European Council agrees Solvency II reform package
The European Council today formally endorsed a Solvency II reform package that implements the political agreement reached with the European Parliament in December 2023, completing the legislative phase of the directive’s first major review.
The review modernises Solvency II to provide stronger incentives for insurance and reinsurance undertakings to invest in long-term capital, aligning prudential rules more closely with the European Union’s broader financing objectives.
The new framework also updates the regime to better capture climate-related risks and to reduce the sensitivity of insurers’ solvency positions to short-term market volatility.
Alongside the core directive changes, the package introduces a dedicated Insurance Recovery and Resolution Directive, creating a new EU-level regime for dealing with distressed (re)insurers.
Key changes in the reform package • Cost of capital rate for the risk margin reduced from 6% to 4.75% • New exponential, time-dependent element added to the risk margin formula • Proportionality thresholds raised to GWP over €15m or GTP over €50m • Group technical provisions threshold doubled to €50m • New macroprudential toolkit for systemic risk in insurance • IRRD requires pre-emptive recovery plans for larger and systemically important entities
Capital framework and risk margin
Agreed amendments to Solvency II lower the assumed cost of capital rate used in the risk margin calculation to 4.75%, down from the current 6%, altering one of the key parameters in the directive’s capital framework.
In addition to the headline rate cut, the reform introduces an exponential and time-dependent component into the risk margin formula, intended to reflect more explicitly the time profile of insurance risks.
Proportionality and scope thresholds
The revised framework brings in simplified and more proportionate requirements for small and non-complex insurance companies, adjusting the application of Solvency II to better match business scale and risk.
Under the reformed regime, Solvency II will now apply to undertakings with gross written premiums above €15m or gross technical provisions above €50m, revising the entry thresholds for full application of the directive.
For insurance undertakings that are part of a group, the group-wide total technical provisions threshold has been raised to €50m, up from €25m, changing the point at which group supervision requirements are triggered.
Macroprudential and systemic risk tools
The package adds a new macroprudential toolkit to the Solvency II framework, giving authorities additional instruments to address the potential build-up of systemic risk within the insurance sector.
The new Insurance Recovery and Resolution Directive complements these tools by establishing a harmonised approach to recovery and resolution planning for (re)insurers across the European Union.
Under IRRD, larger and systemically important entities will be required to prepare pre-emptive recovery plans, setting out options and measures to be deployed if they encounter severe financial stress.
Climate risk and balance sheet volatility
The revised rules explicitly enhance the treatment of certain risks, including those related to climate change, by embedding them more firmly within the prudential framework.
They also adjust aspects of the regime so that insurers’ measured financial strength is less exposed to short-term market fluctuations, with the aim of reducing undue volatility in solvency ratios driven by temporary market moves.
Mairead McGuinness, Commissioner for Financial Services, Financial Stability and Capital Markets Union, said the agreements will enable the insurance sector to “step up and play its full part in the EU economy,” underlining the expected role of insurers in financing growth.
Implementation timetable
The European Parliament and the Council reached their political agreements on the Solvency II review on 13 and 14 December 2023, paving the way for the formal adoption now completed by the Council.
Once the amending legislation is published in the Official Journal, Member States will have two years to transpose the changes into national law, setting the outer limit for when the revised regime must be in force domestically.
--- Sources: https://www.consilium.europa.eu/ https://www.europarl.europa.eu/thinktank/en/document/EPRS_BRI(2023)739314 https://finance.ec.europa.eu/news/insurance-commission-welcomes-political-agreements-review-eu-insurance-rules _en
