ΣΥΝΔΕΣΜΟΣ
ΑΣΦΑΛΙΣΤΙΚΩΝ
ΕΤΑΙΡΕΙΩΝ ΚΥΠΡΟΥ
ΙNSURANCE
ASSOCIATION OF
CYPRUS
06 October 2010
POSITION PAPER OF THE IAC ON IM7-THE CLASSIFICATION AND
ELIGIBILITY OF OWN FUNDS
ARTICLE COF1
1. “The excess of assets over liabilities, valued in accordance with Article 75 and
Section 2 of Chapter VI of Directive 2009/138/EC, comprising…” * Note
Criteria for classification are not meant to apply to the excess of assets over
liabilities as this would result in double counting the risks covered by the SCR.
1a. “Paid-in…”
The Directive (Article 93 (1) states that Tier 1 items should be available, but not
specifically paid-in.
1f. “An amount equal to the sum of deferred tax assets that the insurance or
reinsurance undertaking shall use within the following 12 months or that the
insurance or reinsurance undertaking could legally transfer to another entity within
the 12 months; and…”
We would like to highlight that it is much more practicable and consistent from a
conceptual point of view to deal with Net Deferred Taxes instead of treating
Deferred Tax Assets and Deferred Tax liabilities separately. The IAC believes that
Deferred Taxes should be considered in net terms i.e. DTA and DTL should not be
treated as separate items but netted off from each other. This is consistent with the
way deferred taxes are dealt with for banks.
1gi.
“…net of foreseeable dividends…”
We strongly disagree with this new feature of deducting foreseeable dividends,
which was not in the previous version of the IM. At the end of financial years, the
dividend is not yet paid and even not yet confirmed by shareholders. In case of a
crisis beginning after the assessment of the solvency position, shareholders could
decide to leave dividends in the company to reinforce its solvency position.
23, Zenon Sozos Str., P.O.Box 22030, 1516 Nicosia, Cyprus, Tel. 22452990, Fax 22374288, E-mail: [email protected], Homepage: www.iac.org.cy
Ζήνωνος Σώζου 23, Τ.Θ. 22030, 1516 Λευκωσία, Κύπρος, Τηλ. 22452990, Fax 22374288, E-mail: [email protected], Ιστοσελίδα: www.iac.org.cy
ARTICLE COF2
1e.“The maturity date shall be deemed to be the first opportunity to repay or redeem the
basic own fund item”
We do not agree that the first contractual opportunity to repay or redeem the basic
own-fund item should be the maturity date of the own fund. Such a requirement
ignores industry common practices where hybrid securities, particularly in the retail
market, are expected to incorporate a first call date at around 5 years after the initial
offering. Investors with an appetite for these securities consider such “first call”
provisions as a formality and genuinely treat the hybrid as a perpetual security. This
is further evidenced by the fact that the issuers incur no adverse reaction for not
exercising the call option. There are many examples in the market that demonstrate
that a first call option is not always exercised. Not allowing incentive to redeem
while setting the maturity at the first opportunity to repay seems inconsistent
(redundant prudence).
1f. ”The repayment or redemption of the basic own-fund item shall be subject to prior
supervisory approval if the solvency position would be materially weakened by this
repayment or redemption”
It does not make sense to require supervisory approval of repayments and
redemptions on a going concern basis. It is unjustifiably burdensome, especially at
maturity.
1h. …“dividends…”
This is the exclusive right of shareholders.
3. “The trigger event referred to in paragraph 2 is a significant breach of the
Solvency Capital Requirement, defined for the purposes of this Article as the earlier
of the following events:….”
Introducing an automatic trigger is inconsistent with the purpose of the ladder of
supervisory intervention (also relevant for Tier 2 criteria). How an undertaking best
recovers level of the SCR should assess on a case-by-case basis and should be
part of the recovery plan approved by the supervisor. Automatic contractual
suspensions of repayments and redemptions, coupon/interest and dividend
payments may prove not to be the best actions to take in all situations.
3a. “Eligible own funds covering the Solvency Capital Requirement are equal to or less
than the 75% of the SCR”
This would create a third threshold, in addition to the two already defined in the
Directive (MCR and SCR). It seems to us contrary to the Level 1 text, which would
have defined such a threshold if necessary. The trigger here should be the MCR.
3b. “A breach of the SCR is not resolved within two months”
23, Zenon Sozos Str., P.O.Box 22030, 1516 Nicosia, Cyprus, Tel. 22452990, Fax 22374288, E-mail: [email protected], Homepage: www.iac.org.cy
Ζήνωνος Σώζου 23, Τ.Θ. 22030, 1516 Λευκωσία, Κύπρος, Τηλ. 22452990, Fax 22374288, E-mail: [email protected], Ιστοσελίδα: www.iac.org.cy
We suggest to make a reference to the 6+3 months allowed to undertakings to
cover their SCR, rather than creating a new 2-months period which is new
compared to the Level 1 text.
ARTICLE COF3
1. “The excess of assets over liabilities, valued in accordance with Article 75 and
Section 2 of Chapter VI of Directive 2009/138/EC, comprising:…” * Note
Criteria for classification are not meant to apply to the excess of assets over
liabilities as this would result in double counting the risks covered by the SCR.
ARTICLE COF4
3. ”The exchange or conversion shall be subject to the approval of the supervisory
authority if the solvency position would be materially weakened by this
repayment or redemption:”
It does not make sense to require supervisory approvals of repayments and
redemptions on a going concern basis. It is unjustifiably burdensome, especially at
maturity.
5. …“in such a situation, the supervisory authority may exceptionally waive the
suspension of repayment or redemption of the basic own fund item, provided that
the basic own fund item is exchanged for or converted into another Tier 1 or Tier 2
basic own fund item of at least the same quality and the Minimum Capital
Requirement is complied with even after the repayment or redemption.”
To be kept if the trigger stay above the MCR level. If the trigger is set at the MCR
level, this last sentence becomes meaningless.
6. …“in such a situation, the supervisory authority may exceptionally waive the deferral
of the payment of interest or dividend provided that the payment does not further
weaken the solvency position of the insurance or reinsurance undertaking and the
Minimum Capital Requirement is complied with even after payment of interest or
dividend is made.”
To be kept if the trigger stay above the MCR level. If the trigger is set at the MCR
level, this last sentence becomes meaningless.
ARTICLE COF7
1. “the excess of assets over liabilities…” * Note
Criteria for classification are not meant to apply to the excess of assets over
liabilities as this would result in double counting the risks covered by the SCR.
23, Zenon Sozos Str., P.O.Box 22030, 1516 Nicosia, Cyprus, Tel. 22452990, Fax 22374288, E-mail: [email protected], Homepage: www.iac.org.cy
Ζήνωνος Σώζου 23, Τ.Θ. 22030, 1516 Λευκωσία, Κύπρος, Τηλ. 22452990, Fax 22374288, E-mail: [email protected], Ιστοσελίδα: www.iac.org.cy
Note:
• Any sub-classification of elements of the excess of assets over the liabilities is
fundamentally against the principles of Solvency II. It is in direct contradiction with
Recital 48, which clearly states that the intention of the Directive is that the vast majority
of “assets less liabilities” should be classified as Tier 1.
• It is inappropriate to try to decompose the elements that make the difference between
assets and liabilities valued in accordance with the economic valuation principles set out
in the Directive, and classify them into tiers according to the classification criteria for set
in article 93 (1) (b) (Main criteria for the classification into tiers) which in our
interpretation are intended solely for the classification of debt and contingent capital.
• Any uncertainty in the difference between assets and liabilities is for part of it reflected
in the market consistent value of assets and liabilities under Solvency II and covered by
the SCR beyond that and up to a 99.5% VaR as required by the FD. Having any Solvency
II assets and liabilities subsequently categorised into tiers using the criteria set in article
93 is clearly not what is intended by the Directive and possibly a double counting of
risks.
Intangible assets which are already stressed under the SCR should also be treated as any
other asset and be eligible as Tier 1.
Expected future profits and the conceptual “winding-up gap” item introduced by Ceiops
are already stressed under the SCR. Any classification of these into tiers other than Tier 1
would be inappropriate for the same reasons explained above and in our CEA paper on
the winding-up gap and future profits1 and the joint industry paper on in-force cash
flows.2
The difference between assets and liabilities can also be explained by the requirements to
hold certain reserves under local accounts which are not to be valued as liabilities under
Article 75 and Section 2 of Chapter VI of the Framework Directive to the extent they do
not reflect any economic value. This is possibly the case for the at least part of certain socalled ‘”equalisation reserves” which would not be accounted for liabilities under
Solvency II and should therefore we expect instead be considered as tier 1 “revaluation
reserves” under Solvency II.
Ref.No.:L183-2010/corresp.
23, Zenon Sozos Str., P.O.Box 22030, 1516 Nicosia, Cyprus, Tel. 22452990, Fax 22374288, E-mail: [email protected], Homepage: www.iac.org.cy
Ζήνωνος Σώζου 23, Τ.Θ. 22030, 1516 Λευκωσία, Κύπρος, Τηλ. 22452990, Fax 22374288, E-mail: [email protected], Ιστοσελίδα: www.iac.org.cy