The 2021 Solvency II review: A multilayered exercise
On 22 September 2021, the European Commission proposed a selected number of amendments to the Solvency II framework directive, called “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”. But as the Solvency II directive foresees in level 2 measures, and occasionally level 3 measures, more (regulatory) changes are to be expected. The review will therefore be a multilayered exercise.
In its Communication, adopted together with this proposal, the Commission explains in more detail the interaction between the proposal and forthcoming amendments it is planning to the 2015 Solvency II Delegated Regulation. “Given the close links between Solvency II and its Delegated Regulation (EU) 2015/35, amendments to both acts will be needed to reach all the objectives of the review.” In those cases, the Commission writes, it will have to wait for the finalisation of the legislative process on level 1 before enacting the necessary changes to the Delegated Regulation. Thus, in order to ensure a consistent delivery of the review of the Solvency II framework and in view of the close interaction between different topics, “the Commission will not introduce changes to the Delegated Regulation at this stage. “
Clearly, the synchronisation of the application of level 1 and level 2 will be a challenge.
However, the Communication continues, “in view of the importance of the topics that will require changes to the Delegated Regulation, the Commission is committed to engage with the Member States, the European Parliament and other stakeholders in order to start, without delay, discussions about the possible content of these changes. Such discussions will take place in parallel to the legislative process for amending Solvency II. The Commission will convene meetings of the Expert Group on Banking and Payments, Insurance and Resolution.” With other words, alongside the co-legislators’ process, the Commission will start exchanges with the co-legislators and other stakeholders so as to be ready with the (broad lines of the) L2 amendments when the co-legislators have finalised their reading and amendments on the review.
Word has it that the first expert group meeting is planned soon.
A delegated act, proposed by the Commission, does not need a proposal from EIOPA unlike a regulatory technical standard (RTS) or implementing technical standard (ITS). The Commission intends to amend the SII Delegated Regulation (EU) 2015/35 broadly in line with the Opinion of EIOPA on the SII review. Items where the Commission will deviate, according to the Communication, include the eligibility criteria for the long-term asset class, the risk margin, the volatility adjustment (with focus on the undertaking-specific element), the matching adjustment (in the area of the recognition of diversification benefits), diversification benefits between different market risk categories, extrapolation (as the proposed directive empowers the EC to set the formula for extrapolation), interest rate risk capital requirements (with the exception of an allowance for extrapolation for long-term interest rates), and non-proportional reinsurance treatment in the standard formula (by introducing safeguards).
But this is not the final list.
The Commission will also consider a few topics on which the EIOPA Opinion according to the Commission’s Communication is not the inspiration source such as provisions to clarify the recognition of the risk-mitigating effect of guarantees or reinsurance provided by Member States, in line with EU state aid rules, in the context of insurance underwriting and market risks; and the treatment of mortgage loans originated by insurers to avoid any risk of cross-sector regulatory arbitrage.
In addition to the amendments to the Delegated Regulation, a few new RTS in the area of liquidity risk management need to be written by EIOPA according to the current Solvency II proposal. Also, three new ITS are foreseen in order to ensure uniform conditions of application.