24/03/2015

Solvency II and the treatment of third country jurisdictions

Because insurance is a global industry, the Solvency II regime (entering into force on 1 January 2016) includes some provisions regarding the recognition of third country jurisdictions as offering an equivalent level of supervision. For FERMA, an equivalence decision means an easier access to insurance capacities.

The process leading to the Solvency II equivalence of the insurance supervisory system of a third country jurisdiction is conducted by the European Commission in cooperation with EIOPA, the European insurance supervisor.

The Solvency II Directive has three types of equivalence.

  1. Equivalence under article 172 deals with the recognition of reinsurance contracts between an EU (re)insurer and a non-EU reinsurer. If equivalence is granted for the non-EU reinsurer jurisdiction, the contract will be treated as if it were a full EU reinsurance contact.
  2. A second type of equivalence is about the group solvency calculation and is of particular interest for EU-based insurance companies (article 227). If the country where the EU insurance group has subsidiaries receives an equivalence decision, then the insurance group will be authorised to calculate capital requirements for its branch according to the local solvency rules, deemed as equivalent to the Solvency II capital requirements.
  3. Finally, the third type of equivalence relates to the question of group supervision (article 260). When a non-EU insurance company headquartered in an equivalent jurisdiction has subsidiaries in the European Union, the home supervisor will be responsible for the whole insurance group. This is meant to avoid duplication of supervision for a single insurance group.

For these three types of equivalence, which could be temporary or unlimited, the EU, with the support and advice of EIOPA, is responsible for drafting an equivalence decision for the specific jurisdiction. The equivalence assessment is a long and technical process. The objective is to ensure a level of supervision and customer protection for policyholders that are similar to what Solvency II offers.

Implications for risk managers

For risk managers, equivalence decisions are likely to impact the offering of insurance capacities in the EU. Equivalence facilitates greatly the insurance trade between the EU and approved jurisdictions. It saves, among other things, compliance costs and lengthy procedures, making the EU insurance market more attractive to the benefit of risk managers. Competition is increased and there is a wider access to foreign financial capacities.

This is why FERMA has supported since 2010 equivalence decisions for mature and well-known jurisdictions like Bermuda,
Switzerland or Japan, for which EIOPA has recently published its equivalence advice.

This level of sophistication and their stable regulatory environments are strong arguments towards a positive equivalence decision.

The European Commission is expected to release in the upcoming weeks the legal texts of equivalence decisions about this first batch of countries. As delegated acts, those texts are subject to the scrutiny with veto powers of the European Parliament and the Council of the EU, giving a political taste to a highly technical process.

FERMA intends, therefore, to tell both legislators about the financial impacts of delaying or denying the equivalence to some non-EU jurisdictions that are, nevertheless, essential for the protection of EU industries and their coverage of risks. Businesses rely for protection against some major losses in EU on payments which partly originate from these offshore jurisdictions.