11 October 2012

Risk.net: Insurers push for new way to recognise equivalence of Canada

Insurers are urging European policy-makers to change the rules on third country equivalence to enable countries that do not want to undergo a formal assessment to be recognised as Solvency II equivalent.

A new mechanism known as ‘regime recognition' is understood to be part of the trilogue negotiations between the European Parliament, European Commission (EC) and the Council of the European Union on Omnibus II.

While the negotiations have stalled as policy-makers disagree over the issue of long-term guarantee products, insurers hope that the final text for Omnibus II will include some allowance for such countries to be deemed equivalent on a case-by-case basis.

The move follows the decision by the Canadian regulator, the Office of the Superintendent of Financial Institutions (OSFI), to reject the EC's invitation to undergo an equivalence assessment. This means that European subsidiaries operating in Canada will have to operate according to both local and Solvency II rules unless a political agreement is reached whereby the jurisdiction is granted equivalent status without having to go through the formal assessment process.

Bruce Porteous, Edinburgh-based head of Solvency II and regulatory development at UK insurer Standard Life, says: "Amendments to the Omnibus II text were proposed, including this change, but because Omnibus II got bogged down in the impact assessment, these draft amendments never got discussed at trilogue. Our expectation is that they will come back and be discussed, and hopefully agreed."

But any such amendments are likely to raise questions about the durability of the official equivalence process. The European Insurance and Occupational Pensions Authority (EIOPA) insists there is no other way for a country to secure equivalence except through a formal assessment.

Insurers maintain that some level of flexibility is required if European insurers are to remain competitive overseas. One argument for relaxing the rules on equivalence rests on the fact that many non-European countries are in the process of modernising their regulatory regimes to Solvency II-comparable standards anyway, and should not have to conform to an EU timescale.

Yet any changes to the rules may upset those countries that have already applied to be equivalent, including Switzerland and Bermuda, and could lead to accusations of double standards, says Nick Dexter, Solvency II team member at KPMG in London.

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