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VI. Principal Regulatory Developments Affecting Insurance Companies
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European reinsurance and catastrophe risks, to compete on an equal footing in Europe with EEA companies.
However, the exclusion of special purpose insurers from the equivalence assessment means that European cedents will have to insist that the arrangements comply with Solvency II rules in order for them to count reinsurance with such vehicles for solvency purposes. Most notably, compliance with rules on collateral are likely to be key.
The Japanese Financial Services Agency sought to achieve equivalence only in respect of reinsurance so as to allow Japanese reinsurers to assume business in Europe without collateral requirements for unearned premium or reinsurance recoverables. Japanhasbeengranted(i)temporaryequivalence in respect of reinsurance and (ii) provisional equivalence for group solvency purposes. Temporary equivalence is granted for five years and this may be extended for an additional year. Provisional equivalence is granted for third countries that may not meet all the criteria for full equivalence but where an equivalent solvency regime is expected to be adopted and applied by the third country in the foreseeable future. Provisional equivalence is granted for a period of 10 years and may be renewed for an additional 10-year period.
The equivalence decisions in respect of Bermuda and Japan are subject to a three-month review by the European Council and European Parliament, with a potential extension of up to three additional months. Since the review periods will not end until after the Solvency II implementation date, the decisions of the Council and Parliament will apply retroactively from January 1, 2016.
4. The U.S. and Other Countries Granted Provisional Equivalence
The U.S., along with Australia, Brazil, Canada and Mexico, has been granted provisional equivalence for group solvency purposes only.13 As such, these jurisdictions will be treated as equivalent for purposes of group solvency for a period of 10 years from January 1, 2016. At the end of this period, the
13 European Commission. Press Release. Insurance: European Commission adopts a first package of third country equivalence decisions under Solvency II. Web16 December 2015. http://europa.eu/ rapid/press-release_IP-15-5126_en.htm
European Commission will need to reassess each country’s regime to decide whether to grant full equivalence or grant an additional period of temporary equivalence.
In practice, provisional equivalence means that EEA headquartered insurance groups that are active in one of these countries can either (i) use the default capital requirement calculation method by assessing group solvency using Solvency II rules on an accounting consolidation basis or (ii) use the alternative method by disaggregating group operations and applying local capital requirement rules of equivalent jurisdictions to operations in such equivalent jurisdictions while applying Solvency II rules to other operations of the group. However, in order to apply the alternative method the group must first demonstrate to its group supervisor that the exclusive application of the default method is inappropriate.
As noted and discussed in Section VI.C above, on November 20, 2015 the Treasury and the USTR announced plans to initiate negotiations to enter into a covered agreement with the E.U. The covered agreement will be negotiated to address reinsurance collateral, cross- border regulatory information exchange issues and group supervision issues between the E.U. and the U.S.
The covered agreement is of particular interest to U.S. and E.U. reinsurers. E.U. reinsurers have long been subjected to U.S. reinsurance collateral requirements, which result in them having not only to satisfy E.U. solvency rules, but also local requirements as well when underwriting business in the U.S. Likewise, U.S. reinsurers operating in the E.U. will face similar duplication of capital requirements between U.S. requirements and Solvency II requirements. The negotiations of a covered agreement may be a tool for achieving a set of measures for ensuring that U.S. and E.U. reinsurers are not subject to multiple sets of capital requirement rules.
However, as detailed further in Section VI.C above, U.S. state insurance regulators generally consider a covered agreement to be a drastic step because it could potentially preempt state law and undermine the U.S. system of state regulation of insurance.
Developments and Trends in Insurance Transactions and Regulation 2015 Year in Review