What Does Equivalence Mean to Insurers?

Politics appears to come in play, making winners and losers. But there are opportunities too. 

The story of limited equivalence-granting is significantly more complicated than it might appear at first glance. Like so many issues in European politics, things are not as simple as they seem. Most fundamentally, the EC’s equivalence decisions have so far had no practical impact. They must be approved through formal legislative acts of the European Parliament. The Parliament was widely expected to rubber stamp approval within a three-month window. But instead the Parliament extended its deadline to Dec. 7, 2015.

Parliamentarians were apparently unhappy that the EC presented their decisions for approval under two acts, one for Switzerland and one for the six partial-equivalence countries. In published correspondence between the politicians and the policymakers, the Parliament stressed its preference for each equivalence decision to be presented to it “in a separate manner, per third country and per area” for approval.

This, of course, begs the question: To which country does the Parliament object? No answers have been revealed. Rumblings have suggested that some parliamentarians have judged the EC’s assessments as a little slapdash.

If Parliament is being coy, the EC is acting in the opposite way, as the equivalence rift between the two European government bodies is becoming more apparent. Speaking at a conference of national supervisors held in Frankfurt in late November, Olivier Guersent, the European Commission’s director general for financial stability, financial services and capital markets union, foreshadowed the new decisions on equivalence for Bermuda and Japan. The change of heart for Bermuda came after the European Insurance and Occupational Pensions Authority (EIOPA) said in a September report that regulatory changes in Bermuda brought it closer into line with Solvency II. The bureaucrat also announced that equivalence was expected to be declared by the EC for six unidentified countries in December, although a later statement by the Commission contradicted this, declaring that no new equivalence decisions would be made in 2015.

However, Guersent—and by implication the EC—took a step much further during his presentation to supervisors. His words will resound in Brussels and Strasbourg in apparent defiance of Parliament’s authority. “I don’t think that national supervisors should actively treat non-EU countries as non-equivalent in the meantime if there is a positive Commission equivalence decision pending in Parliament,” he declared. “They should exercise forbearance in this respect.”

Guersent’s informal nod reflects another intriguing aspect of the equivalence story: European motivations. According to Chris Finney, a regulatory lawyer at Cooley, a European reinsurer and insurer, operating in a non-equivalency country will usually need more capital than it would under local rules. That means European insurance and reinsurance groups could get a break under equivalency, because they wouldn’t have to top up their capital to make the solvency of their non-equivalency-located companies compliant.

“The [European] Commission,” Finney wrote in the Global Legal Post, “has therefore been kind enough to solve this potential problem.”

Other reactions have been varied. Munich Re has said it expects Solvency II will stimulate reinsurance purchases as some insurers move towards their regulatory capital thresholds by acquiring contingent capital from the reinsurance markets. Others have suggested insurers from non-equivalence countries that have large EU operations may choose to create a European sub-group rather than subjecting their head office to Solvency II standards.