The recently published delegated regulation on Solvency II is an important one: if passed, it would allow insurers to remove disincentives for long-term investments, in support of the EU's growth initiatives. It's expected to become a European law in 2019. While some of its objectives have a direct impact on investments and standard formula parameters, others target broader EU goals such as:

  • policyholder protection
  • a fairer insurance market
  • harmonized supervision across Member States

Unrated debt and unlisted equity investments

To ease constraints on financing, the amendments would allow organizations to reduce the shock factor for spread and equity risk (under certain circumstances). In particular, the amendments assign unrated debt to credit quality step 2 or 3, depending on the undertaking's own internal credit assessment. Insurers will also have the option to classify unlisted equities as type 1, again subject to criteria.

EIOPA originally proposed a minimum average holding period of 12 years, with the requirement to hold the investment under stressed conditions for 12 more years. However, as insurers are under pressure to stimulate long-term investments in equity, the EC has agreed to reduce this minimum period to five years, with the requirement to demonstrate the ability to hold for 10 more years.

Additionally, exposures in bonds and loans guaranteed by Member States' regional governments and local authorities will now be treated as exposures to the central government.


The amendment further supports the proportionality principle. When the look-through approach cannot be applied to collective investment undertakings and investments packaged as funds, the solvency capital requirement (SCR) may be calculated based on the target underlying asset allocation (data grouping approach) in certain conditions. This is provided that assets are managed in accordance with that target allocation and are not expected to move significantly over time.

Previously, the data-grouping approach was limited to 20% of the total value of assets. Now, this approach can be applied to 20% of the total value of assets net of the assets backing unit-linked or index-linked obligations where the policyholders bear the market risk.

Internal rating-based approach for spread risk

High-quality private placements are often unrated, and thus usually riskier than rated instruments. To encourage investment when a credit assessment by a nominated External Credit Assessment Institution (ECAI) is not available, (re)insurers are allowed to use the results of an internal rating.

In an example of joint investments in bonds and loans with a credit institution, the (re)insurer would be allowed to use the credit institution's approved internal rating to calculate the spread risk SCR. This amendment is also relevant for agreements with insurers that use an approved internal model.

Standard Formula parameters

The delegated regulation proposes several amendments to the Standard Formula parameters. In particular:

  • (Life) The option to calculate life and similar-to-life technique (SLT) health lapse risk capital based on a group of policies, instead of policy-by-policy. This is subject to certain requirements.
  • (Non-life) Risk calibrations for non-life premium and reserve risk and man-made catastrophe risks. This is based on additional data gathered by EIOPA since the last calibration exercise was performed. Non-SLT health lapse risk follows the same approach as the SLT health lapse risk capital.
  • (Market) Simplifications to the concentration risk capital requirements.

Consistency with banking regulation

Another goal is to improve consistency across the insurance and banking sectors, in order to remove unjustified differences across the EU financial legislation. To achieve this, the amendment further aligns the rules that apply to the Solvency II capital requirement to those of the banking sector. In addition, the treatment of derivatives would be adjusted following the adoption of the European Market Infrastructure Regulation (EMIR).

What to expect from the 2021 review

EIOPA's technical advice covered several topics, some of them on the European Insurance Authority's own initiative. A few of these have been postponed for the time being, but may be reintroduced during the full review of Solvency II in 2021. In particular:

  • Interest rate risk: many stakeholders raised concerns about EIOPA's proposal to change the interest rate risk framework to reflect the persisting low-interest rate environment and even negative rates. EIOPA's estimation forecasted a lowering of the solvency ratio by an average of 14 percentage points, with one Member State averaging a 75% decrease.
  • Loss-absorbing capacity of deferred taxes (LACoDT): a few stakeholders criticized EIOPA's proposal to further harmonize the calculation of LACoDT due to the different tax treatments across the EU Member States. Others opposed the proposal due to the additional burden the change would impose.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.