Five years after the EU’s Solvency II regime entered into force, the Commission has put forward proposals to adjust the Union’s rulebook for insurers with the aim of enhancing investment in long-term, sustainable growth. 

Europe’s insurance sector collects around €1tn in premiums every year and manages assets worth about €10tn – close to three quarters of the EU’s GDP. The sector appears to have withstood the impact of the COVID-19 crisis fairly well, remaining well capitalised with an average solvency ratio of 235 percent at the end of 2020 according to data from the European Insurance and Occupational Pensions Authority (EIOPA). 

Capital changes

In avoiding an immediate, overall increase in total capital requirements, the Commission estimates that the new rules could release up to €90bn into the EU’s capital markets. Amendments to the Solvency II Directive could see a gradual tightening of certain capital requirements up until 2032, although some (re)insurers may face stricter increases in capital requirements. Details on changes to the capital framework are mostly left to secondary legislation to come later.

Encouraging equity investment

Noting that insurance companies have been retrenching from long-term investments in equity over the past 20 years, the Commission wants to remove any undue disincentives, including by adjusting long-term guarantee measures to improve how the current framework mitigates the effects of short-term market volatility during crisis times. In the mid-term, the Commission also wants to revise the eligibility criteria of the long-term equity asset class to make it easier for insurers to benefit from preferential capital treatment on equity investments. Revisions to the risk margin, to reduce size and volatility, are also likely to follow. 

Focus on climate risks and impacts

A new requirement for long-term climate change scenario analysis aims to strengthen the sector’s management of climate risks. EIOPA will also conduct climate stress tests and a new climate resilience dialogue will be established to explore how to better the collection of insured loss data. The Commission also wants to mandate EIOPA to review environmentally or socially harmful investments with a view to potentially reviewing the Solvency II standard formula. Regular reviews of physical climate impact trends and EU (re)insurers’ related exposures could also eventually lead to changes to the Solvency II standard formula catastrophe modules. 

Simpler rules for smaller insurers

By tabling a significant extension of the size thresholds which determine the scope of Solvency II’s application, the Commission is moving to exclude smaller insurers from the European regime. Smaller firms would then fall under national regimes which should result in lower compliance costs. A new category of low risk profile (re)insurers is also proposed, associated with lighter and more proportionate rules. Other proportionality measures may apply to other insurers subject to supervisory approval. 

More cross-border supervision

Tackling supervisory gaps which have become more evident in recent years, the Commission wants to update rules on group supervision. Greater clarity is provided on which companies should be included, particularly with reference to holding companies, while other changes outline in more detail on which requirements defined at entity level can be applied at group level, including risks arising from third-country subsidiaries. The powers and responsibilities of supervisory authorities over groups operating in the EEA but with a parent company headquartered in a third country are also addressed. National supervisors could be given greater powers to remove board members, to step in earlier during a crisis to suspend redemption of life insurance policies and to stop dividend payouts. 

Facilitating resolution

Building on measures put in place for the banking sector, the Commission has also published legislative proposals for a new Insurance Recovery and Resolution Directive. With most EU countries not having a specific recovery and resolution framework for insurers in place, the draft EU law provides for a more orderly resolution process by ensuring that national authorities are better equipped to deal with any insurers becoming insolvent. Building also on international work, the proposed Directive would enable the establishment of resolution colleges bringing together relevant supervisors and authorities to take coordinated and timely action to address problems within cross-border insurance and reinsurance groups. Despite expectations, the Commission has not moved ahead with efforts to harmonise insurance guarantee schemes across the EU.

ICAEW reflections

Responding to the Commission’s proposals, Zsuzsanna Schiff from ICAEW’s Financial Service Faculty noted: “The changes have been a long time coming and they will be welcomed by the industry. Even if this time insurers do not get their full wish list, the proposals should provide some certainty as well as an opportunity to contribute to financing the net zero transition. At the same time the UK’s Prudential Regulatory Authority is reviewing its future insurance regulatory principles; it will be interesting to see where they land compared to the EU.”

The legislative package will now be scrutinised by the European Parliament and Council before eventual adoption. Concurrently, the Commission will start work on drafting secondary legislation to supplement the package announced last week.

Find out more on the European Commission’s dedicated pages: Insurance rules’ review: encouraging solid and reliable insurers to invest in Europe’s recovery | European Commission (europa.eu)

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