Solvency II

The Solvency II Directive (2009/138/EC) covers several Long Term Guarantee (LTG) measures, which have an effect on different aspects of solvency calculation. Some of these measures are mandatory for undertakings, others may be used voluntarily, but in some cases may only be used subject to approval by the FMA. The Solvency II Directive requires LTG measures to be reviewed annually (see esp. Article 77 et seq. of the Framework Directive).  The FMA conducts various reviews on behalf of the EIOPA, in which the effect of changes to individual measures is tested. During this review, EIOPA is required to inform the European Parliament, the Council and the European Commission about the effect of the LTG measures in the respective individual Member States.

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The protection of insured persons remains the main objective of insurance supervision in the Solvency II regime. The standards focus on a stronger risk-orientation and serve for the intensification of supervisory convergence, in order to prevent supervisory arbitrage. In accordance with the aim towards cross-sector convergence, the instruments for financial supervision were in particular designed in accordance with the model from the reform in the banking sector. Furthermore, the following can also be listed as aims:

• To extend the existing system that was hitherto predominantly quantitative in nature by adding qualitative requirements: Since there is a relatively broad room for manoeuvre available to insurance and reinsurance undertakings with regard to the formation of their risk profile in the solvency capital requirement (pillar 1), it should be ensured in contrast, that the qualitative requirements for controlling the undertaking, the governance system, and internal processes etc. (pillar 2) are more intensively reviewed by the supervisory authority.
• Strengthening of a risk-oriented supervision: The supervisory authority’s focus is intended to concentrate on the areas where there is the greatest risk potential; the supervisory means deployed should be proportionate to the extent at which the supervisory aims are placed in jeopardy.
• Increasing transparency and accountability: The far-reaching disclosure obligations (pillar 3) benefit the comparability of the financial situation, solvency and the governance system of the individual insurance and reinsurance undertakings. Undertakings that apply model procedures or which have a risk-aware corporate governance, should be “rewarded” for this (at least that is the idea) by the addressees of the disclosure (i.e. the policyholders, insurance intermediaries, ratings agencies, investors and other market participants).
• More efficient monitoring of insurance groups: By extending the tasks conferred on colleges of supervisors and strengthening the role of the supervisory authority for group-level supervision, it is intended to ensure that group-wide risks are not overlooked.
• Aligning the new supervisory regime to international standards: The standards under supervisory law for valuation should as far as possible be harmonised with the international developments in accounting standards (International Accounting Standards (IAS))/(International Financial Reporting Standards (IFRS)), in order to ensure that the administrative burden for insurance undertakings and reinsurance undertakings is kept to a sensible level. Furthermore, the standards developed by the International Association of Insurance Supervisors (IAIS) and the developments in the field of actuarial mathematics have also been taken into account.

In a similar fashion to that of banking supervision law’s “Basel II ” framework, Solvency II is also based on a three pillar model. The quantitative solvency requirements under pillar 1 are complemented by far-reaching qualitative requirements, forming pillar 2, as well as the element of market discipline in pillar 3:

Pillar 1: quantitative requirements

The Solvency Capital Requirement is either calculated by using a prescribed standard formula or by means of an internal (partial) model developed by the insurance and reinsurance undertaking. The minimum capital requirement forms a lower limit, which if underrun would trigger an intervention by the supervisory authority.

The first pillar also includes the regulations for drawing up a solvency balance sheet, which is generally based on market values. The eligible capital is derived on the basis of this balance sheet.

Pillar 2: qualitative requirements

The second pillar contains qualitative requirements, since Solvency II is intended to take into account all risks that are relevant for an undertaking, and not just the quantifiable risks which can be underpinned by means of own funds. Undertakings are required to establish a governance system. It is expected to have appropriate and transparent organisational structures with a clear allocation and delineation of competences as well as an effective system for transmitting information. The following governance functions are required to be established:

• risk management function

• compliance function

• internal audit function, as well as

• an actuarial function.

Guidelines and contingency plans must be drawn up and standards relating to the internal control system and the issue of outsourcing must be adhered to.

Within risk management an Own Risk and Solvency Assessment must be carried out. This includes undertaking forward-looking risk self-assessment.

Under Solvency II investments are required to be managed in accordance with the prudent person principle – legal standards for quantitative limits no longer exist.

Pillar 2 also covers requirements for the principles and methods of supervision. Particular attention is paid to the Supervisory Review Process.

Pillar 3: market discipline

The third pillar of Solvency II contains disclosure and reporting obligations. The Solvency II reports that undertakings are required to submit to the FMA have to a large extent been formalised, both with regard to the contents of the report as well as the reporting format.

The new comprehensive disclosure obligations are intended to increase transparency, by increasing the degree of comparability of information, reducing information asymmetries and by improving the information options for interested parties. Consequently corrective effects can be seen in the market, while the introduction of “good practices” is also being promoted.

The FMA is also required to meet comprehensive supervisory disclosure obligations on its website and to fulfil reporting obligations.

Work has been ongoing since the 1990s on improving (Solvency I) and restructuring (Solvency II) the EU solvency regulations.

In a first step the most necessary changes were made to the directives that existed at that time (Solvency I). These rules were in force in Austria from 1 January 2004 until 31 December 2015.

In several “Calls for Advice” the European Commission has asked the European Insurance and Occupational Pensions Authority (EIOPA) to draw up proposals for the further development of the existing Solvency II rules. In cooperation with the national supervisory authorities, EIOPA has established working groups to work through the topics listed in these Calls for Advice.

1. The first wave of the Solvency II Review

Based on EIOPA’s initial technical recommendations in cooperation with the national supervisory authorities under the first wave of the Solvency II Review, on 18 June 2019 the European Commission published Delegated Regulation (EU) 2019/981 amending Delegated Regulation (EU) 2015/35. The material changes focused on simplifying the standard formula that companies use to calculate their Solvency Capital Ratio (SCR). Inter alia, there were adaptations to non-life risk, the loss-mitigating effect of deferred taxes and in the capital requirements for low-risk bonds and loans, for which no rating is available.

2. The second wave of the Solvency II Review

In February 2019, within the second wave of the Solvency II Review, the European Commission again requested EIOPA to provide further technical analysis about certain points of the Solvency II Directive. EIOPA has been requested to also include an impact assessment of all relevant qualitative and quantitative impacts, both in relation to individual proposals as well as for a combination of all the proposals (holistic impact assessment). For this purpose, the national supervisory authorities are required to conduct numerous quantitative market analyses and also to involve the insurance industry in these.

During the Solvency II Revieiw, the FMA conducted several survey and market studies in the Austrian insurance sector.

EIOPA presented the proposals for amending the regulations to the European Commission on 17 December 2020, that also contained additional background analyses and impact studies.

The core of the analyses also addressed using measures in relation to long-term guarantees (LTG measures). Such measures are intended to “smoothen” the transition to the new capital regulations, or to absorb procyclical behaviour in crisis situations. On the one hand this involves

LTG measures that are deployed individually:

• Matching adjustment of the risk-free interest rate term structure (MA) (Article 77b, c Framework Directive),
• Volatility adjustment of the risk-free interest rate term structure (VA) (Article 77d Framework Directive),
• Duration-based equity risk sub-module (Article 304 Framework Directive),
• Transitional measure for technical provisions or risk-free interest rates (Article 308c, d Framework Directive)

as well as measures that apply automatically:

• The extrapolation of the risk-free interest rate term structure (VA) (Article 77a Framework Directive),
• Symmetric adjustment for equity risk (Article 106 Framework Directive),
• Extension of the period for re-establishing healthy financial conditions (Article 138 Framework Direction).

3. European Commission Draft

Based on EIOPA’s opinion, the European Commission published a legal package on 22 September 2021, consisting of the following elements:

• A legislative proposal for amending the Solvency II Directive (Directive 2009/138/EC);
• A legislative proposal for a new Directive on the Recovery and Resolution of Insurance Undertakings.

In addition to these documents, the package published by the European Commission also contains a rough impact assessment and a study on insurance guarantee systems. In the case of the latter, the European Commission decided to postpone measures for harmonising the regulations for insurance guarantee systems also in light of the economic uncertainty caused by the COVID-19 pandemic.

The legislative package is now being discussed by the European Parliament and the Council, who may choose to accept, reject or amend the legislative proposal. The amendments of the Solvency II Directive are supplemented by an update to the delegated acts (e.g. The extrapolation of the risk-free interest rates, interest rate risk in the standard formula, long-term investments in equities, volatility adjustment and matching adjustment).

The European Commission has identified five main issues, that should be adapted in the Solvency II framework:

• Incentives for long-term investments in equities and consideration of sustainability risks;
• Consideration of the low interest environment and potential inappropriately high volatility of solvency positions;
• Reduction in complexity for small and less risky insurance companies;
• The recent failures of insurance companies active on a cross-border basis, which pointed out the deficiencies of supervisory law and different levels of protection for insurance policyholders in the European Union following these failures;
• Instruments for avoiding systemic risks.

Available in German only.

• FMA -Leitfaden „Solvabilität II, Säule 1: Quantitative Anforderungen”
• FMA -Leitfaden „Unternehmenseigene Risiko- und Solvabilitätsbeurteilung (Own Risk and Solvency Assessment, ORSA) – 2. Ausgabe”
• Long Term Guarantee (LTG) Maßnahmen

Preparations for risk-based insurance supervision under (“Solvency II“) were underway at European level for several years. This page contains an overview of the milestones.

Here you can find information about:

• Solvency I
• The key elements of Solvency II

Solvency I

Since the 1990s, the then Conference of European Supervisory Authorities worked on the improvement (Solvency I) and restructuring (Solvency II) of the EU regulations on solvency that had been introduced in 1973 for non-life assurance and in 1979 for life insurance  undertakings. The Conference of European Supervisory Authorities’ Solvency I working group was established in 1994 under the chairmanship of the then Vice-President of the German Federal Insurance Supervisory Office, Helmut Müller, and published its concluding report in 1997, in which it was stated that the European solvency Directives had on the whole proven themselves. The report, however, also stated that the own funds regulations in place at the time did not adequately take all risks into account. It was therefore decided in 1997 to design a comprehensive system to create new own funds regulations.

In a first step the most necessary changes were made to the existing Directives (Solvency I). These rules entered into force on 1 January 2004 in Austria.

The key elements of Solvency II

• Risk-based corporate governance and risk-based own funds calculation
• Harmonisation and convergence in Europe
• Basel II compatibility (where meaningful, certain techniques are also applied for insurance undertakings)
• Changing from a rule-based system to a principle-based system (e.g. removing of strict rules, replaced by more flexible possibilities for intervention and more qualitative requirements).
• Compatibility with International Accounting Standards
• Three pillar approach:
  – Pillar I – Capital requirements
  – Pillar II – Governance rules
  – Pillar III – disclosure and reporting obligations