Solvency II 2027 reform — does the "look-through" still pay?

Context — the repackaging note

A multi-dealer repackaging platform (e.g. SPIRE SA, a Luxembourg société de titrisation) issues series of secured, limited-recourse notes: the SPV buys a collateral bond and overlays a derivative (asset / cross-currency / interest-rate swap) to reshape the cash flows, and the investor holds a single note paying the combined cash flows.

The question

The 31 January 2027 Volatility Adjustment (VA) reform changes whether look-through is still the optimal election — for a foreign government bond + cross-currency swap wrapped as a single EUR note. Below is the €/notional P&L decomposed across the spread SCR, the swap counterparty/currency SCR, and the new VA / CSSR mechanism.

The mechanism in one paragraph

Today the VA is a flat reference-portfolio add-on applied at a 65% application ratio — identical for everyone regardless of the assets actually held. So whether you look through the note or not, the VA you apply to liabilities is the same; the only thing that moves is the asset-side spread SCR. From 31 January 2027 the gross ratio rises to 85%, but it is now multiplied by an entity-specific Credit Spread Sensitivity Ratio (CSSR ∈ [0,1]), fed only by fixed-income spread-PVBP in the liability currency. That is what breaks the symmetry between the two treatments.

Current regime pre-31 Jan 2027

The applied VA is identical whichever way you report the note, so the decision is purely a capital one.

New regime from 31 Jan 2027

Look-through now reveals a USD-spread bond (wrong currency for the EUR VA bucket) plus a swap contributing zero spread-PVBP — so the position barely supports your EUR CSSR. Held opaque as a single EUR note, the full market value counts as EUR fixed income and lifts the CSSR. Look-through therefore acquires a new, hidden cost it never had before.

The advantage reverses when…

• the wrapper is high-rated or guaranteed, so its spread charge shrinks toward 0 and look-through's SCR edge largely disappears; and/or
• your VA-eligible BEL is large relative to this position, so the CSSR uplift is worth more than the marginal €/bp shown above.

Where it crosses over from 31 Jan 2027

Net economic advantage of look-through over the opaque note (€m PV per €100m), as the wrapper rating worsens left → right. Above the zero line, look-through still wins; below it, the structured note wins. The three lines are different sizes of VA-eligible liability book leaning on this position's CSSR contribution — the second lever alongside rating.

SCR relief is valued at a cost-of-capital PV burden (≈ 6% × asset life ≈ 0.4× the SCR amount, risk-margin logic); VA give-up is the own-funds value forgone by look-through's CSSR drag. Spread charges per Art. 176 at duration 7: AAA 5.5%, AA 6.7%, A 8.4%, BBB 15.5%. Illustrative — exact crossover depends on your CSSR, basis and book size.

The reading: with a small or medium VA book, look-through stays ahead across the whole rating scale — the 0% sovereign charge is simply too valuable to give up. Only with a large VA book does the opaque note win, and even then only for higher-rated wrappers (AAA–A), where the note's own spread charge is low enough that the VA gain dominates. That is the precise sense in which the reform "reverses" the decision.

Bottom line

The intuition holds in direction: post-2027 the structured-note treatment gains a VA advantage it never had, and look-through stops being free. But it is not a clean flip — it is a genuine breakeven between the wrapper's spread charge and the VA/CSSR uplift. The honest one-liner: the reform converts look-through from a no-brainer into a trade-off.

Who is potentially affected

Scenario A — look-through stays optimal (small/medium-book lines, always above zero)

Insurers who have discontinued the VA or barely use it: the opaque note's VA upside is ~zero, so nothing offsets look-through's capital edge — piercing to the 0% sovereign always wins. The 2024 disclosures name Allianz, Talanx/HDI, R+V and MAPFRE as having dropped the VA; add UL-heavy, strongly-capitalised groups with small guaranteed back-books.

Scenario B — structured note becomes newly attractive (large-book line dips below zero)

Insurers with a large VA-eligible guaranteed book and sizeable foreign-currency asset programmes swapped back to base. The CSSR uplift on a big EUR BEL then outweighs the spread charge given up on a high-rated wrapper.

In between — the genuine breakeven cases

Moderate VA users — the disclosures list Generali, Aviva, VIG, Groupama, Legal & General as applying the VA — sit near the crossover, where the answer flips on the specific wrapper rating and their actual CSSR. These are the cases where intuition won't tell you which side of zero they land on, and a parametric run earns its keep.

Sources

• EIOPA Q&A 2321 — look-through for repackaged notes (Solvency II Art. 84)
• Milliman — Navigating the new Volatility Adjustment framework
• Milliman — Implications of the Solvency II Directive VA amendments
• European Commission — Delegated Regulation C(2025) 7206
• Finalyse — Updated Solvency II Delegated Acts, Part 2 (SCR)
• Skadden — The Standard Formula, Ch. 8: Capital Requirements
• BaFin — Government bonds: treatment of risk under Solvency II
• Solvency II Wire — VA users among Europe's largest groups
• Solvency II Wire — Generali SFCR 2024
• Milliman — 2024 SFCR life insurers, Netherlands
• S&P Global — the world's largest life insurers 2024