IVASS, the Italian insurance regulator, recently approved IVASS Regulation 28 of July 26 2016 on the look-through approach to determine the solvency capital requirements of insurers in the context of:
- the Italian Insurance Code;
- the EU Solvency II Directive (2009/138/EC); and
- the European Commission Delegated Regulation (2015/35).
Under the standard formula, the solvency capital requirement will be determined by applying the look-through approach to collective investment schemes consisting of undertakings for collective investment in transferable securities, alternative investment funds and other investments referred to in Article 84(1) of the Delegated Regulation and, more generally, in case of indirect exposure to market, underwriting and counterparty risks.
The look-through approach also applies to investments in other types of collective investment vehicle governed by Decree-Law 58 of February 24 1998 (on consolidated provisions on financial intermediation), including investment companies with variable capital and investment companies with fixed capital.
However, pursuant to Article 84(4) of the Delegated Regulation, the look-through approach does not apply to investments in entities in which an insurer holds a shareholding under the meaning of Articles 212(1)(b) and (2) of the Solvency II Directive.
The application of the look-through approach for the calculation of the solvency capital requirement involves the assessment of the risks associated with each asset underlying the investment. Article 84(3) of the Delegated Regulation establishes that where the look-through approach cannot be applied to the collective investment bodies or investment funds, the capital requirement will be calculated based on the target allocation of the underlying assets using data groupings, provided that such a simplification does not cover more than 20% of the total assets of the insurance undertaking.
In the case of complex financial structures (eg, investment funds investing in investment funds), the company will reiterate the application of the look-through approach with a view to reflect all significant underlying risks.
With particular reference to real estate investments, investments in land, buildings, real property rights and investments in properties dedicated to an insurer's own use will fall under solvency capital requirements for property risks,(1) while equity investments in companies dedicated exclusively to facility management, real estate administration, the development of real estate projects or similar activities will fall under solvency capital requirements for equities.(2)
On the other hand, the look-through approach will apply to investments in real estate through funds. The IVASS regulations apply to domestic insurers and reinsurers (ie, incorporated in Italy) and to the Italian branches of third-country insurers and reinsurers.