Insurers play an important role in the everyday life of almost everybody, helping us to protect our health, wealth and property. They also play a key role in the economy, converting continuous protection into long-term investments. Robust, well-functioning insurers are therefore vital for both European citizens and businesses, as are effective financial rules to ensure their reliability.

A single rulebook

Solvency II is the common set of rules for European insurers that replaces Member States' 28 widely varying insurance regimes with a harmonised economic and risk-based approach. Having one set of rules makes it easier for insurers to do cross-border business in the EU and to become more international. In addition to this, regulatory arbitrage needs to be prevented in order to ensure uniform policyholder protection. So it is essential, in the context of the single market, to have a common approach when it comes to insurers' financial soundness.

Solvency II entered into application on 1 January 2016, after years of preparation and with transitional measures to allow a smooth introduction. Following a proportionate approach, small insurers with less than € 5 million in premiums and € 25 million in technical provisions are excluded from the new framework, which also includes simplified solvency calculations for smaller activities. Acknowledging the international impact of Solvency II, the rules provide for equivalence assessment for certain foreign regimes.

The European Insurance and Occupational Pensions Authority (EIOPA) will play an active role in coordinating national supervisory authorities, to ensure consistent supervision across the EU. In case of a breach of capital requirements, Solvency II provides for progressive supervisory intervention by the national authorities. This could range from closer monitoring to withdrawal of authorisation, to avoid defaults of payment to policyholders.

Risks & regulatory requirements

Solvency II is based on three ''pillars'', like the banking framework, with quantitative rules, governance rules, and rules on transparency.  The amount of capital that insurers must hold depends on the risks they actually take, taking into account their own commitments and investments, and more generally their business model. The use of internal models to calculate capital requirements is allowed, provided they have been approved by Member States' insurance supervisory authorities. Improved risk management, as well as regular assessment by insurers of the risks they are exposed to, is intended to ensure that insurers remain robust and reliable.

As part of the Capital Markets Union, and on the basis of stakeholders' feedback and EIOPA's advice, the Commission carried out certain amendments to Solvency II in September 2015. These changes were introduced in order to remove barriers to investment in infrastructure. This will facilitate insurers' contribution to the Investment Plan for Europe, which the Commission launched in 2014, and allow a practical diversification of insurers' investments, helping to cope with the current low-yield environment. Further work is also ongoing on securitisation and investments in infrastructure corporates.

Solvency II was part of the Commission's recent call for evidence on the cumulative impact of EU financial legislation, and a review will take place in the next few years, ensuring that the rules can evolve and be updated when necessary.

Read more on Solvency II.