The Solvency Capital Requirement (SCR)

What is the Solvency Capital Requirement (SCR)?

The Solvency Capital Requirement (SCR) should reflect a level of eligible own funds that enables insurance and reinsurance undertakings to absorb significant losses and that gives reasonable assurance to policyholders and beneficiaries that payments will be made as they fall due.

In order to promote good risk management, and align regulatory capital requirements with industry practices, the Solvency Capital Requirement should be determined as the economic capital to be held by insurance and reinsurance undertakings in order to ensure that ruin occurs no more often than once every 200 years.

That economic capital should be calculated on the basis of the true risk profile of those undertakings, taking account of the impact of possible risk mitigation techniques, as well as diversification effects.

The quantitative requirements applicable to (re)insurance undertakings ("Pillar I" of the Solvency II framework) are laid down in six sections:

  1. Valuation of assets and liabilities
  2. Technical provisions
  3. Own funds
  4. Solvency Capital Requirement
  5. Minimum Capital Requirement
  6. Investments.

The Pillar I requirements are based on an economic total balance sheet approach. This approach relies on an appraisal of the whole balance-sheet of insurance and reinsurance undertakings, on an integrated basis, where assets and liabilities are valued consistently.

Such an approach implies that the amount of available financial resources of insurance and reinsurance undertakings should cover its overall financial requirements, i.e. the sum of un-subordinated liabilities and capital requirements.

As a consequence of this approach, eligible own funds must be higher than the Solvency Capital Requirement.

The underlying assumptions in the standard formula for the Solvency Capital Requirement calculation, 25 July 2014

This document presents the underlying assumptions of the standard formula that are used for the SCR calculations.

It should be read in conjunction with the Guidelines on the forward looking assessment of own risks (based on the ORSA principles) and, from 2016 onwards, with the Guidelines on ORSA.

The assessment of the significance with which the risk profile of an insurance or reinsurance undertaking (“undertaking”) or group deviates from the assumptions underlying the SCR calculation, is an important process which undertakings and groups are required to perform starting from 2015.

It should ensure that the undertaking or group understands the assumptions underlying its SCR calculation and considers whether the relevant assumptions are appropriate for the undertaking or group.

To do so, the undertaking or group will have to compare those assumptions with its risk profile.

The purpose of the assessment is not to review the appropriateness or calibration of the standard formula.

The standard formula for Solvency Capital Requirement (SCR) aims to capture the material quantifiable risks that most undertakings are exposed to.

The standard formula might however not cover all material risks a specific undertaking is exposed to.

A standard formula is, by its very nature and design, a standardised calculation method, and is therefore not tailored to the individual risk profile of a specific undertaking.

For this reason, in some cases, the standard formula might not reflect the risk profile of a specific undertaking and consequently the level of own funds it needs.

The document at hand covers all risk modules of the standard formula, addressing the assumptions related to the risks covered by the respective modules as well as the assumptions for the correlation between the modules.

It does not address why some risks are not explicitly formulated in the standard formula.

However, this does not mean that these risks do not need to be considered for the purpose of the assessment of the significance of the deviation.

The fact that the document does not specifically refer to every assumption underlying the standard formula should also not automatically lead an undertaking or group to assume that it does not need to consider whether the application of the standard formula in those parts, where no underlying assumptions are specified, results in adequate capital requirements for the risks it is exposed to.

The document is divided between the assumptions per se, which are given in the boxes at the start of the chapters, and background information.

The text in the boxes is information about the assumptions underlying the standard formula that EIOPA would expect the administrative, management or supervisory body (AMSB) of the undertaking to be aware of in order to perform its role in the FLAOR/ORSA process.

The background information is intended to assist persons performing the assessment of the significance of the deviation.

In line with the general approach that the assessment of the significance of the deviation itself is left to the undertaking or group, the document does not seek to prescribe explicitly the circumstances under which it would be appropriate for an undertaking or group to consider possible deviations of its risk profile from the assumptions on which the SCR standard formula calculation is based, or what exactly the undertaking or group should take into account in the assessment.

This document provides background information to the technical analysis carried out for the calibration of key parameters of the SCR standard formula, thus serving as a reference background document for undertakings in performing their FLAOR/ORSA. Moreover, this document tries to point out the main underlying assumptions in the standard formula design.

It is however not intended to give an exhaustive description of all underlying assumptions of the standard formula nor does it aim to list all risks that are not explicitly formulated in the standard formula calculation.

Where simplified calculations are available, they have been developed based on the same assumptions as for the standard calculation.

In most cases, more assumptions were made in order to derive the simplified calculation.

Where applicable, the additional underlying assumptions for the simplified calculations of the standard formula are also reflected in this document.

In accordance with Article 45(6) of Directive 2009/138/EC the undertaking will have to give information on the significance of the deviation of its risk profile from the assumptions underlying the SCR calculation to the supervisory authority in the FLAOR/ORSA supervisory report.

This will require either an indication of why the deviation is significant or an explanation of and evidence why any deviations singly or taken together are not considered to be significant.

As stated in the Explanatory Text to FLAOR Guideline 16 (respectively Guideline 12 of the ORSA consultation paper issued June 2014), the undertaking should consider possible consequences deriving from the significant deviation and if and how it intends to address this issue.

Such a significant deviation also requires closer scrutiny from the supervisory authority which has to assess whether it agrees that there is a significant deviation and if so, has to consider which steps to take to address this issue from a supervisory perspective.

The document was informally consulted with stakeholders in spring 2014 and revised following the comments received.

The document may be further amended as supervisory authorities and undertakings and groups gain experience with the use of the standard formula and the way undertakings and groups assess the significance of the deviation of the risk profile from the assumptions underlying the standard formula. To continue reading you may click here.

Capital add-ons – Article 37

The starting point for the adequacy of the quantitative requirements in the (re)insurance sector is the solvency capital requirement.

Supervisory authorities may therefore require (re)insurance undertakings only under strictly defined exceptional circumstances to have more capital following the Supervisory Review Process.

Even though the standard formula aims at capturing the risk profile of most (re)insurance undertakings in the Community, there may be some cases where the standardised approach might not entirely reflect the very specific risk profile of an undertaking.

In case of material deficiencies in the full or partial internal model or material governance failures it is essential that the supervisory authorities ensure that the undertaking concerned makes all efforts to remedy the deficiencies that led to the imposition of the capital add-on for the sake of policyholder protection.

The supervisory authority is obliged to examine the undertaking's progress in addressing its deficiencies at least once a year.

Only in case the deviation of such an undertaking's risk profile is material and the development of a partial or full internal model is inefficient, the capital add-on may have a permanent character.

The more harmonised and economic approach adopted for the (re)insurance sector as compared to the Capital Requirements Directive duly justifies the more harmonised approach of capital increases.

Own Risk and Solvency Assessment (ORSA) – Article 44

As part of their risk management system, all (re)insurance undertakings should have, as an integral part of their business strategy, a regular practice of assessing their overall solvency needs with a view to their specific risk profile.

The ORSA has a wofold nature. It is an internal assessment process within the undertaking and is as such embedded in the strategic decisions of the undertaking. It is also a supervisory tool for the supervisory authorities, which must be informed about the results of the own risk and solvency assessment of the undertaking.

The ORSA does not require an undertaking to develop or apply a full or partial internal model. However, if the undertaking already uses an approved full or partial internal model for the calculation of the SCR, the output of the model should be used in the ORSA.

The ORSA does not create a third solvency capital requirement.

The ORSA should not be overly burdensome on small or less complex undertakings. The supervisory authority reviews the own risk and solvency assessment as part of the supervisory review process of the undertaking. The results of each ORSA conducted shall be reported to the supervisory authority as part of the information to be provided for supervisory purposes.

Solvency Capital Requirement – Articles 100 to 125

Section 4 on the Solvency Capital Requirement is divided in three parts:

  1. The general presentation of that capital requirement
  2. The Solvency Capital Requirement standard formula
  3. The use of internal models for solvency purposes.

General provisions for the Solvency Capital Requirement, using the standard formula or an internal model

The Solvency Capital Requirement corresponds to the economic capital a (re)insurance undertaking needs to hold in order to limit the probability of ruin to 0.5%, i.e. ruin would occur once every 200 years

The Solvency Capital Requirement is calculated using Value-at-Risk techniques, either in accordance with the standard formula, or using an internal model: all potential losses, including adverse revaluation of assets and liabilities, over the next 12 months are to be assessed.

The Solvency Capital Requirement reflects the true risk profile of the undertaking, taking account of all quantifiable risks, as well as the net impact of risk mitigation techniques.

The Solvency Capital Requirement is to be calculated at least once a year, monitored on a continuous basis, and recalculated as soon as the risk profile of the undertaking deviates significantly; the Solvency Capital Requirement is to be covered by an equivalent amount of eligible own funds.

Solvency Capital Requirement standard formula

Articles 103 to 109 describe the objectives, architecture and overall calibration of the Solvency Capital Requirement standard formula.

The "modular" architecture, based on linear aggregation techniques, is further specified in Annex IV of the Directive.

The risks captured in the various modules and sub-modules of the standard formula are defined in Articles 13, 104 and 105. The detailed specifications of those modules and sub-modules will be adopted through implementing measures, as they are likely to evolve over time.

The Solvency Capital Requirement standard formula aims at achieving the right balance between risk-sensitivity and practicality. It allows both for the use of undertaking-specific parameters, where appropriate and standardised simplifications for SMEs.

As the new valuation standards take due account of credit and liquidity characteristics of assets, as the Solvency Capital Requirement captures all quantifiable risks, and as all investments are subject to the "prudent person" principle, quantitative investment limits and asset eligibility criteria will not be maintained.

However, in the light of market developments, if new risks emerge which are not covered by the Solvency Capital Requirement standard formula, Article 109(2) enables the Commission to adopt temporary implementing measures laying down investment limits and asset eligibility criteria whilst the formula is being updated.

Internal models

Articles 110 to 125 describe the requirements applying to (re)insurance undertakings using or wishing to use a full or partial internal model in the calculation of the Solvency Capital Requirement.

Before approval by the supervisory authorities is given to use an internal model, (re)insurance undertakings must submit an application approved by the administrative or management body of the undertaking, demonstrating that they meet the use test, statistical quality standards, calibration standards, validation standards, and documentation standards.

Supervisory authorities must decide whether to accept or reject the application within six months of receipt of a complete application from an (re)insurance undertaking.

With respect to the use of partial internal models additional requirements are introduced that are designed to prevent cherry-picking by (re)insurance undertakings.

Article 117 gives supervisory authorities the power to require an (re)insurance undertaking calculating the Solvency Capital Requirement using the standard formula, to develop a partial or full internal model in the event that the Solvency Capital Requirement standard formula does not accurately capture the risk profile of that undertaking.


From the European Parliament legislative resolution of 22 April 2009 on the amended proposal for a directive of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (recast)

(14b) The new solvency regime should not be too burdensome for insurance undertakings that specialise in providing specific types of insurance or providing services to specific customer segments, and it should recognise that specialising in this way can be a valuable tool for efficiently and effectively managing risk.

In order to achieve this objective, as well as the proper application of the proportionality principle, provision should also be made to specifically allow undertakings to use their own data to calibrate the parameters in the underwriting risk modules of the standard formula of the Solvency Capital Requirement.

(17) The starting point for the adequacy of the quantitative requirements in the insurance sector is the Solvency Capital Requirement.

(17) The starting point for the adequacy of the quantitative requirements in the insurance sector is the

The The Solvency Capital Requirement standard formula is intended to reflect the risk profile of most insurance and reinsurance undertakings. However, there may be some cases where the standardised approach does not adequately reflect the very specific risk profile of an undertaking.

(18) Some risks may only be properly addressed through governance requirements rather than through the quantitative requirements reflected in the Solvency Capital Requirement.

An effective governance system is therefore essential for the adequate management of the insurance undertaking and for the regulatory system.

(19) All insurance and reinsurance undertakings should have, as an integrated part of their business strategy, a regular practice of assessing their over-all solvency needs with a view to their specific risk profile (own risk and solvency assessment).

This assessment does not require the development of an internal model nor does it serve to calculate a capital requirement different from the Solvency Capital Requirement and the Minimum Capital Requirement.

The results of each assessment should be reported to the supervisory authority as part of the information to be provided for supervisory purposes.

(29b) Not all assets within an undertaking are unrestricted.

In some Member States, specific products origin some ring-fenced fund structures which give one class of policyholders greater rights to assets within their own "fund".

Although these assets are included in computing the excess of assets over liabilities for own-funds purposes they cannot in fact be made available to meet the risks outside the ring-fenced fund.

To be consistent with the economic approach, the assessment of own-funds needs to be adjusted to reflect the different nature of assets, which form part of a ring-fenced arrangement.

Similarly, the Solvency Capital Requirement calculation should reflect the reduction in pooling/diversification related to those ring-fenced funds.

(35) The supervisory regime should provide for a risk-sensitive requirement, which is based

Both capital requirements should be harmonised throughout the Community in order to achieve a uniform level of protection for policyholders. For the good functioning of the Solvency II regime, there should be an adequate ladder of intervention between the Minimum Capital Requirement and the Solvency Capital Requirement.

(35a) In order to mitigate undue potential pro-cyclical effects of the financial system and avoid that insurance and reinsurance undertakings are unduly forced to raise additional capital or sell their investments as a result of unsustained adverse movements in financial markets, the market risk module of the standard formula for the Solvency Capital Requirement should include a symmetric adjustment mechanism with respect to changes in the level of equity prices.

In addition, in the event of exceptional falls in financial markets, and where that symmetric adjustment mechanism is not sufficient to enable insurance and reinsurance undertakings to comply with their Solvency Capital Requirement, provision should be made to allow supervisory authorities to extend the time period within which insurance and reinsurance undertakings have to re-establish the level of eligible own funds covering the Solvency Capital Requirement.

(36) The Solvency Capital Requirement should reflect a level of eligible own funds that enables insurance and reinsurance undertakings to absorb significant losses and that gives reasonable assurance to policyholders and beneficiaries that payments will be made as they fall due.

(36a) In order to ensure that insurance and reinsurance undertakings hold eligible own funds that cover the Solvency Capital Requirement on an on-going basis, taking into account any changes in their risk profile, those undertakings should calculate the Solvency Capital Requirement at least once a year, monitor it continuously and recalculate it whenever the risk profile alters significantly.

(37) In order to promote good risk management, and align regulatory capital requirements with industry practices, the Solvency Capital Requirementshould be determined as the economic capital to be held by insurance and reinsurance undertakings in order to ensure that ruin occurs no more often than once in every 200 cases or, alternatively, that those undertakings will still be in a position, with a probability of at least 99,5%, to meet their obligations to policyholders and beneficiaries over the forthcoming 12 months.

That economic capital should be calculated on the basis of the true risk profile of those undertakings, taking account of the impact of possible risk mitigation techniques, as well as diversification effects.

(38) Provision should be made to lay down a standard formula for the calculation of the Solvency Capital Requirement, to enable all insurance and reinsurance undertakings to assess their economic capital.

For the structure of the standard formula, a modular approach should be adopted, which means that the individual exposure to each risk category should be assessed in a first step and then aggregated in a second step.

Where the use of undertaking-specific parameters allows for the true underwriting risk profile of the undertaking to be better reflected, this should be allowed, provided such parameters are derived using a standardised methodology

(39) In order to reflect the specific situation of small and medium sized undertakings, simplified approaches to the calculation of the Solvency Capital Requirement in accordance with the standard formula should be provided for.

(41a) In accordance with the risk-oriented approach to the Solvency Capital Requirement it should be possible, in specific circumstances, to use partial or full internal models for the calculation of that requirement instead of the standard formula.

In order to provide policyholders and beneficiaries with an equivalent level of protection, such internal models should be subject to prior supervisory approval on the basis of harmonised processes and standards.

(43) The Minimum Capital Requirement should ensure a minimum level below which the amount of financial resources should not fall. It is necessary that it is calculated in accordance with a simple formula, which is subject to a defined floor and cap based on the risk-based Solvency Capital Requirement in order to allow for an escalating ladder of supervisory intervention, and that it is based on the data which can be audited.

(53) An insurance undertaking offering assistance contracts should possess the means necessary to provide the benefits in kind which it offers within an appropriate period of time.

Special provisions should be laid down for calculating the Solvency Capital Requirement and the absolute floor of the Minimum Capital Requirements which such undertaking should possess.

(68a) The consolidated Solvency Capital Requirement for a group should take into account the global diversification of risks that exists across all the insurance entities in that group in order to reflect properly the risk exposures of that group.

(70) It is necessary to ensure that own funds are appropriately distributed within the group and available to protect policyholders and beneficiaries where needed.

To this end insurance and reinsurance undertakings within a group should have sufficient own funds to cover their solvency capital requirement.

Article 18
Conditions for authorisation

1. The home Member State shall require every undertaking for which authorisation is sought to:

(a) as far as insurance undertakings are concerned, limit their objects to the business of insurance and operations arising directly there from, to the exclusion of all other commercial business;

(b) as far as reinsurance undertakings are concerned, limit their objects to the business of reinsurance and related operations; this requirement may include a holding company function and activities with respect to financial sector activities within the meaning of Article 2(8) of Directive 2002/87/EC;

(c) submit a scheme of operations in accordance with Article 23;

(d) hold the eligible basic own funds to cover the absolute floor of the Minimum Capital Requirement provided for in point (d) of Article 127(1);

(e) show evidence that it will be in a position to hold eligible own funds to cover the Solvency Capital Requirement, as provided for in Article 100, going forward;

(f) show evidence that it will be in a position to hold eligible basic own funds to cover the Minimum Capital Requirement, as provided for in Article 125, going forward;

(g) show evidence that it will be in a position to comply with the system of governance referred to in Chapter IV, Section 2;

(h) as far as non-life insurance is concerned communicate the name and address of all claims representatives appointed pursuant to Article 4 of Directive 2000/26/EC in each Member State other than the Member State in which the authorisation is sought if the risks to be covered are classified in class 10 of point A of Annex I, other than carrier's liability.

2. An insurance undertaking seeking authorisation to extend its business to other classes or to extend an authorisation covering only some of the risks pertaining to one class shall be required to submit a scheme of operations in accordance with Article 23.

It shall, in addition, be required to show proof that it possesses the eligible own funds to cover the Solvency Capital Requirement and Minimum Capital Requirement provided for in Articles 100(1) and 126.

3. Without prejudice to paragraph 2, an insurance undertaking carrying on life activities, and seeking authorisation to extend its business to the risks listed in classes 1 or 2 in point A of Annex I as referred to in Article 72, shall demonstrate the following:

(a) that it possesses the eligible basic own funds to cover the absolute floor of the Minimum Capital Requirement for life insurance undertakings and the absolute floor of the Minimum Capital Requirement for non-life insurance undertakings, as referred to in point (d) of Article 127(1);

(b) that it undertakes to cover the minimum financial obligations referred to in Article 73, going forward.

4. Without prejudice to paragraph 2, an insurance undertaking carrying on non-life activities for the risks listed in classes 1 or 2 in point A of Annex I, and seeking authorisation to extend its business to life insurance risks as referred to in Article 72, shall demonstrate that the following:

(a) that it possesses the eligible basic own funds to cover the absolute floor of the Minimum Capital Requirement for life insurance undertakings and the absolute floor of the Minimum Capital Requirement for non-life insurance undertakings, as referred to in point (d) of Article 127(1);

(b) that it undertakes to cover the minimum financial obligations referred to in Article 73(3) going forward.

Article 34
General supervisory powers

1. Member States shall ensure that the supervisory authorities have the power to take preventive and corrective measures to ensure that insurance and reinsurance undertakings comply with the laws, regulations and administrative provisions with which they have to comply with in each Member State.

2. The supervisory authorities shall have the power to take any necessary measures, including where appropriate, those of an administrative or financial nature, with regard to insurance or reinsurance undertakings, and the members of their administrative or management body or the persons who control that body.

3. Member States shall ensure that supervisory authorities have the power to require all information necessary to conduct supervision in accordance with Article 35.

4. Member States shall ensure that supervisory authorities have the power to develop, in addition to the calculation of the Solvency Capital Requirement and where appropriate, and necessary quantitative tools under the supervisory review process to assess the ability of the insurance or reinsurance undertakings to cope with possible events or future changes in economic conditions that could have unfavourable effects on their overall financial standing.

The supervisory authorities shall have the power to require that such tests are performed by the undertakings.

5. The supervisory authorities shall have the power to carry out on-site investigations at the premises of the insurance and reinsurance undertakings.

6. Supervisory powers shall be applied in a timely and proportionate manner.

7. The powers with regard to insurance and reinsurance undertakings referred to in paragraphs 1 to 5 shall also be available with regard to outsourced activities of insurance and reinsurance undertakings.

8. The measures set out in paragraphs 1 to 5 and 7 shall be carried out, if need be by enforcement, where appropriate, through judicial channels.

Article 37
Capital add-on

1. Following the supervisory review process supervisory authorities may in exceptional circumstances set a capital add-on for an insurance or reinsurance undertaking by a decision stating the reasons.

That possibility shall only exist in the following cases:

(a) the supervisory authority concludes that the risk profile of the insurance or reinsurance undertaking deviates significantly from the assumptions underlying the Solvency Capital Requirement, as calculated using the standard formula in accordance with Chapter VI, Section 4, Subsection 2 and:

(i) the requirement to use an internal model under Article 117 is inappropriate or has been ineffective; or

(ii) while a partial or full internal model is being developed in accordance with Article 117;

(b) the supervisory authority concludes that the risk profile of the insurance or reinsurance undertaking deviates significantly from the assumptions underlying the Solvency Capital Requirement, as calculated using an internal model or partial internal model in accordance with Chapter VI, Section 4, Subsection 3, because certain quantifiable risks are captured insufficiently and the adaptation of the model to better reflect the given risk profile has failed within an appropriate timeframe;

(c) the supervisory authority concludes that the system of governance of an insurance or reinsurance undertaking deviates significantly from the standards laid down in Chapter IV, Section 2, that those deviations prevent it from being able to properly identify, measure, monitor, manage and report the risks that it is or could be exposed to and the application of other measures is in itself unlikely to improve the deficiencies sufficiently within an appropriate timeframe.

2. In the cases set out in points (a) and (b) of paragraph 1 of this Article the capital add-on shall be calculated in such a way as to ensure that the undertaking complies with Article 101(3).

In the cases set out in point (c) of paragraph 1 of this Article the capital add-on shall be proportionate to the material risks arising from the deficiencies which gave rise to the decision of the supervisory authority to set the add-on.

3. In the cases set out in points (b) and (c) of paragraph 1 the supervisory authority shall ensure that the insurance or reinsurance undertaking makes all efforts to remedy the deficiencies that led to the imposition of the capital add-on.

4. The capital add-on referred to in paragraph 1 shall be reviewed at least once a year by the supervisory authority and be removed when the undertaking has remedied the deficiencies which led to its imposition.

5. The Solvency Capital Requirement including the capital add-on imposed shall replace the inadequate Solvency Capital Requirement.

Notwithstanding subparagraph 1 the Solvency Capital Requirement should not include the capital add-on imposed in accordance with point (c) of paragraph 1 for the purposes of the calculation of the risk margin referred to in Article 76(5).

6. The Commission shall adopt implementing measures laying down further specifications for the circumstances under which a capital add-on may be imposed and the methodologies for the calculation thereof.

Those measures designed to amend non-essential elements of this Directive by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 304(3).

Article 43
Risk management

1. Insurance and reinsurance undertakings shall have in place an effective risk management system comprising strategies, processes and reporting procedures necessary to identify, measure, monitor, manage and report, on a continuous basis the risks, on an individual and aggregated level, to which they are or could be exposed, and their interdependencies.

That risk management system shall be effective and well integrated into the organisational structure and in the decision making processes of the insurance or reinsurance undertaking with proper consideration of the persons who effectively run the undertaking or have other key functions.

2. The risk management system shall cover the risks to be included in the calculation of the Solvency Capital Requirement as set out in Article 101(4) as well as the risks which are not or not fully included in the calculation thereof.

It shall cover at least the following areas:

(a) underwriting and reserving;

(b) asset – liability management;

(c) investment, in particular derivatives and similar commitments;

(d) liquidity and concentration risk management;

(da) operational risk management;

(e) reinsurance and other risk mitigation techniques.

The written policy on risk management referred to in Article 41(3) shall comprise policies relating to points (a) to (e) of the second subparagraph of this paragraph.

3. As regards investment risk, insurance and reinsurance undertakings shall demonstrate that they comply with Chapter VI, Section 6.

4. Insurance and reinsurance undertakings shall provide for a risk management function which shall be structured in such a way as to facilitate the implementation of the risk management system.

5. For insurance and reinsurance undertakings using a partial or full internal model approved in accordance with Articles 110 and 111 the risk management function shall cover the following additional tasks:

(a) to design and implement the internal model;

(b) to test and validate the internal model;

(c) to document the internal model and any subsequent changes made to it;

(d) to inform the administrative or management body about the performance of the internal model, suggesting areas needing improvement, and up-dating that body on the status of efforts to improve previously identified weaknesses;

(e) to analyse the performance of the internal model and to produce summary reports thereof.

Article 44
Own risk and solvency assessment

1. As part of its risk management system every insurance or reinsurance undertaking shall conduct its own risk and solvency assessment.

That assessment shall include at least the following:

(a) the overall solvency needs taking into account the specific risk profile, approved risk tolerance limits and the business strategy of the undertaking;

(b) the compliance, on a continuous basis, with the capital requirements, as laid down in Chapters VI, Sections 4 and 5 and with the requirements regarding technical provisions, as laid down in Chapter VI, Section 2;

(c) the significance with which the risk profile of the undertaking concerned deviates from the assumptions underlying the Solvency Capital Requirement as laid down in Article 101(3), calculated with the standard formula in accordance with Chapter VI, Section 4, Subsection 2 or with its partial or full internal model in accordance with Chapter VI, Section 4, Subsection 3.

2. For the purposes of point (a) of paragraph 1, the undertaking concerned shall have in place processes, which are proportionate to the nature, scale and complexity of the risks inherent to its business, and which enable it to properly identify and assess the risks it faces in the short and long term and to which it is or could be exposed. The undertaking shall demonstrate the methods used in this assessment.

3. In the case referred to in point (c) of paragraph 1 when an internal model is used, the assessment shall be performed together with the recalibration that transforms the internal risk numbers into the Solvency Capital Requirement risk measure and calibration.

4. The own risk and solvency assessment shall be an integral part of the business strategy and shall be taken into account on an ongoing basis in the strategic decisions of the undertaking.

5. Insurance and reinsurance undertakings shall perform the assessment referred to in paragraph 1 regularly and without any delay following any significant change in their risk profile.

6. The insurance and reinsurance undertakings shall inform the supervisory authorities of the results of each own risk and solvency assessment as part of the information reported under Article 35.

6a. The own risk and solvency assessment shall not serve to calculate a capital requirement. The Solvency Capital Requirement can only be adjusted in accordance with Articles 37, 229, 230, 231 and 236.

Article 50
Report on solvency and financial condition: contents

1. Member States shall, taking into account the principles set out in paragraphs 3 and 4 of Article 35, require insurance and reinsur

That report shall contain the following information, either in full or by way of references to equivalent information, both in nature and scope, disclosed publicly under other legal or regulatory requirements:

(a) a description of the business and the performance of the undertaking;

(b) a description of the system of governance and an assessment of its adequacy for the risk profile of the undertaking;

(c) a description, separately for each category of risk, of the risk exposure, concentration, mitigation and sensitivity;

(d) a description, separately for assets, technical provisions, and other liabilities, of the bases and methods used for their valuation, together with an explanation of any major differences in the bases and methods used for their valuation in financial statements;

(e) a description of the capital management, including at least the following:

(i) the structure and amount of own funds, and their quality;

(ii) the amounts of the Minimum Capital Requirement and of the Solvency Capital Requirement;

(iia) the option set out in Article 305b used for the calculation of the Solvency Capital Requirement;

(iii) information allowing a proper understanding of the main differences between the underlying assumptions of the standard formula and those of any internal model used by the undertaking for the calculation of its Solvency Capital Requirement;

(iv) the amount of any non-compliance with the Minimum Capital Requirement or any significant non-compliance with the Solvency Capital Requirement during the reporting period, even if subsequently resolved, with an explanation of its origin and consequences as well as any remedial measures taken.

2. The description referred to in point (e)(i) of paragraph 1 shall include an analysis of any significant changes as compared to the previous reporting period and an explanation of any major differences in relation to the value of such elements in financial statements, and a brief description of the capital transferability.

The disclosure of the Solvency Capital Requirement referred to in point (e)(ii) of paragraph 1 shall show separately the amount calculated in accordance with Chapter VI, Section 4, Subsections 2 and 3 and any capital add-on imposed in accordance with Article 37 or the impact of the specific parameters the insurance or reinsurance undertaking is required to use in accordance with Article 108a, together with concise information on its justification by the supervisory authority concerned.

However, and without prejudice to any disclosure mandatory under any other legal or regulatory requirements, Member States may provide that, although the total Solvency Capital Requirement referred to in point (e)(ii) of paragraph 1 is disclosed, the capital add-on or the impact of the specific parameters the insurance or reinsurance undertaking is required to use in accordance with Article 108a need not be separately disclosed during a transitional period not exceeding five years after the date referred to in Article 310.

The disclosure of the Solvency Capital Requirement shall be accompanied, where applicable, by an indication that its final amount is still subject to supervisory assessment.

Article 71
Duties of auditors

1. Member States shall provide at least that persons authorised within the meaning of Eighth Council Directive 84/253/EEC of 10 April 1984 based on Article 54 (3) (g) of the Treaty on the approval of persons responsible for carrying out the statutory audits of accounting documents , who perform in an insurance or reinsurance undertaking the statutory audit referred to in Article 51 of Fourth Council Directive 78/660/EEC of 25 July 1978 based on Article 54 (3) (g) of the Treaty on the annual accounts of certain types of companies , Article 37 of Directive 83/349/EEC or Article 31 of Directive 85/611/EEC or any other statutory task, shall have a duty to report promptly to the supervisory authorities any fact or decision concerning that undertaking of which they have become aware while carrying out that task and which is liable to bring about any of the following:

(a) a material breach of the laws, regulations or administrative provisions which lay down the conditions governing authorisation or which specifically govern pursuit of the activities of insurance and reinsurance undertakings;

(b) the impairment of the continuous functioning of the insurance or reinsurance undertaking;

(c) the refusal to certify the accounts or to the expression of reservations;

(d) the non-compliance with the Solvency Capital Requirement;

(e) the non-compliance with the Minimum Capital Requirement.

The persons referred to in the first subparagraph shall likewise have a duty to report any facts and decisions of which they have become aware in the course of carrying out a task as described in the first subparagraph in an undertaking which has close links resulting from a control relationship with the insurance or reinsurance undertaking within which they are carrying out that task.

2. The disclosure in good faith to the supervisory authorities, by persons authorised within the meaning of Directive 84/253/EEC, of any fact or decision referred to in paragraph 1 shall not constitute a breach of any restriction on disclosure of information imposed by contract or by any legislative, regulatory or administrative provision and shall not involve such persons in liability of any kind.

SECTION 4 - SOLVENCY CAPITAL REQUIREMENT

SUBSECTION 1 - GENERAL PROVISIONS FOR THE SOLVENCY CAPITAL REQUIREMENT USING THE STANDARD FORMULA OR AN INTERNAL MODEL

Article 100
General provisions

Member States shall require that insurance and reinsurance undertakings hold eligible own funds covering the Solvency Capital Requirement.

The Solvency Capital Requirement shall be calculated, either in accordance with the standard formula in Subsection 2 or using an internal model, as set out in Subsection 3.

Article 101
Calculation of the Solvency Capital Requirement

1. The Solvency Capital Requirement shall be calculated in accordance with paragraphs 2 to 5:

2 The Solvency Capital Requirement shall be calculated on the presumption that the undertaking will carry on its business as a going concern.

3. The Solvency Capital Requirement shall be calibrated so as to ensure that all quantifiable risks to which an insurance or reinsurance undertaking is exposed are taken into account. It shall cover existing business, as well as the new business expected to be written over the next twelve months. With respect to existing business, it shall cover unexpected losses only.

It shall correspond to the Value-at-Risk of the basic own funds of an insurance or reinsurance undertaking subject to a confidence level of 99,5 % over a one-year period.

4. The Solvency Capital Requirement shall cover at least the following risks:

(a) non-life underwriting risk;

(b) life underwriting risk;

(c) health underwriting risk;

(d) market risk;

(e) credit risk;

(f) operational risk.

Operational risk as referred to in point (f) of the first subparagraph shall include legal risks, and exclude risks arising from strategic decisions, as well as reputation risks.

5 When calculating the Solvency Capital Requirement, insurance and reinsurance undertakings shall take account of the effect of risk mitigation techniques, provided that credit risk and other risks arising from the use of such techniques are properly reflected in the Solvency Capital Requirement.

Article 102
Frequency of calculation

1. Insurance and reinsurance undertakings shall calculate the Solvency Capital Requirement at least once a year and report the result of that calculation to the supervisory authorities.

Insurance and reinsurance undertakings shall ensure that they hold eligible own funds which cover the last reported Solvency Capital Requirement.

Insurance and reinsurance undertakings shall monitor the amount of eligible own funds and the Solvency Capital Requirement on an on-going basis.

If the risk profile of an insurance or reinsurance undertaking deviates significantly from the assumptions underlying the last reported Solvency Capital Requirement, the undertaking concerned shall recalculate the Solvency Capital Requirement without delay and report it to the supervisory authorities.

2. Where there is evidence to suggest that the risk profile of the insurance or reinsurance undertaking has altered significantly since the date on which the Solvency Capital Requirement was last reported, the supervisory authorities may require the undertaking concerned to recalculate the Solvency Capital Requirement.

SUBSECTION 2 - SOLVENCY CAPITAL REQUIREMENT – STANDARD FORMULA

Article 103
Structure of the standard formula

The Solvency Capital Requirement calculated on the basis of the standard formula shall be the sum of the following items:

(a) the Basic Solvency Capital Requirement, as laid down in Article 104;

(b) the capital requirement for operational risk, as laid down in Article 106;

(c) the adjustment for the loss-absorbing capacity of technical provisions and deferred taxes, as laid down in Article 107.

Design of the Basic Solvency Capital Requirement

1. The Basic Solvency Capital Requirement shall comprise individual risk modules, which are aggregated in accordance with point 1 of Annex IV.

It shall consist of at least the following risk modules:

(a) non-life underwriting risk;

(b) life underwriting risk;

(c) health underwriting risk;

(d) market risk,

(e) counterparty default risk.

2. For the purposes of points (a), (b) and (c) of paragraph 1, insurance or reinsurance operations shall be allocated to the underwriting risk module that best reflects the technical nature of the underlying risks.

3. The correlation coefficients for the aggregation of the risk modules referred to in paragraph 1, as well as the calibration of the capital requirements for each risk module, shall result in an overall Solvency Capital Requirement which complies with the principles set out in Article 101.

4. Each of the risk modules referred to in paragraph 1 shall be calibrated using a Value-at-Risk measure, with a 99.5% confidence level, over a one year period.

Where appropriate, diversification effects shall be taken into account in the design of each risk module.

5. The same design and specifications for the risk modules shall be used for all insurance and reinsurance undertakings, both with respect to the Basic Solvency Capital Requirement and to any simplified calculations as laid down in Article 108.

6. With regard to risks arising from catastrophes, geographical specifications may, where appropriate, be used for the calculation of the life, non-life and health underwriting risk modules.

7. Subject to approval by the supervisory authorities, insurance and reinsurance undertakings may, within the design of the standard formula, replace a subset of its parameters by parameters specific to the undertaking concerned when calculating the life, non-life and health underwriting risk modules.

Such parameters shall be calibrated on the basis of the internal data of the undertaking concerned, or of data which is directly relevant for the operations of that undertaking using standardised methods.

When granting supervisory approval, supervisory authorities shall verify the completeness, accuracy and appropriateness of the data used.

Article 105
Calculation of the Basic Solvency Capital Requirement

1. The Basic Solvency Capital Requirement shall be calculated in accordance with paragraphs 2 to 6.

2. The non-life underwriting risk module shall reflect the risk arising from non-life insurance obligations, in relation to the perils covered and the processes used in the conduct of business.

It shall take account of the uncertainty in the results of insurance and reinsurance undertakings related to the existing insurance and reinsurance obligations as well as to the new business expected to be written over the forthcoming twelve months.

It shall be calculated, in accordance with point 2 of Annex IV, as a combination of the capital requirements for at least the following sub-modules:

(a) the risk of loss, or of adverse change in the value of insurance liabilities, resulting from fluctuations in the timing, frequency and severity of insured events, and in the timing and amount of claim settlements (non-life premium and reserve risk);

(b) the risk of loss, or of adverse change in the value of insurance liabilities, resulting from significant uncertainty of pricing and provisioning assumptions related to extreme or exceptional events (non-life catastrophe risk).

3. The life underwriting risk module shall reflect the risk arising from life insurance obligations, in relation to the perils covered and the processes used in the conduct of business.

It shall be calculated, in accordance with point 3 of Annex IV, as a combination of the capital requirements for at least the following sub-modules:

(a) the risk of loss, or of adverse change in the value of insurance liabilities, resulting from changes in the level, trend, or volatility of mortality rates, where an increase in the mortality rate leads to an increase in the value of insurance liabilities (mortality risk);

(b) the risk of loss, or of adverse change in the value of insurance liabilities, resulting from changes in the level, trend, or volatility of mortality rates, where a decrease in the mortality rate leads to an increase in the value of insurance liabilities (longevity risk);

(c) the risk of loss, or of adverse change in the value of insurance liabilities, resulting from changes in the level, trend or volatility of disability, sickness and morbidity rates (disability – morbidity risk);

(d) the risk of loss, or of adverse change in the value of insurance liabilities, resulting from changes in the level, trend, or volatility of the expenses incurred in servicing insurance or reinsurance contracts (life expense risk);

(e) the risk of loss, or of adverse change in the value of insurance liabilities resulting from fluctuations in the level, trend, or volatility of the revision rates applied to annuities, due to changes in the legal environment or in the state of health of the person insured (revision risk);

(f) the risk of loss, or of adverse change in the value of insurance liabilities, resulting from changes in the level or volatility of the rates of policy lapses, terminations, renewals and surrenders (lapse risk);

(g) the risk of loss, or of adverse change in the value of insurance liabilities, resulting from the significant uncertainty of pricing and provisioning assumptions related to extreme or irregular events (life catastrophe risk).

4. The health underwriting risk module shall reflect the risk arising from the underwriting of health insurance obligations, whether it is pursued on a similar technical basis to that of life insurance or not, following from both the perils covered and the processes used in the conduct of business.

It shall cover at least the following risks:

(a) the risk of loss, or of adverse change in the value of insurance liabilities, resulting from changes in the level, trend, or volatility of the expenses incurred in servicing insurance or reinsurance contracts;

(b) the risk of loss, or of adverse change in the value of insurance liabilities, resulting from fluctuations in the timing, frequency and severity of insured events, and in the timing and amount of claim settlements at the time of provisioning;

(c) the risk of loss, or of adverse change in the value of insurance liabilities, resulting from the significant uncertainty of pricing and provisioning assumptions related to outbreaks of major epidemics, as well as the unusual accumulation of risks under such extreme circumstances.

5. The market risk module shall reflect the risk arising from the level or volatility of market prices of financial instruments which have an impact upon the value of the assets and liabilities of the undertaking.

It shall properly reflect the structural mismatch between assets and liabilities, in particular with respect to the duration thereof.

It shall be calculated, in accordance with point 5 of Annex IV, as a combination of the capital requirements for at least the following sub-modules:

(a) the sensitivity of the values of assets, liabilities and financial instruments to changes in the term structure of interest rates, or in the volatility of interest rates (interest rate risk);

(b) the sensitivity of the values of assets, liabilities and financial instruments to changes in the level or in the volatility of market prices of equities (equity risk);

(c) the sensitivity of the values of assets, liabilities and financial instruments to changes in the level or in the volatility of market prices of real estate (property risk);

(d) the sensitivity of the values of assets, liabilities and financial instruments to changes in the level or in the volatility of credit spreads over the risk-free interest rate term structure (spread risk);

(e) the sensitivity of the values of assets, liabilities and financial instruments to changes in the level or in the volatility of currency exchange rates (currency risk);

(f) additional risks to an insurance or reinsurance undertaking stemming, either from lack of diversification in the asset portfolio, or from large exposure to default risk by a single issuer of securities or a group of related issuers (market risk concentrations).

6. The counterparty default risk module shall reflect possible losses due to unexpected default, or deterioration in the credit standing, of the counterparties and debtors of insurance and reinsurance undertakings over the forthcoming twelve months.

The counterparty default risk module shall cover risk-mitigating contracts, such as reinsurance arrangements, securitisations and derivatives, and receivables from intermediaries, as well as any other credit exposures which are not covered in the spread risk sub-module.

It shall take appropriate account of collateral or other security held by or for the account of the insurance or reinsurance undertaking and the risks associated therewith.

For each counterparty, the counterparty default risk module shall take account of the overall counterparty risk exposure of the insurance or reinsurance undertaking concerned to that counterparty, irrespective of the legal form of its contractual obligations to that undertaking.

Article 105a
Calculation of the equity risk sub-module: symmetric adjustment mechanism

1. The equity risk sub-module calculated in accordance with the standard formula shall include a symmetric adjustment to the equity capital charge applied to cover the risk arising from changes in the level of equity prices.

2. The symmetric adjustment made to the standard equity capital charge, calibrated in accordance with Article 104(4), covering the risk arising from changes in the level of equity prices shall be based on a function of the current level of an appropriate equity index and a weighted average level of that index. The weighted average shall be calculated over an appropriate period of time which shall be the same for all insurance and reinsurance undertakings.

3. The symmetric adjustment made to the standard equity capital charge covering the risk arising from changes in the level of equity prices shall not result in an equity capital charge being applied that is more than 10 percentage points lower or 10 percentage points higher than standard equity capital charge.

Article 106
Capital requirement for operational risk

1. The capital requirement for operational risk shall reflect operational risks to the extent they are not already reflected in the risk modules referred to in Article 104. That requirement shall be calibrated in accordance with Article 101(3).

2. With respect to life insurance contracts where the investment risk is borne by the policyholders, the calculation of the capital requirement for operational risk shall take account of the amount of annual expenses incurred in respect of those insurance obligations.

3. With respect to insurance and reinsurance operations other than those referred to in paragraph 2, the calculation of the capital requirement for operational risk shall take account of the volume of those operations, in terms of earned premiums and technical provisions which are held in respect of those insurance and reinsurance obligations. In this case, the capital requirement for operational risks shall not exceed 30% of the Basic Solvency Capital Requirement relating to those insurance and reinsurance operations.

Article 107
Adjustment for the loss-absorbing capacity of technical provisions and deferred taxes

The adjustment referred to in point (c) paragraph 1 of Article 103 for the loss-absorbing capacity of technical provisions and deferred taxes shall reflect potential compensation of unexpected losses through a simultaneous decrease in technical provisions or deferred taxes or a combination of both.

That adjustment shall take account of the risk mitigating effect provided by future discretionary benefits of insurance contracts, to the extent insurance and reinsurance undertakings can establish that a reduction in such benefits may be used to cover unexpected losses when they arise.

The risk mitigating effect provided by future discretionary benefits shall be no higher than the sum of technical provisions and deferred taxes relating to these future discretionary benefits.

For the purpose of the second paragraph, the value of future discretionary benefits under adverse circumstances shall be compared to the value of such benefits under the underlying assumptions of the best-estimate calculation.

Article 108a
Significant deviations from the assumptions underlying the standard formula calculation

Where it is inappropriate to calculate the Solvency Capital Requirement in accordance with the standard formula, as set out in Subsection 2, because the risk profile of the insurance and reinsurance undertakings concerned deviates significantly from the assumptions underlying the standard formula calculation, the supervisory authorities may, by a decision stating the reasons, require the undertakings concerned to replace a subset of the parameters used in the standard formula calculation by parameters specific to those undertakings when calculating the life, non-life and health underwriting risk modules, as set out in Article 104(7).

Those specific parameters shall be calculated in such a way to ensure that the undertaking complies with Article 101(3).

Article 109
Implementing measures

1. In order to ensure that the same treatment is applied to all insurance and reinsurance undertakings calculating the Solvency Capital Requirement on the basis of the standard formula, or to take account of market developments, the Commission shall adopt implementing measures laying down the following:

(-a) a standard formula in accordance with the provisions of Articles 101 and 103 to 108;

(a) any sub-modules necessary or covering more precisely the risks which fall under the respective risk modules referred to in Article 104 as well as any subsequent updates;

(b) the methods, assumptions and standard parameters to be used, when calculating each of the risk modules or sub-modules of the Basic Solvency Capital Requirement laid down in Articles 104 and 105, the symmetric adjustment mechanism and the appropriate period of time, expressed in the number of months, as referred to in Articles 105a and 305b, as well as the appropriate approach for integrating the method referred to in Article 305b related to the use of this method in the Solvency Capital Requirement as calculated in accordance with the standard formula;

(c) the correlation parameters, including, if necessary, those set out in Annex IV, and the procedures for the updating of those parameters;

(d) where insurance and reinsurance undertakings use risk mitigation techniques, the methods and assumptions to be used to assess the changes in the risk profile of the undertaking concerned and adjust the calculation of the Solvency Capital Requirement;

e) the qualitative criteria that the risk mitigation techniques referred to in point (d) must meet in order to ensure that the risk has been effectively transferred to a third party;

(f) the methods and parameters to be used when assessing the capital requirement for operational risk set out in Article 106, including the percentage referred to in paragraph 3 of Article 106;

(fa) the methods and adjustments to be used to reflect the reduced scope for risk diversification of insurers related to ring-fenced funds;

g) the method to be used when calcula

(h) the subset of standard parameters in the life, non-life and health underwriting risk modules that may be replaced by undertaking-specific parameters as set out in Article 104(7);

(i) the standardised methods to be used by the insurance or reinsurance undertaking to calculate the undertaking-specific parameters referred to in point (h), and any criteria with respect to the completeness, accuracy, and appropriateness of the data used that must be met before supervisory approval is given;

(j) the simplified calculations provided for specific sub-modules and risk modules, as well as the criteria that insurance and reinsurance undertakings, including captive insurance and reinsurance undertakings, shall be required to meet in order to be entitled to use each of these simplifications, as set out in Article 108;

(ja) the approach to be used with respect to related undertakings within the meaning of Article 210 in the calculation of the Solvency Capital Requirement, in particular the calculation of the equity risk sub-module referred to in Article 105(5), taking into account the likely reduction in the volatility of the value of those related undertakings arising from the strategic nature of those investments and the influence exercised by the participating undertaking on those related undertakings.

Those measures designed to amend non-essential elements of this Directive, by supplementing it, shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 304(3).

2. The Commission may adopt implementing measures laying down quantitative limits and asset eligibility criteria in order to address risks which are not adequately covered by a sub-module. Such implementing measures shall apply to assets covering technical provisions, excluding assets held in respect of life insurance contracts where the investment risk is borne by the policyholders. Those measures shall be reviewed by the Commission in the light of developments in the standard formula and financial markets.

Those measures designed to amend non-essential elements of this Directive, by supplementing it shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 304(3).

SUBSECTION 3 - SOLVENCY CAPITAL REQUIREMENT – FULL AND PARTIAL INTERNAL MODELS

Article 110
General provisions for the approval of full and partial internal models

1. Member States shall ensure that insurance or reinsurance undertakings may calculate the Solvency Capital Requirement using a full or partial internal model as approved by the supervisory authorities.

2. Insurance and reinsurance undertakings may use partial internal models for the calculation of one or more of the following:

(a) one or more risk modules, or sub-modules, of the Basic Solvency Capital Requirement, as set out in Articles 104 and 105;

(b) the capital requirement for operational risk as laid down in Article 106;

(c) the adjustment referred to in Article 107.

In addition, partial modelling may be applied to the whole business of insurance and reinsurance undertakings, or only to one or more major business units.

3. In any application for approval, insurance and reinsurance undertakings shall submit, as a minimum, documentary evidence that the internal model meets the requirements set out in Articles 118 to 123.

Where the application for that approval relates to a partial internal model, the requirements set out in Articles 118 to 123 shall be adapted to take account of the limited scope of the application of the model.

4. The supervisory authorities shall decide on the application within six months from the receipt of the complete application.

5. Supervisory authorities shall give approval to the application only if they are satisfied that the systems of the insurance or reinsurance undertaking for identifying, measuring, monitoring, managing and reporting risk are adequate and in particular, that the internal model complies with the requirements referred to in paragraph 3.

6. Any decision by the supervisory authorities to reject the application for the use of an internal model shall be accompanied by the reasons therefore.

7. After having received approval from supervisory authorities to use an internal model, insurance and reinsurance undertakings may, by a decision stating the reasons, be required to provide supervisory authorities with an estimate of the Solvency Capital Requirement determined in accordance with the standard formula, as set out in Subsection 2.

Article 111
Specific provisions for the approval of partial internal models

1. In the case of a partial internal model, supervisory approval shall only be given if that model complies with the requirements set out in Article 110 and the following additional conditions:

(a) the reason for the limited scope of application of the model is properly justified by the undertaking;

(b) the resulting Solvency Capital Requirement reflects more appropriately the risk profile of the undertaking and in particular meets the principles set out in Subsection 1;

(c) its design is consistent with the principles set out in Subsection 1 so as to allow the partial internal model to be fully integrated into the Solvency Capital Requirement Standard Formula.

2. When assessing an application for the use of a partial internal model which only covers certain sub-modules of a specific risk module, or some of the business units of an insurance or reinsurance undertaking with respect to a specific risk module, or parts of both, supervisory authorities may require the insurance and reinsurance undertakings concerned to submit a realistic transitional plan to extend the scope of the model.

The transitional plan shall set out the manner in which insurance and reinsurance undertakings plan to extend the scope of the model to other sub-modules or business units, in order to ensure that the model covers a predominant part of their insurance operations with respect to that specific risk module.

Article 214
Ultimate parent undertaking at national level

1. Where the participating insurance or reinsurance undertaking or the insurance holding company which has its head office in the Community, referred to in points (a) and (b) of Article 211(2), does not have its head office in the same Member State as the ultimate parent undertaking at Community level referred to in Article 213, Member States may allow their supervisory authorities to decide, after consultation with the group supervisor and that ultimate parent undertaking at Community level, to subject to group supervision the ultimate parent insurance or reinsurance undertaking or insurance holding company at national level.

In such a case, the supervisory authority shall explain its decision to both the group supervisor and the ultimate parent undertaking at Community level.

Articles 216 to 262 shall apply mutatis mutandis, subject to the provisions set out in paragraphs 2 to 6.

2. The supervisory authority may restrict group supervision of the ultimate parent undertaking at national level to one or several sections of Chapter II.

3. Where the supervisory authority decides to apply to the ultimate parent undertaking at national level Chapter II, Section 1, the choice of method made in accordance with Article 218 by the group supervisor in respect of the ultimate parent undertaking at Community level referred to in Article 213 shall be recognised as determinative and applied by the supervisory authority in the Member State concerned.

4. Where the supervisory authority decides to apply to the ultimate parent undertaking at national level Chapter II, Section 1, and where the ultimate parent undertaking at Community level referred to in Article 213 has obtained, in accordance with Articles 229 or 231(5), the permission to calculate the group Solvency Capital Requirement, as well as the Solvency Capital Requirement of insurance and reinsurance undertakings in the group, on the basis of an internal model, that decision shall be recognised as determinative and applied by the supervisory authority in the Member State concerned.

In such a situation, where the supervisory authority considers that the risk profile of the ultimate parent undertaking at national level deviates significantly from the internal model approved at Community level, and as long as that undertaking does not properly address the concerns of the supervisory authority, that supervisory authority may decide to impose a capital add-on to the group Solvency Capital Requirement of that undertaking resulting from the application of such model, or, in exceptional circumstances where such capital add-on would not be appropriate, to require that undertaking to calculate its group Solvency Capital Requirement on the basis of the standard formula.

The supervisory authority shall explain such decisions to both the undertaking and the group supervisor.

5. Where the supervisory authority decides to apply to the ultimate participating undertaking at national level Chapter II, Section 1, that undertaking shall not be allowed to introduce, in accordance with Articles 234 or 247, an application for permission to subject any of its subsidiaries to Articles 236 to 238.

6. Where Member States allow their supervisory authorities to make the decision referred to in paragraph 1, they shall provide that no such decisions can be made or maintained where the ultimate participating undertaking at national level is a subsidiary of the ultimate participating undertaking at Community level referred to in Article 213 and the latter has obtained in accordance with Articles 235 or 247 permission for that subsidiary to be subject to Articles 236 to 238.

7. The Commission may adopt implementing measures specifying the circumstances under which the decision referred to in paragraph 1 can be made.

Those measures designed to amend non-essential elements of this Directive by supplementing it shall be adopted in accordance with the regulatory procedure with scrutiny referred to in Article 304(3). .....


Article 216
Supervision of group solvency

1. Supervision of the group solvency shall be exercised in accordance with paragraphs 2 and 3, Article 250 and Chapter III.

2. In the case referred to in point (a) of Article 211(2), Member States shall require the participating insurance or reinsurance undertakings to ensure that eligible own funds are available in the group which are always at least equal to the group Solvency Capital Requirement as calculated in accordance with Subsections 2, 3 and 4.

3. In the case referred to in point (b) of Article 211(2), Member States shall require insurance and reinsurance undertakings in a group to ensure that eligible own funds are available in the group which are always at least equal to the group Solvency Capital Requirement as calculated in accordance with Subsection 5.

4. The requirements referred to in paragraphs 2 and 3 shall be subject to supervisory review by the group supervisor in accordance with Chapter III. The provisions set out in Article 134 and in paragraphs 1, 2 and 3 of Article 136 shall apply by analogy.

4a. As soon as the participating undertaking has observed and informed the group supervisor that the group Solvency Capital Requirement is no longer complied with or that there is a risk of non-compliance in the following three months, the group supervisor shall inform the other supervisory authorities within the college, which shall analyse the situation of the group.


Articles 217
Frequency of calculation

1. The group supervisor shall ensure that the calculations referred to in Article 216(2) and (3) are carried out at least once a year, either by the participating insurance or reinsurance undertakings or by the insurance holding company.

The relevant data for and the results of that calculation shall be submitted to the group supervisor by the participating insurance or reinsurance undertaking, or, where the group is not headed by an insurance or reinsurance undertaking, by the insurance holding company or by the undertaking in the group identified by the group supervisor after consultation with the other supervisory authorities concerned and with the group itself.

2. Insurance and reinsurance undertakings and insurance holding company shall monitor the group Solvency Capital Requirement on an on-going basis.

If the risk profile of the group deviates significantly from the assumptions underlying the last reported group Solvency Capital Requirement, the group Solvency Capital Requirement shall be recalculated without delay and reported to the group supervisor.

Where there is evidence to suggest that the risk profile of the group has altered significantly since the date on which the group Solvency Capital Requirement was last reported, the group supervisor may require a recalculation of the group Solvency Capital Requirement.


Article 220
Elimination of double use of eligible own funds

1. The double use of own funds eligible for the Solvency Capital Requirement among the different insurance or reinsurance undertakings taken into account in that calculation shall not be allowed.

For that purpose, when calculating the group solvency and where the methods described in Subsection 4 do not provide for it, the following amounts shall be excluded:

(a) the value of any asset of the participating insurance or reinsurance undertaking which represents the financing of own funds eligible for the Solvency Capital Requirement of one of its related insurance or reinsurance undertakings;

(b) the value of any asset of a related insurance or reinsurance undertaking of the participating insurance or reinsurance undertaking which represents the financing of own funds eligible for the Solvency Capital Requirement of that participating insurance or reinsurance undertaking;

(c) the value of any asset of a related insurance or reinsurance undertaking of the participating insurance or reinsurance undertaking which represents the financing of own funds eligible for the Solvency Capital Requirements of any other related insurance or reinsurance undertaking of that participating insurance or reinsurance undertaking.

2. Without prejudice to paragraph 1, the following may only be included in the calculation in so far as they are eligible for covering the Solvency Capital Requirement of the related undertaking concerned:

(a) surplus funds falling under Article 90(2) arising in a related life insurance or reinsurance undertaking of the participating insurance or reinsurance undertaking for which the group solvency is calculated;

(b) any subscribed but not paid-up capital of a related insurance or reinsurance undertaking of the participating insurance or reinsurance undertaking for which the group solvency is calculated.

However, the following shall in any case be excluded from the calculation:

(a) any subscribed but not paid-up capital which represents a potential obligation on the part of the participating undertaking;

(b) any subscribed but not paid-up capital of the participating insurance or reinsurance undertaking which represents a potential obligation on the part of a related insurance or reinsurance undertaking;

(c) any subscribed but not paid-up capital of a related insurance or reinsurance undertaking which represents a potential obligation on the part of another related insurance or reinsurance undertaking of the same participating insurance or reinsurance undertaking.

3. If the supervisory authorities consider that certain own funds eligible for the Solvency Capital Requirement of a related insurance or reinsurance undertaking other than those referred to in paragraph 2 cannot effectively be made available to cover the Solvency Capital Requirement of the participating insurance or reinsurance undertaking for which the group solvency is calculated, those own funds may be included in the calculation only in so far as they are eligible for covering the Solvency Capital Requirement of the related undertaking.

4. The sum of the own funds referred to in paragraphs 2 and 3 may not exceed the Solvency Capital Requirement of the related insurance or reinsurance undertaking.

5. Any eligible own funds of a related insurance or reinsurance undertaking of the participating insurance or reinsurance undertaking for which the group solvency is calculated that are subject to prior authorisation from the supervisory authority in accordance with Article 89 may only be included in the calculation in so far as they have been duly authorised by the supervisory authority responsible for the supervision of that related undertaking.