There has been quite a lot of media coverage of the recently finalised negotiations between the EU and the US Department of Treasury and Federal Insurance Office on a “covered agreement” for (re)insurance services. Notable features of the deal include the national, uniform treatment of collateral requirements, exchange of regulatory information between leading supervisors and mutual recognition of financial oversight regimes. This last point in particular couldn’t be more topical.
This new accord with the US is a small dose of good news for Brussels, and it was stressed from the Berlaymont that this was a sign of the EU’s regulatory soft power. The European Commission and EIOPA both lauded the agreement as a win-win that levels the transatlantic playing field and reduces unnecessary costs that increase premiums. Insurers generally agreed.
The question is what might have propelled the Commission to conclude the agreement now. It is no coincidence that the deal came a week before the change of administration, secured under the US Obama administration through a unique executive authority granted via the 2010 Dodd-Frank Act. Who knows whether that would have still been possible a few months from now. Aside from the shaky future of Dodd-Frank, two things are going on here that are worth noting, both linked to Brexit.
First, the covered agreement works largely to the EU’s favour, freeing up approximately $40bn in collateral held by EU-based (re)insurers for underwriting business in the US. With the UK on the way out of the EU, Britain’s relative strength in insurance globally, and the expectation that it will tweak EU insurance rules when it leaves after 2019, create something of an incentive to help EU insurers operating abroad. As with the original recognition of Solvency II ‘equivalence’ for the US back in 2012, the ‘mutual recognition’ of regulatory regimes in the covered agreement sees the EU in pragmatic rather than purist mode – in part because the EU wanted a deal and neither side has much power to compel the other.
Second, and related, EU policymakers are well aware of their weakened position for making Solvency II the international standard. It has enjoyed a prominent place in discussions with the International Association of Insurance Supervisors (IAIS). This standing, however, had been enhanced by the worldwide respect held for the UK insurance market. The EU can now expect some competition if the UK’s views on Solvency II should diverge too greatly and influence the IAIS in another direction.
For this reason, Brussels watched with interest last week when parliamentarians on the UK Treasury Select Committee made clear their interest in overhauling the legislation, questioning the value for consumers and impact on the competitiveness of UK insurers. Many of these views are also shared by their continental political counterparts, who have long been hinting at the need to reduce the costs that Solvency II imposes on long-term investments.
However, even EU advocates of nothing more than legislative refinement remain cautious in how they frame their criticism, considering the time and financial investment poured into Solvency II over the last decade. They are also aware that too much criticism could diminish Solvency II’s credibility in Basel as the ideal global benchmark. So European (re)insurers will need to pick their battles come Solvency II’s legislative review in 2018.
All of this makes the post-Brexit global landscape look interesting and complicated. The EU will have to be tactical with its future approach towards Solvency II, perhaps fine-tuning it just enough to help foster EU competitiveness, while aiming to maintain its gold standard status in setting the benchmark others follow and which ultimately defines conditions for EU insurers abroad. The UK will go its own way, at least to some extent. The US is also an open question. What this all means when these jurisdictions try and decide whether they are ‘equivalent’ with each other is hard to say. But the new EU-US mutual recognition deal is a reminder that they will reflect their own competitive interests as well as the precise detail of the laws on their books.