Following on from the announcement that the European Council and Parliament had agreed on the amendments to Solvency II in December 2023 (see my previous post for details), the agreed amendments were published in January 2024. The headline points from the amending legislation are:

• Risk margin/cost of capital – the assumed cost of capital rate for calculating the risk margin will be 4.75% (down from 6% currently). This rate will be reviewed by the Commission periodically, but no earlier than 5 years after the date of application. The Commission can then change the assumed rate to a level between 4% and 5%. In addition, as expected, an exponential and time dependent element is being introduced, to account for the time dependency of risks, reduce the sensitivity of the risk margin to interest rate changes and reduce the amount of the risk margin (particularly for long-term liabilities – so good news for life insurers). It seems that this is the Council and Parliament making good on the stated objective of freeing up capital of (re)insurers for investment in the EU economy, similar to the Solvency UK reforms.
• Small and non-complex undertakings – to be classified as a small and non-complex undertaking, (re)insurers can apply to the national supervisory authority on the basis that they meet the relevant criteria. Supervisors will have two months from receipt of complete applications to approve or object to such classifications (extended to four months for the first six months from the application of the amendments). If no decision is made within that period, the applicant will be deemed to be a small and non-complex undertaking. Once classified as a small or non-complex undertaking, a (re)insurer can avail of all proportionality measures under Solvency II (unless the supervisory authority has serious concerns).
• Captives – the previous proposal that captives would automatically be treated as small and non-complex undertakings has been removed, meaning Irish captives will similarly have to apply to the CBI in order to be granted such classification. 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 group insurance 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 between national supervisors where (re)insurers carry out significant cross-border activities (i.e. annual GWP in the host Member State exceeds €15 million and the supervisory authority in the host Member State consider the activities to be of relevance to their national market). This is likely to be of relevance for a number of Irish (re)insurers who write considerable business in other EEA Member States.
• Board composition – (re)insurers will be required to have policies in place to promote diversity at board level, including quotas for gender balance.
• Long term equity investments (LTEIs) – the criteria for LTEIs will be relaxed, so that the (re)insurer will no longer have to assign LTEIs to specific business lines and manage them separately. In addition, the (re)insurer will only need to satisfy the supervisory authority that it is able to avoid forced sales of LTEIs for five years (as opposed to ten years). The exception to the look-through approach for LTEIs will also be expanded so that where LTEIs are held within ELTIFs, AIFs, and certain other collective investment undertakings identified in delegated acts as having a lower risk profile, the required conditions for LTEIs may be assessed at the level of the funds rather than the underlying assets.
• Powers of supervisors in deteriorating financial conditions – supervisory authorities will have the power to take all measures necessary to safeguard the interests of policyholders where (re)insurers are in a deteriorating financial position. Amendments have been included to ensure that these powers dovetail with the provisions of the Insurance Resolution and Recovery Directive (IRRD). For example, supervisors will be able to require (re)insurers to take measures set out in their pre-emptive recovery plans (as must be put in place under the IRRD) and to suspend or restrict bonuses and distributions.
• Macroprudential tools to address liquidity risks – where (re)insurers face significant liquidity risks, supervisors will have the power to suspend dividends, bonuses and, in exceptional circumstances, redemption rights on life policies. However, such suspension of redemption rights will be temporary and are only to be used as a last resort, with the aim of collective policyholder protection. The recent Eurovita case in Italy shows that the use of supervisory powers to suspend redemption rights of policyholders is more than just a theoretical possibility.
• Sustainability – the amendments reflect the continuing importance of sustainability risks and sustainability factors and the need to integrate consideration of sustainability into (re)insurers risk management frameworks, business models, and investment strategies.

Once published in the Official Journal, Member States will have 2 years to transpose the amendments into national law, so the earliest date for implementation in Ireland would likely be early 2026.