United States and European Union negotiators say they have reached an agreement on reinsurance and insurance regulation. The agreement covers three areas of insurance oversight: reinsurance, group supervision and the exchange of insurance information between regulators.
According to the negotiators, U.S. and EU insurers operating in the other market will only be subject to oversight by the regulators in their home jurisdiction. For the United States, the agreement preserves the primacy of state regulation the U.S. of U.S. insurance groups while for the EU, it preserves the primacy of EU oversight of EU insurance groups.
The agreement calls for an end to collateral and local presence requirements for EU and U.S. reinsurers.
The negotiators say that the agreement is “balanced, in the mutual interest of both the U.S. and the EU, and provides meaningful benefits for U.S. and EU insurance consumers and for U.S. and EU insurers and reinsurers that operate in both markets.”
In November 2015, the U.S. Department of the Treasury and the Office of the U.S. Trade Representative (USTR) announced their intention to begin negotiating a covered agreement with the EU. The talks began in February. U.S. and EU representatives also met in July, May and September, 2016.
The agreement is known as a covered agreement, which is an agreement between the United States and one or more foreign governments, authorities or regulatory entities, regarding prudential measures with respect to insurance or reinsurance.
European reinsurers and regulators have wanted the U.S. to lift reinsurance collateral requirements on foreign reinsurers and treat them like U.S. reinsurers. European reinsurers and Lloyd’s of London syndicates complain they are disadvantaged compared to American competitors by the additional capital and collateral requirements of some states. They note that they must also now comply with new EU solvency [Solvency II) rules.
The agreement calls for the elimination of collateral and local presence requirements for EU and U.S. reinsurers.
U.S. and EU insurers operating in the other market will only be subject to worldwide prudential insurance group oversight by the supervisors in their home jurisdiction, the announcement said.
The limitations on worldwide group oversight outside of the home jurisdiction include limits on matters involving solvency and capital, reporting and governance. Supervisors however preserve the ability to request and obtain information about worldwide activities “which could harm policyholders’ interests or financial stability in their territory.”
The agreement encourages insurance supervisory authorities in the United States and the EU to continue to exchange supervisory information on insurers and reinsurers that operate in the U.S. and EU markets.
Treasury Department released a fact sheet on the agreement and said the final legal text of the agreement has been given to Congress as required by the the Dodd-Frank Act. The European Union approval process involves the Council and the European Parliament.
Michael McRaith, director of the Federal Insurance Office (FIO) within Treasury who is leaving his post next week, has called negotiating a covered agreement with the European Union “a critical step toward leveling the playing field for American insurers and reinsurers.”
AIA, ACLI and RAA Comment
The American Insurance Association (AIA), the American Council of Life Insurers (ACLI) and the Reinsurance Association of America (RAA) welcomed the agreement in a joint statement:
“This agreement, which was reached on January 13, seeks to resolve significant insurance and reinsurance regulatory issues for companies doing business in both jurisdictions. We have long supported the covered agreement process and look forward to reviewing the details.
“We thank the U.S. and European Union parties who were involved in the negotiations for advancing this important initiative. We also applaud state regulators for their invaluable contributions and their continuing commitment to U.S. policyholders.”
The International Underwriting Association, which represents wholesale re/insurance companies in the London market, also welcomed the announcement. This bilateral trade deal between Europe and the U.S. will greatly enhance international reinsurance regulation, make cross-border trading more efficient and promote more open global access to reinsurance services, said the IUA in a statement.
“A more level playing field can now be established between EU and U.S. reinsurers, both in terms of collateral treatment and mutual recognition of two powerful and respected trading blocs,” said Chris Jones, director of Legal and Market Services at the IUA.
“Furthermore, it sends a powerful message to other jurisdictions that protectionist regulation is not in the long term interests of clients,” he added.
“The London Market is a major reinsurer of U.S. risks and the IUA is pleased to see such effective cooperation between regulators and federal negotiators in the U.S. and Europe. ” Jones affirmed.
Before 2012, non-U.S. reinsurance companies had to post collateral equal to 100 percent of the gross reported loss when writing U.S. risks, the IUA explained. It noted, however, that the Dodd-Frank Act eventually allowed states to enact changes to this rule, reducing the collateral requirement to 10-20 percent.
State insurance regulators and some insurers are concerned that a covered agreement could potentially undermine the U.S. system of state regulation of insurance. The National Association of Insurance Commissioners (NAIC) believes states should continue to handle the situation through its model law process. The NAIC has a model law that eases the collateral requirements for foreign reinsurers that has been adopted by 32 states (about 66 percent of the market).
The National Association of Mutual Insurance Companies (NAMIC) has been among the U.S. insurer groups questioning the need for a covered agreement and it expressed concerns again following the news about this final pact, calling it “a proposed solution to an invented problem – the question of European regulators deeming our regulatory system equivalent.”
According to Charles M. Chamness, NAMIC’s president and CEO, “Because the agreement has the authority to pre-empt U.S. insurance law and regulation, this agreement must meet a very high standard. Setting aside the specific elements of this agreement, which we’ll comment on once our analysis is complete, we note that some provisions appear to be temporary and several areas are ambiguous. This will result in confusion and potentially endless negotiations with Europe on insurance regulation.”
NAMIC said it will work with Congress and the new Trump administration to “determine if this agreement is good for American consumers and the industry.”
Comments from the NAIC
State insurance regulators and attorneys from the National Association of Insurance Commissioners (NAIC) said they are reviewing the agreement. But the group remains skeptical.
“After more than a year of secret meetings it’s disappointing that in the waning days of the administration we are finally seeing the details of what purports to be a covered agreement between the U.S. and EU,” said Ted Nickel, NAIC president and Wisconsin insurance commissioner. “As most state regulators were not allowed to participate in the process, the NAIC is coordinating a thorough review of the agreement to ensure consumer protections are not compromised through the preemption of state law, and we encourage Congress to do the same. Of great concern is the potential to use this agreement as a backdoor to force foreign regulations on U.S. companies.”
The IUA acknowledged that important efforts to reduce collateral have been made at the state level, “but this process has been time consuming and is incomplete. A covered agreement, therefore, will be an effective resolution that also offers multiple other benefits.”