On June 5, 2015 the European Commission released an announcement that detailed its Solvency II equivalence decisions. The decisions deemed that the insurance rules implemented by Switzerland achieve the same outcome as those used in the EU in all three areas subject to an equivalence assessment and that the rules in the US, Australia, Bermuda, Brazil, Canada and Mexico are expected to do so in relation to one area only. These decisions are now subject to review by the European Parliament and the Council. This scrutiny process could take up to six months, and the decisions will only enter into force if the process is completed successfully.
There are three areas of Solvency II where there is a requirement for equivalence evaluation, namely solvency calculation (Article 227 of Solvency II), group supervision (Article 260) and reinsurance (Article 172). Solvency calculation is of relevance to EU (re)insurers with participations or subsidiaries ("activities") outside the EU. If an EU (re)insurer is active in a third country that is deemed equivalent, it can carry out its EU prudential reporting for a subsidiary in that third country under the rules of the third country, instead of Solvency II rules, if deduction and aggregation is allowed as the method of consolidation of group accounts. On the other hand, group supervision is of relevance to (re)insurers from third countries with activities in the EU. If the third country's rules are deemed equivalent in this area, they are exempted from some aspects of group supervision in the EU.
Reinsurance is of relevance to (re)insurers from third countries who enter into a reinsurance arrangement with a (re)insurer in the EU. If the third country's rules are deemed equivalent, they must be treated by EU supervisors in the same way as they treat EU reinsurers. Thus, if a solvency regime of a third country is deemed equivalent in this regard, its reinsurers cannot be subject to a requirement to post collateral in the EU.
The Commission has found the Swiss insurance regulatory regime to be fully equivalent to Solvency II in all three of these areas and, thus, full equivalence is granted for an unlimited period. The Commission has found the US, Australia, Bermuda, Brazil, Canada and Mexico to be provisionally equivalent in relation to the solvency calculation only. These six countries do not currently meet all the criteria for full equivalence in this area, but there is an expectation that an equivalent solvency regime will be adopted by these third countries within the foreseeable future. Notably, there is no finding of equivalence in relation to group supervision or reinsurance.
A determination of provisional equivalence is valid for a period of ten years. At the end of that period, the European Commission should carry out an analysis of the developments in the third country’s regime, resulting in either a determination of full equivalence, a renewed determination of provisional equivalence or non-renewal of provisional equivalence. There is no difference in effect between provisional and full equivalence.
The consequences of not being granted equivalence (provisional or full) is significant. For example, if a non-EU country is not granted equivalence in all areas of Solvency II, it is possible that an EU country may unilaterally impose additional regulatory requirements on entities and contracts of that non-EU country. Of the three regulatory areas that are assessed for Solvency II equivalence – solvency calculation for EU groups, group supervision and reinsurance – solvency calculation and reinsurance are of particular relevance for a subsidiaries of EU-based groups. Group supervision and reinsurance are of relevance for non-EU (re)insurers.
With respect to reinsurance, absent equivalence treatment an EU country’s regulator could impose additional requirements, such as the imposition of collateral requirements, on contracts of reinsurance which originate outside the EU. With respect to solvency calculation, Solvency II requires EU (re)insurers to calculate consolidated group solvency across their global insurance business. Where the EU (re)insurer has a subsidiary based in a non-EU jurisdiction, absent equivalence treatment of the non-EU jurisdiction the EU regulator could require that the EU insurer impose on the non-EU subsidiary the use of Solvency II formula for European reporting purposes. Finally, in respect of group supervision, where a non-EU (re)insurer has a subsidiary in the EU, absent equivalence, the whole group will be subject to the Solvency II group supervision requirements.
The US insurance industry, through the ACLI, RAA and other trade associations has been pushing the federal government to negotiate a covered agreement with the EU to prevent the above referenced potentially adverse, competitively disadvantageous outcomes from a lack of equivalence decision by the EU. Those negotiations continue to be mired in political positioning within the federal government (at Treasury and the US Trade Representative), with the US state regulators and with the EU regulators and time is running short. Solvency II is scheduled to take effect on January 1, 2016 and, at present, it appears unclear if the US will be granted equivalence in respect of group supervision and reinsurance.