The US Treasury Department and US Trade Representative (USTR) recently announced controversial plans to negotiate a "covered agreement" on insurance with the European Union (EU), a move that it said will "level the regulatory playing field for U.S.-based insurers and reinsurers" but that critics hailed as "unnecessary and irresponsible."
On November 20th of this year, the US Treasury Department sent letters to several congressional committees announcing its intentions to negotiate an insurance and reinsurance "covered agreement" with the EU. The negotiations would be the first exercise of Treasury's authority to negotiate insurance-related agreements with foreign powers, the terms of which can preempt state insurance laws. The authority was granted to Treasury by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.
According to Treasury, the purpose of the EU negotiations are five-fold:
- to obtain treatment of the US insurance regulatory system by the EU as "equivalent" for Solvency II purposes;
- to obtain recognition by the EU of the integrated state and federal insurance regulatory and oversight system in the United States;
- to facilitate the exchange of confidential regulatory information across borders;
- to afford nationally uniform treatment of EU-based reinsurers operating in the United States; and
- to obtain permanent equivalent treatment for the solvency regime in the United States and applicable to insurance and reinsurance undertakings.
The covered agreement is intended both to assuage the frustration long expressed by insurers and regulators from the EU concerning US reinsurance collateral requirements and to ensure that US insurers operating in the European markets are recognized as "equivalent."
European insurers and reinsurers must comply both with EU solvency rules and any additional requirements when underwriting in the United States, putting such companies at a disadvantage to US rivals by increasing capital costs and the price of premiums. The EU has been pushing the United States for years to free up the billions of euros in collateral that state regulators require foreign reinsurers to set aside against policies.
US companies, meanwhile, face the prospect of disadvantageous treatment in their European operations when the EU's Solvency II regulations become effective on January 1, 2016. Such regulations subject an insurer to unfavorable treatment if the insurer's country of domicile is not recognized as "equivalent." In June, the European Commission granted provisional rather than full equivalence to the United States. With provisional equivalence, European insurers' subsidiaries in the US can report their solvency using local rules, but US companies active in Europe face possible group supervision from regulators in the region and different treatment than local competitors.
Accordingly, the American Insurance Association (AIA) welcomed the announcement of negotiations. Steve Simchak, AIA's director of international affairs, noted that "Without an equivalence determination, US groups in the EU could face duplication of group supervision and other regulatory burdens. It will become more difficult for US insurers to operate in the European markets. We hope that insurance regulators in Europe will recognize that the launch of negotiations puts the US and the EU on a path toward prudential recognition, and act accordingly as they plan for Solvency II's implementation on January 1."
Treasury and USTR affirmed that they will not enter into a covered agreement with the EU unless its terms are beneficial to the United States, and that State insurance regulators will have a meaningful role in the negotiations of any agreement.
Nevertheless, the chief executive of the National Association of Insurance Commissioners (NAIC) stated that it would be "unnecessary and irresponsible" for US federal bodies to sign up to a reinsurance covered agreement with the EU to smooth the way for full Solvency II equivalence. State insurance regulators believe that a reduction in collateral requirements for foreign reinsurers in the United States could needlessly override state laws protecting US consumers. They are also concerned that any covered agreement will set a precedent for the federal government preempting state insurance laws and undermine the state-based regulatory regime in the US. The NAIC stated that its own model law, which eases collateral requirements for foreign reinsurers, achieves the same objective. To date, 32 states have adopted this revised Credit for Reinsurance Model Law, and five more plan to do so, raising the total to 93 percent of the reinsurance market in the US.
Speaking at the Insurance Risk North America conference in New York on November 4, Senator Ben Nelson pointed at the EU as the cause of uncertainty for companies operating across the two regions. "Uncertainty [on equivalence] is caused by the EU – not by the US and our solvency regime. A covered agreement is not the only mechanism for achieving recognition of the US under Solvency II. We believe our US system and strong track record can and should be recognized by Europe now, and certainly before 2016, to alleviate any regulatory uncertainty," he said.
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