Brussels, 14 December 2023
The Commission welcomes the political agreements reached between the European Parliament and the Council on 13 and 14 December on the Commission proposals to strengthen the insurance regulatory framework.
The review modernises the Solvency II Directive by giving better incentives to the insurance and reinsurance (i.e. insurance for insurance companies) sector to invest more in long-term capital in line with the Capital Markets Union objectives, while ensuring it remains solid in difficult economic times and protective of consumers’ interests. The new rules take better account of certain risks, including those related to climate change, and make insurers’ financial strength less sensitive to short-term market fluctuations. A new macroprudential toolkit will also better address the potential build-up of systemic risk in the insurance sector. Moreover, the revised framework introduces simplified and more proportionate rules including for small and non-complex insurance companies, and improves cooperation between supervisors to better protect policyholders across Member States.
The review also introduces a new (re)insurance undertakings’ recovery and resolution directive (‘IRRD’). It will protect policyholders, financial stability and taxpayers in the event of a (re)insurer’s failure. The directive will require larger and systematically important entities to formulate pre-emptive recovery plans to ensure they are prepared for crises. National authorities will have tools to tackle problems with failing (re)insurers, including by taking them off the market in an orderly way while preserving the continuity of the insurance coverage as much as possible. This will achieve the best possible outcome for insured consumers and businesses, in particular when (re)insurers operate in several Member States.
Executive Vice-President Valdis Dombrovskis said:
“These revised rules will ensure that policyholders are better protected in future if their insurer runs into difficulties. We are also making rules simpler for smaller insurers. This agreement takes forward our work to complete the Capital Markets Union and will help to promote the EU’s competitiveness.”
Commissioner Mairead McGuinness said:
“The agreements reached will enable the insurance sector to step up and play its full part in the EU economy. This will foster the participation of insurance companies in the EU’s capital markets, providing the long-term investment that is so vital for a sustainable future.”
Source – EU Commission
EU Council on Solvency II and IRRD agreements for the insurance sector
The Council and the Parliament have reached a provisional agreement on amendments to the Solvency II directive, the EU’s main piece of legislation in the insurance area and new rules on insurance recovery and resolution (IRRD).
The new rules on Solvency II will boost the role of the insurance and reinsurance sector in providing long-term private sources of investments to European businesses. At the same time they will make the sector more resilient and prepared for future challenges in order to better protect insurance policyholders.
With this dual role, the sector will contribute to the achievement of the Capital Markets Union, to the financing of the green and digital transitions and Europe’s economic recovery form the COVID-19 pandemic.
The aim of the Insurance Recovery and Resolution Directive (IRRD) is to ensure that insurers and relevant authorities in the EU are better prepared in cases of significant financial distress, so that they can intervene sufficiently early and quickly in a crisis situation, including across borders. This will protect insurance policyholders, while minimising the impact on the economy, the financial system and any recourse to taxpayers’ money.
Solvency II
Channelling funds for businesses
The provisional agreement will incentivise insurers to invest in long-term capital for the economy, notably towards the Green Deal.
More resilience and stability
The provisional agreement improves the long term guarantees measures making them more risk sensitive, and improving the resilience of the insurance industry, and introduces a new macroprudential dimension in the regime. At the same time, sustainability is going to have a very important role.
According to the agreement, more simplified and proportionate rules will ensure flexibility and reduce the administrative burden especially on small and non-complex insurance companies. The enhanced framework will also strengthen coordination among national supervisory authorities regarding insurers’ and reinsurers’ cross-border activities.
Consumer protection
The Council and Parliament improved the protection of insurance policyholders, notably when buying an insurance in another country, through enhanced cooperation between supervisory authorities. Consumers will also be better informed.
European Insurance and Occupational Pensions Authority (EIOPA)
The provisional agreement assigns a number of new tasks to the European Insurance and Occupational Pensions Authority (EIOPA), not least in terms of elaborating various strands of technical standards, i.e. secondary legislation that will frame a more precise and harmonised implementation of the Directive in the Member States.
The Council and Parliament agreed that the new rules will be complemented by delegated acts at a later stage, which will notably ensure a balanced review of the Solvency II prudential framework in terms of capital requirements.
Insurance recovery and resolution (IRRD)
An orderly resolution in case of insolvency
The provisional agreement will introduce a new harmonised regime at European level for resolving insurers in an orderly manner.
The Council and Parliament give national authorities preventive powers to intervene at an early stage. Member states will have to set up national insurance resolution authorities, either within existing authorities or as new self-standing legal entities, ensure effective cooperation across borders, and grant the European Insurance and Occupational Pensions Authority (EIOPA) a coordinating role.
The provisional agreement requires (re)insurance companies and groups to draw up and submit pre-emptive recovery plans to national supervisory authorities. This requirement will apply to companies representing at least 60% of the respective (re)insurance market.
Furthermore, resolution authorities will have to draw up a resolution plan for insurance and reinsurance undertakings and groups, representing at least 40% of their respective market. Small and non-complex undertakings will in principle not be subject to pre-emptive recovery planning requirements on an individual basis.
Resolution authorities would be given powers to implement resolution actions in a coordinated and timely fashion.
The provisional agreement provides resolution authorities with resolution tools and procedures (including write-down and conversion, solvent run-offs and transfer tools) to address failures, notably in a cross-border context.
The provisional agreement adds more detailed conditions to the use of the tools and procedures. In particular, with regard to write-downs and conversions, some liabilities will be excluded from these tools to avoid adverse outcomes for policy holders.
Furthermore, specific provisions on financing arrangements and a review clause in relation to Insurance Guarantee Schemes are included.
The agreement ensures that the framework is proportionate and adapted to the insurance sector.
Next steps
The texts of the provisional agreements will now be finalised and presented to member states’ representatives and the European Parliament for approval. If approved, the Council and the Parliament will have to formally adopt the texts.
Background
Solvency II adopted in 2009 sets out requirements applicable to insurance and reinsurance companies in the EU with the aim to ensure the adequate protection of policyholders and beneficiaries. Solvency II has a risk-based approach that enables to assess the “overall solvency” of insurance and reinsurance undertakings through quantitative and qualitative measures.
The Solvency II regulatory framework is built on a three-pillar structure:
- pillar I sets the quantitative requirements i.e. the assets and liabilities valuation and capital requirements
- pillar II sets the qualitative requirements, including governance and risk management of the undertakings and the Own Risk and solvency Assessment (ORSA)
- pillar III sets the supervisory reporting and public disclosure
The three pillars allow to coherently understand and to manage risks across the sector. The key features of the Solvency II regulatory framework are:
- market consistent: assets and liabilities shall be valued at the amount for which they can be exchanged, transferred or settled in the market
- risk-based: Higher risks will lead to a higher capital requirement to cover for unexpected losses
- proportionate: regulatory requirements shall be applied in a manner that is proportionate to the nature, scale and complexity of the risks inherent to the business of the insurance and reinsurance undertakings
- group supervision: supervisors shall increase coordination and exchange of information in colleges of supervisors to improve cross-border supervision of insurance and reinsurance groups
The existing legislative framework has been generally working well since its entry into force in 2016, but in the context of a review of Solvency II, the Commission identified areas of improvement.
At the same time the disorderly failure of insurers can have a significant impact on policy holders, beneficiaries, injured parties or affected businesses. It can further lead to or amplify financial instability and impact the real economy as a whole or require exceptional recourse to public funds.
There are currently no harmonised procedures at European level for resolving insurers, with substantial differences between member states leading to uneven levels of protection for policy holders and beneficiaries.
On 22 September 2021, the Commission transmitted to the Council its proposal to amend the Solvency II directive and a proposal for an Insurance Recovery and Resolution Directive (IRRD), as part of comprehensive review package of Solvency II rules.
Unlike for banks, the IRRD does not envisage minimum requirements for the insurance sector to have own funds or eligible liabilities to absorb potential losses nor an EU-wide single resolution fund financed by the sector.
- Commission proposal on Solvency II
- Commission proposal for a directive on a framework for the recovery and resolution of insurance and reinsurance undertakings (IRRD)
- Capital Markets Union (background information)