One of the core objectives of supervisors is to keep regulations and supervisory processes up to date with regards to current market developments and trends. In the insurance sector, this means that:
- Regulators aim to request as much information from the insurance companies as required to ensure a solid and stable insurance business and protect insurance policyholders.
- Supervisors need to ensure not to overburden insurance undertakings with bureaucratic obstacles, having in mind that insurance firms need to operate their business in an efficient manner.
For the supervisor, a continuous tracking of market trends and regulations is crucial when searching for the optimal balance between demand from insurance companies and ensuring insurers’ operability.
After the introduction of Solvency II in 2016, several updates in the regulation were published in the European Journal, aiming to keep the Solvency II regulation up to date like e.g.
At the end of the second decade, EIOPA eventually felt the need to have a more complete evaluation of the Solvency II regulation and initiated the Solvency II Review . The Solvency II Reviewis the starting point for a more thorough update of the Solvency II regulation. Taxonomy 2.8 which is based on the EU regulation 894/2023 and which needs to be applied for the first time end of December 2023, comes in sequence to the Solvency II Review. Some major updates on the asset side in Taxonomy 2.8 go back to the Solvency II Review and subsequent activities:
- Updates for many of the new fields in Taxonomy 2.8 such as for example crypto assets and bail-in rules were first mentioned in EIOPA-BoS-20/754, which is an addendum to the EIOPA Solvency II Review Opinion Paper EIOPA-BoS-20/749 
- The idea to remove QRTs S.06.01 and S.08.02 also goes back to EIOPA-BoS-20/754 and can be considered as a follow-up of the Solvency II Review. It is worth mentioning that with Taxonomy 2.8, EIOPA decided to sunset several substantial asset-related QRTs for the first time since the introduction of the Solvency II framework in 2016, thus following the idea of mitigating the reporting burden for European insurers.
- The pursuit to put more focus on climate change-related risks, which materializes with the new QRT S.06.04 in Taxonomy 2.8 is at least mentioned in the context of the SFCR reporting in EIOPA´s Solvency II Review Opinion Paper EIOPA-BoS-20/749. Details regarding the reporting on climate change-related risks to investments were first mentioned in the Consultation Paper EIOPA-BoS-21/00.
One of the most significant changes in Taxonomy 2.8 highlighted by the Pillar 3 clients during the Taxonomy 2.8 implementation projects, meetings and workshops, is the introduction of the climate change-related QRT S.06.04, which builds a bridge between ESG and SFDR reporting on one side and Solvency II on the other. Regarding S.06.04, the following can be said:
- Altogether, there is a lot of uncertainty how to concretely implement this QRT. Regulation 894/2023 only gives vague statements on the calculation of the new analytics for physical risk and transition risk and says “Undertakings may use their own methodology to compute the KPI”.
Uncertainty regarding calculation logic could be observed for question like:
- How can an insurer determine if an asset has a physical risk/transition risk?
- Should physical risk and transition risk be binary information per asset (Yes/No) or would it be more appropriate to use ratios (between 0 and 100 percent) to classify financial instruments?
- How can the NACE codes be translated into physical risk and transition risk?
- Can one asset have both physical risk and transitional risk or are the two risks mutually exclusive?
- If insurers can use their own methodology to calculate the new analytics, how would the authority be able to compare results from different insurers?
- How to justify, if the QRT is not provided? In the first EIOPA working drafts for the new QRT, this option did not exist yet, but was added later, i.e. an insurance undertaking can provide an explanation, why it is not possible to generate the new QRT and omit the reporting to the authority.
In the SimCorp client community, two approaches on how to calculate physical risk and transition risk have crystallized:
- The rule-based approach: In this approach, a rule-based logic (e.g., IF NACE category=“X” THEN physical risk=100%) are used. The rules are based rather on expert evaluation than on empiric data.
- The market data approach: Instead of using static rules to derive the risks, ESG-related data from data vendors like MSCI is used to derive physical risk and transition risk.
- SimCorp Standard Solution for S.06.04 supports both mentioned approaches, makes use of ratios for both relevant risks and calculates weighted sums (ratios multiplied by the market value of assets) to obtain required ratios. Import of external data is supported as well as rule-based logic using experts’ knowledge and NACE codes. The S.06.04 Standard Solution is completely based on SimCorp`s proven ESG module and provides a flexible platform and detailed analyses beyond the pure S.06.04 requirements. Therefore, Solvency II Pillar 3 Clients can profit from SimCorp´s experience in the ESG area when implementing S.06.04 and thus mitigate uncertainty about detailed calculation logic with a proven software platform that provides established market concepts from the ESG area.
- Finally, both the Solvency II clients and we expect that the market standards and best practices related to S.06.04 will evolve in the upcoming months and years and that EIOPA will reduce the ambiguity on how to produce the new QRT.
For S.06.04 and other asset-related QRTs, SimCorp helps clients to implement the new Taxonomy 2.8 requirements with several services and a dedicated Solvency II team specializing in the implementation of Pillar 3 in SimCorp Dimension. The Solvency II team is in close contact with clients, supporting them during analysis, implementation and testing of the relevant regulatory updates. As part of the service delivery, the team has published two configuration update packages for Taxonomy 2.8, aiming to give SimCorp clients the possibility to have enough time to prepare for Taxonomy 2.8 until it comes into force end of 2023:
- Package I which encompasses updates for S.06.02 and S.08.01 was published in July 2023
- Package II contains updates for S.06.04, S.36.0X and S.37.0X and minor updates for other asset-related QRTs and was published in September 2023
The implementation projects are currently running and scheduled to be finalized before end 2023, such that SimCorp Solvency II clients can report to the National Competent Authorities according to the new Taxonomy 2.8 requirements by the end of 2023.
Regulatory Compliance Center
Navigating the world of regulatory compliance
Since the 2008 crisis, the global financial industry has been hit with major regulatory challenges, including Dodd-Frank, EMIR, MiFID II/MiFIR and more. Most financial industry analysts expect to see even more regulations in the future.