Solvency II 2027: what the review really changes for reinsurance captives

Bertrand Segui (pictured), chief actuary, SRS Europe analyses the impact of the revised Solvency II framework on reinsurance captives.

Member states must adopt and publish the national transposition measures before the revised framework becomes applicable on 30 January 2027. Presented by the Commission and industry associations as a step forward for proportionality, the Solvency II review changes the rules applicable to reinsurance captives domiciled in the EU. Beyond the communication points, what does it actually change for actuarial steering, governance and the risk appetite of these structures? This article offers a technical and operational reading intended for key function holders, captive risk managers and boards of directors.

A reform, a timetable, a philosophy

The text pursues five objectives: improving the efficiency of the framework by encouraging long-term investment, strengthening the supervision of cross-border activities, simplifying regulation for small players, integrating climate risks and equipping supervisors with macro-prudential tools. For captives, the most structuring contribution is the formal recognition of a “small and non-complex undertaking” (SNCU) status, which captives can access under specific criteria distinct from those applied to conventional insurers.

The European Commission has adopted a delegated regulation (EU) 2026/269 amending Regulation (EU) 2015/35 due to apply from 30 January 2027. Certain effects, in particular on long-term commitments, will be phased in gradually until 2032, subject to the supervisor's prior agreement. While the Level 2 prudential amendments are now final, some implementing technical standards, reporting specifications and Level 3 guidance remain to be endorsed or finalised.

What actually changes for captives

SNCU status: a door in, not an automatic entitlement

A captive can be classified as an SNCU if it meets, over two consecutive financial years, a set of quantitative criteria: the share of premiums written in another member state below the lower of €20 million or 10% of total premium volume; exposure to market risk and certain counterparty risk components below 20% of investments; reinsurance accepted not exceeding 50% of annual premiums and compliance with the SCR. Additional criteria apply depending on the life/non-life split of the business.

For captive undertakings, certain general SNCU criteria are replaced by captive-specific conditions reflecting their intra-group business model. The insurance obligations must principally relate to entities belonging to the group of which the captive forms part. Where persons outside the group are covered under a group policy, the corresponding technical provisions must not exceed 5% of the captive’s total technical provisions. The captive must also not underwrite compulsory third-party liability insurance. This status is therefore neither automatic nor permanent: maintaining it depends on the ongoing fulfilment of the criteria set out in the Directive which are assessed over two consecutive financial years.

Pillar I: a real, but uneven, reduction in the cost of capital

• Risk margin: the cost of capital rate falls from 6% to 4.75%. A time weighting factor is also introduced: future SCRs are no longer weighted uniformly over time but decline progressively, which further reduces the risk margin for long-tail liabilities.

• Symmetric adjustment: the corridor widens from ±10% to ±13%, with limited practical effect except in severe market shock.

• Long-term equity investments (LTEI): the reduced 22% shock still applies, but the eligibility criteria are relaxed, with the eligible geographic zone extended from the EEA to OECD countries and the period over which the entity must demonstrate its ability to avoid a forced sale shortened from 10 to five years.

• Interest rate risk: the correlation between interest rate risk and spread risk in the falling rates scenario is revised downward, which tends to reduce the aggregate capital requirement on this module for portfolios combining bonds and rate-sensitive liabilities. Each captive will nevertheless need to assess the effect against the actual composition and duration of its assets and liabilities, as the impact will depend on the respective contributions of the interest-rate and spread-risk sub-modules.

• SNCU simplifications: the possibility of using a simplified calculation for a risk module representing less than 2% of the BSCR (and less than 10% in total across all simplified modules) and a prudent deterministic valuation for life provisions with immaterial options and guarantees.

Pillar II: a lighter ORSA, under conditions

For SNCUs and, under certain conditions, captives more generally, the ORSA becomes biennial instead of annual. These entities are exempt from the macroeconomic analysis and from the long-term climate change scenario analyses otherwise required in the case of confirmed material exposure. The proportionality framework significantly limits the liquidity planning requirements applicable to smaller and less complex undertakings.

However, the precise scope of any exemption, and in particular the distinction between short, medium and long-term liquidity analysis, must be assessed under the final Directive, RTS and national implementation. On governance, holders of the risk, actuarial and compliance key functions will be able to combine other key functions besides internal audit, or sit on the administrative body, subject to certain conditions; this is not an unconditional option.

Pillar III: reporting tightened around quantitative content

SNCUs will be able to publish only the quantitative data required by technical implementing standards relating to the SFCR, with the section intended for policyholders remaining, under conditions waived for captives. The balance sheet included in the SFCR is exempt from audit for SNCUs, though a member state retains the option of imposing this requirement. Submission deadlines are also extended: annual QRTs from 14 to 16 weeks, RSR and SFCR from 14 to 18 weeks (subject to the final reporting ITS applicable from the revised reporting package). Quarterly deadlines remain unchanged.

Opportunities opened up by enhanced proportionality

The first benefit is operational: less reliance on third parties for the balance sheet audit, a biennial ORSA, a five-yearly RSR, all of which reduce internal workload and provider fees for structures whose dedicated team is often small. For an actuary responsible for captives of varying sizes, this frees up time for risk analysis rather than repetitive regulatory production.

The second benefit touches capital directly. Across a sample of recalculations we carried out for captives with varied liability profiles, the isolated effect of the lower risk margin cost of capital (excluding the lambda effect) translated into an improvement in the SCR coverage ratio ranging from a few tenths of a point to several percentage points, with the magnitude depending mainly on the duration of the liabilities and the relative weight of this provision within total liabilities. Long-tail captives (civil liability, ten-year construction guarantees, certain slow-maturing cyber risks) should logically record the most pronounced effect.

Finally, the broadening of the long-term equity investment (LTEI) eligibility criteria to the OECD area opens up, for captives with their own investment portfolio, a wider allocation universe without any deterioration in prudential treatment, provided all qualitative criteria are met (a long-term investment policy approved by the board, segregated management, diversification).

Impact on capital management, provisioning and risk appetite

Regarding the risk margin, it is no longer a simple percentage applied to a discounted sum of future SCRs, but a profile that declines over time. Captives will therefore need to revisit the modelling of their projected SCR run-off in order to measure the effect correctly.

On capital management, the question boards will face is how to use the additional excess own funds: dividend distribution, strengthening available own funds to absorb an increase in retention or funding new risks within the group. This choice will, however, have to contend with a counterweight introduced by the same reform: supervisors will have enhanced macro-prudential powers, including the ability to restrict or suspend dividend distributions if the solvency position deteriorates. Capital released by the lower risk margin is therefore not automatically available capital: mobilising it remains subject to the supervisor’s judgment at the time.

This development naturally invites a review of the captive’s risk appetite statement at the next ORSA cycle, setting out the scenarios for using the additional excess own funds explicitly rather than leaving them implicit.

Point of caution: the treatment of intra-group loans (concentration risk within market risk) is regularly mentioned in informal industry discussions as a likely area of relaxation under the reform. At the time of writing, we have identified no confirmation of such an amendment, either in Directive (EU) 2025/2 or in the Delegated Regulation (EU) 2026/269. Captives whose balance sheet includes significant loans to the parent company should therefore continue to apply the current concentration risk treatment and monitor forthcoming delegated acts and technical standards closely rather than anticipating a relaxation that is not, at this stage, confirmed.

Points of attention for actuarial officers and boards of directors

• SNCU status is not automatic: it must be verified over two consecutive financial years and can be lost if the captive’s profile changes (growth in reinsurance accepted, development of cross-border business, etc.).

• Although EIOPA has already published the technical specifications for the SNCU qualification methodology, some implementing technical standards, reporting specifications and supervisory guidance remain under development. Captives should therefore continue to monitor forthcoming regulatory publications before final implementation.

• Combining key functions for SNCUs remains subject to conditions and to the supervisor’s judgment: it is not an unconditional simplification of governance.

• The frequency of the actuarial function review is not changed by the reform and remains annual, even when the ORSA becomes biennial: proportionality should not be extrapolated to the entire governance framework.

• The phasing in until 2032 for certain effects on long-term commitments is conditional on the supervisor’s prior agreement: it does not apply as of right.

• Early dialogue with the national regulator on SNCU qualification and on how excess own funds interacts with macro-prudential powers to restrict dividends will help avoid unpleasant surprises in 2027.

Misconceptions and practical recommendations

Four misconceptions to correct

• “SNCU status amounts to near exemption from reporting”: False. The quantitative SFCR data remains due annually, compliance with the SCR remains a condition of qualification itself and the ORSA continues, only on a biennial basis.

• “The lower risk margin automatically frees up distributable capital”: It improves the valuation of technical provisions, but actual distribution remains subject to prudential judgment and to the new macro-prudential powers to restrict dividends.

• “All captives will become SNCUs”: The status depends on precise quantitative thresholds (reinsurance accepted, market risk exposure, cross-border activity) that in practice exclude certain structures, notably those with a high level of reinsurance accepted.

• “The treatment of intra-group loans will be relaxed”: An unconfirmed claim at this stage in the texts available; to be checked as delegated acts are published rather than anticipated.

Five operational recommendations

• Launch, from now on, a “mirror” calculation of the solvency ratio under the 2027 rules to quantify the actual impact captive by captive, rather than rely on generic rules of thumb.

• Review the risk appetite statement and capital management policy at the next ORSA cycle, explicitly anticipating scenarios for the use of released capital.

• Audit the governance manual to identify the key function combinations that could be envisaged under SNCU status and open dialogue with the supervisor ahead of time rather than at the point of filing.

• Set up structured monitoring of the remaining reporting and disclosure ITS, liquidity related technical standards, revised guidelines and national transposition measures through the implementation date.

• Document, in the ORSA or in a dedicated note to the board, the aspects of the reform that are not yet settled (in particular the treatment of intra-group loans), rather than building financial communication on unconfirmed assumptions.

Conclusion

In principle, the Solvency II review represents a favourable development for reinsurance captives: a lower risk margin, more proportionate reporting and greater governance flexibility. Its actual impact will nevertheless vary significantly according to each captive’s risk profile, eligibility for SNCU status and use of the available proportionality measures. While the main Level 2 prudential rules are now final, some reporting standards, guidance and national implementation measures remain outstanding. During the remaining months before 30 January 2027, the priority is therefore to quantify the impact captive by captive, document the eligibility assessment and establish robust governance for any resulting increase in excess own funds.

Bertrand Segui is chief actuary, SRS Europe. He can be contacted at: bertrand.segui@strategicrisks.com

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