Norwegian Financial Supervisory Authority clarifies documentation and reporting expectations for deferred tax loss absorbency in Solvency II solvency calculations

The Norwegian Financial Supervisory Authority has issued a letter to insurers on how to apply the loss-absorbing capacity of deferred taxes in Solvency II solvency calculations, after observing that firms meet the underlying analysis and documentation requirements to varying degrees. The guidance restates the key regulatory conditions for recognising a deferred tax adjustment in the standard formula and sets out supervisory expectations for substantiating future taxable profits following a severe loss event. The letter explains that a theoretical deferred tax asset arising after an instantaneous loss scenario under Commission Delegated Regulation (EU) 2015/35 Article 207 does not automatically reduce the Solvency Capital Requirement and must be supported by documented, probable future taxable profits, taking into account factors such as the impact of the loss on the firm’s financial position and the increased uncertainty in projections. It highlights the need to assess going concern where the loss would cause breaches of capital requirements, avoid double counting of tax positions and future profits, and reflect Norwegian participation-exemption rules that can limit tax benefits from equity losses. Expectations for projections include limits on relying on new business beyond existing business plans and, in any case, beyond five years, constraints on assuming investment returns above the post-event risk-free curve without reliable evidence, and robust support for any assumed future management actions, including a detailed implementation plan. The authority also flags common weaknesses it has challenged in supervision, including overly optimistic assumptions on profitability, market share, reinsurance pricing, growth and other income and cost items, and notes that firms with weakened financial positions, including those with negative results for two years or more, should limit use of the adjustment to net deferred tax liabilities in the Solvency II balance. Insurers using the deferred tax loss-absorbency adjustment are expected to review their routines and practices to ensure compliance with the analysis and documentation requirements. Supporting analysis must be documented in the Regular Supervisory Report and described in the Solvency and Financial Condition Report, with firms that do not currently report in line with Article 311(2)(d) required to do so no later than their reporting to the authority for 2025.