2020 review of the Solvency II Directive

Upon its entry into force, the Solvency II Directive included two review clauses:

• In 2018, for the sole delegated regulation (level 2).
• In 2020, for the directive (level 1) and the delegated regulation (level 2).

In December 2023, the Trilogue negotiations between the European Parliament, Commission and Council agreed on the review of Solvency II, allowing for the adoption of Level 1 amendments (the Directive). The European Commission then published draft Level 2 amendments (delegated acts) in July 2025, providing technical details to the directive. The Addactis experts offer you an analysis of the Pillar 1 major changes, definitely adopted at Level 1 and still draft at Level 2.

In this article, you will find these 5 key points:

1. Extrapolation of the risk-free rate curve
2. Volatility Adjustment « VA »)
3. Risk Margin (« RM »)
4. Standard Formula: Market SCR and correlations
5. Standard Formula: Interest rate SCR
6. Standard Formula: Equity SCR and symmetric adjustment

In December 2023, the trilogue negotiations between the European Parliament, Commission and Council reached an agreement on the Solvency II Directive. The reviewed directive was then formally adopted by MEPs in April 2024 and published in the Official Journal of the European Union (OJEU) in January 2025. The amended directive entered into force 20 days after its publication and the measures will be applicable two years later, i.e. from 1 January 2027 for the first quarter of 2027 closings. The European Commission has yet to adopt the amendments to the delegated acts. To this end, it published a draft text for consultation in July 2025.

Objective: To take into account liquid market data beyond the first extrapolation point in order to benefit from an enhanced best estimate.

Themes:

• First Smoothing Point (FSP)

Replaces the current Last Liquid Point (LLP). It corresponds to the first maturity beyond which interest rates will start converging towards the UFR.

• Volatility Adjustment (VA)

Added on top of the extrapolated part of the curve (beyond the FSP).

• Convergence Parameter

The UFR weight should correspond to 77,5% of the extrapolated rates 40 years after the FSP as a minimum. According to the draft regulated acts, a new convergence formula for risk free rates towards the UFR with a convergence factor ”a” set at 11% for the Euro.

​Objective: Redefine the VA to better mitigate the impact of observed spread movements on insurance liabilities.

Themes:

• Reference Portfolio Composition

Only composed of European debt instruments.

• Application Ratio

Increases from 65% to 85%.

• Sensitivity Ratio for assets and liabilities

Additional ratio specific to every undertaking to allow for differences in sensitivities between assets and liabilities, applied to the VA in addition to the application ratio.

• Macro-Economic VA

Will replace the actual national component with a correction factor linked to exposure specific to each country.

Objective: To take into account the reduction of the correlation between risks throughout time and reduce sensitivity of the Risk Margin to interest rates variations.

Themes:

• Cost of Capital

New CoC fixed at 4,75% at level 1. The European Commission could review it at level 2 while staying in a 4% to 5% corridor.

• Introduction of a time-dependent parameter

This exponentially decreasing parameter λ^t aims at introducing a risk dependency evolution over time. Its value will drive the decreasing speed and will be confirmed at Level 2. The draft regulated acts propose a level of 0,96 for λ with a 50% minimum for λ^t

Objective: to reduce the correlation between a reduction in interest rates and a change in credit spreads.

Themes: this correlation factor would go down from 50% et 25% in the draft regulated acts.

Objective: To better take into consideration the recent interest rate environment which could lead to an understatement of the SCR. Still at draft stage in the regulated acts.

Themes:

• Increased Capital Requirements relative to the interest rate shocks

Greater spread of both upward and downward shocks with the introduction of a shock on negative rates.

• Risk Correlation

Reduction in correlation between spread risk and interest rate down SCR from 50% to 25%.

• Transitional Phase

None.

Objective: Provide room for manœuvre to undertakings so that they can contribute to the financing of real economy.

Themes:

• Criteria for the eligibility to Long-Term Equity Investments (LTEI)

Revised criteria to facilitate access to the derogatory prudential regime and expand the list of eligible assets. Reduction of minimum holding from 10 to 5 years.

• Equity risk sub-module based on duration

Removal of the sub-module.

• Equity Dampener

Increase the upper and lower bounds of the dampener from +/- 10% to +/- 13%, enhancing the counter-cyclical effect of the measure.

The ongoing Solvency II review is expected to result in significant changes for both L&H and P&C stakeholders (risk margin, interest rate SCR, LTEI, and equity dampener), and other focused on long-term guarantees (interest rate curve extrapolation and volatility adjustment).

Addactis experts are available to assist in understanding the technical issues, the different positions of co-legislators, and the potential implementation timeline.

Contact us to better understand how to tackle Solvency II challenges within your organisation.

Thibaut GILLIARD
Deputy Head of Modeling & Risk Health