French Insurance Code
In forceI.-In each currency, the equalisation adjustment referred to in Article R. 351-4 is calculated in accordance with the following principles:
1° The equalisation adjustment must be equal to the difference between the following amounts:
a) The effective annual rate, calculated as the single discount rate which, if it were applied to the cash flows of the portfolio of insurance or reinsurance commitments, would give a value equal to the value calculated in accordance with Article L. 351-1 of the assigned portfolio of assets;
b) The effective annual rate, calculated as the single discount rate which, if applied to the cash flows of the portfolio of insurance or reinsurance commitments, would give a value equal to the value of the best estimate of the portfolio of insurance or reinsurance commitments for which the time value of money is taken into account by following the relevant risk-free interest rate curve;
2° The equalisation adjustment may not include the fundamental margin reflecting the risks assumed by the insurance or reinsurance undertaking;
3° Subject to the provisions of 1°, the fundamental margin must be increased, where appropriate, so that the equalising adjustment for assets of a lower quality than investment grade does not exceed the equalising adjustment for good quality assets of the same duration and category;
4° The use of external credit assessments in the calculation of the equalising adjustment must comply with the specifications referred to in Articles 4 to 6 of Commission Regulation (EU) No 2015/35 of 10 October 2014.
II.-For the application of 2° of I, the fundamental margin is:
1° Equal to the sum of the following elements:
a) The credit margin corresponding to the probability of default on the assets; and
b) The credit margin corresponding to the expected loss from a downgrading of the assets;
2° For exposures to central governments and central banks of Member States, greater than or equal to 30% of the long-term average of the margin in relation to the rate of the fundamental risk-free interest rate curve for assets of the same duration, credit quality and category, as observed on the financial markets ;
3° For assets other than exposures to central governments and central banks of Member States, greater than or equal to 35% of the long-term average of the spread over the rate of the fundamental risk-free interest rate curve for assets of the same duration, credit quality and category, as observed on the financial markets.
The probability of default referred to in a of 1° is based on long-term default statistics that are relevant for the asset in question, depending on its duration, credit quality and category.
When no reliable credit margin can be derived from the default statistics mentioned in the previous paragraph, the fundamental margin is equal to the share of the long-term average of the margin in relation to the rate of the fundamental curve set by 2° and 3°.
