Under the pact, states continue to oversee insurance activities in the U.S.
The U.S. Treasury Department and the Office of the U.S. Trade Representative (USTR) announced late last week the agencies’ intent to sign a covered agreement governing insurance and reinsurance regulations with the European Union. Negotiated at the end of the Obama administration, the deal centers mainly on required collateral levels for offshore reinsurers and territorial supervision of insurers spanning both jurisdictions.
The impetus for the covered agreement (or an accord struck between the U.S. and one or more foreign governments, authorities, or regulatory entities) began with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The act established the Federal Insurance Office within Treasury and the USTR, which were then given the authority to mediate agreements to strengthen and equalize consumer protections for buyers of insurance and reinsurance in both regions.
Although the agreement was negotiated by the Obama administration, its policies adhere to President Trump’s stated goal of easing regulations and leveling the playing field for U.S. businesses on the international stage. “This is an important step in making U.S. companies more competitive in domestic and foreign markets and making regulations efficient, effective and appropriately tailored,” according to the Treasury Department’s statement. “Furthermore, the Bilateral Agreement benefits the U.S. economy and consumers by affirming America's state-based system of insurance regulation, providing regulatory certainty, and increasing growth opportunities for U.S. insurers.”
Impact on Reinsurers
Under the agreement, E.U. reinsurers would no longer be required to hold collateral reserves equal to 100% of the risks those entities underwrite for U.S. insurers. European insurers and the International Underwriting Association (IUA), which represents wholesale reinsurance companies in the London market, had sought an end to the collateral requirement, arguing it put E.U. insurers at a competitive disadvantage and restricted capital available for other purposes such as investment.
“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,” Chris Jones, Director of Legal and Market Services at the IUA, told Insurance Journal.
The lifting of the collateral decree follows moves by the National Association of Insurance Commissions to reduce that mandate. In 2011, the NAIC approved amendments to the Credit for Reinsurance Model Law and Regulation giving states the option to lower the collateral requirement if an offshore reinsurer documented its financial strength, paid claims in a timely manner, and is licensed in a qualified jurisdiction. (The NAIC’s list of qualified jurisdictions includes Bermuda, France, Germany, Ireland, Japan, Switzerland, and the U.K.) As of April, the revised law has been adopted in 35 states.
States Still Rule
The new agreement preserves the right of states here to supervise insurance activities within their borders since insurers headquartered in the U.S. or the E.U. would only be subject to regulations in their home markets. By eliminating the local presence requirement, U.S. reinsurers can write business without having to establish an office in each E.U. member country, according to the Reinsurance Association of America. However, the pact permits insurance regulators in any U.S. or U.K. jurisdiction to step in to ensure the financial stability of insurers and protect policyholders from harm. Information sharing is also encouraged between both territories.
The NAIC was reluctant to give the agreement its full support in January when it was introduced, citing concerns over a possible diminishment of state control over insurance matters in the U.S. In brief statement released on July 17th, NAIC President Ted Nickel said the organization was pleased the agreement “affirmed the primacy of state insurance regulation” and stated it would later issue a formal statement.
Nickel noted the next steps will be implementing the agreement’s mandates and making any changes to state laws, if necessary. “State regulators appreciate Treasury’s and the U.S. Trade Representative’s willingness to work constructively with regulators on their concerns,” the statement read. For its part, the Treasury Department said a policy outlining implementation procedures will be made in “the coming weeks.”