The revision of Solvency II represents the most significant adjustment to Europe’s insurance prudential framework since its introduction. While designed to refine capital risk sensitivity within the European Union (EU), the reform will also influence how international insurance groups allocate capital, manage balance sheets and interact with multiple regulatory regimes.
The revision of the Solvency II Directive marks a recalibration of the European insurance prudential framework, aimed at refining risk sensitivity without altering its fundamental architecture. Although its legal application is confined to EU reinsurers, the revised framework carries broader strategic implications for international insurance groups, influencing group-wide supervision, capital allocation strategies, internal model design and the management of interactions with non-EU regulatory regimes.
As the framework moves towards application in 2027, early preparation will be key to effective supervisory engagement and informed capital decisions. Outcomes will remain highly dependent on insurers’ individual balance sheet characteristics and the reform is expected to lead to heterogeneous solvency impacts across insurers, rather than a uniform market effect.
In this article, we explore the Pillar 1, 2 and 3 changes, the key drivers of solvency ratio impacts and the preparatory actions that support governance, processes and solvency outcomes ahead of formal implementation.
Regulatory context and overarching supervisory objectives
The amended Directive, published on 8 January 2025, together with the revised Delegated Regulation (2026/269 amending regulation 2015/35), published on 18 February 2026 will apply no later than 30 January 2027. The revision follows the European Insurance and Occupational Pension Authority’s technical advice and reflects supervisory experience accumulated since Solvency II entered into force.
Across the three pillars, the revision is underpinned by a set of identifiable supervisory objectives:
Refining the risk sensitivity of capital requirements while reducing sources of non-risk-based volatility.
Facilitating long-term investment strategies consistent with insurers’ liability profiles.
Strengthening the treatment of emerging and systemic risks, including climate, cyber and liquidity risks.
Enhancing the proportionality, credibility and consistency of solvency disclosures.
These objectives provide the analytical lens through which the pillar specific changes can be interpreted.
Pillar 1 – recalibrating capital requirements to better reflect long-term insurance risks
Under Pillar 1, the revision aims to improve the alignment between capital requirements and insurers’ actual risk profiles, particularly for long-term business, while limiting excessive balance sheet volatility. Supervisory attention is increasingly focused on the internal consistency between valuation assumptions, asset liability management and capital outcomes. The revised framework places greater emphasis on insurers’ own balance sheet characteristics, which may lead to differentiated impacts across undertakings and groups:
The methodology for extrapolating the risk-free interest rate curve beyond the first extrapolation point of 20 years, is revised to better reflect long-term interest rate expectations. Given the potential material impact on long duration liabilities, a transitional mechanism until 2032 allows a gradual application of the new approach.
The volatility adjustment (VA) is significantly modified. Its calibration now incorporates entity specific parameters reflecting the sensitivity of assets and liabilities to interest rate movements. In addition, the general application ratio is increased from 65% to 85% and the illiquidity component is derived from the insurer’s own bond portfolio. These changes are intended to reduce reliance on standardised assumptions and to strengthen the link between VA benefits and effective Asset Liability management (ALM) practices.
The risk margin is reduced through a decrease in the cost of capital rate from 6% to 4.75%, combined with the introduction of a time dependent parameter. The objective is to lower the level and volatility of the risk margin, particularly for long-term obligations, while maintaining a prudent valuation framework.
The interest rate risk module within the standard solvency capital requirement (SCR) formula is recalibrated, notably to accommodate negative interest rates and a wider range of stressed scenarios. The resulting impact on capital requirements will depend on the prevailing interest rate environment at the time of implementation and, of course, of the duration gap between assets and liabilities.
Finally, the framework for long-term equity investments is clarified and broadened. The revised criteria aim to facilitate the application of the reduced equity shock to qualifying portfolios, subject to clearly defined holding period and risk management conditions.
“The revised Pillar 1 further anchors solvency outcomes in the insurer’s actual balance sheet profile — especially portfolio duration and asset-liability matching — while the reduction in the risk margin releases capital and lowers mechanical volatility. Updates to the SCR increase sensitivity to duration gaps and ALM choices, with potential offsetting effects on the long-term equity portfolios. Consequently, solvency ratios, after moving significantly when the regulation comes into force, are likely to vary more across interest rate cycles. Decisions will have to rely on forward looking ALM analyses rather than point-in-time calibrations only.”
Grégory Boutier
Partner, Forvis Mazars, France
Pillar 2 – Strengthening forward-looking risk management and supervisory oversight
Pillar 2 amendments reinforce supervisory expectations regarding forward-looking risk assessment, resilience and governance effectiveness. The focus is on ensuring that material risks are systematically identified, assessed and integrated into strategic and capital planning processes, rather than treated as isolated compliance exercises:
Supervisory authorities are granted enhanced tools to assess governance arrangements and intervene where deficiencies are identified.
The Own Risk and Solvency Assessment (ORSA) is expanded to include macroprudential considerations and resilience testing. While the ORSA remains an annual requirement for most insurers, eligible small and non-complex undertakings may perform it biennially, subject to defined conditions.
The revised framework explicitly requires the integration of climate-related risks into the ORSA and strategic planning. Insurers must assess climate risk exposure at least once every three years and define two long-term climate scenarios differentiated by temperature pathways. This formalises supervisory expectations regarding the financial materiality of climate risk.
Cyber risk is explicitly recognised as a central operational risk, reflecting its relevance for insurers’ operational resilience.
Governance requirements are strengthened through the obligation to implement diversity policies for administrative, management and supervisory bodies. Insurers must notify supervisory authorities of changes in key function holders, and authorities may require the removal of individuals who do not meet suitability requirements.
Supervisory intervention powers are aligned with the Insurance Recovery and Resolution Directive (IRRD). The introduction of liquidity risk management plans reflects increased supervisory focus on liquidity preparedness, including under stressed conditions.
“The Pillar 2 revision tightens the link between risk analysis and action. It requires insurers to show that forward-looking assessments, across ORSA, liquidity and sustainability, are integrated into strategic planning and actually drive capital, reinsurance and liquidity decisions when conditions change. Supervisory scrutiny will focus less on the existence of frameworks and more on the timeliness, coherence and effectiveness of management responses under stress, making Pillar 2 a discipline of execution rather than documentation.”
Alice Thou
Partner, Forvis Mazars, France
Pillar 3 – Increasing the reliability and auditability of solvency disclosures
Under Pillar 3, the revision seeks to enhance the credibility and consistency of publicly disclosed solvency information. Supervisors place increased emphasis on the reliability of published data as a foundation for market discipline and stakeholder confidence:
A minimum external audit requirement is introduced for the Solvency II balance sheet included in the Solvency and Financial Condition Report (SFCR), at both solo and group level, with exemptions for small and non-complex undertakings. This formalises expectations regarding documentation, internal controls and methodological transparency.
To accommodate audit requirements, reporting deadlines are extended: SFCR and Regular Supervisory Report deadlines by four weeks and quantitative reporting template deadlines by two weeks. The SFCR structure is revised to improve clarity and usability.
Proportionality measures are expanded for eligible undertakings, including simplified modelling approaches, more flexible governance arrangements and reduced reporting scope, subject to sustained compliance with eligibility criteria.
“By making parts of Solvency II reporting subject to external audit, for the first time in some jurisdictions, Pillar 3 significantly raises the bar on the quality and credibility of disclosed solvency information. Insurers will need to demonstrate that their solvency figures are built on reliable data, well-controlled processes and consistent methodologies, comparable to those used for financial statements. Beyond compliance, this is an opportunity to strengthen confidence with supervisors, investors and business partners by showing that capital information is robust, transparent and trustworthy.”
Maxime Simoen
Partner, Forvis Mazars, France
Solvency ratio impacts: key drivers and outlook
The revision of Solvency II was initiated in 2020 with the objective of achieving overall neutrality at aggregate level through compensating calibrations. However, the macroeconomic environment has evolved significantly since then, notably with a sustained increase in interest rates since the end of 2021.
As a result, the effective impact on solvency ratios at the time of application will depend on prevailing market conditions and on insurers’ individual balance sheet characteristics. If current interest rate levels were to persist, the reform could, in aggregate, have a favourable effect for a number of insurers.
Certain changes, such as the revised extrapolation of the risk-free interest rate curve beyond 20 years, may exert downward pressure on own funds for insurers with long duration liabilities. These effects may be partially or fully offset by the reduction in the risk margin and the revised volatility adjustment.
At individual and group level, outcomes will remain highly dependent on liability structure, asset composition, asset liability matching and investment strategy. As a result, the reform is expected to lead to heterogeneous solvency impacts across insurers, rather than a uniform market effect.
Preparing for the entry into force of the revised framework
With application no later than January 2027, insurers are expected to assess early how the revised framework will affect governance, processes and solvency outcomes. From a supervisory standpoint, early preparation helps embed the new requirements into forward-looking management and decision making.
Preparatory work typically focuses on understanding how key metrics, particularly the solvency ratio, may respond to changing market conditions. This analysis is used to support decisions on risk appetite, capital planning and profitability, and is expected to be reflected in ORSA processes and strategic planning ahead of formal implementation.
Some insurers may also review optimisation options, such as adjustments to asset liability management or the use of long-term equity investments, considering changes to the risk-free rate curve, the volatility adjustment and the interest rate SCR.
At the same time, the revised framework strengthens expectations around the robustness of risk management, especially for climate and cyber risks. For climate risk, supervisors increasingly expect consistency across Solvency II, SFDR and the corporate sustainability reporting directive, which may require more centralised governance and data arrangements.
The revised volatility adjustment, which is more sensitive to asset liability mismatches, further highlights the need for strong governance of duration risk. Finally, the introduction of a mandatory external audit of the Solvency II balance sheet in the SFCR will require more formalised processes and documentation, particularly for insurers outside international financial reporting standards regimes. Early preparation should ease the first audited balance sheet review for the 2027 financial year.
International perspective: alignment and divergence
From a comparative perspective, the revised Solvency II framework continues to reflect a market consistent, balance sheet based approach, which differs structurally from regimes such as the U.S. risk-based capital framework, while remaining broadly aligned in objectives with the UK post-Brexit regime. Although several non-EU jurisdictions notably in Asia and Africa are progressing towards economic value-based frameworks, differences in design and supervisory application remain significant.
For non-EU insurance groups with EU operations, this implies a continued need to manage interactions between local capital regimes and Solvency II requirements, including at group level.
In practice, this exposure is primarily anchored in the EU perimeter, through full Solvency II application at solo level and, where relevant, at EU subgroup level, even where worldwide group supervision remains governed by non-EU frameworks.
As a result, non-EU parent groups must actively manage the articulation between homegroup capital metrics and Solvency II measures used in the EU, anticipate constraints on capital fungibility and intragroup transactions, as well as ensure that governance, capital planning and disclosures remain coherent from an EU supervisory perspective.
While the revised framework aims to reduce unnecessary duplication and improve proportionality, it confirms that Solvency II considerations may continue to shape groupwide decision-making beyond the EU perimeter, not as an extraterritorial requirement but as a structural constraint influencing how non-EU groups organise, capitalise and oversee their EU insurance operations.
Frequently asked questions:
What are the key changes in the Solvency II Directive revision for insurers?
The Solvency II revision recalibrates capital requirements, enhances risk sensitivity, updates interest‑rate and volatility adjustments, strengthens governance and increases transparency across Pillars 1–3 to improve supervisory consistency and insurer resilience.
How will the Solvency II capital requirements revision impact insurers’ solvency ratios?
Solvency impacts will vary widely depending on interest rates, liability duration and ALM practices. Revised curve extrapolation, volatility adjustment and reduced risk margin may raise or lower solvency ratios across insurers.
What should insurers do now to prepare for the updated Solvency II regulatory framework?
Insurers should assess solvency impacts early, update ORSA processes, reinforce climate and cyber risk management, adjust ALM strategies and prepare for mandatory external audit ahead of 2027 implementation.
