Changes from report parliamentary committee draft to plenary report

RemovedEXPLANATORY STATEMENT

Added(b) a natural or legal person not subject to supervision under this Directive, Directive 2009/65/EC of the European Parliament and of the Council*, Directive 2013/36/EU , or Directive 2014/65/EU.

RemovedIn September 2021, the Commission adopted a proposal amending the Solvency II Directive (Solvency II Review) and a proposal for an Insurance Recovery and Resolution Directive (IRRD). Although both proposals could be dealt with separately and this draft report proposes amendments only to the Solvency II Review, it should be considered that some overlap of the objectives of the two proposals may exist. Your rapporteur therefore takes the view that there is some merit in ensuring dealing with these proposals in parallel.

Added______________________________________

RemovedGeneral Considerations: The Purpose of Insurance Regulation

Added* Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (OJ L 302, 17.11.2009, p. 32).’;

RemovedYour rapporteur considers that there are four broad objectives of good EU insurance regulation:

Added(32) in Article 60(1), point (a), the words ‘point 2 of Article 1a of Directive 85/611/EEC’ are replaced by the words ‘Article 2(1), point (b), of Directive 2009/65/EC’;

Removed further developing the internal market for insurance and reinsurance, by ensuring a level playing field within the EU, whilst allowing for fair competition with the rest of the world;

Added(33) in Article 62, first paragraph, the first sentence is replaced by the following:

Removed ensuring that insurance companies are safe and stable and policyholders are protected, which also requires close cooperation between supervisors throughout the Union;

Added‘Where the influence exercised by the persons referred to in Article 57 is likely to operate against the sound and prudent management of an insurance or reinsurance undertaking, Member States shall require the supervisory authority of the home Member State of that undertaking in which a qualifying holding is held, sought or increased to take appropriate measures to put an end to that situation.’;

Removed ensuring that policyholders that use insurance policies for investment purposes (e.g. via life insurance policies) can earn a decent return;

Added(34) in Article 63, second paragraph, the words ‘Directive 2004/39/EC’ are replaced by the words ‘Directive 2014/65/EU’;

Removed ensuring that insurance companies can fulfil their role as long-term investors thus supporting the recovery and potentially other EU policy objectives.

Added(34a) in Article 64, the following paragraph is added:

RemovedDuring the legislative deliberations, it will be up to the European legislator to determine the right balance between those objectives that sometimes can be in competition with one another.

Added'The first three paragraphs of this Article shall not prevent the competent authorities from publishing the outcome of stress tests carried out in accordance with Article 34(4) of this Directive or Article 32 of Regulation (EU) No 1094/2010 or from transmitting the outcome of stress tests to EIOPA for the purpose of the publication by EIOPA of the results of Union-wide stress tests.';

RemovedProportionality in Insurance Regulation

Added(35) in Article 72(1), the words ‘Article 51 of Directive 78/660/EEC, Article 37 of Directive 83/349/EEC or Article 31 of Directive 85/611/EEC’ are replaced by the words ‘Article 34 or 35 of Directive 2013/34/EU or Article 73 of Directive 2009/65/EC’;

RemovedThe insurance supervisory framework is risk-based. A risk-based approach should avoid blanket one-size fits all provisions and thus needs to go together with appropriate proportionality provisions. The Commission attempts to address the shortcomings of the Solvency II regime in relation to proportionality measures by introducing a new category of low-risk profile undertakings. Your rapporteur considers this to be a step into the right direction, but proposes the following amendments:

Added(36) Article 77 is amended as follows:

Removed Excluding a larger number of small insurance undertakings from the scope of the Directive by increasing the current thresholds at which insurance undertakings are subject to the Solvency II scope (Art 4);

Added(a) the first subparagraph of paragraph 5 is replaced by the following:

Removed higher thresholds in the definition of low-risk profile undertakings;

Added‘Where insurance and reinsurance undertakings value the best estimate and the risk margin separately, the risk margin shall be calculated by determining the cost of providing an amount of eligible own funds equal to the time-adjusted Solvency Capital Requirement necessary to support the insurance and reinsurance obligations over the lifetime thereof. The adjustment of the Solvency Capital Requirement consists of an exponential and time-dependent element.’;

Removed modifying the criteria for qualifying as low-risk profile undertaking, by replacing the absolute thresholds with relative thresholds in order to better account for different market sizes;

Added(b) the following paragraphs 5a, 6 and 7 are added:

Removed extending these proportionality measures for low-risk undertakings to captive (re)insurance undertakings, but excluding reinsurance undertakings;

Added‘5a. The Cost-of-Capital rate referred to in paragraph 5 shall be assumed to be equal to 4,5 %.

Removed some further simplifications, clarifications and automaticity in the application of these measures.

Added6. Where insurance and reinsurance contracts include financial options and guarantees, the methods used to calculate the best estimate shall appropriately reflect that the present value of cash flows arising from those contracts may depend both on the expected outcome of future events and developments and on potential deviations of the actual outcome from the expected outcome in certain scenarios.

RemovedSupporting the Recovery and other EU Policy Objectives

Added7. Notwithstanding paragraph 6, insurance and reinsurance undertakings that are classified as low-risk profile undertakings and undertakings that have obtained prior supervisory approval may use a prudent deterministic valuation of the best estimate for life obligations with options and guarantees that are not deemed material.’;

RemovedEnhancing the capabilities of insurance undertakings to invest long-term, may also facilitate their support for general economic policy objectives of the European Union. In this context, your rapporteur proposes amendments to modify the very strict criteria of the duration based equity risk sub-module, to set the boundaries of the symmetric adjustment mechanism of the equity risk sub-module in accordance with actual data experience, and to clarify aspects of the matching adjustment.

Added(37) Article 77a is replaced by the following:

RemovedLevel 1 vs. Level 2

Added‘Article 77a Extrapolation of the relevant risk-free interest rate term structure

RemovedSome of the key aspects of the Solvency II framework, in particular in relation to the Long-Term Guarantees (LTG) framework, are currently determined via a delegated regulation. The Commission intends to keep it that way and has already provided a rough guidance on possible changes to the level 2 text via a Communication accompanying the legislative proposal.

Added1. The determination of the relevant risk-free interest rate term structure referred to in Article 77(2) shall make use of, and be consistent with, information derived from relevant financial instruments. That determination shall take into account relevant financial instruments of those maturities where the markets for those financial instruments are deep, liquid and transparent. As of the first maturity (the ‘first smoothing point’) where markets for those financial instruments are not deep, liquid or transparent, the relevant risk-free interest rate ▌shall be extrapolated in accordance with the third subparagraph. The first smoothing point for a currency shall be the longest maturity for which all of the following conditions are met:

RemovedYour rapporteur considers this status quo not to be satisfying. Delegated acts are not the appropriate instrument to deal with political issues. The fact that 10 years after the Omnibus II Directive, amongst others introducing LTG measures into Solvency II at the explicit wish of the Parliament, these LTG measures continue to being discussed, implies that Parliament was right in insisting on inclusion at Level 1 and that the Commission proposal to make important changes only via a delegated act, is not the appropriate way forward.

Added(a) the markets for financial instruments of that maturity are deep, liquid and transparent;

RemovedFor these reasons, your rapporteur proposes in this draft report amendments to provide more detail and political guidance directly into the Directive in relation to:

Added(b) the percentage of outstanding bonds of that or a longer maturity among all outstanding bonds denominated in that currency is sufficiently high.

Removed the risk-free interest rate curve, including the extrapolated part;

AddedThe extrapolated part of the relevant risk-free interest rate term structure shall be based on forward rates converging smoothly from one or a set of forward rates in relation to the longest maturities for which the bonds can be observed in a deep, liquid and transparent market to an ultimate forward rate (UFR).

Removed the Risk Margin;

AddedThe extrapolated forward rates shall be equal to a weighted average of a liquid forward rate and the UFR. The liquid forward rate shall be based on one or a set of forward rates in relation to the longest maturities for which the relevant financial instrument can be observed in a deep, liquid and transparent market. For maturities of at least 40 years past the first smoothing point the weight of the UFR shall be at least 80%.

Removed the Volatility Adjustment;

AddedThe extrapolated part of the relevant risk-free interest rates shall take into account information from financial instruments other than bonds ▌where the markets for those financial instruments are deep liquid and transparent.

Removed long-term equity investments.

Added▌

RemovedCooperation between Supervisors

Added2a. Notwithstanding paragraph 1, where the market conditions referred to in paragraph 1, first subparagraph, points (a) and (b), are similar to those present on ... [date of entry into force of this amending Directive], the starting point for the extrapolation of risk-free interest rates for the euro, shall be at a maturity of 20 years.’;

RemovedCooperation between supervisory authorities is absolute key to the working of cross-border supervision and the internal market, and conducive to the protection of policyholders and beneficiaries. This aspect deserves more attention from the co-legislators in view of the perceived obstruction by supervisors that has come to light over the years, perhaps caused by a lack of trust between them. For these reasons, your rapporteur proposes amendments to the collaboration platforms that have been introduced in 2019 as part of the ESA Review. This would make collaboration and information exchange between home and host supervisors mandatory, and would entail a structural move away from a voluntary process, which clearly has shown to have significant limitations in practice.

Added(37a) in Article 77b, paragraph 1, point (i) is replaced by the following:

RemovedReporting and Audit Requirements

Added(i) the insurance or reinsurance obligations of an insurance or reinsurance contract, and where a group contract is considered a single contract, are not split into different parts when composing the portfolio of insurance or reinsurance obligations for the purpose of this paragraph.’;

RemovedIt should be considered that every change to legislation has an accompanying operational compliance cost to the real economy. The proposal to fundamentally split and amend the Solvency and Financial Condition Report (SFCR) is both costly and based on an artificial split of unclear target groups. Undertakings have spent time and money over the last 10 years to produce these reports and they overall support having an SFCR. Although continuing the SCFR in its current format may have its downside, the possible upside from a change is not supported by evidence in the impact assessment. The Commission acknowledges in its impact assessment that an enhanced use of the proportionality principle seems to be able to provide a better policy answer, which is also the preferred direction of travel of your rapporteur.

Added(38) Article 77d is amended as follows: