The European Commission has just published a draft delegated regulation to amend the Solvency II Delegated Regulation and create a revised prudential framework for insurers and reinsurers, facilitating better capital management and greater investment opportunities, in light of the changes to Solvency II and the proposed Securitisation Regulation amendments.

The Commission notes that:

• the calculation of capital requirements under Solvency II needs improvement to ensure risk-sensitivity and to appropriate treatment of long-term investments;
• provisions on reporting and disclosure could be meaningfully reduced, to remove unjustified compliance costs;
• the implementation of proportionality has been insufficient to reduce the regulatory burden, especially for captives and reinsurers; and
• the securitisation framework has not reduced disproportionately prudential costs for insurers and in increasing the level of investment in securitisations by the insurance sector.

Aims of the changes

The main problems which the proposed changes to the Solvency II Delegated Regulation seeks to address are:

• disincentives for long-term investments in equity and inadequate reflection of sustainability risks;
• inadequate reflection of the low-interest rate environment and unduly high volatility in solvency positions;
• complexity for small and less risky insurers;
• recent failures of cross-border insurers, which highlighted supervisory shortcomings and varying levels of protection of policyholders across the EU;
• insufficiency of tools to prevent systemic risks; and
• undue prudential disincentives that discourage insurers from investing in securitisations.

Solvency II

The main highlights for insurers and reinsurers are the provision of further details in relation to the upcoming changes to Solvency II, such as:

• changes to the calculation of the risk margin, including the introduction of a exponential term-dependent factor and changes to the cost-of-capital rate;
• amendments to the interest rate risk submodule to allow for negative interest rates;
• certain carve-outs from the application of the ‘look-through’ approach to investment funds;
• introduction of rules governing the calculation of foreseeable dividends to be deducted from own funds (using an accrual approach);
• recognition of adverse development covers in the standard formula, and better reflection of their risk mitigating effect;
• changes to the capital requirements for direct exposures to central clearing counterparties, repos and securities lending transactions;
• amendments to the parameters for the calculation of capital requirements for natural catastrophe risk, based on new scientific insights related to climate change;
• introduction of a list of conditions based on which a supervisory authority may decided to approve or reject a request to apply a proportionality measure; and
• streamlining the content of the SFCR and regular supervisory report.

Securitisation

To increase the level of investment in securitisation by the insurance sector, and to facilitate bank lending capacity by allowing originating banks to transfer risk outside the banking sector, the draft delegated regulation seeks to:

• introduce a new set of risk factors for senior tranches of non-STS securitisations, while reducing the risk factors for non-senior tranches in order to ensure a capital requirement ratio that better aligns with banking rules; and
• align the prudential treatment of senior tranches of for STS securitisations with covered bonds, and adjust the treatment of non-senior tranches.

The draft regulation is open for feedback until 5 September 2025.