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					                                                                                        Position Paper


 CEA Response to CEIOPS CP Nº 25 on the Draft Advice on Aspects of
    the Framework Directive Proposal related to Insurance Groups


      CEA reference:               Annex 3 to ECO 8103                   Date:           25 April 2008


      Referring to:                CEIOPS CP Nº 25                                       Solvency II

      Related CEA
                                   -
      documents:

      Contact person:              ECOFIN Department                     E-mail:         ecofin@cea.eu


      Pages:                       40



Introduction

The European insurance industry welcomes the opportunity to comment on CEIOPS’ Draft Advice on Aspects of
the EC Framework Directive Proposal related to Insurance Groups.

CEA strongly supports the inclusion in the Solvency II regime of an appropriate supervision of groups, based on an
economic approach. Putting group supervision at the same level as solo supervision, in terms of its importance
and effectiveness, together with an enhanced cooperation and understanding between supervisory authorities in
the college of supervisors, is critical to achieving the key objectives of the new prudential regime. In this context,
group support is a practical and transparent instrument which allows recognition of the group’s diversification
effects and allocation of capital in the most efficient way and which provides more security than other forms of
contingent capital.

CEA welcomes the results of a survey conducted by CEIOPS in 2007 that shows significant improvements since
2004 in cooperation between supervisors when dealing with cross-border insurance groups. While European
insurers recognise that these improvements have been made and welcome the intention among supervisors to
make further improvements, the current solo/supplementary supervisory approach does not necessitate the level
of cooperation which is needed under Solvency II. For this reason, CEA is supportive of the new approach to
group supervision as proposed by the European Commission, where the economic reality of insurance groups is
recognised and used to assess their financial position and risk-profile.


Objective of this document

The objective of this document is to provide a response to CEIOPS Consultation Paper 25 (CP 25, published on 25
February 2008) – CEIOPS’ Draft Advice on aspects of the Framework Directive Proposal related to Insurance
Groups. This response contains firstly a summary of our high level comments on CP 25 followed by some more
CEA aisbl
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detailed comments, the latter provided within the template provided by CEIOPS. An annex at the end of the
document goes into a more detailed discussion of how we envisage the supervisory intervention process to work
in practice.
It is important to note that the comments in this document should be considered as a whole i.e. they constitute a
coherent package. As such, the rejection of elements of our positions may affect the remainder of our comments.
In addition, these are CEA’s views at the current stage of the project. As our work develops, these views may
evolve depending in particular, on other elements of the framework which are not yet fixed.

We should also note that many cases it is unfortunately unclear whether CEIOPS’ draft advice refers to potential
future level 2 measures or level 3 guidance, which makes it difficult to comment on the proposals made. The
paper deals with several issues, on which there could be a different industry comment dependent on whether the
issues are part of level 2 or level 3. We have assumed that the proposals are related to level 2 implementing
measures, unless otherwise stated. Our comments could be affected by the clarification of the proposed advices.


High Level Comments

Please note that references to specific articles of the EC Framework Directive refer to the proposal published on
26 February 2008 (COM(2008) 119 final), except if otherwise stated.
CEA recognises and welcomes that CEIOPS has made significant efforts to address the technical questions arising
from the Group Support Regime (GSR), as set out in the EC Framework Directive Proposal.

However, we are concerned by some parts of the draft advice proposed by CEIOPS which would, if adopted,
significantly undermine the efficient operation of the GSR. As a result, under these proposals, the likelihood that
insurers would use group support in practice would be significantly reduced.

In its paper, CEIOPS appears to view Group Supervision under Solvency II mainly through the perspective of the
current regime, as if supervision and capital assessment would continue to be completely solo entity based with
the MCR as the primary reference point for supervision, in other words, little change from Solvency I. Paragraph 3
illustrates this view:

“The lower the MCR is calibrated, the higher the average statistical probability that the undertakings will become
insolvent or will need to trigger group support”
In our understanding, this drafting encapsulates a fundamental misapprehension regarding group supervision and
the GSR. The EC Framework Directive Proposal does not change the individual capital requirements for
subsidiaries, but sets out a new approach to group supervision and introduces a new capital instrument in the
form of group support that can be used to cover some or all of the difference between the solo MCR and SCR. It
is important to note that the underlying concepts of group support are not completely new. For example,
contingent capital (e.g. unpaid share capital) is already recognised as own funds under Solvency I. Furthermore,
the use of group support is optional and will be subject to rigorous control, both in the authorisation of the group
capital model, the review of the SCR assessment and the approval of capital support instruments. The new regime
captures the reality of an insurance group as a coherent economic entity, whilst also providing for each entity to
have an identical and transparent standard of capital support to meet its individual SCR.

We are therefore particularly concerned by CEIOPS’ interpretation of Article 237(3)(b) [old Article 246(3)(b)].
Specifically, in paragraph 67 CEIOPS says,

“Article 246(3)(b) of the Framework Directive Proposal will be interpreted by CEIOPS in such a manner, that a
group actually needs capital in excess of the SCR to the extent that the group support is declared”.


                                                                                                          Page 2 of 40
This is in direct contradiction to the Framework Directive Proposal. It is an excessive level of required capital based
upon sum-of-solo requirements and would force groups to meet a capital requirement higher than the SCR
standard of 99.5% 1 year VaR. The Framework Directive Proposal is clear in Article 228 that:

“The Solvency Capital Requirement at group level based on consolidated data shall be calculated on the basis of
either the standard formula or an approved internal model, in a manner consistent with the general principles
contained in [Articles 100 – 125: Solvency Capital Requirement]”
And in Article 237:

“By way of derogation from Article 98(4), any difference between the Solvency Capital Requirement and the
minimum capital requirement of the subsidiary shall be covered either by own funds eligible under Article 98(4) or
group support, or any combination thereof.”
In our view, this clearly allows group support to be provided from within the assets backing the group’s total,
consolidated SCR. This is the logical conclusion of an assessment of all risks and assets on a consolidated basis.
We believe that CEIOPS interpretation of Article 237(3)(b) - no material impediment to group support – is
incompatible with the Framework Directive Proposal and would frustrate the effective functioning of the GSR and
re-impose a ‘sum-of-solo SCR’ capital requirement. Indeed, compliance with the group SCR is required to provide
a new declaration of group support, however, a temporary non-compliance with the group SCR is possible
without the immediate end of the group support regime (see Article 243).

While recognising that specific supervisory tools should be used when applying the GSR, CEA is concerned that
the CEIOPS draft advice appears to also impose more stringent supervisory requirements to groups operating
under the GSR on elements which are not specifically related to the functioning of this regime. In our opinion this
is not compatible with the Framework Directive Proposal. For example: Suggesting that entry into the GSR should
be subject to the group’s ability to meet its SCR in the future (§ 16 & 18); Introducing specific additional criteria
on risk management processes and internal control mechanisms solely to assess the application of group support
(§103 & §107); And suggesting far-reaching and more stringent public disclosure requirements, both in terms of
timing and content for groups operating under the GSR (§116-120 in particular).

Moreover, we would like to point out that within the European Union many insurance groups exist that operate
only on a national level. The specific measures to facilitate effective supervision of national groups, for example
due to the fact that capital would be transferred within one jurisdiction where both the subsidiary’s and the
group’s supervisor would be the same, appear not to have been considered within CEIOPS’ draft advice.

We recognise that CEIOPS has made significant efforts to address the technical questions arising from the move
to the GSR, but CEIOPS appears to consider group support only through the eyes of a solo supervisor and does
not seem to appreciate the step forward that the Solvency II Directive Proposal represents for the effective
supervision of insurance groups. The proposed approach to group supervision requires the solo and group
supervisors to cooperate more closely through the requirement to systematically share information and take joint-
decisions in the college of supervisors. Similar developments, which clarify and enforce the cooperation within the
colleges of supervisors, are currently being considered at the European level in, for example, the banking sector.
Close cooperation between supervisors is essential to achieve the objective of Solvency II.




                                                                                                            Page 3 of 40
High Priority Concerns

§3&4    At the heart of CEIOPS’ analysis appears to be the assumption that a given subsidiary is monitored on an
        MCR basis. Contrary to the approach adopted in the Framework Directive Proposal, CEIOPS seems to be
        implying that the MCR level is the key level in the context of group support by stating that the lower the
        MCR is calibrated, the higher the average statistical probability that the undertaking will become
        insolvent. We disagree with such an assumption which ignores the Framework Directive’s requirement
        that an undertaking which receives group support should comply with its solo SCR. Indeed, insurance
        undertakings will be monitored according to the SCR level whether they are solo entities or part of a
        group.

§6      The situation described, where a stress occurs that exhausts total group resources would be extremely
        rare and would require a set of severe events beyond the 99.5% confidence level over a one-year period.
        Under such a scenario it is likely that a solo insurance company would become insolvent, whilst in a
        group the benefit of diversification derived from a greater spread of risks would reduce the effect of even
        an extreme stress.

        Again, we believe the comment regarding the derogation to Article 134 (which should be Article 137 in
        the current version of the Directive) – non-compliance of MCR - is not compatible with the approach to
        Group supervision and the GSR, as set out in the Framework Directive Proposal. Solo supervisors should
        not be looking at the individual entity in isolation, nor only looking at the capital held locally which could
        just be to the level of the MCR. The solo supervisor should also not be operating independently of the
        other supervisors of the group, but should cooperate in the assessment of the financial strength of the
        whole group, of which the subsidiaries in each country will be a component part. So long as the group is
        strong and can meet its group SCR, the GSR ensures that each solo entity can also operate at its solo SCR
        (and MCR).

§15     We disagree with the assumption that group support will always represent the whole difference between
        the MCR and the SCR. The amount of group support capital required is simply the balance between
        locally held own funds and the solo SCR. Local own funds may in many cases be greater than the MCR.,
        for a variety of reasons, including efficient capital management to avoid excess numbers of transfers,
        investment diversification between different entities and tax reasons.

§22&23 A declaration of group support is a written and legally binding commitment by the parent undertaking
       (or supporting party) to the subsidiary (or supported party) which shall be subject to the applicable law of
       the parent undertaking. The amount of the commitment and the conditions that lead to the actual and
       prompt transfer of own funds shall be specified in the declaration and shall, as a minimum, satisfy the
       conditions laid out in the Framework Directive.

        We agree with CEIOPS that the group declaration could take the form of a ‘first demand guarantee’ – an
        instrument commonly used in international finance that could be described as ‘first pay then raise
        objections’ . Other solutions should however not be excluded.

        Furthermore, based on our understanding of how it should work, we have strong reservations about the
        ‘credit method’ suggested which, at first glance, appears to us to be neither necessary nor compatible
        with the GSR as set out in the Framework Directive Proposal. Please see our detailed comments for a
        further discussion.



                                                                                                           Page 4 of 40
§ 25   It is not necessary for the solo supervisor to be able to directly trigger or enforce the transfer of own
       funds. This would require the solo supervisor to have enforcement powers over the parent undertaking
       which is responsible for the transfer. Capital management is firstly the responsibility of the firm and
       supervisors should not act as ‘shadow directors’ of the company. However, in the case of a breach of the
       solo MCR at the level of the subsidiary, since the solo supervisor is responsible for the enforcement of the
       solo MCR, it shall use its supervisory powers to make sure that the subsidiary triggers the transfer of own
       funds (performance under the declaration of group support). Furthermore, it may request the parent
       undertaking directly to transfer own funds in case the subsidiary failed to trigger the declaration. This
       might be more efficient than using its supervisory powers over the subsidiary, even though it may not be
       considered as an application of enforcing powers over the parent company. Once a request has been
       made for the transfer of own funds in accordance with a group support declaration, it is the group
       supervisor who shall use all powers, including the withdrawal of authorisation, to ensure that the parent
       transfers the capital when required.

§ 67   We disagree with CEIOPS’ proposition that group support shall be limited to available capital held in
       excess of the Group SCR. The purpose of the calculation of the Group Solvency Capital Requirement is to
       assess all risks across the group to the 99.5% 1 year VaR standard to determine the level of capital
       needed to cover these risks across the group.

       To require a group to meet its entire SCR for all its insurance business and then hold surplus capital in
       addition to this amount is an excessive capital requirement which is not in line with the 99.5% 1 year
       VaR Framework for Consultation. This proposition is, in our view, not compatible with the EC Framework
       Directive, since it would impose a sum-of-solo SCR requirements and as a result directly contradicts the
       established economic reality of diversification which is taken into account in the group SCR. Furthermore,
       a temporary non-compliance with the group SCR does in itself not cause a material practical impediment
       to the transfer of capital.

§ 70   We do not agree that the group support declaration should be for an open-ended amount. Indeed, the
       exact amount of capital available to the subsidiary should be specified in the declaration. CEIOPS appears
       to be suggesting that the amount of own funds requested to be transferred to the subsidiary can exceed
       the amount specified in its declaration by stating that the parent undertaking has to increase the own
       funds of the subsidiary to the required level or by the amount of the commitment, whichever is greater.
       The parent undertaking is never required, by the Framework Directive Proposal, to transfer more than the
       amount it has agreed to in the most recent declaration approved by the supervisors.

§ 84   Our reading of article of 237(1) (previously this was article 247(1))) is more narrow than that of CEIOPS.
       Our interpretation of the derogation of enforcement of the SCR is not that the solo supervisor loses its
       role to play in enforcing the solo SCR. Solo supervisors would continue to have a role to play to ensure
       compliance with the solo SCR under the GSR, but the enforcement measures it could take to enforce the
       solo SCR would be different to those which would be used in the case of stand-alone supervision. For
       this reason, CEA would expect that level 2 implementing measures would further clarify the division of
       the tasks and responsibilities. We would also expect these measures to set-out cooperation arrangements
       between the group and the solo supervisors as well as specifying the detailed procedures to follow. In
       particular we would hope they contain the specific measures a solo supervisor can take in response to the
       breach of a solo SCR in line with the principles laid down by Article 238.




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                                                                                                                                             Position Paper
Specific Comments


            Comments on Consultation paper 25: CEIOPS-CP-02/08 draft Advice on aspects of the Framework Directive Proposal related to insurance groups



Name company: CEA

Please insert your comments in the table below, and send it to secretariat@ceiops.eu in word format. In order to facilitate processing of your comments, we would
appreciate if you could refer to the relevant section and/or paragraph in the consulted document.

Reference     Comment

§3            Key issue
              The lower the MCR is calibrated the more likely the undertaking will become insolvent or trigger group support for the transfer of additional own funds.
              Summary of comments
              Contrary to the approach adopted in the Framework Directive Proposal, CEIOPS is implying that the MCR level is the key level in the context of group
              support by stating that “the lower the MCR is calibrated, the higher the average statistical probability that the undertaking will become insolvent”. We
              disagree with such an assumption which ignores the Framework Directive’s requirement that an undertaking which receives group support should comply
              with its solo SCR. Indeed, insurance undertakings will be monitored according to the SCR level whether they are solo entities or part of a group.
              In detail
              CEIOPS concludes in paragraph 4 that robust criteria are essential because the lower the MCR is calibrated, the higher the average statistical probability
              that the undertaking will become insolvent or will need to trigger group support for the transfer of own funds. While CEA supports the development of
              robust criteria for the transfer of own funds, as is also recognised by the Solvency II Directive Proposal, the link with the calibration of the MCR and in
              particular with the average statistical probability that the undertaking will become insolvent, is considered to be inappropriate.
              First of all, the Framework Directive Proposal requires each insurance undertaking to have sufficient eligible own funds or group support for those
              undertakings that are allowed to receive group support from their parent, to cover the SCR, which is calibrated at a confidence level of 99,5%.
              Secondly, the likelihood that the transfer of funds is triggered is not so much dependent on the calibration of the MCR, but on the level of own funds that
              is held by the undertaking in addition to the MCR. Indeed, only in those cases where the subsidiary only has own funds sufficient to cover the MCR and
              where therefore the difference between the solo MCR and SCR is fully covered by group support (which is allowed by the Solvency II Framework Directive
              Proposal (Article 237), but is not a requirement for the use of group support by default - see also comment to § 15) - and is therefore not necessarily
              always used in practise), a non-compliance with the solo SCR due to an unforeseen loss event would at the same time result in a non-compliance with the


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           Comments on Consultation paper 25: CEIOPS-CP-02/08 draft Advice on aspects of the Framework Directive Proposal related to insurance groups



Name company: CEA
           solo MCR. Nevertheless, due to the fact that the parent is obliged to transfer own funds as much as it has committed to in the most recent declaration
           accepted by the group supervisor (which should have been sufficient to cover the subsidiary’s SCR), the financial situation of the subsidiary is in fact as if
           the subsidiary’s SCR had been completely covered by own funds only (See also CEA’s Working Paper; Solvency II: How the Group Support Regime works
           in practice (Case Studies).
             Thirdly, the relation between the level of the MCR and the average statistical probability that the undertaking will become insolvent (or triggers the
             transfer of own funds) is only valid, when the final method that will be approved to calculate the MCR is risk sensitive. For this reason, CEA strongly
             recommends to remove the sentences “The lower the [...] is essential”.
§6           Key issue

             The triggers and limits to the transfer of funds

             Summary of comments
             CEIOPS seem to consider the declaration of group support as an unlimited commitment whereas the parent undertaking is never required, by the
             Framework Directive Proposal, to transfer more than the amount it has agreed to in the most recent declaration approved by supervisors.

             In detail:

             Paragraph 6 provides an overview of the different situations in which the actual transfer of funds under the group support regime could be triggered and
             indicates the limits to the level of capital that has to be transferred. With regards to the potential limits to the actual transfer of funds in case the
             declaration of group support is triggered, no reference is made to the fact that any transfer is limited by the amount expressed in the declaration, while
             the Framework Directive Proposal clearly stipulates this in Articles 238(4) and 239 (old Articles 247(4) and 248). According to Article 239, when a
             subsidiary becomes insolvent (winding-up), the parent undertaking will be requested to transfer own funds up to the limit of the group support resulting
             from the most recent declaration accepted. Articles 238(4), 242(2) and 243(3) (old Articles 247(4), 251 (2) and 252 (3) follow the same logic by stating
             that: “[…] the parent undertaking shall however not be released from the commitment[s] resulting from the most recent declaration[s] accepted […]”. In
             paragraph 56, CEIOPS appears to derive a similar conclusion: “CEIOPS inferred from the Framework Directive Proposal that the declaration shall refer to a
             concrete amount of capital, an amount limited by the rules laid down in the group support declaration.”

             In the respective cases, the amount of own funds to be transferred is determined as follows:


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         Comments on Consultation paper 25: CEIOPS-CP-02/08 draft Advice on aspects of the Framework Directive Proposal related to insurance groups



Name company: CEA
           a) MCR is no longer covered: amount needed to restore compliance with MCR, up to the amount of the most recent declaration that has been provided.

           b) no new declaration provided or new declaration required to restore compliance with the SCR is not accepted (group regime ceases to apply for the
           relevant subsidiary): amount needed to restore compliance with SCR, up to the amount resulting from the commitment made in the most recent
           declaration that has been provided..

           c), d) group support ceases to apply (for one (d) or all (c) subsidiaries): amount needed to restore compliance with SCR, up to the amount resulting from
           the commitment made in the most recent declaration that has been provided.

           The obligation to transfer own funds ceases to apply entirely when the parent has transferred own funds in an amount corresponding to the amount
           expressed in the declaration. This is the case even if compliance with the subsidiary’s MCR or SCR has not been entirely restored, since the amount
           expressed in the declaration is the maximum limit of the parent’s liability in the context of group support. Obliging parent undertakings to transfer more
           than it has committed to in order to recover the financial position of one or more subsidiaries, could put the financial stability of the whole group at risk.
           In case several requests for the transfer of own funds are addressed to the parent undertaking and the group supervisors, and the group does not have
           sufficient own funds to meet all of those requests together, the amounts requested shall be reduced according to a ratio described in Article 244 (old
           253). The parent remains obliged to meet any residual amount remaining from the last declaration of group support accepted.


§6         Key issue
           CEIOPS believes that the absence of derogation to Article 137 (old 136) appears to be a significant defect in the Framework Directive Proposal
           It is stated that the absence of a derogation to Article 137 (old 136, although the text mentions old Article 134 ‘Non-compliance with Technical Provisions’
           which we believe is an incorrect reference), which deals with the non-compliance with the MCR by undertakings operating on a stand-alone basis, is a
           significant defect in the Level 1 text. CEA does not agree with this statement. Solo supervisors should continue to be responsible for monitoring and
           enforcing the MCR. See also CEA’s comments to paragraph 25.
§ 9-13     Key issue
           Treatment of non-EEA subsidiaries of European groups regarding the recognition of diversification effects with 3rd countries under the group support
           regime.
           Summary of comments

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         Comments on Consultation paper 25: CEIOPS-CP-02/08 draft Advice on aspects of the Framework Directive Proposal related to insurance groups



Name company: CEA

           The Commission has made clear that its intention in the Framework Directive Proposal is that the diversification effects arising from non-EEA subsidiaries
           in a group are to be taken into account when determining Group SCR when using the consolidation based method.

           In detail:
           The CEA understands that the draft Framework Directive Proposal requires the calculation of a group SCR and that this calculation is not dependent on
           the use or not of the Group Support option.
           We share the Commissions interpretation that the consolidation based method, the default approach to the determination of the Group SCR (Art 228),
           allows the quantification of diversification effects across the whole group (See Letter from Jörgen Holmquist to Thomas Steffen on the QIS 3 report of
           23.01.2008). There is no qualification regarding EEA or non EEA parts in Art 228.
           Under the alternative Deduction and Aggregation method (Art231) Art 225.1 allows for the use of equivalent third country assessments but does not
           require it ( Art 225.1 para 2 uses ‘may’). The reference to ‘sum of’ in Art 231.3 does not allow diversification effects at group level to enter the
           computation of Group SCR.
§ 14       EU-based groups could have policyholders in third countries through branches or subsidiaries. We appreciate that there is a tension between assessing
           the overall position of a group and the legal responsibilities for supervision of third country operations as set out in article 212(1) of the Framework
           Directive Proposal. We understand CEIOPS concern that policyholders in EU undertakings should not be disadvantaged compared to those in non-EU
           undertakings. However paragraph 14 could be read to require subordination of the non EU to the EU. We think that discrimination equally undesirable as
           an objective and contrary to the way groups are properly run. It certainly would not be helpful when looking beyond Solvency II to wider convergence. We
           urge CEIOPS to reform its statement.

           Where there are concerns that capital standards and/or other constraints would mean that funds held in non EEA entities would not be available to meet
           the needs of an EEA undertaking under the group support regime we would expect this to be investigated under the requirement to demonstrate that
           support can be made available when needed.

           We are also concerned with the references in the first sentence of the advice to “all circumstances”. We appreciate the point that CEIOPS is trying to
           make about a high level of consumer protection but the statement is not entirely consistent with a risk based regime providing protection that allows for a
           0.05 probability of default over a one year horizon.


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Name company: CEA

           The second sentence suggests a possible link between group diversification benefit and the recognition of group support by third countries. We do not
           agree with that.     The recognition of EU group support by third countries should not affect the calculation of the group SCR under the consolidated
           approach as mentioned in our feedback to paragraphs 9 to 13 of this CP. CEA looks forward to work with CEIOPS to ensure that group support works
           with third countries.



§ 15       Key issue

           Obligations under the group support regime

           Summary of comments

           The Framework Directive Proposal does not provide an obligation that a declaration of group support covers the difference between the MCR and the SCR
           of a subsidiary. When the subsidiary holds own funds in addition to the MCR, the amount of group support required can be less than the difference
           between the MCR and the SCR. Indeed, the proposed Directive ensures that some or, but not necessary, all of the difference between the subsidiary’s SCR
           and its MCR can be met by group support. Again, CEIOPS considers group support through the eyes of solo supervision and does not appreciate the step
           forward it represents.

           In detail

           As it is important to have a clear and consistent overview of the rights and obligations stemming from the group support regime, it would be useful if
           CEIOPS would indicate on which provisions of the Framework Directive Proposal the specific obligations referred to in paragraph 15 are based on.

           According to CEA, the Framework Directive Proposal does not provide an obligation that “the commitment covers the difference between the MCR and
           the SCR of a subsidiary in the Group Support Regime” in all circumstances. When the subsidiary holds own funds in addition to the MCR, the amount of
           group support required can be less than the difference between the MCR and the SCR. Indeed, Article 237 (old 246) indicates that some or, but not
           necessary, all of the difference between the subsidiary’s SCR and its MCR can be met by group support. Furthermore, CEA agrees with CEIOPS’ draft
           advice in paragraph 56, that a concrete amount of capital shall be specified in the declaration of group support.

           With regard to the second and last obligation summarized in paragraph 15, CEA would like to refer to our comments made to paragraph 6 and
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Name company: CEA
           paragraphs 57 to 75 respectively.

             The fourth obligation is not stated completely correctly in the view of CEA, because the group support does require that the MCR of a subsidiary in the
             group Support Regime is covered with eligible own funds at all times. It is inevitable of the group support regime there is a short time period elapse
             between the observation of non-compliance with the MCR and the actual transfer of own funds from the parent to the subsidiary to recover the MCR. It
             is for this reason that the Framework Directive Proposal refers to a prompt transfer rather than a direct or immediate transfer. Moreover, it can be the case
             that the non-compliance with the MCR exceeds the amount the parent has committed to and specified in the most recent declaration of group support
             that was approved. In such a situation, the parent undertaking is not obliged to provide more funds than it has legally committed to. There might be good
             equally valid reasons for the group to provide the additional capital (e.g. due to reputational risks) as well as valid reasons not do so (e.g. if the financial
             stability of the group would be at risk).

§ 16 &18     Key issue

             The entry into the Group Support Regime should be subject to the group’s ability to meet its SCR in the future and adequacy of the distribution of the
             distribution of the own funds within the group

             Summary of comments

             The references to the ability of the group to meet its SCR in the future should be removed. The same time period for calculations should apply to
             members of a group as those which apply to a solo entity. Capital requirements (i.e. Pillar 1 calculations) should be specifically based on a 1 year time
             horizon, whereas longer time horizons would be expected to be taken into account only as part of the normal capital management and the supervisory
             review process (Pillar 2) Indeed, it is important that the principles applied at Pillar II should be consistent with those applying to stand-alone undertakings.

             In detail

             Our understanding of considering future developments with regard to the group SCR, is that the pillar I one-year time horizon is the relevant one. CEIOPS
             appears to interpret Article 237(3)(a) (old 246(3)(a)) that the group SCR is covered by own funds at group level as requiring demonstration ‘both at the
             time of authorisation and beyond’. This does not appear to be consistent with the use of 'has' in Art237(3)(a) which implies a test of the sufficiency of
             funds at a single point in time. However CEA accepts that there would be Pillar II obligations at the group level concerning Own Risk and Solvency
             Assessment, which includes the consideration of short and long term risks in the context of the 'own risk assessment' ( Art 44(1)(a) and 44(2)). The time

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Name company: CEA
           horizon to be applied under Pillar II when assessing the group’s solvency position in the future should be consistent with the one applied to stand-alone
           undertakings. We would assume that only a limited period of time will be considered which is sufficiently certain and relevant for the business cycle.

             These considerations are different to a legal requirement to meet all possible future SCRs with current funds. In our view the forward looking requirement
             would be met by normal capital planning at group level. Future capital raising must be recognised as a valid element of such planning. The supervisory
             assessment at group level should be consistent with the requirements placed on standalone undertakings. CEA asks CEIOPS to clarify in the advice that
             this is not intended to be an additional requirement and is about using Pillar 2 assessment.

             CEIOPS also refers to 'an adequate distribution of own funds'. In our view under the group support regime the holding of the MCRs and the Group SCR
             together with the demonstration that support commitments can be met is the evidencing of an adequate distribution of own funds. We believe this is
             fully consistent with Recital 70[old67]. We ask that CEIOPS clarifies its agreement with this. The advice could be clarified along the following lines
             “adequacy of the distribution of the distribution of the own funds within the group to meet calls for transferring eligible own funds to meet the
             commitments arising from group support”.

§ 19-41      Criteria 1: Aspects relating to the legal basis of the commitments

§ 22         Key issue

             Legal issues with regard to design of declaration of group support

             Summary of comments

             A declaration of group support is a written and legally binding commitment by the parent undertaking (or supporting party) to the subsidiary (or
             supported party) which shall be subject to the applicable law of the parent undertaking. The amount of the commitment and the conditions that lead to
             the actual and prompt transfer of own funds shall be specified in the declaration and shall at least according to the conditions as laid down in the
             Framework Directive Proposal.



             In detail

             In order to ensure legal certainty, CEA recommends that the acceptance of a declaration of group support by the group supervisors shall be always made
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           explicitly (§21). Such an explicit statement is in particular important, since acceptance of a declaration by the group supervisors implies that the group
           supervisors has verified the conditions outlined in paragraph 237(3)(b) as it is obliged to do so according to the Framework Directive Proposal.

             CEA agrees with most of the characteristics that are outlined by CEIOPS in paragraph 22. With regard to further details of the design of the group
             support declaration CEA’s position is as follows:

             1. A declaration of group support is a written and legally binding commitment by the parent undertaking (or supporting party) to the subsidiary (or
                supported party) which shall be subject to the applicable law of the parent undertaking.

             2. The amount of the commitment and the conditions that lead to the actual and prompt transfer of own funds shall be specified in the declaration and
                shall at least according to the conditions as laid down in the Framework Directive Proposal.

                 Specifying the specific amount of the parental guarantee in declaration, is in line with the Framework Directive (see CEA’s comments to paragraph 6)
                 and CEIOPS’ conclusion in paragraph 56 “the declaration shall refer to a concrete amount of capital, an amount limited by the rules laid down in the
                 group support declaration.” The parent undertaking and the subsidiary should be entitled to voluntarily agree on an additional (earlier) condition
                 (trigger) for the transfer of own funds which is met and would ensure the transfer of own funds before the directive’s condition (MCR non-
                 compliance) is met, provided that such an earlier transfer would be recognised by the supervisory authorities as a performance under the declaration.
                 It would for example be in both the supervisors’ and the group’s interest that a transfer of own funds occur before the MCR is breached (e.g. to
                 prevent the need for supervisory actions caused by a non-compliance with the subsidiary’s MCR). It is important to note that these comments are
                 made with regard to the design of a declaration of group support and should not be understood as an recommendation to narrow the conditions for
                 the supervisory authorities to enforce the transfer of own funds for all declarations of group support, by introducing more stringent requirements
                 under the Framework Directive Proposal or the Level 2 implementation measures. The CEA is of the opinion that the triggers for the transfer of own
                 funds under the group support regime that are laid down in the Framework Directive Proposal are appropriate and sufficient (see also CEA comments
                 to § 6).
             3. We fully agree that legal certainty, with regard to the transfer of own funds, is a key issue in group support. We agree that transfer of capital could
                take place at first demand when this refers to the fact that such a transfer shall take place promptly and any recourse before a legal or administrative
                body shall not have a suspensive effect.


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               Designing the declaration as a so-called “first demand guarantee” is one strong possibility to comply with the directive’s requirements. Other
               possibilities should however not be excluded though. Instead, level 2 implementing measures should define the criteria that an instrument of group
               support should meet. Insurance undertakings should be free to choose the most appropriate legal instrument to ensure that the above mentioned
               conditions are met. A so-called “first-demand guarantee” is an example of such a legal instrument that could be used and that would meet the
               conditions set by the Framework Directive Proposal that the transfer of funds should take place “promptly” (Article 237(3)(b)) and that any recourse
               for a recourse before a legal or administrative body shall not have a suspensive effect (Article 237(3)(c)).
           4. The transfer of own funds shall be legally enforceable by the subsidiary against the parent undertaking.

               See also comments to paragraph 25 on this issue.
           5. Once a declaration of group support is accepted by the group supervisor it shall be valid for an undefined period of time. However, it shall be allowed
              to update the declaration or end the declaration after respecting a specified notice period. The obligations of the supporting to the supported in case
              the declaration is terminated shall be defined as indicated in point 2.

           6. The declaration of group support shall include the conditions for updating the content.

           Paragraph 22 appears to assume that the transfer of own funds only takes place in case of a “solvency breach”. As specified in CEA’s comments to
           paragraph 6, the transfer of own funds could also be triggered in different situations.

§ 23       Key issue

           Commitment regarded as a credit method (Design (§ 23))

           Summary of comments

           CEA does not support the treatment of group support as a “credit from the supporting to the supported undertaking, as proposed by the so-called ‘credit
           method’. Based on our current understanding, the credit method is neither necessary nor compatible with the group support regime as proposed by the
           EC Solvency II Directive Proposal.



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           In detail
           CEA does not support the treatment of group support as a “credit from the supporting to the supported undertaking”. It does not meet the conditions as
           set out by the Framework Directive Proposal, as the group would continue to hold capital up to the level of the sum of the solo SCRs rather than the
           group SCR. Indeed, as result, group diversification effects would not be recognized by the use of the credit method. Furthermore, it is difficult to
           understand how this method would function on an ongoing basis with a solo SCR which could increase over time and where the original credit would, as
           a result, no longer be sufficient. We would like to point out that according to the industry’s understanding of the Framework Directive proposal, a
           declaration of group support is by definition an off-balance sheet item. However, when an instrument of group support has been triggered, the own
           funds received would be on the subsidiary’s balance sheet.

             Furthermore, when the subsidiary would recognise a loan towards the parent and the parent an obligation towards the subsidiary adverse accounting
             consequences will arise. The suggested approach would not raise the capital base as suggested. Under the application of IAS 32 – the principle (IAS
             32.IN6) a financial instrument is only recognised as part of equity when there is absolute no possibility for the issuer to be required to pay any cash, cash
             equivalents or other financial instruments to redeem the instrument. If there is a possibility (even a remote one) for a requirement for a repayment than
             the issuer has to classify the instrument as a liability.

             The suggested approach will have also tax consequences as interest is paid and received. The taxation on these transfers can be different.

             Any recognised loan on the balance sheet of the subsidiary would also be subject to all the shocks of the SCR calculations and will imply a higher required
             solvency capital.

             The last sentence appears to suggest that subsidiaries that received group support – rather than credit – would benefit from an artificially low cost of
             capital. Such reasoning is based on a misconception of the group support regime which does not artificially reduce the cost of capital but allows the
             efficient allocation of capital and allows groups to benefit from the recognition of group diversification effects which do exist in practice.

§ 25         Key issue

             CEIOPS advises that the supervisor of the subsidiary or the group supervisor shall be allowed to trigger a declaration of group support

             Summary of comments


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           It is not necessary for the solo supervisor to be able to trigger or enforce the transfer of own funds directly which would require the solo supervisor to
           have enforcement powers over the parent undertaking which is responsible for the transfer. Capital management is firstly the responsibility of the firm
           and supervisors should not act as ‘shadow directors’ of the company. However, in the case of failure or negligence at the level of the respective subsidiary,
           since the supervisory authority of the subsidiary is responsible for the enforcement of the solo MCR, it shall use its supervisory powers to make sure that
           the subsidiary triggers the transfer of own funds (performance under the declaration of group support). Furthermore, it may request the parent
           undertaking directly to transfer own funds in case the subsidiary failed to trigger the declaration. This might be more efficient than using its supervisory
           powers over the subsidiary. Once a request has been made for the transfer of own funds in accordance with a group support declaration, it is the group
           supervisor which shall use all powers, including the withdrawal of authorisation, to ensure that the parent transfers the capital when required.

           In detail:

           CEIOPS advices in paragraph 25, that the supervisor of the subsidiary or the group supervisor shall be allowed to trigger a declaration of group support. As
           long as the supervisory authorities are no parties within the declaration of group support (e.g. provided by the declaration with a contractual right to
           trigger the transfer of funds), they will not be able to trigger the transfer of own funds directly. Indeed, CEIOPS indicated in paragraph 22 that a
           declaration of group support shall be an agreement between two private parties: the parent undertaking and the subsidiary. Therefore, the supervisory
           authorities are no parties to the contract. As result, the solo supervisor will not be able to enforce the transfer of own funds directly, because this would
           require that the solo supervisor would have supervisory powers over the parent undertaking. Instead, the Directive Proposal ensure the transfer of funds
           by following safeguards:

           To ensure that the subsidiary request the capital:

           1. Allowance to use group support requires the subsidiary to be part of the integrated risk management and internal control of the parent. If permission
              has been granted by the group supervisor we would assume that the relevant risk management and internal control procedures are in place that
              ensure that the subsidiary acts adequately in case a non-compliance with the MCR requirements under group support is foreseen.

           2.   In case the subsidiary fails to do so, the solo supervisor shall be entitled to use its supervisory powers to ensure that the subsidiary triggers the transfer
                of own funds. Indeed, the solo supervisors are responsible for the monitoring and enforcement of the MCR.

           3.   In addition, the Solvency II Directive Proposal provides solo supervisors with a possibility to request the parent undertaking directly to transfer own

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               funds in case the subsidiary failed to trigger the declaration. This might be more efficient than using its supervisory powers over the subsidiary.

              To ensure that the capital is transferred:

              4. Where the parent undertaking does not rapidly transfer eligible own funds to the subsidiary, the group supervisor shall use all powers available,
                 including the withdrawal of the parents licence, to ensure that the group provides the requested transfer as soon as is practicable”.

              A more detailed description of the process in case of a non-compliance with the subsidiary’s MCR can be found in Annex 1.

§ 29          Conditions with regard to the content of the declaration


              On the specific elements proposed by CEIOPS for public disclosure, CEA would like make the following comments:

              •   an unconditional and irrevocable guarantee from the parent to the subsidiary (a parental guarantee) on first demand (bullet point 1 of §29);

                  A declaration of group support is by definition conditional. The conditions for the transfer of capital are described in paragraph 6 of CP 25. See also
                  CEA comments to paragraph 6 and 22 (point 2) in this respect.

              •   Parties involved: supporting and supported undertaking. Unspecified support (generally or vaguely specified) should not be allowed;

                  CEA agrees that the amount of the guarantee shall be specified in the declaration and shall at least according to the conditions as laid down in the
                  Framework Directive Proposal, as also mentioned in paragraph 56 of CP 25 and in CEA’s comments to paragraph 22 (point 2).

              •   Explicit declaration that no time limits or exclusions for the commitment exist (no side letters);

                  This condition should be clarified, in particular in reference to the condition that no time limits should be included.

              •   Explicit declaration of responsibility for updating the content of the declaration to adapt to future circumstances; and

                  CEA agrees that a simplified mechanism to update or replace the content of an existing declaration would be helpful as it would reduce the
                  administrative burden of the group supervisor and the parent undertaking sufficiently.



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               •   Explicit declaration of responsibility for guaranteeing policyholders’ rights.

                   We are not able to agree with this item as it is not clear to us what extra duties or obligations this is intended to impose on the parent. Any direct
                   guarantee of policyholder’s rights would give each individual policyholder a potential claim on the parent which could even rank ahead of the parent’s
                   own policyholders, either in priority or in time of presentation.

§ 33 & 36      CEIOPS suggests that a reliable legal scheme could entail an equal number of support declarations and support relationships between undertakings The
               concept of a group support declaration between subsidiaries contradicts the Solvency II Directive Proposal, according to which the parent is the guarantor.
               Such a system would further complicate the regime. Indeed, Article 237(3)(c), states that “the document containing the declaration of group support
               meets all requirements existing under the law of the parent undertaking to be recognised as a legal commitment ...” (emphasises added). In case funds
               would be transferred from one subsidiary (in “health”) to another subsidiary (in “need”), it is the parent undertakings’ responsibility to ensure that the
               transfer of own funds takes place promptly as is required by the Solvency II Directive Proposal.

§ 35           CEIOPS states that the solo supervisor should have the power to enforce a declaration against the parent.
               It is unclear though how this is to be legally implemented. The solo supervisor could be situated in a different member state to the parent, and actually has
               no supervisory powers to enforce the parent to act. See CEA comments to paragraph 25.

§ 39           Similar conditions as applicable for the initial authorisation should be applied for the termination, amendment or replacement of an existing declaration
               CEA agrees that similar conditions as applicable for the initial authorisation should be applied for the termination, amendment or replacement of an
               existing declaration.

§ 47, 49,      Key issue
50 and 53.     Concepts of liquidity, fungibility and transferability of capital appear to be used interchangeable while they are not the same.

               Summary of comments

               The concepts of liquidity (paragraph 47), fungibility (paragraphs 49 and 50) and transferability (paragraph 53) are used interchangeably, while in fact they
               are somewhat related but have different meanings. CEA disagrees with CEIOPS draft advice to develop future implementing measures, in the context of


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           group support that should require, at least, adequate liquidity management and sufficient liquidity of the assets transferred.

             In detail
             Liquidity refers to having sufficient liquid assets - assets which can be converted into cash – available to meet policyholder expectations as they fall due.
             Capital is considered to be fungible when it can be transferred between different legal entities of the same group within a given timeframe, for example
             in times of stress when a solo entity needs a capital injection.

             Article 238(3)(b) of the Solvency II Directive Proposal requires that there should be no material or legal impediments to “the prompt transfer” to the
             transfer of own funds. As result, the Framework Directive Proposal requires capital to be transferable but does not require the transfer of liquid funds (e.g.
             cash or equivalents). The capital transfer needs to result in a prompt increase of the own funds of the receiving subsidiary. Management of liquidity is
             indeed an important issue, but is not relevant for the adequate functioning of the group support regime. For this reason, CEA disagrees with CEIOPS draft
             advice to develop future implementing measures, in the context of group support, that should require, at least, adequate liquidity management and
             sufficient liquidity of the assets transferred.

             In order to assess whether capital is available in the context of group support the group has to demonstrate that it has economic ownership and control
             over the capital and is able to transfer it in a timely manner (“promptly”). By considering whether the group has economic ownership and control over the
             capital, the group and the supervisory authorities will be able to assess whether the group is able to make use of those amounts in practise in order to
             manage its capital position and meet its insurance obligations. CEA would expect the consideration of the economic ownership and control over the
             capital should take place as part of the normal group solvency assessment and not as part of a discussion about group support.

             Economic ownership and control of capital does not necessarily mean that capital can be made available in a prompt manner (accessibility of the capital)
             in different circumstances. The period needed for the capital to be transferred depends on the type of capital, the location of capital, the capital transfer
             mechanism used and the specific adverse circumstances the group is facing when the capital is required to be transferred. For this reason, the group
             should perform regular scenario analyses to determine whether any capital shortfalls arise in individual subsidiaries and/or whether the group support
             obligations would be called, and if so how those shortfalls could be met in a timely manner. This analysis should at least consider:

                  •      Where the capital is held currently within the group (the location of capital)

                  •      What the capital positions would be in adverse scenarios

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                  •   What capital transfers would be required in adverse scenarios

                  •   Whether there are sufficient funds available in a timely manner to meet the commitments arising from group support (‘prompt transfer’).

                  •

              By the group solvency assessment and the use of regular scenario analyses, the group and the supervisory authorities will have an appropriate insight in
              the adequateness of the capital available in the group to meet its obligations when they fall due over time.

              CEA wishes to emphasise that the practical outcome is transferring value that counts as own funds to meet the MCR of the subsidiary. Such value can be
              provided in various ways. A transfer from the group’s liquid resources is perhaps the easiest one to envisage but there will be many others and it is
              essential for the success of group support that these are not ruled out.



§ 51 & 65     CEA welcomes CEIOPS’ recognition that at solo level the value of participations in another insurer can be used to meet the solo SCR

§ 54          CEIOPS suggest that the parent’s obligation to transfer own funds must be limited by its obligation to comply with its SCR
              The execution of a group support commitment from the parent should not be restricted by a requirement that the parent must fulfil its solo SCR after the
              execution. If the group support regime does not allow group support to be provided when the outcome is that the supporting undertaking breaks
              temporary its solo SCR, it’s not possible to arrive at a regime which is neutral towards how the group has chosen to allocate its capital. That would not be
              compatible with an economic approach.

              Under Solvency II and in case of the group support regime, an insurance group shall be assessed by its ability to meets to comply with its group SCR.
              However, even a temporary non-compliance with the group SCR is possible without the immediate end of the group support regime (see Article 243; old
              Article 252) and does not mean that the group is unable to transfer funds to a subsidiary which has received group support and requires funds due to the
              non-compliance with its MCR. Furthermore, it is important to keep in mind that a transfer of capital between legal entities of the same group should not
              change the available capital held by the group to cover its group SCR.




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§ 67       Key issue
           Group support shall be limited to available capital held in excess to Group SCR

             Summary of comments
             We disagree fundamentally with CEIOPS’ proposition that group support shall be limited to available capital held in excess to Group SCR. The purpose of
             the calculation of the Group Solvency Capital Requirement is to assess all risks across the group to the 99.5% 1 year VaR standard to determine the level
             of capital needed to mitigate these risks within the group. To require a group to meet its entire SCR for all its insurance business and then hold surplus
             capital in addition to this amount is a crude double-counting. This proposition is in our view not compatible with the EC Framework Directive Proposal,
             since it would impose a sum-of-solo SCR’s requirement and as result directly contradicts the established economic reality of diversification which is taken
             into account in the group SCR and which would be rigorously tested and assessed through the internal model validation and review process, or
             conservatively calculated in the standard approach. Furthermore, a temporary non-compliance with the group SCR does in itself not cause a material
             practical impediment to the transfer of capital.

             In detail:
             Article 237(3)(b) (old 246(3)(b)) requires that there should be no material practical impediments to the prompt transfer of the eligible own funds. CEIOPS
             states in paragraph 67 that it would interpret this in such a way that the amount of group support can be declared is limited to the extent of actual capital
             which is hold in addition to the group SCR. This implicit interpretation is not in line with the approach of the Framework Directive Proposal, as it is in
             conflict with Article 237 (a) (old 246(a)) which explicitly states that the group supervisor shall verify that the group has sufficient eligible own funds to
             cover is consolidated group SCR before accepting a declaration (and thus not to verify if it holds sufficient capital in excess to the group SCR). Indeed,
             under Solvency II groups shall be supervised on the basis of the calculation of the group SCR, which is to assess all risks across the group to the 99.5% 1
             year VaR standard to determine the level of capital needed to mitigate these risks.
             CEIOPS appears to point to the very specific situation that if a group that operates under the group support regime and would only hold just enough
             capital to meet the group SCR, any loss event that reduces the own funds of one of its subsidiaries which received group support below the level of its
             MCR, would always cause a non-compliance of the group SCR at the same time. As result the group needs to raise new funds outside the group to
             recover the group SCR and when the subsidiary calls for the transfer of own funds to restore compliance with its MCR, the group would according to this
             interpretation not have sufficient own funds to meet this request.
             The Framework Directive Proposal however does not prohibit the group to transfer funds in case it does temporarily not comply with the group SCR (for a

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           detailed example, see scenario 3 in CEA’s Working Paper “Solvency II: How the Group Support Regime works in practice (Case Studies)”). As long as the
           group has capital in addition of the sum of the MCRs of its subsidiaries, it would be able to allocate capital available elsewhere within the group to the
           subsidiary that has breached the MCR and requested the transfer of own funds (as agreed between the subsidiary and the parent by the most recent
           accepted declaration and up to the limit of the recovery of the MCR or the monetary amount stated in the declaration, see comments to paragraph 6).
           Indeed, in this specific situation, the group supervisor shall request a recovery plan to restore compliance with group SCR within an appropriate
           timeframe.
           In short, even in the situation that the group has to raise new funds outside the group because the group SCR has been breached, the capital which is left
           in addition of the sum of the MCRs of the groups’ subsidiaries, can be transferred in case a subsidiary that has received group support breaches the MCR.
           As result, the non-compliance with the group SCR does in itself not cause a material practical impediment to the transfer of capital. There is therefore no
           reason to limit the level of group support that can be provided by the parent to the extent that capital is available in extent to the group SCR as is
           suggested by CEIOPS.

§ 70         CEIOPS seems to be suggesting that a parent company operating under the GSR is subject to an open-ended commitment to provide capital to its
             subsidiaries
             We do not agree that the group support declaration should be for an open-ended amount. Indeed, the exact amount of capital available to the subsidiary
             should be specified in the declaration. CEIOPS appears to be suggesting that the amount of own funds requested to be transferred to the subsidiary can
             exceed the amount specified in its declaration by stating that the parent undertaking has to increase the own funds of the subsidiary to the required level
             or by the amount of the commitment, whichever is greater. The parent undertaking is never required, by the Framework Directive Proposal, to transfer
             more than the amount it has agreed to in the most recent declaration approved by the supervisors.

             Please refer to the detailed comments for paragraph 6 where this is issue also covered.

§ 72         Supervision of Holding Companies
             In accordance with the Framework Directive Proposal, only insurance holding companies and not mixed activity holding companies can apply to be
             regulated under the group support regime (Art. 257). Because there are no policyholders of an insurance holding company, the withdrawal of licence
             cannot be an adequate measure against an insurance holding company which does not fulfil its obligations resulting from group support. However, all
             persons who effectively run the insurance holding companies are required to meet the fit and proper criteria (Art. 261). In addition, Art. 262 (2) foresees


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           the Member State option to impose sanctions or measures to insurance holding companies. These possibilities should in principle be regarded as sufficient
           for the enforcement of group support and the functioning of a group support regime.

              It is quite clear that the requirements in Art. 234 (b) have to be fulfilled anyway. We agree that in certain cases additional supervision might be necessary
              though the legal certainty of the instrument of the group support declaration itself is not affected. For example it could be reasonable to look at a
              modified prudent person principle for assets in relation to group support of an insurance holding company.

              The requirements on supervisory reporting and disclosure on group level with regard to the use of group support, with an insurance holding company as
              parent undertaking, should not differ from the requirements that apply to a parent which is an insurance or reinsurance undertaking.

§ 76 & 84     CEIOPS recommends the development of specific criteria on risk management processes and internal control mechanism solely for the assessment of the
              application of group support (§103 & §107).
              CEA accepts that groups who wish to utilise group support must have adequate risk management processes and internal control mechanisms in place as is
              also required by the Framework Directive Proposal. However, CEA disagrees with the development of specific and additional criteria on risk management
              processes and internal control mechanism solely for the assessment of the application of group support as proposed in paragraph 103 & 107. The risk
              management processes and internal control mechanisms should not be more onerous than follows from the requirements for the approval of an internal
              model, as these target the same type and level of risk management and internal control.

§ 84          Key issue

              CEIOPS recommends to keep the status quo where the authorising supervisor would be responsible for monitoring and enforcing compliance with the
              SCR


              Summary of comments

              CEA would not read the derogation about enforcement of the SCR in article 237(1) (old article 247(1)) in a broad way that the solo supervisor is no longer
              responsible for enforcing the SCR at all, but in a more narrow sense since the derogation refers specifically to Article 136 (old Article 135). Solo supervisors
              have a role to play to ensure compliance with the solo SCR under the group support regime, but the measures it can take to enforce the solo SCR are

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           different under the group support regime than under group supervision without the use of group support or in case of stand-alone supervision. For this
           reason, CEA would expect that level 2 implementing measures would further clarify the division of the tasks and responsibilities and cooperation
           arrangements among the group and solo supervisors as well as specifying the procedure to be followed in more detail, in particular with regard to
           measures a solo supervisor can take in response to the breach of a solo SCR in line with the principles laid down by Article 238.

             In detail:

             Whilst an entity is supervised within the group support regime and the parent is able to provide a new declaration of group support within an appropriate
             timeframe, then CEA believes that the solo supervisor should not have a unilateral right to take the actions as described in Article 136, namely (a)
             requiring recapitalisation of the business with externally-raised eligible own funds (Article 136, paragraph 3), (b) requiring the purchase of internal or
             external reinsurance/securitisation (Article 136, paragraph 3), or (c) for the prohibition of the free disposal of assets (Article 136, paragraph 4). However,
             we agree that the solo supervisor will have a role to play in ensuring the subsidiary remains in compliance with the solo SCR.

             The procedure stated in Article 136 paragraphs 2 and 3 appears to be incompatible with the group support regime, as the possibility of recovering the
             solo’s SCR by a new declaration of group support is not recognised. The measures that the undertaking is required to take in accordance with these 2
             paragraphs shall achieve the re-establishment of the level of eligible own funds covering the SCR (which would not include group support) or the
             reduction of the risk profile to ensure compliance with the SCR. Furthermore, allowing the solo supervisor to freeze the subsidiary’s assets due to
             deteriorating financial conditions, while the parent is able and willing to provide the required capital and a new declaration of group support which would
             be able to address these adverse conditions (indeed the amount specified in the declaration would likely to be larger than the level of non-compliance
             with the SCR originally observed), appears to be in conflict with the efficient functioning of the group support regime.

             For this reason, we could envisage the derogation to Article 136 in Article 238(1) being limited, to provide more clearly an indication of the role the solo
             supervisor will have in monitoring the solo SCR and, in agreement with the group supervisor, the measures that can be taken to ensure compliance with
             the solo SCR.


             A more detailed description of the process in case of a non-compliance with the subsidiary’s SCR can be found in Annex 1.



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Name company: CEA

§ 103 & §     Key issue
107
              CEIOPS recommends the development of specific criteria on risk management processes and internal control mechanism solely for the assessment of the
              application of group support (§103 & §107).

              Summary of comments

              CEA recognizes that groups who wish to utilise group support must have adequate risk management processes and internal control mechanisms in place
              as is also required by the Framework Directive Proposal. However, CEA disagrees with the development of very specific and additional criteria on risk
              management processes and internal control mechanism solely for the assessment of the application of group support as proposed in paragraph 103 &
              107. The risk management processes and internal control mechanisms should not be more onerous than follows from the requirements for the approval
              of an internal model, as these target the same type and level of risk management and internal control.


              In detail:

              More specifically, CEA is of the opinion that some of the criteria listed in paragraph 107 need to be clarified or amended, as stated in bullet points below:

              •   First bullet point: Risk appetite is indeed important and it should thus be requirement that is also valid for solo companies and groups without group
                  support.

              •   Third bullet point: Should be reformulated. Board and management should make sure that the governance of risk management is sufficient, including
                  delegation of duties, and that they get appropriate internal reporting in order to be able to make correct decisions. They should however not be
                  involved in the operational risk management work.

              •   Fourth bullet point: Important criteria. See also CEA’s comments to paragraph 25.

              •   Fifth bullet point: Important to point out is that these kinds of stress and scenario analysis could very well be performed in by a daughter company, on
                  behalf of the parent company. This is important especially for groups where a holding company is the parent. These groups should not be forced to
                  establish a large centralised risk management function if they consider to get a more appropriate and accurate picture of the risks situation when risk


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Name company: CEA
               assessments are performed closer to the risks, e.g. in the daughter companies. Groups should of course always make sure to get appropriate
               coordination of the risk management work within the group and appropriate reporting to the parent management and board, but should be able to
               decide where the stress tests etc are to be handled.

            •   Sixth bullet point: Somewhat unclear, might be included in fifth bullet point.

            •   Seventh bullet point: Should be clarified further. It might indeed be prudent for supervisors to assess whether re-financing options have been
                considered, but such assessment should be proportional to the financial position of the group and other risk mitigation measures that could be in
                place within the group that could mitigate the losses to a subsidiary in a crisis scenario (e.g. internal/external reinsurance, securitisation etc.). Such
                consideration should however not be stretched to a requirement in the context of group support: as long as the group hold sufficient capital to meet
                the group SCR and has sufficient capital available in addition to the sum of solo MCR’s that can be transferred within the group which can be used to
                back declaration of group support, groups should not be required to have re-financing options like external guarantees in place.

            Key issue
§ 113
            CEIOPS believes that public disclosure requirements aim at developing a level playing field and strengthening market discipline.

            Summary of comment:
            CEA agrees that public disclosure of relevant information should help to establish a level playing field and strengthening market discipline. However, in
            order to establish such a level playing field, groups operating under the group support regime should not be penalised by more stringent public disclosure
            requirements in terms of timing and content – as is described by CEIOPS advice in paragraphs 116,117, 120 & 121 (see CEA comments below) - than
            those groups that operate without the use of the group support regime or stand alone undertakings. Obviously we would expect the information
            disclosed by a group to usually be more than a stand-alone entity due to the fact that the group is a larger, more complex organisation, but we would
            expect the disclosure standards to be identical for groups and stand-alone entities and that there exist no additional reporting requirements for groups.

            Key issue
§ 116 &
120         CEIOPS refers to a specific “group support regime” section in which far-reaching information should be publically disclosed

            Summary of comment:

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Name company: CEA
           CEA recognizes that the existence of group support should be appropriately disclosed, but disagrees with the more rigorous requirements (in addition to
           specific aspects related to group support) proposed by CEIOPS in paragraphs 116 and 120 with regard to the content of the public disclosure compared to
           the situation of no group support.

             In detail:

             The draft advice refers to a “group support regime” section. It is not clear what is meant by this, CEA does not agree with the separate public disclosure
             of information about the use of group support regime in a specific section. The existence of declarations of group support, and any use thereof, should
             not be disclosed separately but within the relevant sections of the solvency and financial condition report.

             On the specific elements proposed by CEIOPS for public disclosure, CEA would like make the following comments:

             Responsibilities and powers of the subsidiary’s and group supervisors (bullet point 1 of §116)
             The rights and duties of the different supervisory authorities including the division of specific tasks and responsibilities are defined by the proposed
             Solvency II Framework Directive and further clarified by the implementing measures. For this reason, there is no reason to require insurance groups to
             describe the responsibilities and powers of the subsidiary’s and group supervisors. Indeed, Article 252(2) (old Article 261(2)) provides the supervisory
             authorities to entrust additional tasks to the group supervisors provided that they this would not prejudice to any measure adopted pursuant to this
             Directive. If CEIOPS is of the opinion that the responsibilities and powers of the subsidiary’s and group supervisors as defined by the Framework Directive
             Proposal or the result of an agreement between the supervisory authorities need to be described and publically disclosed, CEA would suggest that the
             college of supervisors of each insurance group would be required to publically disclose such information rather than the insurance group.

             For any subsidiary, the percentage of group support amount in the total amount of capital eligible for group support in the group (bullet point 4 of §116)
             CEA disagrees which such a requirement, since the ‘total amount of capital eligible for group support’ is not a concept which is explicitly defined in the
             Framework Directive Proposal. Furthermore, we do not see the purpose of such a calculation. It does not provide any valuable information about the
             security of the subsidiary or the group. If CEIOPS believes this to be useful public information it should explain the use it has in mind.

             For any subsidiary, the percentage of group support used to cover the difference between the MCR and the SCR of that subsidiary (bullet point 6 of
             §116)
             CEA does not understand the added value of the public disclosure of such specific information. It would be useful if CEIOPS could explain what the added

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Name company: CEA
           value of this type of information would be for the public in addition to the information which is available anyway.

             Information disclosed during the period in accordance with para. 117. (bullet point 8 of §116)
             See comments below on § 117 & 121.

             CEA questions why the following information should be publically disclosed in reference to the group support regime as the type of information is not
             specifically related to the use of group support but is related to group supervision in general:

             •   The solo MCR and SCR of all the subsidiaries subject to the Group Support Regime (bullet point 3 of §116)

             •   Quantification of the group diversification effects, including a description of the method applied to distribute positive and negative effects among all
                 the undertakings of the group (bullet point 5 of §116);

             •   What stress and scenario testing has been undertaken; and (bullet point 7 of §116)



             Key issue
§ 117 &
121          CEIOPS advices that the provision of a new declaration of group support shall be immediately publicly disclosed

             Summary of comment:
             CEA recognizes that the existence of group support should be appropriately disclosed, but disagrees with the more rigorous requirements (in addition to
             specific aspect related to group support) proposed by CEIOPS in paragraphs 117 and 121 with regard to the timing of the public disclosure compared to
             the situation of no group support.

             In detail:

             CEIOPS advises that the provision of a new declaration of group support shall be immediately publicly disclosed
             CEIOPS explains in paragraph 117 (in subparagraph II, 2nd bullet point) the public disclosure procedure in case a stand-along undertaking or an subsidiary
             of a group which is not regulated by the group support regime but by normal group supervision does no longer cover the SCR.


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Name company: CEA
           Indeed, in accordance with Article 53, insurance undertakings are not obliged to disclose a non-compliance with the SCR immediately. As long as a viable
           recovery plan is delivered within 2 months and the non-compliance with the SCR has been resolved within 4 months, no public disclosure is required. In
           contrast, in case the group is regulated under the group support regime, CEIOPS advices in § 117 & 121 that insurance undertakings shall disclose,
           immediately after the provision of a new declaration, appropriate information on its delivery, nature and effects. CEA disagrees with applying more
           stringent public disclosure requirements – both in terms of timing and content of the information which needs to be disclosed - in case a new declaration
           of group support has been provided within an appropriate timeframe and in accordance with Article 238(2) (old Article 247(2)).

             First of all, the Framework Directive Proposal does provide a legal basis for applying more stringent public disclosure requirements in case of group
             support. Indeed, Article 241 (old Article 250) does not require an immediate disclosure of the existence or use of a declaration of group support, but
             requires that “[t]he existence of declarations of group support, and any use thereof, shall be publicly disclosed by both the parent undertaking and the
             subsidiary concerned”. Indeed, since Article 241 (old Article 250) does not define or require more stringent conditions, the disclosure requirements of
             Article 53 should apply mutatis mutandis.

             Secondly, CEIOPS concludes that the provision of a new declaration of group support is an “increase of the group support” provided by the parent to the
             subsidiary (Paragraph 117, subparagraph II, 4th bullet point) and therefore legitimates the requirement for an immediate public disclosure. This type of
             reasoning appears to be based on a distrust of the solidness of the group support regime. The parent undertaking will only be able to provide a new
             declaration of group support if a number of rigid conditions are met, including the requirement to have sufficient own funds to meet the group SCR. For
             this reason, the ability of the parent to provide a new declaration within an appropriate timeframe shall not be seen as a significant deterioration of the
             financial position of the subsidiary or the group, which would legitimate the need for such immediate public disclosure. Requiring insurance groups
             however to immediately publicly disclose the provision of a new declaration, while not applying an equal requirement for other type of instruments that
             could have restored the subsidiary’s SCR (like the provision of internal or external reinsurance) would gave a preconceived notion to market participants
             that use of group support should be considered as less a secure measure than other measures the group could use to restore compliance with a
             subsidiary’s SCR (i.e. injection of externally raised capital or risk mitigation measures). It would be difficult for market participants not to be prejudiced
             about the level of security and quality of the use of group support, since comparable information of the use of other instruments (including other forms of
             contingent capital) would not be available in the same detail and at the same time. In essence, CEIOPS advice for applying different disclosure
             requirements to the use of group support in comparison to other measures that could be used would create an unlevel playing field among those


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Name company: CEA
           insurance groups that use and do not use group support.

            CEIOPS advices that the transfer of own funds shall be immediately publicly disclosed
            In paragraph 117 CEIOPS also describes (in subparagraph III, 2nd bullet point) the public disclosure procedure in case a stand-alone undertaking or a
            subsidiary of a group which is not regulated by the group support regime but by normal group supervision does no longer cover the MCR.

            Indeed, in accordance with Article 53, insurance undertakings are not obliged to disclose a non-compliance with the MCR immediately. As long as a viable
            recovery plan is delivered within 1 month and the non-compliance with the MCR has been resolved within 2 months, no public disclosure is required. In
            contrast, in case the group is regulated under the group support regime, CEIOPS advices in § 117 & 121 that insurance undertakings shall disclose,
            immediately after the transfer of the funds, appropriate information on its delivery, nature and effects. The information should also include an explanation
            of the consequences in terms of the balance sheet as well as the required information with regard to the delivery of a new declaration of group support.
            CEA disagrees with applying more stringent public disclosure requirements – both in terms of timing and content of the information which needs to be
            disclosed - in case own funds have been transferred and a new declaration of group support has been provided within an appropriate timeframe and in
            accordance with Article 238(3) (old Article 247(3)).

            First of all, like in case of the provision of a new declaration of group support the Framework Directive Proposal does not provide a legal basis for applying
            more stringent public disclosure requirements in Article 241. Instead, the disclosure requirements of Article 53 should apply mutatis mutandis.

            Secondly, the group support regime allows a subsidiary to hold less own funds than required to cover the solo SCR, provided that it holds at least
            sufficient own funds to ensure compliance with the MCR and that the remaining part necessary to comply with the solo SCR is covered by group support.
            Due to the reduction of own funds held at subsidiary level, there is indeed a higher probability that an unforeseen loss event results in a non-compliance
            with the MCR. However, a subsidiary’s non-compliance with its MCR has a different meaning and therefore requires a different response under the group
            support regime. However, as also indicated in CEA’s comments to paragraph 3, it is a misconception that the higher the probability to not have enough
            own funds to cover the MCR leads to a higher probability for the insurance undertaking to become insolvent.

            If part of the SCR is covered by group support, a breach with a subsidiary’s MCR will in practice mean a non-compliance with one of the above mentioned
            conditions of the group support regime, namely that the subsidiary should hold at least sufficient own funds to cover the MCR. The difference is that one
            could argue that the MCR could still covered in such a situation, but by a combination of own funds and group support which is not allowed under the
            group support regime. As result, the protection of the subsidiary’s policyholders is secured at a higher level in case the MCR would be breached and group
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Name company: CEA
           support is available than without the availability of group support. In fact, the remaining level of own funds and group support by the subsidiary might
           only result in a small or even no breach of the solo SCR (in case more group support was provided than needed to cover the SCR).

             Furthermore, when the subsidiary or solo supervisor calls for the transfer of own funds in order to restore compliance with the MCR on the basis of a
             declaration of group support, the Solvency II Directive Proposal obliges the parent undertaking to promptly transfer own funds (up to the limit of the
             declaration). Indeed, under the group support regime the parent undertaking has a legal obligation to restore the MCR promptly by the transfer of own
             funds (up to the limit stemming from the most recent declaration of group support which has been put in place). As result, compliance with the MCR shall
             be restored within the appropriate timeframe and therefore insurance groups should not be penalised by requiring them to publically disclose the transfer
             of funds while they have been transferred within the appropriate timeframe and restored compliance with the MCR.

             Indeed, as a result there are no legitimate reasons for requiring insurance groups that use group support to immediately publically disclose a transfer of
             funds which has the purpose to increase own funds up to the level of the MCR, while stand-alone undertakings would not be required to publically
             disclose the non-compliance of an MCR immediately provided that a viable recovery plan is delivered within 1 month and the non-compliance with the
             MCR has been restored within 2 months.




                                                                                                                                                            Page 31 of 40
                                                                                                     Position Paper

Annex
For explanatory and discussion purposes only.

I.       Supervisory intervention to deal with a non-compliance of the solo MCR under the group support regime

Normal process in case of solo MCR (and SCR) non-compliance

The following chart illustrates the normal process in case a non-compliance with a subsidiary’s SCR and MCR is
observed.




Description of the process (articles refer to the new EC proposal):

     1. Subsidiary C informs the parent undertaking1 and local supervisor (solo supervisor C) that own funds and
        the group support received from the parent do not cover the solo SCR anymore and that own funds are
        also no longer sufficient to cover the solo MCR (Art. 238 (3)).

     2. The solo supervisor of subsidiary C informs immediately the group supervisor (Art. 240 (1)).

     3. The solo supervisor may call on the parent undertaking to transfer eligible owns funds to cover the MCR
        again and to provide a new declaration to cover the SCR (Art. 238 (3)).

     1
       Note that this is not an explicit requirement in the framework Directive, but should be a normal procedure considering that the
     subsidiary is the beneficiary of the commitment and the subsidiary is subject to the parent’s risk management and internal control
     procedures (which is an explicit condition within the Framework Directive to enter the group support regime).




                                                                                                                          Page 32 of 40
     4. The parent undertaking (a) transfers eligible own funds to cover the MCR again and (b) it applies for
        permission to provide a new declaration to cover the SCR.

     5. If the parent undertaking does not transfer eligible own funds, the group supervisor shall use all powers
        (Art. 240 (1)), including the withdrawal of authorisation (Art. 142), to ensure that the group provides the
        requested transfer as soon as is practicable.

     6. The group supervisor verifies whether the conditions laid down in Article 237 are met before accepting
        the new declaration (Art. 238 (4)).

     7. If the new declaration is accepted, the parent undertaking provides the new declaration to cover the solo
        SCR of subsidiary C.

Supervisory enforcement powers in case of solo MCR (and SCR) non-compliance

To ensure that the subsidiary requests the capital:

1. Allowance to use group support requires the subsidiary to be part of the integrated risk management and
   internal control of the parent. If permission has been granted by the group supervisor we would assume that
   the relevant risk management and internal control procedures are in place to ensure that the subsidiary acts
   adequately in case a non-compliance with the MCR requirements under group support.

2.    In case the subsidiary fails to do so, the solo supervisor shall be entitled to use its supervisory powers to
     ensure that the subsidiary triggers the transfer of own funds. Indeed, the solo supervisor is responsible for the
     monitoring and enforcement of the MCR.

3.   In addition, the Solvency II Directive Proposal provides solo supervisors with a possibility to request the parent
     undertaking directly to transfer own funds in case the subsidiary failed to trigger the declaration. This might
     be more efficient than using its supervisory powers over the subsidiary.

To ensure that the capital is transferred:

4. Where the parent undertaking does not rapidly transfer eligible own funds to the subsidiary, the group
   supervisor shall use all powers available, including the withdrawal of the parents licence, to ensure that the
   group provides the requested transfer as soon as is practicable”.


The above description is based on the fact that the subsidiary or parent responds as required under normal
conditions. What follows is a description of the process in case the subsidiary or the parent fails or neglects to act.
Four different situations can be distinguished in which supervisory intervention would be required. These four
situations can be subdivided in two categories: (I.) failure or negligence to act at the level of the respective
subsidiary and (II.) failure or negligence to act at the level of the parent undertaking. The specific rights and duties
of the local (solo) supervisor and group supervisor are described in each of these situations:

I.   Failure or negligence to act at the level of the respective subsidiary

     1. The subsidiary did not observe the non-compliance with the MCR and therefore failed to trigger the
        transfer of own funds.

     2. The subsidiary observed a non-compliance with the MCR, but neglected to trigger the transfer of own
        funds.




                                                                                                            Page 33 of 40
          In order to resolve the extreme situations referred to in case 1 and 2 above, the supervisory authority of
          the subsidiary, which is obliged to actively monitor the MCR, shall be entitled to use its normal
          supervisory powers to ensure that the subsidiary triggers the transfers of own funds. In addition, as
          indicated by Article 238(3) (old Article 247(3), the solo supervisor may call on the parent undertaking
          directly to transfer of funds to the extent necessary to ensure coverage of the MCR or up to the amount
          resulting from the most recent declaration accepted.
          In order to prevent this situation from happening, a number of rigid safeguards are included in the EC
          Solvency II Directive proposal. The internal risk management process and internal control mechanism
          should in this respect clarify the internal rules, procedures or processes that the group has put in place to
          validate the compliance of the subsidiary with its solo SCR and the internal and external reporting
          procedures for the non-compliance with the SCR on an ongoing basis. We would assume that this will be
          a particular point of attention, when the group supervisor in cooperation with the college of supervisors
          is assessing whether the conditions to enter the group support regime are sufficiently met. Indeed, while
          this needs to be further clarified by the development of implementation measures to Article 234 & 235
          (old Articles 243 & 244)) this appears to be in line with the fourth bullet point of paragraph 107, which
          indicates that supervisory authorities will verify whether the group’s policies and procedures around risk
          identification, risk assessment, risk monitoring, risk reporting and risk mitigation are integrated into the
          parent undertaking and subsidiary. In addition, Article 242 (old Article 251) requires the parent
          undertaking to ensure that the coverage of the relevant subsidiary in the risk management processes and
          internal control mechanism of the parent (Article 234(b); old Article 243(b)) shall be complied with on an
          on-going basis, or to restore compliance within an appropriate period of time, and requires the group
          supervisor to verify this on its own initiative at least once a year.
          Furthermore, we would assume that a subsidiary’s board of management, which fails to claim fulfilment
          of a receivable (group support) in a time of crisis, would not be deemed fit & proper by the solo
          supervisor.
          Indeed, the knowledge that the solo supervisor and group supervisor have sufficient powers to intervene
          in case the subsidiary or parent undertaking fails or neglect to act appropriately, are important incentives
          for both entities to ensure that the parent’s internal control mechanism and risk management procedures
          are in place and complied with. In general, these measures should provide the entities with sufficient
          time for an adequate and timely response to the deterioration of financial conditions of a subsidiary and
          as result prevent the need for supervisory intervention.

II.   Failure or negligence to act at the level of the parent undertaking

      1. The subsidiary has observed a non-compliance with the MCR and the parent undertaking has been
         requested to transfer own funds, but the parent fails or neglects to do so in a prompt manner, while it
         has sufficient available capital to transfer in order to fulfil the request.
         In order to resolve the extreme situation referred to in case 3, the Framework Directive Proposal points
         out in Article 240(1) (old Article 249(1)) that “Where the parent undertaking does not rapidly transfer
          eligible own funds to the subsidiary, the group supervisor shall use all powers available, including the
          power available under Article 142, to ensure that the group provides the requested transfer as soon as is
          practicable”.
          The knowledge that the group supervisor shall use these all measures in order to ensure that the parent
          transfer the own funds promptly, should provide sufficient incentives to the parent undertaking to
          prevent this situation from happening and provides another incentive to put appropriate internal risk
          management process and internal control mechanism in place.



                                                                                                           Page 34 of 40
      2. The subsidiary has observed a non-compliance with the MCR and the parent undertaking has been
         requested to transfer own funds, but the parent fails or neglect to do so in a prompt manner because it
         does not have sufficient transferable capital available to fulfil the request.
         In order to resolve the extreme situation referred to in case 4, the Framework Directive Proposal points
         out in Article 244 (old Article 2453) that “Where several requests to transfer eligible own funds are
         addressed to the parent undertaking and the group supervisor in accordance with Articles 238 or 239,
         and the group does not have sufficient eligible own funds to meet all of those together, the amounts
         resulting from the most recent declarations accepted shall be reduced where necessary.”
         To prevent this situation from happening, Article 243 (old 252) requires the parent undertaking to ensure
         that the original conditions for the acceptance of a declaration (as stated in Article 237(3); old Article
         246(3)) shall be complied with on an on-going basis, or to restore compliance within an appropriate
         period of time, and requires the group supervisor to verify this on its own initiative and at least once a
         year. Under normal conditions, as long as the conditions of Article 237(3) are complied (incl. coverage of
         the group SCR), the group should have sufficient capital available which it could transfer. The situation
         could only happen in the exceptional situation where at the same time several subsidiaries request a
         substantial amount of capital to be transferred and the total amount of capital requested exceeds
         available capital at group level. Indeed, as result, this situation would be in excess of the 99,5%
         confidence level.
Furthermore, by considering whether the group has economic ownership and control over the capital, the group
and the supervisory authorities will be able to assess whether the group is able to make use of those amounts in
practise in order to manage its capital position and meet its insurance obligations. CEA would expect the
consideration of the economic ownership and control over the capital should take place as part of the normal
group solvency assessment and not as part of a discussion about group support. Furthermore, in order to assess
the accessibility of the capital in different circumstances, the group needs to assess the period needed for the
capital to be transferred which depends on the type of capital, the location of capital, the capital transfer
mechanism used and the specific adverse circumstances the group could facing when the capital is required to be
transferred. For this reason, the group should perform regular scenario analyses to determine whether any capital
shortfalls arise in individual subsidiaries and/or whether the group support obligations would be called, and if so
how those shortfalls could be met in a timely manner.

II.   Supervisory intervention to deal with a non-compliance of the solo SCR under the group support regime


Considering the functioning of the group support regime on an on-going basis, the observation of non-
compliance with the solo SCR should normally result in a request to the parent undertaking to provide a new
declaration of group support (except if the cause of the problem is better solved by other measures, e.g. by risk
mitigation measures). As long as the parent is able to provide such a declaration of group support within an
appropriate timeframe (to be defined in Level 2 implementing measures), the solo supervisor should not require
the subsidiary to take other measures which would not be in line with the functioning of the group support
regime in which the parent undertaking has the possibility to provide a new declaration of group support.

Normal process in case of solo SCR non-compliance

The following chart illustrates the normal supervisory process in case a non-compliance with a subsidiary’s SCR is
observed.




                                                                                                        Page 35 of 40
Description of the process (Articles refer to latest EC proposal):

    1. Subsidiary B informs (a) the parent undertaking and (b) the local supervisor (solo supervisor B) that own
       funds and the group support received from the parent do not cover the solo SCR anymore (Art. 238 (2)),
       but that own funds are still sufficient to cover the solo MCR.

    2. The solo supervisor of subsidiary B informs the group supervisor immediately (Art. 240 (1)).

    3. The solo supervisor may call on the parent undertaking to provide a new declaration to cover the SCR
       (Art. 238 (2)).

    4. The parent undertaking applies for permission to provide a new declaration to cover the solo SCR
       (Art. 236).

    5. The group supervisor verifies whether the conditions laid down in Article 236(3) are met before accepting
       the new declaration (Art. 238 (4)).

    6. If the new declaration is accepted, the parent undertaking provides the new declaration to cover the solo
       SCR.



Where the parent undertaking does not provide the new declaration requested within an appropriate timeframe,
or where the new declaration is not accepted, the solo supervisor shall regain full responsibility again for setting
the solo SCR and ensure that it is adequately covered by own funds at subsidiary level. The parent shall, however,
not be released from the commitment resulting from the most recent declaration accepted.




                                                                                                        Page 36 of 40
Supervisory enforcement powers in case of solo SCR non-compliance

The above description is based on the fact that the subsidiary or parent responds as required under normal
conditions. What follows is a description of the process in case the subsidiary or the parent fails or neglects to act.
Five different situations can be distinguished in which supervisory intervention would be required. These five
situations can be subdivided in two categories: (I.) failure or negligence to act at the level of the respective
subsidiary and (II.) failure or negligence to act at the level of the parent undertaking. The specific rights and duties
of the local (solo) supervisor and group supervisor are described in each of these situations:

I.   Failure or negligence to act at the level of the respective subsidiary

     1. The subsidiary did not observe the non-compliance with the SCR and therefore failed to request a new
        declaration

     2. The subsidiary observed a non-compliance with the SCR, but neglected to request a new declaration

         In order to resolve the extreme situations referred to in case 1 and 2 above, the supervisory authority of
         the subsidiary shall be obliged to actively monitor the SCR and shall be entitled to use its supervisory
         powers, in agreement with the group supervisor, to ensure that the subsidiary requests a new
         declaration. In addition, as indicated by Article 238(2) (old Article 247(2), the solo supervisor may call on
         the parent undertaking to provide a new declaration which would bring the level of group support back
         to the amount necessary to ensure that the SCR is again fully covered.

         In order to prevent this situation from happening, a number of safeguards are included in the EC
         Solvency II Directive Proposal. The internal risk management process and internal control mechanism
         should in this respect clarify the internal rules, procedures or processes that the group has put in place to
         validate the compliance of the subsidiary with its solo SCR and the internal and external reporting
         procedures for the non-compliance with the SCR on an ongoing basis. We would assume that this will be
         a particular point of attention, when a group supervisor in cooperation with the college of supervisors is
         assessing whether the conditions to enter the group support regime are sufficiently met. Indeed, while
         this needs to be further clarified by the development of implementation measures to Article 234 & 235
         (old Articles 243 & 244)) this appears to be in line with the fourth bullet point of paragraph 107, which
         indicates that supervisory authorities will verify whether the group’s policies and procedures around risk
         identification, risk assessment, risk monitoring, risk reporting and risk mitigation are integrated into the
         parent undertaking and subsidiary. In addition, Article 242 (old Article 251) requires the parent
         undertaking to ensure that the coverage of the relevant subsidiary in the risk management processes and
         internal control mechanism of the parent (Article 234(b); old Article 243(b)) shall be complied with on an
         on-going basis, or to restore compliance within an appropriate period of time, and requires the group
         supervisor to verify this on its own initiative at least once a year.

         It is important to emphasise that unlike banks, insurers’ risks do not tend to crystallise in a matter of
         hours or days but rather over months or years. Nevertheless, it is possibly that the subsidiary, parent
         undertaking or the supervisory authorities expect that the financial situation of the subsidiary will
         deteriorate further. In case the subsidiary would not be regulated under the group support regime,
         Article 136(4) would allow the supervisory authority to restrict the free disposal of the assets of that
         undertaking. Indeed, due to the derogation to Article 136 in Article 238(1), the solo supervisor would not
         have such possibilities under the group support regime. However, in case the financial situation of the
         subsidiary is expected to deteriorate further we would assume that the subsidiary and the parent, if
         necessary on the specific request of the solo or group supervisor, would put in place a new declaration of



                                                                                                            Page 37 of 40
          group support that takes the further reduction of own funds into account or submits a viable recovery
          plan with other measures to be taken within 2 months to address the expected losses in the future.
          Indeed, in certain circumstances it might be more appropriate to put other measures in place (e.g. a
          capital injection or risk mitigation measures) than simply extending the commitment made by the parent
          in the new declaration of group support. Whilst the solo supervisor should not have a right to take
          unilateral action, the solo supervisor shall be entitled to require the subsidiary to take different measures
          in these specific circumstances provided that is done in coordination and agreement with the group
          supervisor.

          Indeed, the knowledge that solo supervisor and group supervisor have sufficient powers to intervene in
          case the subsidiary or parent undertaking fails or neglects to act appropriately, are important incentives
          for both entities to ensure that the parent’s internal control mechanism and risk management procedures
          are in place and complied with. In general, these measures should provide the entities with sufficient
          time for an adequate and timely response to the deterioration of financial conditions in a subsidiary and
          as a result prevent the need of supervisory intervention.

II.   Failure or negligence to act at the level of the parent undertaking

      1. The subsidiary has observed a non-compliance with the SCR and requested from the parent undertaking
         a new declaration of group support, but the parent does not provide a new declaration because it failed
         or neglected to do so in time.

          In order to prevent and resolve the extreme situation referred to in case 3, the draft Framework Directive
          Proposal points out in Article 238(4) (old Article 247(4)) that the SCR of the relevant subsidiary can no
          longer be covered by group support and that the solo supervisor regains full responsibility for setting the
          SCR of the subsidiary and ensuring that it is adequately met by own funds. As explained in CEA’s
          comments to paragraph 6, if the parent undertaking does not provide a new declaration or where the
          new declaration provided is not accepted the group regime ceases to apply for this specific subsidiary. As
          a consequence, the parent undertaking shall transfer the amount resulting from the commitment made
          in the most recent declaration that has been provided. Furthermore, the solo supervisor regains full
          responsibility for setting the SCR of the subsidiary and ensuring that it will be again adequately covered
          with own funds.

          The knowledge that failure or negligence to provide a new declaration is not without significant
          consequences (end of group support regime for relevant subsidiary) in terms of capital allocation and
          supervision of its subsidiary, provides an important incentive to the parent to provide a new declaration
          on time, if it would be able and willing to do so. Considering that these consequences would have been
          the reasons to include the subsidiary under the group support regime in the first place, it is quite unlikely
          that the parent would not provide a new declaration of group support as long as it is able to do so.

      2. The subsidiary has observed a non-compliance with the SCR and requested from the parent undertaking
         a new declaration of group support, and the parent provides a new declaration on time but the new
         declaration is not accepted by the group supervisor, because it has come to the conclusion that one of
         the conditions referred to in Article 237(3) (old 246(3)) are no longer complied with:

          a)   The group holds no longer eligible own funds to cover its consolidated group SCR

               In accordance with Article 243(2) (old Article 252(2)), the parent undertaking is required to present a
               viable plan to the group supervisor to restore compliance with group SCR within an appropriate



                                                                                                           Page 38 of 40
         period of time. As is made clear in Article 252 (paragraph 2 &3), in case the parent fails to present
         such a recovery plan on time, the group supervisor determines that the plan is insufficient or
         subsequently that it is not being implemented within the agreed period of time, the group supervisor
         shall conclude that the group support regime ceases to apply (for all subsidiaries subject to group
         support). In this situation the parent undertaking will be obliged to transfer own funds to the
         subsidiaries, up to the level of the most recent declaration accepted.

         Indeed, it might be the case that the request for the transfer of funds exceeds the available capital
         within the group. The Framework Directive Proposal points out in Article 244 (old Article 253) that
         “Where several requests to transfer eligible own funds are addressed to the parent undertaking and
         the group supervisor in accordance with Articles 238 or 239, and the group does not have sufficient
         eligible own funds to meet all of those together, the amounts resulting from the most recent
         declarations accepted shall be reduced where necessary”.
         To prevent this situation from happening, Article 243 (old 252) requires the parent undertaking to
         ensure that the original conditions for the acceptance of a declaration (as stated in Article 237(3); old
         Article 246(3)) shall be complied with on an on-going basis, or to restore compliance within an
         appropriate period of time, and requires the group supervisor to verify this on its own initiative and
         at least once a year. Under normal conditions, as long as the conditions of Article 237(3) are
         complied with (incl. coverage of the group SCR), the group should have sufficient capital available
         which it could transfer. Indeed, as a result of these requirements, the non-compliance with the group
         SCR would normally not be discovered at the moment a subsidiary requests a new declaration.

    b) The group supervisor has identified current or foreseeable material practical or legal impediments to
       the prompt transfer of funds

    c)   The document containing the declaration of group support does not meet all existing requirements
         under the law of the parent undertaking to be recognised as a legal commitment or because any
         recourse before a legal or administrative body might have a suspensive effect.

    In most cases, an existing declaration of group support would have been put in place which has met
    these conditions referred to in b and c (corresponding to subparagraphs b and c of Article 237(3); old
    246(3)). In case the parent has based the new declaration on the legal instrument of the existing
    declaration one and the existing one remains valid according the group supervisor, we would assume
    that the parent undertaking is allowed to solve the shortcomings of the new declaration within an
    appropriate timeframe.

3. The parent undertaking does not transfer the own funds it is required to provide, due to the failure or
   negligence to provide a new declaration of group support requested (point 3 above), or where the new
   declaration provided is not accepted (point 4 above).

    In order to resolve the extreme situation referred to in case 5, the Framework Directive Proposal points
    out in Article 240(1) (old Article 249(1)) that “Where the parent undertaking does not rapidly transfer
    eligible own funds to the subsidiary, the group supervisor shall use all powers available, including the
    power available under Article 142, to ensure that the group provides the requested transfer as soon as is
    practicable”.




                                                                                                      Page 39 of 40
        The knowledge that the group supervisor shall use these all measures (including the withdrawal of its
        licence) in order to ensure that the parent transfer the own funds promptly, should provide a sufficient
        incentive to the parent undertaking to prevent this specific situation from happening.




About CEA

The CEA is the European insurance and reinsurance federation. Through its 33 member bodies, the national
insurance associations, the CEA represents all types of insurance and reinsurance undertakings, e.g. pan-
European companies, monoliners, mutuals and SMEs. The CEA represents undertakings that account for
approximately 94% of total European premium income. Insurance makes a major contribution to Europe’s
economic growth and development. European insurers generate premium income of €1 065bn, employ over one
million people and invest more than €6 900bn in the economy.

www.cea.eu




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