By Kareline Daguer, Director, PwC
So many directives and so many million words to level those playing fields. And yet, what is making the gender playing field so pitched to the male side? There are many factors, most we cannot control. So let’s concentrate on what we can control: our own behaviour. Earlier this week I saw the inspirational Barbara Schonhofer - founder of the Insurance Supper Club – and her message is to be bold. I could not agree more, so if you are a woman reading this, go for bold and know that there are many women and men out there willing to help us progress and realise our potential.
And talking of level playing fields, back in January the European Commission finalised a document that did not get as much attention as it probably deserved. This was the EU-US bilateral agreement on prudential measures regarding insurance and reinsurance. There are two significant aspects to this document: firstly, what it proposes and secondly, what it represents for the UK after Brexit.
The agreement proposes the elimination of collateral and presence (branch) requirements for reinsurers subject to meeting some conditions. The European Commission estimates EU reinsurers have about $40bn of collateral posted in the US, and argues that the money could be used more effectively in other investments. It declares the opportunity cost to be around $400m per year. Collateral is a widespread requirement of state regulators for reinsurers operating in the US on a non-admitted basis (not established there). Elimination of collateral is a win for EU reinsurers, as it will make operating in the US cheaper.
In exchange, the Commission is giving US insurers the chance to operate in the EU without having to establish branches or comply with Solvency II SCR. Instead, the capital benchmark for US reinsurers to trade in the EU is set at risk-based capital 300% Authorized Control Level. This is the real win for the US: its capital formula is recognised for the first time as comparable to SCR, which will likely vanish the ghost of going through equivalence on a state by state basis. It also provides a good starting point to negotiate with the International Association of Insurance Supervisors on its setting of insurance capital standards. The agreement also allows for Solvency II group supervision not to extend to the worldwide level of the group, which means that a US group would only be subject to Solvency II group supervision at the top level of its European operations. This is achieved by improved cooperation and exchange of key information between regulators.
The only catch to the agreement lies in its implementation. The fact that the US state regulators are not keen on it, having acted as observers during its negotiation, is not encouraging. Only in mid-March the National Association of Insurance Commissioners (NAIC) sent a letter to the US Treasury complaining about the agreement and its perceived faults. The NAIC’s concern centers on elimination of collateral and perceived lack of policyholder protection. The Trump administration is likely to be sympathetic if the agreement is painted as a ‘bad deal’ for the US. The plan is for both the EU and US to implement the agreement over the next five years, with collateral requirements to be reduced by 20% year on year.
You might ask, why do we care about this in the UK when we are exiting the EU? This is the first bilateral agreement on insurance prudential regulation the Commission has concluded and it proves that it’s possible to strike such an arrangement without an equivalence assessment. Having said that, it delivers outcomes broadly comparable to recognition of equivalence under Articles 172 (reinsurance) and 260 (group supervision) whilst relying on the regulatory frameworks in each jurisdiction, limiting duplication. Finally and significantly, the agreement is based on achieving consistent regulatory outcomes rather than the exact mirroring of regulations.
When the UK looks to shape its new relationship with the EU and other significant territories, this agreement shows a potential pathway. It shows the EU is able, when willing, to bypass equivalence and focus on achieving consistent regulatory outcomes. It also demonstrates a pragmatic way of dealing with territories with a fundamentally different regulatory framework. The UK will need ingenuity and flexibility when the time for deal making comes, and this agreement can help shine some light on the road ahead.