Ten years of Solvency II equivalence

Ten years after Solvency II came into force, equivalence has become an established part of the EU’s prudential architecture for dealing with third country insurance markets. The first decade of its application suggests that the framework has performed its core regulatory function: it recognises sufficiently comparable prudential and supervisory regimes for specific purposes, reducing unnecessary duplication and enabling supervisory reliance without lowering the standards of policyholder protection underpinning Solvency II. Its relatively limited geographical coverage is not in itself a weakness: equivalence is a targeted form of regulatory recognition, not a general market-access regime.

Its importance also needs to be understood in the context of an internationally integrated insurance market. More than one third of European Economic Area reinsurance transactions involve third countries, allowing risks originating in the EU to be distributed across geographically diversified pools of capital. Access to global risk-bearing capacity is particularly important for large, concentrated and emerging risks and broadens the capital, counterparties and specialist expertise available to EU insurers. Equivalence does not create this international capacity, but by avoiding unnecessary regulatory frictions where comparable prudential outcomes have been established, it can help the EU insurance market remain connected to it.

The priority for the next decade should therefore be evolution rather than a fundamental redesign. Equivalence should remain technically grounded, outcomes-based and prudentially robust, while also becoming more predictable, transparent and adaptable as international standards and national regulatory frameworks evolve. The EU should ensure that existing equivalence determinations are appropriately incorporated across its financial rulebook and make effective use of other forms of regulatory recognition where full equivalence is neither necessary nor appropriate. In an environment of growing investment needs, emerging risks and competition for global capital, the objective should not be more equivalence as an end in itself, but more effective regulatory recognition where comparable prudential outcomes justify it. This would allow the EU to combine high standards of policyholder protection with openness to international capital, expertise and risk-bearing capacity.

Apostolos Thomadakis is Head of Research at ECMI, and Senior Research Fellow and Head of the Financial Markets and Institutions Unit at CEPS.