Equivalence under Solvency II
Process for assessing equivalence of third countries under Solvency II
Solvency II includes provisions for assessments of the solvency regimes and systems of group supervision of countries outside the EU (termed “third countries”). The purpose of these assessments is to determine whether the regimes and systems assessed are equivalent to the comparable provisions of Solvency II.
If they are equivalent, then EU supervisors must take the assessment into account in their regulatory approaches. In effect, on the issues covered by the assessments, the third country is treated more as if it were an EU member state. This would bring advantages to reinsurers situated in such third countries, as well as, to insurance groups with a presence in the third country.
The overarching principle of equivalence is to ensure that a third countries supervisory regime ensures a similar level of policyholder and beneficiary protection as Solvency II. There are three tests for equivalence:
A test of whether a third country’s solvency regime applied to reinsurance activities of third country undertakings is equivalent to that laid down in the Solvency II Directive.
A finding of equivalence for reinsurance supervision means that reinsurance contracts between EU insurers and third country reinsurers are treated in the same manner as those concluded with EU reinsurers. In particular, member states cannot require pledging of assets to cover unearned premiums and outstanding claims provisions in relation to such reinsurance contracts.
A test of whether an insurer in a third country owned by an insurer in the EU is subject to a solvency regime equivalent to that laid down in the Solvency II Directive.
A finding of equivalence for the solvency regime means that calculation of group solvency may take into account the Solvency Capital Requirement (SCR) and own funds of the third country insurer. This applies if group solvency is being calculated in accordance with method 2 – the “deduction and aggregation” method, rather than method 1, which is the default method.
A test of group supervision, not of a third country’s supervision of solo entities. If the third country is judged to be equivalent, member states will rely on the group supervision exercised by the third country supervisor if EU insurers have a parent undertaking in a third country. Member state supervisors will form a college led by the third country group supervisor.
In the absence of third country equivalence, member states can either apply the Directive’s group supervision provisions or other methods which ensure appropriate supervision of the insurers in a group.
The Directive allows the Commission to grant a third country temporary or provisional equivalence, if they meet criteria set out in the Directive, even if they do not meet the criteria for full equivalence. Temporary equivalence is until 31 December 2020 (reinsurance and group supervision) or for up to 10 years (group solvency). Conditions for temporary equivalence are essentially intended to ensure that the third country will move to be equivalent within the period specified. The Commission is assisted by EIOPA in making these decisions.
In June 2015, the European Commission adopted two delegated acts, covering:
- Switzerland – to be granted full equivalence for reinsurance, group supervision and group solvency.
- Australia, Bermuda, Brazil, Canada, Mexico and the USA – to be granted provisional equivalence (for 10 years) for group solvency (for Bermuda, this excludes captives).
In September 2015, the delegated act granting full equivalence to Switzerland was published in the Official Journal of the EU.
In December 2015, the delegated act granting provisional equivalence for group solvency to Australia, Bermuda, Brazil, Canada, Mexico and the USA was published in the Official Journal of the EU.
In November 2015, the European Commission adopted a further two delegated acts, covering:
- Bermuda – to be granted full equivalence for reinsurance, group supervision and group solvency.
- Japan – to be granted provisional equivalence for group solvency (for 10 years from 1 January 2016) and temporary reinsurance equivalence (until 31 December 2020).
On 4 March 2016, the delegated acts on equivalence with Solvency II for Bermuda (Commission Delegated Decision 2016/309) and Japan (Commission Delegated Decision 2016/310) were published in the Official Journal of the EU.
The decision on Bermuda excludes captives and special purpose vehicles.