Remember the Covered Agreement?
In September 2017, the European Union and the US (US Treasury Department) announced that they had signed a Covered Agreement, formally titled Bilateral Agreement Between the United States of America and the European Union On Prudential Measures Regarding Insurance and Reinsurance (Agreement)[1*], on which negotiations had begun several years earlier. For the US, the Agreement requires States to eliminate reinsurance collateral within 5 years or risk preemption, i.e., federal law would displace, or preempt state law, due to the Supremacy Clause of the US Constitution. Without the Agreement, reinsurance companies that are not licensed in the U.S. must post 100% collateral to secure the transaction, unless they are a Certified Reinsurer or a Reciprocal Jurisdiction Reinsurer. If not licensed or approved to accept reinsurance, they are an Unauthorised Reinsurer. Companies that have a head office or are domiciled in Reciprocal Jurisdictions can become Reciprocal Jurisdiction Reinsurers if they meet the standards in certain model laws, in which case these companies are not required to post collateral.
The Agreement is not self-implementing. This could have been a particular additional hurdle, as it should be noted that in the US, insurers and reinsurers cannot use the same passporting technique as in the EU (with a few exceptions), and a license is required in every State. Although the collateral requirement was already reduced in some US States, these States could not be used as “home” country to write reinsurance business across the US, unlike in the EU.
While the US insurance regulatory and supervisory system is State-based, model laws developed by NAIC (the National Associations of Insurance Commissioners) help provide some uniformity. “It is primarily through the states’ adoption of NAIC model laws and regulations that the legal framework for insurance regulation has been largely harmonised throughout all the states.”, thus NAIC. According to a US observer, “Model laws, written by NAIC and adopted by State legislators, are not discretionary. It is rare that they don’t. The rate of adoption of model laws by States is high. This creates a powerful system, with a very high level of consistency in the area of capital requirements.”
Therefore, and in order to implement the collateral provisions of the Agreement to allow EU reinsurers to become Reciprocal Jurisdiction Reinsurers, model laws would be necessary. NAIC worked on two model laws: the Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786).
For the Agreement to enter into force, the precondition was the adoption or revision of the relevant model laws in each US State. The US reported in the EU-US Joint Committee of 14 July 2022 that the Credit for Reinsurance Model Regulation had been transposed in all States, or all 56 NAIC jurisdictions, hence avoiding the issuance of a federal preemption determination by the US Federal Insurance Office.
The Covered Agreement entered into force on 22 September 2022. Accordingly, the reduction of collateral should have happened from 22 September 2022 onwards. In that same meeting, the US also gave clarifications on group capital calculation. EIOPA is reported to be working on practical arrangements for the implementation of the Agreement. Member States are invited to inform the EU Commission directly if any issues are encountered by (re)insurers. The next EU-US Joint Committee will take place around July 2023.
On the EU side, the Covered Agreement foresees that the EU will not impose local presence requirements on U.S. reinsurance companies operating in the EU, and effectively must defer to a U.S. group capital calculation for U.S. entities of EU-based insurers and reinsurers. For the EU, the Covered Agreement is hitherto the only agreement to establish cooperation with third country supervisory authorities signed under Article 264 of the SII framework directive.
On 18 December 2018, a similar Covered Agreement was signed between the US and the United Kingdom with a similar effective date.
According to Professor Van Hulle, “(t)he importance of this bilateral agreement cannot be underestimated. For years, the EC discussed with US authorities, including the NAIC, the possibility of abolishing the collateral requirement imposed on non-US reinsurers, which was seen by many EU reinsurers as an unjustified regulatory burden, particularly for those reinsurers that were well capitalised. US ceding insurers opposed the abolition of the collateral requirement, arguing that maintaining this requirement was in the interest of policyholders, as the collateral was a guarantee in case the reinsurer were to fail to honour its commitments.”
End good, all good?[*1] Bilateral Agreement between the EU and the USA on prudential measures regarding (re)insurance, dated 18 September 2017, OJ L 258, 6.10.2017, p. 4.