The European Commission (EC) adopted a comprehensive review package of Solvency II rules in the European Union. The package consists of a legislative proposal to amend the Solvency II Directive and a legislative proposal for a new Insurance Recovery and Resolution Directive. EC also published questions and answers and impact assessments related to the package. The amendments to the Solvency II Directive address proportionality, quality of supervision, reporting requirements, long-term guarantee measures, macro-prudential tools, sustainability risks, group and cross-border supervision. The proposed Insurance Recovery and Resolution Directive addresses crisis management (preventive powers and pre-emptive recovery planning and resolution) in relation to all insurance and reinsurance undertakings in the European Union that are subject to the Solvency II framework. The legislative package will now be discussed by the European Parliament and Council.
The aim of the review is to strengthen the contribution of insurers in Europe to the recovery financing, the work on Capital Markets Union, and the channeling of funds toward the European Green Deal. The review aims to provide incentives for insurers to contribute to the long-term sustainable financing of the economy, improve risk-sensitivity, mitigate excessive short-term volatility in the solvency positions of insurers, and improve proportionality. It also aims to enhance quality, consistency, and coordination of insurance supervision across the European Union; to improve protection of policyholders and beneficiaries, including when their insurer fails; and to better address the potential build-up of systemic risk in the insurance sector. The proposed amendments to Solvency II Directive entail:
- Changing long-term guarantee measures, in particular extrapolation of risk-free interest rates and volatility adjustment, which are used in the valuation of insurance liabilities
- Making prudential rules more proportional by allowing more small insurers to be exempted from Solvency II rules and by creating a more suitable framework for insurers identified as insurers with a low risk profile
- Modifying reporting requirements for low-risk profile undertakings and modifying the structure of the Solvency and Financial Condition Report (SFCR)
- Adding new reporting deadlines and introducing the possibility to change them, where justified by extraordinary circumstances
- Amending provisions to require undertakings using an internal model to report regularly to the supervisors an estimation of the Solvency Capital Requirement calculated with the standard formula
- Refining the rules on transparency by better adapting disclosures required from insurers to the information needed by recipients while differentiating between the information for policyholders and analysts
- Improving the quality of supervision and leveling up the playing field through several changes, particularly with respect to the ongoing compliance with prudential rules, cross-border insurance business, and insurance groups
- Ensuring that climate and systemic risks are better managed and supervised by introducing new requirements on long-term climate change scenario analysis
Additionally, the proposed Insurance Recovery and Resolution Directive includes provisions that address resolution planning and resolvability assessments; resolution tools and powers; cross-border group resolution; penalties; and ancillary provisions for resolution, including valuation, safeguards, procedural obligations and rights of appeal, and exclusion of other actions. The proposal also amends the Solvency II Directive, Company Law Directives, and the European Insurance and Occupational Pensions Authority (EIOPA) Regulation (1094/2010). The aim of this proposed Directive is to ensure that insurers and relevant authorities in the European Union are better prepared in cases of significant financial distress. The Directive will introduce a new orderly resolution process to better protect policyholders and financial system, including the taxpayers. The proposed Directive will complement the revised Solvency II framework and is proportionate to the specificities of the insurance and reinsurance business. In terms of future work, the European Commission highlighted in its Communication that, to analyze the problems and intensify efforts for narrowing the climate protection gap, it will set up a Climate Resilience Dialog by 2022, bringing together insurers, reinsurers, public authorities, and other relevant stakeholders.
- Press Release
- Communication (PDF)
- Proposal on Solvency II Directive (PDF)
- Proposed Recovery and Resolution Directive (PDF)
- Review Package and Other Documents
Keywords: Europe, EU, Insurance, Reinsurance, Solvency II, Recovery and Resolution, Resolution Framework, Proportionality, Macro-Prudential Tools, Reporting, Climate Change Risk, ESG, European Green Deal, Q&A, SCR, Solvency Capital Requirement, EIOPA, EC
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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