What is Solvency II?
Solvency II is a harmonised prudential framework for insurance firms, introduced in 2009 to replace a patchwork of rules in the areas of
- life insurance
- non-life insurance
Solvency II rules introduce prudential requirements tailored to the specific risks which each insurer bears. They promote transparency, comparability and competitiveness in the insurance sector.
The framework consists of
- a directive
- delegated acts
- technical standards
Solvency II directive
The Solvency II directive (amended by the Omnibus 2 directive ), became fully applicable to European insurers and reinsurers on 1 January 2016. It covers 3 main areas, related to capital requirements, risk management and supervisory rules.
Risk-based capital requirements
The directive requires insurance companies to hold capital in relation to their risk profiles to guarantee that they have enough financial resources to withstand financial difficulties.
Governance and risk management requirements
Insurance companies have to
- put in place an adequate and transparent governance system
- conduct their own risk and solvency assessment on a regular basis
Supervisory reporting and public disclosure
- enables supervisors to review and evaluate whether insurance companies comply with the rules
- requires these companies to report to supervisory authorities and disclose information publicly
More information is available in the frequently asked questions on Solvency II
Solvency II delegated regulation
Under the Solvency II directive the European Commission can adopt delegated and implementing acts , including technical standards and information for the calculation of technical provisions and basic own funds.
Regulation (EU) 2015/35 (known as the Solvency II delegated regulation), sets out detailed requirements for applying the Solvency II framework. It is the core of the single prudential rule book for insurance and reinsurance firms. The Solvency II delegated regulation covers, among other things
- assets and liabilities valuation, including the so-called long-term guarantee measures
- how to set the level of capital for asset classes an insurer may invest in
- the eligibility of insurers’ own fund items to cover capital requirements
- how insurance companies should be managed and governed
- assessing the equivalence of non-EU countries' solvency regimes with EU rules
- rules on the use of 'internal models' to calculate requirements on solvency capital
- specific rules related to insurance groups
- simplified methods and exemptions to make Solvency II easier to apply for smaller insurers
The Commission reviewed the Solvency II delegated regulation in 2018. In the context of this review, it sent two calls for technical advice to the European Insurance and Occupational Pensions Authority (EIOPA).
On 8 March 2019 the Commission adopted amendments to the Solvency II delegated regulation to help insurers invest in equity and private debt by reducing their capital requirements for investments. The amendments are set to boost private sector investment, a key objective of the capital markets union action plan.
Incentives for insurers to invest in infrastructure
The Solvency II delegated regulation was amended by Regulation (EU) 2016/467 as part of the Commission's capital markets union initiative to remove barriers to investment in the EU and channel capital to infrastructure and long-term sustainable projects.
Large institutional investors such as insurance companies are often reluctant to invest in infrastructure because prudential requirements oblige them to hold a high level of capital against those investments.
The amendments to the Solvency II delegated regulation aim to create better incentives for insurers to invest in those projects.
In particular, under the new regulation
- 'qualifying infrastructure investments' will form a distinct asset category and will benefit from an appropriate, lower risk calibration
- investments in European Long-Term Investment Funds (ELTIFs) and equities traded on multilateral trading facilities (MTFs) will also benefit from lower capital charges
More information is available in the frequently asked questions on amending Regulation (EU) 2016/47
Further to the changes on “infrastructure projects”, Delegated regulation (EU) 2017/1542 introduced a new category (“infrastructure corporates”) in the assets that can benefit from a lower risk calibration.
Capital requirements for insurers’ investments in STS securitisation
In June 2018, the Commission adopted an amendment to the Solvency II delegated regulation to make it easier for insurers to invest in simple, transparent and standardised (STS) securitisation. The changes aim to align the Solvency II framework with the harmonised rules on STS securitisation recently adopted by the EU and to ensure consistent prudential treatment of this asset class in the banking and insurance sectors.
In particular, the new rules will
- replace the current distinction between “type 1” and “type 2” securitisation with the distinction between STS and non-STS securitisation
- replace the sector-specific provisions on due diligence and risk retention with references to the harmonised STS framework
- introduce risk-sensitive capital requirements for senior and non-senior tranches of STS securitisation
- provide for transitional rules concerning investments in securitisation that were issued prior to application of the STS framework.
2021 review of rules for insurers and reinsurers
The Solvency II Directive sets out mandates to review several of its pivotal components, in particular its risk-based capital requirements and rules on valuation of long-term liabilities, and to draw conclusions from the first years of experience with the framework. In February 2019, the Commission requested technical input from EIOPA for the review. The Commission also underlined the relevance of the EU’s political priorities in the context of the review.
Against this background, the Commission pursued the following objectives during its work on the review
- provide incentives for insurers to contribute to the long-term sustainable financing of the economy
- improve risk-sensitivity
- mitigate excessive short-term volatility in insurers’ solvency positions
- improve proportionality
- enhance quality, consistency and coordination of insurance supervision across the EU, and improve the protection of policyholders and beneficiaries, including when their insurer fails
- better address the potential build-up of systemic risk in the insurance sector
- improve preparedness for extreme scenarios that may make recovery or the resolution of a failing insurer or reinsurer necessary
Following the conclusion of its review, the Commission adopted legislative proposals to amend Directive 2009/138/EC and to create an EU framework for the recovery and resolution of insurers and reinsurers in September 2021. The proposals were adopted together with a Communication which explains the broad intentions of the Commission as regards forthcoming changes to the Solvency II delegated regulation. The next step is for the European Parliament, and the Member States in the Council, to negotiate final legislative texts on the basis of the Commission's proposals.
Equivalence decisions recognise that the supervisory regime for insurers in force in certain non-EU countries is equivalent to the Solvency II regime.
After receiving equivalence, EU insurers can use local rules to report on their operations in these countries, while third country insurers are able to operate in the EU without complying with all EU rules.
To know more about the international activities of the Commission in the area of insurance, see the international relations section.