The Solvency II Directive recognises the fact that the insurance industry is a global industry.
To avoid unnecessary duplication of regulation, the European Commission may decide about the equivalence of a third country's solvency and prudential regime. Positive equivalence findings are mutually beneficial to European Economic Area (EEA) (re)insurers and third country (re)insurers. Moreover, equivalence findings promote open international insurance markets, whilst simultaneously ensuring that policy holders are adequately protected globally.
The EU law empowers EIOPA to assist the European Commission in preparing equivalence decisions pertaining to supervisory regimes in third countries.
Areas for equivalence assessment
There are three distinct areas for equivalence assessment under Solvency II:
Reinsurance (Article 172 of the Solvency II Directive): relevant for reinsurers from third countries. If the third country's rules are deemed equivalent, such reinsurers must be treated by EEA supervisors in the same way as the EEA reinsurers. This is also likely to increase the attractiveness for EEA insurers of entering into reinsurance arrangements with reinsurers from third countries.
Solvency calculation (Article 227 of the Solvency II Directive): relevant for EEA insurers operating in a third country. A positive equivalence finding will allow EEA internationally active insurance groups to use the local rules relating to capital (own funds) and capital requirements rather than the Solvency II rules. This would relieve the related companies in the third country from having to recalculate their data in conformity with the Solvency II requirements.
Group supervision (Article 260 of the Solvency II Directive): relevant for insurers from third countries with activities in the EEA. If the third country's rules are deemed equivalent in this area, EEA supervisors will under certain conditions rely on the group supervision exercised by a third country. This would free the third country international groups from being subject to the unnecessary burdens arising from dual group supervision.
Types of equivalence
There are three types of equivalence under Solvency II for the three areas mentioned above, with the following characteristics:
be determined for all 3 areas
be determined (if progress is being made towards full equivalence) for reinsurance
(Art. 172.4) and third country groups operating in the EEA (Art. 260.5)
be determined (if progress is being made towards full equivalence) for EEA
groups operating in the third jurisdiction (Art. 227.5)
limited period (until 31/12/2020 with the possibility to extend by 1 year)
limited period (10 years, renewable for further 10-year periods)