Solvency II – Commission’s equivalence decisions leaves uncertainty for many European groups
Recent decision by the European Commission regarding Solvency II relevant in Switzerland has left many questions for firms in Europe.
It was no surprise to see the European Commission decide that Switzerland’s regulatory regime is equivalent to Solvency II in all three areas (reinsurance (Article 172), recognition of local solo solvency basis where the entity is included in the group solvency calculation on a deduction and aggregation basis (Article 227) and group supervisory (Article 260)). However, no final decisions were taken on Bermuda (the only other country seeking full equivalence) or Japan (reinsurance).
Although there will be a second round of equivalence decisions later this year, this will most likely not be not until quarter 3. Given the progress made by the Bermuda Monetary Authority, it seems unlikely that Bermuda will not gain either full or temporary group equivalence in respect of the groups it will supervise.
This leaves groups parented from Bermuda with a significant issue. Allowing for the review process by the European Parliament and Council, a final decision on Bermuda groups equivalence may not be known until very close to the start of Solvency II. Most of these groups are likely to want European level sub-group supervision to be waived, as permitted by Guideline 5 of EIOPA’s Guidelines on Group Solvency. However, will group supervisors be willing to consider such a request in the absence of a formal equivalence decision? The absence of such a waiver could result in a significant burden for such groups, including the need to submit the day 1 reporting at the European sub-group level.
Treatment of solo insurers within the group solvency calculation
The Commission also announced that it regards the prudential supervisory regimes of Australia, Bermuda (excluding captives), Brazil, Canada, Mexico and the USA as meeting the provisional equivalence classification for Article 227 purposes (treatment within group calculation). Provisional equivalence runs for 10 years, which may be renewed for further periods of 10 years, potentially ad infinitum. The rationale for the list of countries that made the first cut of provisional equivalence decisions is unclear, but may be driven both by the number of European groups with insurance entities in the selected countries and on-going developments to the local regimes.
In 2012, the original list of countries that the Commission announced had expressed an interest in the transitional equivalence regime was Australia, Chile, Hong Kong, Israel, Mexico, Singapore and South Africa, although Brazil and Mexico have publicly spoken about Solvency II equivalence subsequently. Neither the USA nor Canada sought to be included within the equivalence process. However, the provisional equivalence category that was devised in the Omnibus 2 negotiations was designed to cater for those regimes that did not seek to participate in the equivalence assessment process. Although originally thought of as a way for dealing with the challenges of US negotiations, it has been recognized for some time that Canada could also benefit from this arrangement.
The Commission has therefore effectively drawn its line under the need for European groups to be required to holdcapital above local requirements in respect of the risks within group companies located in those jurisdictions. However, this will only be the case where the group is granted permission to perform its group solvency calculation (at least in respect of those entities) on a deduction and aggregation basis, so anapproval process is still required.
However, groups with insurance entities based in Chile, Hong Kong, Israel, Singapore and South Africa face a longer wait to determine whether they will be able to include these entities on a solo basis. This is likely to delay any deduction and aggregation calculation basis applications, which could result in groups reconsidering their approach to group supervision. In particular, it should be noted that EIOPA has already stated (in its April Opinion on Internal Models) that no assumption can be made regarding equivalence in the absence of a Commission draft delegated act. Where such operations are small, affected groups may wish to consider applying for these entities to be excluded from the scope of group supervision under Article 214 using the negligible interest argument.
It is worth remembering that the provisional decisions have no impact on worldwide group supervision, so groups parented in the countries named above will still need to agree with their group supervisor the basis on which the worldwide group supervision will be performed in accordance with Article 262.
The European Parliament and the Council now has three months (extendable to six months) to consider these decisions before they are published in the Official Journal and enter into force. By making the provisional equivalence decisions as one draft act, instead of one per country (and affected Article) as the European Parliament had requested, it seems very likely that both draft acts will be passed.