E-zine Insurance Regulation - Solvency II Review: the Commission has spoken. A first overview.
On 22 September 2021, the European Commission published its comprehensive package of proposals and related documentation regarding the review of the Solvency II Directive. 
Notably, the European Commission adopted two proposals for a Directive, one related to review of the existing Solvency II framework,  the other harmonising recovery and resolution procedures following (likely) failures of (re)insurance undertakings. 
The Commission has not proposed a harmonisation of national insurance guarantee schemes. This decision may come as a surprise to some observers, as EIOPA has recommended such harmonisation in its earlier Opinion on the Solvency II Review  . The Commission explains this decision by referring to the “economic uncertainties created by the COVID-19 pandemic, as well as the need to focus on economic recovery”  and will reassess this policy decision in the future.
Long awaited proposals
The Solvency II review was long anticipated. Indeed, the Directive itself provides that the European Commission should review at least four areas in 2020 (moved to 2021 due to COVID-19):
- Long term guarantees measures and measures on equity risk, 
- Methods, assumptions and standard parameters used when calculating the Solvency Capital Requirement (“SCR”) standard formula, 
- Member States’ rules and supervisory authorities” practices regarding the calculation of the Minimum Capital Requirement (“SCR”),  and
- Group supervision and capital management within a group of insurance or reinsurance undertakings. 
Furthermore, the Commission issued a request for technical advice to EIOPA on 11 February 2019, which the latter delivered on 17 December 2020. 
Both the (request for) technical advice and the current proposals of the European Commission do not only address the four domains listed above. Instead, the European Commission has subjected Solvency II to a general review based on the experiences from the first 5 years of application. In addition, it proposes to align the Directive with the current political objectives of the European Union, notably the financing of the post COVID-19 economic recovery, the Capital Markets Union and the European Green Deal.
According to the European Commission, the proposals provide capital relief up to a consolidated amount of 90 billion EUR in the short-term and, considering the progressive implementation of stricter capital requirements for certain (re)insurers, 30 billion EUR in the long-term.
“Evolution rather than revolution”
EIOPA refers to the proposed reforms as an evolution rather than a revolution. Indeed, the existing comprehensive regulatory framework is now being refined and not redesigned. Nevertheless, the proposals contain no less than 224 pages of reforms and will be supplemented by a review of the Solvency II Delegated Regulation , as well as implementing acts.
Therefore, (re)insurance undertakings should carefully analyse the impact of the review on their capital requirements, system of governance, reporting and day-to-day business. Likewise, groups and holdings should carefully analyse how their organisation is affected by the current reforms and what changes are required.
We summarise the most relevant elements of the review as follows. Considering the comprehensive and detailed nature of the proposals, this summary is non-exhaustive.
To address concerns of small undertakings regarding complex and burdensome regulatory requirements, the Commission increases the thresholds for the Member States’ option to exclude small undertakings from the application of Solvency II.
Furthermore, it proposes to expand the scope of the principle of proportionality and to allow so-called “low-risk profile undertakings” to benefit from the applicable exemptions. The proposed Article 29a defines “low-risk profile undertakings” in a detailed manner. The definition distinguishes between life and non-life insurers and considers, among others, whether the undertaking has significant cross-border business (>5%), the technical provisions (life) or premium written (non-life), the investments in non-traditional investments and the reinsurance premium collected by the undertaking. However, the definition excludes from its scope undertakings using an internal model to calculate the SCR and parent undertakings of groups (unless the group is classified as a “low-risk profile group”.
(ii) Quality of supervision
The proposals strengthen the supervisory powers of the national competent authorities (“NCAs”) by enhancing cooperation (e.g. supervisory information sharing, joint assessment of applications for authorisation) and attributing additional powers with regard to the supervision on fit and proper requirements of members of the administrative, management or supervisory body (“AMSB”).
The Commission proposes to further consider the principle of proportionality in the applicable reporting requirements, in particular regarding the newly introduced category of “low-risk profile undertakings”.
Furthermore, the proposals have an impact on the principles and frequency of the Regular Supervisory Report (“RSR”) and the structure of the Solvency and Financial Conditions Report (“SFCR”), which will be split into a part addressed to policyholders and a part addressed to other stakeholders.
The prudential balance sheet, the group balance sheet and/or the single SFCR become subject to an auditing requirement.
(iv) Long-term guarantee measures
The Omnibus II Directive  introduced long-term guarantees (“LTG”) measures in Solvency II to mitigate the impact of short-term market fluctuations on (re)insurers’ solvency positions. The current package introduces various technical changes to these measures.
With these changes, the European Commission intends to release capital into the economy and to encourage (re)insurance undertakings to provide long-term capital funding to businesses. It pursues this objective by providing capital relief for long-term equity investments and decreasing incentives of procyclical behaviour.
The proposed changes impact, among others, the eligibility criteria of the existing long-term equity asset class (with preferential capital treatment).
Furthermore, the proposals change the applicable rules on the extrapolation of the relevant risk-free interest rate term structure, the volatility adjustment (short term market fluctuations will have fewer impact on the solvency position), the symmetric adjustment to the equity risk, the duration-based equity risk sub-module and the transitional measures on the risk-free interest rates and the technical provisions.
Further clarity will be provided by (amendments to) delegated and implementing acts. While the Commission clarified its intentions in its Communication to the European Parliament and the Council,  it has not yet published the actual text of these level 2 measures.
(v) Macro-prudential tools
The European Commission proposes to integrate macroeconomic considerations and analysis in the Own Risk and Solvency Assessment (“ORSA”) and the prudent person principle for investments.
Furthermore, the proposals introduce additional requirements regarding liquidity management and planning.
Finally, the Commission proposes to attribute additional powers to NCAs in case of exceptional circumstances, for example to impose temporary freezes on redemption options on life insurance policies or to suspend or restrict profit distributions.
(vi) European Green Deal
The proposals introduce a requirement of a climate scenario analysis, i.e. the identification of any material exposure to climate change risk and, where relevant, an assessment of the impact of long-term climate change scenarios on their business. The Commission announced that it may extend this requirement to other environmental risks in the future.
Furthermore, the Commission proposes to mandate EIOPA to submit a report by 2023 regarding the potential need for a dedicated prudential treatment of exposures related to assets or activities associated substantially with environmental and/or social objectives and to conduct climate stress tests in the (re)insurance sector.
(vii) Group supervision
The Commission proposes comprehensive amendments to the regulatory framework governing groups and holding companies.
Among others, amendments relate to the definition of groups and holding companies, the scope of group supervision, the scope of intragroup transactions reporting, reinforcement of NCA’s supervisory powers, group solvency calculation, the system of governance on group level etc.
(viii) Supervision of cross-border insurance business
The proposed reforms intend to enhance the exchange of information between NCAs. The Commission pursues this objective by requiring applicants for authorisation to disclose whether any possible previous application in another Member State was rejected or withdrawn and to introduce additional information sharing arrangements between NCAs themselves.
In addition, the Commission proposes to enhance EIOPA’s powers in case NCAs fail to reach a common view in complex cross-border cases or in case of conflict between home and host competent authorities.
(ix) Recovery and resolution
In its most profound proposal, the Commission harmonises the rules on recovery and resolution of (re)insurance undertakings. The proposals are inspired by the existing framework applicable to other financial services but reflects, according to the Commission, the specificities of the insurance sector. The rules on recovery and resolution will apply in a worst-case scenario, i.e. when the Solvency II framework has not prevented a (likely) failure.
The proposal on recovery and resolution is comprehensive. If adopted, each Member State will designate national resolution authorities with vigorous supervisory tools and powers. Additional rules aimed at preventing and/or preparing a possible failure will govern insurance and reinsurance undertakings. These rules include, among others, a requirement for most (re)insurance undertakings to draw up a pre-emptive recovery plan. Furthermore, (re)insurance undertakings will become subject to the supervision of the resolution authority in case of (likely) failure. The latter may, in that case, impose, among others, a mandatory portfolio transfer, withdraw the authorisation to conclude new insurance contracts, take control over the undertaking, remove or replace members of senior management or impose a bail-in.
A (re)insurer may become subject to resolution measures when it breaches the MCR or is otherwise failing or likely to fail, when all other intervention measures (e.g. recovery measures under Solvency II) have been exhausted and where resolution action is necessary in the public interest (e.g.when winding up the undertaking under normal insolvency proceedings would risk prolonged financial instability or a worse outcome for policyholders).
The European Commission has now sent the proposals to the European Parliament and Council for their consideration. After negotiation and adoption of the final texts, the Member States must transpose the final Directives into national law and apply the measures at the latest 18 months after the entry into force or the final Directives.
Furthermore, the Commission has announced that the current proposals will be supplemented by a review of the Solvency II Delegated Regulation and implementing acts. While it has not yet published any of these proposals, the Commission has announced that it will commence discussions with stakeholders in parallel to the legislative process amending Solvency II.
In addition, EIOPA may also issue additional regulatory guidance (for example in the form of guidelines), as suggested by its Opinion on the Solvency II Review.
Finally, we anticipate a review of Directive (EU) 2016/97 of the European Parliament and of the Council of 20 January 2016 on insurance distribution (“IDD”) in 2022. This review may lead to proposals which could further change the existing framework of insurance regulation in a significant manner.
 Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance, as amended from time to time (“Solvency II”). Consolidated text available on Eur-Lex.
 European Commission, Proposal for a Directive of the European Parliament and of the Council amending Directive 2009/138/EC as regards proportionality, quality of supervision, reporting, long-term guarantee measures, macro-prudential tools, sustainability risks, group and cross-border supervision, available on Eur-Lex.
 European Commission, Proposal for a Directive of the European Parliament and of the Council establishing a framework for the recovery and resolution of insurance and reinsurance undertakings and amending Directives 2002/47/EC, 2004/25/EC, 2009/138/EC, (EU) 2017/1132 and Regulations (EU) No 1094/2010 and (EU) No 648/2012, available on Eur-Lex.
 EIOPA, “Opinion on the 2020 review of Solvency II”, 17 December 2020, available on EIOPA’s website, Section 13.
 European Commission, “Questions and Answers: Proposals for amendments to the Solvency II Directive and a new Insurance Recovery and Resolution Directive”, 22 September 2022, available on the website of the European Commission; European Commission, “Communication from the Commission to the European Parliament and the Council on the review of the EU prudential framework for insurers and reinsurers in the context of the EU’s post pandemic recovery”, 22 September 2021 ,available on Eur-Lex, section 5.1.
 Article 77f, Solvency II.
 Article 111.3, Solvency II.
 Article 129, Solvency II.
 Article 242, Solvency II.
 EIOPA, “Opinion on the 2020 review of Solvency II”, 17 December 2020, available on EIOPA’s website.
 Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up and pursuit of the business of Insurance and Reinsurance, OJ L 12, 17.1.2015, p. 1–797.
 Directive 2014/51/EU of the European Parliament and of the Council of 16 April 2014 amending Directives 2003/71/EC and 2009/138/EC and Regulations (EC) No 1060/2009, (EU) No 1094/2010 and (EU) No 1095/2010 in respect of the powers of the European Supervisory Authority (European Insurance and Occupational Pensions Authority) and the European Supervisory Authority (European Securities and Markets Authority), OJ L153, 22.05.2014, p.1.
 European Commission, “Communication from the Commission to the European Parliament and the Council on the review of the EU prudential framework for insurers and reinsurers in the context of the EU’s post pandemic recovery”, 22 September 2021 ,available on the Eur-Lex, Section 4.
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