Capital Conundrum - EIOPA Expresses Concerns Over Solvency II Amendments

July 2025, the European Commission (Commission) published a draft delegated regulation to amend the Solvency II Delegated Regulation (the Draft Regulation).

The proposed changes in the Draft Regulation aim to address several challenges in the current Solvency II framework, including excessive sensitivity to short-term market volatility, disincentives for long-term equity investment, and disproportionate regulatory burdens on smaller insurers.

In summary, the key proposed changes include:

• Risk Margin Calculation– introduction of an exponential term-dependent factor to boost investment capacity and available capital.
• Volatility Adjustment– revised risk correction mechanism to better reflect expected losses and credit risk as spreads increase.
• Capital Relief Measures– additional reliefs to support long-term investments.
• Securitisation Investments– reduced risk factors to facilitate bank lending and insurer participation in securitisation markets.
• Standard Formula Simplification– carve-outs from mandatory 'look-through' for investment funds and other simplifications.
• Own Funds– new rules for calculating foreseeable dividends using an accrual approach.
• Reinsurance Recognition– inclusion of adverse development covers in the standard formula.
• Counterparty Risk– updated capital requirements for exposures to central clearing counterparties, repos, and securities lending.
• Reporting and Disclosure– a more streamlined SFCR and supervisory reporting, with greater proportionality for smaller insurers.
• Proportionality Measures– defined conditions for supervisory authorities to approve or reject a proportionality request.

On 29 September 2025, EIOPA issued a letter to the Commission referring to the public consultation on the Draft Regulation (which formally closed on 5 September). While EIOPA welcomed the adoption of certain technical recommendations in the Draft Regulation that it made to the Commission, it expressed 'strong concerns' about what it described as 'the extensive capital relief' that the proposed changes would introduce.

EIOPA highlighted that the amendments to the risk margin of insurance liabilities proposed under the Draft Regulation would result in a 'significant reduction of quantitative requirements', which, in their view, would not be technically justified. It asserted that the risk margin of insurance liabilities would be reduced by 39%. This reduction, in EIOPA's view, would be beyond what is necessary under the already agreed (Level 1) changes to the Solvency II regime.

In the letter, EIOPA outlines that Solvency II has acted as a robust foundation during recent market turbulence, such as the COVID-19 pandemic and high inflation. While EIOPA is and has been of the opinion that some reduction of capital requirements for long-term investments would be appropriate, while at the same time ensuring that the overall capacity in the insurance sector remained adequate, it warned that the resilience of the insurance sector would be at risk of erosion should capital requirements be lowered in the manner proposed. In particular, EIOPA believes that releasing capital under the proposed measures and increased risk-taking in investment strategies could leave insurers exposed and undercapitalised when the next financial crisis occurs.

EIOPA reminded the Commission that the protection of policyholders and financial stability are key objectives of Solvency II and asked that any amendments to Solvency II be risk and evidence-based while accounting for these objectives.

Conclusion

It is clear from EIOPA's letter that achieving an appropriate balance between (i) an adequate reduction in capital requirements to free up capital and encourage economic growth and (ii) maintaining resilience within the insurance sector will be a tight balancing act. Market participants and observers would welcome clarification from EIOPA of the basis for its statement that the risk margin would reduce by 39%. It should also be noted that the risk margin typically represents a reasonably small proportion of the Solvency II Technical Provisions, though of course a lower risk margin will, as a rule, lead in turn to a lower Solvency Capital Requirement calculation. Measures to be taken by the Commission to address EIOPA's concerns remain to be seen – one to watch.

Contributed by Molly Ryan & Martha Ní Dhochartaigh

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