AM Best: Solvency II Equivalency Could Benefit Bermuda
Tuesday November 15 2011 | 08:03 AM

If Bermuda and Switzerland are successful in their bids to be considered among the first non-European Unionjurisdictions to meet new regulatory requirements under Solvency II, it could have a positive impact on companies domiciled there, said Stefan Holzberger, managing director of analytics with A.M. Best Europe.

"Equivalency will allow insurers domiciled in countries deemed equivalent to continue to operate under the rules imposed by their local regulator," Holzberger said. "This means that these companies will be able to write business within the EU without additional regulatory hurdles imposed by the EU regulators such as heightened collateral requirements, and additional required capital to back up certain lines of business."

"In addition, these companies will enjoy greater fungibility of capital with the ability to move funds in and out of the EU," Holzberger said. "Ultimately, the domiciles that obtain equivalency will likely see greater interest in (re)insurers relocating there due to the lower regulatory costs and red tape related to doing business within the EU."

The European Insurance and Occupational Pensions Authority, the European insurance regulators, are working on rolling out Solvency II for the 27-member EU nations, and recently assessed the first countries --Bermuda, Switzerland and Japan -- that are being considered for equivalency.

EIOPA found the jurisdictions could be considered equivalent, with some caveats and suggested improvements.

"It's really a very positive element," said Philippe Brahin, head of regulatory affairs at Swiss Re. "For the first time, we will have a regulation that really materializes as supervisors can work together and recognize each other in supervising groups. It's a big improvement."

However, Marc Beckers, head of Aon Benfield Analytics for Europe, Middle East, Africa, questions if it makes a difference.

If a company is domiciled in a jurisdiction that is not deemed equivalent, then it may have an extra step of needing to speak to local regulators before doing business in the EU, Beckers said. "It's an extra step, but I don't think it's the end of the world," he said. "It will make your life easier if you have equivalency. It's a good thing. It's great for the industry, it's important from a publicity or marketing perspective, but from a practical economic perspective, I don't think it's going to completely change the game."

If Switzerland's regulator, FINMA, is deemed equivalent for group supervision for Swiss Re, then the European regulators can rely on the Swiss regulators and no additional information or calculations should be required, Brahin said. "It's a big benefit for us when it comes to the efficiency of supervision and the cost of regulation. When an EU client is doing business with a reinsurer in Switzerland, there shouldn't be any discriminatory requirements on the transactions."

One major change under the new risk-based solvency regime is it will better recognize the benefits of reinsurance in the solvency assessments of companies, Brahin said.

"Solvency II is a real improvement ... more transactions can be expected," he said.

He said Solvency II will determine whether the supervisory regime of the third country is equivalent in three areas: reinsurance activities, group capital calculation and group supervision.

A total of 162 insurers were domiciled in Switzerland at year-end 2010, including 27 reinsurance companies, according to FINMA and EIOPA. Eight of those companies were subject to group supervision.

Bermuda, which is home to 14 of the top 40 reinsurers, writes about 40% of the European property catastrophe reinsurance market, according to EIOPA. The Bermuda Monetary Authority, the Bermudainsurance regulatory body, also oversees 799 captive insurers with gross premiums of $33.4 billion as of year-end 2009.

"It should be noted that the Bermuda captive market has a strong focus on the U.S. as opposed to the EU market," EIOPA said in its assessment.

Bermuda divides insurers into different classes based on size and the type of business written. EIOPA noted the solvency requirements should be applied proportionally to small insurance companies, such as captives.

Bermuda's top insurance regulator said the domicile "is in a very good position" for reaching Solvency II equivalency by the end of next year. "We feel quite good about the report as it stands today," Jeremy Cox, chief executive officer of the Bermuda Monetary Authority, told BestWeek in the past. "Effectively, what they said is Bermuda, for its commercial insurance sector, is equivalent, with some caveats" (Best's News Service, Oct. 19, 2011).

Achieving equivalency with Solvency II is a direction every supervisor should be pushing to go in if "you have internationally active groups in your jurisdiction," Cox said. "We are trying to get to the point where supervisors from around the world can talk to their brother and sister regulators in a similar language and have the openness and the trust and respect for each other's regimes."

It's especially important when regulators are dealing with insurance groups that have an international presence, he said.

"A lot of EU groups are very keen to make sure other countries beyond Switzerland and Bermuda will qualify," Brahin said.

Bermuda and Switzerland's equivalency "is a first step. It's a good first step, and hopefully, many more countries over time can be deemed equivalent so many companies can capture the benefits of Solvency II equivalency," he said.