Building Solvency II equivalence into your strategic plans

Equivalence is a key focus for multinational insurance groups. The status of equivalence in a particular country will affect whether your business will have to restate local capital requirements according to Solvency II rules, which may in turn affect the pricing of certain products.

Bermuda, Switzerland and Japan are seeking equivalence in the first wave. A second tier of countries, which currently includes Australia, Singapore, Hong Kong and South Africa, are set to join a transitional tier, which will confer equivalence for a specified period while their solvency rules move towards Solvency II. The US is yet to formally join this group. Its inclusion is clearly crucial to many UK insurers, given the size of the US market and its importance to their businesses. Discussions between EU and US regulators are continuing. The challenge is how to secure agreement across all the different state jurisdictions within the US.

Equivalence is an important consideration in structuring decisions, with a number of groups looking to move to a branch structure to ease movement of capital around the business. Some are also reviewing their domicile as they seek a base where regulation is aligned to their strategy and avoid the potential traps from non-equivalence. Further considerations include buying reinsurance from non-equivalent jurisdictions and how equivalence will affect acquisition decisions.

Looking ahead, equivalence will provide a further catalyst for regulatory harmonisation worldwide, which may eventually allow groups to apply similar capital rules across all their operating territories. Key areas of focus on the IAIS convergence agenda include group supervision and the own risk and solvency assessment (ORSA).