EC (Solvency II) including proportionality, reporting, tools, guarantees, risks and supervision - Main contents

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dossier	COM(2021)581 - Amendment of various elements of Directive 2009/138/EC (Solvency II) including proportionality, reporting, tools, ...
document	COM(2021)581
date	September 22, 2021

(1) Directive 2009/138/EC of the European Parliament and of the Council ¹⁷ has created more risk-based and more harmonised prudential rules for the insurance and reinsurance sector. Some of the provisions of that Directive are subject to review clauses. The application of that Directive has substantially contributed to strengthening the financial system in the Union and rendered insurance and reinsurance undertakings more resilient to a variety of risks. Although very comprehensive, that Directive does not address all identified weaknesses affecting insurance and reinsurance undertakings.

(2) The Covid-19 pandemic has caused tremendous socio-economic damage and left the EU economy in need of a sustainable, inclusive and fair recovery. This has made the work on the Union’s political priorities even more urgent, in particular ensuring that the economy works for people and attaining the objectives of the European Green Deal. The insurance and reinsurance sector can provide private sources of financing to European businesses and can make the economy more resilient by supplying protection against a wide range of risks. With this dual role, the sector has a great potential to contribute to the achievement of the Union’s priorities.

(3) As underlined in the Commission’s Communication of 24 September 2020 ‘A Capital Markets Union for people and businesses’ ¹⁸ , incentivising institutional investors, in particular insurers, to make more long-term investments will be instrumental in supporting re-equitisation in the corporate sector. To facilitate insurers’ contribution to the financing of the economic recovery of the Union, the prudential framework should be adjusted to better take into account the long-term nature of the insurance business. In particular, when calculating the Solvency Capital Requirement under the standard formula, the possibility to use a more favourable standard parameter for equity investments which are held with a long-term perspective should be facilitated, provided that insurance and reinsurance undertakings comply with sound and robust criteria, that preserve policyholder protection and financial stability. Such criteria should aim to ensure that insurance and reinsurance undertakings are able to avoid forced selling of equities intended to be held for the long term, including under stressed market conditions.

(4) In its Communication of 11 December 2019 on the European Green Deal ¹⁹ , the Commission made a commitment to integrate better into the Union’s prudential framework the management of climate and environmental risks. The European Green Deal is the Union’s new growth strategy, which aims to transform the Union into a modern, resource-efficient and competitive economy with no net emissions of greenhouse gases by 2050. It will contribute to the objective of building an economy that works for the people, strengthening the Union’s social market economy, helping to ensure that it is future-ready and that it delivers stability, jobs, growth and investment. In its proposal of 4 March 2020 for a European Climate Law, the Commission proposed to make the objective of climate neutrality and climate resilience by 2050 binding in the Union. That proposal was adopted by the European Parliament and by the Council and it entered into force on 29 July 2021 ²⁰ . The Commission’s ambition to ensure global leadership by the EU on the path towards 2050 was reiterated in the 2021 Strategic Foresight Report ²¹ , which identifies the building of resilient and future-proof economic and financial systems as a strategic area of action.

(5) The EU sustainable finance framework will play a key role in meeting the targets of the European Green Deal and environmental regulation should be complemented by a sustainable finance framework which channels finance to investments that reduce exposure to these climate and environmental risks. In its Communication of 6 July 2021 on a Strategy for Financing the Transition to a Sustainable Economy ²² , the Commission committed to propose amendments to Directive 2009/138/EC to consistently integrate sustainability risks in risk management of insurers by requiring climate change scenario analysis by insurers.

(6) Directive 2009/138/EC excludes certain undertakings from its scope, due to their size. Following the first years of application of Directive 2009/138/EC and with a view to ensuring that it does not unduly apply to undertakings of reduced size, it is appropriate to review those exclusions by increasing those thresholds, so that more small insurance undertakings that fulfil certain conditions are not subject to that Directive. However, undertakings benefitting from such increased thresholds should have the option to keep or seek authorisation under Directive 2009/138/EC in order to benefit from the single license provided therein.

(7) Directive 2009/138/EC does not apply to an assistance activity where the conditions of Article 6(1) of that Directive are fulfilled. The first condition states that the assistance is to be related to accidents or breakdowns involving a road vehicle which occurs in the territory of the Member State of the undertaking providing cover. That provision could mean a requirement of authorisation as insurer for providers of assistance of road vehicles in the event of an accident or breakdown that occurs just across the border and may unduly disrupt assistance. For this reason, it is appropriate to review that condition. Therefore, the condition under Article 6(1), point (a), of Directive 2009/138/EC should be also extended to accidents or breakdowns, involving the road vehicle covered by that undertaking, that occur occasionally in a neighbouring country.

(8) Insurance and reinsurance undertakings can submit an application for authorisation in any Member State. Information on previous applications and the outcomes of the assessment of such applications could provide essential information for the assessment of their application. Therefore, the supervisory authority should be informed by the applicant insurance or reinsurance undertaking about previous rejections or withdrawals of authorisation in another Member State.

(9) Prior to the granting of authorisation, the supervisory authority of the home Member State should consult the supervisory authorities of any Member States concerned. In view of increased cross-border insurance activities, it is necessary to enhance the convergent application of Union law in cases of cross-border insurance activity and the exchange of information between the supervisory authorities, in particular before authorisations are granted. Therefore, where several supervisory authorities need to be consulted, any supervisory authority concerned should be allowed to request a joint assessment of an application for authorisation from the supervisory authority of the Member State where the authorisation process is ongoing.

(10) Directive 2009/138/EC should be applied in accordance with the proportionality principle. To facilitate the proportionate application of the Directive to undertakings presenting a lower risk profile than the average undertaking, and to ensure that they are not subject to disproportionately burdensome requirements, it is necessary to provide risk-based criteria that allow for their identification.

(11) Undertakings complying with the risk-based criteria should be able to be classified as low-risk profile undertakings pursuant to a simple notification process. Where, within one month after such notification, the supervisory authority does not oppose the classification for duly justified reasons linked to the assessment of the relevant criteria, that undertaking should be deemed as low-risk profile undertaking. Once classified as a low-risk profile undertaking, in principle, it should automatically benefit from identified proportionality measures on reporting, governance, revision of written policies, own-risk solvency assessment and disclosure requirements.

(12) It is appropriate that proportionality measures are available also to undertakings that are not classified as low-risk profile undertakings, but for which some of the requirements of Directive 2009/138/EC are too costly and complex, in view of the risks involved in the business carried out by such undertakings. Those undertakings should be permitted to use proportionality measures based on a case-by-case analysis and following prior approval by their supervisory authorities.

(13) A proper implementation of the proportionality principle is crucial to avoiding excessive burden on insurance and reinsurance undertakings. Supervisory authorities need to be regularly informed of the use of proportionality measures. For this reason, insurance and reinsurance undertakings should annually report to their supervisory authorities information on the proportionality measures they use.

(14) Captive insurance undertakings and captive reinsurance undertakings which only cover risks associated with the industrial or commercial group to which they belong, present a particular risk profile that should be taken into account when defining some requirements, in particular on own-risk and solvency assessment, disclosures and the related empowerments for the Commission to further specify the rules on such empowerments. Moreover, captive insurance undertakings and captive reinsurance undertakings should also be able to benefit from the proportionality measures when they are classified as low-risk profile undertakings.

(15) It is important that insurance and reinsurance undertakings maintain a healthy financial position. For that purpose, Directive 2009/138/EC provides for financial supervision with respect to an undertaking’s state of solvency, the establishment of technical provisions, its assets and its eligible own funds. However, the system of governance of an undertaking is also an important factor in ensuring that the undertaking maintains its financial health. To that end, supervisory authorities should be required to carry out regular reviews and evaluations of the system of governance as part of their financial supervision of insurance and reinsurance undertakings.

(16) Cooperation between the supervisory authority of the home Member State that granted authorisation to an insurance or reinsurance undertaking and the supervisory authorities of the Member States where that undertaking pursues activities by establishing branches or by providing services, should be strengthened in order to better prevent potential problems and to enhance the protection of policyholders across the Union. This cooperation should include more information coming from the supervisory authority of the home Member State, in particular regarding the outcome of the supervisory review process related to the cross-border activity.

(17) Supervisory authorities should be entitled to receive from each supervised insurance and reinsurance undertaking and their groups, at least every three years, a regular narrative report with information on the business and performance, system of governance, risk profile, capital management and other relevant information for solvency purposes. In order to simplify this reporting requirement for insurance and reinsurance groups, it should be possible, subject to certain conditions, to submit the information of the regular supervisory report relating to the group and its subsidiaries in an aggregated way for the whole group.

(18) It should be ensured that low-risk profile undertakings are prioritised when supervisors grant exemptions and limitations to reporting. For this type of entities, the process of notification that applies for the classification as low-risk profile undertakings should ensure that there is enough certainty as regards the use of exemptions and limitations to reporting.

(19) Reporting and disclosure deadlines should be clearly laid down in Directive 2009/138/EC. However, it should be recognised that extraordinary circumstances such as sanitary emergencies, natural catastrophes and other extreme events could make it impossible for insurance and reinsurance undertakings to submit such reports and disclosures, within the established deadlines. To this end, the Commission should be empowered to extend the deadlines under such circumstances.

(20) Directive 2009/138/EC provides that supervisory authorities are to assess whether any new person appointed to manage an insurance or reinsurance undertaking or to perform a key function are fit and proper. However, those who manage the undertaking or perform a key function should be fit and proper on a continuous basis. Supervisory authorities should therefore have the power to react and, where appropriate, to remove the person concerned from the relevant position, in the case of non-compliance with the fit and proper requirements.

(21) As insurance activities may trigger or amplify risks for financial stability, insurance and reinsurance undertakings should incorporate macroprudential considerations and analysis in their investment and risk management activities. This could include taking into account the potential behaviour of other market participants, macroeconomic risks, such as credit cycle downturns or reduced market liquidity, or excessive concentrations at market level in certain asset types, counterparties or sectors.

(22) Insurance and reinsurance undertakings should factor any relevant macroprudential information provided by the supervisory authorities in their own-risk and solvency assessment. The supervisory authorities should analyse the own-risk and solvency assessment supervisory reports of undertakings within their jurisdictions, aggregate them and provide input to undertakings on the elements that should be considered in their future own-risk and solvency assessments, particularly as regards macroprudential risks. Member States should ensure that, where they entrust an authority with a macroprudential mandate, the outcome and the findings of macroprudential assessments by the supervisory authorities are shared with that macroprudential authority.

(23) In line with the Insurance Core Principles adopted by the International Association of Insurance Supervisors, national supervisory authorities should be able to identify, monitor and analyse market and financial developments that may affect insurance and reinsurance undertakings, and insurance and reinsurance markets, and should use that information in the supervision of individual insurance or reinsurance undertakings. Those tasks should, where appropriate, use information from, and insights gained by, other supervisory authorities.

(24) Authorities with a macroprudential mandate are in charge of the macroprudential policy for their national insurance and reinsurance market. The macroprudential policy can be pursued by the supervisory authority or by another authority or body entrusted with this purpose.

(25) Good coordination between supervisory authorities and the relevant bodies and authorities with a macroprudential mandate is important for identifying, monitoring and analysing possible risks to the stability of the financial system that may affect insurance and reinsurance undertakings, and for taking measures to effectively and appropriately address those risks. Cooperation between authorities should also aim to avoid any form of duplicative or inconsistent actions.

(26) Directive 2009/138/EC requires insurance and reinsurance undertakings to have, as an integrated part of their business strategy, a periodic own-risk and solvency assessment. Some risks, such as climate change risks, are difficult to quantify or they materialise over a period that is longer than the one used for the calibration of the Solvency Capital Requirement. Those risks can be better taken into account in the own-risk and solvency assessment. Where insurance and reinsurance undertakings have material exposure to climate risks, they should be required to carry out, within appropriate intervals and as part of the own-risk and solvency assessment, analyses of the impact of long-term climate change risk scenarios on their business. Such analyses should be proportionate to the nature, scale and complexity of the risks inherent in the business of the undertakings. In particular, while the assessment of the materiality of exposure to climate risks should be required from all insurance and reinsurance undertakings, long-term climate scenario analyses should not be required for low-risk profile undertakings.

(27) Directive 2009/138/EC requires the disclosure, at least, annually, of essential information through the solvency and financial condition report. That report has two main types of addressees: policyholders and beneficiaries on the one hand, and analysts and other market participants on the other hand. In order to address the needs and the expectations of those two different groups, the content of the report should be divided into two parts. The first part, addressed mainly to policyholders and beneficiaries, should contain the key information on business, performance, capital management and risk profile. The second part, addressed to analysts and other market participants, should contain detailed information on the system of governance, specific information on technical provisions and other liabilities, the solvency position as well as other data relevant for specialised analysts.

(28) It is possible for insurance and reinsurance undertakings to adjust the relevant risk-free interest rate term structure for the calculation of the best estimate in line with the spread movements of their assets after supervisory approval (‘matching adjustment’) or in line with the average spread movement of assets held by insurance and reinsurance undertakings in a given currency or country (‘volatility adjustment’). The part of the solvency and financial condition report addressed to policyholders should only contain the information that is expected to be relevant to the decision-making of an average policyholder. While insurance and reinsurance undertakings should publicly disclose the impact of not applying the matching adjustment, the volatility adjustment and the transitional measures on risk-free interest rates and on technical provisions on their financial positions, such disclosure should not be assumed to be relevant to the decision-making of an average policyholder. The impact of such measures should therefore be disclosed in the part of the solvency and financial condition report addressed to market participants and not in the part addressed to policyholders.

(29) Disclosure requirements should not be excessively burdensome for insurance and reinsurance undertakings. To this end, some simplifications and proportionality measures should be included in Directive 2009/138/EC, in particular when they do not jeopardise the readability of the data provided by insurance and reinsurance undertakings.

(30) In order to guarantee the highest degree of accuracy of the information disclosed to the public, a substantial part of the solvency and financial condition report should be subject to audit. Such audit requirement should cover the balance sheet assessed in accordance with the valuation criteria set out in Directive 2009/138/EC.

(31) The burden of the auditing requirement does not seem to be justified for low-risk profile undertakings, which are not expected to be relevant for the financial stability of the Union and whose policyholders are not numerous. One of the criteria that low-risk profile undertakings are required to meet is that they be small in size. To alleviate this burden, an exclusion from this requirement should be granted.

(32) It should be acknowledged, that, although beneficial, the auditing requirement would be an additional burden for every undertaking. Therefore, annual reporting and disclosure deadlines for insurance and reinsurance undertakings and for insurance and reinsurance groups should be extended in order to give those undertakings sufficient time to produce audited reports.

(33) It should be ensured that the methods for calculating technical provisions of contracts with options on guarantee are proportionate to the nature, scale and complexity of the risks faced by the insurer. In this regard, some simplifications should be provided.

(34) The determination of the relevant risk-free interest rate term structure should balance the use of information derived from relevant financial instruments with the ability of insurance and reinsurance undertakings to hedge interest rates derived from financial instruments. In particular, it can happen that smaller insurance and reinsurance undertakings do not have the capacities to hedge interest rate risk with instruments other than bonds, loans or similar assets with fixed cash-flows. The relevant risk-free interest rate term structure should therefore be extrapolated for maturities where the markets for bonds are no longer deep, liquid and transparent. However, the method for the extrapolation should make use of information derived from relevant financial instruments other than bonds, where such information is available from deep, liquid and transparent markets for maturities where the bond markets are no longer deep, liquid and transparent. To ensure certainty and harmonised application while also allowing for timely reaction to changes in market conditions, the Commission should adopt delegated acts to specify how the new extrapolation method should apply.

(35) The determination of the relevant risk-free interest rate term structure has a significant impact on the solvency position in particular for life insurance undertakings with long-term liabilities. In order to avoid a disruption to the existing insurance business and to allow for a smooth transition to the new extrapolation method, it is necessary to provide for a phasing in measure and a transitional measure. The transitional measures should aim to avoid market disruption and provide a transparent path to the final extrapolation method.

(36) Directive 2009/138/EC provides for a volatility adjustment, which seeks to mitigate the effect of exaggerations of bond spreads and is based on reference portfolios for the relevant currencies of insurance and reinsurance undertakings and, in the case of the euro, on reference portfolios for national insurance markets. The use of a uniform volatility adjustment for entire currencies or countries can lead to benefits in excess of a mitigation of exaggerated bond spreads, in particular where the sensitivity of relevant assets of those undertakings to changes in credit spreads is lower than the sensitivity of the relevant best estimate to changes in interest rates. In order to avoid such excessive benefits from the volatility adjustment, the volatility adjustment should be subject to supervisory approval and its calculation should take into account undertaking-specific characteristics related to the spread sensitivity of assets and the interest rate sensitivity of the best estimate of technical provisions. In light of the additional safeguards, insurance and reinsurance undertakings should be allowed to add up to an increased proportion of 85% of the risk-corrected spread derived from the representative portfolios to the basic risk-free interest rate term structure.

(37) Directive 2009/138/EC provides for a country component in the volatility adjustment that aims to ensure that exaggerations of bond spreads in a specific country are mitigated. However, the activation of the country component is based on an absolute threshold and a relative threshold with respect to the risk-adjusted spread of the country, which can lead to cliff-edge effects and therefore increase the volatility of own funds of insurance and reinsurance undertakings. In order to ensure that exaggerations of bond spreads in a specific Member State whose currency is the euro are mitigated effectively, the country component should be replaced by a macro component which is to be calculated based on the differences between the risk adjusted spread for the euro and the risk adjusted spread for the country. In order to avoid cliff-edge effects, the calculation should avoid discontinuities with respect to the input parameters.

(38) In order to take account of developments in the investment practices of insurance and reinsurance undertakings, the Commission should be empowered to adopt delegated acts to set out criteria for the eligibility of assets to be included in the assigned portfolio of assets where the nature of the assets could lead to diverging practices with respect to the criteria for the application and the calculation of the matching adjustment.

(39) In order to ensure that the same treatment is applied to all insurance and reinsurance undertakings calculating the volatility adjustment, or to take account of market developments, the Commission should be empowered to adopt delegated acts specifying the calculation of undertaking-specific elements of the volatility adjustment.

(40) For the purposes of calculating their own funds under Regulation (EU) No 575/2013 of the European Parliament and of the Council ²³ , institutions which belong to financial conglomerates that are subject to Directive 2002/87/EC of the European Parliament and of the Council ²⁴ may be permitted not to deduct their significant investments in insurance or reinsurance undertakings, provided that certain criteria are met. There is a need to ensure that prudential rules applicable to insurance or reinsurance undertakings and credit institutions allow for an appropriate level-playing field between banking-led and insurance-led financial groups. Therefore, insurance or reinsurance undertakings should also be permitted not to deduct from their eligible own funds participations in credit and financial institutions, subject to similar conditions. In particular, either group supervision in accordance with Directive 2009/138/EC or supplementary supervision in accordance with Directive 2002/87/EC should apply to a group encompassing both the insurance or reinsurance undertaking and the related institution. In addition, the institution should be an equity investment of strategic nature for the insurance or reinsurance undertaking and supervisory authorities should be satisfied as to the level of integrated management, risk management and internal controls regarding the entities in the scope of group supervision or supplementary supervision.

(41) The existing limits imposed on the level of the symmetric adjustment restrict the ability of this adjustment to mitigate potential pro-cyclical effects of the financial system and to avoid a situation in which insurance and reinsurance undertakings are unduly forced to raise additional capital or sell their investments as a result of unsustained adverse movements in financial markets, such as the ones triggered by the Covid-19 pandemic. Therefore, the symmetric adjustment should be amended so that it allows for larger changes to the standard equity capital charge and further mitigates the impact of sharp increases or decreases in stock markets.

(42) To enhance the proportionality within the quantitative requirements, insurance and reinsurance undertakings should be granted the possibility to calculate the capital requirement for immaterial risks in the standard formula with a simplified approach for a period of no more than three years. Such a simplified approach should allow undertakings to estimate the capital requirement for an immaterial risk on the basis of an appropriate volume measure which varies over time. This approach should be based on common rules and subject to common criteria for the identification of immaterial risks.

(43) Insurance and reinsurance undertakings that use the matching adjustment have to identify, organise and manage the assigned portfolio of assets and obligations separately from other parts of the business and should therefore not be permitted to meet risks arising elsewhere in the business using the assigned portfolio of assets. However, the separated management of the portfolio does not result in an increase in correlation between the risks within that portfolio and those within the rest of the undertaking. Therefore, insurance and reinsurance undertakings which use the matching adjustment should be allowed to calculate their Solvency Capital Requirement based on the assumption of full diversification between the assets and liabilities of the portfolio and the rest of the undertaking, unless the portfolios of assets covering a corresponding best estimate of insurance or reinsurance obligations form a ring-fenced fund.

(44) As part of the supervisory review process, it is important for supervisory authorities to be able to compare information across the companies they supervise. Partial and full internal models allow to capture the individual risk of a company better and Directive 2009/138/EC allows insurance and reinsurance undertakings to use them for determining capital requirements without limitations stemming from the standard formula. However, partial and full internal models make comparisons across companies more difficult and supervisory authorities would therefore benefit from access to the outcome of the calculation of standard formula capital requirements. All insurance and reinsurance undertakings should therefore regularly report such information to their supervisors.

(45) Directive 2009/138/EC provides for the possibility for insurance and reinsurance undertakings to calculate their Solvency Capital Requirement with an internal model subject to supervisory approval. Where an internal model is applied, that Directive does not prevent the insurance and reinsurance undertaking from taking into account the effect of credit spread movements on the volatility adjustment in its internal model. As the use of the volatility adjustment can lead to benefits in excess of a mitigation of exaggerated bond spreads in the calculation of the best estimate, such excessive benefits can also distort the calculation of the Solvency Capital Requirement where the effect of credit spread movements on the volatility adjustment is taken into account in the internal model. In order to avoid such distortion, the Solvency Capital Requirement should be floored, where supervisory authorities allow insurance and reinsurance undertaking to take into account the effect of credit spread movements on the volatility adjustment in their internal model, at a level below which benefits on the Solvency Capital Requirement in excess of a mitigation of exaggerated bond spreads are expected to occur.

(46) Insurance and reinsurance undertakings should be incentivised to build resilience for crisis situations. Where insurance and reinsurance undertakings take into account the effect of credit spread movements on the volatility adjustment in their internal model, while also considering the effect of credit spread movements on the macro volatility adjustment, this could undermine in a severe manner any incentives to build up resilience for crisis situations. Insurance and reinsurance undertakings should therefore be prevented from taking into account a macro volatility adjustment in their internal model.

(47) National supervisory authorities should be able to collect relevant macroprudential information on the investment strategy of undertakings, analyse it together with other relevant information that might be available from other market sources, and incorporate a macroprudential perspective in their supervision of undertakings. This could include supervising risks related to specific credit cycles, economic downturns and collective or herding behaviour in investments.

(48) Directive 2009/138/EC provides for an extension of the recovery period in cases of breaches of the Solvency Capital Requirement where the European Insurance and Occupational Pensions Authority (EIOPA) has declared the existence of exceptional adverse situations. The declarations can be made following requests by national supervisory authorities, who are required to consult the European Systemic Risk Board (ESRB) where appropriate before the request. The consultation with the ESRB in a decentralised manner by national supervisory authorities is less efficient than a consultation with the ESRB in a centralised manner by EIOPA. In order to ensure an efficient process, it should be EIOPA, and not the national supervisory authorities, that consults the ESRB before the declaration of the existence of exceptional adverse situations, where the nature of the situation allows such prior consultation.

(49) Directive 2009/138/EC requires insurance and reinsurance undertakings to inform the supervisory authority concerned immediately where they observe a failure to comply, or a risk of non-compliance in the following three months, with the Minimum Capital Requirement. However, that Directive does not specify when the non-compliance with the Minimum Capital Requirement or the risk of non-compliance in the following three months can be observed and undertakings could delay informing supervisory authorities until the end of the relevant quarter when the calculation of the Minimum Capital Requirement to be formally reported to the supervisory authority takes place. In order to ensure that supervisory authorities receive timely information and are able to take necessary action, insurance and reinsurance undertakings should be required to immediately inform the supervisory authorities of a failure to comply with the Minimum Capital Requirement or a risk of non-compliance also where this has been observed on the basis of estimations or calculations between two dates of official calculations of the Minimum Capital Requirement, in the relevant quarter.

(50) The protection of the interests of insured persons is a general objective of the prudential framework that should be pursued by competent supervisory authorities at every stage of the supervisory process, including in case of breaches or likely breaches of requirements by insurance or reinsurance undertakings that may give rise to the withdrawal of authorisation. That objective should be pursued before the withdrawal of authorisation, and in consideration of any legal implication for insured persons that may derive from it, after the withdrawal of authorisation as well.

(51) National supervisory authorities should be equipped with tools to prevent the materialisation of risks for the financial stability in insurance markets, limit pro-cyclical behaviours by insurance and reinsurance undertakings and mitigate negative spillover effects within the financial system and into the real economy.

(52) Recent economic and financial crises, in particular the crisis ensuing from the Covid-19 pandemic, have demonstrated that a sound liquidity management by insurance and reinsurance undertakings can prevent risks for the stability of the financial system. For this reason, insurance and reinsurance undertakings should be required to strengthen liquidity management and planning, especially in the context of adverse situations affecting a large part or the totality of the insurance and reinsurance market.

(53) Whenever undertakings with particularly vulnerable profiles, such as those having liquid liabilities or holding illiquid assets, or with liquidity vulnerabilities which can affect the overall financial stability, do not appropriately remedy the situation, national supervisory authorities should be able to intervene to reinforce their liquidity position.

(54) Supervisory authorities should have the necessary powers to preserve the solvency position of specific insurance or reinsurance undertakings during exceptional situations such as adverse economic or market events affecting a large part or the totality of the insurance and reinsurance market, in order to protect policyholders and preserve financial stability. Those powers should include the possibility to restrict or suspend distributions to shareholders and other subordinated lenders of a given insurance or reinsurance undertaking before an actual breach of the Solvency Capital Requirement occurs. Those powers should be applied on a case-by-case basis, respect common risk-based criteria and not undermine the functioning of the internal market.

(55) As the restriction or the suspension of distribution of dividends and other bonuses would affect, even on a temporary basis, the rights of shareholders and other subordinated creditors, supervisory authorities should duly take into account the principle of proportionality and necessity when taking such measures. Supervisory authorities should also ensure that none of the measures adopted entails disproportionate adverse effects on the whole or parts of the financial system in other Member States or in the Union as a whole. In particular, supervisory authorities should only restrict capital distributions within an insurance and reinsurance group in exceptional circumstances, and when duly justified to preserve the stability of the insurance market and of the financial system as a whole.

(56) Recent failures of insurance and reinsurance undertakings operating cross-border have underlined the need for supervisory authorities to be better informed on activities conducted by undertakings. Therefore, insurance and reinsurance undertakings should be required to notify the supervisory authority of their home Member State any material changes affecting their risk profile in relation to their ongoing cross-border insurance activities, and that information should be shared with the supervisory authorities of the host Member States concerned.

(57) Under Directive 2009/138/EC, as amended by Directive (EU) 2019/2177 of the European Parliament and of the Council ²⁵ , EIOPA has the power to set up and coordinate collaboration platforms to enhance collaboration between the relevant supervisory authorities where an insurance or reinsurance undertaking carries out, or intends to carry out, activities which are based on the freedom to provide services or the freedom of establishment. However, in view of the complexity of the supervisory issues dealt with within those platforms, in several cases, national supervisory authorities fail to reach a common view on how to address issues related to an insurance or reinsurance undertaking which is operating on a cross-border basis. In the event that the supervisory authorities involved in the collaboration platforms cannot reach an agreement on issues related to an insurance or reinsurance undertaking which is operating on a cross-border basis, EIOPA should have the power to settle the disagreement in accordance with Article 19 of Regulation (EU) No 1094/2010.

(58) Under Directive 2009/138/EC, insurance or reinsurance undertakings are not required to provide information on the conduct of their business to the supervisory authorities of the host Member States in a timely manner. Such information may only be obtained by requesting it to the supervisory authority of the home Member State. However, such an approach does not ensure access to information in a reasonable period of time. Therefore, the supervisory authorities of the host Member States, like the supervisory authority of the home Member State, should also have the power to directly request information to insurance or reinsurance undertakings in a timely manner.

(59) Where an insurance or reinsurance undertaking carries out significant cross-border activities in a host Member State, the supervisory authority of that Member State should have the power to request basic information from the supervisory authority of the home Member State on the solvency position of that insurance or reinsurance undertaking. Where the supervisory authority of the host Member State has serious concerns regarding that solvency position, it should have the power to request the carrying out of a joint on-site inspection together with the supervisory authority of the home Member State, where there is a significant non-compliance with the Solvency Capital Requirement. EIOPA should be invited to participate. In this regard, EIOPA should indicate as soon as practicable whether it intends to participate. Where supervisory authorities disagree on the opportunity to carry out a joint on-site inspection, EIOPA should have the power to settle the disagreement in accordance with Article 19 of Regulation (EU) No 1094/2010.

(60) In order to be identified as an insurance holding company, a parent company should in particular have, as its main business, the acquisition and holding of participations in subsidiary undertakings, where those subsidiary undertakings are exclusively or mainly insurance or reinsurance undertakings, or third‑country insurance or reinsurance undertakings. Currently, supervisory authorities have different interpretations as to the meaning of “exclusively or mainly” in that context. Therefore, a clarification of that concept should be provided, similar to the clarification provided in Regulation (EU) No 575/2013, as amended by Regulation (EU) 2019/876 of the European Parliament and of the Council ²⁶ , for the banking sector. Subsidiary undertakings should be considered as “mainly insurance or reinsurance undertakings or third-country insurance or reinsurance undertakings” where such firms represent more than 50% of the insurance holding company’s equity, consolidated assets, revenues, personnel or other indicator considered relevant by the supervisory authority.

(61) In some cases, several insurance and reinsurance undertakings form a de facto group and behave as such, although they do not meet the definition of a group as set out in Directive 2009/138/EC. Therefore, Title III of that Directive does not apply to such insurance and reinsurance undertakings. In such cases, in particular for horizontal groups with no capital links between different undertakings, the group supervisors should have the power to identify the existence of a group. Objective criteria should also be provided to make such an identification.

(62) Insurance and reinsurance groups are free to decide on the specific internal arrangements, distribution of tasks and organisational structure within the group as they see fit to ensure compliance with Directive 2009/138/EC. However, in a few cases, such arrangements and organisational structures can jeopardise effective group supervision. Therefore, group supervisors should have the power - in exceptional circumstances and after consulting EIOPA and the other supervisory authorities concerned - to require changes to those arrangements or organisational structures. Group supervisors should duly justify their decision and explain why the existing arrangements or structures obstruct and jeopardise effective group supervision.

(63) Group supervisors may decide to exclude an undertaking from group supervision, in particular when such an undertaking is deemed of negligible interest with respect to the objectives of group supervision. EIOPA has noted diverging interpretations on the criterion of negligible interest, and has identified that, in some cases, such exclusions result in complete waivers of group supervision or in supervision at the level of an intermediate parent company. It is therefore necessary to clarify that such cases should only occur in very exceptional circumstances and that group supervisors should consult EIOPA before making such decisions. Criteria should also be introduced so that there is more clarity as to what should be deemed as negligible interest with respect to the objectives of group supervision.

(64) There is a lack of clarity regarding the types of undertakings for which Method 2, namely a deduction and aggregation method as defined in Article 233 of Directive 2009/138/EC, may be applied when calculating group solvency, which is detrimental to the level-playing field in the Union. Therefore, it should be clearly specified which undertakings may be included in the group solvency calculation through Method 2. Such method should only apply to insurance and reinsurance undertakings, third‑country insurance and reinsurance undertakings, undertakings belonging to other financial sectors, mixed financial holding companies, insurance holding companies, and other parent undertakings the main business of which is to acquire and hold participations in subsidiary undertakings, where those subsidiary undertakings are exclusively or mainly insurance or reinsurance undertakings, or third-country insurance or reinsurance undertakings.

(65) In some insurance or reinsurance groups, an intermediate parent undertaking other than an insurance or reinsurance undertaking or a third-country insurance or reinsurance undertaking acquires and holds participations in subsidiary undertakings where those undertakings are exclusively or mainly third-country insurance or reinsurance undertakings. Under current rules, if those intermediate parent undertakings do not hold a participation in at least one insurance or reinsurance subsidiary undertaking which has its head office in the Union, they are not treated as insurance holding companies for the purpose of group solvency calculation, although the nature of their risks are very similar. Therefore, rules should be amended so that such holding companies of third-country insurance or reinsurance undertakings are treated in the same manner as insurance holding companies for the purpose of group solvency calculation.

(66) Directive 2009/138/EC, and Commission Delegated Regulation (EU) 2015/35 ²⁷ provide four methods of inclusion in the group solvency calculation of undertakings belonging to other financial sectors, including methods 1 and 2 set out in Annex I to Directive 2002/87/EC. This leads to inconsistent supervisory approaches and an uneven playing field, and generates undue complexity. Therefore, rules should be simplified so that undertakings belonging to other financial sectors always contribute to the group solvency by using the relevant sectoral rules regarding the calculation of own funds and capital requirements. Those own funds and capital requirements should simply be aggregated to the own funds and capital requirements of the insurance and reinsurance part of the group.

(67) Under current rules, participating insurance and reinsurance undertakings are granted limited possibilities to use simplified calculations for the purpose of determining their group solvency when method 1, namely accounting consolidation-based method, is used. This generates disproportionate burden, in particular when groups hold participations in related undertakings that are very small in size. Therefore, subject to prior supervisory approval, participating undertakings should be allowed to integrate related undertakings whose size is immaterial in their group solvency by using simplified approaches.

(68) The concept of encumbrance which should be taken into account when classifying own-fund items into tiers is not specified. In particular, it is unclear how that concept applies to insurance holding companies and mixed financial holding companies which do not have policyholders and beneficiaries as direct clients. Therefore, minimum criteria should be introduced to allow for the identification of cases where an own-fund item issued by an insurance holding company or a mixed financial holding company is clear of encumbrances.

(69) The scope of the undertakings which should be taken into account when calculating the floor for the group Solvency Capital Requirement should be consistent with the scope of undertakings contributing to the eligible own funds that are available to cover the consolidated group Solvency Capital Requirement. Therefore, when calculating the floor, third-country insurance and reinsurance undertakings, insurance holding companies, third‑country insurance holding companies and mixed financial holding companies should be taken into account.

(70) The formula for calculating the minimum consolidated group Solvency Capital Requirement may lead to situations where that minimum is close, or even equal, to the consolidated group Solvency Capital Requirement. In such cases, non-compliance with that minimum may occur although compliance with the consolidated group Solvency Capital Requirement is ensured. Such unintended consequence should be avoided. Therefore, the calculation formula should be amended so that, similarly to individual insurance and reinsurance undertakings, the minimum consolidated group Solvency Capital Requirement is never higher than 45% of the consolidated group Solvency Capital Requirement.

(71) For the purpose of group solvency calculation, insurance holding companies and mixed financial holding companies should be treated as insurance or reinsurance undertakings. This implies calculating notional capital requirements for such undertakings. However, such calculations should never imply that insurance holding companies and mixed financial holding companies are required to comply with those notional capital requirements at the individual level.

(72) There is no legal provision specifying how to calculate group solvency when a combination of Method 1 and Method 2 is used. This leads to inconsistent practices and uncertainties, in particular in relation to the way of calculating the contribution to the group Solvency Capital Requirement of insurance and reinsurance undertakings included through Method 2. Therefore, it should be clarified how group solvency is to be calculated when a combination of methods is used. In order to avoid material increases in capital requirements, it should be clarified that, for the purpose of calculating the consolidated group Solvency Capital Requirement, no equity risk capital charge is to be applied to such holdings. For the same reason, currency risk charge should only be applied to the value of those holdings that is in excess of the Solvency Capital Requirements of those related undertakings. Participating insurance or reinsurance undertakings should be allowed to take into account diversification between that currency risks and other risks underlying the calculation of the consolidated group Solvency Capital Requirement.

(73) Currently, group supervisors may determine thresholds above which intra-group and risk concentration are deemed significant based on Solvency Capital Requirements, technical provisions, or both. However, other risk-based quantitative or qualitative criteria, for instance eligible own funds may also be appropriate for determining the thresholds. Therefore, group supervisors should have more flexibility when defining a significant intra-group transaction or a significant risk concentration.

(74) Group supervisors may miss important information on intra-group transactions that are not required to be reported under current rules, in particular those involving third-country insurance and reinsurance undertakings, insurance holding companies and mixed financial holding companies. Therefore, the definition of ‘intra-group transactions to be reported’ should be reviewed. In addition, group supervisors should have the power to tailor the definition of ‘intra-group transactions to be reported’ so that it better fits the specificities of each group.

(75) Insurance holding companies and mixed financial holding companies can be parent undertakings of insurance or reinsurance groups. In that case, the application of group supervision is required on the basis of the consolidated situation of such holding companies. As the insurance or reinsurance undertakings controlled by such holding companies are not always able to ensure compliance with the requirements on group supervision, it is necessary to ensure that group supervisors have the appropriate supervisory and enforcement powers to ensure compliance by groups with Directive 2009/138/EC. Therefore, similar to amendments to Directive 2013/36/EU of the European Parliament and of the Council ²⁸ introduced by Directive (EU) 2019/878 of the European Parliament and of the Council ²⁹ for credit and financial institutions, group supervisors should have a minimum set of powers over holding companies, including the general supervisory powers that are applicable to insurance and reinsurance undertakings for the purpose of group supervision.

(76) Where insurance and reinsurance undertakings are part of a group whose parent undertaking has its head office in a third country that is not deemed equivalent or temporarily equivalent in accordance with Article 260 of Directive 2009/138/EC, exercising group supervision is more challenging. Group supervisors may decide to apply so-called “other methods” in accordance with Article 262 of that Directive. However, those methods are not clearly defined and the objectives that those other methods should achieve are uncertain. Therefore, the purpose of the other methods should be further specified, including a minimum set of measures that group supervisors should consider.

(77) Commission Delegated Regulation (EU) 2019/981 ³⁰ introduced a preferential treatment for long-term investments in equity. The duration-based equity risk submodule, which also aims at reflecting the lower risk of investing over a longer time horizon, but is of very limited use in the Union, is subject to criteria that are stricter than those applicable to long-term equity investments. Therefore, the new prudential category of long-term equity investments appears to obviate the need for the existing duration-based equity risk submodule. As there is no need to keep two distinct preferential treatments which have the same objective of rewarding long-term investments, the duration-based equity risk submodule should be deleted. However, in order to avoid a situation whereby those amendments lead to adverse effects, a grandfathering clause should be provided for with respect to insurers which are currently applying the duration-based equity risk submodule.

(78) Achieving the environmental and climate ambitions of the Green Deal requires the channelling of large amounts of investments from the private sector, including from insurance and reinsurance companies, towards sustainable investments. The provisions of Directive 2009/138/EC on the capital requirements should not impede sustainable investments by insurance and reinsurance undertakings but should reflect the full risk of investments in environmentally harmful activities. While there is not sufficient evidence at this stage on risk differentials between environmentally or socially harmful and other investments, such evidence may become available over the next years. In order to ensure an appropriate assessment of the relevant evidence, EIOPA should monitor and report by 2023 on the evidence on the risk profile of environmentally or socially harmful investments. Where appropriate, EIOPA’s report should advise on changes to Directive 2009/138/EC and to the delegated and implementing acts adopted pursuant to that Directive. EIOPA may also inquire whether it would be appropriate that certain environmental risks, other than climate change-related, should be taken into account and how. For instance, if evidence so suggests, EIOPA could analyse the need for extending scenario analyses as introduced by this Directive in the context of climate change-related risks to other environmental risks.

(79) Climate change is affecting and will affect at least over the next decades the frequency and severity of natural catastrophes which are likely to further aggravate due to environmental degradation and pollution. This may also change the exposure of insurance and reinsurance undertakings to natural catastrophe risk and render invalid the standard parameters for natural catastrophe risk set out in Delegated Regulation (EU) 2015/35. In order to ensure that there is no persistent discrepancy between the standard parameters for natural catastrophe risk and the actual exposure of insurance and reinsurance companies to such risks, EIOPA should review regularly the scope of the natural catastrophe risk module and the calibrations of its standard parameters. For that purpose, EIOPA should take into account the latest available evidence from climate science and, where discrepancies are found, it should submit an opinion to the Commission accordingly.

(80) The requirements set out in Article 308b(12) of Directive 2009/138/EC should be amended to ensure consistency with the banking framework and a level playing field in the treatment of exposures to Member States' central governments or central banks denominated and funded in the domestic currency of any Member State. For this purpose, a grandfathering regime for such exposures should be introduced to exempt the relevant exposures from spread and market concentration risk capital charges, provided that the exposures were incurred before 1 January 2020.

(81) In some cases, insurance or reinsurance groups heavily rely on the use of the transitional measure on the risk-free interest rates and of the transitional measure on technical provisions. This may misrepresent the actual solvency position of the group. Therefore, insurance or reinsurance groups should be required to disclose the impact on their solvency position of assuming that own funds stemming from those transitional measures are not available to cover the group Solvency Capital Requirement. Supervisory authorities should also have the power to take appropriate measures so that the use of the measures appropriately reflects the financial position of the group. Those measures should however not affect the use by related insurance or reinsurance undertakings of those transitional measures when calculating their individual Solvency Capital Requirement.

(82) Directive 2009/138/EC provides for transitional measures for the risk-free interest rates and on technical provisions which are subject to supervisory approval and which apply with respect to contracts that give rise to the insurance and reinsurance obligations that were concluded before 2016. While the transitional measures should encourage undertakings to move as timely as possible towards compliance with that Directive, the application of transitional measures approved for the first time long after 2016 are likely to slow down the path to compliance with that Directive. Such approval of the use of those transitional measures should therefore be restricted to cases where an insurance or reinsurance undertaking becomes for the first time subject to the rules of Directive 2009/138/EC and, where an undertaking has accepted a portfolio of insurance or reinsurance contracts and the transferring undertaking applied a transitional measure with respect to the obligations relating to that portfolio, before the transfer.

(83) The United Kingdom became a third country on 1 February 2020 and Union law ceased to apply to and in the United Kingdom on 31 December 2020. Given that Directive 2009/138/EC has several provisions that address the specifics of particular Member States, where such provisions specifically concern the United Kingdom, they have become obsolete and should therefore be deleted.

(84) Directive 2009/138/EC should therefore be amended accordingly.