Solvency II reforms won’t solve the problems of all carriers – particularly the smallest

As the insurance industry assesses the European Commission’s proposed reforms to Solvency II, carriers will need to address a few key areas over the next 18 months, ahead of implementation.

The provisions for capital relief will be welcome news for many, not least as insurers seek to make good on pledges to address climate change by pivoting towards increased green investment. A major focus for carriers will be determining the details of which long-term investments are eligible for lower solvency capital requirements before they can formulate investment strategies.

The improved guidance on institutional proportionality will be particularly helpful for mid-sized domestic carriers and will also be welcomed by specialist insurers, captives and the run-off sector, who, along with smaller carriers, have shouldered an overly heavy regulatory burden under Solvency II. However, the proposals will require additional work on the part of some, particularly run-off insurers pending the result of the consultation conducted by EIOPA on the run-off market, to prove they are below the compliance threshold.

Group supervision has been a particularly difficult area under Solvency II, and the new proposals will introduce clarifications that should ease the regulation of some entities. However, it comes at a price; much closer collaboration between EU27 regulators will mean a higher level of scrutiny for insurance groups and increased requirements for the knowledge of local markets they are active in.

The recovery and resolution framework will be rolled out to all insurers subject to Solvency II, not just large, systemic carriers, but should add an element of flexibility to how the financial stability of insurers is viewed by regulators. Although the revised provisions will be applied to a wider swath of companies, small carriers are still likely to qualify for exemption, and other proportionality provisions may apply in their case.

With many smaller carriers continuing to be challenged by Solvency II, particularly with respect to investment restrictions and the relatively strict quantitative rules on proportionality, we anticipate that there will be a move by a number of small insurers towards partnering up, or even merging, with other companies as a result of the proposed reforms.

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