2027 Solvency II cuts long-liability risk margin, broadens MA diversification
EIOPA sharpens Solvency II risk margin and matching adjustment before 2027
Solvency II undertakings now have EIOPA’s final Guidelines and draft technical standards for liquidity powers, risk-margin calculation and matching-adjustment treatment before the revised framework starts in January next year. EIOPA published today eight sets of guidelines and draft technical standards, completing the legal instruments it was mandated to develop under the review.
The package comprises one new set of Guidelines on liquidity vulnerabilities, one set of Regulatory Technical Standards (RTS) on simplified risk-margin calculation, revisions to four further guideline sets and revisions to two sets of Implementing Technical Standards (ITS).
Risk margin and long-term liabilities
- Lambda factor: The review requires an exponential, time-dependent lambda factor in the risk-margin calculation. The change reduces both the amount of the risk margin for long-term liabilities and its sensitivity to interest-rate changes.
- Risk-margin standard: EIOPA published an RTS on the simplified calculation of the risk margin to align the Delegated Regulation with the revised formula.
Mechanically, projected solvency capital requirement (SCR) amounts are multiplied by the lambda factor compounded by the number of years between the valuation date and the projected date. EIOPA's technical advice had proposed a lambda factor of about 0.975; the adopted Delegated Regulation sets the factor at 0.96 and retains the 50% floor.
Matching adjustment and SCR diversification
The matching-adjustment changes affect how undertakings recognise diversification between asset portfolios and the rest of the balance sheet when calculating capital requirements.
- Full diversification: Undertakings using the matching adjustment (MA) may assume full diversification between the MA portfolio and the rest of the undertaking when calculating the SCR, provided that the best estimate of insurance and reinsurance obligations does not form a ring-fenced fund.
- ITS alignment: EIOPA revised ITS on the treatment of the MA to keep the technical standards consistent with the full-diversification amendment.
- Ring-fenced funds: EIOPA removed text that had extended ring-fenced fund guidance to MA portfolios, confirming that MA portfolios that are not ring-fenced funds qualify for full diversification.
- Restructured assets: MA portfolio eligibility includes restructured assets when they meet the relevant Solvency II and Delegated Regulation criteria. Undertakings must provide evidence that those conditions are satisfied.
The revised ITS also allow undertakings to combine the MA liquidity plan with the overall liquidity risk management plan as a transitional streamlining measure.
Liquidity powers
The new liquidity-vulnerability Guidelines allow supervisors to act on deficient liquidity risk management. The most intrusive power is a temporary suspension of policyholders’ redemption rights, available only in exceptional circumstances specified by the Guidelines.
Reporting, group solvency and simplification
Reporting and group-solvency changes sit behind the capital and asset-treatment measures, but they still change which undertakings face financial-stability reporting and how group calculations are aligned with the amended framework.
- Reporting threshold: The financial stability reporting threshold for groups and solo undertakings rises from €12bn to €20bn, reducing the reporting population by 24% for groups and 53% for solo undertakings.
- Reporting burden: The supervisory reporting amendments target a 25% reduction in reporting burdens for the general corporate population and 35% for small and medium-sized enterprises by 2029.
- Group solvency: EIOPA revised the Guidelines on group solvency to align them with the amended Solvency II legal framework and simplify the instrument.
EIOPA also revised ITS on disclosure templates for supervisory authorities and Guidelines on reporting and disclosure to reflect the Solvency II amendments.
Earlier review work simplified supervisory guidance outside today’s final package. EIOPA revised Guidelines on the supervisory review process and on market and counterparty risk exposures, deleting four Guidelines and adding a new Guideline on leveraged funds.
Legislative path
The draft technical standards have been submitted to the European Commission, which will decide on adoption within three months. The Guidelines and technical standards, together with the other legal changes made by the review, will apply from 30 January 2027.
--- Sources: https://www.eiopa.europa.eu/eiopa-completes-solvency-ii-review-mandate-final-guidelines-and-draft-technical-standards-revised _en
