August 26th, 2009

Solvency II – Summary of CEIOPS March Consultation Papers: Criteria for Approval of Ancillary Own Funds

Posted at 1:00 AM ET

Financial Intelligence Team
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Own funds are comprised of “basic own funds” and “ancillary own funds.” Ancillary own funds are only accepted as own funds under certain limited circumstances. Examples of ancillary own funds are unpaid common shares or letters of credit and guarantees.

According to the CEIOPS, the assessment of the amount of an ancillary own fund item requires supervisory judgment and cannot be created on a mechanical basis. The insurer determines the amount of ancillary own funds for which it seeks supervisory approval and is responsible for the method. The supervisory authority grants (or refuses) approval of the amount or method for a period of 12 months. However, the supervisor has the power to revise the amount when informed that the counterparty’s ability to pay has changed.

For the approval process, the supervisor should consider criteria related to:

  • The status of the counterparty, in relation to its ability (default risk, liquidity risk) and willingness to pay (nature of the counterparty and its involvement with the insurer).
  • The recoverability of the funds, taking into account the legal form of the item, as well as any conditions which would prevent the item from being successfully paid in or called up.
  • Any information on the outcome of past calls which the insurer has made for such ancillary own funds, to the extent that information can be reliably used to assess the expected outcome of future calls.

To enhance the application of the principles-based approach, an insurer should be required to publicly disclose, as part of Solvency II Pillar III, detailed information on ancillary own funds.

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Contributors:

  • Susan Witcraft, Managing Director
  • Frank Achtert, Managing Director
  • Iain Boyer, Managing Director
  • Michelle Harnick, Managing Director
  • Dave Lightfoot, Managing Director
  • Scott Lohman, Managing Director
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  • Eddy Vanbeneden, Managing Director
  • Jeff Bellmont, Senior Vice President
  • Gina Carlson, Senior Vice President
  • Debbie Griffin, Senior Vice President
  • David Flandro, Senior Vice President
  • Benoît Butel, Vice President
  • Sebastien Portmann, Vice President
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