EU Solvency II and IRRD: Negotiators reach political agreement

Representatives of the Council of the EU and the European Parliament have announced that they have reached provisional agreements on (i) amendments to the EU’s version of the Solvency II Directive (2009/138/EC) and (ii) a new framework for the recovery and resolution of (re)insurance undertakings (the “Insurance Recovery and Resolution Directive”).

The underlying legal texts of these agreements have not yet been made publicly available, with only limited details so far having been communicated via twin press releases (see here for the Council of the EU press release and here for its European Parliament counterpart).

Background

The project to review and update the Solvency II Directive has been underway for a number of years, with the last major development being the adoption in September 2021 by the European Commission of the text of a proposed Directive which would make a substantial number of targeted amendments to the Solvency II Directive. At the same time, the Commission published the text of its proposal for an Insurance Recovery and Resolution Directive. Our client alert provides an overview of each set of changes proposed by the Commission. 

Key changes agreed during negotiations

In its press release, the Parliament makes clear that agreement has been reached to reduce the current cost-of-capital rate set out in the Solvency II Directive (which forms part of the risk margin calculation) from 6% to 4.75%.

On the Insurance Recovery and Resolution Directive, the press releases disclose that the agreement reached by co-legislators means that 60% of a member state’s (re)insurance market will be subject to pre-emptive recovery planning requirements (reduced from the original proposal of 80%), while this figure will be 40% when it comes to resolution planning (down from 70%). The Parliament’s press release also indicates that the new Directive will contain a review clause “that will pave the way for the introduction of insurance guarantee schemes across the Union”. No harmonised system of insurance guarantee schemes currently exists across the EU.

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 next step would be formal adoption by the Council and the Parliament. 

The agreement that has been made on Solvency II relates to the Solvency II Directive and not another key component of the framework, Commission Delegated Regulation (EU) 2015/35 (the “Solvency II Delegated Regulation”), which contains some of the more detailed requirements. Previously, the Commission had indicated that some revisions to the Solvency II Delegated Regulation would also be required as part of the review process and that it would be engaging with stakeholders in relation to them. The Council’s press release indicates 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.”