Solvency II is unlikely to lead to a wave of European insurers moving their headquarters out of Europe as a result of concerns about third-country equivalence, particularly for the US.
Insurers with large US life operations would be most severely affected if the US regulatory regime is not granted equivalence with that of the EU. This concern is the chief cause of Prudential Plc and AEGON's indications that they could move their headquarters. But while this extra capital requirement would be a significant burden, we believe the US regime will ultimately achieve equivalent status.
Our discussions with non-life insurers indicate that they would not have to increase the capital they are holding for their US operations under Solvency II, making US equivalence less important for them.
Differences in the implementation of the rules among EU member countries could lead some firms to consider moving headquarters within Europe. Hannover Re's announcement on Wednesday that it will change its legal structure highlights this possibility. However, in general, relocating within the EU would have to result in a big benefit to justify the cost and would probably only be an option for firms with operations in another EU country on a similar scale to their home market.
The approval of insurers' internal models, which are intended to better reflect the firms' risk profile and may allow them to hold less capital, could be crucial for companies such as reinsurers with business and risk profiles not adequately captured within the Solvency II standard formula. If the application of the standard formula would lead to much higher capital requirements the non-approval of internal models would lead to a competitive disadvantage for these insurers.
Insurers are therefore likely to seek swift approval of their internal models. Hannover Re said it does not have any concrete plans to move, but it is reportedly uncertain regarding the approval of its own internal model. Relocating to another country in the EU could remove that concern.
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