We have posted a number of times on the Covered Agreement between the U.S. and the E.U. concerning the reduction of collateral requirements for reinsurance provided by reinsurers domiciled in the E.U. The approach of the National Association of Insurance Commissioners ("NAIC") to the implementation of the Covered Agreement, through its Reinsurance Task Force, has been based upon proposed amendments to the Credit for Reinsurance Model Act and Credit for Reinsurance Model Regulation, with the assumption being that the adoption of the revised Models by the individual states would ensure compliance with the Covered Agreement. Drafts of the revised Models have been under consideration, and are scheduled to be presented for a vote at the NAIC's Fall National Meeting in approximately two weeks. The Reinsurance Advisory Board ("RAB"), which is a trade association composed of European domiciled reinsurers that purport to account for "approximately 60% of worldwide reinsurance business," has submitted a comment letter to the chair of the NAIC's Reinsurance Task Force expressing doubts over whether the proposed revisions to the Models would appropriately implement the Covered Agreement. This is potentially a serious issue, because if the revised Models do not appropriately implement the requirements of the Covered Agreement, the adoption of the revised Models by the states might not save state credit for reinsurance laws from preemption by the Covered Agreement. The RAB is represented at the CEO level by Gen Re, Hannover Re, Lloyd's of London, Munich Re, Partner Re, Scor, and Swiss Re.
While many of the comments in the RAB's letter concern fairly modest wording issues, one of the concerns expressed by the RAB is that "some of the language in the exposure drafts [of the proposed Model revisions] deviates significantly from the language of the bilateral agreement [i.e., the Covered Agreement] and thereby provides extensive discretion to state regulators in their compliance with the terms of the bilateral agreement." We raised this issue as a possible concern in our last post on the Covered Agreement. One of the criticisms of the Covered Agreement in the Congressional hearing on the agreement shortly after it was announced was that it was too rigid, and took away the discretion and flexibility that individual state insurance commissioners have in our state-based structure of insurance regulation. The focus of the letter on the ability of individual state insurance commissioners to exercise some discretion in the implementation of the Models raises an issue that may be problematic. It will be interesting to see if and how the NAIC responds to this letter.
On a related note, the U.S. Department of the Treasury has announced plans to engage in discussions with the United Kingdom aimed at agreeing to a Covered Agreement with the U.K. that would be similar to that in place with the E.U. The NAIC has stated its position on that announcement.
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