” applies to:

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

Related Undertakings

Article 84(3) 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, 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 approach by Article 84(4) and are therefore treated under the equity risk sub-module.

10. The Minimum Capital Requirement

In addition to the SCR, (re)insurers must also calculate an MCR and hold eligible own funds to cover it.285

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, specified in Euros and 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.

_______________

247 Recital 60 to Directive 2009/138/EC (the Solvency II Directive) as onshored by the European Union (Withdrawal) Act 2018, implemented through the PRA Rulebook.

248 Article 102 of the Solvency II Directive.

249 Article 87 of the Level 2 Delegated Regulation.

250 Article 101 of the Solvency II Directive.

251 Article 104(4) of the Solvency II Directive.

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

253 Article 104(4) of the Solvency II Directive.

254 Article 84 of the Level 2 Delegated Regulation.

255 Article 44(4a) of the Solvency II Directive.

256 Article 105(2) of the Solvency II Directive and Articles 114 to 135 of the Level 2 Delegated Regulation.

257 Article 105(3) and Annex IV point (3) Solvency II Directive.

258 Article 105(4) of the Solvency II Directive.

259 Article 104(7) of the Solvency II Directive.

260 Article 110 of the Solvency II Directive.

261 See “Supervisory Statement | SS4/15 Solvency II: The Solvency and Minimum Capital Requirements,” March 2015.

262 Articles 165 to 167 of the Level 2 Delegated Regulation.

263 Articles 168 to 173 of the Level 2 Delegated Regulation.

264 Article 169(1)-(2) of the Level 2 Delegated Regulation.

265 Article 169(3) of the Level 2 Delegated Regulation (as added by Commission Delegated Regulation (EU) 2016/467).

266 These are entities or groups that derive the substantial majority of their revenues from owning, financing, developing or operating infrastructure asset 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).

267 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 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.

268 Article 171 of the Level 2 Delegated Regulation.

269 Recital 61 to the Solvency II Directive.

270Article 106 of the Solvency II Directive and Article 172 of the Level 2 Delegated Regulation.

271 Article 304 of the Solvency II Directive and Art. 170 of the Level 2 Delegated Regulation.

272 Article 74 of the Level 2 Delegated Regulation.

273 Articles 175 to 181 of the Level 2 Delegated Regulation.

274 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 based in the EEA, that the corporate has operated for at least 10 years without a credit event and that the debt constitutes a senior exposure.

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

276 Articles 182 to 187 of the Level 2 Delegated Regulation.

277 Article 188 of the Level 2 Delegated Regulation.

278 Articles 189 to 202 of the Level 2 Delegated Regulation.

279 Irrespective of whether they are held for hedging or speculation.

280 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.

281 See Article 202 of the Level 2 Delegated Regulation.

282 Article 108 of the Solvency II Directive.

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

284 Article 84 of the Level 2 Delegated Regulation.

285 Article 129 of the Solvency II Directive & Articles 248 to 254 of the Level 2 Delegated Regulation.

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