Legislators strike deal on updating the EU’s rules regulating the insurance sector

On Wednesday EU legislators agreed a set of reforms to the rules regulating insurance firms, the so-called ‘Solvency II’ rules.

The agreement was reached between member states, represented by the Spanish EU Presidency and MEP negotiators, led by Markus Ferber (EPP, DE).

More money into the real economy

The changes to the Solvency II rules will free up large sums of money which insurance firms had to keep in reserve, allowing the sector to channel more funds into the economic recovery and the European Green Deal more particularly. Currently the cost-of-capital rate, which determines reserve levels, is assumed to be equal to 6%, whereas the agreement reached will take this rate down to 4,75%.

Better and more tailored supervision

They will also simplify supervision while on the other hand empowering supervisors on systemic risks. At the initiative of the Parliament, supervisors will also be required to better cooperate with each other where insurers operate in other Member States.

Factoring in and communicating sustainability related risks

Finally, the update includes new provisions which will require insurance firms to better take into account sustainability-related risks and to report more about these risks so that policyholders can understand a firm’s green credentials.

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After Wednesday’s deal on the update to the Solvency II rules, the rapporteur Markus Ferber (EPP, DE) said, “Due to the existing rules. European insurance companies have been forced to hold hundreds of billions of Euros in excess capital above the minimum reserves. With today’s agreement, we release a meaningful amount of capital that can flow into productive investments such as green infrastructure and digitalisation. For the Green Deal to succeed private investment is needed. The review we agreed allows insurance undertakings to play their part without putting policy-holders at risk.

“The review also enables insurers to make more long-term investments, which will ultimately benefit policy-holders.

“Finally, the review will also make insurance supervision more proportionate and better tailored to the actual risks. Small insurance companies with a simple and safe business model will benefit from reduced administrative burdens.”

Second chapter of regulatory reform

On Thursday, negotiators will continue talks on the second chapter of the reform of the insurance sector’s regulatory architecture, in a bid to strike a deal on new rules for the recovery and resolution of insurance firms.

Background

The main aim of the review of the Solvency II directive is to strengthen European insurers' contribution to the financing of the recovery, progressing on the Capital Markets Union and the channelling of funds towards the European Green Deal. It is estimated that the rule changes could allow the insurance sector to invest around another EUR 100 billion into the economy, equal to around 0.6% of the EU’s GDP.

The aim of the Insurance recovery and resolution directive is to ensure that insurers and the relevant authorities in the EU are better prepared in cases of significant financial troubles.

Together, the rules should create a more dynamic and yet stable sector.