Insurance Sector Braces for Major Shake-Up: Solvency II Reform to Unlock Billions in Capital

A Regulatory Turning Point for Europe’s Insurance Industry

The European Commission’s adoption of the delegated acts for the Solvency II reform on 29 October 2025 marks one of the most significant overhauls of insurance regulation in decades. As the package enters the final scrutiny phase by the European Parliament and the Council, the industry is preparing for a new regime that blends prudential stability with investment mobilisation.

The reform aims to address long-standing concerns that Solvency II, while robust, had become excessively conservative—particularly in a period of higher interest rates that already mitigate balance-sheet risks. The new approach shifts the regulatory philosophy toward greater alignment between supervision and the EU’s economic and strategic ambitions.

More Eligible Capital, Lower Requirements, and a New Supervisory Mindset

A core pillar of the reform is the reduction of the risk margin, a reserve designed to cover the hypothetical cost of transferring liabilities to a third party. For years, insurers argued that the margin overstated real-world risks. Under the new rules, the recalibrated risk margin:

• Boosts eligible own funds, immediately improving solvency ratios
• Reduces volatility in capital requirements
• Reflects more accurately the current interest-rate environment

At the same time, capital charges for certain strategic asset classes—especially infrastructure, green transition projects, and securitisations—are being cut. This adjustment reflects improved modelling of investment risk and the EU’s explicit intent to channel private capital into long-term sectors critical for its competitiveness and energy transition.

The message is clear: Europe wants insurers not only to remain stable, but to deploy more capital into the real economy.

Will Insurers Actually Invest the Freed-Up Capital? Moody’s Has Doubts

Despite the regulatory optimism, Moody’s remains cautious. The rating agency argues that insurers’ investment behaviour is shaped not by policy aspirations, but by:

• Long-duration liability profiles
• Liquidity needs
• Risk appetite and market conditions
• Supervisory pressures

Historically, the easing of capital rules has not automatically translated into higher allocations to long-term, illiquid, or higher-risk assets. For this reason, the reform includes a subtle but powerful shift: stronger oversight by EIOPA and national authorities. Supervisors will monitor how companies use the released capital and provide detailed reporting to EU policymakers.

This creates a new, more activist supervisory model—one that aligns market behaviour with political priorities.

Securitisations: Fixing a Long-Standing Regulatory Asymmetry

One of the most notable changes concerns the treatment of securitisations, where insurers faced harsher requirements than banks and asset managers—an imbalance that had discouraged participation in a sector vital for Europe’s financing ecosystem.

The reform corrects this by:

• Removing the mandatory dual-rating requirement for STS securitisations
• Lowering capital requirements for STS exposures
• Maintaining stricter rules for non-STS securitisations, which carry higher complexity and risk

This alignment should improve liquidity, reduce distortions, and encourage insurers to re-enter a market that supports credit creation across the EU.

Looking Toward 2027: A New Era for Insurance, Regulation, and Capital Flows

If approved without objections, the new framework will enter into force in January 2027. Its impact will be transformative:

• More capital flexibility for insurers
• Stronger solvency metrics across the industry
• Closer supervisory scrutiny of investment allocations
• Greater alignment between prudential regulation and the EU’s strategic economic goals

For insurers, the reform creates both opportunity and obligation. The sector gains room to invest, but will face pressure to demonstrate prudent, well-documented use of its enhanced capital position. For policymakers, the new Solvency II represents a carefully balanced attempt to link financial stability with Europe’s long-term growth agenda.

In essence, Europe is betting that a modernised regulatory framework can maintain market resilience while unlocking the capital needed to reinforce the continent’s economic autonomy, green transition, and infrastructure development.

Source: pagenews.gr