Matching adjustment to the relevant risk-free interest rate term structure

(1) With the approval of the supervisory authority, insurance undertakings may apply a matching adjustment to the relevant risk-free interest rate term structure to calculate the best estimate of the portfolio of life insurance or reinsurance obligations, including annuities stemming from non-life insurance or reinsurance contracts. Approval is granted where the following conditions are met: 1. the insurance undertaking has assigned a portfolio of assets, comprising bonds and other assets with similar cash flow characteristics, to cover the best estimate of the portfolio of insurance or reinsurance obligations, and maintains that assignment throughout the lifetime of the obligations, except for the purpose of maintaining the replication of expected cash flows between assets and liabilities where the cash flows have materially changed; 2. the portfolio of insurance or reinsurance obligations to which the matching adjustment is to be applied and the assigned portfolio of assets are identified, organised, and managed separately from the other activities of the undertaking, and the assigned portfolio of assets cannot be used to cover losses arising from the undertaking's other activities; 3. the expected cash flows of the assigned portfolio of assets replicate all future cash flows of the portfolio of insurance or reinsurance obligations in the same currency, and any mismatch does not give rise to risks that are material in relation to the risks inherent in the insurance or reinsurance business to which the matching adjustment is applied; 4. the insurance and reinsurance contracts underlying the portfolio of obligations do not give rise to future premium payments; 5. the only underwriting risks associated with the portfolio of insurance or reinsurance obligations are longevity risk, expense risk, revision risk, and mortality risk; 6. where mortality risk is among the underwriting risks associated with the portfolio of insurance or reinsurance obligations, the best estimate of the portfolio of insurance or reinsurance obligations does not increase by more than 5 percent under a mortality risk stress calibrated in accordance with section 97; 7. the contracts underlying the portfolio of insurance or reinsurance obligations contain no options for the policyholder, or only a surrender option where the surrender value does not exceed the value, valued under section 74, of the assets covering the insurance or reinsurance obligations at the time the surrender option is exercised; 8. the assets of the assigned portfolio of assets generate fixed cash flows that cannot be altered by the issuers of the assets or by third parties, and 9. the insurance or reinsurance obligations of an insurance or reinsurance contract are not split into different parts when compiling the portfolio of insurance or reinsurance obligations for the purposes of this subsection. Without prejudice to the second sentence, point 8, insurance undertakings may use assets whose cash flows are fixed apart from their dependency on inflation, where those assets replicate the inflation contained in the cash flows of the portfolio of inflation-linked insurance or reinsurance obligations. Where issuers or third parties have the right to alter the cash flows of assets in such a way that the investor receives sufficient compensation to obtain the same cash flow through reinvestment in assets of equivalent or better credit quality, the right to alter cash flows does not exclude the asset from eligibility for the assigned portfolio under the second sentence, point 8.
(2) Insurance or reinsurance undertakings that apply the matching adjustment to a portfolio of insurance or reinsurance obligations may not revert to an approach that does not include a matching adjustment. Where an insurance or reinsurance undertaking applying the matching adjustment is no longer able to meet the conditions named in subsection (1), it must inform the supervisory authority without delay and take the necessary measures to restore compliance with those conditions. Where the undertaking fails to restore compliance with the conditions named in subsection (1) within two months of the date of non-compliance, it may no longer apply a matching adjustment to its insurance or reinsurance obligations, and may resume applying the matching adjustment only after a further 24 months.
(3) The matching adjustment may not be applied to insurance or reinsurance obligations where the relevant risk-free interest rate term structure for calculating the best estimate of those obligations includes a volatility adjustment under section 82 or a transitional measure on the risk-free interest rates under section 351.