Key Changes Arising From Agreed Amendments To Solvency II - Insurance Laws and Products - Ireland (2024)

Following on from the announcement that the European Council andParliament had agreed on the amendments to Solvency II in December2023 (see my previous post for details), the agreed amendments werepublished in January 2024. The headline points from the amendinglegislation are:

• Risk margin/cost of capital – theassumed cost of capital rate for calculating the risk margin willbe 4.75% (down from 6% currently). This rate will be reviewed bythe Commission periodically, but no earlier than 5 years after thedate of application. The Commission can then change the assumedrate to a level between 4% and 5%. In addition, as expected, anexponential and time dependent element is being introduced, toaccount for the time dependency of risks, reduce the sensitivity ofthe risk margin to interest rate changes and reduce the amount ofthe risk margin (particularly for long-term liabilities – sogood news for life insurers). It seems that this is the Council andParliament making good on the stated objective of freeing upcapital of (re)insurers for investment in the EU economy, similarto the Solvency UK reforms.
• Small and non-complex undertakings – tobe classified as a small and non-complex undertaking, (re)insurerscan apply to the national supervisory authority on the basis thatthey meet the relevant criteria. Supervisors will have two monthsfrom receipt of complete applications to approve or object to suchclassifications (extended to four months for the first six monthsfrom the application of the amendments). If no decision is madewithin that period, the applicant will be deemed to be a small andnon-complex undertaking. Once classified as a small or non-complexundertaking, a (re)insurer can avail of all proportionalitymeasures under Solvency II (unless the supervisory authority hasserious concerns).
• Captives – the previous proposal thatcaptives would automatically be treated as small andnon-complex undertakings has been removed, meaning Irish captiveswill similarly have to apply to the CBI in order to be granted suchclassification. 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 groupinsurance 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 framework for enhanced cooperation betweennational supervisors where (re)insurers carry out significantcross-border activities (i.e. annual GWP in the host Member Stateexceeds €15 million and the supervisory authority in the hostMember State consider the activities to be of relevance to theirnational market). This is likely to be of relevance for a number ofIrish (re)insurers who write considerable business in other EEAMember States.
• Board composition – (re)insurers will berequired to have policies in place to promote diversity at boardlevel, including quotas for gender balance.
• Long term equity investments (LTEIs) –the criteria for LTEIs will be relaxed, so that the (re)insurerwill no longer have to assign LTEIs to specific business lines andmanage them separately. In addition, the (re)insurer will only needto satisfy the supervisory authority that it is able to avoidforced sales of LTEIs for five years (as opposed to ten years). Theexception to the look-through approach for LTEIs will also beexpanded so that where LTEIs are held within ELTIFs, AIFs, andcertain other collective investment undertakings identified indelegated acts as having a lower risk profile, the requiredconditions for LTEIs may be assessed at the level of the fundsrather than the underlying assets.
• Powers of supervisors in deteriorating financialconditions – supervisory authorities will have thepower to take all measures necessary to safeguard the interests ofpolicyholders where (re)insurers are in a deteriorating financialposition. Amendments have been included to ensure that these powersdovetail with the provisions of the Insurance Resolution andRecovery Directive (IRRD). For example, supervisors will be able torequire (re)insurers to take measures set out in their pre-emptiverecovery plans (as must be put in place under the IRRD) and tosuspend or restrict bonuses and distributions.
• Macroprudential tools to address liquidityrisks – where (re)insurers face significantliquidity risks, supervisors will have the power to suspenddividends, bonuses and, in exceptional circ*mstances, redemptionrights on life policies. However, such suspension of redemptionrights will be temporary and are only to be used as a last resort,with the aim of collective policyholder protection. The recentEurovita case in Italy shows that the use of supervisory powers tosuspend redemption rights of policyholders is more than just atheoretical possibility.
• Sustainability – the amendments reflectthe continuing importance of sustainability risks andsustainability factors and the need to integrate consideration ofsustainability into (re)insurers risk management frameworks,business models, and investment strategies.

Once published in the Official Journal, Member States will have2 years to transpose the amendments into national law, so theearliest date for implementation in Ireland would likely be early2026.

This article contains a general summary of developments andis not a complete or definitive statement of the law. Specificlegal advice should be obtained where appropriate.

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