Government-Led Regulatory Proportionality and Market Development: Evidence From Spain’s Funeral Insurance Under Solvency Ii

• Empirically analyses Solvency II versus Spain’s simplified regime. • Uses real data from a representative insurance portfolio. • Finds over 80% reduction in capital requirements under the adapted model. • Shows how regulatory flexibility affects solvency and market expansion. • Stresses the need to balance proportionality, fairness, and coherence. This study examines how government-led regulatory design shapes market outcomes when harmonised frameworks are applied to locally specific financial products. Focusing on Spain’s funeral insurance market, it quantifies the effects of a national proportionality-based adaptation within the Solvency II regime by applying both the simplified Spanish approach and the standard Solvency II framework to the same real insurer portfolio. Maintaining actuarial, demographic and financial assumptions constant, the results show that the adapted regime reduces Solvency Capital Requirements by more than 80% in key modules, indicating that observed solvency margins are driven primarily by regulatory architecture rather than underlying risk. These differences alter competitive conditions by lowering entry and operating costs for providers qualifying for the adapted treatment, thereby creating incentives based on regulatory classification rather than technical efficiency. At the same time, Spain’s experience suggests that a well-calibrated adaptation can foster the consolidation of a stable and socially widespread market that remains resilient under adverse shocks, including the COVID-19 mortality surge. The findings highlight a central governance trade-off: while regulatory harmonisation enhances transparency and comparability, excessively uniform implementation may constrain specialised products with social value. The study therefore argues for proportionality mechanisms that preserve supervisory consistency while allowing governments sufficient flexibility to support market development and financial inclusion.