Solvency II unlikely to spark relocations wave but movements within Europe possible

Rating agency Fitch believes the USA will ultimately achieve Solvency II equivalent status.

As such, the rating agency does not expect a wave of European insurers moving headquarters out of Europe due to concerns about US equivalence, as threatened by UK insurer Prudential and Dutch insurer Aegon.

Fitch’s stance on US equivalency with the European Commmission’s pending insurance capital regime contrasts sharply with that of US regulators.

Speaking to Global Reinsurance at the beginning of this year, National Association of Insurance Commissioners president and Florida insurance commissioner Kevin McCarty said: “We are not going to subject ourselves to the same kind of evaluation that Bermuda has gone through and Switzerland. We don’t think it is appropriate.”

However, NAIC chief executive Terri Vaughan added that US regulators would not leave those firms with operations in Europe and the US high and dry.

“We understand there is a need to make sure that the system works for the firms that are doing transatlantic business on a transatlantic basis and I think we can work that out,” she said.

Insurers with large US life operations would be most severely affected if the US regulatory regime is not granted equivalence with that of the EU. This concern is the chief cause of Prudential and Aegon’s indications that they could move their headquarters.

While this extra capital requirement would be a significant burden, Fitch believes the US regime will ultimately achieve equivalent status.

Discussions with non-life insurers indicate that they would not have to increase the capital they are holding for their US operations under Solvency II, making US equivalence less important for them.

Differences in the implementation of the rules among EU member countries could lead some firms to consider moving headquarters within Europe. Hannover Re’s announcement that it will change its legal structure highlights this possibility.

However in general, relocating within the EU would have to result in a big benefit to justify the cost and would probably only be an option for firms with operations in another EU country on a similar scale to their home market, added Fitch.

The approval of insurers’ internal models, which are intended to better reflect the firms’ risk profile and may allow them to hold less capital, could be crucial for companies such as reinsurers with business and risk profiles not adequately captured within the Solvency II standard formula.

If the application of the standard formula would lead to much higher capital requirements the non-approval of internal models would lead to a competitive disadvantage for these insurers.

Insurers are therefore likely to seek swift approval of their internal models. Hannover Re said it does not have any concrete plans to move, but it is reportedly uncertain regarding the approval of its own internal model. Relocating to another country in the EU could remove that concern.