Proposed amendments to the EU's Solvency II framework could encourage European insurers to take on greater investment risk, according to a new analysis by Fitch Ratings.
The ratings agency said the European Commission's proposal to reduce capital requirements under Solvency II is mildly credit negative for the sector as it may underestimate spread risk and increase sensitivity to equity and credit market volatility.
The European Commission's plan aims to free up insurer capital to boost economic investment, support the green and digital transitions, enhance SME financing and improve international competitiveness. While policyholder protection remains a stated priority, Fitch estimated the average capital benefit from the reforms at 5% to 7% of insurers' solvency capital, with life insurers expected to gain more than non-life carriers.
Fitch also noted that life insurers are more likely to redeploy freed-up capital into higher-risk assets over time to stay competitive, while non-life insurers are expected to maintain more conservative portfolios.
Life sector stands to gain
A key component of the proposal involves adjustments to the risk margin calculation, notably through a lower cost of capital and the introduction of a "decay factor" that tapers future capital requirements. These measures would benefit life insurers with large savings back-books, while changes to the volatility adjustment and risk-free rate extrapolation are expected to have more neutral effects, according to Fitch.
However, the ratings agency warned that while the recalibration aims to reduce solvency volatility during short-term market stress, it could understate spread risk in stable conditions. This might encourage shifts into riskier or less liquid credit investments, such as private debt or real assets.
Insurers with strong capital positions are likely to manage this risk through prudent asset-liability matching, profit retention, and capital buffers, but those with weaker balance sheets could face rating pressure if market conditions deteriorate.
Heightened credit and counterparty risk exposure
The proposed updates also include more granular spread risk and concentration calibrations, along with enhanced “look-through” requirements for complex assets. Fitch said this will increase insurers’ capital sensitivity to credit migration, downgrades, and illiquidity premia.
Firms with greater allocations to private credit, real assets, and structured products may find it harder to align asset and liability cashflows during periods of stress and could face valuation uncertainty despite lower headline capital charges.
Implementation will be phased, with outcomes varying by jurisdiction and business mix as technical standards are finalised. The EU Parliament and Council have three months to review the delegated regulation, extendable by another three months. If approved, the changes will apply from Jan. 30, 2027, according to the note.
