Commission Delegated Regulation (EU) 2015/35Dangos y teitl llawn

SECTION 1 U.K. Elements of the system of governance

Article 258 U.K. General governance requirements

1. Insurance and reinsurance undertakings shall fulfil all of the following requirements:

(a) establish, implement and maintain effective cooperation, internal reporting and communication of information at all relevant levels of the undertaking;

(b) establish, implement and maintain effective decision making procedures and an organisational structure which clearly specifies reporting lines, allocates functions and responsibilities, and takes into account the nature, scale and complexity of the risks inherent in that undertaking's business;

(c) ensure that the members of the administrative, management or supervisory body collectively possess the necessary qualifications, competency, skills and professional experience in the relevant areas of the business in order to effectively manage and oversee the undertaking in a professional manner;

(d) ensure that each individual member of the administrative, management or supervisory body has the necessary qualifications, competency, skills and professional experience to perform the tasks assigned;

(e) employ personnel with the skills, knowledge and expertise necessary to carry out the responsibilities allocated to them properly;

(f) ensure that all personnel are aware of the procedures for the proper carrying out of their responsibilities;

(g) ensure that the assignment of multiple tasks to individuals and organisational units does not or is not likely to prevent the persons concerned from carrying out any particular function in a sound, honest and objective manner;

(h) establish information systems which produce complete, reliable, clear, consistent, timely and relevant information concerning the business activities, the commitments assumed and the risks to which the undertaking is exposed;

(i) maintain adequate and orderly records of the undertaking's business and internal organisation;

(j) safeguard the security, integrity and confidentiality of information, taking into account the nature of the information in question;

(k) introduce clear reporting lines that ensure the prompt transfer of information to all persons who need it in a way that enables them to recognise its importance as regards their respective responsibilities;

(l) adopt a written remuneration policy.

2. Policies on risk management, internal control, internal audit and, where relevant, outsourcing, shall clearly set out the relevant responsibilities, objectives, processes and reporting procedures to be applied, all of which shall be consistent with the undertaking's overall business strategy.

3. Insurance and reinsurance undertakings shall establish, implement and maintain a business continuity policy aimed at ensuring, in the case of an interruption to their systems and procedures, the preservation of essential data and functions and the maintenance of insurance and reinsurance activities, or, where that is not possible, the timely recovery of such data and functions and the timely resumption of their insurance or reinsurance activities.

4. Insurance and reinsurance undertakings shall ensure that at least two persons effectively run the undertaking.

5. Insurance and reinsurance undertakings shall ensure that effective processes and procedures are in place to prevent conflicts of interest and that potential sources of conflicts of interest are identified and procedures are established in order to ensure that those involved in the implementation of the undertaking's strategies and policies understand where conflicts of interest could arise and how such conflicts are to be addressed.

6. Insurance and reinsurance undertakings shall monitor, and on a regular basis evaluate, the adequacy and effectiveness of their system of governance and take appropriate measures to address any deficiencies.

Article 259 U.K. Risk Management System

1. Insurance and reinsurance undertakings shall establish, implement and maintain a risk management system which includes the following:

(a) a clearly defined risk management strategy which is consistent with the undertaking's overall business strategy. The objectives and key principles of the strategy, the approved risk tolerance limits and the assignment of responsibilities across all the activities of the undertaking shall be documented;

(b) a clearly defined procedure on the decision-making process;

(c) written policies which effectively ensure the definition and categorisation of the material risks by type to which the undertaking is exposed, and the approved risk tolerance limits for each type of risk. Such policies shall implement the undertaking's risk strategy, facilitate control mechanisms and take into account the nature, scope and time periods of the business and the associated risks;

(d) reporting procedures and processes which ensure that information on the material risks faced by the undertaking and the effectiveness of the risk management system are actively monitored and analysed and that appropriate modifications to the system are made where necessary.

2. Insurance and reinsurance undertakings shall ensure that the persons who effectively run the undertaking or have other key functions take into account the information reported as part of the risk management system in their decision making process.

3. Insurance and reinsurance undertakings shall, where appropriate, include the performance of stress tests and scenario analysis with regard to all relevant risks faced by the undertaking, in their risk-management system.

4. In addition to the requirements set out in Article 44(4a) of Directive 2009/138/EC for the purposes of the calculation of technical provisions and the Solvency Capital Requirement, internal risk management methodologies shall not rely solely or automatically on external credit assessments. Where the calculation of technical provisions or of the Solvency Capital Requirement is based on external credit assessments by an ECAI or based on the fact that an exposure is unrated, that shall not exempt insurance and reinsurance undertakings from additionally considering other relevant information.

Article 260 U.K. Risk management areas

1. The areas referred to in Article 44(2) of Directive 2009/138/EC shall include all of the following policies:

(a) Underwriting and reserving:

(i)

actions to be taken by the insurance or reinsurance undertaking to assess and manage the risk of loss or of adverse change in the values of insurance and reinsurance liabilities, resulting from inadequate pricing and provisioning assumptions;

(ii)

the sufficiency and quality of relevant data to be considered in the underwriting and reserving processes, as set out in Article 19 of this Regulation, and their consistency with the standards of sufficiency and quality;

(iii)

the adequacy of claims management procedures including the extent to which they cover the overall cycle of claims.

(b) Asset-liability management:

(i)

the structural mismatch between assets and liabilities and in particular the duration mismatch of those assets and liabilities;

(ii)

any dependency between risks of different asset and liability classes;

(iii)

any dependency between the risks of different insurance or reinsurance obligations;

(iv)

any off-balance sheet exposures of the undertaking;

(v)

the effect of relevant risk-mitigating techniques on asset-liability management.

(c) Investment risk management:

(i)

actions to be taken by the insurance or reinsurance undertaking to ensure that the undertaking's investments complies with the prudent person principle set out in Article 132 of Directive 2009/138/EC;

(ii)

actions to be taken by the insurance or reinsurance undertaking to ensure that the undertaking's investments take into account the nature of the undertaking's business, its approved risk tolerance limits, its solvency position and its long-term risk exposure;

(iii)

the insurance or reinsurance undertakings' own internal assessment of the credit risk of investment counterparties, including where the counterparties are central governments;

(iv)

where the insurance or reinsurance undertaking uses derivatives or any other financial instrument with similar characteristics or effects, the objectives of, and strategy underlying their use and the way in which they facilitate efficient portfolio management or contribute to a reduction of risks, as well as procedures to assess the risk of such instruments and the principles of risk management to be applied to them;

(v)

where appropriate in order to ensure effective risk-management, internal quantitative limits on assets and exposures, including off-balance sheet exposures.

(d) Liquidity risk management:

(i)

actions to be taken by the insurance or reinsurance undertaking to take into account both short term and long term liquidity risk;

(ii)

the appropriateness of the composition of the assets in terms of their nature, duration and liquidity in order to meet the undertaking's obligations as they fall due;

(iii)

a plan to deal with changes in expected cash in-flows and out-flows.

(e) Concentration risk management: actions to be taken by the insurance or reinsurance undertaking to identify relevant sources of concentration risk to ensure that risk concentrations remain within established limits and actions to analyse possible risks of contagion between concentrated exposures.

(f) Operational risk management: actions to be taken by the insurance or reinsurance undertaking to assign clear responsibilities to regularly identify, document and monitor relevant operational risk exposures.

(g) Reinsurance and other insurance risk mitigation techniques:

(i)

actions to be taken by the insurance or reinsurance undertaking to ensure the selection of suitable reinsurance and other risk mitigation techniques;

(ii)

actions to be taken by the insurance or reinsurance undertaking to assess which types of risk mitigation techniques are appropriate according to the nature of the risks assumed and the capabilities of the undertaking to manage and control the risks associated with those techniques;

(iii)

the insurance or reinsurance undertakings' own assessment of the credit risk of the risk mitigation techniques.

[F1 (h) Deferred taxes:

(i)

actions related to the insurance or reinsurance undertaking's selection of methods and assumptions to demonstrate the amount and recoverability of the loss-absorbing capacity of deferred taxes;

(ii)

involvement of the relevant key functions in the selection and assessment of methods and assumptions to demonstrate the amount and recoverability of the loss-absorbing capacity of deferred taxes, how the outcome of that assessment is reported to the administrative, management or supervisory body, including the assessment of the underlying assumptions applied for the projection of future taxable profit for the purposes of Articles 15 and 207, and an explanation of any concerns about those assumptions, which shall be carried out in each case by either the actuarial function or the risk management function;

(iii)

risks that the insurance or reinsurance undertaking is or could be exposed to, taking into account potential future changes in its risk profile due to its business strategy or the economic and financial environment, including operational risks and potential changes in its loss-absorbing capacity of deferred taxes. That assessment shall include the overall reliance of the solvency and financial condition on deferred taxes and its consistency with the risk management policy.]

2. The expected profit included in future premiums shall be calculated as the difference between the technical provisions without a risk margin calculated in accordance with Article 77 of that Directive and a calculation of the technical provisions without a risk margin under the assumption that the premiums relating to existing insurance and reinsurance contracts that are expected to be received in the future are not received for any reason other than the insured event having occurred, regardless of the legal or contractual rights of the policyholder to discontinue the policy.

3. The calculation of the expected profit included in future premiums shall be carried out separately for the homogeneous risk groups used in the calculation of the technical provisions, provided that the insurance and reinsurance obligations are also homogeneous in relation to the expected profit included in future premiums.

4. Loss-making policies may only be offset against profit-making policies within a homogeneous risk group.

Textual Amendments

F1 Inserted by Commission Delegated Regulation (EU) 2019/981 of 8 March 2019 amending Delegated Regulation (EU) 2015/35 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).

Article 261 U.K. Risk management in undertakings providing loans and/or mortgage insurance or reinsurance

1. Where insurance and reinsurance undertakings engage in the activity of providing loans, they shall have written policies to ensure all of the following:

(a) that credit-granting is based on sound and well-defined criteria and that the process for approving, amending, renewing and refinancing credits is clearly established;

(b) that undertakings have internal methodologies that enable them to assess the credit risk of exposures to individual obligors and at the portfolio level;

(c) that the ongoing administration and monitoring of the loan portfolios, including for identifying and managing problematic credits, and for making adequate value adjustments, is operated through effective systems;

(d) that the diversification of the loan portfolios is adequate given the target markets and overall investment strategy of the undertaking.

2. Where insurance and reinsurance undertakings engage in mortgage insurance or reinsurance, they shall base their underwriting on sound and well-defined criteria and comply with the requirements set out in points (b), (c) and (d) of paragraph 1 with regard to the mortgage loans underlying their insurance and reinsurance obligations.

[F2 Article 261a U.K. Risk management for qualifying infrastructure investments or qualifying infrastructure corporate investments

1. Insurance and reinsurance undertakings shall conduct adequate due diligence prior to making a qualifying infrastructure investment or a qualifying infrastructure corporate investment, including all of the following:

(a) a documented assessment of how the infrastructure entity satisfies the criteria set out in Article 164a or Article 164b, which has been subject to a validation process, carried out by persons that are free from influence from those persons responsible for the assessment of the criteria, and have no potential conflicts of interest with those persons;

(b) a confirmation that any financial model for the cash flows of the infrastructure entity has been subject to a validation process carried out by persons that are free from influence from those persons responsible for the development of the financial model, and have no potential conflicts of interest with those persons.

2. Insurance and reinsurance undertakings with a qualifying infrastructure investment or a qualifying infrastructure corporate investment shall regularly monitor and perform stress tests on the cash flows and collateral values supporting the infrastructure entity. Any stress tests shall be commensurate with the nature, scale and complexity of the risk inherent in the infrastructure project.

3. The stress testing shall consider risks arising from non-infrastructure activities, but the revenues generated by such activities shall not be taken into account when determining whether the infrastructure entity is able to meet its financial obligations.

4. Where insurance or reinsurance undertakings hold material qualifying infrastructure investments or qualifying infrastructure corporate investments, they shall, when establishing the written procedures referred to in Article 41(3) of Directive 2009/138/EC, include provisions for an active monitoring of these investments during the construction phase, and for a maximisation of the amount covered from these investments in case of a work-out scenario.

5. Insurance or reinsurance undertakings with a qualifying infrastructure investment or a qualifying infrastructure corporate investment in bonds or loans shall set up their asset-liability management to ensure that, on an ongoing basis, they are able to hold the investment to maturity.]

Textual Amendments

F2 Substituted by Commission Delegated Regulation (EU) 2017/1542 of 8 June 2017 amending Delegated Regulation (EU) 2015/35 concerning the calculation of regulatory capital requirements for certain categories of assets held by insurance and reinsurance undertakings (infrastructure corporates) (Text with EEA relevance).

Article 262 U.K. Overall solvency needs

1. The assessment of an insurance or reinsurance undertaking's overall solvency needs, referred to in Article 45(1)(a) of Directive 2009/138/EC shall be forward-looking and include all of the following elements:

(a) risks the undertaking is or could be exposed to, taking into account potential future changes in its risk profile due to the undertaking's business strategy or the economic and financial environment, including operational risks;

(b) the nature and quality of own fund items or other resources appropriate to cover the risks identified in point (a) of this paragraph.

2. The elements referred to paragraph 1 shall take the following into account:

(a) the time periods that are relevant for taking into account the risks the undertaking faces in the long-term;

(b) valuation and recognition bases that are appropriate for the undertaking's business and risk profile;

(c) the undertaking's internal control and risk-management systems and approved risk tolerance limits.

Article 263 U.K. Alternative methods for valuation

Where alternative valuation methods in accordance with Article 10(5) are used, insurance and reinsurance undertakings shall:

(a)

identify the assets and liabilities to which that valuation approach applies;

(b)

justify the use of that valuation approach for the assets and liabilities referred to in point (a);

(c)

document the assumptions underlying that valuation approach;

(d)

assess the valuation uncertainty of the assets and liabilities referred to in point (a);

(e)

regularly compare the adequacy of the valuation of the assets and liabilities referred to in point (a) against experience.

Article 264 U.K. Valuation of technical provisions — validation

1. Insurance and reinsurance undertakings shall validate the calculation of technical provisions, in particular by comparison against experience as referred to in Article 83 of Directive 2009/138/EC, at least once a year and where there are indications that the data, assumptions or methods used in the calculation or the level of the technical provisions are no longer appropriate. The validation shall cover the following:

(a) the appropriateness, completeness and accuracy of data used in the calculation of technical provisions as set out in Article 19 of this Regulation;

(b) the appropriateness of any grouping of policies in accordance with Article 34 of this Regulation;

(c) the remedies to limitations of the data referred to in Article 20 of this Regulation;

(d) the appropriateness of approximations referred to in Article 21 of this Regulation for the purposes of calculating the best estimate;

(e) the adequacy and realism of assumptions used in the calculation of technical provisions for the purposes of meeting the requirements in Articles 22 to 26 of this Regulation;

(f) the adequacy, applicability and relevance of the actuarial and statistical methods applied in the calculation of technical provisions;

(g) the appropriateness of the level of the technical provisions as referred to in Article 84 of Directive 2009/138/EC necessary to comply with Article 76 of that Directive.

2. For the purposes of point (d) of paragraph 1, insurance and reinsurance undertakings shall assess the impact of changes in the assumptions on future management actions on the valuation of the technical provisions. Where changes in an assumption on future management action have a significant impact on the technical provisions, insurance and reinsurance undertakings shall be able to explain the reasons for this impact and how the impact is taken into account in their decision-making process.

3. The validation shall be carried out separately for homogeneous risk groups. It shall be carried out separately for the best estimate, the risk margin and technical provisions calculated according to the market value of financial instruments which reliably replicate future cash flows in accordance with Article 40 of this Regulation. It shall be carried out separately for technical provisions where the matching adjustment referred to in Article 77b of Directive 2009/138/EC is applied. In relation to the best estimate, it shall be carried out separately for the gross best estimate and amounts recoverable from reinsurance contracts and special purpose vehicles. In relation to non-life insurance obligations, it shall be carried out separately for premium provisions and provisions for claims outstanding.

Article 265 U.K. Valuation of technical provisions — documentation

1. Insurance and reinsurance undertakings shall document the following processes:

(a) the collection of data and analysis of its quality and other information that relates to the calculation of technical provisions;

(b) the choice of assumptions used in the calculation of technical provisions, in particular the choice of relevant assumptions about the allocation of expenses;

(c) the selection and application of actuarial and statistical methods for the calculation of technical provisions;

(d) the validation of technical provisions.

2. For the purposes of point (a) of paragraph 1, the documentation shall include:

(a) a directory of the data used in the calculation of the technical provisions, specifying their source, characteristics and usage;

(b) the specification for the collection, processing and application of data referred to in Article 19(3)(e);

(c) where data are not used consistently over time in the calculation of technical provisions, a description of the inconsistent use and its justification.

3. For the purposes of point (b) of paragraph 1, the documentation shall include:

(a) a directory of all the relevant assumptions that the calculation of technical provisions are based upon; this shall include assumptions on future management actions;

(b) a justification for the choice of the assumption in accordance with Subsection 1 of Section 3 of Chapter III;

(c) a description of the inputs on which the choice is based;

(d) the objectives of the choice and the criteria used for determining the appropriateness of this choice;

(e) any material limitations in the choice made;

(f) a description of the processes in place to review the choice of assumptions;

(g) a justification for the changes of assumptions from one period to another and an estimation of the impact of material changes;

(h) the relevant deviations referred to in Article 23(2).

Article 266 U.K. Internal control system

The internal control system shall ensure the insurance and reinsurance undertaking's compliance with applicable laws, regulations and administrative provisions and the effectiveness and the efficiency of the undertaking's operations in light of its objectives as well as ensure the availability and reliability of financial and non-financial information.

Article 267 U.K. Internal control of valuation of assets and liabilities

1. Insurance and reinsurance undertakings shall have effective systems and controls to ensure that valuation estimates of their assets and liabilities are reliable and appropriate to ensure compliance with Article 75 of Directive 2009/138/EC and shall have a process for regularly verifying that market prices or valuation model inputs are appropriate and reliable.

2. Insurance and reinsurance undertakings shall establish, implement, maintain and document clearly defined policies and procedures for the process of valuation, including the description and definition of roles and responsibilities of the personnel involved with the valuation, the relevant models, and the sources of information to be used.

3. At the request of the supervisory authorities, insurance and reinsurance undertakings shall undertake an external, independent valuation or verification of the value of material assets and liabilities.

4. Insurance and reinsurance undertakings shall fulfil all of the following requirements:

(a) provide sufficient resources, both in terms of quality and quantity, to develop, calibrate, approve and review valuation approaches used for solvency purposes;

(b) establish internal control processes which include all of the following:

(i)

an independent review and verification on a regular basis of the information, data, and assumptions which are used in the valuation approach, its results, and the suitability of the valuation approach with respect to valuation of the items referred to in point (a) of Article 263;

(ii)

oversight by the persons who effectively run the undertaking of the internal processes for approval of those valuations and the process in place to take account of any external, independent valuation or verification of the value of material assets or liabilities.