Changes to Solvency II make it easier for insurers to invest in economy

On 8 March 2019 the European Commission adopted new rules to help insurers invest in equity and private debt and provide long-term capital financing.

As a result of the new rules, insurers will have to hold less capital for investments in equity and private debt, including in small and medium-sized enterprises.

The newly adopted rules take the form of a delegated regulation, amend the EU Solvency II Directive (2009/138/EC) and follow on from the mid-term review of the Capital Markets Union Action Plan.

Considering the European Insurance and Occupational Pensions Authority's technical advice, the amendments aim to meet the following main objectives:

• Removal of constraints to financing the economy – prudential criteria have been introduced that allow a reduction of capital charges in the standard formula for insurers' unrated debt and unlisted equity investments. Changes allow for the reduction of the shock factor by up to 56% for spread risk and 20% for equity risk.
• Enhancing proportionality in the framework – further simplifications to burdensome or costly elements of the capital requirement standard formula have been introduced, including a carve-out from the mandatory application of the look-through in investment funds and exceptions to the use of external ratings. These simplifications are subject to prudent conditions, ensuring that their application does not conceal risks to which insurance and reinsurance undertakings are exposed.
• Removal of inconsistencies between different EU financial legislation – the rules applicable to the EU Solvency II Directive capital requirement standard formula are further aligned with those applicable in the banking sector. This alignment involves the classification of funds and exposures to central counterparties and the treatment of exposures to regional governments and local authorities.

The amendments will now be subject to a three-month scrutiny period by the European Parliament and the European Council.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.