Introduction  

The recent amendments to the Solvency II Directive mark a significant evolution in EU insurance regulation. It aims to enhance the sector’s resilience, improve risk management, and reduce regulatory burdens for smaller entities. This article summarizes the key changes introduced across the three pillars of Solvency II and analyses the new measures designed to simplify compliance for small (re)insurers and captives. Additionally, it provides insights into how insurers should strategically adapt to these reforms.

Pillar I: Strengthening the capital framework

The revised Solvency II framework refines capital requirements and risk sensitivity, incentivizing insurers to support long-term, sustainable economic growth. The following are the five key changes that will have an impact on (re)insurance companies on Pillar I.

1. Extrapolation of risk-free interest rates

A new methodology slows the convergence to the ultimate forward rate (UFR) to better reflect market rates, impacting long-term business. To mitigate sudden shocks, implementation will be phased in until 2032, subject to supervisory approval.

Insurers should reassess their long-term liabilities and investment strategies to anticipate these changes and their impact on the technical provisions.

2.  Volatility adjustment

The volatility adjustment (VA) is now needs supervisory approval. Some adjustments are being introduced in the VA framework, including an increased application ratio (from 65% to 85%), a macro-VA for the Eurozone and the credit spread sensitivity ratio (CSSR).

This means  insurers need to monitor spreads closer because if credit spreads remain persistently high or fluctuate unpredictably, the effectiveness of the VA could be reduced, leading to higher capital volatility.

3. Risk margin

Lowering the cost of capital rate from 6% to 4.75% and introducing a tapering parameter (“lambda”) will reduce capital burdens. For example,  Luxembourg’s life insurance market expects a 14% decrease in the risk margin (see Figure 1).

Lowering the risk margin through a reduced cost of capital rate and tapering parameter helps insurers reassess their capital allocation. With lower capital burdens, they have more flexibility to optimize investment strategies, reallocate capital to higher-yielding opportunities, or adjust risk appetite.

Figure 1: Risk margin for Luxembourg life insurance market (data 2023 - EUR)

Source: Deloitte SII Benchmarking Tool, Deloitte calculations (Insurance Market Insights: 2024 Edition | Deloitte Luxembourg).

4. Long-term equity investments

The criteria for long term equity investments (LTEI) classification have been relaxed, particularly for equities held in European long-term investment funds (ELTIFs) and alternative investment funds (AIFs) with a lower risk profile.

Insurers should analyze their equity investments to optimize capital requirements. Classifying equity investments as LTEIs represents an additional effort but could be worthy in terms of achieving lower and more stable capital requirements.

5. Symmetric adjustment

The adjustment corridor increases from 10% to 13%, improving risk sensitivity to equity shocks. For example, during the March-April 2020 market downturn, the revised framework would have reduced capital requirements by three percentage points (See Figure 2).

Insurers should integrate these changes into their risk models to enhance financial resilience and accurately reflect the potential volatility in the symmetric adjustment (SA).

Figure 2: Symmetric adjustment under the current and new corridors (historical data 1991 – 2024)

Source: Deloitte calculations based on EIOPA insurance statistics.

Pillar II: Strengthening governance and risk oversight

The revised directive introduces new supervisory and risk management requirements to bolster resilience in the face of systemic risks. These are five key developments that will have an impact on the industry:

1. Own risk and solvency assessment

The new package is including an analysis of the macroeconomic situation of the firm, possible macroeconomic and financial markets’ developments, and the capacity to settle obligations under stressed conditions.

Insurers should enhance their own risk and solvency assessment (ORSA) frameworks by incorporating macroprudential risks such as systemic financial instability, market-wide stress, and macroeconomic downturns.

2. Macroprudential tools

Supervisors gain new powers to impose pre-emptive recovery plans for firms showing financial vulnerabilities. In addition, authorities can now impose stricter requirements on capital buffers, restrict dividend distributions, or require additional liquidity stress testing.

To avoid the execution of any of these macroprudential tools, (re)insurers should ensure a robust capital planning and align their recovery and liquidity management plans with evolving regulatory expectations.
 

3. Operational and sustainability risk management

Cybersecurity must now be a core component of operational risk management. In addition, entities will have to consider the short, medium, and long-term horizon when assessing sustainability risks. Undertakings must create plans and systems to identify, measure, manage, and monitor sustainability risks.

4. Climate risk change scenario analysis

Entities must assess significant climate change risks. If found, they should outline two scenarios, and analyze their impact: one where global temperature increase remaining below 2°C, and one where significantly exceeds 2°C.

Firms should understand the exposures to climate risks, integrate climate risk scenario analyses and the potential impacts for the business under those scenarios.

5. Governance and fit and proper

Stronger governance requirements include diversity policies and gender balance promotion in the administrative, management or supervisory body. In addition, entities need to inform the supervisory authority of the reasons for any changes in persons who effectively run the undertaking or have other key functions.

Companies should review board compositions and internal governance frameworks to ensure compliance.

Pillar III: Enhancing transparency and reporting

New reporting requirements aim to improve stakeholder communication and regulatory oversight. Three main changes have been identified and are highlighted below:

1. Solvency and financial condition report

The solvency and financial condition report (SFCR) is now divided into two sections: one for policyholders and beneficiaries, covering key business and risk information; and another for market professionals, providing detailed solvency and governance data.

Insurers should refine their reporting structures to ensure clarity and alignment with each stakeholder needs.

2. Audit requirements

The balance sheet disclosed in the SFCR must now be subject to an audit. The undertakings should submit a separate report, including a description of the audit’s nature and results prepared by the statutory auditor or the audit firm, together with the SFCR.

Companies should prepare for expanded audit obligations by improving financial reporting accuracy, enhancing data governance, and ensuring compliance with more stringent external review processes.
 

3.  Reporting deadlines

Annual quantitative reporting template (QRT) deadlines extend from 14 to 16 weeks, while regular supervisory report (RSR) and SFCR submissions extend from 14 to 18 weeks (and from 20 to 22 weeks for group SFCRs). Insurers should optimize reporting workflows to allow for an efficient external audit process.

Proportionality measures: Reducing regulatory burdens for smaller entities

The Directive introduces tailored measures for small and non-complex undertakings (SNCUs) and captives, reducing compliance costs and simplifying calculations. The five key measures include:

1. Technical Provisions:

SNCUs can use deterministic valuation to calculate the best estimate for life obligations with options and guarantees, instead of full stochastic models in their calculations.

2. Liquidity Risk Management plan:

SNCUs and captives are exempted from this requirement.
 

3. Governance

Key function holders (except internal audit) in SNCUs and captives may perform multiple key roles.

4. ORSA Requirements

For SNCUs and certain captives, ORSA is required biennially instead of annually, with exemptions from climate scenario and macroeconomic analysis.

5. Reporting

Reduced SFCR content and audit exemptions for SNCUs and captives. In addition, the RSR will only be required at least every five years instead of three years for SNCUs and captives. Smaller insurers should assess eligibility for proportionality measures and adjust internal processes to benefit from reduced compliance requirements.

Conclusion

The Solvency II review introduces a more balanced regulatory framework, strengthening resilience while alleviating burdens for smaller players. The member states will have until January 2027 to transpose its provisions, however, in Luxembourg we expect a sooner implementation. In that sense, (re)insurers must proactively adapt to changes in capital requirements, governance, sustainability risk management, and reporting.

If your firm requires support in navigating the implementation challenges of the new Solvency II Directive, our team is here to help. With deep expertise in insurance regulation and hands-on experience in financial risk management, we provide tailored solutions to ensure compliance and strategic adaptation. Contact us to leverage our insights and make the most of the opportunities presented by the updated regulatory framework.