The importance of equivalence: preserving the global competitiveness of pan-European insurance companies

This topic was among those discussed at the September Eurofi Financial Forum in Poland, where Swiss Re CEO Stefan Lippe participated in a panel discussion on the topic of Solvency II. Extracts of his arguments appeared in the newsletter for the event. A short summary is provided below.

The upcoming Solvency II regime aims to establish a level playing field for re/insurance companies in Europe, through implementing a common set of rules and a harmonised supervisory approach across the European Union.

But is the same true for internationally active insurance and reinsurance companies not based in the EU? Companies, for example, that are using an economic approach and internal models and are reporting under risk- and economic-based regulatory systems like the Swiss Solvency Test (SST).

Certainly, equivalence is a key component of a new regulatory regime. A positive equivalence assessment would ultimately allow third country regulators to perform Group Supervision and EU regulators to rely on third country regulatory standards for Group Capital Calculations – this would accelerate regulatory convergence and resolve unlevel playing fields. It is important that well advanced countries like Switzerland achieve equivalence in order to avoid multiple reporting requirements with different capital regimes, as that would be costly and may lead to inefficient risk allocation, ultimately leading to a competitive disadvantage.

The equivalence assessment has to be an objective and principle-based process, as the third country regimes will differ in practice, although adhering to the basic principle of well advanced risk-based supervision. The first draft advice from the European Insurance and Occupational Pensions authority (EIOPA) to the European Commission is reassuring that the equivalence assessment is moving into the right direction.

Equivalence and Switzerland
The question of equivalence is particularly relevant for Switzerland. The SST, which entered into force on 1 January 2011, has been developed on similar economic principles to Solvency II. In view of these similarities, Swiss Re sees recognition of equivalence of these two regimes as a priority. Shortly before the Eurofi meeting, EIOPA released its draft advice on equivalence assessments for Japan, Bermuda and Switzerland.

What was the report recently released by EIOPA about?
EIOPA published a report on 17 August containing draft advice on the equivalence assessment on Solvency II for Japan, Bermuda and Switzerland. The assessment is done against pre-defined criteria/principles. For Switzerland, the assessment covers group supervision of non-EEA countries (article 260), reinsurance supervision of non-EEA countries (article 172), and use of national solvency capital calculations for the SST for EEA group capital calculations (article 227).

What does EIOPA’s draft advice say
about Switzerland?
Switzerland is seen as equivalent on most aspects of its supervisory regime; not- full-equivalence is only suggested for governance (where the requirement is to have compliance and audit function for all undertakings) and public disclosure requirements on both group supervision (art. 260) and reinsurance supervision (art.172).

This was already expected as the Swiss regime currently foresees far less disclosure requirements than the future Solvency II regime. Furthermore EIOPA noted that all insurers should be required to have a compliance and internal audit function comparable to Solvency II.

EIOPA recognised that FINMA is currently in the process of reviewing these areas. On the assessment of the use of the SST for EEA group capital calculations (art. 227), EIOPA sees the FINMA regime as equivalent without any caveats.

What are the next steps?
The draft was released for on a period of public consultation that ended on 23 September 2011. Advice, including the feedback from the consultation period, will be sent to the EU Commission who ultimately decides on the equivalence assessment.

Published 17 October 2011

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