Small and non-complex undertakings: News on sustainability reporting in insurance

On 28 January 2025, Directive (EU) 2025/2 of the European Parliament and of the Council of 27 November 2024 entered into force. It amends Solvency II and contains, among other things, some innovations on sustainability reporting in the insurance sector. Member states have to transpose the Directive by 29 January 2027.

The Directive recognises that reporting requirements shouldn’t be unduly burdensome for insurance and reinsurance companies. To this end, it introduces some simplifications and modifications, in accordance with the proportionality principle.

This article focuses on sustainability reporting amendments to Directive 2013/34/EU of the European Parliament and of the Council on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings.

An exemption from the general rules has been introduced for “small and non-complex undertakings”. They’re defined, according to the provision introduced in Solvency II, as insurance or reinsurance undertakings (including captive insurance or reinsurance undertakings) that meet certain risk-based criteria specifically provided for in the new Article 29a of Solvency II for the two consecutive fiscal years immediately preceding classification. Exclusions include firms that use an approved partial or full internal model to calculate the Solvency Capital Requirement, parent undertakings of a financial conglomerate or insurance group (except for small, non-complex groups).

Providing specific criteria for identifying small and non-complex undertakings meets the objective of strengthening the application of the proportionality principle in the insurance sector and ensuring consistency in its implementation among member states.

Undertakings that meet the criteria can notify the supervisor to be classified as small and non-complex undertakings, following a straightforward procedure. The notification must also include a statement that the enterprise isn’t planning any strategic changes that would lead to non-compliance with any of the criteria in the next three years. And the undertaking should indicate the proportionality measures it plans to implement.

The supervisory authority can oppose the classification of the undertaking as small and non-complex within two months after receiving the notification. It can oppose the classification if the undertaking doesn’t comply with the criteria or the Solvency Capital Requirement, or when an undertaking represents more than 5% of the life market or, where applicable, the non-life market of the undertaking’s home member state. If the supervisory authority doesn’t oppose the classification, the undertaking will be classified as a small and non-complex undertaking as of the expiration of the two-month period following the notification.

Once classified as a small and non-complex undertaking, in principle, the undertaking benefits from the proportionality measures identified in reporting, communication, governance, review of written policies, calculation of technical provisions, internal risk and solvency assessment, and liquidity risk management plans.

Among the simplifications, it’s worth mentioning that small and non-complex undertakings don’t have to analyse long-term climate change scenarios. But they still have to assess the materiality of exposure to climate change risks, which is required of all insurance and reinsurance undertakings. It’s also stipulated that small and non-complex undertakings aren’t subject (unless otherwise stipulated by member states) to the audit requirement that’s been introduced for other insurance and reinsurance undertakings in relation to the balance sheet presented as part of the solvency and financial condition report. The exemption is explained by the fact that small and non-complex undertakings aren’t considered relevant for the financial stability of the EU.

With specific reference to sustainability reporting, by way of derogation from the general rules in Article 19a of Directive 2013/34/EU, “small and non-complex undertakings” can limit sustainability reporting to the following information:

1. a brief description of the company’s business model and strategy;
2. a description of the company’s policies in relation to sustainability matters;
3. the principal actual or potential adverse impacts of the undertaking on sustainability matters, and any actions taken to identify, monitor, prevent, mitigate or remediate such actual or potential adverse impacts;
4. the principal risks to the undertaking related to sustainability matters and how the undertaking manages those risks;
5. key indicators necessary for the disclosures referred to in points (a) to (d).

If they use the exemption, small and non-complex undertakings report information in accordance with the sustainability reporting principles applicable to SMEs set out in the Directive. They can make use of proportionality measures, unless restricted by the supervisory authority on the basis of specific concerns in relation to the undertaking’s risk profile.

Specifically, it’s stipulated that a serious concern exists when the Solvency Capital Requirement is no longer met or there’s a risk that it won’t be met in the following three months. Or when the system of governance of the undertaking isn’t effective, or when material changes in the undertaking’s risk profile could result in significant non-compliance with any of the criteria established for identifying the undertaking as small and non-complex.

Overall, the changes introduced aim to implement the proportionality principle across member states and avoid excessive burdens on insurance and reinsurance companies.

More broadly, the Directive recognises that insurance undertakings can provide private sources of financing for European businesses and contribute to the goals of the European Green Deal by making the economy more resilient and providing protection against a wide range of risks. It aims to provide incentives for insurers to contribute to the long-term sustainable financing of the economy.

Sustainability reporting, even in its simplified form for small and non-complex undertakings, will be the litmus test for ascertaining the undertaking’s sustainability strategy and its impact on sustainability matters.