1.The contractual arrangements governing the risk-mitigation technique shall ensure that the extent of the cover provided by the risk-mitigation technique and the transfer of risk is clearly defined and incontrovertible.
2.The contractual arrangement shall not result in material basis risk or in the creation of other risks, unless this is reflected in the calculation of the Solvency Capital requirement.
3.Basis risk is material if it leads to a misstatement of the risk-mitigating effect on the insurance or reinsurance undertaking's Basic Solvency Capital Requirement that could influence the decision-making or judgement of the intended user of that information, including the supervisory authorities.
3a.A risk-mitigation technique shall only be considered not to result in material basis risk where the insurance or reinsurance undertaking can demonstrate that both of the following conditions are met:
the exposure covered by the risk-mitigation technique is sufficiently similar in nature to the risk exposure of the undertaking; and
the changes in value of the exposure covered by the risk-mitigation technique closely mirror the changes in value of the risk exposure of the undertaking under a comprehensive set of relevant risk scenarios, including scenarios that are consistent with the confidence level set out in Article 101(3) of Directive 2009/138/EC.
4.The determination that the contractual arrangements and transfer of risk is legally effective and enforceable in all relevant jurisdictions in accordance with Article 209(1)(a) shall be based on the following:
whether the contractual arrangement is subject to any condition which could undermine the effective transfer of risk, the fulfilment of which is outside the direct control of the insurance or reinsurance undertaking;
whether there are any connected transactions which could undermine the effective transfer of risk.
5.Where an insurance or reinsurance undertaking combines several contractual arrangements to transfer risk, each of the contractual arrangements shall meet the requirements set out in paragraphs 1 and 4 and the contractual arrangements in combination shall meet the requirements set out in paragraphs 2 and 3.
6.The undertaking can demonstrate that the transfer of risk is effective and that any reduction in the Solvency Capital Requirement or increase in available basic own funds resulting from the risk transfer arrangements is commensurate with the actual change in risks that the undertaking is exposed to.
The Solvency Capital Requirement and available basic own funds shall reflect the economic substance of the contractual arrangements governing the risk-mitigation techniques. When calculating the Basic Solvency Capital Requirement, insurance or reinsurance undertakings shall only take into account risk-mitigation techniques as referred to in Article 101(5) of Directive 2009/138/EC where the insurance or reinsurance undertaking can demonstrate that all of the following conditions are met:
the contractual arrangements governing the risk-mitigation technique result in an effective transfer of risk;
the reduction in the Solvency Capital Requirement is commensurate with the extent of transfer of risks stemming from the contractual arrangements; and
the Solvency Capital Requirement appropriately reflects any risk arising from the risk-transfer process.