Solvency II Level 2 Review finalised: What insurers should focus on before 2027

At a glance

The European Commission has finalised the amendments to the Solvency II Delegated Regulation, following the July 2025 consultation and the publication of the revised Delegated Regulation on 29 October 2025. These changes complete the core implementation of the Solvency II review, sitting alongside the Solvency II Amending Directive, and apply from 30 January 2027.  Further changes in implementing and regulatory technical standards as well as EIOPA guidance will complete the picture over the coming months.

Insurers face a critical 12-month window to act. It is imperative to rapidly assess the implications of the Solvency II changes, set clear priorities, and drive decisive transformation across capital, reporting, governance, and investment strategy.

Background: What has just been finalised?

The Solvency II review has been delivered in two main parts. The Amending Directive updates the Level 1 legislation. It strengthens policyholder protection, updates supervisory tools including the Insurance Recovery and Resolution Directive (IRRD), supports long term investment and introduces a proportionate regime for small and non complex undertakings (SNCUs). It also embeds liquidity, sustainability and climate risk more explicitly within governance and risk management expectations.

The finalised Delegated Regulation updates Level 2. It provides the detailed rules needed to make the Level 1 changes operational. The Commission’s objectives include encouraging long-term equity and infrastructure investment, reducing unwarranted capital volatility, reinforcing proportionality and rationalising reporting while increasing the focus on sustainability.

The July 2025 consultation proposed calibration updates and reporting simplifications. These have been refined but broadly retained in the final text adopted in October 2025.

Key developments insurers should be aware of

Technical provisions and the risk margin

• The cost of capital rate used to calculate the risk margin is reduced from 6% to 4.75%. A new time dependent tapering factor is also introduced which progressively lowers risk margin requirements. The changes aim to reduce the risk margin’s sensitivity to interest rate movements and lead to a more stabilised balance sheet especially for long-term business.
• The methodology for the extrapolation of the risk-free yield curve has been updated by replacing the Last Liquid Point (LLP) with the First Smoothing Point (FSP) – set at 20 years for euro – and introducing a revised convergence approach to the Ultimate Forward Rate (UFR), enhancing the accuracy and stability of long-term insurance liability calculations.
• The volatility adjustment (VA) has been updated to better reflect fundamental spread movements and to reward strong asset liability management (ALM). The Credit Spread Sensitivity Ratio (CSSR) and adjustments to the risk correction were focal points of consultation feedback.
• Updates to the matching adjustment (MA) clarify diversification rules with other parts of the business and open MA eligibility for a wider range of assets, provided they meet risk management and matching criteria.
• Contract boundaries may be shortened where insurers have a legal right to reassess risk, aligning boundaries more closely with actual risk exposure.
• Expense assumptions and projections should align to Board decisions, such as closing to new business and not reflect the going concern.
• The revised framework also introduces simplified methodologies for valuing options and guarantees.

  Own funds and capital requirements

• An accrual-based method must be used to determine foreseeable dividends and distributions deducted from Own Funds and must be based on formal decisions or established distribution policies. There are also updates to how strategic participations and share buy-backs are accounted for within Own Funds.
• On the capital side, interest rate shocks are recalibrated to be parametrised across maturities rather than the current parallel shifts making the SCR more sensitive to the actual shape of the curve. There is also a reduced capital charge for equity risk associated with long-term equity investments fitting specific criteria. The correlation parameter between interest-rate risk and spread (credit) risk under downward shock scenarios is being lowered (from 50% to 25%). Securitisation capital rules have also been updated and aligned with the broader EU securitisation review.

Liquidity risk and macroprudential risk

• The reforms introduce requirements for mandatory Liquidity Risk Management Plans (LRMPs) for selected insurers and requirements for liquidity stress‑testing over the short, medium and long term.
• Macroprudential risk analyses will also need to be integrated into the ORSA and the internal risk framework.

Reporting, disclosure, and data expectations

• Reporting has been rationalised, but new climate and sustainability disclosures are being introduced.
• There are updates to the content and frequency of key reports such as the Solvency and Financial Condition Report (SFCR) and the Regular Supervisory Report (RSR).
• Firms will need to ensure that data, look through capabilities, reporting systems and processes can meet the updated templates from Q1 2027.

Group supervision and internal models

• The review provides clarifications on group solvency, the group minimum Solvency Capital Requirement (SCR), and the interaction with internal models.
• Supervisory expectations will also reflect the requirements of the Insurance Recovery and Resolution Directive (IRRD), particularly regarding recovery planning and group-level coordination.

Proportionality and SNCUs

• The revised framework embeds proportionality more clearly and introduces simplified expectations for SNCUs. The Delegated Regulation sets out thresholds, qualitative simplifications and reporting reductions to operationalise this.

What should be on insurers’ radar in the run up to Q1 2027?

4most sees six key areas where firms should now focus their efforts.

1 – Capital, ALM, and balance sheet strategy

Insurers should promptly assess how capital positions shift under the revised regulations, at a minimum considering the impact of key changes such as the risk margin, the VA and equity risk before carrying out a full balance sheet impact assessment. Strategic asset allocation should be revisited to understand how long-term equity, infrastructure and other eligible assets can now be used more effectively. Groups should evaluate how national supervisors will interpret the reforms and any implications for capital fungibility.

2 – Product, pricing, and guarantees

Long-term margins and a revised VA may create opportunities to refine product designs, guarantees and with-profits structures. Pricing and management actions must remain aligned with the revised technical provisions and capital metrics and must be clearly evidenced to supervisors.

3 – Governance, risk management, and sustainability

Risk appetite, limits and the ORSA framework need to reflect revised capital drivers and long-term investment strategies. Firms should prepare for liquidity governance and develop (or revise) liquidity risk management frameworks, policies for cash‑flow monitoring, stress‑testing, buffer liquidity, and certain firms will need to document them into formal Liquidity Risk Management Plans (LRMPs). Climate and sustainability risk should be embedded more clearly across underwriting, investments and scenario analysis. Boards and committees may require targeted training to ensure they can provide effective challenge.

4 – Reporting, data, and systems

Firms should perform a gap analysis against updated Quantitative Reporting Templates (QRTs) and the updated SFCR and RSR. The biggest challenges are likely to arise around data, particularly look-through, sustainability metrics and new equity classifications. Reporting changes need to be integrated with existing finance and data transformation programmes.

5 – Programme governance and regulatory engagement

Insurers should establish a cross functional change programme covering Actuarial, Risk, Finance, Investments, IT and Compliance. Early engagement with supervisors is essential, particularly for firms using internal models, applying the VA or seeking SNCU classification. A structured roadmap will be key to ensuring successful delivery.

6 – Proportionality and operating model design

Insurers should assess whether any entities meet the criteria for SNCUs and what this means for governance, reporting and the ORSA. Mapping existing processes is essential to identify where proportionality can simplify operations without undermining control.

How 4most can help

The Solvency II review brings meaningful change for insurers across capital, strategy, reporting and governance. The challenge is no longer understanding the direction of travel, but delivering the operational, technical and strategic changes required ahead of Q1 2027.

4most supports clients across the full lifecycle of Solvency II change, including:

• Quantifying the impact of the Level 1 and Level 2 changes
• Developing proportionate and efficient operating models
• Updating methodologies and internal models
• Enhancing reporting processes and data architecture
• Strengthening governance and Board understanding
• Supporting delivery through structured change programmes

Firms that act early will be best placed to benefit from the increased flexibility intended within the revised framework.

Get in touch

Send us an email if you are interested in learning more about how 4most can support your Solvency II strategy – info@4-most.co.uk.