Over recent years I have observed at close quarters a profound change in the European insurance world — a change that, somewhat surprisingly, has remained below the radar of the wider public, despite having a direct bearing both on how insurers manage risk and on how investors approach subordinated bonds in the sector.

I am referring to the conclusion of the Solvency II transitional period, which will formally end on 31 December 2025 and which represents the culmination of a transformation that has taken nearly a decade.

It is an evolution that has altered the capital structure, the quality of the financial instruments used by insurers and, above all, the entire market for insurance subordinated debt. And it has done so by literally rewriting the vocabulary of risk and capital.

Why Solvency II is a revolution and not merely an update

For over forty years, the European insurance sector operated under the logic of Solvency I — a framework developed in the 1970s, based on simplified formulae and estimates that were often poorly aligned with actual risk.

With Solvency II, all of that changed.

The new regulation introduces a modern, three-dimensional model built on three pillars: quantitative requirements (SCR and MCR), governance and internal risk management (ORSA), and disclosure obligations. It is no longer about “having capital”, but about “having the right capital for the risk being taken”.

Within this new framework:

  • capital is classified into Tier 1, Tier 2 and Tier 3,
  • each level has specific loss-absorption characteristics,
  • requirements are calibrated to actual market, credit, underwriting and operational risks,
  • the valuation of technical provisions becomes market consistent, i.e. in line with prevailing market conditions.

The result is a sector that is more robust, more transparent and more predictable for investors as well. The transition, however, did not happen overnight: it required a massive effort to realign capital structures and financial instruments.

The great subordinated debt turnover: what RT1 and Tier 2 really are

A crucial part of the transformation concerns the instruments issued by insurers to meet the new requirements.

Solvency II does not merely specify “how much” capital is needed; it also determines “which instruments” may be used.

This gives rise to the distinction between:

  • RT1 (Restricted Tier 1), the “purest” and most risky form of capital, akin to bank AT1 instruments,
  • Tier 2, a subordinated debt instrument with lower cost and less stringent requirements,
  • and legacy instruments, created under Solvency I and today almost entirely outside the regulatory perimeter.

The entire decade from 2016 to 2025 was dominated by the replacement of old capital with new instruments better aligned with the rules. At the peak of the transition:

  • RT1 issuance exceeded €30 billion equivalent,
  • with more than half concentrated in the years 2024–2025,
  • whilst non-RT1 subordinated instruments outstanding surpassed €150 billion,
  • and the remaining legacy instruments to be replaced amount to approximately €5 billion.

These figures are not a technical footnote: they have direct implications for investors.

Why? Because once the transition is complete, there will no longer be any need for large new RT1 issuances. And when supply declines whilst demand remains firm, prices tend to stabilise or rise, and spreads tend to compress.

Do insurers really prefer RT1? Spoiler: not any more

In theory, RT1 instruments are ideal: they absorb losses, are perpetual and strengthen the highest-quality capital.

In practice, however, insurers have quickly learnt that:

  • RT1 instruments are costly to issue,
  • investor demand is selective,
  • Tier 2 offers greater flexibility at a lower cost.

It is therefore no coincidence that many issuers have chosen — and will continue to choose — to reduce their RT1 weighting in favour of Tier 2.

This does not mean RT1 instruments will disappear — they remain essential to the capital structure — but that they will become scarcer.

For investors, this is valuable information: future scarcity could improve the technical profile of RT1 instruments already in circulation.

And the analogies with the banking world? They exist, but only up to a point

Anyone familiar with bank bonds will notice the resemblance between RT1 and AT1.

The parallel is valid: banks underwent a similar evolution under Basel III, replacing old Tier 1 instruments with new AT1s.

The material difference, however, lies in the nature of the business:

  • a bank is an intermediary that lives on liquidity and leverage,
  • an insurer has long-term liabilities and more stable risk models.

This is why the RT1 market has shown less volatility than the AT1 market, even following extreme events such as the Credit Suisse collapse.

The current theme: exposure to private credit

In recent months a great deal has been written — at times in apocalyptic tones — about insurers’ exposure to private credit.

It is a genuine issue, but it needs to be put into context.

Insurers have always invested in illiquid assets:

  • infrastructure,
  • commercial real estate,
  • mortgages,
  • private equity,
  • private corporate credit.

Private credit is just one piece of this puzzle.

The real question is not its presence, but its pace of growth and any ownership links between those originating the credit and those purchasing it.

When the insurer and the originator belong to the same group, distorted incentives and governance risks can emerge.

This dynamic has been observed primarily in the US market.

In Europe, by contrast, the picture appears more closely supervised, more prudent and subject to less internal commercial pressure.

For the investor, the implication is straightforward: one should not avoid private credit, but understand how it is positioned within the portfolio and under what controls.

What to expect in 2026 and beyond: a healthier, more mature and more selective market

With the end of the Solvency II transitional period, we can draw up a balance sheet:

  • the European insurance sector is today more financially sound,
  • capital is of higher quality,
  • subordinated instruments are more consistent with their intended function,
  • technical provisions are valued more rigorously,
  • the debt market has become more disciplined.

For investors, this translates into a clearer and more legible environment.

In particular:

  • future RT1 supply will be limited,
  • demand could remain elevated,
  • spreads could compress,
  • Tier 2 will continue to cover the bulk of insurers’ needs,
  • the selection of individual issuances will become even more important.

The investor must pay attention not only to yield, but also to:

  • call mechanisms,
  • loss-absorption clauses,
  • subordination structure,
  • issuer rating,
  • solvency (SCR ratio),
  • quality of governance and assets.

Why this transformation matters beyond specialists

This might seem like a topic for technicians and regulators, but it is not.

Insurers are systemic actors, and the instruments they issue are among those most widely held by:

  • bond funds,
  • ETFs,
  • multi-asset products,
  • institutional portfolios,
  • sophisticated retail investors.

Understanding how insurance capital is changing means understanding the stability of an important part of the European financial market.

In this sense, Solvency II is not merely a sectoral reform: it also provides an indirect guarantee for investors.

It reduces hidden risks, clarifies the capital hierarchy, improves the transparency of issuances and, consequently, enables more informed investment decisions.

Conclusion: a more robust sector for a more mature market

The transformation imposed by Solvency II has been lengthy, complex and at times onerous for insurers, but it has brought the European insurance sector to a level of financial soundness markedly superior to that of the past.

It has cleaned up the market of opaque instruments, created a clear capital hierarchy and given investors a more legible framework.

The result?

A more stable sector, a more efficient bond market and a context in which opportunities remain attractive — provided one knows how to distinguish between yield and genuine risk.