Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) Text with EEA relevance

The cash flow projection used in the calculation of the best estimate shall, explicitly or implicitly, take account of all uncertainties in the cash flows, including all of the following characteristics:

• (a) uncertainty in the timing, frequency and severity of insured events;

• (b) uncertainty in claim amounts, including uncertainty in claims inflation, and in the period needed to settle and pay claims;

• (c) uncertainty in the amount of expenses referred to in point (1) of Article 78 of Directive 2009/138/EC;

• (d) uncertainty in expected future developments referred to in Article 29 to the extent that it is practicable;

• (e) uncertainty in policyholder behaviour;

• (f) dependency between two or more causes of uncertainty;

• (g) dependency of cash flows on circumstances prior to the date of the cash flow.

Article 31

Expenses

• (a) administrative expenses;

• (b) investment management expenses;

• (c) claims management expenses;

• (d) acquisition expenses.

The expenses referred to in points (a) to (d) shall take into account overhead expenses incurred in servicing insurance and reinsurance obligations.

Article 32

Contractual options and financial guarantees

When calculating the best estimate, insurance and reinsurance undertakings shall take into account all of the following:

• (a) all financial guarantees and contractual options included in their insurance and reinsurance policies;

• (b) all factors which may affect the likelihood that policy holders will exercise contractual options or realise the value of financial guarantees.

Article 33

Currency of the obligation

The best estimate shall be calculated separately for cash flows in different currencies.

Article 34

Calculation methods

Article 34a

Use of the prudent deterministic valuation of the best estimate for life obligations with options and guarantees that are deemed immaterial

• (a) the insurance or reinsurance undertaking clearly identifies the life obligations with options and guarantees which it deems immaterial and to which it intends to apply the prudent deterministic valuation of the best estimate;

• (b) the time value of options and guarantees of the life obligations referred to in point (a) represents less than 5 % of the Solvency Capital Requirement;

• (c) the insurance or reinsurance undertaking confirms in writing that it intends to apply the calculation methodology referred to in paragraph 2 to the life obligations referred to in point (a) of this paragraph;

• (d) the undertaking is classified as small and non-complex undertaking.

For the purposes of the first subparagraph, point (b), insurance and reinsurance undertakings shall use the most recent set of scenarios that are laid down and published by EIOPA in accordance with Article 77e(1), point (ab), of Directive 2009/138/EC.

• (a) the deterministic best estimate of the life obligations with options and guarantees that are deemed immaterial;

• (b) the product of a stochastic add-on and the Solvency Capital Requirement of the undertaking.

For the purposes of the first subparagraph, point (b), the stochastic add-on shall be equal to 5 %, unless the undertaking demonstrates to the satisfaction of the supervisory authority that another percentage would more appropriately reflect its risk profile. For the purposes of that demonstration, the insurance and reinsurance undertaking shall use the set of scenarios referred to in paragraph 1, second subparagraph.

Article 35

Homogeneous risk groups of life insurance obligations

The cash flow projections used in the calculation of best estimates for life insurance obligations shall be made separately for each policy. Where the separate calculation for each policy would be an undue burden on the insurance or reinsurance undertaking, it may carry out the projection by grouping policies, provided that the grouping complies with all of the following requirements:

• (a) there are no significant differences in the nature and complexity of the risks underlying the policies that belong to the same group;

• (b) the grouping of policies does not misrepresent the risk underlying the policies and does not misstate their expenses;

• (c) the grouping of policies is likely to give approximately the same results for the best estimate calculation as a calculation on a per policy basis, in particular in relation to financial guarantees and contractual options included in the policies.

Article 36

Non-life insurance obligations

Subsection 4 Risk margin

Article 37

Calculation of the risk margin

Image omitted; see official source

where:

• (a) CoC denotes the Cost-of-Capital rate;

• (b) the sum covers all integers including zero;

• (c) SCR(t) denotes the Solvency Capital Requirement referred to in Article 38(2) after t years;

• (d) r(t + 1) denotes the basic risk-free interest rate for the maturity of t + 1 years.

The basic risk-free interest rate r(t + 1) shall be chosen in accordance with the currency used for the financial statements of the insurance and reinsurance undertaking.

Article 38

Reference undertaking

• (a) the whole portfolio of insurance and reinsurance obligations of the insurance or reinsurance undertaking that calculates the risk margin (the original undertaking) is taken over by another insurance or reinsurance undertaking (the reference undertaking);

• (b) notwithstanding point (a), where the original undertaking simultaneously pursues both life and non-life insurance activities according to Article 73(5) of Directive 2009/138/EC, the portfolio of insurance obligations relating to life insurance activities and life reinsurance obligations and the portfolio of insurance obligations relating to non-life insurance activities and non-life reinsurance obligations are taken over separately by two different reference undertakings;

• (c) the transfer of insurance and reinsurance obligations includes any reinsurance contracts and arrangements with special purpose vehicles relating to these obligations;

• (d) the reference undertaking does not have any insurance or reinsurance obligations or own funds before the transfer takes place;

• (e) after the transfer, the reference undertaking does not assume any new insurance or reinsurance obligations;

• (f) after the transfer, the reference undertaking raises eligible own funds equal to the Solvency Capital Requirement necessary to support the insurance and reinsurance obligations over the lifetime thereof;

• (g) after the transfer, the reference undertaking has assets which amount to the sum of its Solvency Capital Requirement and of the technical provisions net of the amounts recoverable from reinsurance contracts and special purpose vehicles;

• (h) the assets are selected in such a way that they minimise the Solvency Capital Requirement for market risk that the reference undertaking is exposed to;

• (i) the Solvency Capital Requirement of the reference undertaking captures all of the following risks:
• (i) underwriting risk with respect to the transferred business,
• (ii) where it is material, the market risk referred to in point (h), other than interest rate risk,
• (iii) credit risk with respect to reinsurance contracts, arrangements with special purpose vehicles, intermediaries, policyholders and any other material exposures which are closely related to the insurance and reinsurance obligations,
• (iv) operational risk;

• (j) the loss-absorbing capacity of technical provisions, referred to in Article 108 of Directive 2009/138/EC, in the reference undertaking corresponds for each risk to the loss-absorbing capacity of technical provisions in the original undertaking;

• (k) there is no loss-absorbing capacity of deferred taxes as referred to in Article 108 of Directive 2009/138/EC for the reference undertaking;

• (l) the reference undertaking will, subject to points (e) and (f), adopt future management actions that are consistent with the assumed future management actions, as referred to in Article 23, of the original undertaking.

Article 39

Cost-of-Capital rate

The Cost-of-Capital rate referred to in Article 77(5) of Directive 2009/138/EC shall be assumed to be equal to 4,75 %.

Subsection 5 Calculation of technical provisions as a whole

Article 40

Circumstances in which technical provisions shall be calculated as a whole and the method to be used

• (a) cash flows associated with insurance or reinsurance obligations that depend on the likelihood that policy holders will exercise contractual options, including lapses and surrenders;

• (b) cash flows associated with insurance or reinsurance obligations that depend on the level, trend, or volatility of mortality, disability, sickness and morbidity rates;

• (c) all expenses that will be incurred in servicing insurance and reinsurance obligations.

Subsection 6 Recoverables from reinsurance contracts and special purpose vehicles

Article 41

General provisions

• (a) the cash flows relating to provisions for claims outstanding shall include the compensation payments relating to the claims accounted for in the gross provisions for claims outstanding of the insurance or reinsurance undertaking ceding risks;

• (b) the cash flows relating to premium provisions shall include all other payments.

Article 42

Counterparty default adjustment

SECTION 4 Relevant risk-free interest rate term structure

Subsection 1 General provisions

Article 43

General provisions

• (a) insurance and reinsurance undertakings are able to earn the rates in a risk-free manner in practice;

• (b) the rates are reliably determined based on financial instruments traded in a deep, liquid and transparent financial market.

The rates of the relevant risk-free interest rate term structure shall be calculated separately for each currency and maturity, based on all information and data relevant for that currency and that maturity.

Article 43a

Currency-related percentages for the determination of the first smoothing point

• (a) for the euro, the applicable percentage shall be the closest half-integer or integer percentage greater than or equal to the sum of:
• (i) 1,5 percentage point;
• (ii) the lowest percentage of outstanding bonds which would result in the determination of a first smoothing point of 20 years on 28 January 2025;

• (b) for currencies other than the euro, where on 29 January 2027 the last maturity for which the relevant risk-free interest rate term structure is not extrapolated was at least 20 years, the applicable percentage shall be the same as that applicable for the euro;

• (c) for currencies other than those referred to in points (a) and (b), the applicable percentage shall be half of the one applicable for the euro.

By way of derogation, where the currency-related percentage determined in accordance with the first subparagraph does not result, at the first reference date on which the new data source is applied, in a first smoothing point equal to that applicable during the previous calendar year, the applicable percentage shall be the closest lower value which does result in such a first smoothing point.

For the purposes of this paragraph, Article 43(5) shall apply.

Subsection 2 Basic risk free interest rate term structure

Article 44

Relevant financial instruments to derive the basic risk-free interest rates

Article 45

Adjustment to swap rates for credit risk

Where an adjustment for credit risk is applied pursuant to Article 44(1), the adjustment shall be determined in a transparent, prudent, reliable and objective manner that is consistent over time. The adjustment shall be determined on the basis of the difference between rates capturing the credit risk reflected in the floating rate of interest rate swaps and overnight indexed swap rates of the same maturity, where both rates are available from deep, liquid and transparent financial markets. The calculation of the adjustment shall be based on 50 percent of the average of that difference over a time period of one year. The adjustment shall not be lower than 10 basis points and not higher than 35 basis points.

Article 46

Extrapolation

1a. The extrapolated relevant risk-free interest rates for a currency shall be equal to the following:

Image omitted; see official source

where:

• (a) FSP denotes the first smoothing point as referred to in Article 77a(1) of Directive 2009/138/EC;

• (b) h denotes the number of years exceeding the first smoothing point;

• (c) r FSP denotes the annualised discretely compounded relevant risk-free interest rate at a maturity equal to the first smoothing point;

• (d) Image omitted; see official source denotes the annualised discretely compounded relevant risk-free interest rate at a maturity equal to the sum of the first smoothing point and h;

• (e) f h denotes the annualised continuously compounded forward rate calculated in accordance with paragraph 1b;

• (f) exp( ) denotes the exponential function.

1b. For the purposes of paragraph 1a, point (e), the forward rate fh shall be equal to the following:

Image omitted; see official source

where:

• (a) UFR denotes the ultimate forward rate referred to in Article 47;

• (b) LLFR denotes the last liquid forward rate determined in accordance with paragraph 1c;

• (c) α denotes the parameter determining the speed of the convergence towards the ultimate forward rate UFR;

• (d) ln( ) denotes the natural logarithm;

• (e) exp( ) denotes the exponential function.

The parameter α referred to in point (c) of the first subparagraph shall be equal to 40 % for the Swedish Krona and 11 % for other currencies.

1c. For the purposes of paragraph 1b, the last liquid forward rate for a currency as referred to in point (b) of that paragraph shall be a weighted average of the following forward rates:

• (a) the annualised continuously compounded forward rate derived from the basic risk-free interest rate term structure for the period up to the first smoothing point and beginning at the closest shorter maturity where the basic risk-free interest rate term structure is derived on the basis of interest rate swap rates or government bonds;

• (b) the annualised continuously compounded forward rate derived from the basic risk-free interest rate term structure and risk-adjusted interest rate swap rates or, as applicable, government bond rates for the periods from the first smoothing point to the maturities after the first smoothing point where interest rate swap rates or, as applicable, government bond rates are available from deep, liquid and transparent financial markets.

For the calculation of the weighted average referred to in the first subparagraph, the relevant annualised continuously compounded forward rates shall be weighted by the average notional amount of traded contracts of the interest rate swaps of the relevant maturity.

For currencies where no interest rate swap rates are available from deep, liquid and transparent financial markets for maturities after the first smoothing point, the last liquid forward rate shall be equal to the annualised continuously compounded forward rate determined in accordance with point (a) of the first sub-paragraph.

Notwithstanding the first subparagraph, where an insurance or reinsurance undertaking applies the volatility adjustment to calculate the weighted average referred to in the first paragraph, the volatility adjustment shall be added to the annualised continuously compounded forward rate referred to in point (a) of that subparagraph.

Article 46a

Phasing-in of the extrapolation

Article 47

Ultimate forward rate

Article 48

Basic risk-free interest rate term structure of currencies pegged to the euro

• (a) the pegging ensures that the exchange rate between that currency and the euro stays within a range not wider than 20 % of the upper limit of the range;

• (b) the economic situation of the euro area and the area of that currency are sufficiently similar to ensure that interest rates for the euro and that currency develop in a similar way;

• (c) the pegging arrangement ensures that the relative changes in the exchange rate over a one-year-period do not exceed the range referred to in point (a) of this paragraph, in the event of extreme market events, that correspond to the confidence level set out in Article 101(3) of Directive 2009/138/EC;

• (d) one of the following criteria is complied with:
• (i) participation of that currency in the European Exchange Rate Mechanism (ERM II);
• (ii) existence of a decision from the Council which recognizes pegging arrangements between that currency and the euro;
• (iii) establishment of the pegging arrangement by the law of the country establishing that country's currency.

For the purpose of point (c), the financial resources of the parties that guarantee the pegging shall be taken into account.

Subsection 3 Volatility adjustment

Article 49

Reference portfolios

• (a) for each currency, the assets are representative of the investments made by insurance and reinsurance undertakings in that currency to cover the best estimate for insurance and reinsurance obligations denominated in that currency; for each country, the assets are representative of the investments made by insurance and reinsurance undertakings in that country to cover the best estimate for insurance and reinsurance obligations sold in the insurance market of that country and denominated in the currency of that country;

• (b) where available the portfolio is based on relevant indices which are readily available to the public and published criteria exist for when and how the constituents of those indices will be changed;

• (c) the portfolio of assets includes all of the following assets:
• — bonds, securitisations and loans, including mortgage loans
• — equity
• — property

For the purposes of points (a) and (b), investments of insurance and reinsurance undertakings in collective investment undertakings and other investments packaged as funds shall be treated as investments in the underlying assets.

Article 50

Formula to calculate the spread underlying the volatility adjustment

For each currency and each country, the spread referred to in Article 77d(2) and (4) of Directive 2009/138/EC shall be equal to the following:

S = wgov · Sgov + wcorp · Scorp

where:

• (a) wgov denotes the ratio of the value of government bonds included in the reference portfolio of assets for that currency or country and the value of all bonds, loans and securitisations included in that reference portfolio;

• (b) Sgov denotes the average currency spread on government bonds included in the reference portfolio of assets for that currency or country;

• (c) wcorp denotes the ratio of the value of bonds other than government bonds, loans and securitisations included in the reference portfolio of assets for that currency or country and the value of all bonds, loans and securitisations included in that reference portfolio;

• (d) Scorp denotes the average currency spread on bonds other than government bonds, loans and securitisations included in the reference portfolio of assets for that currency or country.

For the purposes of this Article, ‘government bonds’ means exposures to central governments and central banks.

Article 51

Risk-corrected spread

RC = 30 % Image omitted; see official source min(S⁺· LTAS⁺) + 20 %

Image omitted; see official source max {0, min(S⁺

Image omitted; see official source  LTAS⁺, LTAS⁺)} + 15 %

Image omitted; see official source  max(0, S⁺

Image omitted; see official source  2

Image omitted; see official source  LTAS⁺)

where:

• (a) S ⁺ denotes the maximum of zero and the average spread of government bonds issued by Member States of the European Economic Area of the same duration, credit quality and asset class in the representative portfolio, as observed in financial markets;

• (b) LTAS ⁺ denotes the maximum of 0 and the long-term average spread of government bonds issued by Member States of the European Economic Area of the same duration, credit quality and asset class in the representative portfolio, as observed in financial markets.

Without prejudice to the first subparagraph, the risk correction on government bonds issued by Member States of the European Economic Area shall never exceed the maximum of zero and 65 % of the long-term average spread of government bonds issued by Member States of the European Economic Area of the same duration, credit quality and asset class in the representative portfolio as observed in financial markets.

RC = 50 % Image omitted; see official source min(S⁺, LTAS⁺) + 40 %

Image omitted; see official source max {0, min(S⁺

Image omitted; see official source  LTAS⁺, LTAS⁺)} + 30 %

Image omitted; see official source  max(0, S⁺

Image omitted; see official source  2

Image omitted; see official source  LTAS⁺)

where:

• (a) S ⁺ denotes the maximum of zero and the average spread of bonds other than government bonds issued by Member States of the European Economic Area, loans and securitisations of the same duration, credit quality and asset class in the representative portfolio as observed in financial markets;

• (b) LTAS ⁺ denotes the maximum of 0 and the long-term average spread of bonds other than government bonds issued by Member States of the European Economic Area, loans and securitisations of the same duration, credit quality and asset class in the representative portfolio as observed in financial markets.

Without prejudice to the first subparagraph, the risk correction on bonds other than government bonds issued by Member States of the European Economic Area, loans and securitisations of the same duration, credit quality and asset class shall never exceed the maximum of zero and 125 % of the long-term average spread of bonds other than government bonds issued by Member States of the European Economic Area, loans and securitisations of the same duration, credit quality and asset class in the representative portfolio as observed in financial markets.

Article 51a

Credit spread sensitivity ratio

CSSR = max [min ( Image omitted; see official source ; 1); 0]

where:

• (a) CSSR denotes the credit spread sensitivity ratio of the insurance or reinsurance undertaking for a currency;

• (b) PVBP(MV^FI) denotes the price value of a basis point of the value of the investments in bonds, loans and securitisations of the insurance or reinsurance undertaking, calculated in accordance with paragraph 2;

• (c) PVBP(BEL) denotes the price value of a basis point of the value of the best estimate of liabilities of the insurance or reinsurance undertaking, calculated in accordance with paragraph 3.

By way of derogation from the first subparagraph, where PBVP(BEL) for a given currency is equal to 0 or is negative, the credit spread sensitivity ratio for that currency shall be equal to 1.

PVBP(MV^FI) = Image omitted; see official source

where:

• (a) MV ^FI denotes the value of the investments in bonds, loans and securitisations of the insurance or reinsurance undertaking denominated in the given currency;

• (b) VA* denotes the notional volatility adjustment, calculated in accordance with Article 77d(3) of Directive 2009/138/EC, under the assumption that the credit spread sensitivity ratio is equal to 1;

• (c) MV^FI* denotes the value of investments in bonds, loans and securitisations of the insurance or reinsurance undertaking denominated in the given currency, under the assumption that for each asset the spread increases by an amount equal to the value of the notional volatility adjustment for all maturities.

For the purposes of points (a) and (c), in relation to unit-linked business, the insurance or reinsurance undertaking shall exclude fixed income investments which give rise to no or immaterial credit spread risk exposure for the undertaking.

PVBP(BEL) = Image omitted; see official source

where:

• (a) BEL denotes the value of the best estimate of liabilities of the insurance or reinsurance undertaking denominated in the given currency without a volatility adjustment, where the value is determined in accordance with Article 75 of Directive 2009/138/EC;

• (b) VA* denotes the notional volatility adjustment, calculated in accordance with Article 77d(3) of Directive 2009/138/EC, under the assumption that the credit spread sensitivity ratio is equal to 1;

• (c) BEL* denotes the value of the best estimate of liabilities of the insurance or reinsurance undertaking denominated in the given currency, where the value is determined in accordance with Article 75 of Directive 2009/138/EC, under the assumption that the notional volatility adjustment is applied to the relevant risk-free interest rate term structure.

For the purposes of point (c), the best estimate shall be revaluated, taking into account the effect of future discretionary benefits. However, for that revaluation, no impact of a change in credit spreads on the value of assets held by the undertaking shall be taken into account.

Article 51b

Credit spread sensitivity ratio for pegged currencies

CSSReuro, pegged currency = max [min ( Image omitted; see official source , 1) , 0]

where:

• (a) CSSReuro, pegged currency denotes the credit spread sensitivity ratio of the insurance or reinsurance undertaking for both the euro and the pegged currency;

• (b) PVBP(MV^FI) denotes the price value of a basis point of the value of the investments in bonds, loans and securitisations of the insurance or reinsurance undertaking denominated in both the euro and the pegged currency, calculated in accordance with paragraph 2;

• (c) PVBP(BEL) denotes the price value of a basis point of the value of the best estimate of liabilities of the insurance or reinsurance undertaking, denominated in both the euro and the pegged currency, calculated in accordance with paragraph 3.

By way of derogation from the first subparagraph, where PBVP(BEL) for a given currency pegged to the euro is equal to 0 or is negative, the credit spread sensitivity ratio for that currency pegged to the euro shall be equal to 1.

PVBP(MV^FI) = Image omitted; see official source

where:

• (a) MV ^FI denotes the value of the investments in bonds, loans and securitisations of the insurance or reinsurance undertaking denominated in both the euro and the pegged currency, where the value is determined in accordance with Article 75 of Directive 2009/138/EC;

• (b) VA* denotes the maximum of the notional volatility adjustment for the euro and the notional volatility adjustment for the pegged currency, calculated in accordance with Article 77d(3) of Directive 2009/138/EC, under the assumption that the credit spread sensitivity ratio is equal to 1;

• (c) MV^FI* denotes the value of investments in bonds, loans and securitisations of the insurance or reinsurance undertaking denominated in both the euro and the pegged currency, where the value is determined in accordance with Article 75 of Directive 2009/138/EC, under the assumption that for each asset the spread increases by an amount equal to the value of the notional volatility adjustment for all maturities.

For the purposes of points (a) and (c), in relation to unit-linked business, the insurance or reinsurance undertaking shall exclude fixed income investments which give rise to no or immaterial credit spread risk exposure for the undertaking.

PVBP(BEL) = Image omitted; see official source

where:

• (a) BEL denotes the sum of the value of the best estimate of liabilities of the insurance or reinsurance undertaking denominated in euro without a volatility adjustment and the value of the best estimate of liabilities denoted in the pegged currency without a volatility adjustment, and for which the basic risk-free rate term structure for the euro, adjusted for currency risk, is used in accordance with Article 48(1) of this Regulation, where both values are determined in accordance with Article 75 of Directive 2009/138/EC;

• (b) VA* denotes the maximum of the notional volatility adjustment for the euro and the notional volatility adjustment for the pegged currency, calculated in accordance with Article 77d(3) of Directive 2009/138/EC, under the assumption that the credit spread sensitivity ratio is equal to 1;

• (c) BEL* denotes the sum of the value of the best estimate of liabilities of the insurance or reinsurance undertaking denominated in euro, and the value of the best estimate of liabilities denominated in the pegged currency and for which the basic risk free rate term structure for the euro, adjusted for currency risk, is used in accordance with Article 48(1), where both values are determined in accordance with Article 75 of Directive 2009/138/EC, under the assumption that the notional volatility adjustment is applied to the relevant risk-free interest rate term structures.

For the purposes of point (c), a revaluation of the best estimate shall be performed, taking into account the effect of future discretionary benefits. However, for that revaluation, no impact of a change in credit spreads on the value of assets held by the undertaking shall be taken into account.

Subsection 4 Matching adjustment

Article 52

Mortality risk stress

• (a) an instantaneous permanent increase of 15 % in the mortality rates used for the calculation of the best estimate;

• (b) an instantaneous increase of 0.15 percentage points in the mortality rates (expressed as percentages) which are used in the calculation of technical provisions to reflect the mortality experience in the following 12 months.

• (a) multiple insurance policies in respect of the same insured person may be treated as if they were one insurance policy;

• (b) where the calculation of technical provisions is based on groups of policies as referred to in Article 35, the identification of the policies for which technical provisions increase under an increase of mortality rates may also be based on those groups of policies instead of single policies, provided that it yields a result which is not materially different.

Article 53

Calculation of the matching adjustment

Article 54

Calculation of the fundamental spread

• (a) the replacing asset has the same cash flow pattern as the replaced asset before downgrade;

• (b) the replacing asset belongs to the same asset class as the replaced asset;

• (c) the replacing asset has the same credit quality step as the replaced asset before downgrade or a higher one.

Article 54a

Restructured assets

• (a) the underlying financial assets of the restructured assets provide a sufficiently fixed level of income such that the cash-flows of the restructured asset are themselves sufficiently fixed;

• (b) the cash flows of the restructured asset are supported by features for loss absorbency ensuring that those cash flows remain sufficiently fixed where operating conditions change;

• (c) where the underlying financial assets include financial guarantees, those guarantees do not increase the matching adjustment in the calculation pursuant to Article 77c of Directive 2009/138/EC and Article 53 of this Regulation;

• (d) the undertaking is able to properly identify, measure, monitor, manage, control and report the risks of the underlying financial assets.

SECTION 5 Lines of business

Article 55

Lines of business

SECTION 6 Proportionality and simplifications

Article 56

Proportionality

• (a) an assessment of the nature, scale and complexity of the risks underlying their insurance and reinsurance obligations;

• (b) an evaluation in qualitative or quantitative terms of the error introduced in the results of the method due to any deviation between the following:
• (i) the assumptions underlying the method in relation to the risks;
• (ii) the results of the assessment referred to in point (a).

• (a) no other method with a smaller error is available and the method is not likely to result in an underestimation of the amount of technical provisions;

• (b) the method leads to an amount of technical provisions of the insurance or reinsurance undertaking that is higher than the amount that would result from using a proportionate method and the method does not lead to an underestimation of the risk inherent in the insurance and reinsurance obligations that it is applied to.

Article 57

Simplified calculation of recoverables from reinsurance contracts and special purpose vehicles

• (a) the best estimate calculated gross as referred to in Article 77(2) of Directive 2009/138/EC;

• (b) the best estimate, after taking into account the amounts recoverable from reinsurance contracts and special purpose vehicles and without an adjustment for the expected loss due to default of the counterparty (unadjusted net best estimate) calculated in accordance with paragraph 2.

Article 58

Simplified calculation of the risk margin

Without prejudice to Article 56, insurance and reinsurance undertakings may use simplified methods when they calculate the risk margin, including one or more of the following:

• (a) methods which use approximations of the amounts denoted by the terms SCR(t) referred to in Article 37(1);

• (b) methods which approximate the discounted sum of the amounts denoted by the terms SCR(t) as referred to in Article 37(1) without calculating each of those amounts separately.

Article 59

Calculations of the risk margin during the financial year

Without prejudice to Article 56, insurance and reinsurance undertakings may derive the risk margin for calculations that need to be performed quarterly from the result of an earlier calculation of the risk margin without an explicit calculation of the formula referred to in Article 37(1).

Article 60

Simplified calculation of the best estimate for insurance obligations with premium adjustment mechanism

Without prejudice to Article 56, insurance and reinsurance undertakings may calculate the best estimate of life insurance obligations with an arrangement by which the insurance undertaking has the right or the obligation to adjust the future premiums of an insurance contract to reflect material changes in the expected level of claims and expenses (premium adjustment mechanism) using cash flow projections which assume that changes in the level of claims and expenses occur simultaneously with premium adjustments and which result in a net cash flow that is equal to zero, provided that all of the following conditions are met:

• (a) the premium adjustment mechanism fully compensates the insurance undertaking for any increase in the level of claims and expenses in a timely manner;

• (b) the calculation does not result in an underestimation of the best estimate;

• (c) the calculation does not result in an underestimation of the risk inherent in those insurance obligations.

Article 61

Simplified calculation of the counterparty default adjustment

Without prejudice to Article 56 of this Regulation, insurance and reinsurance undertakings may calculate the adjustment for expected losses due to default of the counterparty, referred to in Article 81 of Directive 2009/138/EC, for a specific counterparty and homogeneous risk group to be equal as follows:

Image omitted; see official source

where:

• (a) PD denotes the probability of default of that counterparty during the following 12 months;

• (b) Durmod denotes the modified duration of the amounts recoverable from reinsurance contracts with that counterparty in relation to that homogeneous risk group;

• (c) BErec denotes the amounts recoverable from reinsurance contracts with that counterparty in relation to that homogeneous risk group.

CHAPTER IV OWN FUNDS

SECTION 1 Determination of own funds

Subsection 1 Supervisory approval of ancillary own funds

Article 62

Assessment of the application

• (a) the legal effectiveness and enforceability of the terms of the commitment in all relevant jurisdictions;

• (b) the contractual terms of the arrangement that the insurance or reinsurance undertaking has entered into, or will enter into, with the counterparties to provide funds;

• (c) where relevant, the insurance or reinsurance undertaking's memorandum and articles of association or statutes;

• (d) whether the insurance or reinsurance undertaking has processes in place to inform the supervisory authorities of any future changes, which may have the effect of reducing the loss-absorbency of the ancillary own-fund item, to any of the following:
• (i) the structure or contractual terms of the arrangement;
• (ii) the status of the counterparties concerned;
• (iii) the recoverability of the ancillary own funds item.

Article 63

Assessment of the application — Status of the counterparties