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Portfolio > ETFs > Broad Market

Fitch: U.S. Expected to Achieve Solvency II Equivalence

By Warren S. Hersch

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The U.S. solvency regime for insurers should achieve equivalence with the European Union’s Solvency II requirements, despite the fact that the U.S. was not included in the first wave of third-country assessments announced last week, according to Fitch Ratings Ltd.

Fitch Ratings, a unit of Fitch Inc., New York, says the equivalence would be mutually beneficial for both markets. The equivalence would help European insurers and reinsurers with U.S. 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.

Fitch add the U.S. insurance market would gain the capital and investment that European companies bring via their U.S. subsidiaries.

Fitch notes the U.S. has a long-standing, risk-based solvency regime that gives policyholders the same protection as Solvency II. Despite differences in the methodologies, Fitch expects the protection will result in equivalence recognition from the European Union.

Beneficiaries of regulatory equivalence are European companies that have large subsidiaries regulated in the U.S., U.S. companies selling reinsurance to E.U. companies, and US groups with subsidiaries in Europe.

Fitch notes that losers are likely to be local competitors of E.U.-owned subsidiaries that would otherwise have benefited from reduced competition and possible acquisitions as well as E.U. reinsurers that may have picked up extra business.

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 says 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 believes the U.S. will likely be covered by transitional measures for a limited time, if necessary.

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