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On April 23, The European Parliament adopted the proposed amendments to the Solvency II Directive, with the Council's adoption pending.


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Connect to a new world of efficiency by utilizing cleversoft’s business solutions.

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On April 23, The European Parliament adopted the proposed amendments to the Solvency II Directive, with the Council’s adoption pending. These amendments are set to take effect on the twentieth day following their publication in the Official Journal of the European Union. There are changes stated in the texts adopted that will take effect from the date of application of the amending Directive, while other amendments would first require the development and publication of Delegated Acts and Technical Standards to detail the practical steps or technical criteria necessary for full implementation.

Pillar I

Risk Margin

The cost of capital rate has been reduced from 6% to 4.75%. This change will take effect from the date of application of the amending Directive.

Interest Rate risk module

Considering the low and in some cases negative interest rates over the previous years, the Directive now specifies that the interest risk module should accommodate for situations where negative interest rates are a reality. Furthermore, a floor rate will be introduced for which the interest rate cannot be shocked below to avoid highly unrealistic scenarios. Although obligatory to all undertakings, the Directive allows for the new methodology of the interest risk module to be phased in over a five-year period, allowing for some time for undertakings to adopt.

Symmetric Adjustment

The symmetric adjustment made to the standard equity capital which covers equity prices and the equity capital charge being applied have been changed from 10 percentage points to 13 percentage points.

Possible natural catastrophe parameters change due to climate change effect.

Given the dynamic nature of climate change and its increasing impact on natural catastrophes, the Directive acknowledges the necessity to adapt the parameters used for assessing natural catastrophe risks within the insurance and reinsurance sectors. To address this, the Directive has empowered the EIOPA with the responsibility to monitor and recommend adjustments to the natcat parameters.

Long-term Equities

Insurance and reinsurance undertakings, insurance holding companies and mixed financial holding companies shall now to apply a lower capital requirement of 22% for long-term equity investments if they meet specific conditions, such as maintaining a separate, well-diversified equity portfolio with a commitment to hold investments for over five years. These equities must be from EEA or OECD countries. Compliance is monitored by supervisory authorities, and breaches must be corrected within six months. The Commission will detail these conditions through delegated acts.

Duration-based equity sub-module

The duration-based equity sub-module has been removed due to the introduction of the Long-term Equities with a grandfathering clause provided for those currently applying it.

Extrapolation of risk-free interest rates

Where markets for financial instruments are not deep, liquid, or transparent, the extrapolation of the relevant risk-free interest rate shall now be equal to a weighted average of a liquid forward rate and the UFR. Further details of the methodology will be revealed in the Technical Standard.

Volatility Adjustment

Several amendments have been made to the volatility adjustment. One of the major changes is that undertakings will now be allowed to add up to an increased proportion of 85% (from 65%) of the risk-corrected spread derived from the representative portfolios to the basic risk-free interest rate term structure. Additionally, new parameters have either been added or changed in the volatility adjustment formula.

Matching Adjustment

No significant changes have been applied to the matching adjustment. The Directive does, however, mention that the matching adjustment should from now on be included in the SFCR, specifically in the part that is targeted at market professionals. More information about the changes in SFCR can be found under the Pillar III section of this summary.

Pillar II

Operational Risk Management

Cyber security shall now be included as part of the general operational risk management.

Sustainability Risk Management

EIOPA shall develop a draft of Technical Standard of sustainability risk within 12 months after the Directive enters into force. This Technical standard needs to include the following:

Macroprudential Considerations

The amendments to the Solvency II Directive include an enhanced focus on macroprudential considerations, emphasizing the need for insurance and reinsurance undertakings to incorporate these factors into their risk management frameworks. Specifically, the Directive requires that the Own Risk and Solvency Assessment (ORSA) reports now include a thorough analysis of the macroeconomic environment and its potential impacts on the undertaking. EIOPA shall develop a draft of regulatory Technical Standard on macroprudential considerations that specify the criteria to be considered by supervisory authorities.

Climate change scenario analysis

Where the undertaking has material exposure to climate change risks, the undertaking needs to specify at least two long-term climate change scenarios:

The long-term climate change scenarios shall be reviewed, at least every three years, and updated where necessary. However shorter intervals may be required depending on the nature, scale and complexity of the climate change risks inherent in the business of the undertaking.

Pillar III

Deadlines

Deadlines for the annual reporting will be extended:

Deadlines for quarterly reporting remain the same.

Solvency and Financial Condition Report (SFCR)

Layout of the SFCR has been amended to consist of two sections:

  1. Addressed to policyholders and beneficiaries. This section focuses on providing clear and concise data that directly affects policyholders, avoiding overly technical details. In addition, it will require minimal auditing, covering primarily the balance sheet to ensure its accuracy and reliability.
  2. Addressed to market professionals. This section to contain more detailed and technical information on the undertaking. This includes, for example, the Matching Adjustment (MA), the Volatility Adjustment (VA), and the transitional measures on risk-free interest rates and on technical provisions concerning their financial positions.

Other

Exclusions from scope of directory due to size of undertaking

Thresholds for when the Solvency II Directive shall be obligatory have increased, essentially excluding more smaller and medium size businesses from having to comply with the Solvency II Directive.

Small and Non-complex Undertakings

The amended Solvency II Directive includes new articles that outline criteria, for when is met, undertakings can be classified as “small and non-complex”.

Once an undertaking has been classified as small and non-complex it is in principle eligible to benefit from proportionality measures on reporting, disclosure, governance, revision of written policies, calculation of technical provisions, ORSA, and liquidity risk management plans. Proportionality measures reduce the reporting burden by either easing requirements or completely excluding items that is normally required for reporting.

Read the full adopted text.

What does this mean for your Solvency II Service?

Once the proposed amendment is fully adopted and published in the Official Journal of the European Union, cleversoft will begin making the necessary changes. The changes will take effect from the specified date of application in the amending Directive.

A new configuration release will be prepared and delivered as soon as the implementation is complete to ensure that you are compliant for the next reporting period.

Explore our Solvency II Service to get more information on how we can optimize your reporting process.
In case you have of any questions feel free to send us a message via the contact form on our website.