Solvency III | Status Update and What is Next

Solvency III or Solvency II amendments?

Despite frequent references in the media and industry discussions, there is currently no official directive, regulation, or framework called “Solvency III.” The European Union is still operating under Solvency II.

What is often referred to as “Solvency III” is, in reality, a comprehensive review of the existing Solvency II framework. Initiated by the European Commission, this review aims to assess the effectiveness of Solvency II, address any shortcomings, and introduce targeted refinements to better support financial stability, policyholder protection, and the evolving needs of the insurance and reinsurance sector.

The European Commission gave to this initiative the name: "Review of measures on taking up and pursuit of the insurance and reinsurance business (Solvency II)". We read:

"The Solvency II review clauses provide that the Commission should assess and, where necessary, make legislative proposals for changes on four areas of the framework, namely:

1. The long-term guarantees measures and measures on equity risk;
2. The standard formula solvency capital requirements;
3. The minimum capital requirements; and
4. Group supervision and capital management within a group of insurance or reinsurance undertakings, in light of new developments in various areas including early intervention and resolution frameworks, as well as insurance guarantee schemes (IGSs).

Beyond that minimum scope, based on the experience gained over the first years of implementation of the framework, as well as on feedback from stakeholders, other parts of the Solvency II framework have been identified by Commission services as deserving an assessment. The Commission’s call for advice to the European Insurance and Occupational Pensions Authority (EIOPA) covers 19 topics.

The objective is to conduct a holistic assessment of the main components of the framework, without changing its fundamental principles, including the reliance on a market consistent valuation and on risk-based capital requirements.

As some of those topics are addressed in the Commission Delegated Regulation (EU) 2015/35, the review of Solvency II will require considering amendments of both the Solvency II Directive and its Delegated Regulation."

1 October 2024 - The European Insurance and Occupational Pensions Authority (EIOPA) launched a series of consultations on regulatory technical standards (RTS) and implementing technical standards (ITS) regarding changes that are expected to be introduced to the regulatory framework as part of the Solvency II review process.

The five consultations (four on RTS and one on ITS) cover topics ranging from cross-border supervision and the liquidity management of insurers to the criteria for identifying exceptional sector-wide shocks. These standards, once adopted, will guide the implementation of the new features within the Solvency II framework to improve supervisory effectiveness, risk management and financial stability in the EU’s insurance sector.

3 April 2025 - EIOPA launched a series of public consultations related to the review of Solvency II. The first consultation presents draft Guidelines on the exclusion of undertakings from the scope of group supervision. Group supervisors might decide to exclude undertakings from group supervision. These exclusions may have significant consequences for group supervision. The decision of such exclusions should be made in exceptional circumstances that are specified by the draft Guidelines now opened for consultation.

The second consultation concerns Guidelines on how to identify and treat related undertakings including participations under Solvency II. The revised Guidelines published today update and clarify existing instructions in light of the Solvency II Review. Moreover, some guidelines have been simplified or even proposed for deletion, in line with EIOPA’s general objective to reduce the number of existing Solvency II guidelines that are relevant to the insurance industry by 25%.

The third consultation relates to the supervisory assessment of internal models, including the use of dynamic volatility adjustment (dynamic VA or DVA) within them. The draft Opinion aims to ensure alignment with the amended Solvency II Directive, which has revised the methodology for calculating volatility adjustments and introduced a broader prudency principle for the DVA in the regulation.

There is nothing about a "Solvency III" in these public consultations

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Solvency III, like Basel IV.

The term “Solvency III” is unofficial and informal. It's often used for convenience to describe the upcoming changes to Solvency II—but it creates confusion. Just as there is no official “Basel IV” (only Basel III reforms), there is no Solvency III regulation at this point in time. It is more accurate to speak about a “Solvency II review” or “Solvency II amendments.”

For a Basel IV framework to exist officially, we need a formal announcement from the Basel Committee on Banking Supervision (BCBS), supported by a clear naming convention. As of now, the Committee refers to the post-2017 reforms as the "finalization of Basel III," not as a new framework. Unless the BCBS decides to issue a distinct, standalone set of rules under a new name, Basel IV for example, there will be no official Basel IV framework.

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But what would need to happen for “Solvency III” to move from an informal term to an official regulatory framework? What steps would lead to formal recognition?

For “Solvency III” to evolve from an informal label into a formally recognized regulatory framework, several critical steps would need to take place within the European Union’s legislative and regulatory process:

Step 1: Identification of Weaknesses in the Existing Solvency II Framework

The process would begin with the identification of significant weaknesses, regulatory blind spots, or new systemic risks that the current Solvency II regime cannot adequately address.

This could be driven, for example, by:

1. New financial crises or shocks involving insurance and reinsurance undertakings that expose gaps in risk modeling, reserving requirements, or supervisory coordination.

2. Climate-related financial risks, where the long-term nature of liabilities and underwriting risks are misaligned with current solvency capital requirements.

3. Hybrid threats, especially when major insurers suffer large losses from hybrid warfare events.

Such triggers could demonstrate that amendments to Solvency II are insufficient, and that a new framework in scope, structure, or ambition is required.

Step 2: The European Commission must issue a "Call for Advice" to EIOPA.

A Call for Advice (often abbreviated as CfA) is a formal request issued by the European Commission to an EU agency or authority (such as EIOPA, ESMA, or EBA) asking them to provide independent technical input on a specific regulatory issue.

It is an official document that sets out the scope of the requested advice (what areas or topics should be covered), specific questions the Commission wants answered, deadlines for when the advice must be delivered, and considerations that should be taken into account (like proportionality, market stability, competitiveness).

Why is it needed? Well, the Commission is a political body, not a technical supervisor. It needs expert analysis to design well-informed, evidence-based legislation. EU law requires major legislative proposals to be based on sound technical evidence. Therefore, before proposing new rules or amending existing rules, the Commission asks for advice.

We often hear: But we do have a Call for Advice! We do, but not for Solvency III. The European Commission issued a Call for Advice for the Solvency II Review to EIOPA on 11 February 2019. It asked EIOPA to assess 19 areas, such as the functioning of long-term guarantee measures, the need for macroprudential tools, the introduction of recovery and resolution frameworks for insurers, the treatment of cross-border supervision, and the proportionality of rules for small and medium-sized insurers.

Why the 2019 Call for Advice for the Solvency II Review is NOT "Solvency III"? The 2019 Call for Advice asked EIOPA to assess and improve certain parts of Solvency II. It did not ask EIOPA to replace Solvency II entirely. No European institution called it "Solvency III." The policymakers were clear: After the heavy effort of designing and implementing Solvency II (which took 10+ years!), they did not want to start again from scratch. The political priority was about refining, not rewriting.

Step 3: EIOPA starts its work: studies, consultations, draft reports.

After receiving the Call for Advice from the European Commission, EIOPA organizes and structures its technical work program to respond comprehensively to the Commission’s request. It sets up specialized internal working groups and collaborates closely with national supervisory authorities across the EU to gather relevant information.

EIOPA launches a series of thematic studies to analyze the practical functioning of the existing regulatory framework and to identify potential areas for improvement. It opens public consultations to collect views from a wide range of stakeholders, including insurers, reinsurers, consumer associations, academic experts, and other interested parties. These consultations are critical for ensuring transparency, inclusiveness, and the consideration of market realities.

In parallel, EIOPA publishes discussion papers that present preliminary ideas and invite debate on specific technical issues identified during the initial stages of the review. These documents help frame the public dialogue and guide the consultation process.

To support evidence-based policymaking, EIOPA also conducts quantitative analyses, such as impact assessments and stress tests, where necessary. These exercises aim to measure the potential financial, operational, and systemic consequences of different regulatory options. Throughout this process, EIOPA carefully evaluates feedback and data, aiming to develop robust, proportionate, and forward-looking recommendations for the European Commission.

Step 4: EIOPA's Technical Advice

EIOPA consolidates the outcomes of its technical analyses, stakeholder consultations, and data collection exercises into a formal Opinion or Technical Advice, submitted to the European Commission in accordance with the mandate set out in the Call for Advice. This deliverable represents a thorough and independent assessment of the functioning of the existing regulatory framework, informed by empirical evidence and broad stakeholder engagement.

The Opinion presents detailed technical findings and identifies potential areas for regulatory enhancement. It outlines a range of policy options, accompanied where appropriate by a qualitative and quantitative assessment of their likely impacts on financial stability, policyholder protection, market efficiency, and supervisory convergence across the European Union. In certain instances, EIOPA may also advance specific recommendations for legislative amendments aimed at reinforcing the resilience and effectiveness of the prudential framework.

While EIOPA’s Technical Advice is grounded in its expertise as the European supervisory authority for insurance and pensions, it is important to underline that its recommendations are not binding. The European Commission retains full discretion in determining the extent to which EIOPA’s input is reflected in any subsequent legislative proposals. EIOPA’s Opinion thus serves as an essential, but advisory, contribution to the Commission’s policymaking process, ensuring that future initiatives are informed by rigorous analysis and broad consultation.

We have been asked: On what legal basis is EIOPA’s Technical Advice important but not binding? Well, the legal basis comes mainly from the Regulation (EU) No 1094/2010 establishing EIOPA. According to Article 8(2): "Upon a request from the European Parliament, the Council, or the Commission, the Authority shall provide opinions to the institutions of the Union." EIOPA is required to provide opinions, when requested. The Regulation does not say that the opinions are binding on the requesting institution.

Step 5: Internal Review and Analysis inside the European Commission

When analyzing EIOPA’s Technical Advice, the European Commission does not look only at the narrow insurance or prudential supervision issues. It also checks whether proposed changes are aligned with the European Union’s wider strategic priorities. Some key examples are:

1. Capital Markets Union (CMU). The goal is to create a truly integrated EU capital market. Insurers are major institutional investors. Regulatory reforms (like changes to capital requirements) can influence how much insurers invest in long-term assets like infrastructure, green projects, or private equity.

2. European Green Deal and Sustainable Finance Strategy. The goal is to make Europe the first climate-neutral continent by 2050, and embed sustainability into all areas of EU policy.

Insurers manage huge investment portfolios and insure physical risks (e.g., floods, wildfires). Solvency II reforms will be designed to integrate sustainability risks, such as climate-related financial risks. Supervisors and insurers must consider environmental risks in their solvency assessments. Capital frameworks might evolve to reward "green investments" or at least ensure that climate risks are properly measured. The Commission must ensure that prudential rules do not unintentionally discourage sustainable investments.

Step 6: Preparation of a Draft Policy Document (Working Document) by the European Commission.

The Commission will prepare a draft "Staff Working Document" with the problems identified, the objectives of any potential action, and the possible policy options. This is not yet a legislative proposal, it is a preparatory document for internal use and for discussions with stakeholders.

Step 7: Public consultation.

The Commission will launch a broad public consultation to gather more views beyond technical stakeholders. It includes insurance companies, consumer organizations, trade associations, academics, and the general public.

The Commission may organize targeted consultations (like focus groups, or workshops with specific groups). The goal is to test whether EIOPA’s advice is acceptable politically, to check if there are unexpected concerns or opposition, and to increase transparency and legitimacy.

Step 8: Regulatory Impact Assessment (RIA) (Mandatory for Major Changes).

The RIA analyzes costs and benefits of proposed changes, economic, financial, social, and environmental impacts, and the effects on SMEs (small insurers), competition, innovation, etc.

The Impact Assessment must include different policy options (Option 1: minor changes; Option 2: major overhaul) and explain which is preferred and why.

Step 9: Drafting the Legislative Proposal.

Once the internal analysis, public consultation, and Impact Assessment are complete, the Commission drafts the legislative text (a Proposal for a Directive amending Solvency II). The text includes detailed legal articles, recitals (explanatory text at the beginning), and references to the Impact Assessment.

Before publishing, the Commission conducts an inter-service consultation. Directorates-General (for example, DG Competition, DG Environment, DG Climate Action) review the draft. They can raise objections or propose changes to ensure the proposal fits broader EU policies.

Step 10: The draft is submitted to the College of Commissioners for formal consideration and adoption.

The legislative proposal, reflecting EIOPA’s Technical Advice, the outcome of broader stakeholder consultations, and the findings of the Regulatory Impact Assessment, is submitted to the College of Commissioners.

The College of Commissioners consists of the President of the European Commission and one Commissioner from each of the 27 Member States. Each Commissioner is responsible for specific policy portfolios, but all Commissioners share collective responsibility for all decisions of the Commission. This practice reflects the principle of collegiality, a core governance rule of the European Commission, whereby decisions are taken collectively and Commissioners are jointly responsible for adopted initiatives.

Prior to the College meeting, the draft proposal is circulated internally, accompanied by supporting documents, including the text of the proposed legislative act, an explanatory memorandum detailing the background, objectives, and rationale of the proposal, a summary of the consultation results and the main issues raised by stakeholders, and the final version of the Regulatory Impact Assessment (RIA).

At the College meeting, the relevant Commissioner (typically the Commissioner for Financial Services, Financial Stability, and Capital Markets Union, currently overseeing EIOPA matters) will present the proposal. Other Commissioners have the opportunity to raise questions, propose minor adjustments, or discuss the political and strategic implications of the draft, especially its alignment with the Commission’s overall political priorities.

Following deliberation, the College must formally adopt the proposal. Adoption is usually achieved by consensus, but if necessary, a simple majority vote can be called under the Commission’s internal Rules of Procedure. Once adopted, the proposal becomes an official act of the European Commission.

Step 11: The final adopted legislative proposal is published.

Once the legislative proposal is formally adopted by the College of Commissioners, it is officially published on the European Commission’s website and recorded in the Commission’s Register of Documents, ensuring full transparency and public accessibility.

The Register provides the general public, stakeholders, and institutional actors with access to the adopted proposal, accompanying explanatory materials, and any related supporting documents, such as the impact assessment and summaries of stakeholder consultations.

The final adopted proposal is formally transmitted to the two co-legislators of the European Union, the European Parliament, representing the citizens of the EU, and the Council of the European Union, representing the governments of the Member States.

This transmission marks the official start of the Ordinary Legislative Procedure (also known historically as the co-decision procedure). Under this process, both institutions must examine the proposal, discuss it independently, and ultimately agree on the exact wording of the future law. The procedure involves multiple readings in both Parliament and Council, the possibility of amendments, negotiations to find a common position, and, where necessary, the convening of trilogues — informal tripartite meetings between representatives of Parliament, Council, and the Commission to broker a compromise.

Throughout the legislative process, the European Commission may also participate actively by explaining and defending the proposal before Parliament committees and Council working parties, offering technical and legal clarifications, but also facilitating compromise where divergent views between Parliament and Council emerge.

The successful completion of the Ordinary Legislative Procedure results in the adoption of the new legal act, which then becomes part of EU law.

Step 12: The Official Journal of the European Union (OJEU).

Once adopted, the legal act must be published in the Official Journal of the European Union, which serves as the formal and authoritative record of EU legislation. The act appears in all official EU languages, ensuring accessibility and legal certainty across all Member States.

Publication in the Official Journal marks the final procedural step required for the act to acquire full legal validity. From that point, if the legal act is a Regulation, it becomes directly applicable in all Member States without the need for national transposition. If the legal act is a Directive, it binds the Member States as to the result to be achieved, but each Member State must adopt its own national measures to implement the Directive within a specified deadline.

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Opinion - Will Solvency III be a Directive, a Regulation, or both?

Solvency II was adopted as a Directive: Directive 2009/138/EC of 25 November 2009. It had to be transposed into national law, which led to variability in timing, interpretation, and supervisory practice across Member States.

In our opinion, Solvency III is likely to be a Directive, accompanied by one or more Regulations.

Why? Insurance supervision remains nationally embedded. Unlike banking supervision, which is centralized through the European Central Bank (ECB) under the Single Supervisory Mechanism (SSM), insurance supervision is still handled at national level. A Directive allows Member States to tailor implementation to their domestic supervisory structures, legal systems, and market characteristics.

To ensure technical harmonization, Solvency III will likely be supported by Delegated Acts, used to supplement or amend non-essential elements of the Directive, and Implementing Acts, for uniform supervisory reporting, disclosure, and operational practices.

Could Solvency III be adopted purely as a Regulation? In our opinion, it is unlikely, but not impossible. This would represent a significant shift in EU insurance law, and would likely face resistance from Member States, particularly those with large domestic insurance sectors and distinct regulatory traditions.

In recent years, especially in financial regulation, the trend has been to combine a Directive and a Regulation when updating major frameworks. This is called the "two-legislative-instrument approach."

Examples include the Capital Requirements Directive (CRD) and the Capital Requirements Regulation (CRR) for banking, and the Anti-Money Laundering Directive (AMLD) and Anti-Money Laundering Regulation (AMLR).

A Solvency III Regulation could include technical rules (Solvency Capital Requirement (SCR) formula, market risk calculations, reporting templates, risk calibration for investments and underwriting).

A Solvency III Directive could include general principles (supervisory powers and practices, governance requirements).

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