Proposed changes to the EU’s Solvency II regime are fuelling debate over the balance between regulatory capital relief and the long-term resilience of the insurance sector, as policymakers push to unlock investment into the wider economy, according to a note from Moody’s Ratings.
The European Commission (EC) and European Parliament (EP) are seeking to use ongoing technical negotiations to ease capital requirements for insurers, with the goal of freeing up capital for economic investment.
However, Europe’s insurance regulator, the European Insurance and Occupational Pensions Authority (EIOPA), has warned that the current proposals risk undermining insurers’ capital positions while increasing their exposure to higher-risk assets.
The EC and EIOPA are in the process of drafting the delegated acts and technical standards that will define how Solvency II reforms are applied. While the overall framework was agreed in December 2023, the final legislative package, which is expected to come into force in 2027, will depend heavily on the technical detail, according to the note.
The insurance industry was widely expected to benefit from some degree of capital relief under the reform. But recent indications suggest the EC is pushing for deeper cuts than initially planned. Proposed changes include reducing the risk margin, which would boost insurers’ Own Funds, and lowering capital charges for long-term equity and selected securitisation investments.
In a European Parliament hearing on June 24, 2025, an EC representative said the reforms could increase insurers’ Own Funds by around €60 billion, arguing that this would strengthen the industry’s capacity to invest in the economy.
EIOPA, by contrast, has expressed concern that these changes could weaken insurers’ capital buffers and heighten systemic risk. EIOPA chair Petra Hielkema reiterated this position in an op-ed on 10 July, calling for greater caution.
While the reforms aim to encourage insurers to redirect capital into long-term, productive assets, Moody’s said there are doubts over whether listed insurers would respond as expected. Many continue to prioritise stable earnings and shareholder returns, with limited appetite for increased investment risk. Analysts suggest that these firms may retain excess capital or distribute it, rather than deploying it into infrastructure or other long-term exposures.
In contrast, mutual insurers and others not subject to shareholder pressure may be more likely to use additional capital for growth or asset diversification. However, the broader concern is that the reforms could lead to reduced capital levels and increased investment risk without significantly altering solvency ratios—posing potential risks to financial strength and policyholder protection.
The situation mirrors aspects of the UK’s own Solvency II overhaul, which also introduced incentives for long-term investment. But since implementation in 2024, UK insurers have made few material changes to their asset allocations or capital positions, reflecting a cautious approach to regulatory-driven investment strategies.
As negotiations continue, the insurance industry faces a critical test: whether the pursuit of economic policy goals will come at the cost of capital resilience, or whether a more measured approach can preserve financial stability while supporting growth.
