COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the review of the EU prudential framework for insurers and reinsurers in the context of the EU’s post pandemic recovery
Date: 2021-09-22
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: coronavirus disease, economic recovery, epidemic, financial requirements, financial risk, financial supervision, insurance company, insurance contract, insurance occupation, investment, reinsurance

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 22.9.2021  COM(2021) 580 final  COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the review of the EU prudential framework for insurers and reinsurers in the context of the EU’s post pandemic recovery  
 
 
1.  SOLVENCY II AND THE CONTEXT OF ITS REVIEW 

Insurance policies form an integral part of the daily life of European citizens. For many social 
and  economic  activities,  holding  an  insurance  policy  is  necessary  as  a  protection  against 
potential risks. An insurance contract can also be a savings product, which will determine the 
long-term  welfare  of  the  holders  while  insurers  channel  these  savings  via  financial  markets 
into the real economy. Insurance and reinsurance companies also play an essential role in the 
real economy as they cover risks for individuals and businesses in exchange for the payment 
of premiums. By pooling premiums from a multitude of clients and diversifying across a large 
number  of  individual  risks,  private  insurance  provides  protection  at  an  affordable  price  for 
individuals  and  businesses  against  otherwise  potentially  financially  devastating  events, 
thereby contributing to the resilience of our economies and societies.  

Insurers’  investment  capacity  is  geared  towards  the  real  economy  and  contributes  to  the 
economic recovery and the long-term financing of European businesses, including SMEs, and 
infrastructure, that create jobs and growth in the Union. According to data from the European 
Insurance and Occupational Pensions Authority (EIOPA), in 2020 EU insurers collected more 
than €1 trillion in premiums and incurred claims of around €800 billion1.  

At the end of 2020, overall, EU insurers and reinsurers had reserved more than €7 trillion to 
be able to pay for expected future claims and held assets worth more than €10 trillion, making 
the  sector  one  of  the  largest  among  institutional  investors.  The  sector  remained  well 
capitalised during the Covid-19 pandemic with an average ratio of regulatory capital to capital 
requirements of 235% at the end of 2020, albeit 7 percentage points lower than at the end of 
2019. 

Given their crucial role, insurers’ financial resilience is of paramount importance. Prudential 
rules  for  this  sector  are  set  out  in  Directive  2009/138/EC  (Solvency  II)2,  which  has  applied 
since 1 January 2016. The principal objectives of Solvency II are to protect policyholders and 
beneficiaries, as well as to preserve financial stability.  

The Directive contains several mandates for the Commission to review the functioning of key 
elements of the prudential rules: 

–  The  Commission  is  required  to  assess  the  functioning  of  measures  covering  the 
particular  situation  of  insurers  supplying  long-term  guarantees,  which  are  relevant 
for  many  life  insurance  products.  These  “long-term  guarantee  measures”  aim  to 
mitigate the impact of short-term market fluctuations on insurers’ solvency positions. 
More  stable  solvency  ratios  avoid  undue  competitive  disadvantages  for  business 
models  based  on  offering  long-term  guarantees  and,  ultimately,  increase  financial 
stability.  

1 The figures for premiums and claims are presented gross of reinsurance and aggregated for direct business in 
the EU27. 
2 Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up 
and pursuit of the business of Insurance and Reinsurance (OJ L 335, 17.12.2009, p. 1) 

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–  The  Commission  has  to  review  the  calculations  of  capital  requirements.  These 
calculations  are  expected  to  be  sensitive  to  the  risks  insurers  and  reinsurers  are 
exposed to, and the review aims at verifying the adequacy of this risk sensitivity.  

–  The legal mandate covers the rules related to  capital management within insurance 

and reinsurance groups.  

–  The Commission is required to assess the case for further aligning insurance rules on 

crisis management and insurance guarantee schemes.  

Beyond  the  legal  mandates,  the  review  is  an  opportunity  to  reflect  more  broadly  on  the 
lessons learned since the rules have been in force.  

Given the significant volume of investments managed by insurers and reinsurers, the review 
also assessed whether the sector could contribute to the EU’s political priorities – especially 
the  Capital  Markets  Union3  as  well  as  the  climate  and  environmental  targets  under  the 
European Green Deal4.  

For  instance,  the  EU  climate  targets  for  2030  will  require  €350  billion  of  additional  annual 
investment just to finance transition in the energy sector. The role of private investment has 
also  become  even  more  prominent  given  the  need  for  economic  recovery  following  the 
COVID19 pandemic. While the insurance sector can contribute to those financing needs with 
private  investments,  it  can  also  have  an  important  role  in  protecting  individuals  and 
businesses  against  climate  risks  and  thereby  help  our  society  to  adapt  to  climate  change  as 
underlined in the strategy on climate adaptation5. 

The review was an opportunity to ensure that the regulatory framework is conducive to long-
term investment by the insurance sector.  

In  addition,  there  is  a  consensus  among  stakeholders  that  the  proportionality  principle 
enshrined in Solvency II, i.e. the application of rules in a manner that is proportionate to the 
nature,  scale  and  complexity  of  the  risks  inherent  in  the  business  of  an  insurer,  could  be 
improved. While Solvency II is generally perceived as a success, due to the closer alignment 
of prudential rules with state-of-the-art risk management practices, this may have resulted in 
undue complexity for some business models.  

Finally, Solvency II, unlike the prudential framework for credit institutions, currently has no 
specific macro-prudential tools to explicitly address the build-up of systemic risks, and there 
is  so  far  no  dedicated  common  framework  for  crisis  preparedness  and  resolution  for  failing 
insurers, in the interests of policyholders and the public at large.  

Against this background, the present review aims to: 

3 Communication from the Commission: A Capital Markets Union for people and businesses  - new action plan 
(COM(2020)590) 
4  Communication  from  the  Commission  to  the  European  Parliament,  the  European  Council,  the  Council,  the 
European  Economic  and  Social  Committee  and  the  Committee  of  the  Regions:  The  European  Green  Deal 
(COM(2019)640) 
5 Communication  from the Commission to the European Parliament,  the Council, the European Economic and 
Social Committee and the Committee of the Regions: Forging a climate-resilient Europe -the new EU Strategy 
on Adaptation to Climate Change (COM(2021)82) 

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  provide  incentives  for  insurers  to  contribute  to  the  long-term  sustainable  financing 

of the economy; 

 

improve risk-sensitivity; 

  mitigate excessive short-term volatility in insurers’ solvency positions; 

 

improve proportionality; 

  enhance  quality,  consistency  and  coordination  of  insurance  supervision  across  the 
EU,  and  improve  the  protection  of  policyholders  and  beneficiaries,  including  when 
their insurer fails; 

  better address the potential build-up of systemic risk in the insurance sector; 

 

improve  preparedness  for  extreme  scenarios  that  may  make  recovery  or  the 
resolution of a failing insurer or reinsurer necessary. 

For  its  work  on  the  review,  the  Commission  was  able  to  build  on  contributions  from 
stakeholders  (mainly  submitted  during  the  public  consultation)  and  EIOPA’s  opinion 
published on 17 December 20206.  

On  sustainability,  the  Commission  also  took  into  account  a  separate  opinion  from  EIOPA, 
published in September 20197. In line with that opinion, the Commission proposes to amend 
risk management requirements for insurers and reinsurers by adding an obligation to conduct 
long-term climate scenario analysis. At a later stage, the Commission may consider extending 
this requirement to other environmental risks. This will contribute the European Green Deal’s 
objective  that  climate  risks  are  managed  and  integrated  into  the  financial  system  and  the 
strategic  areas  of  action  set  out  in  the  2021 Strategic  Foresight  Report8.  In  addition,  further 
work will be launched to assess the suitability of the existing Solvency II capital requirements 
for green assets. 

Following  the  conclusion  of  its  review,  the  Commission  is  putting  forward  legislative 
proposals to amend Directive 2009/138/EC9 and to create an EU framework for the recovery 
and  resolution  of  insurers  and  reinsurers10.  The  revision  of  the  Solvency  II  directive  is 
explained in the next section.  

6 EIOPA: “Opinion on the 2020 review of Solvency II”, December 2020 (EIOPA-BoS-20/749) 
7 EIOPA: “Opinion on Sustainability within Solvency II”, September 2019 (EIOPA-BoS-19/241) 
8  COM(2021)750,  see  strategic  area  of  action  6  (“building  resilient  and  future-proof  economic  and  financial 
systems”) 
9 COM(2021)581 
10 COM(2021)582 

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2.  IMPLICATIONS  OF  THE  REVIEW  FOR  SOLVENCY  II  AND  ITS  SUPPLEMENTING 

DELEGATED ACTS 

The  review  aims  to  achieve  its  multiple  objectives  by  targeting  specific  elements  of  the 
regulatory framework: 

– 

Improving  risk  sensitivity  and  better  mitigating  undue  volatility  will  be  achieved 
through changes to the long-term guarantee measures as also explained in section 4, 
in particular extrapolation of risk-free interest rates and volatility adjustment which are 
used in the valuation of insurance liabilities.  

–  Making prudential rules more proportional will be possible by allowing more small 
insurers  to  be  exempted  from  Solvency  II  rules  and  by  creating  a  more  suitable 
framework for insurers identified as insurers with a low risk profile.  

–  Refining  the  rules  on  transparency  will  be  achieved  by  better  adapting  disclosures 
required from insurers to the information needed by recipients, differentiating between 
the information for policyholders and analysts.  

– 

Improving  the  quality  of  supervision  and  levelling  up  the  playing  field  will  be 
brought  about  through  several  changes,  in  particular  as  regards  ongoing  compliance 
with prudential rules, cross-border insurance business and insurance groups.  

–  Ensuring that climate and systemic risks are better managed and supervised will be 
attained  by  introducing  new  requirements  on  long-term  climate  change  scenario 
analysis.  

Given  the  close  links  between  Solvency  II  and  its  Delegated  Regulation  (EU)  2015/35, 
amendments to both acts will be needed to reach all the objectives of the review. 

The Solvency II directive empowers the Commission to adopt certain rules through delegated 
acts. In a number of areas, the Commission is proposing adjustments to those empowerments 
in order to better achieve its objectives under this review. In such cases, the Commission will 
have  to  wait  for  the  finalisation  of  the  legislative  process  before  enacting  the  necessary 
changes to the Delegated Regulation11. Therefore, in order to ensure a consistent delivery of 
the  review  of  the  Solvency  II  framework  and  in  view  of  the  close  interaction  between 
different  topics,  the  Commission  will  not  introduce  changes  to  the  Delegated  Regulation  at 
this stage.  

In view of the importance of the topics that will require changes to the Delegated Regulation, 
the  Commission  is  committed  to  engage  with  the  Member  States,  the  European  Parliament 
and other stakeholders in order to start, without delay, discussions about the possible content 
of  these  changes.  Such  discussions  will  take  place  in  parallel  to  the  legislative  process  for 
amending  Solvency  II.  The  Commission  will  convene  meetings  of  the  Expert  Group  on 
Banking and Payments, Insurance and Resolution. 

11  Examples  of  areas  listed  in  section  4  where  a  coordination  of  changes  to  the  Solvency  II  Directive  and  the 
Delegated Regulation are necessary: volatility adjustment, matching adjustment and extrapolation.  

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3.  RECOVERY AND RESOLUTION 

The recovery and resolution proposal aims to ensure that (re)insurers and relevant authorities 
are  better  prepared  to  address  instances  of  significant  financial  distress  in  the  sector  to 
mitigate their fall-out. It will also give national authorities the necessary tools to help maintain 
insurance  coverage  for  policyholders  and  protect  the  real  economy,  financial  stability  and 
taxpayers through an orderly resolution process for insurers who fail. 

Despite  the  robust  prudential  framework  created  by  Solvency  II,  situations  of  financial 
distress  cannot  be  completely  excluded.  The  disorderly  failure  of  (re)insurers  can  have  a 
significant  impact  on  policyholders,  beneficiaries,  injured  parties  or  affected  businesses, 
especially  where  critical insurance services cannot  be substituted in  a reasonable  amount of 
time  and  at  a  reasonable  cost.  The  management  of  a  near-failure  or  the  failure  of  certain 
(re)insurers,  particularly  large  cross-border  groups,  or  the  simultaneous  failure  of  multiple 
(re)insurers can also lead to or amplify financial instability.  

The proposal has been developed in full consistency with the Solvency  II framework and is 
proportionate  to  the  specificities  of  (re)insurance  business.  It  will  complement  the  revised 
Solvency  II  framework  and  strengthen  the  trust  in  the  EU’s  insurance  sector  so  that  it  can 
fully play its role in the economic recovery following the COVID-19 crisis, in line with the 
political objectives of the Capital Markets Union and the European Green Deal.  

4.  THE UPCOMING DELEGATED ACTS 

Future amendments to the Delegated Regulation will significantly contribute to achieving the 
objectives of the Solvency II review. As regards the review topics not covered in this section, 
the  Commission  intends  to  amend  the  delegated  regulation  broadly  in  line  with  EIOPA’s 
Opinion. 

Equity investments 

The intention to improve the long-term financing of the economy as part of the Solvency II 
review is mentioned in the new Capital Markets Union plan adopted on 24 September 202012.  

More  specifically,  as  announced  in  the  plan,  the  Commission  intends  to  assess  the 
appropriateness of Solvency II rules concerning the criteria for long-term equity investments, 
the  risk  margin  calculation  and  the  valuation  of  insurers’  liabilities  –  with  the  aim  both  of 
avoiding  undue  pro-cyclical  behaviours  and  better  reflecting  the  long-term  nature  of  the 
insurance business13. 

12 Communication from the Commission: A Capital Markets Union for people and businesses - new action plan 
(COM(2020)590) 
13 The objectives on the Solvency II review set out in the new CMU plan are captured under the two objectives 
“provide  incentives  for  insurers  to  long-term  sustainable  financing  of  the  economy”  and  “mitigate  excessive 
short-term volatility in insurers’ solvency position” mentioned in section 2 of this Communication. 

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The  Commission  will  consider  revising  the  eligibility  criteria  for  the  long-term  equity  asset 
class  that  were  introduced  through  Delegated  Regulation  (EU)  2019/93114  (which  amended 
the original Solvency II Delegated Regulation).  

In  particular,  it  will  consider  simplifying  the  conditions  under  which  equity  investments, 
including  via  infrastructure  funds,  would  be  treated  as  “long-term”.  This  would  expand  the 
scope  of  equities  that  can  be  subject  to  the  more  favourable  22%  risk  factor  (instead  of  the 
reference 39% for listed equities and 49% for unlisted equities).  

At  this  stage,  it  is  difficult  to  assess  the  amount  of  equity  investments  which  could  benefit 
from  the  preferential  treatment  for  long-term  investments  based  on  a  revised  set  of  criteria. 
Under  a  cautious  scenario  assuming  that  only  15%  of  additional  equities  would  qualify  as 
long-term,  the  reduction  in  capital  requirements  for  equity  risk  would  reach  approximately 
€10.5 billion (a decrease of more than 6% compared to current levels  for insurers using the 
standard formula). This money can be further invested in the economy.  

Therefore,  by  facilitating  access  to  preferential  treatment  for  long-term  equity  investments, 
the  review  of  the  eligibility  criteria  for  the  long-term  equity  asset  class  would  help  insurers 
ramp up their contribution to the economic recovery and the long-term financing of European 
businesses, including SMEs, and infrastructure.  

At  the  same  time,  the  Commission  considers  that  the  framework  for  long-term  equity 
investments  should  remain  prudentially  robust,  so  the  review  does  not  harm  policyholder 
protection  and  financial  stability,  in  line  with  the  new  Action  Plan  for  a  Capital  Markets 
Union. 

Risk margin 

The  risk  margin  is  part  of  the  value  of  insurance  liabilities.  It  seeks  to  ensure  that  their 
valuation  is  in  line  with  what  another  party  would  require  to  accept  those  liabilities  in  an 
arm’s  length  transfer.  The  formula  used  for  the  calculation  of  the  risk  margin  shows  a 
tendency, for long-term insurance business, of producing more volatile and higher values than 
expected  to  be  observed  in  arm’s  length  transactions.  EIOPA  proposed  to  amend  the  risk 
margin  formula  with  two  additional  parameters.  First,  EIOPA  considered  a  time  dependent 
“lambda” parameter that would on its own reduce the value and volatility of the risk margin 
for  long-term  business.  The  reduction  would  be  particularly  significant  for  longer-term 
business.  Second,  EIOPA  envisaged  a  floor  parameter  that  would  provide  a  safeguard  and 
ensure  that  the  risk  margin  does  not  fall  below  a  certain  level  compared  to  the  current 
calculation, notably as regards the risk margin for particularly long-term business.  

The  Commission  will  consider  building  on  the  lambda  approach  proposed  by  EIOPA,  but 
without  a  floor  parameter,  to  allow  for  more  effective  mitigation  of  volatility  than  under 
EIOPA’s proposal.  

14  Commission  Delegated  Regulation  (EU)  2019/981  of  8  March  2019  amending  Delegated  Regulation  (EU) 
2015/35 supplementing Directive 2009/138/EC of the European Parliament and of the Council on the taking-up 
and pursuit of the business of Insurance and Reinsurance (OJ L 161, 18.6.2019, p. 1) 

6 

 
 
                                                 
It will also consider reducing the cost-of-capital rate used in the risk margin calculation from 
6% to 5%, in line with the reduction in capital cost for insurance and reinsurance companies 
over the past years.  

Overall, these envisaged changes would reduce the size of the risk margin by more than €50 
billion  across  the  sector  in  the  EU,  increasing  the  insurance  industry’s  capacity  to  invest  in 
EU businesses.  

Volatility adjustment  

Many insurance companies are willing to hold a significant share of their assets over a long 
period  of  time.  However,  short-term  fluctuations  in  the  value  of  those  assets  are  reflected 
when  calculating  their  solvency  position.  This  is  in  spite  of  the  fact  that  the  insurance 
company may be able to hold those assets in the long term and for this reason may not realise 
losses in the meantime. The volatility adjustment seeks to mitigate the short-term volatility of 
insurers’ solvency by taking into account the long-term perspective of the insurance company. 
It  reduces  the  impact  of  short-term  changes  in  credit  spreads  on  the  valuation  of  insurance 
liabilities, thereby making capital resources less volatile.  

The proposed Directive increases the percentage of the risk-adjusted credit spread that forms 
the  basis  of  the  volatility  adjustment.  A  higher  volatility  adjustment  resulting  from  this 
proposed  change  can  more  effectively  compensate  for  fluctuations  in  assets  prices  in  the 
valuation of insurance liabilities.  

At the same time, experience has also shown that the impact of the volatility adjustment on 
the  value  of  liabilities  can  exceed  the  movement  of  assets  prices.  Such  overshooting  of  the 
volatility  adjustment  artificially  reduces  insurers’  technical  provisions  so  the  proposed 
Directive contains a safeguard addressing the issue.  

The safeguard takes the form of an undertaking-specific element in the volatility adjustment, 
which should be specified in delegated acts. To calculate that element, the Commission will 
consider  EIOPA’s  advice  and  possibly  change  the  Delegated  Regulation  to  address 
overshooting due to differences in the credit spread sensitivity of assets and the interest-rate 
sensitivity of liabilities. 

Matching adjustment 

The Commission is also considering possible amendments to the Delegated Regulation in line 
with EIOPA’s advice as regards the rules on diversification benefits and asset eligibility for 
the matching adjustment.  

Where  insurance  companies  hold  bonds  or  other  assets  with  similar  characteristics  to 
maturity,  changes  in  spreads  on  those  assets  will  not  realise  as  losses.  The  matching 
adjustment aims to account for the fact that insurance companies are more likely to be able to 
hold  assets  to  maturity  where they identify portfolios  of assets and liabilities with  matching 
cash flows (“matching adjustment portfolio”) and manage such portfolios separately from the 
rest  of their business.  More specifically, the matching adjustment compensates a part of the 
spread  movement-related  changes  to  the  value  of  assets  in  matching  adjustment  portfolios 
with  changes  to  the  value  of  the  liabilities  in  those  portfolios.  For  that  purpose,  insurance 

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companies  can  receive  an  approval  to  add  the  matching  adjustment  to  the  relevant  risk-free 
interest rate term structure for the valuation of insurance liabilities in a matching adjustment 
portfolio.  

To account for the low likelihood that all risks will materialise at the same time and gains in 
some areas may compensate for losses in  others, Solvency  II  capital  requirements generally 
provide for benefits of diversification between different types of risks. Because of the separate 
management  of  a  matching  adjustment  portfolio  and  the  rest  of  the  undertaking,  the  rules 
currently prohibit the recognition of diversification benefits between the two in the standard 
formula  calculation  of  the  capital  requirements.  However,  EIOPA  found  that  the  separate 
management does not per se prevent diversification in practice and the general prohibition of 
diversification benefits in the standard formula calculation may have resulted in unnecessarily 
high capital requirements for companies that apply the matching adjustment. The Commission 
will  therefore  consider  dropping  that  general  prohibition  in  the  context  of  matching 
adjustment  portfolios  as  recommended  by  EIOPA.  The  resulting  additional  diversification 
benefits  for  companies  using  the  matching  adjustment  and  calculating  capital  requirements 
with the standard formula would reduce their capital requirements. 

Furthermore, safeguards could be introduced to avoid an excessive relief from the matching 
adjustment where the corresponding portfolio contains restructured assets that depend on the 
performance of underlying assets. 

Diversification benefits  

Another  way  to  support  the  provision  of  long-term  financing  by  insurance  and  reinsurance 
companies  is  by  improving  the  recognition  of  diversification  benefits  between  different 
categories  of  market  risks  via  correlation  parameters.  The  Commission  will  consider 
amending  the  Delegated  Regulation  in  line  with  EIOPA’s  advice  on  the  setting  of  the 
correlation  parameter  between  spread  risk  and  interest  rate  risk.  This  will  provide  more 
certainty than the current rules where the correlation parameter is dependent on whether the 
company is exposed to an increase or to a decrease in interest rates. The change will also lead, 
on average, to higher benefits for diversification between these two risks. 

Extrapolation 

Interest  rates  are  an  important  driver  for  the  amounts  that  insurance  and  reinsurance 
companies  have  to  put  aside  for  future  claims  and  benefits.  Managing  interest  rates  is 
therefore  crucial  for  the  insurance/reinsurance  business,  and  prudential  rules  should  provide 
the appropriate incentives in this respect.  

Insurance  and  reinsurance  companies  have  obligations  that  may  result  in  claims  or  benefit 
payments  very  far  into  the  future.  This  long-term  aspect  of  the  insurance  business  makes 
extrapolating interest  rates necessary, since  rates can be observed on financial markets  only 
up to certain maturities.  

Given that insurers rely mostly on bonds, loans or similar fixed-income investments to match 
their liabilities, it is reasonable to determine the starting point for the extrapolation based on 
the  depth  of  bond  markets.  However,  information  on  longer-term  interest  rates  may  be 
observable  from  financial  instruments  other  than  bonds.  In  order  to  ensure  an  appropriate 

8 

 
 
level of policyholder protection, the proposed Directive sets out changes to the principles for 
extrapolating risk-free interest rates. The proposed Directive would empower the Commission 
to  set  the  formula  for  extrapolation,  so  that  the  extrapolation  method,  takes  into  account 
information on longer-term interest rates, where available, to avoid complacency and ensure 
appropriate incentives. 

For that purpose, the Commission will consider building on the formula and parametrisation 
proposed by EIOPA.  

Given  that  the  new  extrapolation  method  will  have  a  significant  impact  on  insurers’  capital 
resources in several markets, the proposed Directive provides for a phasing in of the method 
until the end of 2031, which is consistent with the duration of existing transitional provisions 
in the Solvency II Directive. The phasing in will avoid disruptions, by gradually introducing 
the impact of the new extrapolation method. 

Calculating the capital requirement for interest rate risk  

Recent  analyses  have  shown  that  Solvency  II  rules  do  not  appropriately  reflect  the  risks 
related to movements of interest rates, where those rates are low or even negative.  

The  capital  requirement  for  interest  rate  risk  with  the  standard  formula  should  therefore  be 
revised  to  take  into  account  the  experience  gained  in  recent  years  in  a  low  interest  rate 
environment. 

Furthermore, the standard formula calculation should also be consistent with the methodology 
for determining  risk-free interest  rates for the valuation  of liabilities, in  particular  regarding 
extrapolation.  

The Commission therefore will consider reflecting EIOPA’s advice on the calculation of the 
capital requirement for interest rate risk with the standard formula, with the exception of an 
allowance for extrapolation for long-term interest rates.  

To  that  end,  for  each  currency,  the  stressed  risk-free  interest  rates  for  maturities  up  to  the 
starting point of the baseline extrapolation  will be derived on the basis  of the approach and 
parametrisation  proposed  by  EIOPA15  in  its  Opinion.  The  remaining  rates  could  be 
extrapolated  in  the  same  manner  as  the  risk-free  rates  of  the  baseline,  however,  towards  a 
stressed ultimate forward rate16.  

Similar to the amendments to the extrapolation rules, the Commission will consider phasing 
in the changes to the standard formula calculation for interest rate risk over a period of five 
years after the adoption of the amendments as proposed by EIOPA in its Opinion. 

Further recognition of risk-mitigation techniques within the standard formula 

15 In its Opinion to the Commission, EIOPA advised to review the calibration of interest rate risk in the standard 
formula  and  proposed  a  new  methodology  (i.e.  “relative  shift  approach)  in  order  to  better  model  interest  rate 
shocks in a low interest rate environment.  
16 In line  with the one-year time horizon for calculating the  solvency capital requirement and the methodology 
for  determining  and  updating  the  ultimate  forward  rate,  the  Commission  will  consider  stressing  the  ultimate 
forward  rate  in  a  way  it  will  be  15  basis  points  lower  or  –  as  applicable  –  higher  than  the  ‘ordinary’  ultimate 
forward rate in the “stressed” scenario. 

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The  Commission  will  consider  extending  the  recognition,  within  the  standard  formula,  of 
innovative  forms  of  non-proportional  loss-sharing  between  insurers  and  their  reinsurers,  in 
line  with  EIOPA’s  Opinion.  In  this  context,  introducing  specific  safeguards  would  help 
exclude possible cases of underestimating risks.  

Effect of State aid compatible guarantees or reinsurance  

The  Commission  will  also  consider  providing  clarity  on  recognition  of  the  risk-mitigating 
effect of guarantees or reinsurance provided by Member States, in line with EU state aid rules, 
in the context of insurance underwriting and market risks.  

For instance, several Member States provided such schemes during the COVID-19 crisis17, to 
ensure  credit  insurers  were  able  to  continue  supplying  protection  to  businesses  despite  the 
exceptional economic circumstances.  

Mortgage loans 

Finally,  further  work  on  risk  assessment  related  to  mortgage  loans  originated  by  insurers  is 
needed, to avoid any risk of cross-sector regulatory arbitrage. In this context, the Commission 
will  consider  amending  the  delegated  acts  to  better  align  the  calibration  of  the  standard 
formula  counterparty  default  risk  for  mortgage  loans  with  the  credit  risk  framework  for  the 
banking sector. 

5.  ONGOING WORK BEYOND THE SOLVENCY II REVIEW 

Beyond  the  review  work  described  in  the  previous  sections,  the  Commission  has  been 
assessing  the  case  for  potential  alignment  of  rules  on  insurance  guarantee  schemes  and  has 
been  monitoring  the  role  of  insurance  in  the  context  of  business  interruption  during 
pandemics. The Commission will continue that work with a view to possible future initiatives. 

5.1. Insurance Guarantee Schemes 

Insurance  guarantee  schemes  (IGSs)  use  contributions  raised  by  the  insurance  industry  to 
provide  last-resort  protection  for  policyholders,  beneficiaries  and  injured  parties  when  their 
insurers cannot meet their contractual commitments in case of failure.  

There  is  currently  no  harmonised  framework  for  these  schemes  in  the  EU18.  Most  Member 
States  have  established  one  or  more  schemes,  often  in  response  to  past  failures  by  insurers, 
but these differ in terms of scope, features and design.  In its opinion on the 2020 review of 

17 Belgium (State aid case SA.57188, as amended by SA.58045, SA.59113 and SA.60548), Denmark (SA.57112, 
as  amended  by  SA.59637),  France  (SA.56903,  as  amended  by  SA.59571  and  SA.63316;  and  SA.57607), 
Germany  (SA.56941,  as  amended  by  SA.60071),  Italy  (SA.57937  as  amended  by  SA.59681),  Lithuania 
(SA.58540),  Luxembourg  (SA.57708,  as  amended  by  SA.59682),  the  Netherlands  (SA.57095,  as  amended  by 
SA.60287), Poland (SA.59800), Portugal (SA.58082), Romania (SA.58531), Spain (SA.58458, as amended by 
SA.63690), all adopted measures to support the credit insurance supply during the COVID-19 crisis. 
18  In  June  2021,  the  co-legislators  agreed  a  revision  of  the  Motor  Insurance  Directive  (2009/103/EC)  that 
requires  Member  States  to  designate  an  administrative  body  to  compensate  accident  victims  insured  by  an 
insolvent undertaking. This legislative text is not affected by the decision to postpone the work on IGSs. 

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Solvency II, EIOPA recommended aligning national guarantee schemes at EU level, based on 
a set of minimum principles. 

Creating  consistent  last-resort  safety  nets  could  promote  trust  in  the  single  market  for 
insurance.  

However,  introducing  a  minimum  common  framework  for  these  schemes  in  Europe  might 
entail important implementation costs for insurers, in particular for Member States that do not 
currently have such a scheme or where changes would need to be made to existing schemes to 
comply with the new framework.  

The Commission has assessed all these impacts in its review of Solvency II19 and considers 
that,  given  the  economic  uncertainties  created  by  the  COVID-19  pandemic,  as  well  as  the 
need to focus on economic recovery, action to align rules for insurance guarantee schemes is 
not appropriate at this juncture.  

However,  as  such  action  would  constitute  a  major  improvement  in  protection  for 
policyholders  across  the  EU,  the  Commission  is  committed  to  reassess  the  appropriateness 
and timing of alignment in the future. 

5.2. Role of insurance during pandemics and other large-scale disruptive events 

The COVID-19 pandemic has highlighted some issues in relation to the role that insurers and 
reinsurers can play to provide protection against the consequences of systemic events that are 
disruptive for the economy, especially when governments decide to shut down public activity 
and private business.  

This experience should allow drawing lessons and identifying ways to better prepare society 
for future large-scale disruptive events.  

The  pandemic  has  highlighted  the  need  for  clearer  and  simpler  information  on  the  terms  of 
insurance  cover  and  the  guarantees  offered  to  consumers,  especially  as  regards  business 
interruption  and  travel  insurance,  and  for  constantly  verifying  that  insurance  products 
continue to be in line with consumer needs. For this reason, the Commission intends to work 
closely with EIOPA to intensify insurance product oversight and analyse consumer needs and 
expectations in the post-pandemic environment. 

In the longer term, the Commission will consider the viability of potential ways of increasing 
both our preparedness and resilience to pandemics and similar events, including via the use of 
foresight capacities. To this end, it is involved in discussions with all stakeholders to explore 
mechanisms and incentives for increased awareness and coverage of pandemic-related risks in 
insurance contracts,  including  “non-damage business  interruption”  risks,  and to  increase the 
resilience of the economy to various large-scale events.  

This  is  a  complex  debate  requiring  an  assessment  of  the  insurability  of  various  types  of 
systemic  risks.  It  also  needs  to  consider  several  challenges,  including  an  evaluation  of  the 

19 SWD(2021)260 

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availability  of  financial  resources  in  the  post-pandemic  environment,  and  in  the  general 
context of the recovery phase, to improve resilience to future uncertain events.  

This  also  requires  to  assess the ability of the insurance sector to  supply  enhanced insurance 
cover against pandemic-related risks, and to form, also based on foresight capacities, a good 
understanding of the needs of businesses (of various sizes) for insurance products in the post-
pandemic environment.  

EIOPA has gained relevant expertise in this field and has already initiated exploratory work to 
assess  options  and  measures  regarding  the  insurability  of  pandemic  losses,  including 
mechanisms  for  pandemic  risk  prevention  and  forms  of  insurance  coverage  for  business 
interruption risks during pandemics.  

The Commission will continue to work closely with EIOPA and all relevant stakeholders on 
some of the elements concerning business interruption insurance during pandemics mentioned 
above. 

Apart  from  the  experience  during  the  Covid-19  pandemic,  the  floods  and  fires  in  Europe 
during the summer months of 2021 demonstrated,  yet  again,  the intensifying impacts  of the 
climate crisis and underlined the importance of raising awareness of the benefits of insurance 
coverage  for  climate  risks.  While  insurers  paid  considerable  compensations,  the  overall 
damage for property owners was much higher with many properties not being insured against 
the damage suffered. 

Insurance coverage of climate risks varies between Member States and the average insurance 
compensation  for  losses  from  climate  risks  has  been  as  low  as  5%  or  less  in  some  parts  of 
Europe. Climate change may aggravate the problem due to additional hazards such as severe 
seasonal water shortage. 

In  order  to  analyse  the  problems  and  intensify  efforts  for  narrowing  the  climate  protection 
gap,  the  Commission  will  set  up  a  Climate  Resilience  Dialogue  by  2022,  bringing  together 
insurers, reinsurers, public authorities and other relevant stakeholders. 

6.  CONCLUSIONS 

To  conclude,  the  insurance  and  reinsurance  sector  has  a  key  role  to  play  to  achieve  several 
high  priority  EU  objectives.  The  review  of  Solvency  II  is  instrumental  in  that  respect,  as  it 
makes the sector more resilient and efficient as well as boosting its capacity for investment.  

The  Commission  therefore  calls  on  the  European  Parliament  and  the  Council  to  advance 
swiftly in inter-institutional negotiations on the amendments to Directive 2009/138/EC – and 
the creation of a resolution framework for insurers.  

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