Key Changes Arising From Agreed Amendments To Solvency II

• Published date: 27 March 2024
• Subject Matter: Insurance, Insurance Laws and Products
• Law Firm: Arthur Cox
• Author: Stephen D'Ardis

Following on from the announcement that the European Council and Parliament had agreed on the amendments to Solvency II in December 2023 (see my previous post for details), the agreed amendments were published in January 2024. The headline points from the amending legislation are:

• Risk margin/cost of capital - the assumed cost of capital rate for calculating the risk margin will be 4.75% (down from 6% currently). This rate will be reviewed by the Commission periodically, but no earlier than 5 years after the date of application. The Commission can then change the assumed rate to a level between 4% and 5%. In addition, as expected, an exponential and time dependent element is being introduced, to account for the time dependency of risks, reduce the sensitivity of the risk margin to interest rate changes and reduce the amount of the risk margin (particularly for long-term liabilities - so good news for life insurers). It seems that this is the Council and Parliament making good on the stated objective of freeing up capital of (re)insurers for investment in the EU economy, similar to the Solvency UK reforms.
• Small and non-complex undertakings - to be classified as a small and non-complex undertaking, (re)insurers can apply to the national supervisory authority on the basis that they meet the relevant criteria. Supervisors will have two months from receipt of complete applications to approve or object to such classifications (extended to four months for the first six months from the application of the amendments). If no decision is made within that period, the applicant will be deemed to be a small and non-complex undertaking. Once classified as a small or non-complex undertaking, a (re)insurer can avail of all proportionality measures under Solvency II (unless the supervisory authority has serious concerns).
• Captives - the previous proposal that captives would automatically be treated as small and non-complex undertakings has been removed, meaning Irish captives will similarly have to apply to the CBI in order to be granted such classification. In addition, captives will need to show that: (i) all insured persons and beneficiaries are members of their group (ii) their business covering natural persons covered under group insurance policies is less than 5% of technical provisions and (iii) their obligations do not consist of any compulsory third -party liability insurance (e.g. motor insurance).
• Significant cross-border activities - the amendments set out a...