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

• (b) equities, other than qualifying infrastructure equities or qualifying infrastructure corporate equities, held within collective investment undertakings which are qualifying venture capital funds as referred to in Article 3(b) of Regulation (EU) No 345/2013 of the European Parliament and of the Council ([^E0014]) where the look-through approach set out in Article 84 of this Regulation is possible for all exposures within the collective investment undertaking, or units or shares of those funds where the look through approach is not possible for all exposures within the collective investment undertaking;

• (c) as regards closed-ended alternative investment funds which are established in the Union or, if they are not established in the Union, which are marketed in the Union in accordance with Article 35 or 40 of Directive 2011/61/EU and which, in either case, have no leverage in accordance with the commitment method set out in Article 8 of Commission Delegated Regulation (EU) No 231/2013 ([^E0015]):
• (i) equities, other than qualifying infrastructure equities or qualifying infrastructure corporate equities, held within such funds where the look-through approach set out in Article 84 of this Regulation is possible for all exposures within the alternative investment fund;
• (ii) units or shares of such funds where the look-through approach is not possible for all exposures within the alternative investment fund;

• (d) equities, other than qualifying infrastructure equities or qualifying infrastructure corporate equities, held within collective investment undertakings which are authorised as European long-term investment funds pursuant to Regulation (EU) 2015/760 where the look through approach set out in Article 84 of this Regulation is possible for all exposures within the collective investment undertaking, or units or shares of those funds where the look through approach is not possible for all exposures within the collective investment undertaking;

• (e) qualifying unlisted equity portfolios as defined in Article 168a.

Article 168a

Qualifying unlisted equity portfolios

• (a) the set of investments consists solely of investments in the ordinary shares of companies;

- (b) the ordinary shares of each of the companies concerned are not listed in any regulated market;

• (c) each company has its head office in a country which is a member of the EEA;

• (d) more than 50 % of the annual revenue of each company is denominated in currencies of countries which are members of the EEA or the OECD;

• (e) more than 50 % of the staff employed by each company have their principal place of work in countries which are members of the EEA;

• (f) each company fulfils at least one of the following conditions for each of the last three financial years ending prior to the date on which the Solvency Capital Requirement is being calculated:
• (i) the annual turnover of the company exceeds EUR 12 800 000 ;
• (ii) the balance sheet total of the company exceeds EUR 12 800 000 ;
• (iii) the number of staff employed by the company exceeds 50;

• (g) the value of the investment in each company represents no more than 10 % of the total value of the set of investments;

• (h) none of the companies is an insurance or reinsurance undertaking, a credit institution, an investment firm, a financial institution, an alternative investment fund manager, a UCITS management company, an institution for occupational retirement provision or a non-regulated undertaking carrying out financial activities;

• (i) the beta of the set of investments does not exceed 0,796.

Image omitted; see official source

where:

• (a) β is the beta of the equity investment in the company;

• (b) GM is the average gross margin for the company over the last five financial years ending prior to the date on which the Solvency Capital Requirement is being calculated;

• (c) Debt is the total debt of the company at the end of the most recent financial year for which figures are available;

• (d) CFO is the average net cash-flow for the company from operations over the last five financial years ending prior to the date on which the Solvency Capital Requirement is being calculated;

• (e) ROCE is the average return on common equity for the company over the last five financial years ending prior to the date on which the Solvency Capital Requirement is being calculated. Common equity shall be understood as capital and reserves as referred to in Annex III to Directive 2013/34/EU of the European Parliament and of the Council ([^E0016]) excluding preference shares and the related share premium account.

Article 169

Standard equity risk sub-module

• (a) an instantaneous decrease equal to 22 % in the value of type 1 equity investments in related undertakings within the meaning of Article 212(1)(b) and 212(2) of Directive 2009/138/EC where these investments are of a strategic nature;

• (b) an instantaneous decrease equal to 22 % in the value of type 1 equity investments that are treated as long-term equity investments in accordance with Article 105a of Directive 2009/138/EC;

• (c) an instantaneous decrease equal to the sum of 39 % and the symmetric adjustment as referred to in Article 172 of this Regulation, in the value of type 1 equities other than those referred to in points (a) and (b).

• (a) an instantaneous decrease equal to 22 % in the value of type 2 equity investments in related undertakings within the meaning of Article 212(1)(b) and 212(2) of Directive 2009/138/EC where these investments are of a strategic nature;

• (b) an instantaneous decrease equal to 22 % in the value of type 2 equity investments that are treated as long-term equity investments in accordance with Article 105a of Directive 2009/138/EC;

- (c) an instantaneous decrease equal to the sum of 49 % and the symmetric adjustment as referred to in Article 172 of this Regulation, in the value of type 2 equities other than those referred to in points (a) and (b).

• (a) an instantaneous decrease equal to 22 % in the value of qualifying infrastructure equity investments in related undertakings within the meaning of point (b) of Article 212(1) and Article 212(2) of Directive 2009/138/EC, where those investments are of a strategic nature;

• (b) an instantaneous decrease equal to 22 % in the value of qualifying infrastructure equity investments that are treated as long-term equity investments in accordance with Article 105a of Directive 2009/138/EC;

• (c) an instantaneous decrease equal to the sum of 30 % and 77 % of the symmetric adjustment as referred to in Article 172 of this Regulation, in the value of qualifying infrastructure equity investments other than those referred to in points (a) and (b).

• (a) an instantaneous decrease equal to 22 % in the value of qualifying infrastructure corporate equity investments in related undertakings within the meaning of point (b) of Article 212(1) and Article 212(2) of Directive 2009/138/EC where those investments are of a strategic nature;

• (b) an instantaneous decrease equal to 22 % in the value of qualifying infrastructure corporate equity investments that are treated as long-term equity investments in accordance with Article 105a of Directive 2009/138/EC;

• (c) an instantaneous decrease equal to the sum of 36 % and 92 % of the symmetric adjustment as referred to in Article 172 of this Regulation, in the value of qualifying infrastructure corporate equities other than those referred to in points (a) and (b).

• (a) the term ‘value of type 1 equity investments’ shall mean ‘absolute value of type 1 equity investments’;

• (b) the term ‘value of type 2 equity investments’ shall mean ‘absolute value of type 2 equity investments’;

• (c) the term ‘value of qualifying infrastructure equity investments’ shall mean ‘absolute value of qualifying infrastructure equity investments’; and

• (d) the term ‘value of qualifying infrastructure corporate equity investments’ shall mean ‘absolute value of qualifying infrastructure corporate equity investments’.

The first subparagraph shall not apply to any short equity position.

For the purposes of paragraphs 1 to 4, insurance and reinsurance undertakings shall assume that equity investments with negative values other than those referred to in the first subparagraph have a value of 0.

Article 170

Duration-based equity risk sub-module

1. Where an insurance or reinsurance undertaking has received supervisory approval to apply the provisions set out in Article 304(1) of Directive 2009/138/EC before 29 January 2027 the capital requirement for type 1 equities shall be equal to the loss in the basic own funds that would result from the following instantaneous decreases:

• (a) an instantaneous decrease equal to 22 % in the value of the type 1 equities corresponding to the business referred to in point (i) of Article 304(1) of Directive 2009/138/EC;

• (b) an instantaneous decrease equal to 22 % in the value of type 1 equity investments in related undertakings within the meaning of Article 212(1)(b) and 212(2) of Directive 2009/138/EC where these investments are of a strategic nature;

• (c) an instantaneous decrease equal to the sum of 39 % and the symmetric adjustment as referred to in Article 172 of this Regulation, in the value of type 1 equities, other than those referred to in points (a) or (b).

- (a) equal to 22 % in the value of the type 2 equities corresponding to the business referred to in point (i) of Article 304(1) of Directive 2009/138/EC;

• (b) equal to 22 % in the value of type 2 equity investments in related undertakings within the meaning of Article 212(1)(b) and (2) of Directive 2009/138/EC, where these investments are of a strategic nature;

• (c) equal to the sum of 49 % and the symmetric adjustment as referred to in Article 172 of this Regulation, in the value of type 2 equities, other than those referred to in points (a) or (b).

• (a) equal to 22 % in the value of the qualifying infrastructure equity corresponding to the business referred to in point (i) of Article 304(1) of Directive 2009/138/EC;

• (b) equal to 22 % in the value of qualifying infrastructure equity investments in related undertakings within the meaning of Article 212(1)(b) and (2) of Directive 2009/138/EC, where these investments are of a strategic nature;

• (c) equal to the sum of 30 % and 77 % of the symmetric adjustment as referred to in Article 172 of this Regulation in the value of qualifying infrastructure equities other than those referred to in points (a) or (b).

4. Where an insurance or reinsurance undertaking has received supervisory approval to apply the provisions set out in Article 304(1) of Directive 2009/138/EC before 29 January 2027 the capital requirement for qualifying infrastructure corporate equities shall be equal to the loss in the basic own funds that would result from the following instantaneous decreases:

• (a) equal to 22 % in the value of the qualifying infrastructure corporate equity corresponding to the business referred to in point (i) of Article 304(1)(b) of Directive 2009/138/EC;

• (b) equal to 22 % in the value of qualifying infrastructure corporate equity investments in related undertakings within the meaning of Article 212(1)(b) and (2) of Directive 2009/138/EC, where these investments are of a strategic nature;

• (c) equal to the sum of 36 % and 92 % of the symmetric adjustment as referred to in Article 172 of this Regulation in the value of qualifying infrastructure corporate equities other than those referred to in points (a) or (b).

Article 171

Strategic equity investments

For the purposes of Article 169(1), point (a), 169(2), point (a), 169(3), point (a), and 169(4), point (a), and of Article 170(1), point (b), 170(2), point (b), 170(3), point (b) and 170(4), point (b), equity investments of a strategic nature shall mean equity investments to which the look-through approach does not apply and for which the participating insurance or reinsurance undertaking demonstrates the following:

• (a) that 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 as a result of both the nature of the investment and the influence exercised by the participating undertaking in the related undertaking;

• (b) that the nature of the investment is strategic, taking into account all relevant factors, including:
• (i) the existence of a clear decisive strategy to continue holding the participation for long period;
• (ii) the consistency of the strategy referred to in point (a) with the main policies guiding or limiting the actions of the undertaking;
• (iii) the participating undertaking's ability to continue holding the participation in the related undertaking;
• (iv) the existence of a durable link;
• (v) where the insurance or reinsurance participating company is part of a group, the consistency of such strategy with the main policies guiding or limiting the actions of the group.

Article 171a

Long-term equity investments: Demonstration of ability to avoid forced sales

• (a) the methodologies referred to in Article 171b of this Regulation to assess whether they can avoid forced sales; or

• (b) the forced selling test set out in Article 171c of this Regulation.

Notwithstanding the first subparagraph, insurance or reinsurance undertakings may change the selected approach where they demonstrate ex ante to the satisfaction of the supervisory authority that such change is justified, taking into account the risk profile of the undertaking, the amount of equity investments intended to be classified as long-term investments, and the nature, scale and complexity of the risks of the undertaking.

Article 171b

Long-term equity investments: methodologies to avoid forced sales

• (a) a sufficient amount of particular homogeneous risk groups of the life insurance and reinsurance liabilities, whose Macaulay duration exceeds 9,5 years, are illiquid within the meaning of paragraph 2; or

• (b) a sufficient liquidity buffer is in place for non-life insurance and reinsurance obligations, calculated in accordance with paragraphs 3 to 5.

• (a) the value in accordance with Article 75 of Directive 2009/138/EC of illiquid liabilities referred to in paragraph 1, point (a) exceeds the total amount of long-term equity investments within the portfolio of assets related to life insurance or reinsurance obligations;

• (b) the share of equity investments to which Article 105a(4) of Directive 2009/138/EC is intended to be applied does not exceed the higher of zero and the ratio of the value in accordance with Article 75 of Directive 2009/138/EC of illiquid liabilities referred to in point (a) of this paragraph to the total best estimate of life technical provisions of the insurance or reinsurance undertaking.

For the purposes of the first subparagraph, a homogenous risk group of life insurance and reinsurance liabilities shall be considered illiquid where the capital requirement for each of the following risks is lower than 5 % of the best estimate of the liabilities belonging to that homogenous risk group:

• (a) the mortality risk referred to in Article 137;

• (b) the risk of a permanent increase in lapse rates referred to in Article 142(1), point (a);

• (c) the health mortality risk referred to in Article 152;

• (d) the risk of a permanent increase in SLT health lapse rates referred to in Article 159(1), point (a).

For the purposes of the first subparagraph, the liquidity buffer shall be calculated as the ratio of the value of the portfolio of liquid assets corresponding to non-life insurance activities to the best estimate of non-life technical provisions net of reinsurance, calculated in accordance with paragraphs 4 and 5.

The sum of the values for solvency purposes of Level 2A and Level 2B assets shall not exceed 40 % of the total value for solvency purposes of the portfolio of liquid assets referred to in the first subparagraph. The value for solvency purposes of Level 2B assets shall not exceed 15 % of the total value for solvency purposes of the portfolio of liquid assets referred to in the first subparagraph.

Liquid assets held through collective investment undertakings and through other investments packaged as funds in which insurance or reinsurance undertakings hold units or shares, may be taken into account up to an absolute amount of EUR 500 million.

Level 1 assets shall only include assets falling under one or more of the following categories:

• (a) cash and cash equivalents;

• (b) assets representing claims on one of the counterparties referred to in Article 180(2);

• (c) assets that are fully, unconditionally and irrevocably guaranteed by one of the counterparties referred to in Article 180(2), where the guarantee meets the requirements set out in Article 215.

Level 2A assets shall only include assets falling under one or more of the following categories:

• (a) bonds and loans which have been assigned to credit quality step 0 or 1, excluding bonds and loans issued by insurance and reinsurance undertakings or financial sector entities within the meaning of Article 4, point (27) of Regulation (EU) No 575/2013;

• (b) covered bonds referred to in Article 180(1) which have been assigned to credit quality step 0 or 1, excluding those which are issued by a financial sector entity which is part of the same group.

Level 2B assets shall only include assets falling under one or more of the following categories:

• (a) STS securitisation which either has been assigned a credit assessment of credit quality step 0 or 1 by a nominated ECAI, or which is a senior tranche, and which is not originated by entities belonging to the same group as the insurance or reinsurance undertaking;

• (b) bonds and loans which have been assigned to credit quality step 2 or 3, excluding bonds and loans issued by insurance and reinsurance undertakings or financial sector entities within the meaning of Article 4, point (27) of Regulation (EU) No 575/2013;

• (c) investments in equities, other than long-term equity investments or strategic equities, and other than investments in insurance and reinsurance undertakings, credit or financial institutions and investment firms, which are either listed in regulated markets in the countries which are members of the EEA or the OECD, or traded on multilateral trading facilities, as defined in Article 4(1), point (22), of Directive 2014/65/EU, whose registered office or head office is in a Member State of the European Union.

• (a) the value of the portfolio of liquid assets referred to in paragraph 4, first subparagraph, shall be the sum of the following:
• — the value for solvency purposes of Level 1 assets, subject to a haircut of 0 %;
• — the value for solvency purposes of Level 2A assets, subject to a haircut of 15 %;
• — the value for solvency purposes of securitisations which fall under Level 2B assets, subject to a haircut of 25 %;
• — the value for solvency purposes of Level 2B assets other than securitisations, subject to a haircut of 50 %;

• (b) for the purposes of calculating the best estimate of non-life technical provisions referred to in paragraph 4, cash flows stemming from reinsurance contracts or special purpose vehicles that meet the requirements set out in Articles 209, 211 and 213 shall be subject to a haircut of 15%. Cash flows stemming from reinsurance contracts or special purpose vehicles that do not meet the requirements set out in Article 209, 211 and 213 shall be subject to a haircut of 50 %.

• (a) 0 % for cash and cash equivalents;

• (b) 5 % for Level 1 assets other than cash and cash equivalents;

• (c) 20 % for Level 2A assets;

• (d) 30 % for securitisations which fall under Level 2B assets;

• (e) 55 % for Level 2B assets other than securitisations.

Article 171c

Long-term equity investments: forced selling test

• (a) the undertaking complies with its risk tolerance limits;

• (b) the undertaking’s solvency capital requirement, assessed without the use of any of the transitional measures referred to in Article 77a(2), Article 308c, Article 308d, or where relevant, Article 111(1), second subparagraph, of Directive 2009/138/EC, is exceeded by an appropriate margin, taking into account the solvency position of the undertaking including the undertaking’s medium-term capital management plan;

• (c) based on projections over a five-year time horizon, the undertaking is able to generate cash inflows that are higher than cash outflows, both on an ongoing basis and under stressed conditions during each of the next five financial calendar years (forced selling test) over the time horizon of the test.

• (a) when assessing cash inflows and outflows on an ongoing basis, insurance and reinsurance undertakings shall assume that the situation in financial markets over the time horizon of the test remains the same as the one at the reference date of the test;

• (b) when assessing cash inflows and outflows under stressed conditions, insurance and reinsurance undertakings shall apply the stress assumptions set out in paragraph 5 and shall not be required to take into account additional secondary or market-wide effects;

• (c) when assessing cash inflows and outflows both on an ongoing basis and under stressed conditions, the projected decisions of investment or divestments by the insurance or reinsurance undertaking shall be consistent with the business strategy of the undertaking, its written policies on investment, liquidity and asset-liability management, and the future management actions referred to in Article 23.

• (a) revenues stemming from the sale of the following assets, held either directly or through a collective investment undertaking or other investment packaged as funds in which the undertaking holds units or shares:
• (i) assets representing claims on one of the counterparties referred to in Article 180(2);
• (ii) assets that are fully, unconditionally and irrevocably guaranteed by one of the counterparties referred to in Article 180(2), where the guarantee meets the requirements set out in Article 215;
• (iii) bonds and loans which have been assigned to credit quality step 0, 1, 2 or 3, excluding bonds and loans issued by insurance and reinsurance undertakings or financial sector entities within the meaning of Article 4, point (27), of Regulation (EU) No 575/2013;
• (iv) covered bonds referred to in Article 180(1) which have been assigned to credit quality step 0 or 1, excluding those which are issued by a financial sector entity which is part of the same group;
• (v) STS securitisation which either has been assigned a credit assessment of credit quality step 0 or 1 by a nominated ECAI, or which is a senior tranche, and which is not originated by entities belonging to the same group as the insurance or reinsurance undertaking;
• (vi) equities, other than long-term equity investments or strategic equities, and other than investments in financial sector entities, which are either listed in regulated markets in the countries which are members of the EEA or the OECD, or traded on multilateral trading facilities, as referred to in Article 4(1), point (22), of Directive 2014/65/EU, whose registered office or head office is in EU Member States;

• (b) revenues at maturity date stemming from dated assets referred to in point (a), and regular revenues stemming from assets referred to in that point and from property investments and long-term equity investments, including prudently estimated future non-contractual revenues such as dividend payments, provided that the projected non-contractual revenues for a given year are not higher than their three-year historical average;

• (c) premiums and other cash inflows included in the contract boundary of the best estimate of life technical provisions, prudently estimated life premiums and other cash inflows to be earned by the undertaking over the time horizon of the test not included in the contract boundary, provided that such prudently estimated premiums and other cash inflows during a given year are never assumed to be higher than their three-year historical average, or, where there is less than three years of available data, they are not assumed to be higher than those of the most recent year, as well as cash inflows from accepted reinsurance of life obligations;

• (d) premiums and other cash inflows included in the contract boundary of the best estimate of non-life technical provisions, prudently estimated non-life premiums and other cash inflows to be earned by the undertaking over the time horizon of the test not included in the contract boundary, provided that such prudently estimated premiums and other cash inflows during a given year are not assumed to be higher than their three-year historical average or, where there is less than three years of available data, they are not assumed to be higher than those of the most recent year, as well as cash inflows from accepted reinsurance of non-life obligations;

• (e) revenues stemming from the reinvestment of the cash inflows listed in points (a) to (d) in excess of the cash outflows referred to in paragraph 4, where the return on investment is derived from the risk-free interest rate term structure, taking into account the volatility adjustment.

The assets referred to in the first subparagraph, point (a), held through an investment vehicle over which the insurance or reinsurance undertaking exercises control, or, to the extent of the rights of the undertaking, through an investment vehicle over which another entity within the same group exercises control and in which the undertaking holds units or shares, may be fully taken into account. The assets referred to in the first subparagraph, point (a), held through collective investment undertakings or through other investments packaged as funds, other than those referred to in the preceding sentence, may be taken into account up to an absolute amount of EUR 500 million.

Insurance and reinsurance undertakings may decide not to take into account cash inflows referred to in the first subparagraph, point (b) or (e).

For estimating the cash inflows referred to in the first subparagraph, points (c) and (d), which are not included in the contract boundary, the insurance or reinsurance undertaking shall be able to demonstrate to the satisfaction of the supervisory authority that plausible negative outlooks with regard to historical data are appropriately taken into account.

For the purposes of the first subparagraph, point (a), insurance and reinsurance undertakings shall not take into account assets covering the best estimate of insurance obligations to which the matching adjustment is applied.

When assuming revenues stemming from the sale of bonds, loans and securitisations covering the best estimate of insurance obligations to which the volatility adjustment is applied over the time horizon of the test, the undertaking shall be able to demonstrate to the satisfaction of the supervisory authority that its risk profile does not deviate significantly from the following assumptions underlying the volatility adjustment, even as a result of such sales, including under stressed conditions:

• (a) the undertaking holds assets that are spread-sensitive, and is exposed to changes in credit spreads;

• (b) the application of the volatility adjustment does not result in situations where the impact of an exaggeration of credit spreads on the assets held by the undertaking is overcompensated by the impact of the volatility adjustment on the best estimate of technical provisions;

• (c) the cash flows arising from insurance liabilities of the undertaking to which the volatility adjustment is applied are sufficiently stable and predictable to ensure that the undertaking is not exposed to the risk of forced sale of its assets that are spread-sensitive, and can instead hold on to such assets, including during market turmoil.

• (a) cash outflows related to claims, surrenders, other technical outflows including operating expenses, and taxes, within the contract boundary of the best estimate of life technical provisions, cash outflows corresponding to obligations related to the life premiums which are not included in the contract boundary referred to in paragraph 3, first subparagraph, point (c), as well as cash outflows from accepted reinsurance of life obligations;

• (b) cash outflows related to claims, surrenders, other technical outflows including operating expenses, taxes, within the contract boundary of the best estimate of non-life technical provisions, cash outflows corresponding to obligations related to the non-life premiums which are not included in the contract boundary referred to in paragraph 3, first subparagraph, point (d), as well as cash outflows from accepted reinsurance of non-life obligations;

• (c) cash outflows arising from repurchase agreements, reverse repurchase agreements and similar arrangements, margin requirements, and other financial outflows;

• (d) cash outflows arising from pension scheme contributions related to the employees of the insurance or reinsurance undertaking;

- (e) cash outflows arising from other expenses that are not included in the calculation of the best estimate of technical provisions, and other cash outflows, including all of the following:

• (i) dividend distributions and other payments to shareholders and other subordinated creditors;
• (ii) share buy-backs and repayment or redemption of own fund items;
• (iii) other cash outflows, including intragroup ones, not captured by previous points, including contingent liabilities, bonuses and other variable remuneration and off-balance sheet commitments.

• (a) during the first financial year of the projections, there is an additional cash outflow equal to the aggregation of capital requirements stemming from the risk modules referred to in Chapter V of Title I, net of the adjustment for the loss-absorbing capacity of technical provisions and deferred taxes referred to in Article 205, where the aggregation is based on the correlation parameters set out in Annex IV to Directive 2009/138/EC;

• (b) during each of the following four financial years of the projections, there is an additional cash outflow equal to the aggregation of capital requirements stemming from the risk modules referred to in Chapter V of Title I, net of the adjustment for the loss-absorbing capacity of technical provisions and deferred taxes referred to in Article 205, without taking into account the submodules referred to in the second subparagraph of this paragraph, where the aggregation is based on the correlation parameters set out in Annex IV to Directive 2009/138/EC.

The submodules referred to in the first subparagraph, point (b), shall be the following:

• (a) the sum of capital requirements for non-life, life and health catastrophe risks, calculated in accordance with Articles 119, 143 and 160 respectively;

• (b) the sum of capital requirements for non-life, life, NSLT health and SLT health lapse risks, calculated in accordance with Articles 118, 142, 150 and 159 respectively.

For the purposes of the first subparagraph, point (b), the following assumptions shall apply:

• (a) capital requirements for market risk and counterparty default risk modules decrease each year of the test, the percentage of reduction for a given year is equal to the decrease in the total projected value of the assets held by the insurance or reinsurance undertaking at the end of the previous year.

• (b) in relation to the non-life premium and reserve risk sub-module referred to in Article 115, cash outflows referred to in paragraph 4, point (b), shall be estimated by increasing the relevant cash outflows in each segment s set out in Annex II as follows:
• (i) the cash outflows occurring during the first year following the date when the insurance or reinsurance cover begins or is renewed shall be increased by a percentage that is equal to the standard deviations for non-life premium risk of the segments s as set out in Annex II multiplied by three;
• (ii) the cash outflows occurring after the first year following the date when the insurance or reinsurance cover begins or is renewed shall be increased by a percentage that is equal to the standard deviation for non-life reserve risk of the segments s as set out in Annex II multiplied by three;

• (c) in relation to the NSLT health premium and reserve risk sub-module referred to in Article 146, cash outflows referred to in paragraph 4, point (b), shall be estimated by increasing the relevant cash outflows in each segment s set out in Annex XIV as follows:
• (i) the cash outflows occurring during the first year following the date when the insurance or reinsurance cover begins or is renewed shall be increased by a percentage that is equal to the standard deviation for NSLT health premium risk of the segment s as set out in Annex XIV multiplied by three;
• (ii) the cash outflows occurring after the first year following the date when the insurance or reinsurance cover begins or is renewed shall be increased by a percentage that is equal to the standard deviation for NSLT health reserve risk of the segment s as set out in Annex XIV multiplied by three.

6. For the forced selling test under stressed conditions referred to in paragraph 1, point (c), the insurance or reinsurance undertaking shall make the following additional assumptions regarding certain cash flows:

• (a) over the time horizon of the test, the stressed values of cash flows referred to in paragraph 3, first subparagraph, point (c), and paragraph 4, point (a), shall be consistent with the scenario of the life lapse risk sub-module referred to in Article 142 and, as applicable, the SLT health lapse risk sub-module referred to in Article 159;

• (b) over the time horizon of the test, the stressed values of cash flows referred to in paragraph 3, first subparagraph, point (d), and paragraph 4, point (b), shall be consistent with the scenario of the non-life lapse risk sub-module referred to in Article 118 and, as applicable, the NSLT health lapse risk sub-module referred to in Article 150;

• (c) the stressed values of cash outflows referred to in paragraph 4, points (c), (d) and (e) shall be consistent with paragraph 2, point (c), and with past distribution practices by insurance and reinsurances undertakings, in particular in stressed market environments; in addition, the insurance and reinsurance undertaking shall assume that the contingent liabilities and off-balance sheet commitments referred in paragraph 4, point (e)(iii), are triggered;

• (d) for determining reinvestment revenues referred to in paragraph 3, first subparagraph, point (e), the term structure of interest rate shall be assumed to change in accordance with the scenario underlying the calculation of the interest rate risk submodule included in the calculation of the cash outflow referred to in paragraph 5.

Article 171d

Long-term equity investments: collective investment undertakings with a lower risk profile

• (a) European long-term investment funds pursuant to Regulation (EU) 2015/760;

• (b) qualifying social entrepreneurship funds as referred to in Article 3, point (b), of Regulation (EU) No 346/2013;

• (c) qualifying venture capital funds as referred to in Article 3, point (b), of Regulation (EU) No 345/2013;

• (d) closed-ended alternative investment funds managed by authorised EU AIFMs, which have no leverage calculated in accordance with the commitment method set out in Article 8 of Delegated Regulation (EU) No 231/2013.

3. Where the conditions set out in Article 105a(1) of Directive 2009/138/EC are complied with at the level of a collective investment undertaking referred to in paragraph 2 of this Article, Article 105a(4) of that Directive shall apply to:

• (a) equities held within the collective investment undertaking, where the look-through approach set out in Article 84 of this Regulation can be applied to all exposures;

• (b) units or shares of the collective investment undertaking, where the look-through approach set out in Article 84 of this Regulation cannot be applied to all exposures.

Article 172

Symmetric adjustment of the equity capital charge

1. The equity index referred to in Article 106(2) of Directive 2009/138/EC shall comply with all of the following requirements:

- (a) the equity index measures the market price of a diversified portfolio of equities which is representative of the nature of equities typically held by insurance and reinsurance undertakings;

• (b) the level of the equity index is publicly available;

- (c) the frequency of published levels of the equity index is sufficient to enable the current level of the index and its average value over the last 36 months to be determined.

2. Subject to paragraph 4, the symmetric adjustment shall be equal to the following:

Image omitted; see official source

where:

• (a) CI denotes the current level of the equity index;

• (b) AI denotes the weighted average of the daily levels of the equity index over the last 36 months.

Article 173

Investments in equity under legislative programmes

Subsection 4 Property risk sub-module

Article 174

The capital requirement for property risk referred to in point (c) of the second subparagraph of Article 105(5) of Directive 2009/138/EC shall be equal to the loss in the basic own funds that would result from an instantaneous decrease of 25 % in the value of immovable property.

Subsection 5 Spread risk sub-module

Article 175

Scope of the spread risk sub-module

The capital requirement for spread risk referred to in point (d) of the second subparagraph of Article 105(5) of Directive 2009/138/EC shall be equal to the following:

Image omitted; see official source

where

• (a) SCRbonds denotes the capital requirement for spread risk on bonds and loans;

• (b) SCRsecuritisation denotes the capital requirement for spread risk on securitisation positions;

- (c) SCRcd denotes the capital requirement for spread risk on credit derivatives.

Article 176

Spread risk on bonds and loans

Credit quality step	Credit quality step	0	0	1	1	2	2	3	3	4	4	5 and 6	5 and 6
Duration (duri)	stressi	ai	bi	ai	bi	ai	bi	ai	bi	ai	bi	ai	bi
up to 5	bi · duri	—	0,9 %	—	1,1 %	—	1,4 %	—	2,5 %	—	4,5 %	—	7,5 %
More than 5 and up to 10	ai + bi · (duri – 5)	4,5 %	0,5 %	5,5 %	0,6 %	7,0 %	0,7 %	12,5 %	1,5 %	22,5 %	2,5 %	37,5 %	4,2 %
More than 10 and up to 15	ai + bi · (duri – 10)	7,0 %	0,5 %	8,5 %	0,5 %	10,5 %	0,5 %	20,0 %	1,0 %	35,0 %	1,8 %	58,5 %	0,5 %
More than 15 and up to 20	ai + bi · (duri – 15)	9,5 %	0,5 %	11 %	0,5 %	13,0 %	0,5 %	25,0 %	1,0 %	44,0 %	0,5 %	61,0 %	0,5 %
More than 20	min[ai + bi · (duri – 20);1]	12,0 %	0,5 %	13,5 %	0,5 %	15,5 %	0,5 %	30,0 %	0,5 %	46,6 %	0,5 %	63,5 %	0,5 %

Duration (duri)	stressi
up to 5	3 % · duri
More than 5 and up to 10	15 % + 1,7 % · (duri – 5)
More than 10 and up to 20	23,5 % + 1,2 % · (duri – 10)
More than 20	min(35,5 % + 0,5 % · (duri – 20); 1)

4a. Notwithstanding paragraph 4, bonds and loans that are assigned to a credit quality step in accordance with paragraph 1 or 2 of Article 176a or paragraph 1 of Article 176c shall be assigned a risk factor stressi depending on the credit quality step and the modified duration duri of the bond or loan i assigned in accordance with the table set out in paragraph 3 of this Article.

• (a) where the risk-adjusted value of collateral is higher than or equal to the value of the bond or loan i, stressi shall be equal to half of the risk factor that would be determined in accordance with paragraph 4;

• (b) where the risk-adjusted value of collateral is lower than the value of the bond or loan i, and where the risk factor determined in accordance with paragraph 4 would result in a value of the bond or loan i that is lower than the risk-adjusted value of the collateral, stressi shall be equal to the average of the following:
• (i) the risk factor determined in accordance with paragraph 4;
• (ii) the difference between the value of the bond or loan i and the risk-adjusted value of the collateral, divided by the value of the bond or loan i;

• (c) where the risk-adjusted value of collateral is lower than the value of the bond or loan i, and where the risk factor determined in accordance with paragraph 4 would result in a value of the bond or loan i that is higher than or equal to the risk-adjusted value of the collateral, stressi shall be determined in accordance with paragraph 4.

The risk-adjusted value of the collateral shall be calculated in accordance with Articles 112, 197, 198.

Article 176a

Internal assessment of credit quality steps of bonds and loans

• a) the insurance or reinsurance undertaking's own internal credit assessment of the bond or loan meets the requirements listed in Article 176b;

• b) the bond or loan is issued by a company which does not belong to the same corporate group as the insurance or reinsurance undertaking;

• c) the bond or loan is not issued by a company which is an insurance or reinsurance undertaking, an infrastructure entity, a credit institution, an investment firm, a financial institution, an AIFM, a UCITS investment management company, an institution for occupational retirement provision or a non-regulated undertaking carrying out financial activities;

• d) no claims on the issuing company of the bond or loan rank senior to the bond or loan, except for the following claims:
• (i) statutory claims and claims from liquidity facility providers provided that those statutory claims and claims from liquidity facility providers are in aggregate not material relative to the overall senior debt of the issuing company;
• (ii) claims from trustees;
• (iii) claims from derivatives counterparties;

• e) the bond or loan provides a fixed redemption payment on or before the date of maturity, in addition to regular fixed or floating rate interest payments;

• f) the contractual terms and conditions of the bond or loan provide for the following:
• (i) the borrower is obliged to provide audited financial data to the lender at least annually;
• (ii) the borrower is obliged to notify the lender of any events that could materially affect the credit risk of the bond or loan;
• (iii) the borrower is not entitled to change the terms and conditions of the bond or loan unilaterally, nor to make other changes to its business that would materially affect the credit risk of the bond or loan;
• (iv) the issuer is prohibited from issuing new debt without the prior agreement of the insurance or reinsurance undertaking;
• (v) what constitutes a default event is defined in a way that is specific to the issue and the issuer;
• (vi) what is to happen on a change of control;

• g) the bond or loan is issued by a company that meets all of the following criteria:
• (i) the company is a limited liability company;
• (ii) the company has its head office in a country which is a member of the EEA;
• (iii) more than 50 % of the annual revenue of the company is denominated in currencies of countries which are members of the EEA or the OECD;
• (iv) the company has operated without any credit event over at least the last 10 years;
• (v) at least one of the following conditions is fulfilled with respect to each of the last three financial years ending prior to the date on which the Solvency Capital Requirement is being calculated:
• — the annual turnover of the company exceeds EUR 12 800 000 ;
• — the balance sheet total of the company exceeds EUR 12 800 000 ;
• — the number of staff employed by the company exceeds 50;
• (vi) the sum of the company's annual earnings before interest, tax, depreciation and amortisation (‘EBITDA’) over the last five financial years is larger than 0;
• (vii) the total debt of the company at the end of the most recent financial year for which figures are available is no higher than 6,5 times the average of the company's annual free cash flows over the last five financial years;
• (viii) the average of the company's EBITDA over the last five financial years is no lower than 6,5 times the company's interest expense for the most recent financial year for which figures are available;
• (ix) the net debt of the company at the end of the most recent financial year for which figures are available is no higher than 1,5 times the company's total equity at the end of that financial year.

• a) the average of the yields on the two indices determined in accordance with paragraph 6;

- b) the sum of 0,5 % and the yield on the index that meets the requirement in point (d) of that paragraph.

• a) the average of the yields on the two indices determined in accordance with paragraph 7;

• b) the sum of 0,5 % and the yield on the index that meets the requirement in point (b) of that paragraph.

• a) both indices are broad indexes of traded bonds for which an external credit assessment is available;

• b) the constituent traded bonds in the two indices are denominated in the same currency as the bond or loan;

• c) the constituent traded bonds in the two indices have a similar maturity date as the bond or loan;

• d) one of the two indices consists of traded bonds of credit quality step 2;

• e) one of the two indices consists of traded bonds of credit quality step 4.

• a) both indices meet the requirements set out in points (a), (b) and (c) of paragraph 6;

- b) one of the two indices consists of traded bonds of credit quality step 3;

• c) one of the two indices consists of traded bonds of credit quality step 4.

Article 176b

Requirements for an undertaking's own internal credit assessment of bonds and loans

The requirements to be met for the purposes of point (a) of Article 176a(3) by an insurance or reinsurance undertaking's own internal credit assessment of a bond or loan shall be as follows:

• (b) the bond or loan is allocated a credit quality step on the basis of the own internal credit assessment;

• (c) the insurance or reinsurance undertaking is able to demonstrate to the supervisory authority's satisfaction that the own internal credit assessment, and the allocation of a credit quality step to the bond or loan on the basis of that assessment, are reliable and properly reflect the spread risk of the bond or loan contained in the sub-module specified in point (d) of the second subparagraph of Article 105(5) of Directive 2009/138/EC;

• (d) the own internal credit assessment takes into account all factors which could have a material effect on the credit risk associated with the bond or loan, including the following factors:
• (i) the competitive position of the issuer;
• (ii) the quality of the issuer's management;
• (iii) the financial policies of the issuer;
• (iv) country risk;
• (v) the effect of any covenants that are in place;
• (vi) the issuer's financial performance history, including the number of years that it has been operating;
• (vii) the issuer's size and the level of diversity in its activities;
• (viii) the quantitative impact on the issuer's risk profile and financial ratios of its having issued the bond or loan;
• (ix) the issuer's ownership structure;
• (x) the complexity of the issuer's business model;

• (e) the own internal credit assessment uses all relevant quantitative and qualitative information;

• (f) the own internal credit assessment, the allocation of a credit quality step on the basis of that assessment and the information used to support the own internal credit assessment is documented;

• (g) the own internal credit assessment takes into account the characteristics of comparable assets for which a credit assessment by a nominated ECAI is available;

• (h) the own internal credit assessment takes into account trends in the issuer's financial performance;

• (i) the own internal credit assessment is procedurally independent from the decision to underwrite;

• (j) the insurance or reinsurance undertaking regularly reviews the own internal credit assessment.

Article 176c

Assessment of credit quality steps of bonds and loans based on an approved internal model

• a) an insurance or reinsurance undertaking has concluded an agreement (‘co-investment agreement’) to invest in bonds and loans jointly with another entity;

• b) that other entity (‘the co-investor’) is one or other of the following:
• (i) an institution as defined in point (3) of Article 4(1) of Regulation (EU) No 575/2013 which uses the Internal Ratings Based Approach referred to in Article 143(1) of that Regulation;
• (ii) an insurance or reinsurance undertaking which uses an internal model in accordance with Article 100 of Directive 2009/138/EC;

• c) pursuant to the co-investment agreement, the insurance or reinsurance undertaking and the co-investor invest jointly in bonds and loans for which a credit assessment by a nominated ECAI is not available and for which debtors have not posted collateral that meets the criteria set out in Article 214;

• d) the co-investment agreement provides that the co-investor shares with the insurance or reinsurance undertaking the probabilities of default produced by its Internal Ratings Based Approach or, as applicable, the credit quality steps produced by its internal model for the bonds or loans referred to in point (c) for the purpose of using that information for the calculation of the Solvency Capital Requirement of the insurance or reinsurance undertaking.

• a) in a case where the co-investor falls within point (i) of paragraph 1(b), credit quality steps shall be determined on the basis of the most recent probabilities of default that the Internal Ratings Based Approach has produced;

• b) in a case where the co-investor falls within point (ii) of paragraph 1(b), credit quality steps shall be the credit quality steps produced by the internal model.

• a) the issuer of each bond or loan does not belong to the same corporate group as the insurance or reinsurance undertaking;

• b) the issuer is not an insurance or reinsurance undertaking, an infrastructure entity, a credit institution, an investment firm, a financial institution, an AIFM, a UCITS investment management company, an institution for occupational retirement provision or a non-regulated undertaking carrying out financial activities;

• c) the issuer has its head office in a country which is a member of the EEA;

• d) more than 50 % of the issuer's annual revenue is denominated in currencies of countries which are members of the EEA or the OECD;

• e) at least one of the following conditions is met for each of the last three financial years ending prior to the date on which the Solvency Capital Requirement is being calculated:
• (i) the annual turnover of the issuer exceeds EUR 12 800 000 ;
• (ii) the balance sheet total of the issuer exceeds EUR 12 800 000 ;
• (iii) the number of staff employed by the issuer exceeds 50.

4. The criteria in this paragraph are as follows:

• a) the co-investment agreement defines the types of bonds and loans to be underwritten, and the applicable assessment criteria;

• b) the co-investor provides the insurance or reinsurance undertaking with sufficient details of the underwriting process, including the criteria used, the organisational structure of the co-investor and the controls conducted by the co-investor;

• c) the co-investor provides the insurance or reinsurance undertaking with data on all applications for bonds and loans to be underwritten;

• d) the co-investor provides the insurance or reinsurance undertaking with details of all decisions to approve or reject applications for bonds and loans to be underwritten;

• e) the co-investor retains an exposure of at least 20 % of the nominal value of each bond and loan;

• f) the underwriting process is the same as the underwriting process followed by the co-investor for its other investments in comparable bonds and loans;

• g) the insurance or reinsurance undertaking invests in all bonds and loans of the types referred to in point (a) for which the co-investor decides to approve the bond or loan application;

• h) the co-investor provides the insurance or reinsurance undertaking with information that allows the undertaking to understand the Internal Ratings Based Approach or, as applicable, internal model and its limitations, as well as its adequacy and appropriateness, in particular:
• (i) a description of the Internal Ratings Based Approach or, as applicable, internal model, including the inputs and risk factors, the quantification of risk parameters and the underlying methods, and the general methodology applied;
• (ii) a description of the scope of the use of the Internal Ratings Based Approach or, as applicable, internal model;
• (iii) a description of the model validation process and of other processes which allow the model's performance to be monitored, the appropriateness of its specification to be reviewed over time, and the results of the Internal Ratings Based Approach or, as applicable, internal model to be tested against experience.

• a) the insurance or reinsurance undertaking clearly documents to which credit quality step the probability of default produced by the institution's Internal Ratings Based Approach corresponds;

• b) the mapping of probabilities of default to credit quality steps carried out by the insurance or reinsurance undertaking ensures that, for the bond or loan in question, the resulting level of capital requirement for the spread risk sub-module referred to in point (d) of the second subparagraph of Article 105(5) of Directive 2009/138/EC is appropriate;

• c) the mapping is based on Table 1 in Annex I to Commission Implementing Regulation (EU) 2016/1799 ([^E0017]);

• d) adjustments are made in a prudent manner to the probabilities of default before the mapping is carried out, taking into account the qualitative factors set out in Article 7 of Implementing Regulation (EU) 2016/1799;

• e) an adjustment to the probabilities of default is made in either of the following situations:
• (i) the time horizon covered by the Internal Ratings Based Approach deviates significantly from the 3-year time horizon set out in Article 4(2) of Implementing Regulation (EU) 2016/1799;
• (ii) the definition of default used in the Internal Ratings Based Approach deviates significantly from the one set out in Article 4(4) of that Implementing Regulation.

Article 178

Spread risk on securitisation positions: calculation of the capital requirement

Credit quality step	Credit quality step	0	0	1	1	2	2	3	3	4	4	5 and 6	5 and 6
Duration	stress i	ai	bi	ai	bi	ai	bi	ai	bi	ai	bi	ai	bi
(duri)	stress i	ai	bi	ai	bi	ai	bi	ai	bi	ai	bi	ai	bi
up to 5	min [bi Image omitted; see official source duri; 1]	—	0,7 %	—	0,9 %	—	1,4 %	—	2,5 %	—	4,5 %	—	7,5 %
More than 5 and up to 10	min [ai + bi Image omitted; see official source (duri – 5); 1]	3,5 %	0,5 %	4,5 %	0,6 %	7,0 %	0,7 %	12,5 %	1,5 %	22,5 %	2,5 %	37,5 %	4,2 %
More than 10 and up to 15	min [ai + bi Image omitted; see official source (duri – 10); 1]	6,0 %	0,5 %	7,5 %	0,5 %	10,5 %	0,5 %	20,0 %	1,0 %	35,0 %	1,8 %	58,5 %	0,5 %
More than 15 and up to 20	min [ai + bi Image omitted; see official source (duri – 15); 1]	8,5 %	0,5 %	10,0 %	0,5 %	13,0 %	0,5 %	25,0 %	1,0 %	44,0 %	0,5 %	61,0 %	0,5 %
More than 20	min [ai + bi Image omitted; see official source (duri – 20); 1]	11,0 %	0,5 %	12,5 %	0,5 %	15,5 %	0,5 %	30,0 %	0,5 %	46,5 %	0,5 %	63,5 %	0,5 %