‘Fixed is fixed’ – DNB stands firm on matching adjustment

Dutch regulator unmoved on mortgages and group pensions

De Nederlandsche Bank: sticking to the rules

The Dutch regulator, De Nederlandsche Bank (DNB), is sticking resolutely to a position on the Solvency II matching adjustment that is seen by many in the industry as an inflexible interpretation of the rules.

In an interview with Risk.net, a spokesperson for the regulator indicated it will maintain a tough line on two key areas: the eligibility of mortgage assets and the treatment of group pensions under the rules. 

“Assets have to meet the criteria set out in Solvency II, one of which is that the cashflows must be fixed,” says Yildiz Ekinci from DNB’s supervision policy division. “Insurers have to show us whether the criteria are met… our stance is that fixed is fixed.”

Ekinci’s comments confirm the regulator’s position as outlined in January by the Verbond van Verzekeraars (Dutch Association of Insurers) in a letter to members, in which the association explained its understanding of the DNB’s views.

Dutch mortgages fail to qualify for the matching adjustment because borrowers are able to pay back up to 10% of principal without penalty every year and can repay the full loan if they sell the property. To remove this prepayment risk through a repackaging of mortgages would be possible but expensive.

Insurers have to meet the criteria set out.... our stance is that fixed is fixed

The DNB has been in discussions with individual insurance companies about the eligibility of their mortgage portfolios. But Ekinci’s comments indicate the regulator’s view has not softened as a result of ideas presented so far.

At least two insurers in the Netherlands, where firms such as Aegon hold as much as half their fixed-income portfolio in mortgages, were understood to be planning to use the matching adjustment. Firms had hoped the regulator would apply a materiality test for the transfer of prepayment risk in mortgage repackagings.

But, says Ekinci: “The matching eligibility criteria for the assets are given in the directive. The criteria are binding, and we will always look at products in the context of those criteria.”

This literal reading of the directive contrasts with a more flexible approach from regulators in the UK, most notably for equity-release mortgages. The PRA is allowing insurers to repackage equity-release assets even though they include elements of prepayment and property risk that create uncertainty of cashflows.

But the DNB seems unmoved by the actions of other regulators. “We all have to meet the Solvency II criteria, which are the same for us as for any other national supervisory authority in Europe,” Ekinci says. 

“There is leeway in interpretation on matters such as what constitutes a material mismatch. That will be assessed case-by-case by each supervisor. It is not defined in the regulation. But where the criteria and regulation is clear, we have to meet those criteria.”

Meanwhile, Ekinci also confirms the DNB’s stance that group pension contracts are highly unlikely to qualify for the adjustment. Dutch insurers hold about €44 billion ($47.5 billion) of in-force group pension liabilities, according to DNB figures for the end of 2014.

“We have described theoretically what insurers can do to assess the eligibility [of group pension schemes]. But we doubt they will meet the criteria because of the many legal options at the participant level,” she says. 

Group pension schemes fall short of eligibility because they are typically contracted with the employer rather than individual employees and include both pensions in-force and those on which policyholders continue to pay premiums. Policies that are still active do not qualify.

Although the DNB has accepted that firms might be able to segregate the two groups, the regulator says the contractual optionality that is normal for these contracts makes them ineligible nonetheless. A recent Q&A published by the regulator on the matching adjustment states: “Pension insurance contracts typically offer members various options, statutory or otherwise, such as those relating to transfer of accrued benefits, trade-off and settlement upon divorce, which is why we do not expect that the matching adjustment can generally be applied where the criteria are assessed at the level of the member.”

No further public statements are expected from the regulator, meaning insurers will have to apply for the matching adjustment and rely on nudges from the DNB, says Neal Hegeman, Amsterdam-based director, institutional solutions and advisory, at Royal Bank of Scotland.

“The guidance has been a long way from the level of detail provided by the PRA in the UK,” he says. “Dutch were hoping for more, but they will have been disappointed.”