Fitch Ratings says it expects the US solvency regime for insurers to achieve equivalence with the European Union's Solvency II requirements, despite the fact that the US was not included in the first wave of third-country assessments announced last week.
The US has a long-standing, risk-based solvency regime. If it is seen to give policyholders the same protection as Solvency II, despite fundamental differences in the underlying methodologies, we expect this to result in equivalence recognition from the EU.
Equivalence would be mutually beneficial for both markets. It would help European insurers and reinsurers with US operations, which would otherwise face the same capital requirements in the US as locally-owned companies plus the extra capital requirements of Solvency II - a competitive disadvantage when pricing products. The US insurance market would gain the capital and investment that European companies bring via their US subsidiaries.
Beneficiaries of regulatory equivalence are European companies that have large subsidiaries regulated in the US, US companies selling reinsurance to EU companies, and US groups with subsidiaries in Europe.
Losers are likely to be local competitors of EU-owned subsidiaries that would otherwise have benefited from reduced competition and possible acquisitions as well as EU reinsurers that may have picked up extra business.
In reaction to Solvency II, the US started the "Solvency Modernisation Initiative" (SMI) in 2008. The SMI will bring in better risk assessment with the "Own Risk and Solvency Assessment" (ORSA), and possibly group supervision, both of which are required under Solvency II, but it is not yet clear what form they will take.
Co-operation has recently increased between the US and Europe on reinsurance written in the US by European companies. Previously harsh collateral requirements have been dropped in a number of US states. Fitch sees this as a positive sign that co-operation will lead to an agreement on equivalence.
If there is no ruling on US equivalence by the European Commission, then each member country can make its own determination.
Last week, the European Insurance and Occupational Pensions Authority (EIOPA) published its final advice to the European Commission regarding its assessment of the Solvency II equivalence of supervisory systems in Switzerland, Bermuda and Japan. EIOPA said that Switzerland meets the criteria set out in its equivalent assessments, with some caveats, as does Bermuda for certain categories of insurer. Japan meets the criteria, with certain caveats, under Article 172 of the Solvency II directive, which deals with insurers from the European Economic Area purchasing reinsurance outside the zone.
Although it was not included in the first assessments, Fitch thinks the US will likely be covered by transitional measures for a limited time, if necessary.
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