In January 2025, the directive amending the Solvency II Directive was published in the Official Journal of the European Union. These amendments introduce significant changes to the Volatility Adjustment (VA) framework, aiming to enhance its effectiveness and better align it with insurers' actual risk exposures. In this paper, we explore the new supervisory approval requirements, the overhaul of the VA mechanism, and the introduction of new components such as the Credit Spread Sensitivity Ratio (CSSR) and the undertaking-specific adjustment to the risk-corrected spread. Additionally, we provide real-world examples to illustrate the impact of these changes on the solvency positions of insurance companies.

Our report’s main sections include:

• Background on the VA
• Approved amendments in the Directive
• Deep dive into VA methodology revisions and remaining uncertainties
• Impact analysis for VA design change
• Next steps for insurers