The directive introduces the concept of a "Group Supervisor". For each group, a single authority will be appointed with concrete coordination and decision powers.
Groups will be required to calculate a group-level SCR. With a view to ensuring as much as possible that groups benefit from diversification effects, the directive expresses a strong preference for the calculation of the group solvency to be undertaken at a consolidated level. Initial reactions from the market suggest that this may lead to an increase in merger and acquisition activity.
The SCR at group level may be calculated on the basis of either the standard formula or an approved internal model. The granting of permission to use an internal model for the calculation of the group SCR, as well as the SCR for individual firms within the group, will be subject to the same criteria as for an individual firm. However, the various supervisors involved will need to cooperate in order to arrive at a joint view. The supervisors would have the power to impose capital add-ons at the individual firm level if they felt that the group model did not properly capture the risk profile of that business, or to insist that the SCR was calculated using the standard formula instead.
Coverage of the SCR for Firm within a Group
The proposal introduces the concept of group support as a way for firms within a group to cover their SCR, in addition to their own funds. The MCR, however, must always be covered locally.
The group support shall take the form of a declaration to the group supervisor, expressed in a legally binding document and constituting a commitment to transfer funds from the group (or possibly from other subsidiaries) when necessary. The group supervisor will need to verify that it has sufficient funds to cover its group SCR, and that there is no practical or legal restriction on the prompt transfer of funds. The group supervisor will also review, at least annually, any significant risk concentration at group level and any significant intra-group transactions.
Most of the other requirements at the individual firm level will also apply at the group level. Risk management and internal control systems and reporting procedures should be implemented consistently in all the undertakings included in the scope of group supervision.
As for individual firms, a report on the solvency and financial condition at the level of the group must also be produced. Subject to the agreement of the group supervisor, a group may provide a single report that comprises the required information at group level and for each subsidiary.
