Regulatory Equivalence: The Lurking Risk

Managing all the issues and risks that an insurance or reinsurance company faces is no simple matter, as we at Awbury are well aware, in spite of the climatic compensations of beautiful Bermuda!

As readers will know, in many ways and in spite of supposed comity and common purpose, the world is in reality dominated by two Leviathan-like regulatory “empires” – the United States and the European Union, in which the complex, federal American approach to regulation confronts the countervailing complexity, and economic and cultural weight of the EU, as represented by the leading organs of the EU- The Council, The Commission and the Parliament. The result is often more pain, wasted effort and cost for those regulated entities which have businesses which operate across both of the “empires”.

For insurers, the elephant in the room is Solvency II and the potential impact of its concept of “regulatory equivalence” on those entities that will be subject to it (i.e., insurers with subsidiaries or branches within one or more of the 28 EU member states), but which are owned or controlled by an entity that is domiciled outside the EU, such as the US or Bermuda.

So, what exactly is “regulatory equivalence”? In broad terms, it means the recognition by one regulatory regime (e.g., that which will comprise Solvency II) that the approach and standards applied by another regulatory regime (e.g., the NAIC) are sufficiently “equivalent” for the first regulatory regime to accept that the second regime meets the standards of the first

A set of six principles are outlined (by the European coordinating body, EIOPA, which succeeded CEIOPS), for the underlying the regulatory review process that need to be met in order for a jurisdiction to be considered equivalent. They are:

  1. powers and  responsibilities  of  the   supervisory authority;
  2. authorization requirements to undertake (re)insurance business;
  3. system of governance and its regulatory oversight;
  4. business change assessment;
  5. solvency assessment; and
  6. supervisory cooperation, exchange of information, and professional secrecy.

Regulatory equivalence matters, because it affects how those institutions which are subject to its risks (e.g., US-domiciled insurers with EU-based operations, or vice versa) have to manage and report a whole range of their operations, particularly capital, collateral requirements and risk management. Not benefitting from regulatory equivalence potentially significantly increases complexity and cost. Of course, this complexity is still compounded by the continuing uncertainty over exactly when and in what form Solvency II will actually be implemented!

While Bermuda (in the form of the BMA) has already wisely sought interim recognition for the “equivalency” of its own insurance regulatory regime via EIOPA and been granted provisional recognition, the US, in the guise of the NAIC, has not yet been granted such status; and there is considerable uncertainty as to when, how and if this will be achieved- all of which leaves Boards and senior management with a continuing headache over how to deal with the situation.

At Awbury, we aim to monitor and keep on top of all key regulatory developments, as they are important to us, not only because of our own status as a Bermuda-domiciled insurer, but also so that we may assist our diverse client base in structuring and managing their risks.

-The Awbury Team

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