Introduction

Introduced formally in 2016, the Solvency II framework sets out prudential requirements for (re)insurance companies, groups and third country branches across EU Member States. The European Insurance and Occupational Pensions Authority (EIOPA) is responsible for developing technical standards, guidance and supervisory tools to support consistent application across the European Union. Member states are responsible for enacting provisions and supervising (re)insurers headquartered in their territory. While detailed requirements are set in directly applicable European Regulations, supervision remains a national competency resulting in some divergence in practice.

Following the United Kingdom’s exit from the European Union (Brexit), the UK retained Solvency II in domestic law and committed to reforming the framework to reflect the structure and needs of the UK insurance market. These reforms resulted in the introduction of “Solvency UK”, which came into effect from 31 December 2024 and which continues to evolve independently from EU Solvency II.

This comes at the same time when the European Union is advancing its own review of Solvency II. Following the European Commission’s legislative proposals in 2020, the amended Directive was approved in November 2024. The revised requirements must be transposed and applied in all Member States by 30 January 2027. Further EIOPA‑led reforms may narrow some areas of divergence with the UK, while significantly widening others.

The increasing divergence between EU Solvency II and Solvency UK presents significant challenges for insurers operating across both regimes either through insurance subsidiaries or branches.  Understanding the differences, particularly in areas such as capital requirements, the risk margin, the matching adjustment, group supervision,  reporting requirements and supervision of UK branches, is becoming increasingly important for insurers operating across both regimes.

Evolution of the UK regime: from Solvency II to Solvency UK

After Brexit, the UK initially on-shored Solvency II into domestic legislation, but committed to revising it to better suit its own insurance market. This culminated in reforms in areas such as risk margin, matching adjustment, reporting and UK branch supervisions which were completed at the end of 2024, resulting in the establishment of Solvency UK. These reforms were guided by the objectives of the PRA: maintaining policyholder protection while facilitating competition, encouraging long-term investment, and reducing regulatory burdens.

The resulting Solvency UK reforms, finalised in 2024 and documented across several PRA policy statements including PS2/24 (Review of Solvency II: Adapting to the UK insurance market), PS10/24 (Review of Solvency II: Reform of the Matching Adjustment) and PS15/24 (Review of Solvency II: Restatement of assimilated law), introduced targeted changes across internal models, the matching adjustment, the risk margin, group supervision, reporting requirements, transitional measures, capital add‑ons and supervision of UK insurance branches.

EU Solvency II reforms

The EU is progressing its own Solvency II reforms, with a focus on reinforcing financial stability, allowing for proportionality for smaller and less complex insurers and aligning the prudential framework with broader EU sustainability objectives.

The European Parliament formally adopted amendments to the Solvency II Directive in April 2024. In July 2025, the European Commission published draft amendments to the Solvency II Delegated Regulation. Subject to finalisation and national transposition, the revised framework will apply from 30 January 2027.

Key differences between Solvency UK (SUK) and EU Solvency II

Pillar 1

Liability Discount Rates

The discount rates used to discount liabilities under Solvency II consist of the basic risk-free rates (RFR) with the addition of a volatility adjustment (VA) or a matching adjustment (MA) for certain (re)insurers, subject to regulatory approval.

EU Solvency II (EIOPA)

  • The basic RFR are published monthly by EIOPA. The construction of the risk-free rate term structure makes use of financial instruments up to the maturity for which there is a deep, liquid and transparent market and extrapolation is used to determine the term structure after that point.
  • The method for calculating and extrapolating the RFR will be updated in the amendments.
  • The VA is currently the sum of a currency-specific VA and a country-specific VA. Regulatory approval is required to apply this in Ireland. The amendments will change how the VA is calculated and will introduce a parameter so that the VA will now be undertaking-specific.
  • The MA is an allowance over the risk-free rate reflecting the spread earned on assets held to back illiquid liabilities, less an allowance for cost of default risk and cost of downgrade risk.  Regulatory approval is required to apply this in Ireland. There are no changes expected in the amendments relating to the MA.

Solvency UK

  • The PRA requires the use of PRA monthly published RFR rates and fundamental spreads for the calculation of the matching MA and VA adjustments.  This means that adjustments are required to replace EIOPA discount rates with PRA discount rates for the purposes of discounting technical provisions for UK branch reporting and inclusion of EEA subsidiaries in Solvency UK group reporting (unless the group is applying Method 2 for those subsidiaries).
  • The PRA has introduced a number of changes to the MA, notably the enhanced flexibility for how the MA can be applied and calculated, and the enhanced risk management and disclosure protocols introduced relating to the MA.

Risk margin

The risk margin represents the theoretical cost of transferring insurance obligations to a third party. In some quarters, the risk margin has been viewed as being too high, too sensitive to interest rates and not fully allowing for diversification effects.

It is calculated using a cost-of-capital approach. It is calculated without allowance for the SII volatility adjustment or matching adjustment.

EU Solvency II (EIOPA)

  • Currently the cost-of-capital is prescribed at 6% and no risk tapering is permitted.
  • The revised SII directive will reduce the cost-of-capital to 4.75% and introduce risk tapering, with a specified floor.

Solvency UK

  • Solvency UK applies a 4% cost-of-capital with a risk tapering factor and a specified floor. The cost-of-capital, risk tapering factor and floor are all lower under SUK compared to the revised SII approach.

SCR

The Solvency Capital Requirement (SCR) represents the capital an insurer must hold to withstand a 1‑in‑200 year shock.

The SCR is calculated for individual risk modules (e.g. market, underwriting and counterparty risks), which get aggregated to allow for diversification benefits.

The final SCR includes allowance for operational risk and the loss-absorbing capacity of liabilities and deferred taxes.

Standard Formula

EU Solvency II (EIOPA)

  • The shocks and risk correlations applied under the standard formula are prescribed by EIOPA.
  • The amendments will introduce changes to the calculation of a number of the risk modules
    • Market Risk
      • Interest Rate Risk
      • Spread Risk
      • Equity Risk
    • Counterparty Default Risk
    • Underwriting Risk
      • Non-Life Catastrophe Risk

Solvency UK

  • Under the standard formula, the Solvency UK approach is aligned to the current Solvency II approach. While there are changes to the standard formula under the EU Solvency II reforms, the PRA has not proposed any Solvency UK amendments to the standard formula.

Internal Model

EU Solvency II (EIOPA)

  • (Re)insurance companies can choose to develop their own internal model to determine their SCR. This is subject to regulatory approval and ongoing regulatory review.
  • The amendments will change how the effect of credit spread movements get allowed for through the VA used in the internal model.

Solvency UK

  • While the requirement for regulatory approval to use an internal model is common across the UK and the EU, the PRA has transitioned away from a prescriptive framework to a more principles-based framework.
  • The changes have also introduced a new type of capital add-on relating to residual model limitations, and additional attestations and reporting requirements for IM companies in the UK.

Group SCR Calculations

EU Solvency II (EIOPA)

  • A choice of two methods can be used to determine the SCR for an insurance Group.
  • Further clarifications and materiality measures will be included in the incoming amendments.

Solvency UK

  • A choice of two methods can be used to determine the SCR for an insurance Group.
  • The PRA included changes and clarifications to both approaches for the SUK regime, allowing for example more flexibility where there is more than one internal model in the group.

Transitional Measures on Technical Provisions (TMTP)

TMTPs are intended to smooth the financial impact for firms relating to the transition from Solvency I to Solvency II. TMTP must amortise to 0 by 2032.

EU Solvency II (EIOPA)

  • The changes to the TMTP under the SII amendments relate mainly to regulatory approvals and disclosure requirements for (re)insurers.

Solvency UK

  • The PRA has introduced a new simplified default method for determining the TMTPs and has removed the Financial Resource Requirement (FRR) test.

Group Supervision

EU Solvency II (EIOPA)

  • For an EEA insurance company, Solvency II group supervision by an EEA regulator applies at the level of the highest EEA parent and the highest worldwide parent (unless located in a Solvency II equivalent jurisdiction or waived by the regulator) where that parent meets the updated regulatory definition of an insurance holding company, a mixed financial holding company or is itself an insurer or reinsurer.

Solvency UK

  • For a UK insurance company, Solvency UK group supervision applies at the level of highest UK parent and the highest worldwide parent (unless located in a Solvency UK equivalent jurisdiction or waived by the PRA).
  • The PRA have refined the definition of an insurance holding company.
  • EEA member states treated as equivalent jurisdictions by the PRA.

Branch Supervision

EU Solvency II (EIOPA)

  • EEA branches of an EEA insurance company are subject to supervision by the supervisor in the company’s home state with limited supervisory role for the host state supervisor.
  • Post Brexit an EEA branch of a UK insurance company is regulated by EEA regulators as a third country branch and subject to full EEA third country branch Solvency II requirements including branch level solvency requirements. However, in practice few EEA regulators permit the establishment of third country branches at all for direct insurance business. Reinsurance branches generally have more flexibility.

Solvency UK

  • A UK branch of an EEA insurer is treated as a third country branch subject to Solvency UK requirements. 
  • Differences compared to third country branch regulation under EU Solvency II include no UK branch level SCR, MCR or risk margin requirements, no UK asset localisation requirements (other than the UK deposit requirement) and reduced QRT reporting requirements for lower risk category branches.
  • The PRA consulted on further reforms in CP20/25 (Insurance third country branches: policy implementation and other updates). Final policy changes are yet to be announced. 

Pillar 2

Own Risk and Solvency Assessment (ORSA) – Sustainability

The ORSA considers each (re)insurer’s overall solvency needs, taking into account the specific risk profile, approved risk tolerance limits and the business strategy.

 EU Solvency II (EIOPA)

  • Under Solvency II there is no explicit requirement for (re)insurers to prepare sustainability risk plans. The SII amendments as part of 2020 Review include requirements for insurers to design, implement and disclose Sustainability Risk Plans (SRPs).
  • The requirements include climate change scenario analysis based on material risks and at least two long term scenarios to be included in the ORSA framework.

Solvency UK

  • The Solvency UK approach aligns to the current SII approach.

Liquidity Risk Management Plan (LRMPs)

EU Solvency II (EIOPA)

  • The EU amendments as part of the EU 2020 Review have also introduced the formal requirement for undertakings to prepare and maintain an up-to-date liquidity risk management plan covering liquidity analysis over the short term. When requested by supervisors, this will be extended to the medium and long-term.

Solvency UK

  • PRA set out its expectations for liquidity risk management for insurers in 2019 (in SS5/19), for example stating that it “expects that an insurer’s liquidity risk profile and approach to liquidity risk management will be referenced in appropriate detail in other reports including its Own Risk and Solvency Assessment (ORSA), business plan, Solvency and Financial Condition Report (SFCR) ….”
  • In 2025 PRA set out enhanced liquidity reporting requirements for the largest UK insurers in PS15/25.

Pillar 3

Reporting and disclosure

Reporting reform is a priority in both regimes, but the nature of the changes in requirements differs, resulting in increasing divergence as time goes on.

EU Solvency II (EIOPA)

  • Insurers are required to provide a number of different reports and templates (QRTs) to supervisors, national competent authorities and to the public in the form of a published Solvency and Financial Condition Report (SFCR).
  • EIOPA periodically proposes changes, which are typically made by the European Commission as Regulations without amendment.
  • EIOPA’s proposals for amendment of Solvency II QRT reporting  applicable for Q1 2027 onwards and are set out in EIOPA’s final report dated 30 March 2026.
  • Other changes resulting from the 2020 Solvency II review include amendments to the structure and content of the public SFCR, mandatory audit of the Solvency II balance sheet and inclusion of elements of the Sustainability Risk Plan (referred to under Pillar 2 above) in the SFCR.

Solvency UK

  • The PRA made significant changes to the reporting requirements on introduction of the Solvency UK regime resulting in significant divergence from Solvency II. 
  • The PRA consulted on further reporting changes in CP22/25 (UK Solvency II reporting and disclosure: Post-implementation amendments).  The consultation closed on 4 March 2026, but final policy changes are yet to be announced. 

Conclusion

Both Solvency UK and EU Solvency II share a common heritage and remain aligned in many fundamental respects—most notably their risk‑based structure and overarching objective of protection of policyholders. However, divergence is increasing in many areas.

For insurers operating across both jurisdictions, understanding these differences is essential. Strategic capital allocation, product design, investment decisions and reporting data requirements and processes will continue to be impacted by the evolving gap between the two regimes.

Reporting teams in particular face significant challenges both in terms of keeping up to date with EU and PRA developments, and in maintaining reporting systems capable of reporting in compliance with diverging EU and PRA requirements.

To safeguard effective decision-making and ensure regulatory compliance, insurers should ensure that boards, management and teams including product development, pricing, reserving and reporting have a clear understanding of the differences between the two regimes and their implications.