The European Commission have recently adopted a review of Solvency II. The review largely follows EIOPA’s proposals, as set out in their Opinion from December 2020.
In addition to the communication published on 22 September 2021, the Commission also published 2 legislative proposals to amend the Solvency II Directive and to introduce a new insurance recovery and resolution directive, as well as a question and answers document.
The stated aims of the review are as follows:
- Promote insurers’ contribution to the long-term sustainable financing of the economy.
- Improve risk-sensitivity whilst mitigating excessive short-term volatility in insurers’ solvency positions.
- Improve proportionality.
- Enhance quality, consistency and coordination of insurance supervision across the EU, and improve the protection for policyholders.
- Better address the potential build-up of systemic risk in the insurance sector.
- Prepare for extreme scenarios that may make recovery or the resolution of a failing insurer necessary.
The amendments to the Solvency II directive amend the EU insurance rules at a high level and this will be supplemented by Delegated Acts at a later stage.
Key proposals in the changes to the directive include:
- Improving risk sensitivity and better mitigating undue volatility by changes to the long-term guarantee measures. Among other things the symmetric adjustment of the equity risk shock which was previously limited to +/-10% can be up to +/-17% under the proposals.
- Making the rules more proportional by allowing more small insurers to be exempted from the Solvency II Regime and by creating a more suitable framework for insurers identified as having a low risk profile.
- Refining rules on transparency by better adapting disclosures required from insurers to the information needed by recipients.
- Improving the quality of supervision in relation to ongoing compliance with prudential rules, cross-border insurance business and insurance groups.
- Introducing new requirements on long-term climate change scenario analysis. Companies with material exposure to climate change risk must, at least every 3 years, consider a minimum of two long-term climate change scenarios, including:
(a) a long-term climate change scenario where the global temperature increase remains below two degrees Celsius.
(b) a long-term climate change scenario where the global temperature increase is equal to or higher than two degrees Celsius.
- A new insurance recovery and resolution framework which includes provision for a national resolution authority empowered to apply resolution tools and powers in each Member State.
The next step is for the European Parliament and the Member States in the Council to negotiate the final legislative texts on the basis of the Review. The Commission will also now launch work on delegated acts supplementing the amendments to the Solvency II Directive. These delegated acts will specify in more detail how the actual calculations are to be performed and address areas including (but not limited to) the following:
- Interest risk calculations based on the new model suggested by EIOPA .
- Market risk correlation changes.
- Criteria for long-term equity investments which are subject to a favourable 22% risk factor (instead of the reference 39% for listed equities and 49% for unlisted equities).
- Risk margin calculation changes.
- Volatility and matching adjustments.
- Interest rate extrapolations.
In summary a relatively large number of changes affecting the SCR calculation are expected. Although the details are yet to be confirmed it is possible these will apply as early as Q4 2022. Insurers should begin preparing for the changes and review the possible consequences for their businesses. We will publish a new blog article here once the proposals for changes to delegated acts are published.