On 22 September 2021, the European Commission adopted a review of the Solvency II regime. The Solvency II regime includes the Solvency II framework directive (Directive 2009/138/EC) and delegated regulations. The review includes a legislative proposal to amend the framework directive as well as a legislative proposal for a new EU Insurance Recovery and Resolution Directive.
The aim of the review package is to strengthen insurers’ contribution towards post-Covid 19 recovery, progressing the Capital Markets Union and the European Green Deal.
Following a review of Solvency II, the Commission has found that although the regime is broadly effective, the existing framework does not fully take into account the new financial and economic environment or new policy objectives set by the European Union.
The legislative proposal to amend the framework directive will be supplemented by delegated acts.
Directive to amend Solvency II Directive
The changes set out in the legislative proposal (COM(2021) 581) relate to proportionality, quality of supervision, long-term guarantee measures, macro-prudential tools, sustainability risks, group and cross-border supervision.
Amendments to the size thresholds will reduce the scope of the Solvency II regime, excluding a greater number of small firms. The proposals also introduce a new category of low risk-profile insurers and reinsurers that will benefit from lighter touch requirements, reflecting a more proportionate approach to supervision.
A number of amendments are introduced to better reflect the long-term nature of insurance business, reducing pro-cyclical behaviour. The proposals increase the percentage of the risk-adjusted credit spread that forms part of the volatility adjustment. The European Commission believes that a higher volatility adjustment resulting from the proposed changed can more effectively compensate for fluctuations in asset prices in the valuation of insurance liabilities.
Amongst the proposals is a requirement for insurers to identify any material exposure to climate risks and to assess the impact of long-term climate change scenarios on their business. A requirement to assess macroeconomic circumstances and integrate any macroeconomic developments into investment strategies and the Own Risk and Solvency Assessment is also proposed.
Extensive changes have been made to group supervision, including the application of Solvency II to insurance holding companies and mixed financial holding companies. Amendments also empower group supervisors to require a group to restructure.
Insurance Recovery and resolution Directive
The Solvency II review package also includes a proposal for an Insurance Recovery and resolution Directive (COM(2021) 582). The aim of the directive is to ensure that insurers and relevant authorities in the EU are prepared when firms are in financial distress.
There is currently no harmonised approach to the recovery and resolution of insurance companies in the European Union. The proposed directive will apply to all insurance and reinsurance undertakings in the EU that are subject to the Solvency II regime. It will require that all insurance undertakings and parent undertakings put together a pre-emptive recovery plan which is submitted to their supervisor. Supervisors should assess the adequacy of these plans. Resolution authorities will have the power to apply a suit of resolution tools where relevant conditions are met. Resolution authorities will take a co-ordinated response to firms in financial distress through the operation of resolution ‘colleges’
It is now for the Council and the European Parliament to consider the two legislative proposals. Once the proposals are agreed and enter into force EU Member States must implement the directive after 18 months and a day.