Equivalence

Hi,

If an aspect of a third country regulatory regime is considered to be broadly
compliant with Solvency II, then that aspect of the regime can be said to be
“equivalent”.

Could you give an example of what an aspect may be?

 

Yes it does, thanks a lot Lindsay.

 

Hello- to further clarify, if for example, a group company which has presence in UK but parent company is in Asia (outside EEA)-if the equivalence status is granted to this parent company in Asia- does it mean that they (UK operation or Asia company?) will have to report based on Solvency II to the UK regulator? How does this work practically? Can someone please help?

Thank you!

 

Can someone please help with the question above regarding equivalence? @Lindsay Smitherman

 

Alright, no problem.

 

Here's my attempt as equivalence has come up in my work in the past. In the context of UK insurance, there are several aspects where equivalence is relevant, including group supervision, reinsurance and third country branch supervision. It's important to note that equivalence is not granted to a company or entity but to the regulatory regime of a non-UK country ie the UK regulatory regime views that other regulatory regime as equivalent in outcomes to its own (outcomes for policyholders). So, in your example, if the Asian country had equivalence in the aspect of group supervision, the UK regulator could decide that it will not carry out group supervision but rely on the group supervision carried out by the Asian regulator at the level of the parent company. Without equivalence, the UK regulator could decide to carry out its own group supervision (using Solvency II requirements) and the Asian regulator could carry out its own. The group would then be subject to group supervision by 2 regulators (potentially for different parts of the group). In practice, there are other ways that UK regulators can use to reduce the regulatory burden even in the absence of equivalence.

 

This was very helpful. Thank you!

 

On further reflection, it's worth adding an additional way equivalence can affect UK group supervision to complete the picture. If the UK is carrying out group supervision for a group that has subsidiaries abroad and one or more of those subsidiaries is regulated at entity level, under a regime that the UK has determined to be equivalent to Solvency II solo/ entity-level supervision in terms of capital requirements, the UK regulator can decide that the group can use capital requirements calculated in that other jurisdiction for those entities. Ie UK group capital requirements would be calculated as the addition of (a) Solvency II (including diversification) for UK entities and entities in non-equivalent jurisdictions and (b) the individual entity capital requirements for the entities in the equivalent jurisdiction (ie no diversification between each of those entities and any other entity in the group). This would save the group having to extend Solvency II capital requirement calculation (eg use of a group internal model) to those subsidiaries in that other country. The US has this kind of equivalence and it makes sense to give up the diversification benefits this way to reduce modelling costs because US capital requirements at entity level come out lower than would be the case under Solvency II entity level capital requirements.

 

Just noted your reference to non-EEA in this. As UK is now outside the EU (and EEA) following Brexit, an Asian country is no different to a European country from the perspective of the UK regulator.

To complete the picture, UK deems EU Solvency II as equivalent in all aspects. EU does not deem the UK's Solvency II as equivalent to that of the EU (although the 2 are pretty much identical, the UK having left the EU with an inheritance of the EU rules that the UK helped develop - why? That bit is definitely beyond the scope of SA2. On second thought, I wouldn't put it past the examiners to think international politics and trade negotiation affects insurance business and should be included in a question.).