EIOPA Forwards Q&A 3650 to European Commission on Intra-Group Transactions in Group VA Calculation

Key Takeaways

• EIOPA has forwarded Question 3650 to the European Commission, asking how intra-group loans and reinsurance should be treated in the volatility adjustment (VA) and credit spread sensitivity ratio (CSSR) calculations for consolidated technical provisions under Method 1.
• No answer has been issued, so the treatment remains unresolved.
• Group compliance and actuarial teams should document their current approach and prepare for possible recalculation of the group VA.

Deep Dive

EIOPA has forwarded Question 3650 to the European Commission, asking how intra-group loans and reinsurance should be treated in the volatility adjustment (VA) and credit spread sensitivity ratio (CSSR) calculations for consolidated technical provisions under Method 1. No answer has been issued, so the treatment remains unresolved. Group compliance and actuarial teams should document their current approach and prepare for possible recalculation of the group VA.

The issue has two parts. First, an undertaking may hold an intra-group loan in the portfolio of bonds, loans and securitisations used for its CSSR calculation. Consolidation on a Method 1 basis would normally eliminate such a position, which could change the asset composition, the CSSR and the VA applied. Second, the same issue arises for group-internal reinsurance, particularly from the perspective of the internal reinsurer, whose liabilities and reinsurance exposures may or may not be eliminated on consolidation. Depending on the answer, the group VA could be higher or lower than under current practice, which would directly affect consolidated technical provisions, own funds and the group solvency ratio.

No deadlines or implementation dates are given. The submission date and forwarding status are the only timeline markers, and the Commission has no set response period. Until a response is issued, groups should not assume a particular outcome. Existing methodologies remain in place, but they carry interpretive risk.

Recommended actions for compliance, risk and actuarial teams:
- Inventory intra-group loans and internal reinsurance arrangements that feed into CSSR and VA calculations.
- Document the current consolidation treatment and its rationale, including how it was agreed with the group supervisor.
- Run sensitivity analyses to estimate the effect on the group VA and solvency ratio if eliminated or replaced positions change the CSSR.
- Monitor EIOPA and Commission publications for the response.
- Engage the group supervisor proactively if the potential impact is material.

The risk implications are mainly regulatory interpretation risk and potential misstatement of group technical provisions and solvency position. The impact is likely greatest for groups with significant internal financing or internal reinsurance structures, and for those with large VA benefits. A later change in treatment could require model changes, restated calculations and updated regulatory reporting and disclosures.

Source: European Insurance and Occupational Pensions Authority