On 5 June 2015, the European Commission recognised the Swiss (re)insurance supervision system as being fully equivalent with the Solvency II Directive. The European Commission recognised in particular the equivalence of the Swiss system in three areas, such as reinsurance, solvency calculation and insurance group supervision.

By Petra Ginter (Reference: CapLaw-2015-42)

1) Introduction

The European Insurance and Occupational Pensions Authority (EIOPA) has conducted a detailed assessment on the equivalence of the Swiss (re)insurance supervision system with the Solvency II Directive (Directive 2009/138/EC, as modified by the “Omnibus II” Directive 2014/51/EU) which will be fully applied from 1 January 2016. The Solvency II Directive will introduce a modernised risk-based prudential and supervisory regime for (re)insurance undertakings in the European Union.

Switzerland is the only third country whose insurance regulation the European Commission has recognised as equivalent in full and for an indefinite period. It appears that the EU has positively recognised the regulatory framework and (re)insurance supervision in Switzerland, and in particular the changes that have been introduced with the revision of the Swiss Insurance Supervision Ordinance (ISO). The EU recognition of the equivalence of the Swiss (re)insurance supervision system enhances the reputation and competitiveness of Switzerland as a global financial centre.

The decision of the European Commission shall enter into force on the twentieth day following its publication in the Official Journal of the European Union.

2) What are the Three Areas of Recognised Equivalence?

The Solvency II Directive provides for equivalence determination of third countries in three areas namely:

• Resinsurance: A reinsurer located in a third country enters into a reinsurance arrangement with a (re)insurer in the European Economic Area (EEA) (Article 172 Solvency II Directive).
• Solvency Calculation: A (re)insurer is headquartered within the EEA and has participations or subsidiaries (collectively known as related undertakings) located outside the EEA (Article 227 Solvency II Directive).
• Group Supervision: A (re)insurer is headquartered within a third country and has related undertakings located within the EEA (Article 260 Solvency II Directive).

For each of the above three areas, full equivalence of Switzerland’s (re)insurance regulation / supervision system has been recognised for an unlimited period.

3) What are the Main Criteria that Led to an Equivalence Decision by the European Commission?

The following criteria are relevant for the determination of equivalence:

• Supervisory authorities in the third country must have the necessary means, powers and responsibilities to effectively ensure the protection of policyholders and beneficiaries of (re)insurance contracts.
• (Re)insurance undertakings in the third country must hold adequate financial resources, in line with the solvency requirements of the Solvency II Directive. This implies in particular that there is a market consistent valuation of all assets and liabilities, technical provisions reflect all (re)insurance obligations, assets are invested in the best interest of policyholders and beneficiaries, own funds and the use of internal or standard models are adequate, and ultimately capital requirements adequately capture risks and protect policyholders in case of significant losses.
• (Re)insurance undertakings in the third country must have an effective system of governance in place, in particular an effective risk management system and adequate functions and procedures as defined under the Solvency II Directive.
• Transparency of information both towards the supervisory authorities in the third country and to the public must be ensured.
• Professional secrecy and exchange of information obligations between authorities must be complied.
• The supervisory authorities of the third country must consider the impact of their decisions on global financial stability and take into account potential procyclical effects.

Some other equivalence criteria are specific for equivalence for group supervision or for reinsurance. For instance, for group supervision, supervisors must have the power by law to determine which undertakings fall under the scope of supervision at group level. For reinsurance, the taking-up of business of reinsurance must be subject to prior authorisation by the supervisor.

4) What are the Main Benefits of the Recognition of Equivalence?

The recognition of equivalence has the following main benefits for a third party (re)insurer (and such as (re)insurance undertakings in Switzerland):

• If a solvency regime of a third country is deemed equivalent under Article 172 Solvency II Directive, its reinsurers cannot be subject to a requirement to post collateral in the EU.
• If a solvency regime of a third country is deemed equivalent under Article 227 Solvency II Directive, EU (re)insurance groups can do their EU prudential reporting for a subsidiary in that third country under local rules instead of Solvency II, if deduction and aggregation is allowed as the method of consolidation of group accounts.
• If a prudential regime of a third country is deemed equivalent under Article 260 Solvency II Directive, its (re)insurance groups which are active in the EU are exempted from some aspects of group supervision in the EU.

Petra Ginter (Petra_Ginter@Swissre.com)