The EU extends the US provisional equivalence in the area of insurance or reinsurance group solvency calculation
On 14 March 2024, the European Commission decided to extend the provisional equivalence decision regarding the insurance and reinsurance solvency regime in force in the US. The regime applicable to insurance and reinsurance undertakings with head offices in the US is to be considered provisionally equivalent to the solvency rules related to the valuation of assets and liabilities, technical provisions, own funds, SCR, MCR and investment rules as laid down in Solvency II (SII). “EU insurance groups will be able to calculate capital requirements for their operations in the US on the basis of local rules. By eliminating the need to reconcile with EU rules, European groups can continue to operate on an equal footing with their American counterparts, and to benefit from alleviated administrative burden and reduced costs”, thus the Commission.
The first Commission decision on provisional equivalence of the US dates from 2015 and was granted for 10 years as of 1 January 2016. In that Commission Delegated Decision (EU)2015/2290 of 15 July 2015, Australia, Brazil, Canada and Mexico, together with the US, were all declared provisionally equivalent. The recently decided extension did not concern the other jurisdictions, although the Commission in its press release comments stated tthat “(b)eyond the US, the Commission is working on renewing provisional equivalence decisions also for other third countries with a view to ensure timely renewal for those countries too”. In consideration 6, the Commission explains that it will initiate the process of renewing. No further details are being provided and one can wonder why the US did get its renewal first and why now. Should we infer any link with the IAIS comparability exercise between the Insurance Capital Standards (ICS) due for adoption by the end of this year, and the Aggregation Method being developed by the US? In any case, this timely renewal will give the EU’s insurers and reinsurers the necessary legal certainty well in advance.
Equivalence decisions regarding SII are taken by the European Commission on the advice of EIOPA. According to Article 33,2 of the EIOPA Regulation, EIOPA shall assist the Commission in preparing equivalence decisions following a specific request by the Commission, or where required to do so by SII. Article 227 of the SII directive details the rules regarding the equivalence concerning related third-country insurance and reinsurance undertakings. Par. 5 lays down five criteria such as “the third country has an independent system of supervision”. In par. 6, explicit mention is made to the assistance of EIOPA in case of a renewal for further periods of 10 years.
But how does this assistance of EIOPA manifests itself? The explanatory memorandum of the extension decision states that in 2023, following assistance of EIOPA, it was concluded that “the factual statements in the 2015 Commission Delegated Decision with respect the US have not changed”. Reference to EIOPA’s assistance is further made in consideration 5 of the draft delegated decision in a quite dry way and without any meaningful insights: “On the basis of the assistance of EIOPA (…) it is clear that the criteria laid down in Article 227 (5) continue to be met by (the) solvency regime in force in the United States (…) It is therefore appropriate to renew the determination, laid down in Delegated Decisions (EU) 2015/2290/EC (…)”. What this assistance of EIOPA implies in terms of form and content is not explained. In the draft delegated decision, published as required by the Better Regulation Guidelines, reference was made to an exchange of letters in 2023 between the Commission services and EIOPA. That reference disappeared in the adopted version. No insight has been provided as to the assessment of the criteria of Article 227.
Article 227 (6) SII also includes an obligation to consider the reports made by the Commission in accordance with Article 177 (2) SII. These are reports to the Council about third-country treatment of EU (re)insurance undertakings. There is no reference to any report based on Article 177(2) in the draft Decision. This is a pity. Even if the report was short and there were no issues to be reported on the treatment of EU insurers and reinsurers in that third country, it would have been a point of reference. Consideration 2 refers to the regular dialogues between the US and Union’s authorities as an equal source of information to EIOPA’s assistance. But are these dialogues a proper replacement to a report to the Council?
Furthermore, it would have been insightful to understand the developments which occurred in the third country during the ten years that provisional equivalence was granted. Did really nothing change? It will be interesting to see how the Commission will conduct the re-evaluation of the provisional equivalence once the new Solvency II provisions will enter into force, as these amended SII in areas such as macro-prudential tools, sustainability risks and group supervision.
