The new Solvency II regulations for insurers domiciled in the European Union–which will use a three-pillar approach to determine and supervise implementation of capital requirements–don't take effect until 2012, but already U.S. carriers and regulators are considering the impact on foreign reinsurers and domestic oversight.
The three “pillars” of Solvency II will establish rules for an EU carrier's financial resources, define the principles of the supervisory review process and incorporation of enterprise risk management, and increase disclosure and transparency.
Solvency II can also simplify oversight for all carriers if U.S. and EU regulators can agree on a common approach, which Vasilis Katsipis, general manager with A.M. Best Europe, described a likely scenario.
“A U.S. subsidiary's local regulator in the U.S. will tell it to hold so much capital,” he said. “But when the parent company [in Europe] is analyzed in Europe, the regulator of the parent will look at the total scheme of things.”
The EU regulator, he said, may decide the U.S. entity offers diversification, meaning the company would have more capital in the United States than needed under Solvency II. Therefore, he noted, “they would get some credit for that back home in the EU.”
If EU regulators and U.S. regulators work together and eventually find common ground, he added, “it would tend to bring a level playing field.”
John Andre, group vice president with A.M. Best, said the “mutual lack of recognition-collateral argument” between U.S. and EU regulators over how much capital foreign carriers must post to do business in the United States “has been going on for awhile. Solvency II would cut down on these issues, but they would have to reach out and respect the other's opinion.”
He added, however, that “you have 50 different bureaucracies to deal with [in the United States],” referring to the insurance departments in each state.
Aspects of Solvency II can be compared to new demands for insurers to incorporate ERM in the United States, Andrew Kail, partner and U.K. insurance leader with PricewaterhouseCoopers in London, told National Underwriter last month at the Reinsurance Rendez-Vous in Monte Carlo.
Solvency II, he said, has “moved from being interesting to something companies are now executing.”
Reinsurers need to comply, he said, adding, “you would argue it is good business, anyway.”
Imbedding risk management, he said, is “good business, because a company that's invested heavily in ERM will be doing many of the things that Solvency II requires. So it allows the regulators to look at their ERM program.”
He also pointed out that ERM is not yet imbedded in many companies. “The companies aren't required to do [ERM],” he said. “If their solvency capital is required to be $100 million, for example, and after looking at the ERM, regulators determine that the capital requirement is $85 million, then there's a $15 million win out of embedding ERM.”
On the other hand, he pointed out, the company might be satisfied with the $100 million benchmark, if it is still lower than their rating agency's capital requirement of $120 million.
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