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A guide to Solvency II review

By Yannis Pitaras, Principal Consultant

and Jessica Ukendi, Associate Consultant

Introduction

On 18th June 2019, The Official Journal of the EU has adopted a regulation amending Solvency II.
These changes are the results of the 2018 solvency review and aim at: 

  • Removing unjustified constraints to the financing of the economy and incentivising long-term investments by, amongst other things, introducing the long-term equity investments which can benefit from a reduced shock at 22%
  • Enhancing proportionality by providing additional simplifications for the calculation of capital requirements
  • Removing inconsistencies between banking and insurance legislation as far as own funds are concerned
  • Reducing divergent practices in the recognition of the loss absorbing capacity of deferred taxes by complementing the existing text
  • Adjusting the calibration of the non-life premium and reserve risk, and of the health and non-life catastrophe risks
  • Improving the recognition of insurance risk mitigation techniques
  • Bringing more transparency on the calculation of the relevant risk-free interest rate term structure

The vast majority of the amendments will enter into force on the twentieth day following their publication. However, some provisions will only apply as from 1st January 2020.

These are neither the first nor last changes to the Solvency II legislation. In 2016, amendments were adopted to incentivise investments in infrastructure and STS securitisations. Currently, the Commission is in a consultation process which aims at bringing amendments to the Solvency II Directive itself by 2020. This is commonly referred to as the 2020 Solvency II review.
 

Regulatory Calendar

Insurance Solvency Compliance Agenda 2015-2022

 

 

Overview of amendments

In the annex to this paper, you will find a list of the “2018 Solvency II review” changes, presented in a user-friendly way which should help you navigate the amendments and identify the changes relevant to your organisation in an easier way.
The changes introduced by the “2018 Solvency II review” either replace or amend existing articles of the Delegated Acts or introduce new articles.
 

New articles

The 2018 Solvency II review introduces a significant number of new articles on simplified approaches for the calculation of:

  • the Non-Life SCR for Cat risk, Lapse risk and fire risk
  • the NSLT and SLT Health lapse risks
  • the Spread risk
  • the concentration risk
  • the risk mitigating effects of reinsurance
  • the Counterparty Default risk on type 1 exposure

 

Other new articles brought about by the 2018 Solvency II review have been incorporated in:

  • The equity risk SCR module, introducing the qualifying unlisted equity portfolios and long-term equity investments
  • The spread risk SCR module incentivising furher the use of own internal credit assessment
  • The counterparty risk SCR introducing specific capital requirements for exposure to clearing members
     

Amendments to existing articles

The 2018 Solvency II review includes amendments to:

  • The calculation of the Spread Risk, Concentration Risk, Currency Risk, Counterparty Default Risk SCRs
  • The requirements ensuring the transparency of the calculation of Risk-Free Rate Curve
  • The definition of contract boundaries
  • The calibration of the Marine, Aviation and Fire risk sub-modules in the Non-Life risk SCR
  • The use of the look-through approach for investments in funds in the calculation of the Market risk SCR
  • The recognition of the risk mitigating effects of reinsurance in the calculation of the SCR
  • The calibration of the SCR for Non-life Nat Cat perils such as Windstorm, Earthquake, Flood, Hail in jurisdictions such as Greece, Finland, Hungary, Sweden, Slovenia, Romania, Slovakia and the Czech Republic
  • The calculation of the adjustment for the loss-absorbing capacity of deferred taxes
     

Our opinion on the change

It seems that the amendments brought by the 2018 Solvency II review partly achieve some of their stated objectives, in particular in terms of proportionality, removing inconsistencies between banking and insurance legislation, adjusting the calibration of some insurance risk modules and improving the recognition of insurance risk mitigation techniques.

However, many stakeholders expect more from the 2020 review, in particular in terms of incentivising long-term investments.

Furthermore, although the simplifications introduced for a number of risk modules are useful for many smaller insurers, they may come too late. Indeed, 3 years after the entry into force of Solvency II, it is thought that many of them would have already implemented the more complex approaches included in the Standard Formula. 

There is another matter of adjustment for the loss-absorbing capacity of deferred taxes: we wrote a whole paper on this very relevant topic 

 


A comprehensive overview of all the regulatory changes introduced by 2018 Solvency II review.

Download table as PDF

 

Amd #ChapterSectionSubsection (if applciable)Existing Article TitleNew Artcile TitleType of changeTopic
1CHAPTER I GENERAL PROVISIONS SECTION 1 Definitions and general principles N/AArticle 1
Definitions
N/ANewCentral counterparties (CCPs) 
2CHAPTER III RULES RELATING TO TECHNICAL PROVISIONSSECTION 1 General provisions N/AArticle 18
Boundary of an insurance or reinsurance contract
N/AAmendedContract Boundary
3CHAPTER III RULES RELATING TO TECHNICAL PROVISIONSSECTION 4 Relevant risk-free interest rate term structureSubsection 2
Basic risk free interest rate term structure 
Article 46
Extrapolation
N/AReplacedTransparency of caluclation of Risk Free Rate Curve
4CHAPTER IV OWN FUNDS SECTION 2
Classification of own funds 
N/AArticle 71
Tier 1 — Features determining classification 
N/AAmendedOwn Funds
5CHAPTER IV OWN FUNDS SECTION 2
Classification of own funds 
N/AArticle 73
Tier 2 Basic own-funds — Features determining classification
N/ANewOwn Funds
6CHAPTER IV OWN FUNDS SECTION 2
Classification of own funds 
N/AArticle 77
Tier 3 Basic own-funds– Features determining classification
N/ANewOwn Funds
7CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 1 General provisionsSubsection 1 Scenario based calculationsSubsection 2 Look-through approach N/AAmendedLook-through
8CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 1 General provisionsSubsection 6
Proportionality and simplifications
Article 88
Proportionality
N/AAmendedProportionality
9CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 1 General provisionsSubsection 6
Proportionality and simplifications
N/AArticle 90a Simplified calculation for discontinuance of insurance policies in the non-life lapse risk sub-modulNewSimplification
Article 90b Simplified calculation of the sum insured for natural catastrophe risksNewSimplification
Article 90c Simplified calculation of the capital requirement for fire riskNewSimplification
10CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 1 General provisionsSubsection 6
Proportionality and simplifications
Article 91
Simplified calculation of the capital requirement for life mortality risk 
N/AAmendedSimplification
11CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 1 General provisionsSubsection 6
Proportionality and simplifications
N/AArticle 95a Simplified calculation of the capital requirement for risks in the life lapse risk sub-moduleNewSimplification
12CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 1 General provisionsSubsection 6
Proportionality and simplifications
N/AArticle 96a Simplified calculation for discontinuance of insurance policies in the NSLT health lapse risk sub-moduleNewSimplification
13CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 1 General provisionsSubsection 6
Proportionality and simplifications
Article 97
Simplified calculation of the capital requirement for health mortality risk 
N/AAmendedSimplification
14CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 1 General provisionsSubsection 6
Proportionality and simplifications
N/A‘Article 102a Simplified calculation of the capital requirement for risks in the SLT health lapse risk sub-moduleNewSimplification
15CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 1 General provisionsSubsection 6
Proportionality and simplifications
N/A‘Article 105a Simplified calculation for the risk factor in the spread risk sub-module and the market risk concentration sub-moduleNewSimplification
16CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 1 General provisionsSubsection 6
Proportionality and simplifications
Article 107
Simplified calculation of the risk mitigating effect for reinsurance arrangements or securitisation 
N/AReplacedRecognition of Reinsurance
17CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 1 General provisionsSubsection 6
Proportionality and simplifications
Article 108
Simplified calculation of the risk mitigating effect for proportional reinsurance arrangements
N/AReplacedRecognition of Reinsurance
18CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 1 General provisionsSubsection 6
Proportionality and simplifications
Article 110
Simplified calculation — grouping of single name exposures
Article 110 Simplified calculation — grouping of single name exposuresReplacedConcentration Risk
19CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 1 General provisionsSubsection 6
Proportionality and simplifications
Article 111
Simplified calculation of the risk mitigating effect 
N/AReplacedRecognition of Reinsurance
20CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 1 General provisionsSubsection 6
Proportionality and simplifications
N/AArticle 111a Simplified calculation of the risk-mitigating effect on underwriting riskNewSimplification / Recognition of Reinsurance
21CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 1 General provisionsSubsection 6
Proportionality and simplifications
N/A‘Article 112a Simplified calculation of the loss-given-default for reinsuranceNewSimplification / Recognition of Reinsurance
Article 112b Simplified calculation of the capital requirement for counterparty default risk on type 1 exposureNewSimplification
22CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 2 Non-life underwriting risk module N/AArticle 115
Non-life premium and reserve risk sub-module 
N/AReplacedFuture Premiums in the Non-Life UW risk SCR
23CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 2 Non-life underwriting risk module N/AArticle 121
Windstorm risk sub-module 
N/AAmendedWindstrom risk SCR
24CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 2 Non-life underwriting risk module N/AArticle 122
Earthquake risk sub-module 
N/AAmendedEarthquake risk SCR
25CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 2 Non-life underwriting risk module N/AArticle 123
Flood risk sub-module
N/AAmendedFlood risk SCR
26CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 2 Non-life underwriting risk module N/AArticle 124
Hail risk sub-module
N/AAmendedHail risk SCR
27CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 2 Non-life underwriting risk module N/AArticle 125
Subsidence risk sub-module 
N/AAmendedSubsidence risk SCR
28CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 2 Non-life underwriting risk module N/AArticle 130
Marine risk sub-module 
N/AReplacedMarine risk sub-module
29CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 2 Non-life underwriting risk module N/AArticle 131
Aviation risk sub-module 
N/AAmendedAviation Risk SCR
30CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 2 Non-life underwriting risk module N/AArticle 132
Fire risk sub-module 
N/AReplacedFire Risk SCR
31CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 4
Health underwriting risk module 
N/AArticle 147
Volume measure for NSLT health premium and reserve risk 
N/AReplacedFuture Premiums in the Non-Life UW risk SCR
32CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 5 Market risk moduleSubsection 3
Equity risk sub-module
Article 168
General provisions 
N/AAmendedInvestments in Funds
33CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 5 Market risk moduleSubsection 3
Equity risk sub-module
N/A‘Article 168a Qualifying unlisted equity portfoliosNewEquity Risk SCR
34CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 5 Market risk moduleSubsection 3
Equity risk sub-module
Article 169
Standard equity risk sub-module
‘Article 169 Standard equity risk sub-moduleReplacedEquity Risk SCR
35CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 5 Market risk moduleSubsection 3
Equity risk sub-module
N/A‘Article 171a Long-term equity investmentsNewEquity Risk SCR
36CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 5 Market risk moduleSubsection 5 Spread risk sub-module Article 176
Spread risk on bonds and loans
N/ANewSpread Risk SCR
37CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 5 Market risk moduleSubsection 5 Spread risk sub-module N/AArticle 176a Internal assessment of credit quality steps of bonds and loansNewSpread Risk SCR
Article 176b Requirements for an undertaking's own internal credit assessment of bonds and loansNewSpread Risk SCR
Article 176c Assessment of credit quality steps of bonds and loans based on an approved internal modelNewSpread Risk SCR
38CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 5 Market risk moduleSubsection 5 Spread risk sub-module Article 180
Specific exposures 
N/AAmendedSpread Risk SCR
39CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 5 Market risk moduleSubsection 6 Market risk concentrations sub-moduleArticle 182
Single name exposure
N/ANewSpread Risk SCR
40CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 5 Market risk moduleSubsection 6 Market risk concentrations sub-moduleArticle 184
Excess exposure 
N/AReplacedConcentration Risk
41CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 5 Market risk moduleSubsection 6 Market risk concentrations sub-moduleArticle 186
Risk factor for market risk concentration 
N/ADeletionConcentration Risk
42CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 5 Market risk moduleSubsection 6 Market risk concentrations sub-moduleArticle 187
Specific exposures 
N/AAmendedSpread Risk SCR
43CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 5 Market risk moduleSubsection 7
Currency risk sub-module
 N/AAmendedCurrency Risk SCR
44CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 6 Counterparty default risk module Subsection 1 General provisionsArticle 192
Loss-given-default 
N/AAmendedCounterparty Default Risk
45CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 6 Counterparty default risk module Subsection 1 General provisionsN/A‘Article 192a
Exposure to clearing members
NewCounterparty Default Risk
46CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 6 Counterparty default risk module Subsection 1 General provisionsArticle 196
Risk-mitigating effect
‘Article 196 Risk-mitigating effectReplacedRecognition of Reinsurance
47CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 6 Counterparty default risk module Subsection 1 General provisionsArticle 197
Risk-adjusted value of collateral
N/AAmendedCounterparty Default Risk
48CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 6 Counterparty default risk module Subsection 2 Type 1 exposures Article 199
Probability of default 
N/ANewCounterparty Default Risk
49CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 6 Counterparty default risk module Subsection 2 Type 1 exposures Article 201
Variance of the loss distribution of type 1 exposures 
N/AReplacedCounterparty Default Risk
50CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 9
Adjustment for the loss-absorbing capacity of technical provisions and deferred taxes 
N/AArticle 207
Adjustment for the loss-absorbing capacity of deferred taxes 
N/AAmendedDeferred Taxes
51CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 10
Risk mitigation techniques
N/AArticle 208
Methods and Assumptions 
N/AReplacedRecognition of Reinsurance
52CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 10
Risk mitigation techniques
N/AArticle 209
Qualitative Criteria 
N/AReplacedRecognition of Reinsurance
53CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 10
Risk mitigation techniques
N/AArticle 210
Effective Transfer of Risk 
N/ANewRecognition of Reinsurance
54CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 10
Risk mitigation techniques
N/AArticle 211
Risk-Mitigation techniques using reinsurance contracts or special purpose vehicles
N/AAmendedRecognition of Reinsurance
55CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 10
Risk mitigation techniques
N/AArticle 212
Financial Risk-Mitigation techniques 
N/AReplacedRecognition of Reinsurance
56CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 10
Risk mitigation techniques
N/AArticle 213
Status of the counterparties 
N/AReplacedRecognition of Reinsurance
57CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 12
Undertaking-specific parameters
N/AArticle 218
Subset of standard parameters that may be replaced by undertaking-specific parameters 
N/AAmendedRecognition of Reinsurance
58CHAPTER V SOLVENCY CAPITAL REQUIREMENT STANDARD FORMULASECTION 12
Undertaking-specific parameters
N/AArticle 220
Standardised methods to calculate the undertaking-specific parameters 
N/AReplacedRecognition of Reinsurance
59CHAPTER IX
SYSTEM OF GOVERNANCE 
SECTION 1 Elements of the system of governance N/AArticle 260
Risk management areas 
N/ANewDeferred Taxes
60CHAPTER XII
PUBLIC DISCLOSURE 
SECTION 1 Solvency and financial condition report: structure and contents N/AArticle 297
Capital management 
N/AAmendedDeferred Taxes
61CHAPTER XIII
REGULAR SUPERVISORY REPORTING
SECTION 1 Elements and contentsN/AArticle 311
Capital management 
N/AAmendedDeferred Taxes
62CHAPTER XV SPECIAL PURPOSE VEHICLES SECTION 5 Solvency requirements N/AArticle 326
Solvency requirements 
N/AReplacedSPV
63TITLE II INSURANCE GROUPS : CHAPTER I SOLVENCY CALCULATION AT GROUP LEVEL SECTION 2
Group solvency: calculation methods
N/AArticle 335
Method 1: determination of consolidated data 
N/AAmendedInvestments in Funds
64TITLE II INSURANCE GROUPS : CHAPTER I SOLVENCY CALCULATION AT GROUP LEVEL SECTION 2
Group solvency: calculation methods
N/AArticle 336
Method 1: Calculation of the consolidated group Solvency Capital Requirement
N/AAmendedInvestments in Funds
65TITLE II INSURANCE GROUPS : CHAPTER I SOLVENCY CALCULATION AT GROUP LEVEL SECTION 2
Group solvency: calculation methods
N/AArticle 337
Method 1: determination of the local currency for the purposes of the currency risk calculation
N/AReplaceCurrency Risk SCR
66AnnexesAnnex IIN/AN/AN/AReplacedCalibration of NL risk SCR
67AnnexesAnnex IIIN/AN/AN/AAmendedANNEX III
FACTOR FOR GEOGRAPHICAL DIVERSIFICATION OF PREMIUM AND RESERVE RISK 
68AnnexesAnnex VN/AN/AN/AReplacedCalibration of Windstorm risk SCR
69AnnexesAnnex VIN/AN/AN/AAmendedCalibration of Earthquake risk SCR
70AnnexesAnnex VIIN/AN/AN/AAmendedCalibration of Flood risk SCR
71AnnexesAnnex VIIIN/AN/AN/AReplacedCalibration of Hail risk SCR
72AnnexesAnnex IX N/AN/AN/AAmendedGeographical Risk Zones for CAT risks
73AnnexesAnnex XN/AN/AN/AReplacedCalibration of Windstorm, Earthquake, Flood and Hail risks SCR.
74AnnexesAnnex XIVN/AN/AN/AAmendedCalibration of Health risk SCR
75AnnexesAnnex XVIN/AN/AN/AAmendedCalibration of MASS ACCIDENT RISK SUB-MODULE AND
ACCIDENT CONCENTRATION RISK SUB-MODULE 
76AnnexesAnnex XVIIN/AN/AN/AAmendedNon-proportional reinsurance method 2 - Input data and method-specific data requirements
77AnnexesAnnex XXIN/AN/AN/AAmendedANNEX XXI
AGGREGATE STATISTICAL DATA  
78AnnexesAnnex XXIIN/AN/AN/AAmended‘Correlation coefficients for windstorm risk in the Republic of Finland,  in the Republic of Hungary, in the Kingdom of Sweden and in the Republic of Slovenia.
79AnnexesAnnex XXIIIN/AN/AN/AAmendedCorrelation coefficients for earthquake risk in the Hellenic Republic,  in the Republic of Romania and  in the Slovak Republic.
80AnnexesAnnex XXIVN/AN/AN/AAmendedCorrelation coefficients for flood risk in the Republic of Hungary ane in the United Kingdom of Great Britain and Northern Ireland.
81AnnexesAnnex XXVN/AN/AN/AAmendedCorrelation coefficients for hail risk in the Czech Republic and in the Republic of Slovenia.