Solvency II equivalence continues to be a goal for U.K. insurers despite the mechanisms companies have set up to ensure continued trade after the U.K. left the European Union. But they should not expect it to be granted any time soon.

Clare Lebecq, CEO of the London Market Group, recently met with the U.K.'s economic secretary to the Treasury. Following that meeting, Lebecq in an interview said "everything is on hold at the moment."

The transition period for the U.K.'s exit from the EU ended Dec., 31, 2020, cutting the automatic access EU and U.K. insurers had enjoyed to each other's markets. The trade deal struck the day before Brexit went into effect was silent on financial services, but most insurers had ensured trade could continue by setting up EU subsidiaries, or making more use of existing ones, and transferring relevant business to them.

Under Solvency II equivalence, the EU would recognize a non-EU country's solvency regime as producing comparable outcomes to its own, meaning less regulatory scrutiny. The Solvency II directive extends equivalence in three areas: reinsurance, solvency calculation and group supervision.

Regulators would treat reinsurers from countries with reinsurance equivalence as if they were based in the European Economic Area, and would rely on the home regulator's supervision under conditions where there is group supervision equivalence. Switzerland and Bermuda have full Solvency II equivalence in all three areas. The U.K. declared the EU equivalent for Solvency II purposes on Nov. 9, 2020.

Easing the burden

While insurers can still trade across borders thanks to the measures they implemented, Bob Haken, partner at law firm Norton Rose Fulbright, said group supervision equivalence would be "really quite valuable." Without equivalence "there is a very high risk of ending up with multiple group supervision regimes," he said in an interview.

Some companies may already have started to experience such regulatory duplication. Carlos Montalvo, a partner at consulting firm PwC and a former executive director of the European Insurance and Occupational Pensions Authority said some European regulators have started asking EU-based subsidiaries of U.K. groups to prepare Solvency II reporting. If equivalence was in place, there is a good chance that requirement "would basically be waived," Montalvo said in an interview.

Reinsurance equivalence may have less importance than originally thought, as all but Germany and Poland accept reinsurance from non-EU countries as equivalent. Companies could satisfy these two countries' requirements by writing their business from an EU-based subsidiary. But Haken said being able to continue writing the business from the U.K. with reinsurance equivalence would mean "less attritional cost" and "fewer risks of inadvertently stepping over a regulatory line."

Getting political

Whether equivalence will be granted remains an extant question, especially since reforming Solvency II's risk margin is at the top of the list in the U.K. government’s call for evidence on potential changes to its version of the directive. EIOPA has also recommended that the risk margin be reduced, but it will be tough to predict how much deviation from Solvency II is too much.

"What should be a technical determination has become overly politicized, and therefore to put any kind of measurement on that is impossible," Lebecq said.

European Commissioner Mairead McGuinness in a Jan. 25 speech said the U.K.'s intention to diverge from EU financial services rules more generally "requires a case-by-case discussion in each area." Haken said that statement may be "a little bit of a warning" about how far the U.K. can go before losing out on equivalence, but he also is “fairly optimistic” that changes under consideration on both sides would not put any equivalence assessment at risk.

Alan Sheppard, senior insurance adviser at the U.K.’s Prudential Regulation Authority, during a Feb. 3 Fitch Ratings event said the U.K. intends to retain the principles of Solvency II and that there is "no appetite to tear that up and start again."

A prerequisite to equivalence being granted is a memorandum of understanding on financial services, which the EU and U.K. have agreed to reach by the end of March 2021. McGuinness in her speech indicated that talks had not yet started. Lebecq was hopeful that the memorandum of understanding could facilitate further dialogue, but admitted that the two sides are "not going anywhere fast at the moment."