Ancillary own funds (Solvency II)

A mutual whose bylaws let it call another 20% in contributions from its members has capital that is booked nowhere. Solvency II puts it in ancillary own funds. Article 89 of Directive 2009/138/EC defines them as items other than basic own funds that can be called up to absorb losses: unpaid and uncalled share capital, letters of credit and guarantees, legally binding commitments and, for mutuals, the right to call supplementary contributions. The key is Article 90: they count only with the supervisor's prior approval, which sets the amount retained, the valuation method and the validity period. The insurer has to show that the item is callable, that the counterparty is solvent, and that no trigger condition collapses at the same time as the loss. Depending on their nature they are classed in Tier 2 or Tier 3 (letters of credit and guarantees in Tier 2 if of good quality). An insurer that relies heavily on them depends on a third party, the issuing bank or the members, which analysts discount. They cover only the SCR, since the MCR admits only basic own funds, and the supervisor can withdraw approval if the third party deteriorates.