Commission Delegated Regulation (EU) 2019/981 of 8 March 2019 amending Delegated Regulation (EU) 2015/35 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II) (Text with EEA relevance.)

‘6 Where an insurance or reinsurance contract can be unbundled into two parts and where one of those parts meets the requirements set out in points (a), (b) and (c) of paragraph 5, any obligations that do not relate to the premiums of that part and which have already been paid do not belong to the contract.’;

1 The rates of the basic risk-free interest rate term structure shall meet all of the following criteria: (a) insurance and reinsurance undertakings are able to earn the rates in a risk-free manner in practice; (b) the rates are reliably determined based on financial instruments traded in a deep, liquid and transparent financial market. The rates of the relevant risk-free interest rate term structure shall be calculated separately for each currency and maturity, based on all information and data relevant for that currency and that maturity.

2 The techniques, data specifications and parameters used for determining the technical information on the relevant risk-free interest rate term structure referred to in Article 77e(1) of Directive 2009/138/EC, including the ultimate forward rate, the last maturity for which the relevant risk-free interest rate term structure is not being extrapolated and the duration of its convergence towards the ultimate forward rate, shall be transparent, prudent, reliable, objective and consistent over time.

3 EIOPA shall inform the Commission of any substantial change in the data used for determining the technical information on the relevant risk-free interest term structure. A substantial change shall mean any change which renders the techniques, data specifications or parameters invalid, including the ultimate forward rate, the last maturity for which the basic risk-free interest rate term structure is not being extrapolated and the duration of its convergence towards the ultimate forward rate.

4 In the event of a substantial change in the data as referred to in paragraph 3, EIOPA may submit to the Commission a proposal containing such modifications to the techniques, data specifications or parameters as are needed to address the invalidity and are proportionate to the substantial change in question. That proposal shall be accompanied by an assessment of the appropriateness and impact of those proposed modifications.

5 A technique, data specification or parameter, including the ultimate forward rate, the last maturity for which the basic risk-free interest rate term structure is not being extrapolated and the duration of its convergence towards the ultimate forward rate, shall be modified by EIOPA at the request of the Commission to ensure that the rates of the relevant risk-free interest rate term structure are determined in a transparent, prudent, reliable and objective manner that is consistent over time.’;

For the purposes of point (a) of Article 118(1), where Article 88 is complied with, insurance and reinsurance undertakings may determine the insurance policies for which discontinuance would result in an increase of technical provisions without the risk margin on the basis of groups of policies, provided that the grouping complies with the requirements laid down in points (a), (b) and (c) of Article 35.

1 Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the sum insured for windstorm risk referred to in point (b) of paragraph 6, and in paragraph 7, of Article 121 on the basis of groups of risk zones. Each of the risk zones within a group shall be situated within one and the same particular region set out in Annex V. Where the sum insured for windstorm risk referred to in point (b) of Article 121(6) is calculated on the basis of a group of risk zones, the risk weight for windstorm risk referred to in point (a) of Article 121(6) shall be the risk weight for windstorm risk in the risk zone within that group with the highest risk weight for windstorm risk set out in Annex X.

2 Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the sum insured for earthquake risk referred to in point (b) of paragraph 3, and in paragraph 4, of Article 122 on the basis of groups of risk zones. Each of the risk zones within a group shall be situated within one and the same particular region set out in Annex VI. Where the sum insured for earthquake risk referred to in point (b) of Article 122(3) is calculated on the basis of a group of risk zones, the risk weight for earthquake risk referred to in point (a) of Article 122(3) shall be the risk weight for earthquake risk in the risk zone within that group with the highest risk weight for earthquake risk as set out in Annex X.

3 Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the sum insured for flood risk referred to in point (b) of paragraph 6, and in paragraph 7, of Article 123 on the basis of groups of risk zones. Each of the risk zones within a group shall be situated within one and the same particular region set out in Annex VII. Where the sum insured for flood risk referred to in point (b) of Article 123(6) is calculated on the basis of a group of risk zones, the risk weight for flood risk referred to in point (a) of Article 123(6) shall be the risk weight for flood risk in the risk zone within that group with the highest risk weight for flood risk as set out in Annex X.

4 Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the sum insured for hail risk referred to in point (b) of paragraph 6, and in paragraph 7, of Article 124 on the basis of groups of risk zones. Each of the risk zones within a group shall be situated within one and the same particular region set out in Annex VIII. Where the sum insured for hail risk referred to in point (b) of Article 124(6) is calculated on the basis of a group of risk zones, the risk weight for hail risk referred to in point (a) of Article 124(6) shall be the risk weight for hail risk in the risk zone within that group with the highest risk weight for hail risk as set out in Annex X.

5 Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the weighted sum insured for subsidence risk referred to in Article 125(2) on the basis of groups of risk zones. Where the weighted sum insured referred to in Article 125(2) is calculated on the basis of a group of risk zones, the risk weight for subsidence risk referred to in point (a) of Article 125(2) shall be the risk weight for subsidence risk in the risk zone within that group with the highest risk weight for subsidence risk as set out in Annex X.

1 Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the capital requirement for fire risk referred to in Article 132(1) as follows: SCRfire = max(SCRfirei; SCRfirec; SCRfirer) where: a) SCRfirei denotes the largest industrial fire risk concentration; b) SCRfirec denotes the largest commercial fire risk concentration; c) SCRfirer denotes the largest residential fire risk concentration.

2 The largest industrial fire risk concentration of an insurance or reinsurance undertaking shall be equal to the following: SCRfirei = max(E1,i; E2,i; E3,i; E4,i; E5,i) where Ek,i denotes the total exposure within the perimeter of the k-th largest industrial fire risk exposure.

3 The largest commercial fire risk concentration of an insurance or reinsurance undertaking shall be equal to the following: SCRfirec = max(E1,c; E2,c; E3,c; E4,c; E5,c) where Ek,c denotes the total exposure within the perimeter of the k-th largest commercial fire risk exposure.

4 The largest residential fire risk concentration of an insurance or reinsurance undertaking shall be equal to the following: SCRfirer = max(E1,r; E2,r; E3,r; E4,r; E5,r; θ) where: (a) Ek,r denotes the total exposure within the perimeter of the k-th largest residential fire risk exposure; (b) θ denotes the market share based residential fire risk exposure.

5 For the purpose of paragraphs 2, 3 and 4, the total exposure within the perimeter of the k-th largest industrial, commercial or residential fire risk exposure of an insurance or reinsurance undertaking is the sum insured by the insurance or reinsurance undertaking with respect to a set of buildings that meets all of the following conditions: (a) in relation to each building, the insurance or reinsurance undertaking has obligations in lines of business 7 and 19 set out in Annex I which cover damage due to fire or explosion, including as a result of terrorist attacks; (b) each building is partly or fully located within a radius of 200 meters around the industrial, commercial or residential building with the k-th largest sum insured after deduction of the amounts recoverable from reinsurance contracts and special purpose vehicles. For the purposes of determining the sum insured with respect to a building, insurance and reinsurance undertakings shall take into account all reinsurance contracts and special purpose vehicles that would pay out in case of insurance claims related to that building. Reinsurance contracts and special purpose vehicles that are subject to conditions not related to that building shall not be taken into account.

6 The market share based residential fire risk exposure shall be equal to the following: θ = SIav · 500 · max(0,05; maxc(marketSharec)) where: (a) SIav is the average sum insured by the insurance or reinsurance undertaking with respect to residential property; (b) c denotes all countries where the insurance or reinsurance undertaking has obligations in lines of business 7 and 19 set out in Annex I covering residential property; (c) marketSharec is the market share of the insurance or reinsurance undertaking in country c related to obligations in those lines of business covering residential property.’;

Where Article 88 is complied with, insurance and reinsurance undertakings may calculate each of the following capital requirements on the basis of groups of policies, provided that the grouping complies with the requirements laid down in points (a), (b) and (c) of Article 35: (a) the capital requirement for the risk of a permanent increase in lapse rates referred to in Article 142(2); (b) the capital requirement for the risk of a permanent decrease in lapse rates referred to in Article 142(3); (c) the capital requirement for mass lapse risk referred to in Article 142(6).’;

For the purposes of point (a) of Article 150(1), where Article 88 is complied with, insurance and reinsurance undertakings may determine the insurance policies for which discontinuance would result in an increase of technical provisions without the risk margin on the basis of groups of policies, provided that the grouping complies with the requirements laid down in points (a), (b) and (c) of Article 35.’;

Where Article 88 is complied with, insurance and reinsurance undertakings may calculate each of the following capital requirements on the basis of groups of policies, provided that the grouping complies with the requirements laid down in points (a), (b) and (c) of Article 35: (a) the capital requirement for the risk of a permanent increase in SLT health lapse rates referred to in Article 159(2); (b) the capital requirement for the risk of a permanent decrease in SLT health lapse rates referred to in Article 159(3); (c) the capital requirement for SLT health mass lapse risk referred to in Article 159(6).’;

Where Article 88 is complied with, insurance and reinsurance undertakings may assign a bond other than those to be included in the calculations under paragraphs (2) to (16) of Article 180 a risk factor stressi equivalent to credit quality step 3 for the purposes of Articles 176(3) and assign the bond to credit quality step 3 for the purpose of calculating the weighted average credit quality step in accordance with 182(4), provided that all of the following conditions are met: (a) credit assessments from a nominated ECAI are available for at least 80 % of the total value of the bonds other than those to be included in the calculations under paragraphs (2) to (16) of Article 180; (b) a credit assessment by a nominated ECAI is not available for the bond in question; (c) the bond in question provides a fixed redemption payment on or before the date of maturity, in addition to regular fixed or floating rate interest payments; (d) the bond in question is not a structured note or collateralised security as referred to in Annex VI to Commission Implementing Regulation (EU) 2015/2450 ; (e) the bond in question does not cover liabilities that provide profit participation arrangements, nor does it cover unit-linked or index-linked liabilities, nor liabilities where a matching adjustment is applied.

Where Article 88 is complied with, insurance and reinsurance undertakings may calculate the loss-given-default set out in Article 192, including the risk-mitigating effect on underwriting and market risks and the risk-adjusted value of collateral, for a group of single name exposures. In that case, the group of single name exposures shall be assigned the highest probability of default assigned to single name exposures included in the group in accordance with Article 199.’;

For the purposes of Article 196, where Article 88 is complied with and the reinsurance arrangement, securitisation or derivative covers obligations from only one of the segments (segment s) set out in Annex II or, as applicable, Annex XIV, insurance and reinsurance undertakings may calculate the risk-mitigating effect of that reinsurance arrangement, securitisation or derivative on their underwriting risk as follows: SCRhypCATSCRwithoutCAT23σsPhypsPwithoutsRecoverables21,5σsPhypsPwithoutsRecoverablesSCRhypCATSCRwithoutCAT where: a) SCRCAThyp denotes the hypothetical capital requirement for the non-life catastrophe underwriting risk module referred to in Article 119(2), or, as applicable, the hypothetical capital requirement for the health catastrophe risk sub-module referred to in Article 160, that would apply if the reinsurance arrangement, securitisation or derivative did not exist; b) SCRCATwithout denotes the capital requirement for the non-life catastrophe underwriting risk module referred to in Article 119(2) or, as applicable, the capital requirement for the health catastrophe risk sub-module referred to in Article 160; c) σs denotes the standard deviation for non-life premium risk of segment s determined in accordance with Article 117(3) or, as applicable, the standard deviation for the NSLT health premium risk of segment s determined in accordance with Article 148(3); d) Pshyp denotes the hypothetical volume measure for premium risk of segment s determined in accordance with Article 116(3) or (4), or, as applicable, Article 147(3) or (4), that would apply if the reinsurance arrangement, securitisation or derivative did not exist; e) Pswithout denotes the volume measure for premium risk of segment s determined in accordance with Article 116(3) or (4) or, as applicable, Article 147(3) or (4); f) Recoverables denotes the best estimate of amounts recoverable from the reinsurance arrangement, securitisation or derivative and the corresponding debtors.’;

Where Article 88 is complied with, insurance or reinsurance undertakings may calculate the loss-given-default on a reinsurance arrangement or insurance securitisation referred to in the first subparagraph of Article 192(2) as follows: LGD = max[90 % · (Recoverables + 50 % · RMre) – F · Collateral; 0] where: a) Recoverables denotes the best estimate of amounts recoverable from the reinsurance arrangement or insurance securitisation and the corresponding debtors; b) RMre denotes the risk mitigating effect on underwriting risk of the reinsurance arrangement or securitisation; c) Collateral denotes the risk-adjusted value of collateral in relation to the reinsurance arrangement or securitisation; d) F denotes a factor to take into account the economic effect of the collateral arrangement in relation to the reinsurance arrangement or securitisation in case of any credit event related to the counterparty.

Where Article 88 is complied with and the standard deviation of the loss distribution of type 1 exposures, as determined in accordance with Article 200(4), is lower than or equal to 20 % of the total losses-given default on all type 1 exposures, insurance and reinsurance undertakings may calculate the capital requirement for counterparty default risk referred to in Article 200(1) as follows: SCRdef,1 = 5 · σ where σ denotes the standard deviation of the loss distribution of type 1 exposures as determined in accordance with Article 200(4).’;

1 The capital requirement for marine risk shall be equal to the following: SCRmarineSCR2vesselSCR2platform where: a) SCRvessel is the capital requirement for the risk of a vessel collision; b) SCRplatform is the capital requirement for the risk of a platform explosion.

2 The capital requirement for the risk of a vessel collision shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous loss of an amount equal to the following: Lvessel = maxv(SI(hull,v) + SI(liab,v)+ SI(pollution,v)) where: (a) the maximum relates to all sea, lake, river and canal vessels insured by the insurance or reinsurance undertaking in respect of vessel collision in lines of business 6, 18 and 27 set out in Annex I where the insured value of the vessel is at least EUR 250000; (b) SI(hull,v) is the sum insured by the insurance or reinsurance undertaking, after deduction of the amounts that the insurance or reinsurance undertaking can recover from reinsurance contracts and special purpose vehicles, for marine hull insurance and reinsurance in relation to vessel v; (c) SI(liab,v) is the sum insured by the insurance or reinsurance undertaking, after deduction of the amounts that the insurance or reinsurance undertaking can recover from reinsurance contracts and special purpose vehicles, for marine liability insurance and reinsurance in relation to vessel v; (d) SI(pollution,v) is the sum insured by the insurance or reinsurance undertaking, after deduction of the amounts that the insurance or reinsurance undertaking can recover from reinsurance contracts and special purpose vehicles, for oil pollution insurance and reinsurance in relation to vessel v. For the purposes of determining SI(hull,v), SI(liab,v) and SI(pollution,v), insurance and reinsurance undertakings shall only take into account reinsurance contracts and special purpose vehicles that would pay out in the event of insurance claims related to vessel v. Reinsurance contracts and special purpose vehicles where payout is dependent on insurance claims not related to vessel v shall not be taken into account. Where the deduction of amounts recoverable would lead to a capital requirement for the risk of a vessel collision that captures insufficiently the risk of a vessel collision that the insurance or reinsurance undertaking is exposed to, the insurance or reinsurance undertaking shall calculate SI(hull,v), SI(liab,v) or SI(pollution,v) without deduction of amounts recoverable.

3 The capital requirement for the risk of a platform explosion shall be equal to the loss in basic own funds of insurance and reinsurance undertakings that would result from an instantaneous loss of an amount equal to the following: Lplatform = maxp(SIp) where: (a) the maximum relates to all oil and gas offshore platforms insured by the insurance or reinsurance undertaking in respect of platform explosion in lines of business 6, 18 and 27 set out in Annex I; (b) SIp is the accumulated sum insured by the insurance or reinsurance undertaking, after deduction of the amounts that the insurance or reinsurance undertaking can recover from reinsurance contracts and special purpose vehicles, for the following insurance and reinsurance obligations in relation to platform p: (i) obligations to compensate for property damage; (ii) obligations to compensate for the expenses for the removal of wreckage; (iii) obligations to compensate for loss of production income; (iv) obligations to compensate for the expenses for capping of the well or making the well secure; (v) liability insurance and reinsurance obligations. For the purposes of determining SIp, insurance and reinsurance undertakings shall only take into account reinsurance contracts and special purpose vehicles that would pay out in the event of insurance claims related to platform p. Reinsurance contracts and special purpose vehicles where payout is dependent on insurance claims that are not related to platform p shall not be taken into account. Where the deduction of amounts recoverable would lead to a capital requirement for the risk of a platform explosion that captures insufficiently the risk of a platform explosion that the insurance or reinsurance undertaking is exposed to, the insurance or reinsurance undertaking shall calculate SIp without the deduction of amounts recoverable.’;

1 For the purposes of point (e) of Article 168(6), a qualifying unlisted equity portfolio is a set of equity investments that meets all of the following requirements: (a) the set of investments consists solely of investments in the ordinary shares of companies; (b) the ordinary shares of each of the companies concerned are not listed in any regulated market; (c) each company has its head office in a country which is a member of the EEA; (d) more than 50 % of the annual revenue of each company is denominated in currencies of countries which are members of the EEA or the OECD; (e) more than 50 % of the staff employed by each company have their principal place of work in countries which are members of the EEA; (f) each company fulfils at least one of the following conditions for each of the last three financial years ending prior to the date on which the Solvency Capital Requirement is being calculated: (i) the annual turnover of the company exceeds EUR 10000000; (ii) the balance sheet total of the company exceeds EUR 10000000; (iii) the number of staff employed by the company exceeds 50; (g) the value of the investment in each company represents no more than 10 % of the total value of the set of investments; (h) none of the companies is an insurance or reinsurance undertaking, a credit institution, an investment firm, a financial institution, an alternative investment fund manager, a UCITS management company, an institution for occupational retirement provision or a non-regulated undertaking carrying out financial activities; (i) the beta of the set of investments does not exceed 0,796.

2 For the purposes of paragraph 1(i), the beta of a set of investments is the average of the betas for each of the investments in that set of investments, weighted by the book values of those investments. The beta of an investment in a company shall be determined as follows: β0,94780,0034GM0,0139DebtCFO0,0015ROCE where: (a) β is the beta of the equity investment in the company; (b) GM is the average gross margin for the company over the last five financial years ending prior to the date on which the Solvency Capital Requirement is being calculated; (c) Debt is the total debt of the company at the end of the most recent financial year for which figures are available; (d) CFO is the average net cash-flow for the company from operations over the last five financial years ending prior to the date on which the Solvency Capital Requirement is being calculated; (e) ROCE is the average return on common equity for the company over the last five financial years ending prior to the date on which the Solvency Capital Requirement is being calculated. Common equity shall be understood as capital and reserves as referred to in Annex III to Directive 2013/34/EU of the European Parliament and of the Council excluding preference shares and the related share premium account.

1 The capital requirement for type 1 equities referred to in Article 168 of this Regulation shall be equal to the loss in the basic own funds that would result from the following instantaneous decreases: (a) an instantaneous decrease equal to 22 % in the value of type 1 equity investments in related undertakings within the meaning of Article 212(1)(b) and 212(2) of Directive 2009/138/EC where these investments are of a strategic nature; (b) an instantaneous decrease equal to 22 % in the value of type 1 equity investments that are treated as long-term equity investments in accordance with Article 171a; (c) an instantaneous decrease equal to the sum of 39 % and the symmetric adjustment as referred to in Article 172 of this Regulation, in the value of type 1 equities other than those referred to in points (a) and (b).

2 The capital requirement for type 2 equities referred to in Article 168 of this Regulation shall be equal to the loss in the basic own funds that would result from the following instantaneous decreases: (a) an instantaneous decrease equal to 22 % in the value of type 2 equity investments in related undertakings within the meaning of Article 212(1)(b) and 212(2) of Directive 2009/138/EC where these investments are of a strategic nature; (b) an instantaneous decrease equal to 22 % in the value of type 2 equity investments that are treated as long-term equity investments in accordance with Article 171a; (c) an instantaneous decrease equal to the sum of 49 % and the symmetric adjustment as referred to in Article 172 of this Regulation, in the value of type 2 equities other than those referred to in points (a) and (b).

3 The capital requirement for qualifying infrastructure equities referred to in Article 168 of this Regulation shall be equal to the loss in the basic own funds that would result from the following instantaneous decreases: (a) an instantaneous decrease equal to 22 % in the value of qualifying infrastructure equity investments in related undertakings within the meaning of point (b) of Article 212(1) and Article 212(2) of Directive 2009/138/EC, where those investments are of a strategic nature; (b) an instantaneous decrease equal to 22 % in the value of qualifying infrastructure equity investments that are treated as long-term equity investments in accordance with Article 171a; (c) an instantaneous decrease equal to the sum of 30 % and 77 % of the symmetric adjustment as referred to in Article 172 of this Regulation, in the value of qualifying infrastructure equity investments other than those referred to in points (a) and (b).

4 The capital requirement for qualifying infrastructure corporate equities referred to in Article 168 of this Regulation shall be equal to the loss in the basic own funds that would result from the following instantaneous decreases: (a) an instantaneous decrease equal to 22 % in the value of qualifying infrastructure corporate equity investments in related undertakings within the meaning of point (b) of Article 212(1) and Article 212(2) of Directive 2009/138/EC where those investments are of a strategic nature; (b) an instantaneous decrease equal to 22 % in the value of qualifying infrastructure corporate equity investments that are treated as long-term equity investments in accordance with Article 171a; (c) an instantaneous decrease equal to the sum of 36 % and 92 % of the symmetric adjustment as referred to in Article 172 of this Regulation, in the value of qualifying infrastructure corporate equities other than those referred to in points (a) and (b).’;

1 For the purpose of this Regulation, a sub-set of equity investments may be treated as long-term equity investments if the insurance or reinsurance undertaking demonstrates, to the satisfaction of the supervisory authority, that all of the following conditions are met: (a) the sub-set of equity investments as well as the holding period of each equity investment within the sub-set are clearly identified; (b) the sub-set of equity investment is included within a portfolio of assets which is assigned to cover the best estimate of a portfolio of insurance or reinsurance obligations corresponding to one or several clearly identified businesses, and the undertaking maintains that assignment over the lifetime of the obligations; (c) the portfolio of insurance or reinsurance obligations, and the assigned portfolio of assets referred to in point (b) are identified, managed and organised separately from the other activities of the undertaking, and the assigned portfolio of assets cannot be used to cover losses arising from other activities of the undertaking; (d) the technical provisions within the portfolio of insurance or reinsurance obligations referred to in point (b) only represent a part of the total technical provisions of the insurance or reinsurance undertaking; (e) the average holding period of equity investments in the sub-set exceeds 5 years, or where the average holding period of the sub-set is lower than 5 years, the insurance or reinsurance undertaking does not sell any equity investments within the sub-set until the average holding period exceeds 5 years; (f) the sub-set of equity investments consists only of equities that are listed in the EEA or of unlisted equities of companies that have their head offices in countries that are members of the EEA; (g) the solvency and liquidity position of the insurance or reinsurance undertaking, as well as its strategies, processes and reporting procedures with respect to asset-liability management, are such as to ensure, on an ongoing basis and under stressed conditions, that it is able to avoid forced sales of each equity investments within the sub-set for at least 10 years; (h) the risk management, asset-liability management and investment policies of the insurance or reinsurance undertaking reflects the undertaking's intention to hold the sub-set of equity investments for a period that is compatible with the requirement of point (e) and its ability to meet the requirement of point (g).

2 Where equities are held within collective investment undertakings or within alternative investment funds referred to in points (a) to (d) of Article 168(6), the conditions set out in paragraph 1 of this Article may be assessed at the level of the funds and not of the underlying assets held within those funds.

3 Insurance or reinsurance undertakings that treat a sub-set of equity investments as long-term equity investments in accordance with paragraph 1 shall not revert back to an approach that does not include long-term equity investments. Where an insurance or reinsurance undertaking that treats a sub-set of equity investments as long-term equity investments is no longer able to comply with the conditions set out in paragraph 1, it shall immediately inform the supervisory authority and shall cease to apply Article 169(1)(b), (2)(b), (3)(b) and (4)(b) to any of its equity investments for a period of 36 months.’;

1 A bond or loan for which a credit assessment by a nominated ECAI is not available and for which debtors have not posted collateral that meets the criteria set out in Article 214 may be assigned to credit quality step 2 if all of the criteria set out in paragraphs 3 and 4 are met with respect to the bond or loan.

2 A bond or loan for which a credit assessment by a nominated ECAI is not available and for which debtors have not posted collateral that meets the criteria set out in Article 214, other than a bond or loan assigned to credit quality step 2 under paragraph 1, may be assigned to credit quality step 3 if all of the criteria set out in paragraphs 3 and 5 are met with respect to the bond or loan.

3 The criteria in this paragraph are as follows: a) the insurance or reinsurance undertaking's own internal credit assessment of the bond or loan meets the requirements listed in Article 176b; b) the bond or loan is issued by a company which does not belong to the same corporate group as the insurance or reinsurance undertaking; c) the bond or loan is not issued by a company which is an insurance or reinsurance undertaking, an infrastructure entity, a credit institution, an investment firm, a financial institution, an AIFM, a UCITS investment management company, an institution for occupational retirement provision or a non-regulated undertaking carrying out financial activities; d) no claims on the issuing company of the bond or loan rank senior to the bond or loan, except for the following claims: (i) statutory claims and claims from liquidity facility providers provided that those statutory claims and claims from liquidity facility providers are in aggregate not material relative to the overall senior debt of the issuing company; (ii) claims from trustees; (iii) claims from derivatives counterparties; e) the bond or loan provides a fixed redemption payment on or before the date of maturity, in addition to regular fixed or floating rate interest payments; f) the contractual terms and conditions of the bond or loan provide for the following: (i) the borrower is obliged to provide audited financial data to the lender at least annually; (ii) the borrower is obliged to notify the lender of any events that could materially affect the credit risk of the bond or loan; (iii) the borrower is not entitled to change the terms and conditions of the bond or loan unilaterally, nor to make other changes to its business that would materially affect the credit risk of the bond or loan; (iv) the issuer is prohibited from issuing new debt without the prior agreement of the insurance or reinsurance undertaking; (v) what constitutes a default event is defined in a way that is specific to the issue and the issuer; (vi) what is to happen on a change of control; g) the bond or loan is issued by a company that meets all of the following criteria: (i) the company is a limited liability company; (ii) the company has its head office in a country which is a member of the EEA; (iii) more than 50 % of the annual revenue of the company is denominated in currencies of countries which are members of the EEA or the OECD; (iv) the company has operated without any credit event over at least the last 10 years; (v) at least one of the following conditions is fulfilled with respect to each of the last three financial years ending prior to the date on which the Solvency Capital Requirement is being calculated: the annual turnover of the company exceeds EUR 10000000; the balance sheet total of the company exceeds EUR 10000000; the number of staff employed by the company exceeds 50; (vi) the sum of the company's annual earnings before interest, tax, depreciation and amortisation (“EBITDA”) over the last five financial years is larger than 0; (vii) the total debt of the company at the end of the most recent financial year for which figures are available is no higher than 6,5 times the average of the company's annual free cash flows over the last five financial years; (viii) the average of the company's EBITDA over the last five financial years is no lower than 6,5 times the company's interest expense for the most recent financial year for which figures are available; (ix) the net debt of the company at the end of the most recent financial year for which figures are available is no higher than 1,5 times the company's total equity at the end of that financial year.

4 The yield on the bond or loan, and the yield on any bonds and loans with similar contractual terms and conditions issued by the same company in the previous three financial years, is no higher than the higher of the following values: a) the average of the yields on the two indices determined in accordance with paragraph 6; b) the sum of 0,5 % and the yield on the index that meets the requirement in point (d) of that paragraph.

5 The yield on the bond or loan, and the yield on bonds and loans with similar contractual terms and conditions issued by the same company in the previous three financial years, is no higher than the higher of the following values: a) the average of the yields on the two indices determined in accordance with paragraph 7; b) the sum of 0,5 % and the yield on the index that meets the requirement in point (b) of that paragraph.

6 For the purposes of paragraph 4, the insurance or reinsurance undertaking shall determine, for the bond or loan referred to in paragraph 1, the yield, as at the time of issuance of that bond or loan, on two indices that meet all of the following requirements: a) both indices are broad indexes of traded bonds for which an external credit assessment is available; b) the constituent traded bonds in the two indices are denominated in the same currency as the bond or loan; c) the constituent traded bonds in the two indices have a similar maturity date as the bond or loan; d) one of the two indices consists of traded bonds of credit quality step 2; e) one of the two indices consists of traded bonds of credit quality step 4.

7 For the purposes of paragraph 5, the insurance or reinsurance undertaking shall determine, for the bond or loan referred to in paragraph 2, the yield, as at the time of issuance of that bond or loan, on two indices that meet all of the following requirements: a) both indices meet the requirements set out in points (a), (b) and (c) of paragraph 6; b) one of the two indices consists of traded bonds of credit quality step 3; c) one of the two indices consists of traded bonds of credit quality step 4.

8 For the purposes of paragraph 4, where the bond or loan referred to in paragraph 1 has features, other than those related to credit risk or illiquidity, which materially differ from the features of the constituent traded bonds in the two indices determined in accordance with paragraph 6, the insurance or reinsurance undertaking shall adjust the yield on the bond or loan to reflect those differences.

9 For the purposes of paragraph 5, where the bond or loan referred to in paragraph 2 has features, other than those related to credit risk or illiquidity, which materially differ from the features of the constituent traded bonds in the two indices determined in accordance with paragraph 7, the insurance or reinsurance undertaking shall adjust the yield on the bond or loan to reflect those differences.

The requirements to be met for the purposes of point (a) of Article 176a(3) by an insurance or reinsurance undertaking's own internal credit assessment of a bond or loan shall be as follows: (b) the bond or loan is allocated a credit quality step on the basis of the own internal credit assessment; (c) the insurance or reinsurance undertaking is able to demonstrate to the supervisory authority's satisfaction that the own internal credit assessment, and the allocation of a credit quality step to the bond or loan on the basis of that assessment, are reliable and properly reflect the spread risk of the bond or loan contained in the sub-module specified in point (d) of the second subparagraph of Article 105(5) of Directive 2009/138/EC; (d) the own internal credit assessment takes into account all factors which could have a material effect on the credit risk associated with the bond or loan, including the following factors: (i) the competitive position of the issuer; (ii) the quality of the issuer's management; (iii) the financial policies of the issuer; (iv) country risk; (v) the effect of any covenants that are in place; (vi) the issuer's financial performance history, including the number of years that it has been operating; (vii) the issuer's size and the level of diversity in its activities; (viii) the quantitative impact on the issuer's risk profile and financial ratios of its having issued the bond or loan; (ix) the issuer's ownership structure; (x) the complexity of the issuer's business model; (e) the own internal credit assessment uses all relevant quantitative and qualitative information; (f) the own internal credit assessment, the allocation of a credit quality step on the basis of that assessment and the information used to support the own internal credit assessment is documented; (g) the own internal credit assessment takes into account the characteristics of comparable assets for which a credit assessment by a nominated ECAI is available; (h) the own internal credit assessment takes into account trends in the issuer's financial performance; (i) the own internal credit assessment is procedurally independent from the decision to underwrite; (j) the insurance or reinsurance undertaking regularly reviews the own internal credit assessment.

1 This Article shall apply in the following circumstances: a) an insurance or reinsurance undertaking has concluded an agreement (“co-investment agreement”) to invest in bonds and loans jointly with another entity; b) that other entity (“the co-investor”) is one or other of the following: (i) an institution as defined in point (3) of Article 4(1) of Regulation (EU) No 575/2013 which uses the Internal Ratings Based Approach referred to in Article 143(1) of that Regulation; (ii) an insurance or reinsurance undertaking which uses an internal model in accordance with Article 100 of Directive 2009/138/EC; c) pursuant to the co-investment agreement, the insurance or reinsurance undertaking and the co-investor invest jointly in bonds and loans for which a credit assessment by a nominated ECAI is not available and for which debtors have not posted collateral that meets the criteria set out in Article 214; d) the co-investment agreement provides that the co-investor shares with the insurance or reinsurance undertaking the probabilities of default produced by its Internal Ratings Based Approach or, as applicable, the credit quality steps produced by its internal model for the bonds or loans referred to in point (c) for the purpose of using that information for the calculation of the Solvency Capital Requirement of the insurance or reinsurance undertaking.

2 If all of the criteria set out in paragraphs 3 to 6 are met, the bonds and loans referred to in point (c) of paragraph 1 shall be assigned to credit quality steps determined as follows: a) in a case where the co-investor falls within point (i) of paragraph 1(b), credit quality steps shall be determined on the basis of the most recent probabilities of default that the Internal Ratings Based Approach has produced; b) in a case where the co-investor falls within point (ii) of paragraph 1(b), credit quality steps shall be the credit quality steps produced by the internal model.

3 The criteria in this paragraph are as follows: a) the issuer of each bond or loan does not belong to the same corporate group as the insurance or reinsurance undertaking; b) the issuer is not an insurance or reinsurance undertaking, an infrastructure entity, a credit institution, an investment firm, a financial institution, an AIFM, a UCITS investment management company, an institution for occupational retirement provision or a non-regulated undertaking carrying out financial activities; c) the issuer has its head office in a country which is a member of the EEA; d) more than 50 % of the issuer's annual revenue is denominated in currencies of countries which are members of the EEA or the OECD; e) at least one of the following conditions is met for each of the last three financial years ending prior to the date on which the Solvency Capital Requirement is being calculated: the annual turnover of the issuer exceeds EUR 10000000; the balance sheet total of the issuer exceeds EUR 10000000; the number of staff employed by the issuer exceeds 50.

4 The criteria in this paragraph are as follows: a) the co-investment agreement defines the types of bonds and loans to be underwritten, and the applicable assessment criteria; b) the co-investor provides the insurance or reinsurance undertaking with sufficient details of the underwriting process, including the criteria used, the organisational structure of the co-investor and the controls conducted by the co-investor; c) the co-investor provides the insurance or reinsurance undertaking with data on all applications for bonds and loans to be underwritten; d) the co-investor provides the insurance or reinsurance undertaking with details of all decisions to approve or reject applications for bonds and loans to be underwritten; e) the co-investor retains an exposure of at least 20 % of the nominal value of each bond and loan; f) the underwriting process is the same as the underwriting process followed by the co-investor for its other investments in comparable bonds and loans; g) the insurance or reinsurance undertaking invests in all bonds and loans of the types referred to in point (a) for which the co-investor decides to approve the bond or loan application; h) the co-investor provides the insurance or reinsurance undertaking with information that allows the undertaking to understand the Internal Ratings Based Approach or, as applicable, internal model and its limitations, as well as its adequacy and appropriateness, in particular: (i) a description of the Internal Ratings Based Approach or, as applicable, internal model, including the inputs and risk factors, the quantification of risk parameters and the underlying methods, and the general methodology applied; (ii) a description of the scope of the use of the Internal Ratings Based Approach or, as applicable, internal model; (iii) a description of the model validation process and of other processes which allow the model's performance to be monitored, the appropriateness of its specification to be reviewed over time, and the results of the Internal Ratings Based Approach or, as applicable, internal model to be tested against experience.

5 In a case where the co-investor falls within point (i) of paragraph 1(b): a) the insurance or reinsurance undertaking clearly documents to which credit quality step the probability of default produced by the institution's Internal Ratings Based Approach corresponds; b) the mapping of probabilities of default to credit quality steps carried out by the insurance or reinsurance undertaking ensures that, for the bond or loan in question, the resulting level of capital requirement for the spread risk sub-module referred to in point (d) of the second subparagraph of Article 105(5) of Directive 2009/138/EC is appropriate; c) the mapping is based on Table 1 in Annex I to Commission Implementing Regulation (EU) 2016/1799 ; d) adjustments are made in a prudent manner to the probabilities of default before the mapping is carried out, taking into account the qualitative factors set out in Article 7 of Implementing Regulation (EU) 2016/1799; e) an adjustment to the probabilities of default is made in either of the following situations: (i) the time horizon covered by the Internal Ratings Based Approach deviates significantly from the 3-year time horizon set out in Article 4(2) of Implementing Regulation (EU) 2016/1799; (ii) the definition of default used in the Internal Ratings Based Approach deviates significantly from the one set out in Article 4(4) of that Implementing Regulation.

6 In a case where the co-investor falls within point (ii) of paragraph 1(b), the internal model ensures that, for the bond or loan in question, the resulting level of capital requirement for the spread risk sub-module referred to in point (d) of the second subparagraph of Article 105(5) of Directive 2009/138/EC is appropriate.

1 For the purposes of Article 192(3), a derivative falls within this paragraph if the following requirements are met: (a) the derivative is a CCP-related transaction in which the insurance or reinsurance undertaking is the client; (b) the positions and assets of the insurance or reinsurance undertaking related to that transaction are distinguished and segregated, at the level of both the clearing member and the CCP, from the positions and assets of both the clearing member and the other clients of that clearing member and as a result of that distinction and segregation those positions and assets are bankruptcy remote in the event of the default or insolvency of the clearing member or one or more of its other clients; (c) the laws, regulations, rules and contractual arrangements applicable to or binding the insurance or reinsurance undertaking or the CCP facilitate the transfer of the client's positions relating to that transaction and of the corresponding collateral to another clearing member within the applicable margin period of risk in the event of default or insolvency of the original clearing member. In such circumstance, the client's positions and the collateral shall be transferred at market value, unless the client requests to close out the position at market value; (d) the insurance or reinsurance undertaking has available an independent, written and reasoned legal opinion that concludes that, in the event of legal challenge, the relevant courts and administrative authorities would find that the client would bear no losses on account of the insolvency of the clearing member or of any the clients of that clearing member under any of the following laws: (i) the laws of the jurisdiction of the insurance or reinsurance undertaking, its clearing member or the CCP; (ii) the law governing the transaction; (iii) the law governing the collateral; (iv) the law governing any contract or agreement necessary to meet the requirement set out in point (b); (e) the CCP is a qualifying central counterparty.

2 For the purposes of Article 192(3a), a derivative falls within this paragraph if the requirements set out in paragraph 1 are met, with the exception that the insurance or reinsurance undertaking is not required to be protected from losses in the event that the clearing member and another client of the clearing member jointly default.’;

The risk-mitigating effect on underwriting or market risks of a reinsurance arrangement, securitisation or derivative shall be the larger of zero and the difference between the following capital requirements: (a) the hypothetical capital requirement for underwriting or market risk of the insurance or reinsurance undertaking, calculated in accordance with Sections 1 to 5 of this Chapter, that would apply if the reinsurance arrangement, securitisation or derivative did not exist; (b) the capital requirement for underwriting or market risk of the insurance or reinsurance undertaking.’;

1 Where the consolidated group Solvency Capital Requirement is calculated, wholly or in part, on the basis of the standard formula, the local currency referred to in the first paragraph of Article 188 shall be the currency used for the preparation of the consolidated accounts.

2 Notwithstanding paragraph 1, where a material amount of the consolidated technical provisions or the consolidated group own funds is denominated in a currency other than the one used for the preparation of the consolidated accounts, that currency may be considered as the local currency referred to in the first paragraph of Article 188.’;

This Regulation shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Union. Points (50), (59) to (61), (66) and (74) of Article 1 shall apply from 1 January 2020.