French Insurance Code
In forceI.-Insurance and reinsurance undertakings may apply an equalising adjustment to the relevant risk-free interest rate curve to calculate the best estimate of a portfolio of life insurance or reinsurance liabilities, including annuities arising from non-life insurance or reinsurance contracts, subject to the agreement of the Autorité de contrôle prudentiel et de résolution, where the following conditions are met:
1° Insurance and reinsurance undertakings have assigned a portfolio of assets made up of bonds or other securities with similar cash flow characteristics to cover the best estimate of the portfolio of insurance or reinsurance commitments and maintain this assignment until the maturity of these obligations, unless they wish to maintain the equivalence of the expected cash flows between assets and liabilities if these flows have changed significantly ;
2° The portfolio of insurance or reinsurance commitments to which the equalisation adjustment is applied and the assigned portfolio of assets are identified, managed and organised separately from the other activities of the undertakings, and the assigned portfolio of assets may not be used to cover losses arising from other activities of the undertakings;
3° The expected cash flows of the assigned portfolio of assets correspond in the same currency, point by point, to the expected cash flows of the portfolio of insurance or reinsurance commitments and no equivalence break gives rise to risks which are real in relation to the risks inherent in the insurance or reinsurance activity to which the equalisation adjustment applies;
4° The underlying contracts of the portfolio of insurance or reinsurance commitments do not give rise to the payment of future premiums;
5° The underwriting risks associated with the portfolio of insurance or reinsurance commitments are solely longevity risk, expense risk, revision risk and mortality risk;
6° Where the underwriting risk associated with the portfolio of insurance or reinsurance commitments includes mortality risk, the best estimate of the portfolio of insurance or reinsurance commitments must not increase by more than 5% in the context of a mortality risk shock calibrated in accordance with Article R. 352-2 ;
7° The contracts underlying the portfolios of insurance or reinsurance commitments do not include any options for policyholders, subscribers or beneficiaries, apart from a surrender option if the surrender value does not exceed the value of the assets, valued in accordance with Article L. 351-1, covering the insurance or reinsurance commitments on the date on which the surrender option is exercised;
8° The cash flows of the assets making up the assigned portfolio of assets are fixed and cannot be modified by the issuers of the securities or by third parties;
9° The insurance or reinsurance commitments of an insurance or reinsurance contract are not divided into different parts when composing the portfolio of insurance or reinsurance commitments for the purposes of this I.
The insurance undertaking or the reinsurance undertaking may use assets with fixed cash flows, subject to indexation to inflation, provided that those assets correspond to the cash flows of the portfolio of insurance or reinsurance obligations which are a function of inflation.
Where issuers or third parties have the right to modify the cash flows of an asset in such a way that the investor receives sufficient compensation to enable him to obtain the same cash flows by reinvesting in assets of equivalent or better credit quality, the right to modify the cash flows does not exclude the asset from being eligible for the portfolio assigned in accordance with 8°.
II. insurance and reinsurance undertakings which apply the equalisation adjustment to a portfolio of insurance or reinsurance commitments may not revert to a method which ignores the equalisation adjustment. If an insurance or reinsurance undertaking applying the equalisation adjustment is no longer able to meet the conditions set out in I, it shall immediately inform the Autorité de contrôle prudentiel et de résolution and take the necessary measures to ensure compliance. If the undertaking is unable to comply with these conditions within two months, it shall cease to apply the equalisation adjustment to each of its insurance or reinsurance commitments and may not apply such an adjustment again until after a further 24 months.
The equalisation adjustment is not applied to insurance or reinsurance commitments where the relevant risk-free interest rate curve used to calculate the best estimate of the commitments includes an adjustment for volatility pursuant to Article R. 351-6 or a transitional measure on risk-free interest rates pursuant to Article L. 351-4.
