Home Knowledge Brexit: The Current State of Play on Solvency II equivalence for the UK

Brexit: The Current State of Play on Solvency II equivalence for the UK

As widely anticipated by (re)insurance industry stakeholders, the European Union (EU) and the United Kingdom (UK) did not meet the self-imposed 30 June 2020 deadline for completing Solvency II equivalence assessments in the areas of reinsurance, group supervision and group solvency.  Speaking shortly after the passing of the deadline, the EU’s Chief Brexit Negotiator, Michel Barnier, emphasised that the EU’s equivalence assessments must be forward-looking, given the UK’s stated intention to diverge from EU rules from 1 January 2021.

On 13 July 2020, the European Commission published a notice to stakeholders about the withdrawal of the UK and the impact of EU rules in the field of (re)insurance, including an update regarding the ongoing equivalence assessments (Notice). Given the expiry of the Brexit transition period on 31 December 2020, the stark message to all (re)insurers in the Notice is that they must ensure all necessary preparations are made to be ready for a “no deal” outcome, and also, a “no equivalence” outcome.  For further insight into the Notice, please see our separate article here.   

Solvency II Equivalence

Under Solvency II, the European Commission has the power to grant regulatory equivalence to a “third country” (i.e. the UK) in three possible areas:

  1. Reinsurance – where reinsurance contracts entered into with reinsurers in a third country must be treated in the same manner as contracts entered with EEA reinsurers (Article 172, Solvency II).
  2. Group Solvency – where EEA groups with third country subsidiaries can use the local capital rules for their subsidiaries located in a third country, rather than the Solvency II rules (Article 227, Solvency II).
  3. Group Supervision – where group supervision rules in a third country jurisdiction are deemed equivalent, EEA supervisors may, under certain conditions, rely on the group supervision exercised by the third country national supervisor. In particular, (re)insurers operating in the EEA as part of a group with a UK-registered parent undertaking may be required to provide a worldwide group solvency or to apply other methods aiming to ensure appropriate group level supervision including the establishment of a holding company with a head office in the EU (Article 260, Solvency II).

The European Commission confirms in the Notice that although the assessment of the UK’s equivalence is ongoing, the assessment has not been finalised. Accordingly, the Notice advises that the relevant (re)insurance industry stakeholders must prepare for a situation with no equivalence. 

It is important to note that equivalence under Solvency II is not a singular determination, but rather it is assessed individually under the three Articles 172, 227 and 260 mentioned above.   For example, the European Commission previously decided that Australia, Bermuda, Brazil, Canada, Mexico and the USA are Solvency II equivalent, for group solvency purposes only (on a 10 year renewable basis) whereas, in the case of Switzerland, it was deemed Solvency II equivalent across all three areas.  

UK to Review Features of Solvency II

On 23 June 2020, Rishi Sunak, the UK Chancellor of the Exchequer, announced that the UK government plans to review certain features of Solvency II to ensure that “it is properly tailored to take account of the structural features of the UK insurance sector”. It is understood that the main areas that will be subject to review include, but are not limited to, the risk margin, the matching adjustment, the operation of internal models and reporting requirements for insurers. 

As underscored by Mr Barnier’s recently expressed views, this announcement by the UK government, means that the equivalence assessment process is likely to prove particularly challenging in light of the UK’s clear wish to diverge from EU rules after the transition period.  Furthermore, given the ongoing uncertainty in respect of the overall EU-UK relationship post-Brexit, it seems ever more important for affected (re)insurers to ensure that their contingency arrangements are not reliant on a successful conclusion of the Solvency II equivalence assessments prior to the end of the transition period.  

We will continue to monitor and update in respect of developments on this topic.  

Please contact a member of our Insurance and Reinsurance team, or your usual William Fry contact, if you need advice on your Brexit preparations.

Contributed by James Foster and James Grogan