1.Each Member State in whose territory business is carried on shall require the undertaking to establish sufficient technical reserves. The amount of such reserves shall be determined according to the rules fixed by the State, or, in the absence of such rules, according to the established practices in such State.
2.Technical reserves shall be required to be covered by equivalent and matching assets localized in each country where business is carried on. Member States may, however, permit relaxations in the rules as to matching assets and the localization of assets. Having regard to its special position, the Grand Duchy of Luxembourg may, pending coordination of legislation on the winding-up of undertakings, retain the system of guarantees for technical reserves existing at the time of entry into force of this Directive. The regulations of the country where the business is is carried on shall determine the nature of such assets and, where appropriate, the extent to which they may be used for the purpose of covering the technical reserves and shall also determine the rules for valuing such assets.
3.If a Member State allows any technical reserves to be covered by claims against reinsurers, it shall fix the percentage so allowed. In such case, it may not require the assets representing such claims to be localized in its territory, notwithstanding the provisions of paragraph 2.
4.The supervisory authority of the Member State in whose territory the head office of an undertaking is situated shall verify that its balance sheet shows in respect of the technical reserves assets equivalent to the underwriting liabilities assumed in all the countries where it undertakes business.