Solvency II, which came into effect for EU countries on 1 January 2016, has all the complexity that one would expect from a single regime designed to replace fourteen. Its explicit goal was to put an end to what the European Commission considers Solvency I’s "one-model-fits-all approach" – in other words, complexity by-design.
Fortunately, in the UK at least, insurers have time on their side. The Prudential Regulation Authority (PRA) has created a number of transitional measures for insurers aiming at compliance, the last of which only expires in 2032.
Interestingly, this may mean that the PRA’s transitional measures outlast Solvency II itself. A Solvency II review had already been planned the European Commission for the end of 2020, but this has now been brought forward to 2018.
By observing the implementation process of Solvency II across the various member states, the Commission will begin generating improvements to the framework. We expect that these changes will likely form the basis of Solvency III, possibly within the next decade.
International Capital Standard
The changes enacted by the European Commission over the coming years will also be a response to developments abroad, and in particular the International Association of Insurance Supervisors (IAIS)’s International Capital Standard (ICS).
The ICP targets all Internationally Active Insurance Groups (IAIGs), and aims to alleviate the systemic risk posed by cross-border insurance activity.
A first version of the ICP is planned for mid-2017, with implementation to begin in 2020. The IAIS has kept a close eye on the development of Solvency II, aware of the danger of demanding that European IAIGs comply with two broadly wildly different regulatory regimes – Solvency II alongside their own.
In turn, the European Commission would do well to use its review of Solvency II in 2018 and beyond to consider how it could bring its own requirements more in line with those planned under ICS.
In theory, because the European Commission is offering third-parties equivalency under Solvency II, an international standard such as ICS should not be necessary.
However, non-EU countries have been slow to gain equivalence. The majority of the blame lies with the European Commission, which, by making it extremely arduous to achieve third-party equivalence, has created its own barrier to global Solvency II adoption.
To date, only two countries – Switzerland and Bermuda – have achieved full equivalence under Solvency II.
The process took over four years, with these countries’ original assessment beginning in 2011. For another five countries – Australia, Brazil, Canada, Mexico and the USA – equivalence has been achieved for group solvency, one of the three areas of the Solvency II equivalence regime, while Japan has reached equivalence for both group solvency and reinsurance.
Equally, some countries are not interested in seeking equivalence. The complexity of the Solvency II requirements has spooked some countries, which consider the benefits of the new regime to outweigh the costs. This is especially true given that the IAIS is holding up ICS as a simpler alternative.
In the US, matters are further complicated by the tensions between state and federal authority. The US insurance industry has traditionally been regulated by state-level bodies, a privilege that state regulators are keen to retain.
However, the US Treasury and the US Trade Representative have taken advantage of the authority granted to them by the Federal Insurance Office Act of 2010 to begin negotiating a bilateral agreement with the European Union.
In a November letter, the US Treasury and US Trade Representative assured state insurance regulators that they "will have a meaningful role during the covered agreement negotiating process."
However, the National Association of Insurance Commissioners (NAIC), an organization governed by the individual state insurance regulators, highlights the actions taken by the individual states to modernize their regulations, and states that "the NAIC is neither convinced nor persuaded that a covered agreement for reinsurance collateral is necessary."
China moves ahead
China, meanwhile, has moved ahead with its own new regulatory regime C-ROSS, taking heed of the advice from the IMF and the World Bank in their March 2012 assessment of China’s financial sector that given China’s development stage, "a move towards Solvency II might not be recommendable".
Unlike Solvency II, solvency under C-ROSS is supervised from a single central location. It is also has lower capital requirements, justified in part by the Chinese government’s willingness to serve as a backstop in times of need.
These and other adjustments reflect the CIRC’s appreciation of the need to provide a personalised solvency framework for China, one of the world’s most vibrant and turbulent insurance markets.
Solvency II Equivalence of the World’s Twenty Largest Insurance Markets
Rank Country Solvency 2 Equivalence
1 United States – Group Solvency Equivalence
2 Japan – Reinsurance & Group Solvency Equivalence
3 United Kingdom – Solvency II
4 China – None
5 France – Solvency II
6 Germany – Solvency II
7 Italy – Solvency II
8 South Korea – None
9 Canada – Group Solvency Equivalence
10 Australia – None
11 Bermuda – Full Equivalence
12 Netherlands – Solvency II
13 Taiwan – None
14 Spain – Solvency II
15 India – None
16 Switzerland – Full Equivalence
17 Russia- None
18 Brazil – Group Solvency Equivalence
19 Ireland – Solvency II
20 South Africa – None