Prudential Regulation Authority Rulebook

2.1

Where a firm owns a participation in an insurance or reinsurance undertaking, this will appear as an investment on the firm’s balance sheet. This will generally pose a risk to the firm as if the undertaking in which the participation is held suffers a loss, this will impact the participating firm’s balance sheet. This risk should be reflected in the solo SCR for the participating firm.

2.2

When considering how to reflect this risk in an internal model, firms may consider it appropriate to examine the characteristics of the assets and liabilities of the undertaking in which the participation is held and the risks arising from these. Firms may also consider the extent to which the risks of the assets and liabilities of the participant might diversify with the assets and liabilities of the participation.

2.3

Firms should also consider the risks posed by any obstacles to covering losses with resources currently held in the form of a participation in related undertakings. These obstacles might arise from any barriers to moving resources between entities, taking into account reduced scope for diversification under extreme scenarios.

2.4

As well as requiring that internal models should take account of all material risks, the Solvency II Regulations require that the assumptions underlying the system used for measuring diversification effects should be justified on an empirical basis. Firms will therefore need to demonstrate that any allowance for inter-entity diversification in the calculation of the solo SCR appropriately takes account of restrictions on transferring resources between the participant and the participation.

2.5

Firms’ attention is drawn to the draft European Insurance and Occupational Pensions Authority (EIOPA) Guidelines which state that the calculation of the solo SCR should not be replaced with a consolidated calculation as though the participating undertaking and its related undertaking were a Solvency II group.³