The European Insurance and Occupational Pensions Authority (EIOPA) released an opinion on 27 January relating to group solvency calculations performed using a combination of the default accounting consolidation (AC) method and the deduction and aggregation (D&A) method.
Application of the combination approach requires regulatory approval and EIOPA reminds supervisory authorities of the need to consider all the criteria set out in Article 328(1) before approving this.
Although the methods are intended to be prudentially equivalent, this is not always the case and there may be instances where the combination leads to a result that does not reflect the real financial position of the group. Where this happens, EIOPA advises that the group supervisor should assess the circumstances and seek solutions to correct any unjustified advantages or disadvantages arising from use of the combined approach.
If a solution is established, it should be subject to strong internal monitoring of cash-flows in the D&A entity, with clear evidence that there has been no double use of eligible own funds. The solution should be explained in the group Solvency and Financial Condition Report (SFCR), together with the rationale behind its use.
EIOPA recommends that the following conditions should apply to use of the combined approach:
In EIOPA’s opinion, the tiering limits should be separately applied to the AC and D&A parts of the group, rather than applying these to the overall group own funds.
Use of the overall group SCR to calculate tiering limits will not be possible.
In the interest of achieving supervisory convergence, EIOPA will monitor the application of supervisory solutions to this issue and may revisit its opinion as a result.
KPMG member firms' experience to date suggests that some groups have been unduly penalized through the strict application of the rules, for example in relation to the non-elimination of intra-group transactions between the AC and D&A parts of the group. EIOPA’s opinion therefore offers such groups an opportunity to discuss the issue with their group supervisor and seek a more equitable and pragmatic treatment.
Although member firms' experience suggests that regulatory advantages have generally not been gained, where groups are aware that they are in this position, we would recommend they also discuss this with their supervisor, to prevent any need to correct public disclosures at a later date.