The Standard Formula: A Guide to Solvency II – Chapter 1: Own Funds

Capital is a term used in Solvency II1 to refer to the items that make up an insurer's regulatory capital (RE). These are mainly balance sheet items, with limited reserves for off-balance sheet items.

Own funds are those items that must be paid out most to cover losses, such as retained earnings, proceeds from paid-up ordinary shareholders, and long-term debt instruments. Provisions are also made against certain assets that are less readily available to cover losses, and may be applied to other items such as uncalled ordinary share capital and deferred tax assets, subject to compliance with underwriting standards.

A (re)insurer must have own funds at least equal to the capital requirement. The capital requirement is, firstly, the Solvency Requirement (SCR) capital and, secondly, the Minimum Capital Requirement (MCR) capital within the SCR. These should not be confused with the insurer's technical provisions (Re), which are necessary to meet the Re) obligations and are obligated to the insurer on a regular basis as they become due. Furthermore, own funds should not be confused with the assets in which a (re)insurer can invest (including the income from such own funds). These different concepts and regimes are considered in other chapters.

Since the UK left the EU on 31 December 2020, the discrepancy between the rules established in the EU and the UK has become a fairy tale. This discrepancy also includes the liberalisation of the Solvency II EU mode. At present, these changes do not affect own funds and it is expected that in the foreseeable future the UK Prudent Regulatory Administration (PRA) will continue to follow the current Solvency II requirements in this respect. This chapter has provided a brief overview of the position of Solvency II and the UK approach (where it differs or is noteworthy). In the field of own funds, the UK has decided to align with Solvency II and therefore the number of cases is limited.

The main provisions on own funds are detailed in Articles 87 to 99 of Solvency II, the "Own Funds" section of the PRA Rulebook, second level delegated acts (Delegated Resolutions) and the European Insurance, Work and Pensions Authority (EIOPA) Classification Manual3 (EIOPA-BOS-14/168 EN) (Classification Manual). This regulation is supplemented by various PRA Supervisors4 who explain specific provisions or explain the PRA's position where the regulations or supporting legislation are unclear.

1. Categorisation

Insurance companies are obliged to systematize personal methods into categories with different uses and subordinate attributes. The first grade is the finest, the second grade is in the middle, and the third grade is wider and elastic.

Personal funds are also called "basic personal funds" or "additional personal funds". Level 1 belongs to the balance and mechanical power grade, and the reception of reception is higher. The second is deemed of f-balance bonds, and the encouragement of the supervisory authorities described in paragraph 9 below is urgently needed.

2. Composition of Own Funds

(Re) The underwriter is required to comply with the following restrictions in the composition of sel f-funds.

• Space｝ The first item is not covered by at least 50 % SCR and 80 % MCR.
• Space｝ The value of Article 2 does not need to exceed 20 % of MCR.
• Space｝ The third value item is limited so that it does not exceed 15 % of SCR.

Privileged promotion, corresponding obligations, and some other bank tickets are limited to at least 20%of the total value of 1. Please refer to Section 5 below. 7

3. General Characteristics of Own Funds

In the PRA rules, the company is "(a) that is deemed (a) as a basic bill for personal funding, and (b) it is 3. 5 (1) [constant existence] and 3. 5 (2) [subordinate]. If the features have been pointed out to an important degree, have the option to link personal funds in a personal way in the first value only when the details indicated in paragraph 3. 6 [Personal Funds] are considered. I am. " 8

Two of the most important characteristics in consciousness of their own funds are "certain presence" and "subordinate attributes".

• Space｝ “Certain presence” is what kind of possibilities that these personal methods are mobilized to cover the loss, and how quickly they are.
• Space} "Submission" is what it is and what is it if there is a bill that can be used to cover the loss during the company's liquidation. This ensures the value and protection of the insurance policyholder and the same beneficiaries.

Higher accessibility and subordinate attributes are another capital from a regulatory perspective.

When an insurance company (and regulatory authorities in a specific context) evaluate funds (Re), it is necessary to consider the following four characteristics of the corresponding funds.

• In particular, if the period of the bill exposure or the date of the bill is not taken into account, and the date of the bill of personal funds is considered, the blended exposure of the bill is in the comparison with the promised exposure of the company insurance and r e-insurance. (Sufficient).
• Space｝ Is there any request for face value or inclusion (lack of repayment)?
• Is the product there is no invasion of fixed payments (there is no invasion of service charges).
• Is it a property without a fee?

(Re) If the insurance company has a lon g-term insurance promise, capital is required according to it, and at least the corresponding period can be used in that direction. Such an inventory of personal funds does not need to have a restriction or standard that may suddenly run out.

Section 4 shows a certain aspect necessary to comply with all the basic precautions regarding sel f-funds. Section 5, Section 6, and Section 7 describe the auxiliary aspects of value 1, value 2, and value 3.

4. Criteria for All Basic Own-Fund Items

Charge and related editing

In other words, sel f-funds related to the tasks that may not be able to comply with the request of Solbencies II should not be released in the first, 2, and third values ​​shown below. With this application, the components of the funds are actually available to absorb the loss, and in fact, it is systematized and important for the company's economic power.

The systematization manual emphasizes that companies are required to critically consider the financial results of each collateral right. The results are different from collateral rights, collateral, and legal restrictions, and each has potentially enhance the use and effectiveness of cash. The evaluation must be more than the legal format and to consider the consistency of "higher format content". In this way, the (re) insurance company is required to recognize the realistic results of each collateral, except for the name for the purpose.

According to the systemization department, the appropriate narrow sense has the following:

• Right of offset.
• Space} constraints.
• Price or guarantee
• Hope the bill of the company's personal funds.
• Influence of transactions or related trading groups. The transaction or relevant trading group has the same impact, or otherwise, the function that determines the systematization of personal funds is impaired.

Restoration or repayment due to SKL no n-compliance

All basic personal funding tools are required to predict redemption and repayment when there is a SCR default (or when redemption or repayment leads to this default). 10

However, early repayment and ransom may be accepted:

• Exceptionally, supervisors have defended the brand repayment or redemption.
• The item is exchanged or converted to another personal item in the minimum amount of the same value.
• MCR is complied with cash or repayment. 11

Restrictions on cash incentive

The aggressive authority guideline 19 detailed what is deemed to be a "reduction incentive". Since these items are not limited to specific options, they are prohibited at all levels as shown below:

• If the call option is not exercised, the owner of the fund bonds for individuals must be regularly promoted, a settlement of a larg e-priced promotion in combination with a call option.
• Forced change combined with call options.
• Increase in reading amount used for call options combined with call options.
• In addition, conditions or agreements that are rationally assumed to be the financial basis for the final settlement of the given position.

Exchange with equivalent bank tickets (or redemption by the price)

Basic personal security securities can be replaced or switched to another basic securities with the same amount as the lower limit of the same amount, with the same amount of the same amount. However, such a conversion or alternative requires the approval of the regulatory authorities. 12

5. Criteria for Tier 1 Own Funds

First value capital is distinguished by its high quality, and its implementation is not limited. The capital of this value must be particularly at the highest level:

• Capitals must be universally accessed or easy to access according to requests to comprehensively cover the loss during continuous work, such as during liquidation. Ensure possibilities).
• At the time of liquidation, the full amount of bills can be used to cover the loss, and the return of the bills to the holder will be returned until all other promises, including insurance and r e-insurance promises, are fulfilled. Rejected (guarantee inferiorness). 13

The first value capital includes the following:

• Paid ordinary stock capital (or equivalent).
• Surpers (actually profit).
• S o-called adjustment reserve ((re) is a flexible category that enables predictable dividends and profits expected for future insurance premiums). 14
• Promotional payment capital and inferior debt (limit grade 1 or RT1). 15

Solvencies II are (a) insurance period, (b) redemption incentive, (c) cancellation or delay of dividends, (d) "complete flexibility", and (e) leader Loss devices in the case of RT1. We are still making special requests.

period

• All products of the firs t-value are redeemed only by (a), (a), and (b), which must be started (a), or (b), or selecting a company. I have to do it. 17
• The RT1 (A) tool does not need to be redeemed before the release date 5 years later, and is reimbursed only if SCR exceeds the right value, 5 to 10 years later. be. 18

Increase in repayment amount

The firs t-time tool tools do not have the opportunity to connect repayment incentives. 19

Dividends, states, coupon s-not compliance with SCR

The first value fund resources have no opportunity to allow dividends, distributions, and coupons in case of SCR violation (or if payment leads to violations)

• Space} As an exception, the supervisor rejected the cancellation of the payment.
• Space Distribution does not lead to a decrease in the company's payment ability.
• MCR is thus observed by distributed. 20

This is because the British corporate law (because the terms of the dividend cannot be specified in the articles of incorporation or approval resolution), and the promotion of the final dividend is an indispensable promise that leads to the appearance of the debt. In response, the PRA announced that if there is no direct prohibition provision (including publications) in the company's articles of incorporation (including publication), the company will be allowed to cancel the dividend. This allows companies to symbolize the dividends, and if the specific situation is not satisfied, protect the right to withdraw dividends before payment. 21 < SPAN> Solvencies II are (a) insurance period, (b) redemption incentive, (c) Cancellation or delay of dividends, (d) "complete flexibility", and (e) leader loss We are still making special requests for the device.

period

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All products of the firs t-value are redeemed only by (a), (a), and (b), which must be started (a), or (b), or selecting a company. I have to do it. 17

• The RT1 (A) tool does not need to be redeemed before the release date 5 years later, and is reimbursed only if SCR exceeds the right value, 5 to 10 years later. be. 18
• The firs t-time tool tools do not have the opportunity to connect repayment incentives. 19
• The first value fund resources have no opportunity to allow dividends, distributions, and coupons in case of SCR violation (or if payment leads to violations)

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• This is because the British corporate law (because the terms of the dividend cannot be specified in the articles of incorporation or approval resolution), and the promotion of the final dividend is an indispensable promise that leads to the appearance of the debt. In response, the PRA announced that if there is no direct prohibition provision (including publications) in the company's articles of incorporation (including publication), the company will be allowed to cancel the dividend. This allows companies to symbolize the dividends, and if the specific situation is not satisfied, protect the right to withdraw dividends before payment. 21 Sorbencies II are (a) insurance period, (b) redemption incentive, (c) cancellation or delay of dividends, (d) "complete flexibility", and (e) leader Loss device in the case of RT1. We are still making special requests.
• {space}

All products of the firs t-value are redeemed only by (a), (a), and (b), which must be started (a), or (b), or selecting a company. I have to do it. 17

• The RT1 (A) tool does not need to be redeemed before the release date 5 years later, and is reimbursed only if SCR exceeds the right value, 5 to 10 years later. be. 18
• The firs t-time tool tools do not have the opportunity to connect repayment incentives. 19
• The first value fund resources have no opportunity to allow dividends, distributions, and coupons in case of SCR violation (or if payment leads to violations)

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Space} As an exception, the supervisor rejected the cancellation of the payment.

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• This is because the British corporate law (because the terms of the dividend cannot be specified in the articles of incorporation or approval resolution), and the promotion of the final dividend is an indispensable promise that leads to the appearance of the debt. In response, the PRA announced that if there is no direct prohibition provision (including publications) in the company's articles of incorporation (including publication), the company will be allowed to cancel the dividend. This allows companies to symbolize the dividends, and if the specific situation is not satisfied, protect the right to withdraw dividends before payment. twenty one
• Comprehensive flexibility

Tier1 capital should also give (re) insurance companies "complete flexibility", that is, complete discretionary rights for dividends and coupons. 22 Complete flexibility is defined as follows:

{RFLEX}

Dividends are paid only from distributed ones.

• Unpaid is not a default.
• Cancellation of payment does not restrict the work of the company. twenty three
• {credit}.

There is no priority or hierarchy in the order of payment.

6. Criteria for Tier 2 Basic Own Funds

{Caution} There is no priority or ranking in the payment order.

period

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There is no upper limit on the distribution level.

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The company does not need to distribute it.

• {overview}.
• cancel

There is no obligation to replace the benefits with another form.

cancel

There is no obligation to distribute in connection with other asset items. twenty four

7. Criteria for Tier 3 Basic Own Funds

This provision is detailed in the classification manual. In particular, the "dividend restriction" (the provisions of lowe r-hierarchical stocks that restrict distribution to the firs t-class brand) should be used because they may decrease the motivation of new investors to the first hierarchy sel f-accounts. isn't it.

period

RT1 products also have a mechanism that enables any of the following actions when SCR or MCR is greatly affected (see below).

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Amortization of the principal of the product.

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Automatic conversion to ordinary stock capital (or equivalent).

8. Ancillary Own Funds

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Mechanism with equivalent results. twenty five

This is a reminiscent that for England's (re) insurance companies, if there is no resolution of the Board of Directors, the prices of promotions will not be issued according to the English Group Law. In fact, some companies have realized such a temporary withdrawal method, and in effect, the prices of promotions may actually fall at that point and rise later. PRA is paying attention to the need to close the temporary debt strategies in a thorough discussion so that the possibility of future valuation losses does not hinder capital growth due to the release of new ordinary stock funds. Such a possibility of depreciatio n-of f-the benefit of the benefit of the initial traders, so it may keep a highly possible trader and the creep to come. 。 26

• The following action suggests a trigger action of the preliminary loss absorption mechanism of RT1 described above:
• The number of en d-basements of personal funds to be targeted by the coating SCR is 75%or less.
• The number of personal funds with the right to cover MCR is the same or less as MCR.
• UTO's compliance will not recover for three months from the first day of the SCA violation. 27

Companies reserve the right to take relief measures according to their tools. This elasticity is more noticeable when multiple tools, including their own trigger actions for lead loss record devices, are issued. In such a case, PRA is actually waiting, but companies are more comprehensive in the context of a more comprehensive strategy to ensure the penetration of interaction between these tools and manage the condition of the company. Secure coordinated functions. 28

• period
• As in the case of level 1, repayment or ransom must be realized at the discretion of the insurance company (and it is a condition of promotion of PRA). 31
• However, the retail base method 2 figures may have limited redemption incentives (e. g., interest rate increases), which may only be utilized 10 years after the launch date. 32 They may also bind interest rate increases associated with collusive options, provided that the coupon rate increase occurs in the form of a one-time extension not exceeding the appropriate value:
• space} 100 basis points minus the swap spread between the initial index basis and the increased index basis.

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space} 50% of the original credit spread minus the swap path between the initial index basis and the increased index basis. 33

Dividends, Screams, or Coupons - Non-SCR Compliant

As with Level 1, the tools are also required to allow the insurer to delay payments, dividends, or coupons for periods that violate the SCR (or if the payment of spreads, dividends, or coupons would result in a violation of the SCR). 34

There is no requirement of "full flexibility" (as in level 1), which allows the insurer to pay fixed and/or cumulative winding up, dividend and coupon payments (RE).

The third value fundamentals are essentially implied by the remaining notes in the balance sheet and are subordinated to policyholder and beneficiary claims that may not infallibly be determined at the first or second level. 35 Nevertheless, they may well lead to deferred tax assets (RE) for the insurer. 36

Term

Basic third value retail fund products must be low cost or have a minimum maturity period of 5 years. 37

9. Pre-Issuance Notification

Dividends, premiums and coupons - not MCR compliant.

• Limited Repayment Incentives
• Values ​​2 and 3 capital may take the form of Reserve Personal Funds (AOF). These are off-balance sheet notes that (re)insurers may remove to absorb losses if necessary. AOFs are required to be attached to promises that have no legal effect and may become popular in the event of a claim. There is essentially no possibility of an AOF denouncing a grade 1.
• To qualify as a grade 2 AOF, an instrument must have the symptoms of a grade 1 tool (coordinated with point 5 above) and then claim and pay the funds. 40 AOF - Value 2 includes appropriate:
• space}Unpaid/incomprehensible ordinary or pathos shareholders (or equivalent).

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10. Surplus Funds — With-Profits Funds

{space}Unpaid dependent obligations.

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Credit and guarantee

11. Ring-Fenced Funds (RFFs)

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Other legal binding contracts. Provided, however, that the property is required to be requested according to the request and is unable to security. 41

AOF-Level 2 must be on-demand high demand. 42 In other words, this requirement should not be:

• Space must not depend on the start of the event or the implementation of the standards.
• Space｝ Follow the consent of a counter party or a third party.
• It is unlikely that it will cause such a position or incentive that means that the business is not approved.
• By all agreements or agreements with the same effect. 43

AOF level 3

12. Own Funds Treatment of Participations

AOF-Level 3 is an AOF that does not meet all the requirements of AOF-level 2. 44

PRA statement about AOF

AOF incorporation requires the approval of regulatory authorities, and in our experience, such incorporation is usually subject to thorough PRA analysis. (Re) Insurers seeking approval shall carefully prove that the proposed AOF matches the normative standards, such as statutory characteristics, accessories, and reliability for loss absorption.

PRA approves the specific amount or method for determining the amount of AOF for the predetermined period. The 45 PRA also calls for the fact that the quantitative amount related to AOFs is cautious and realistic, reflecting the ability to absorb items. 46

• The special procedure for AOF approval emphasizes the need to provide a comprehensive confirmation documents, especially the ability to conclude contracts and related agreements in related laws, and provide a detailed mediu m-term capital management plan to the company. There is. The latter shall clarify the contributions of AOF to existing capital management systems and the role of AOF in the current or future capital management order. 48
• Except for ordinary stocks (or the release of the type or type approved within the past 12 months), the PRA hopes that a provisional issuance notice (PIN) will be submitted at least one month before the sel f-funded tool. 49 Regarding the release of private funds, the company that complies with Solvency II must submit the following information to the PRA:

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13. Application to Lloyd’s

PIN entry form.

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Space} A copy of the project and suspicion tools.

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Space｝ A draft of an independent legal opinion of a qualified person who meets the qualification condition called the capital standard.

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In the case of RT 1-A draft of an independent accounting with a qualified person to determine the procedure to reflect the means in the financial statements of the Company or group members.

It should be noted that PIN is not a preliminary thing, not to support or confirm the PRA rights that include tools in certain levels of regulated capital.

In principle, when calculating technical reserves, all insurance and r e-insurance debt of the company must be considered.

However, this is an exception if these liabilities are "excess funds" according to the relevant domestic law, and if they meet their own firs t-level funds (see 5 above). 50 The definition of the excess funds indicated by PRA for this purpose is "for interest funds-unable to distribute to insurers or other beneficiaries." 51

In order to comply with the exclusion of the category into the technical regulations, the cost of such funds must be calculated in accordance with the calculation formula specified in the PRA to be included in the insurer's sel f-fund (Re). 52

RFF occurs when the sel f-funded article in an insurance company is limited to covering a specific class debt or the loss of an insurer.

Such funds cannot be used to cover general losses, and it is necessary to calculate sel f-fund and SCR. Solvency II requires "adjustment". Solvencies II requested "coordination to relocate the ability to transfer items (access restricted funds) that can only be used to cover a specific debt segment or specific risk". I'm doing it. 53, 54

The following items are generally not corresponding to RFF:

{Space}, except for ordinary stocks (or release of the type or type approved within the past 12 months), the PRA must be submitted by a provisional issuance notification (PIN) at least one month in advance of the sel f-funded tool. I am expecting. 49 Regarding the release of private funds, the company that complies with Solvency II must submit the following information to the PRA:

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PIN entry form.

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Space} A copy of the project and suspicion tools.

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Space｝ A draft of an independent legal opinion of a qualified person who meets the qualification condition called the capital standard.

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In the case of RT 1-A draft of an independent accounting with a qualified person to determine the procedure to reflect the means in the financial statements of the Company or group members.

It should be noted that pin is not a preliminary thing, not to support or confirm the Pra rights, including tools, in a specific level of regulated capital.

In principle, when calculating technical reserves, all insurance and r e-insurance debt of the company must be considered.

However, this is an exception if these liabilities are "excess funds" according to the relevant domestic law, and if they meet their own firs t-level funds (see 5 above). 50 The definition of excess funds indicated by PRA for this purpose is "for interest funds-unable to distribute to insurers or other beneficiaries." 51

In order to comply with the exclusion of the category into the technical regulations, the cost of such funds must be calculated in accordance with the calculation formula specified in the PRA to be included in the insurer's sel f-fund (Re). 52

RFF occurs when the sel f-funded article in an insurance company is limited to covering a specific class debt or the loss of an insurer.

Such funds cannot be used to cover general losses, and it is necessary to calculate sel f-fund and SCR. Solvency II requires "adjustment". Solvencies II requested "coordination to relocate the ability to transfer items (access restricted funds) that can only be used to cover a specific debt segment or specific risk". I'm doing it. 53, 54

The following items are generally not corresponding to RFF:

Except for {Space｝ Ordinary stocks (or release of the type or type approved within the past 12 months), the PRA hopes that the provisional issuance notification (PIN) will be submitted at least one month before the sel f-funded tool. I am. 49 Regarding the release of private funds, the company that complies with Solvency II must submit the following information to the PRA:

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PIN entry form.

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Space} A copy of the project and suspicion tools.

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Space｝ A draft of an independent legal opinion of a qualified person who meets the qualification condition called the capital standard.

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In the case of RT 1-A draft of an independent accounting with a qualified person to determine the procedure to reflect the means in the financial statements of the Company or group members.

It should be noted that PIN is not a preliminary thing, not to support or confirm the PRA rights that include tools in certain levels of regulated capital.

In principle, when calculating technical reserves, all insurance and r e-insurance debt of the company must be considered.

However, this is an exception if these liabilities are "excess funds" according to the relevant domestic law, and if they meet their own firs t-level funds (see 5 above). 50 The definition of the excess funds indicated by PRA for this purpose is "for interest funds-unable to distribute to insurers or other beneficiaries." 51

In order to comply with the exclusion of the category into the technical regulations, the cost of such funds must be calculated in accordance with the calculation formula specified in the PRA to be included in the insurer's sel f-fund (Re). 52

RFF occurs when the sel f-funded article in an insurance company is limited to covering a specific class debt or the loss of an insurer.

Such funds cannot be used to cover general losses, and it is necessary to calculate sel f-fund and SCR. Solvency II requires "adjustment". Solvencies II requested "coordination to relocate the ability to transfer items (access restricted funds) that can only be used to cover a specific debt segment or specific risk". I'm doing it. 53, 54

The following items are generally not corresponding to RFF:

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Unit link regular product

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A conventional product with an index link.

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Normal r e-insurance work. Provided, however, that a certain contract does not lead to a restricted work.

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The coating assets and similar mechanisms designed to protect the insurance policyholder during the liquidation procedure. 55

This "adjustment" includes a change in insurance claims to a certain state, a risk management measure that the insurer must do to secure the financial resources to protect the insurer from the bankruptcy. 。 This may link SCR calculation, technical reserves, and other risk management systems to clearly reflect company risk profiles and economic recovery standards. 56

According to Solvencies II's claims, the role of the insurer (Re) in the finance and credit agencies (major banks and investment companies) should be deducted from the insurer's personal funds (Re). Unless 57 roles have more than 20% or more voting rights or money in the company directly or by dominance. 58

The reason for justifying this situation is that the decrease in doubl e-entry bookkeeping accounting for funds received from the regulated funds of banks and investment companies.

These personal methods should be reduced by the complete compensation of the roles in financial and credit organizations, and the price is 10 of the insurer's personal funds (excluding RT1). It exceeds %. In the 59 solo calculation, the risk is provided by submission of equity risk, and in effect, the accumulation of funds, which means that the negative of personal funds is used in return. 60

The exception is that the (re) Solvencies calculation by the insurance company do not need to deduct the "strategic participation bottom" integrated by mass solbensy calculation based on the method of "accounting consolidation". 61 Strategic roles are linked by investment in ordinary stock capital, and the insurance company's participation (re) shows that:

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You can do it so that you can do it so that you are actually a promise, everyone can quickly ignore these seemingly accurate {} people. can.

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A conventional product with an index link.

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Normal r e-insurance work. Provided, however, that a certain contract does not lead to a restricted work.

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