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Regulatory divergence could weaken UK’s case for Solvency II equivalence: Sidley

7th April 2021 - Author: Luke Gallin

Post-Brexit, it’s vital for the UK to obtain reinsurance equivalence under the Solvency II regime to avoid losing significant business in the European Union (EU), reports law firm Sidley Austin LLP.

rate-divergenceEssentially, reinsurance equivalence establishes a level playing field for carriers; ensuring that the EU is unable to impose further requirements on reinsurers in equivalent jurisdictions.

Currently, most EU members states, with the exception of Germany, do not impose local presence or compulsory collateral requirements on non-equivalent carriers.

However, without equivalence, which the UK is yet to secure, the EU can essentially alter their rules at any time, and could, for example, state that going forward non-equivalent reinsurers are required to establish local regulated branches or post additional collateral, warns Sidley.

“It’s really important for the UK to secure reinsurance equivalence to create a stable footing moving forward.

“While international groups with UK subsidiaries – including many U.S.-based reinsurers – could potentially switch their underwriting operations to equivalent locations (or to the U.S., which benefits from the EU Covered Agreement), UK-centric companies could lose significant EU business should they not be granted reinsurance equivalence,” says Martin Membery, co-leader of Sidley’s global Insurance group.

Clearly, failure to secure reinsurance equivalence would be a real issue for carriers, but Sidley notes that so long as the UK and the EU remain under the current Solvency II regime, “equivalence would be the logical step.”

But, as we’ve reported recently, that might also be about to change with the PRA exploring possible changes to Solvency II in order to tailor the rules specifically for the UK re/insurance market.

Furthermore, the UK government has expressed a desire to reform risk margin rules once the transition period with the EU has ended. And, at the same time, the EU is also looking at Solvency II.

According to Membery, “It would be bizarre for the UK not to be granted equivalence seeing as they’re operating under the same regime already.”

However, “If the UK starts changing and/or if the EU makes changes that the UK doesn’t follow, that’s when regulatory divergence happens – and this divergence might strengthen the EU’s case for saying that the UK should not be granted equivalent status,” he adds.

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