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LONDON—While the United States is not in the first group of nations whose regulatory structure is being considered for equivalence with Europe's upcoming Solvency II rules, experts say it is likely to be granted some form of equivalent status.
Bermuda, Japan and Switzerland are the first wave of nations being considered for equivalence under Solvency II, the European Union's risk-based capital regulatory regime for insurers and reinsurers that is to be phased in starting Jan. 1, 2013.
In an analysis, Fitch Ratings Ltd. said last week that it believes the United States will achieve Solvency II equivalence.
“Equivalence would be mutually beneficial for both markets,” Fitch said.
“It would help European insurers and reinsurers with U.S. operations, which would otherwise face the same capital requirements in the United States as locally owned companies plus the extra capital requirements of Solvency II—a competitive disadvantage when pricing products,” according to the analysis. “The U.S. insurance market would gain the capital and investment that European companies bring via their U.S. subsidiaries.”
The United States has a long-established risk-based solvency regulatory system, Fitch said. “If it is seen to give policyholders the same protection as Solvency II, despite fundamental differences in the underlying methodologies, we expect this to result in equivalence recognition from the European Union.”
In 2008, U.S. regulators launched a solvency modernization initiative in response to the development of Solvency II, Fitch noted.
That initiative likely will result in an “own risk” and solvency assessment, which is required under Solvency II, and may include elements of Solvency II's group supervision rules, Fitch said, noting that the form of those changes is not yet clear.
Regulatory cooperation already has begun between Europe and the United States. For example, several U.S. states recently relaxed rules on the collateral that overseas reinsurers must post to be able to underwrite reinsurance. This, Fitch said, is a “positive sign that cooperation will lead to an agreement on equivalence.”
But whether the United States will be granted equivalence remains a political issue, said Paul Clarke, global head of Solvency II at PricewaterhouseCoopers L.L.P. in London.
The U.S. likely will not wish to make wholesale changes to its system in order to gain equivalence, he said.
In addition to the formal equivalence assessments that are under way on the regulatory regimes of Bermuda, Japan and Switzerland, the Frankfurt, Germany-based European Insurance and Occupational Pensions Authority has put into place a five-year transitional process for countries that do not wish to go through a formal equivalence process.
It is very likely that the U.S. system will, at the end of that five-year period, be deemed to be equivalent to Solvency II, Mr. Clarke said.
But there are some large differences between U.S. regulations and Solvency II that could prevent a formal equivalence declaration.
While EIOPA's assessment is very “granular,” U.S. regulators are unlikely to want to make wholesale changes to their rules to meet the equivalence requirements, he said.
Meanwhile, EIOPA last month gave its equivalence assessment to the European Commission on the regulatory regimes of Bermuda, Japan and Switzerland. While Japan and Switzerland meet the criteria for equivalence with certain caveats, Bermuda does so only for certain classes of insurers and with certain caveats.
While this is an important step in the countries being granted equivalent status, there is no guarantee that the European Commission will agree, Mr. Clarke said.
However, the assessments strongly indicate that Japan and Switzerland are likely to be granted equivalent status while Bermuda may be considered partially equivalent, he said.