Solvency II review implementation in Luxembourg: the clock has started ticking!

Overview

Directive 2009/138/EC (known as Solvency II) is the cornerstone of EU prudential regulation for (re)insurance undertakings, setting harmonised requirements on capital adequacy, risk management and public disclosure. After a decade of application, the framework is now being modernised through Directive (EU) 2025/2 of 27 November 2024 (known as the Solvency II review), which entered into force on 28 January 2025. The review preserves the architecture of the existing regime whilst introducing targeted enhancements designed to sharpen proportionality (particularly for small and non-complex undertakings), strengthen resilience against emerging risks (including climate and systemic risks), support long-term investment and reinforce policyholder protection.

Luxembourg has now formally launched its implementation of the Solvency II review. On 17 July 2026, bill of law 8796 (Bill) amending the amended law of 7 December 2015 on the insurance sector (LIS) was submitted to Parliament. The implementation is structured as a two-track process: the Bill addresses the legislative layer, whilst the Commissariat aux assurances (CAA) will amend CAA Regulation No. 15/03 to cover the more technical and operational provisions, consistent with the existing architecture of Luxembourg’s insurance regulatory framework.

With less than six months until the 29 January 2027 implementation deadline, compliance assessments are now starting. The changes introduced by the Bill span licensing, governance, sustainability, reporting, capital and supervisory powers — each requiring a dedicated workstream. This newsflash identifies the key changes and the actions to consider for tackling them.

New proportionality regime for “small and non-complex” (SNC) undertakings

One of the most significant changes is the creation of a formal SNC status, conferring automatic regulatory relief for eligible undertakings.

Eligibility criteria: new Article 56-1 LIS sets out detailed criteria that must be satisfied during the two financial years preceding classification, differentiated according to whether the undertaking’s business is primarily life or non-life, and covering thresholds relating to premiums written, technical provisions, interest rate risk exposure, proportion of cross-border business, weight of certain investment risk modules, and compliance with the Solvency Capital Requirement (SCR). Captive undertakings benefit from an adapted regime. Certain undertakings are excluded from SNC status, including those using an internal model, parent companies of financial conglomerates or of certain types of financial entities, and collective pension funds with assets exceeding EUR 1 billion.

Classification procedure:[1] classification as SNC is achieved by making a notification to the CAA accompanied by (i) evidence of compliance with the relevant criteria, (ii) a declaration that no strategic change is planned over the following three years and (iii) a list of the proportionality measures the undertaking intends to apply. The CAA may object within two months[2] on grounds of non-compliance with the criteria, SCR non-compliance or a market share exceeding 5%. SNC status ceases where the criteria are no longer met for more than two consecutive financial years or where an exclusion criterion is triggered (with effect from the following financial year), with obligations to notify the CAA at various points.

Proportionality measures: SNC undertakings may automatically apply a range of proportionality measures covering reporting and disclosure, governance, own risk and solvency assessment (ORSA), technical provisions and liquidity planning, and may use a “prudent deterministic valuation” approach for certain best estimate calculations for life obligations with options and guarantees that are not deemed material. Non-SNC undertakings may apply for prior CAA approval to benefit from a more restricted set of proportionality measures, subject to a formal procedure.

What this means in practice: SNC classification can deliver material operational savings, but eligibility is not self-evident as the criteria are detailed, multi-year and differentiated by business line. Captives should assess whether their specific regime applies.

How Arendt can assist: eligibility analysis against the Bill’s criteria, preparation of the CAA notification and strategic dialogue during the review window.

Governance: confirmation of existing rules and enhancements

• Members of administrative, management and supervisory bodies must permanently satisfy the good repute requirements and collectively possess the necessary knowledge, skills and experience. They must not have been convicted of any serious or repeated offences related to AML/CFT in at least the preceding ten years.
• Internal reviews of the governance system must include an assessment of the composition, effectiveness and internal governance of the management body, and written policies promoting diversity must be put in place.
• Key functions[3] must be performed by different and independent individuals. However, cumulation of certain key functions (other than internal audit) is permitted for SNC undertakings or those approved under Article 56-4 LIS, subject to conflicts of interest management and preservation of fitness requirements. Undertakings must notify the CAA where a manager or key function holder no longer satisfies the relevant requirements, and the CAA has the power to require the removal of a person who no longer meets the fit and proper standards.
• The management of operational risk now explicitly encompasses cybersecurity, by reference to Regulation (EU) 2019/881.

What this means in practice: the governance requirements are now directly included in the LIS and warrant verification. Undertakings should map current key function holders against the independence requirements, assess whether existing cumulation arrangements remain permissible, update fit & proper policies and internal notification procedures, and integrate cybersecurity explicitly into the operational risk framework.

How Arendt can assist: governance framework reviews, fit & proper policy drafting and updates, key function mapping, cumulation analysis for SNC entities and management of CAA notification procedures.

Sustainability risks

Definition and sustainability plans:[4] the LIS integrates the definition of “sustainability risk” as an ESG event or condition that could negatively affect the value of an investment or liability. Undertakings must establish and maintain specific plans containing quantifiable objectives and processes to monitor and address financial risks linked to sustainability factors over the short, medium and long term, and must publish those quantifiable objectives annually. Where an undertaking publishes sustainability information under Directive 2013/34/EU, the plans must be consistent with those obligations. An exemption is available for subsidiaries covered by a group-level plan that fulfils the relevant conditions.

Climate scenario analysis:[5] undertakings must assess whether they are materially exposed to climate risks. Where they are, they must define at least two long-term climate scenarios (below 2°C and above 2°C) and analyse their impact at regular intervals of no more than three years. SNC undertakings are exempt from this scenario analysis obligation.

What this means in practice: sustainability plans with quantifiable objectives must be in place by the implementation date. For undertakings that already publish sustainability information under the CSRD, failing to align the Solvency II sustainability plan and their CSRD disclosures can create both regulatory and reputational risk. Climate scenario analysis requires defining at least two long-term scenarios and repeating the analysis every three years.

How Arendt can assist: sustainability plan review, climate scenario methodology guidance, CSRD/Solvency II alignment analysis and publication strategy for quantifiable objectives — drawing on the expertise of our dedicated ESG practice.

Reporting and transparency: notable amendments

Rapport régulier au contrôleur (regular supervisory report, RSR): undertakings must submit a regular supervisory report covering business and performance, governance, risk profile, solvency valuation and capital management.[6]

Solvency and financial condition report (SFCR) split into two parts: the SFCR must comprise two parts published jointly: a “policyholders and beneficiaries” part[7] and a more detailed “market professionals” part. Exemptions and simplifications are available for captives, reinsurers and SNC undertakings.Non-SNC and non-captive undertakings must have the balance sheet published in the SFCR audited, and a separate audit report must be submitted to the CAA together with the SFCR.

Long-term equity investments

Subject to strict conditions, undertakings may apply a reduced capital charge calibrated to an instantaneous decrease of 22% (instead of 39% under the standard approach[8]), thereby significantly reducing the amount of own funds required to be held against long-term equity investments.

Macroprudential supervision and CAA powers

Liquidity risk management:[9] undertakings must ensure sound liquidity risk management and draw up a short-term liquidity plan to be submitted to the CAA (with medium and long-term plans available if requested by the CAA). SNC undertakings and those approved under Article 56-4 LIS are exempt from the obligation to prepare a plan.

Exceptional supervisory powers:[10] where significant liquidity risks constitute an imminent threat, the CAA may temporarily restrict or suspend distributions, payments, redemptions and bonuses, and may even, as a last resort, suspend policyholder redemption rights on life policies.[11] The CAA may also, during exceptional sector-wide shocks, impose restrictions or suspensions (dividends, payments, redemptions, bonuses) on particularly vulnerable undertakings, with mandatory review at least every three months and proportionality considerations.

What this means in practice: the CAA’s power to suspend policyholder redemption rights on life policies — even if only as a last resort — materially impacts the legal and operational risk landscape for life insurers. Policy terms, client communications frameworks and operational procedures should be reviewed in light of this power. All undertakings (other than SNC entities and those approved under Article 56-4 LIS) must prepare a short-term liquidity plan for submission to the CAA.

How Arendt can assist: client communication and policy wording review, and assessment of contractual implications.

Cross-border supervision

The Bill introduces the concept of “significant cross-border activities” in Luxembourg for an EEA (re)insurer operating on a branch or freedom of services basis, notably where gross annual premiums written in Luxembourg exceed EUR 15 million or where the CAA considers the activity to be of relevance with respect to the Luxembourg market.[12] Where significant cross-border activities are identified, enhanced cooperation covers at minimum governance, outsourcing and distribution partnerships, commercial strategy and claims handling, and consumer protection. In the event of actual or foreseeable SCR/MCR[13] non-compliance, the CAA may request a joint on-site inspection, and EIOPA-mediated resolution mechanisms are available in the event of disagreement between authorities.

Insurance secrecy: targeted modernisation

The scope of insurance secrecy is adjusted to expressly exclude “large risks”, in line with proportionality and competitiveness considerations. Exceptions to insurance secrecy are extended to permit responses to reasoned requests from foreign authorities in the areas of prudential and macroprudential supervision, AML/CFT, sanctions, anti-corruption, dormant policies and consumer protection, subject to equivalent confidentiality guarantees.

Entry into force

The law is expected to enter into force on 30 January 2027.

[1] New Article 56-2 LIS.

[2] Extended to four months for notifications received within the first six months from 30 January 2027.

[3] Risk management, actuarial, compliance and internal audit.

[4] New Article 43(33-1) and new Article 74-1 LIS.

[5] New Article 75-1 LIS.

[6] In principle every three years, with SNC undertakings permitted a cycle of up to five years and the CAA retaining the power to require more frequent submission by non-SNC undertakings.

[7] Comprising a brief description of business and results, capital management and risk profile including sustainability, and an indication regarding CSRD plan publication.

[8] For listed equities in EEA/OECD countries

[9] New Article 207-1 LIS.

[10] New Articles 207-2 and 207-3 LIS.

[11] These measures can be taken for a maximum of three months (renewable), and after consulting the Systemic Risk Committee, with notification to EIOPA/ESRB in certain cases.

[12] New Article 153-1 LIS.

[13] Minimum Capital Requirement.