Solvency II Review: What Changes to Expect in 2026

Overview

The Solvency II framework is undergoing its most significant review since implementation. Following extensive consultation and political negotiation, a package of reforms is set to take effect through 2026 and beyond. This article examines the key changes and their practical implications for insurers.

Key Changes to the Framework

Risk Margin Reform

Perhaps the most impactful change is the revision to the risk margin calculation. The introduction of a lambda parameter that decays over time will significantly reduce risk margins for long-duration business, particularly affecting life insurers with substantial annuity portfolios. Early estimates suggest reductions of 30-40% for some firms.

Interest Rate Risk

The treatment of interest rate risk is being revised to address concerns about the extrapolation of the risk-free rate curve. The last liquid point and convergence period are being reconsidered, with implications for how insurers calculate their technical provisions and manage their asset-liability positions.

Matching Adjustment Reforms

The matching adjustment provisions are being clarified and in some areas expanded. This includes greater flexibility around eligible assets and a more principles-based approach to demonstrating that cash flows are matched. However, the fundamental spread calculation methodology remains largely unchanged.

Proportionality Measures

Significant enhancements to proportionality are being introduced, including a new category of "small and non-complex undertakings" with reduced reporting requirements. This should provide relief for smaller insurers while maintaining appropriate prudential standards.

Implementation Timeline

Practical Implications

Insurers should begin preparing now for these changes. Key areas requiring attention include:

• Quantifying the impact of risk margin changes on balance sheets and capital positions
• Reviewing asset-liability management strategies in light of interest rate methodology changes
• Assessing eligibility for enhanced proportionality measures
• Updating internal models and standard formula calculations

How Wizard and Company Can Help

Our team can support you in understanding and preparing for these regulatory changes. From impact assessments to implementation planning, we provide the independent expertise you need to navigate this evolving landscape.