Proposed amendments to the Solvency II Delegated Acts - Part 2 – Solvency Capital Requirement (SCR)

The proposed updates allow member states with currencies pegged to the euro to apply a single, joint interest rate shock for exposures in both the euro and the pegged currency, since their best estimate liabilities are already based on the euro discount curve. In practice, the impact is very limited, as Bulgaria is the only EU member state with a pegged currency and will adopt the euro from 1 January 2026.

The methodology for interest rate up shocks has been revised: instead of a pure multiplicative shock, the new approach combines a multiplicative shock with a parallel shift, and the previous +1% floor has been removed. In addition, the extrapolation of shocked yield curves must follow the same approach applicable for the base curve, using a stressed UFR (base UFR +15 bps) and the same weighting up to the last liquid forward rate, which overall increases the size of the up shocks.

The methodology for interest rate down shocks is similar to the up shock and the previous rule of applying no shock to negative rates has been replaced with term-dependent negative floors (e.g. –1.25% at 1–7 years, –0.893% at 20+ years). Extrapolation must follow the base curve method with a stressed UFR set 15 bps lower, and while the overall impact of down shocks is smaller than for up shocks, it remains significant at longer maturities.

The proposed change introduces a lower correlation factor between interest rate and spread risk when the interest rate down shock is applicable, reducing it to 0.25 instead of matching the 0.5 level used for the up shock, which decreases the SCR by enhanced diversification.

Defaulted and forborne loans are no longer stressed under the spread risk module; instead, they are stressed in the counterparty default risk module.

Spread risk charges reduced for senior and non-senior STS securitisations and for other senior securitisations, with the most favourable treatment for senior STS to encourage greater use of this asset class. Risk factors for other securitisations are unchanged.

Finally, the 0% spread risk charge for bonds and loans (or pools of such assets) that are fully or partially guaranteed by central banks, EU governments, the ECB, multilateral development banks, or certain international organisations has been extended, with proportional relief in the case of partial guarantees.

The eligibility criteria for unlisted equity portfolios have been updated, with higher thresholds for turnover and balance sheet size (EUR 12.8m instead of EUR 10m) to reflect indexation.

The new rules clarify how to treat equity investments with negative values: leveraged or structured positions that could lead to losses beyond the original investment must be valued as positive exposures, while non leveraged negative equity values are set to zero, ensuring firms cannot reduce capital requirements through accounting effects.

Insurers must now demonstrate that they can hold long-term equity investments without being forced to sell them, even in stressed markets conditions. This can be demonstrated either by having a stable base of long-term, illiquid policy obligations (e.g. annuities) that match the investment horizon, or by maintaining a robust liquidity buffer, both subject to strict rules on asset quality, limits, and haircuts. Firms must also prove they have adequate solvency margins and cash flow resilience over five years, ensuring the preferential capital treatment for long-term equities only applies where holdings are genuinely sustainable.

Under the proposed Solvency II framework, equity investments made under legislative programs can benefit from reduced equity risk charges, separate from the relief available for long-term equity investments. Eligible programs must be public schemes (e.g., with government or EU oversight) that provide subsidies or guarantees and demonstrably lower the overall credit risk of the insurer; ad hoc interventions, economy-wide measures, and private initiatives are excluded. Up to 10% of eligible own funds may qualify, with additional conditions such as restrictions on investment scope and caps, unless the program is listed in a recognised register. The capital relief is linked to the reduction in credit risk achieved—for example, a 10% credit risk reduction would lower the type 1 equity risk charge proportionally from 39% to 36.1%.

The proposed changes refine how credit quality steps are assigned: certain government and central bank exposures now have their credit step reduced, while some regional and local authority exposures move from step 2 to step 1. Bonds and loans from these issuers can still receive a 0% concentration charge if they meet the conditions. In addition, equity positions with negative values are now excluded from the calculation.

The corridor for the symmetric adjustment in equity risk has been broadened from +/- 10% to +/- 13%, aligning with the updated Solvency II Directive. Look-through is generally not required for participations in related undertakings, but it now applies where the related entity manages assets on behalf of the company or any other group entity.

The loss-given-default (LGD) rules have been refined with updated formulae for certain reinsurance exposures, repos, securities lending, borrowing transactions, and pre-funded central clearing house (CCP) default fund contributions. These can now be assessed on a net basis under contractual netting agreements. A 5% floor has been introduced for mortgage loans and guarantees from fully backed sovereign or institutional counterparties are recognised with temporary relief when provisional payments are received. Defaulted and forborne loans have been reclassified from spread risk to counterparty default risk.

The upper limit for mortgage loans treated as Type 2 counterparty default exposures has been raised to reflect indexation, and a new eligibility option has been added that links directly to the prudential rules for mortgage exposures under EU banking regulation. This means insurers can rely on risk weights reviewed and adjusted by national authorities for residential and commercial mortgages, ensuring consistency with banking supervision and alignment to property market risks.

The proposed rules assign a small probability of default (0.002%) and corresponding LGD values to pre-funded and unfunded contributions to the default fund of qualifying central counterparties. This technical adjustment is intended solely to prevent division by zero errors in the SCR calculation, rather than to change the overall treatment of these exposures.

For Type 2 counterparty default exposures, defaulted and forborne loans are now included with an LGD of 100%, while LGD factors for all other exposures remain unchanged. This change reflects the reclassification of these loans from spread risk to counterparty default risk to better capture their true risk characteristics.

The scope of references to the collateral factors (F, F’, F’’, F’’’) has been expanded to explicitly cover provisions on LGD for pool exposures, as well as the calculation of risk-mitigating effects, for greater clarity. The factors themselves remain unchanged—100% where collateral is excluded from the insolvency estate, and 50%, 18%, 16%, and 90% respectively in all other cases.

The scope of Type 1 counterparty default risk has been expanded to include repos, securities lending, borrowing transactions, and pre-funded CCP contributions.

Certain aspects of the non-life premium and reserve risk calculation have been clarified. For premium risk, the adjustment factor to the standard deviation only applies where non-proportional reinsurance is in place, with segments 1, 4, and 5 set at 80% and all others at 100%. For reserve risk, the same principle applies, but a new formula has been introduced for adverse development covers (ADCs) that meet strict conditions, ensuring the capital relief reflects the actual protection provided while being prudently capped. If the reinsurance is not an eligible ADC, the adjustment remains 100%, and a detailed formula now defines recoveries under reserve risk scenarios.

The rules for NSLT health premium and reserve risk have been clarified to align treatment with non-life risks. For premium risk, the adjustment factor for non-proportional reinsurance now applies only if qualifying cover is in place, otherwise a 100% factor is used. For reserve risk, a similar rule applies, with an additional framework for adverse development covers (ADCs): capital relief is granted through a detailed formula that reflects net obligations, volatility, recoveries, cession rates, prudency, and premiums, but only if the ADC meets strict conditions on segmentation and attachment points. Recoveries are capped at the lower of stress-driven losses above the attachment point and the remaining contractual cover, ensuring prudence and preventing overstated relief.

Mass lapse risk has been expanded and should now be applied uniformly across all insurance and reinsurance obligations.

Only minor wording edits were made to the health expense risk provisions to improve clarity and consistency, with no change in substance.

The proposed updates strengthen the conditions for recognising risk-mitigation in the SCR. Insurers must now demonstrate that hedges or reinsurance genuinely transfer risk, are proportionate to the protection provided, and do not create material basis risk. Basis risk is considered immaterial only if the hedged and underlying exposures are closely aligned across a wide range of scenarios, while new guidance clarifies that mismatched currencies, contract behaviour differences, or capped protections must be reflected in the assessment. Additional rules set out how to test for similarity of exposures and require comprehensive scenario analysis beyond the standard formula. Government-backed reinsurance schemes are formally treated as valid risk-mitigation, while contingent capital and convertible bond instruments are explicitly excluded. Overall, the framework ensures that only genuine, effective, and transparent risk-transfer arrangements reduce capital requirements.

Recognition of guarantees has been clarified with minor wording updates for consistency. Special provisions now apply to guarantees on residential mortgage loans, giving lenders 24 months to meet certain requirements and allowing coverage even where contracts include cancellation clauses for due diligence or fraud; guarantees can pay out either as a lump sum or by taking over the borrower’s future payment obligations. Insurers must also demonstrate to supervisors how they manage concentration risk from guarantees and explain how their guarantee strategy fits into their overall risk profile. In addition, exposures are now allowed to be treated as fully protected when backed by robust sovereign or public sector counter-guarantees, provided these are equivalent strength to a direct guarantee.

The rules around ring-fenced funds have been streamlined by removing all references to matching adjustment portfolios (MAPs). Note that there are currently no matching adjustment portfolios in Ireland and the only EU member state with MAPs is Spain. Approvals granted under the old framework will only remain valid until 29 January 2027, after which the SCR must be calculated under the general rules. The calculation principles for ring-fenced funds remain largely the unchanged - treating each fund and the rest of the undertaking as separate entities and summing their SCRs - but the wording has been simplified and an explicit cap added so that profit participation adjustments cannot exceed future discretionary benefits. Overall, the scope is now narrowed to ring-fenced funds only, with clearer language but no fundamental methodological changes.

The statistical quality standards for internal models have been updated to stress the need to avoid overreliance on historic climate risk data. Diversification effects linked to matching adjustment portfolios are no longer included. The scope has been broadened to explicitly cover other techniques that reduce the SCR, and contingent capital and convertible bond instruments have been excluded from eligible risk-mitigation tools to ensure consistency with other updates.

New proportionality measures allow simplified calculations for immaterial risk modules, subject to materiality thresholds of 5% of the BSCR per module and 10% in total, and only for up to three years before a full recalculation is required. The simplified approach applies a fixed risk factor from the last full calculation to an updated volume measure, floored at the original level, with firms required to justify the chosen measure. Additional simplifications are introduced for calculating the risk-mitigating effects of reinsurance, securitisations, and derivatives by allocating them proportionally to counterparty exposures, and for adjusting standard deviations in non-life premium and reserve risk, including specific rules for adverse development covers. Overall, the changes aim to reduce complexity for smaller or less material risks while ensuring that simplifications remain proportionate and appropriately justified.

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.