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Groups

This page provides information on what Solvency II means for groups and gives details on third-country equivalence.
  

Solvency II – group supervision framework

The PRA is required under Solvency II to carry out group supervision with a view to identifying risks at the group level that are not apparent when looking at the group’s solo entities. Under Solvency II, groups face a range of group-specific considerations which span across Capital, Governance and Risk Management, and Reporting and Public Disclosure. For example, groups must calculate a separate group solvency capital requirement (SCR) and, produce a group own risk and solvency assessment (ORSA) and solvency and financial condition report (SFCR).
 
While group supervision takes into account insurance holding companies and mixed-activity insurance holding companies, and third country insurers to the extent necessary, that does not mean or imply that supervision is to be applied to those undertakings on a solo basis.
 

Scope of group supervision

Articles 212 to 214 of the Solvency II Directive set out how the scope and application of group supervision should be identified.
 
Article 214(2) allows the PRA to decide on a case-by-case basis whether to exclude an undertaking from the scope of group supervision where the objectives of group supervision are not prejudiced. Groups that consider that they may be affected should discuss the issue with their supervisor.
 

Group capital requirements

As set out in Recital 100 of the Directive, it is necessary to calculate solvency at the group level for insurance and reinsurance undertakings forming part of a group. Subject to PRA approval as group supervisor, groups can also use internal models for their group solvency calculation.
 
Group solvency is measured as the difference between group own funds and the group SCR. The group solvency calculation reflects the risk exposure of the group by taking into account the global diversification of risks that exists across all the insurance undertakings in the group.  Groups headed by an EEA firm or holding company are required by Article 218 of the Directive to hold eligible group own funds that are at least equal to the group SCR.
Group solvency calculations need to be carried out by UK groups at least annually and the relevant data and results of those calculations must be submitted to the PRA as their group supervisor.
 
Firms are required to monitor the group SCR on an ongoing basis and where there is a significant change in the risk profile of the group, or a significant deviation from the assumptions underlying the last reported group SCR, then the firm should recalculate the group SCR (without delay) and report the results to the PRA.
 

Group governance

The Directive requires in Article 246 that all solo governance requirements are also applicable at group level. In practical terms, risk-management and internal control systems need to be set up at the group-wide level. Groups are also expected to produce a Group Own Risk and Solvency Assessment and provide it to the PRA.
 

Group reporting

Under Article 256 of the Directive groups have to publish their SFCR and their legal structure and the governance and organisational structure on an annual basis.  The disclosures include a description of all subsidiaries, material related undertakings and significant branches belonging to the group (Article 256a).
 
The Commission Delegated Regulation and the Solvency II Implementing Technical Standards detail the group reporting requirements in respect of group supervisory reporting.
 

Supervisory treatment of firms outside the EEA which belong to EEA-regulated groups

Third-country equivalence is an important issue for many firms seeking to determine their group solvency under the deduction and aggregation approach. In case of equivalence determined under Article 227 of the Solvency II Directive, the SCR and the own funds eligible to satisfy that requirement as laid down by the third country concerned can be taken into account when calculating group solvency. This relieves the related undertaking in the third country concerned from having to recalculate its data in conformity with the Solvency II requirements.
 
The European Commission made equivalence determinations under Article 227 of Solvency II that entered into force on 1 January 2016; see
 
• Delegated Decision (EU) 2015/1602
• Delegated Decision (EU) 2015/2290
 
For those countries that the Commission has determined provisionally equivalent, the effect is to treat the third country’s solvency regime as if it had been assessed as fully equivalent even though it will not have been subject to full equivalence assessment.
 
In November 2015, the Commission proposed two further Delegated Decisions. One of these will upgrade the provisional equivalence decision in respect of Bermuda to one of full equivalence with no time limit (again excluding the rules on captives). The other will provide for provisional equivalence in respect of Japan. These Decisions are subject to scrutiny by the European Council and European Parliament. The scrutiny period is usually for 3 months but it can be extended for a further period of 3 months. Consequently it is not anticipated that the Delegated Decisions will be in force before March 2016 at the earliest, although the Commission intends that they shall have retrospective application from 1 January 2016. Again, groups that may be affected should discuss the issue with their supervisor. 
 
The Commission may consider proposing further Delegated Decisions in the course of 2016.
 
Under Solvency II EEA group supervisors, in collaboration with EIOPA and college members, may undertake an equivalence assessment under Article 227 where no determination (full or provisional) has already been made by the Commission. EIOPA has issued Guidelines on the conduct of such assessments.
 

Supervisory treatment of UK firms which belong to groups headquartered in a third country

The PRA will rely on the group supervision exercised by a third country supervisory authority where its group supervision regime has been determined as equivalent, or temporarily equivalent, under Article 260 of Solvency II. In the absence of a positive equivalence determination then either the group supervision rules under Solvency II will be applied with the appropriate changes or the PRA can use ‘other methods’ per Article 262 to achieve the objectives of group supervision.  
 
Delegated Decision (EU) 2015/1602 (see External Links) provides that the group supervision exercised by Switzerland shall be considered equivalent to that required under Solvency II.  The November 2015 proposal for a Delegated Decision covering Bermuda will also provide for the Bermudan group supervision regime to be considered fully equivalent. No further Commission determinations under Article 260 are in the pipeline as of 17 February 2016.
 
Acting EEA group supervisors, in collaboration with EIOPA and college members, may undertake an equivalence assessment under Article 260 where no determination (full or temporary) has already been made by the Commission. Again EIOPA has issued Guidelines on the conduct of such assessments.
 

PRA publications

Readers can also find more information on Regulatory Policy in the PRA Publications section of the website – see Related links. Select Insurance policy publications, and click on the ‘Topic’ drop down and select ‘Regulatory Policy.
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