1. SOLVENCY II
1.1 European Parliament adopts proposed Solvency II amending Directive and IRRD
On 23 April 2024, the European Parliament published a press release announcing that it had voted in plenary to adopt the proposed Directive amending the Solvency II Directive (2009/138/EC) (2021/0295 (COD)) and the proposed Insurance Recovery and Resolution Directive (IRDD) (2021/0296 (COD)).
The changes to the Solvency II rules will free up large sums of money which insurance firms had to keep in reserve, intended to allow the sector to channel more funds into the economic recovery and the European Green Deal more particularly.
Currently the cost-of-capital rate, which determines reserve levels, is assumed to be equal to 6%, whereas the update will take this rate down to 4.75%. The update will also simplify supervision while on the other hand empowering supervisors on systemic risks.
The update includes new provisions which will require insurance firms to better take into account sustainability-related risks and to report more about these risks so that policyholders can understand a firm's green credentials.
The proposal of the Commission is notably improved by making the system more selective, targeting the riskier sectors of the industry more, and more focussed on protecting policyholders. Finally, the review clause lays the ground for the introduction of insurance guarantee schemes in all member states. It will help deal with failing insurance undertakings, thereby ensuring that these undertakings can be recovered or wound down without taxpayers footing the bill.
The aim of the Insurance Recovery and Resolution Directive is to ensure that insurers and the relevant authorities in the EU are better prepared in cases of significant financial troubles.
The next step is for the Council of the EU to formally adopt the Directives. The Directives will enter into force 20 days after their publication in the Official Journal of the European Union. Member states are expected to apply legislation and regulation implementing the Directives from 24 months and one day after their entry into force.
The European Parliament and the Council reached political agreement on the final compromise text for the Directives in December 2023. The Council published the agreed texts in January 2024.
The press release from the European Parliament can be viewed here.
1.2 EIOPA peer review report on supervision of prudent person principle under Solvency II
On 2 May 2024, the European Insurance and Occupational Pensions Authority ("EIOPA") published a peer review report following on from a peer review conducted in 2023 on the supervision of the prudent person principle ("PPP") under the Solvency II Directive (2009/138/EC), together with a factsheet and a press release.
The PPP, which is set out in Article 132 of the Solvency II Directive, requires insurance and reinsurance undertakings to invest only in assets whose risks they can thoroughly understand, monitor and manage. When investing, insurers must also act in the best interests of policyholders while ensuring the overall security, liquidity and profitability of the portfolio.
The peer review focused on the supervision of investments in non-traditional or more complex assets, including derivatives (particularly in the case of their use for efficient portfolio management) and of assets backing unit-linked and index-linked contracts where the risk is borne by policyholders.
Following the peer review, EIOPA issued 49 recommended actions to 22 national competent authorities (NCAs). Some of the more pertinent recommendations from EIOPA to NCAs included:
- Developing internal guidance to ensure a common approach during supervision or publishing guidance to the market on what type of assessments would need to be carried out prior to investing in risky or complex investments.
- Improving their supervision of derivatives through regularly performing detailed off-site analyses and on-site inspections or by providing detailed guidance on the supervision of derivatives used for hedging and efficient portfolio management.
- Developing, maintaining and using risk indicators on the PPP to implement a data-driven supervision.
- Providing specific supervisory expectations to insurers on how to assess whether investments for unit-linked and index-linked contracts are made in the best interests of policyholders.
EIOPA states that it will monitor and assess NCAs' compliance with the recommended actions. It will also consider how to best reflect the overall findings of the peer review in its work on supervisory convergence.
The peer review report can be accessed here.
1.3 Delegated Decision renewing Solvency II equivalence decision for US published in OJ
On 21 June 2024, Commission Delegated Decision (EU) 2024/1763 on the renewal of the determination that the solvency regime in force in the United States applicable to undertakings with their head office in that country is provisionally equivalent to that laid down in the Solvency II Directive (2009/138/EC) was published in the Official Journal of the European Union (OJ). The European Commission adopted the Delegated Regulation in March 2024.
Article 227(6) of the Solvency II Directive provides that provisional equivalence granted under Article 227 of the Solvency II Directive is subject to renewals for further periods of ten years where certain specified criteria continue to be met. The provisional equivalence granted to the US (among other non-EU jurisdictions) under Commission Delegated Decision ((EU) 2015/2290) expires on 1 January 2026.
On the basis of the assistance provided by EIOPA and in the light of the solvency requirements applicable in the United States, EIOPA found that the criteria laid down in Article 227(5) of Directive 2009/138/EC continue to be met by the solvency regime in force in the United States applicable to undertakings with their head office in that third country. EIOPA found it appropriate to renew the determination, laid down in Delegated Decision (EU) 2015/2290/EC, that that solvency regime is provisionally equivalent to that laid down in Title I, Chapter VI of Directive 2009/138/EC (Solvency II).
The Delegated Decision will renew the US provisional equivalence for ten years from 1 January 2026 to 31 December 2035.
The Commission Delegated Decision published in the OJ renewing Solvency II equivalence for the US can be viewed here.
2. EUROPEAN INSURANCE AND OCCUPATIONAL PENSIONS AUTHORITY (EIOPA)
2.1 European Commission requests EIOPA technical advice on Solvency II Delegated Regulation review
On 9 May 2024, the European Commission published its formal request (Ares (2024)3165513) (dated 30 April 2024) for technical advice from EIOPA on the review of specific items in Commission Delegated Regulation (EU) 2015/35 (Solvency II Delegated Regulation), with an accompanying cover letter.
In this mandate to EIOPA, the Commission seeks its technical advice on the following areas:
- The methodology to be used when classifying undertakings as small and non-complex, and the conditions for granting or withdrawing supervisory approval for proportionality measures to be used by undertakings not classified as small and non-complex undertakings.
- The standard formula capital requirements for exposures to central counterparties (CCPs) when they become direct clearing members.
- The standard formula capital requirements for investments in crypto-assets.
The Commission requests that EIOPA deliver its technical advice by 31 January 2025 in relation to the areas summarised in the first two bullet points and by 30 June 2025 in relation to the area summarised in the third bullet point
The formal request from the Commission to EIOPA relating to technical advice on the review of specific items on Solvency II can be viewed here and the accompanying cover letter, here.
2.2 EIOPA consults on natural catastrophe risk reassessments in the standard formula
On 3 April 2024, EIOPA launched a public consultation on reassessing natural catastrophe risks in the standard formula.
EIOPA's review of these parameters aims to better capture the risks stemming from perils such as earthquake, flood, hail and windstorm, based on new insights, new data and new models that have come online since the last reassessment in 2018.
Natural catastrophes are becoming more frequent and more severe across Europe due to climate change. Against this development – and with a view to ensuring the continued protection of policyholders and the stability of the EU's insurance market – it is important that insurers' capital requirements for natural catastrophe underwriting risk continue to reflect the excepted impact of climate change. EIOPA has therefore reviewed natural catastrophe parameters in the standard formula to see if previous parameters needed recalibrating in light of new evidence, but also to assess whether new perils or regions should be included.
As a result of the 2023/2024 (re)assessment exercise, EIOPA is proposing new risk factors for 25 perils/regions across five perils (flood, hail, earthquake, windstorm, subsidence). Flood risk, for instance, is to be (re)calibrated for 10 countries. Additionally, EIOPA suggests including more countries in the standard formula for which certain natural catastrophe risks were previously not covered. Nine countries including the Netherlands, Ireland and Finland are slated to be added for flood risk.
Beyond the five perils already included in the standard formula, EIOPA is also monitoring emerging perils across Europe that could have a material impact on the region's insurance sector. EIOPA is considering including wildfire, coastal flood and drought in the future as new perils to be covered under the standard formula.
Stakeholders are invited to provide their feedback to the proposals made in EIOPA's Consultation Paper by responding to the questions via the online survey. The deadline for the submission of comments was 20th June 2024.
The Solvency II Review mandates EIOPA to reassess, and, in case of significant discrepancies, recalibrate these parameters at least every five years. EIOPA therefore performs regular recalibrations of the standard formula's natural catastrophe risk every five years to consider the latest data and scientific evidence.
This reassessment exercise is part of EIOPA's broader work related to natural catastrophes, which, among others, includes the analysis of insurers' exposure to physical climate change, the insurance protection gap dashboard for natural catastrophes and the analysis of insurance-based solutions for natural catastrophe protection gaps.
The press release from EIOPA launching the public consultation can be accessed here.
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