The Solvency II Directive sets out three distinct areas for equivalence:
- Group Solvency
- Group Supervision
The European Commission (EC) has adopted a number of equivalence decisions for third countries under Solvency II, which set out rules to develop a single market for the insurance sector.
After receiving equivalence, third country insurers are able to operate in the European Union (EU) in compliance with all EU rules. The United States, in addition to Australia, Brazil, Canada, Japan and Mexico, has been granted provisional equivalence regarding group solvency calculations for ten years. Switzerland and Bermuda have been granted full equivalency, while Japan has received equivalence for reinsurance.
Based on these guidelines, achieving equivalence has taken on significant importance for a European Economic Area (EEA) (re)insurer. For example, a positive equivalence allows EEA insurance groups permitted by their group supervisor to adopt local rules regarding their own funds and capital requirements.
Equivalence status has both strategic and capital management implications. For EEA firms operating inside non-equivalent countries, these firms may be required to change or alter their strategies.
Non-equivalent EEA firms may face higher capital requirements, which could deter their expansion into new territories, or their ability to offer and write new products, or even delay the payment of dividends. Recent experience has shown that equivalence reference has also been used for data protection and reinsurance transactions, making it more difficult for reinsurers located in non-equivalent countries to access European business.