Is it possible for an insurance company to satisfy the criteria in Point 47 of Annex II, Part 2?

The drafting of the credit risk mitigation factor in Point 47 of Annex II, Part 2 is purposefully abstract and general in view of ensuring its broad potential applicability by the full range of PRIIP manufacturers, so as to not include or exclude specific types of PRIIP manufacturers or provide a specific treatment only for certain PRIIP manufacturers, for instance to either exclude insurance undertakings or to result in only insurance undertakings being able to satisfy this provision. Point 47 (a) relates to the matching of assets and liabilities over time. It ensures that the assets backing the payment obligations of a PRIIP are able to satisfy – that is, are at least equivalent to, the payment obligations of the PRIIP. Point 47 (b) relates to the specific identification of these assets. It refers to arrangements based on provisions in the Solvency II Directive, but does not exclude that other arrangements, including by PRIIP manufacturers who are not insurance undertakings, can satisfy this provision. Point 47 (c) relates to the priority of claims of retail investors to these assets over the claims of other creditors. With respect to insurance undertakings, the Commission Delegated Regulation does not automatically lead to the conclusion that either all or no insurance undertakings would benefit from the application of Point 47. Some insurance undertakings are exempt from Solvency II, and these may not be able to meet the conditions under Point 47. In addition, the application of Point 47 would not be met by all insurance undertakings that are subject to Solvency II. Each insurance undertaking would need to apply the criteria set out in Point 47 to assess whether the mitigation foreseen in Point 47 can be applied. Having said this, the breadth of the drafting has raised some specific practical challenges for insurance undertakings as to how to assess the criteria, including in particular in regards the application of 47 (a) and 47 (c) to an insurance undertaking subject to Solvency II. It is therefore appropriate to further clarify the application of Point 47 in this case without altering the substance of this provision. Regarding Point 47(a), since insurance undertakings have future liabilities that relate to non-financial factors, the prudential approach in Solvency II is to ensure that in total the net present value of these liabilities is covered by assets on an ongoing basis. The insurance undertaking should, that is, be always in a position to transfer its different books of business to another insurance undertaking. For this reason, for those insurance undertakings that comply with Solvency II, Point 47 (a) can be met – this is indicated already in the Commission Delegated Regulation in Recital 6. However, it is not the case that all insurance undertakings subject to Solvency II will be capable of meeting this point at a given time. Regarding Point 47 (c) this relates to the claims of policy holders in the insurance context. In this case, the two arrangements foreseen under Article 275 (1) (a) and (b) of Solvency II are relevant. The arrangement under Article 275 1 (a) entails the priority of the claims of policyholders over other claimants, and therefore should enable Point 47 (c) to be satisfied. However, under Article 275 (1) (b) it would depend on how Article 278 of Solvency II is applied. Article 278 requires that any claims that are prior to those of policyholders shall be represented by assets. In view of this those insurance undertakings that are subject to Article 275 1 (b) are expected to hold specific assets in respect of any claims that can be made on the insurance undertakings assets that are prior to those of policy holders. An insurance undertaking subject to Article 275 (1) (b) may in some cases be able to meet the condition under Point 47 (c), so long as these specific assets entirely cover the claims that have priority over those of the policy holders, and also so long as the remaining assets match, on their own, the insurance undertaking’s liabilities, as is required under Point 47 (a). It can be noted that the legislative intention of the two alternatives foreseen in Article 275 (1) (a) and (b) respectively was that these should be implemented so as to be equivalent in outcome in view of policy holder protection.