Proposed amendments to the Solvency II Delegated Acts

In Part 1, we examine the amendments to the calculation of Technical Provisions and Own Funds. Upcoming blogposts in this series will explore the changes to the Solvency Capital Requirement (SCR) and to Pillars II and III, for both solo and group entities.

The key changes affecting Technical Provisions (TPs) are:

• Risk Margin
• Best Estimate Liabilities
• Risk-free yield curves
• Smoothing
• Volatility adjustment
• Matching adjustment 
• Contract boundaries
• Expenses
• Simplified calculation of options and guarantees
• Reliance on historic climate risk data
• Homogenous Risk Groups (HRGs)

We explain each of these changes below.

the cost of capital (CoC) was decreased from 6% to 4.75%.

The reduction in cost of capital is intended to help EU insurers keep pace with their UK counterparts after Brexit, although the rate still remains above the 4% applied under the Solvency UK regime. The risk tapering factor is 0.9 for life and 1 for non-life companies in the UK – in contrast with the single factor of 0.96 in Solvency II - with a lower floor of 0.25. This also means that there is no tapering adjustment for non-life companies although it is more relevant for life portfolios with long durations. This change will significantly reduce long-term liabilities, particularly for life insurers, improving capital ratios.

The smoothing (or extrapolation) methodology of yield curves changed with the introduction of the first smoothing point (FSP):

• The FSP for the euro remains at 20 years. To maintain this level, an additional margin has been added to the minimum threshold for the share of outstanding bonds. The same rule applies to other currencies with a 20-year FSP, while for other currencies, the threshold is reduced by half.
• The Smith-Wilson method was replaced by a formula using the observed rate at the FSP and a forward rate that converges towards the ultimate forward rate (UFR). 
• The forward rate is calculated as a weighted blend of the last liquid forward rate (LLFR) and the UFR, with the speed of convergence controlled by a parameter α (40% for Swedish Krona, 11% for other currencies). This methodology ensures a smooth and consistent extension of the yield curve beyond available market data.

Furthermore, it was clarified that no credit risk adjustment is required for overnight swaps as part of financial instruments used to derive the basic risk-free interest rates.

Phased implementation of the extrapolation of yield curves is allowed for five years between 1 January 2027 and 1 January 2032. The Delegated Act also introduces explicit α-values for the extrapolation transition: 11% for the euro and 40% for the Swedish krona. These will taper linearly to zero by 2032, providing a gradual move from the last liquid point (LLP) toward the ultimate forward rate (UFR).

The amendments of the Solvency II Directive⁴ approved by the European Parliament in 2024 included changes to the calculation of the volatility adjustment, we covered this in detail in our previous blog post⁵, namely:

• Increased general application ratio from 65% to 85% to capture unexpected credit and other risks
• New macroeconomic component for euro-denominated countries in place of the country component to mitigate the existing cliff-edge effect
• An entity-specific Credit Spread Sensitivity Ratio (CSSR) to address the issue of movement in liability values overshooting or undershooting movement in asset prices
• An entity-specific adjustment factors to the Risk Corrected Spread (RCS) by currency, used in the VA calculation

The updated Delegated Acts provide further detail and formulae for the calculation of the volatility adjustment. The update formalises the Country-Specific Spread Risk (CSSR) mechanism, ensuring the VA better reflects persistent spread widening in local markets. It also clarifies treatment for insurers with pegged-currency portfolios, whose reference risk-free rate is tied to the euro.

The formula for the spread underlying the volatility adjustment was simplified by removing the zero floor, meaning negative spreads will now be included rather than floored at zero. The new formula is:

S = w_gov · S_gov  +  w_corp · S_corp

where w and S denote weights and spreads of government and corporate bonds, respectively. In addition, the denominator for calculating the weights w_gov  and w_corp has changed — it is now based only on the total value of bonds, loans, and securitisations in the reference portfolio, rather than all assets.

Formulae are provided for the calculation of the risk-corrected spread for both government bonds and non-government bonds, loans, and securitisations in the European Economic Area (EEA). Both calculations apply a tiered formula of average spreads capped at 65% and 125% of the long-term average spreads, respectively.

The formula for the Credit Spread Sensitivity Ratio (CSSR) was introduced for each currency as the ratio of PVBP (price value of a basis point) of assets – bonds, loans and securitisations – and best estimate liabilities. 

The new rules enable undertakings to invest in more complex, restructured assets - where the cash flows depend on the performance of other underlying assets – with certain conditions.

These conditions are designed to ensure that the cash flows of the underlying assets are sufficiently predictable and fixed, and that this predictability is preserved and carried through to the restructured assets held in the portfolio.

The condition on repeating risk assessment changed from factual impossibility to legal right. This may lead to shorter contract boundaries for certain protection products where the insurance company has the right to reassess the risk by contract before the end of the term – even if this is currently not done or not feasible to perform in practice.

The proposed amendments require expenses to be projected in line with management’s actual intentions around writing new business, rather than assuming ongoing new business activity by default as under the current going-concern approach. For closed and entities this may result in a higher expense BEL which allows for expected run-off expenses and potentially also expense floors.

The amendments also clarify that expense inflation assumptions should reflect the insurer’s own expectations and experience, rather than relying on a general market index.

This new proportionality measure allows small and non-complex entities to simplify the valuation of immaterial options and guarantees. The regulation defines immaterial as those representing less than 5% of the SCR, which may differ from internal or audit materiality thresholds. Without this provision, entities would otherwise be required to perform a full stochastic calculation of the value of options and guarantees.

New rules require undertakings to avoid overreliance on past events in relation to climate change-related trends.

The rationale for this lies in adverse trends in climate risk in recent years which are not always linear and hence projections based on historic data can be misleading. Instead, EIOPA promotes the use of forward-looking climate risk scenario analysis and projections. This requirement is consistent with EIOPA’s ORSA guidance, reinforcing the need to integrate forward-looking climate scenarios and avoid reliance on purely historical experience.

Although covered in the Pillar II section, the offsetting rules between and across homogeneous risks groups (HRGs) affects the calculation of the BEL. The proposed updates add explicit requirements for offsetting both within and between HRGs, the latter was not permissible earlier. This may lead to a revision of the BEL aggregation methodology and potentially a reduction in the total BEL due to more offsetting.

The updated Delegated Acts clarify several key definitions to improve alignment between prudential and accounting frameworks. New or revised terms include future management actions, expected profit in future fees (EPIFF), and the classification of defaulted and forborne exposures, distributions and foreseeable charges ensuring greater consistency with IFRS 17 terminology.

The key changes affecting Own Funds are:

• Strategic participations
• Foreseeable dividends and distributions
• Adjustments to ring-fenced funds

The conditions for not deducting strategic participations changed, it now requires permission from the supervisory authority. Previously, the condition was that the strategic participation is included in the group solvency calculation using method 1 (consolidation method).

The proposed amendments introduce the accrual method for calculating foreseeable dividends and distributions that form part of the reconciliation reserve. In addition, a new hierarchy is established: foreseeable dividends are determined first by an approved dividend policy, then by an established payout ratio, and finally by the most recent distribution proposal. This structured approach enhances consistency and transparency in the assessment of Own Funds. This hierarchy brings greater predictability and comparability in Own Funds reporting across insurers.

The amount of dividends and distributions have to be formally approved by management or proposed to the relevant body and should be in line with the undertaking’s dividends or distributions policy. If such a policy does not exist or does not provide a prudent basis for foreseeable dividends and distribution, then they should be calculated as a historic average over three years excluding exceptional items.

The proposed amendments also introduce a new provision clarifying that transactions with the same economic effect as repayment or redemption, such as most share buyback unless the bought back shares are used immediately (or within 1 month) to service stock option programs, must be treated accordingly, tightening rules on capital management and preventing artificial inflation of solvency ratios.

The amendments clarify that foreseeable losses arising after the balance sheet date must be recognized prudently in the Own Funds calculation. This measure ensures that the reported solvency positions accurately reflect the undertaking’s current and prospective financial position.

The proposed rules remove the need to calculate a separate SCR for matching adjustment portfolios (MAP) unless they qualify as ring fenced funds. This change allows diversification between MAPs and the rest of the portfolio, replacing the current approach where no such diversification is permitted.

Note that, following Brexit, the only country in the EU with significant use of matching adjustment portfolios is Spain, so this is not relevant for other countries. The rules related to MAPs changed recently as part of the Solvency UK reform recently marking a divergence between the two regimes.

The upcoming amendments to the Solvency II Delegated Acts and Directive aim to modernise the framework and address key gaps identified in the review. Although the changes will not apply until January 2027, regulators expect (re)insurers to start assessing their impact well in advance.

At Finalyse, our actuarial and risk management experts can help you prepare through our comprehensive Solvency II Review Service — a structured, two-phase approach designed to assess your readiness and support implementation.

• Phase I – Impact & Readiness Assessment: We identify material areas of impact — capital, models, data, reporting — and deliver a concise Readiness Report highlighting key priorities.
• Phase II – Governance & Implementation Alignment: We help align internal models, data flows and reporting frameworks with updated Solvency II requirements, update ORSA and governance structures, and prepare a Board-ready Implementation Action Plan.

These phases are supported by:

• Gap Analysis – Comparing your current framework against the latest regulatory requirements and identifying critical gaps.
• Roadmap Development – Designing a clear, practical roadmap with milestones for integrating the changes.
• Workshops & Upskilling – Equipping key stakeholders with the knowledge and skills to apply the new requirements.
• Strategic Advisory Support – Explaining how the amendments affect your ORSA, risk management, reporting, and long-term planning.

1.   Commission seeks feedback on the review of the Solvency II Delegated Regulation - European Commission
2.   Directive - EU - 2025/2 - EN - EUR-Lex
3.   Finalyse: Solvency II Amendments
4.   Directive - EU - 2025/2 - EN - EUR-Lex
5.   Finalyse: Solvency II Amendments