- Volatility adjustment increase: The Commission raises the volatility adjustment (VA) general application factor from 65% to 85%, increasing the share of the risk‑adjusted credit spread recognised in the VA, reducing short‑term balance‑sheet volatility.
- Risk margin and delegated acts: The Commission will implement changes to the risk margin and other balance‑sheet mechanics through delegated acts, leaving detailed calibrations to the secondary rulemaking process.
- Timing of capital effect: The Commission ties much of the capital change to a transition and implementation timetable that runs to 2032, consistent with EIOPA’s proposed phase‑out mechanics for certain transitionals.
These items alter the mechanics used to value liabilities and recognise credit spread in technical provisions, which directly affects solvency capital requirement (SCR) volatility and the capital that can be made available for investment.
Volatility adjustment, extrapolation and sensitivity
The package targets two of the standard inputs that cause short‑term solvency swings: the volatility adjustment that adjusts the discounting of liabilities for credit spread, and the extrapolation method used to construct the risk‑free term structure.
- VA calibration and mechanics: The Commission adopts EIOPA’s principles to strengthen the VA system, including introducing a factor to reflect duration and/or volume mismatch between fixed‑income assets and insurance liabilities.
- Extrapolation sensitivity: EIOPA recommended that firms test the impact of changing the extrapolation convergence parameter to 5% and disclose the outcome. The Commission’s review points the industry to that sensitivity analysis as a supervisory expectation.
- Disclosure threshold: EIOPA sets a mandatory disclosure threshold when the sum of cash‑flows beyond the first smoothing point exceeds 10% of total cash‑flows, and it advises that the sensitivity outcome be included in regular supervisory reporting.
EIOPA also published detailed numerical shock calibrations and a phased introduction for alternative extrapolation parameters. For example starting‑values (X) of 20% in year one, reducing linearly to 10% by 2032.Additionally, special treatments for currencies with short first smoothing points — which are the technical templates likely to inform delegated acts.
Long‑term equity (LTE)
The Commission proposes loosening the eligibility criteria for the long‑term equity (LTE) asset class so insurers can more easily qualify for the preferential 22% capital charge and thus support longer‑term private funding.
- LTE capital charge: Qualifying LTE exposures would attract the reduced 22% risk charge that EIOPA’s advice specifies for long‑dated, diversified equity exposures that meet the required conditions.
- Eligibility and buffers: The review raises the LTE buffer threshold to 105% in the Commission’s impact framing and signals broader revisions to the eligibility tests for the 22% treatment. Holdings that lose LTE eligibility would revert to the standard higher equity stresses (noted as 39% or 49% in industry commentary).
- EIOPA criteria to watch: EIOPA’s advice spells out the practical tests the industry will be measured against — examples include an average holding horizon above five years, liability Macaulay duration above ten years, proper diversification of the LTE sub‑set, exclusion of participations and intra‑group controlled investments, a minimum control threshold of 20%, and liquidity buffer requirements. These elements are the detailed mechanics market participants should map to their portfolios while delegated acts and national supervisors set final application rules.
For investment teams, the LTE changes are the clearest route in the package to lower capital on equity‑type exposures, provided they meet the tightened governance, diversification and liquidity tests by EIOPA.
Group supervision, proportionality and small‑undertaking regimes
The Commission’s amendments strengthen group supervision and expand proportionality for smaller or lower‑risk insurers.
- Group supervision: Solvency II requirements would be applied directly to insurance holding companies and mixed financial holding companies, and group supervisors would be empowered to require restructuring of groups where necessary.
- Proportionality and small undertakings: The directive text will permit more small insurers to be exempted from full Solvency II requirements and proposes a tailored framework for undertakings meeting low‑risk criteria. The low‑risk undertaking (LRU) tests in EIOPA’s advice include thresholds such as life undertakings with gross technical provisions not higher than €1bn, non‑life undertakings with gross written premiums not higher than €100m, limited cross‑border underwriting, and limits on non‑traditional investments and concentration.
These changes aim to reduce regulatory burden for genuinely small or low‑risk firms while increasing supervisory reach and corrective powers at group level.
Recovery, resolution and reporting
The package creates a new, harmonised Insurance Recovery and Resolution Directive to address cross‑border failures and gaps in policyholder protection exposed by recent insurer collapses.
- New resolution framework: The Insurance Recovery and Resolution Directive would provide harmonised tools to manage failing insurers across Member States.
- MCR and supervisory triggers: EIOPA has advised tightening MCR‑related processes — for example, requiring immediate notification of MCR breaches to supervisory authorities, specifying timelines for supervisory actions and allowing withdrawal of authorisation if remedial finance schemes are manifestly inadequate or not complied with within a defined period. Those supervisory‑process calibrations are part of the technical advice that will inform the Recovery and Resolution work.
The set of measures strengthens early‑warning, reporting and remedial powers for supervisors and links resolution tools to enhanced liquidity and systemic‑risk planning for larger or systemically important undertakings.
Legislative path
The Commission adopted the legislative proposals on 22 September 2021. The Solvency II revision is now before the European Parliament and Council as an ordinary legislative file (procedural file 2021/0295(COD)). Many of the package’s detailed calibrations — including the volatility adjustment and risk‑margin mechanics — are to be fleshed out in delegated acts and secondary instruments, so firms should treat EIOPA’s technical advice as the best available benchmark for likely numbers rather than settled law. EIOPA has also proposed repeating reviews at least every five years and recommended a range of disclosure and transition timetables, including phase‑out mechanics through 2032 for certain transitional arrangements.
Sources: finance.ec.europa.eu · eiopa.europa.eu · europarl.europa.eu
