Solvency II Regulation

The Solvency II Regulation defines a European Union (EU) Directive that categorizes and coordinates regulations that precede over EU insurance policies. In a nutshell, the regulation deals with the magnitude of capital that insurance companies (positioned with the EU jurisdiction) should hold to reduce the level of insolvency risk. Regardless of the numerous incidences where the date of the implementation of Solvency II Directive, an EU Parliament vote that took place on 11 March 2014 over the Omnibus II Directive has confirmed that Solvency II regulation shall come into play on 1st  January 2016.

As reflected earlier, the Solvency II directive was formed to govern insurance regulations within the EU. However, close evaluation of relevant pieces of literature reveal details of the aims of the directives. For example, it is presumed that the EU insurance regulation is purposed to facilitate the development of an integrated EU insurance market and uphold customer protection. Nonetheless, the directive establishes a single license (an “EU passport”) for insurers to defend all member states provided they accomplish EU standards.  Numerous member states resolved that the EU minima were not substantial and took up individual reforms that still lead to variant regulations, obscuring the goal of a unified market.

It should not go unnoted that, in a note published in 2015, the European Commission has declared adopting its first third country equivalence decision under the Solvency II Regulation. Upon receiving the equivalence, the EU insurers may use local regulations to report their activities in third countries. Meanwhile, third country insurers can operate within the EU without complying with all EU requirements. The equivalence ruling takes the shape of delegated acts, and they take into consideration countries such as Australia, Switzerland, Canada, Brazil, USA, and Mexico.

Equivalence is one important consideration in structuring decisions. Groups may seek to align their strategy  according to the regulation and avoid Solvency II potential traps. Further considerations include mergers and acquisitions from non-equivalent jurisdictions and how equivalence will affect such decisions.

In contrast, equivalence can provide a unique form of “regulatory harmonization” to groups, which may apply similar internal audit requirements, risk management functions, internal controls, solvency assessment and capital rules across all their operating territories.


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