3-2707

SECTION 217.607—Capital Requirements under the Building Block Approach

(a) Determination of building block capital requirement. For each building block parent, building block capital requirement means the sum of the items in paragraphs (a)(1) and (2) of this section:

(1) The company capital requirement of the building block parent; that is:

(i) Recalculated under the assumption that members of the building block parent’s building block had no investment in any downstream building block parent; and is:

(ii) Adjusted pursuant to paragraph (b) of this section;

(2) For each downstream building block parent, the adjusted downstream building block capital requirement (BBCR_ADJ), which is calculated according to the following formula:

BBCR_ADJ = BBCR_DS • CRSM • AS

Where:

BBCR_DS is equal to the building block capital requirement of the downstream building block parent recalculated under the assumption that the downstream building block parent had no upstream investment in the building block parent;

CRSM is equal to the appropriate capital requirement scaling modifier under section 217.606; and

AS is equal to the building block parent’s allocation share of the downstream building block parent.

(b) Adjustments in determining the building block capital requirement. A supervised insurance organization must adjust the company capital requirement for any building block parent as follows:

(1) Internal credit risk charges. A supervised insurance organization must deduct from the building block parent’s company capital requirement any difference between:

(i) The building block parent’s company capital requirement; and

(ii) The building block parent’s company capital requirement recalculated excluding capital requirements related to potential for the possibility of default of any company in the supervised insurance organization.

(2) Permitted accounting practices and prescribed accounting practices.¹ A supervised insurance organization must adjust the building block parent’s company capital requirement by any difference between:

(i) The building block parent’s company capital requirement, after making any adjustment in accordance with paragraph (b)(1) of this section; and

(ii) The building block parent’s company capital requirement, after making any adjustment in accordance with paragraph (b)(1) of this section, recalculated under the assumption that neither the building block parent, nor any company that is a member of that building block parent’s building block, had prepared its financial statements with the application of any permitted accounting practice, prescribed accounting practice, or other practice, including legal, regulatory, or accounting procedures or standards, that departs from a solvency framework as promulgated for application in a jurisdiction.

(3) Risks of certain intermediary entities. Where a supervised insurance organization has made an election with respect to a company not to treat that company as a material financial entity pursuant to section 217.605(c), the supervised insurance organization must add to the company capital requirement of any building block parent, whose building block contains a member, with which the company engages in one or more transactions, and for which the company engages in one or more transactions described in section 217.605(c)(2) with a third party, any difference between:

(i) The building block parent’s company capital requirement; and

(ii) The building block parent’s company capital requirement recalculated taking into account the risks of the company, excluding internal credit risks described in paragraph (b)(1) of this section, allocated to the building block parent, reflecting the transaction(s) that the company engages in with any member of the building block parent’s building block. Note, the total allocation of the risks of the intermediary entity to building block parents must capture all material risks and avoid double counting.

(4) Investments in own capital instruments.

(i) In general. A supervised insurance organization must deduct from the building block parent’s company capital requirement any difference between:

(A) The building block parent’s company capital requirement; and

(B) The building block parent’s company capital requirement recalculated after assuming that neither the building block parent, nor any company that is a member of the building block parent’s building block, held any investment in the building block parent’s own capital instrument(s), including any net long position determined in accordance with paragraph (b)(5)(ii) of this section.

(ii) Net long position. For purposes of calculating an investment in a building block parent’s own capital instrument under this section, the net long position is determined in accordance with section 217.22(h), provided that a separate account asset or associated guarantee is not regarded as an indirect exposure unless the net long position of the fund underlying the separate account asset (determined in accordance with section 217.22(h) without regard to this paragraph (b)(4)(ii)) equals or exceeds 5 percent of the value of the fund.

(5) Risks relating to title insurance. A supervised insurance organization must add to the building block parent’s company capital requirement the amount of the building block parent’s reserves for claims pertaining to title insurance, multiplied by 300 percent.

The adjustment can be either positive or negative depending on the permitted or prescribed practices. In most cases, the reversal of the permitted or prescribed practice would result in an increase in the building block parent’s company required capital. In rare cases, a permitted or prescribed practice could increase the insurers required capital. In this instance, this adjustment would reduce the building block parent’s company required capital.