The European Commission has adopted amendments (in the form of a regulation) to Delegated Regulation (EU) 2015/35 (the Solvency II Delegated Regulation) which implements various technical requirements of the Solvency II Directive (2009/138/EC).  The amending regulation has been introduced as part of the proposals for the Capital Markets Union (CMU).

The CMU was proposed in 2015 in order to kick-start growth in Europe by revitalising capital markets while maintaining stability. CMU is intended to reduce obstacles to cross-border investment and to make the capital markets more accessible to small and medium-sized enterprises as an alternative to bank loans. For investors, CMU aims to encourage access to a wider range of competitive and transparent investment products, and improve returns on long-term savings.

The Commission issued two consecutive calls for technical advice to the European Insurance and Occupational Pensions Authority to review Solvency II in the light of CMU.

Taking into account this advice, the amending regulation:

  • removes constraints to the financing of the European economy by reducing capital charges in the standard formula for unrated debt and unlisted equity investments;
  • introduces various simplifications to the standard formula including: a carve-out from the mandatory application of the look-through in investment funds and exceptions to the use of external ratings;
  • aligns the rules applicable to the standard formula under Solvency II with rules applied to banks (to the extent that alignment works with sector differences in business models). Alignment includes the classification of own funds and exposures to central counterparties and the treatment of exposures to regional governments and local authorities;
  • introduces principles to ensure convergence in the recognition of the capacity of deferred taxes to absorb losses;
  • further refines the recognition of risk mitigation techniques, the group solvency calculation and the volume measure for non-life premium risk with the aim of improving the risk sensitivity of the capital requirement in the standard formula; and
  • lays down a more rigorous framework, principles and techniques for laying down the technical information on the relevant risk-free interest rate terms structure and the system for determining technical information.

What happens next?

The amending regulation is subject to scrutiny by the European Parliament and the Council over a period of three months.

View: European Commission adopts amendments to Solvency II delegated regulation to help insurers invest in equity and private debt and to provide long-term capital financing