A decision regarding of the largest lingering questions in the regulatory arena, whether the United States would be granted regulatory equivalence by members of the European Union, appears to be imminent.
In a research note, ratings firm Fitch said it expects the U.S. solvency regime for insurers to achieve equivalence with the European Union's Solvency II requirements, despite the fact that the United States was not included in the first wave of third-country assessments announced last week. The issue of regulatory equivalence is important for both U.S.-based insurers operating in Europe as well as European companies with U.S.-based subsidiaries.
“Equivalence would be mutually beneficial for both markets,” Fitch states. “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. The U.S. insurance market would gain the capital and investment that European companies bring via their US subsidiaries.”
The long-gestating Solvency II directive, which will revamp the capital requirements, governance and risk management practices of insurers across the EU, prompted the National Association of Insurance Commissioners to launch a corresponding Solvency Modernization Initiative in 2008. The SMI will encourage U.S. insurers to perform an "Own Risk and Solvency Assessment" (ORSA) which would bring them in line with Solvency II standards.
Testifying before Congress in June, American Insurance Association (AIA) President and CEO Leigh Ann Pusey said a failure to harmonize U.S. and EU regulations would have serious ramifications for the industry. “The consequences of a negative equivalence determination, including having to meet solvency requirements without counting U.S. capital, are potentially severe both for U.S. insurers doing business in EU countries and for EU-based insurers with U.S. operations,” Pusey warned. “Therefore, it will be critical for the U.S. system to be deemed equivalent under Solvency II.”
