Implementation briefing to go – IRRD Solvency II

This briefing is intended to give a first analysis of the European Parliament’s overview over the European Parliament’s ECON committee negotiation position regarding the reform of prudential rules for insurance companies, known as Solvency II. The way is now free for negotiations with national governments, who consolidated their position already a year ago. The European Parliament’s position already gives a good overview which changes are likely to be implemented in the final legislative compromise.

Background

The Committee on Economic and Monetary Affairs (ECON) in the European Parliament adopted on 18 July 2023 by 55 votes in favour, (3 votes against and 1 abstention) its position on the review of the Solvency II directive. At the same time ECON adopted by 44 votes in favour, (7 votes against and 8 abstentions) its position on the insurance recovery and resolution directive. This means that the inter-institutional negotiations can commence in September 2023. The vote came after a 9-months delay and several attempts by the rapporteur to go ahead without the IRRD and to solely drive the review of the Solvency II directive.

Currently, the European insurance regulatory framework only provides for limited requirements with respect to recovery and does not include requirements for the resolution of insurance and reinsurance companies. In other words, in contrast to European banks and investment firms, European insurance regulation currently does not provide for an equivalent to the European Bank Recovery & Resolution Directive (BRRD) and/or the Single Resolution Mechanism (SRM). As part of the Solvency II review, this is expected to change. Together with the formal proposal of the European Commission and the future negotiations of the EU co-legislators with the aim to amend the

Solvency II framework, which was published on September 22, 2021, a separate legislative proposal was published to introduce a recovery and resolution framework for insurers and reinsurers, on a minimum harmonisation basis, a proposal for a European Insurance Recovery & Resolution Directive, IRRD. In fact, this is one of the most important material changes in the 2020 review of Solvency II. At the same time, several European countries have already introduced recovery and resolution regimes for insurance and reinsurance companies at the Member State level. Based on information from an EIOPA survey, conducted in the first quarter of 2016, four EU Member States (The Netherlands, Belgium, France and Romania) had recently reinforced their national recovery and resolution frameworks. Similarly, the European landscape with respect to resolution funding and insurance guarantee schemes is based on national laws and consequently diverse.

On 17 December 2020, EIOPA published its opinion on the 2020 review of Solvency II, EIOPA Opinion on the 2020 Review of Solvency II. The Solvency framework, which became applicable in EU Member States on 1 January 2016, provided that certain areas of the framework would need to be reviewed by the European Commission at the latest by 1 January 2021. In that context, the European Commission has requested for EIOPA technical advice on the Solvency II 2020 review in February 2019 on nineteen main topics, including recovery and resolution, insurance guarantee schemes and on macro-prudential issues, published on 22 September 2021. The EIOPA advice contains many impositions from the perspective of insurers, probably the most intrusive and painful of the new resolution powers, as suggested by EIOPA, is the power to restructure, limit or write down liabilities, including (re)insurance liabilities and allocate losses to shareholders, creditors and policyholders. According to EIOPA, the exercise of the resolution powers should be subject to adequate safeguards, an alternative to ordinary bankruptcy proceedings. EIOPA followed here the Dutch Financial

Supervision Act that adopted this ranking of objectives. However, the European Commission did not follow EIOPA’s advice on resolution actions. Instead, the Commission introduced the concept of a low-risk-profile undertaking that would automatically be eligible for reduced regulatory requirements.

ECON Committee’s report on Solvency II review

One contested adjustment had been to make climate change scenario analysis mandatory in Article 45a. NFU welcomes that insurers are required to run climate change scenarios as part of their own risk and solvency assessment, as addressing climate risks is crucial to a successful green transformation of our economy. At the same time, the European Insurance and Occupational Pensions Authority (EIOPA) received the mandate to assess whether specific capital requirements should be set for sustainability and biodiversity risks.

In addition, the European Parliament’s negotiating position requires insurers to draw up transition plans, including goals and milestones, which must be disclosed. This way, the commitment of insurers to decarbonisation and climate protection can be tracked in the future.

Some parliamentary amendments suggested a so-called “One-for-one rule” for undertakings, according to which insurance companies would have had to fully cover the risks of every euro invested in fossil fuels with own capital. These proposed changes were however abandoned during the negotiations of the Rapporteur and Shadow-Rapporteurs.

Exceeding the Commission proposal, which already contained a reduction in capital requirements, the ECON committee further reduces the Solvency Capital Requirements through delegated acts. The rationale for this further capital relief is to free available capital to direct it towards productive investments in the real economy in order to support the economic recovery.

Further, the ECON committee wants to empower the European Commission to adopt delegated acts supplementing this Directive, in order to reflect the risk posed by crypto-assets in Article 105 para 6a. This amendment of the proposal should in NFU’s opinion be taken over in the final compromise as this may be contributing to financial stability in the insurance sector.

ECON Committee’s report on the insurance recovery and resolution directive

The negotiation position of the European Parliament is limiting recovery and resolution requirements to a significantly smaller number of insurance companies than the proposal or the Council in its general approach. Subject to pre-emptive recovery planning requirements are only undertakings if they operate “significant cross-border activities”. At the same time, the ECON negotiating position defines “significant cross-border activities” as “insurance and reinsurance activities carried out by an insurance or reinsurance undertaking (…) in a host Member State, which exceed 15 % or EUR 30 000 000 of the annual gross written premium income of the undertaking, (…).” According to the European Commission’s proposal the annual gross written premium of the undertaking had to make up only 5 % in order to qualify as “significant cross-border activities”. Simultaneously, the Parliament’s position does define national rules on resolution financing – an aspect that was missing from the European Commission’s proposal. According to these rules, insurance companies have to provide financing at national level to be available in the event of a resolution.

In conclusion and as one of the more important aspects for Nordic insurers, NFU welcomes the ECON position’s extension of the scope of exemption rules for low-risk profile undertakings, such as mutual undertakings in Article 29b.

Next steps

After nine months of delays and doubts about whether the European Parliament would refuse to negotiate both files jointly, the ECON committee has passed both reports as well as the mandate to enter trilogue negotiations with the Council. After complicated negotiations in the European Parliament, the trilogue negotiations with the Council of the European Union and the European Commission can begin in September. The Council had already decided on its positions on Solvency II and IRRD in 2022.