Update on NAIC Action to Implement Covered Agreement
April 4, 2018, Carlton Fields
NAIC Statement on Covered Agreement Negotiation
November 2017, NAIC Press Release
NAIC Responds to Covered Agreement
September 2017, NAIC Press Release
U.S. Signing Agreement
September 2017, Office of the U.S. Trade Representative Press Release
U.S. and EU Covered Agreement
September 2017, U.S. Department of Treasury
The Year Before Us: Perspectives from NAIC President Ted Nickel
March 2017, CIPR Newsletter
NAIC Raises Concerns Before Congress on International Insurance Deal
February 2017, NAIC Press Release
NAIC Urges Congress to Protect U.S. Interests in International Insurance Negotiations
September 2016, NAIC Press Release
Assessing the U.S.-EU Covered Agreement
Testimony of Ted Nickel, Commissioner, Office of the Wisconsin Commissioner of Insurance Before the Subcommittee on Housing and Insurance Committee on Financial Services
NAIC List of Qualified Jurisdictions
January 2017, NAIC Committee Document
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Last Updated 4/23/2018
Issue: Historically, U.S. state insurance regulators have required non-U.S. reinsurers to hold 100% consumer protection collateral within the U.S. for the risks they assume from U.S. insurers. As reinsurers are ultimately providing security to other insurance companies that are directly protecting U.S. policyholders, requiring consumer protection collateral in the U.S. is intended to ensure claims-paying capital is available and reachable by U.S. firms and regulators should it be needed, particularly in the wake of a natural disaster. Foreign reinsurers' regulators and politicians have objected to their companies having to post consumer protection collateral in the U.S.; arguing that capital is therefore unavailable for other purposes, including investment opportunities. Recognizing that the potential for variation across state lines makes planning for consumer protection collateral liability more uncertain, and thus potentially more expensive, state insurance regulators have been working together through the NAIC to reduce consumer protection collateral requirements in a consistent manner, commensurate with the financial strength of the reinsurer and the quality of the regulatory regime that oversees it.
In 2011, the NAIC passed amendments to its Credit for Reinsurance Model Law (#785) and its Credit for Reinsurance Model Regulation(#786) that, once implemented by a state, will allow foreign reinsurers to post significantly less than 100% consumer protection collateral for U.S. claims, provided the reinsurer is evaluated and certified. The 2011 revisions are an accreditation requirement, effective Jan. 1, 2019. Individual reinsurers are certified based on criteria that include, but are not limited to, financial strength, timely claims payment history, and the requirement that a reinsurer be domiciled and licensed in a "qualified jurisdiction." To date, 42 states have passed legislation, representing more than 76% of direct U.S. premium, to implement the revised Model #785 and Model #786. Additional states have indicated their plans to take up the models in the near future, which would raise the total market coverage to over 90%.
The NAIC has established a comprehensive process to evaluate jurisdictions' oversight of reinsurers to establish "qualified jurisdictions" for purposes of reduced consumer protection collateral. As of Jan. 1, 2016, seven jurisdictions (Bermuda, France, Germany, Ireland, Japan, Switzerland and the United Kingdom) have been placed on the NAIC List of Qualified Jurisdictions. The NAIC has also established a peer-review system surrounding the certification of foreign reinsurers by states, which provides a foreign reinsurer an opportunity for a "passport" throughout the U.S. To date, 26 foreign reinsurers have been certified for passporting purposes under this peer-review system.
The concept of a "covered agreement" was included in the federal Dodd-Frank Wall Street Reform and Consumer Protection Act as unique stand-by authority for the U.S. Department of the Treasury and the Office of the U.S. Trade Representative (USTR) to address, if necessary, those areas where U.S. state insurance laws or regulations treat non-U.S. insurers differently than U.S. insurers, such as reinsurance consumer protection collateral requirements.
A covered agreement can serve as a basis for preemption of state law under certain circumstances and with several limitations, but only if the agreement relates to measures that are substantially equivalent to the protections afforded consumers under state law. It is negotiated jointly by the Treasury Department and the USTR with foreign authorities and can only enter into force if various notice and administrative requirements are met, and after the agreement has been subject to a 90 day "layover" period in Congress (a vote of Congress is not necessary for the covered agreement to enter into force). While preemption itself is limited within a covered agreement, the agreement may include language on virtually any prudential aspect of insurance regulation, and could potentially include statements of mutual recognition or cooperation.
Some have linked the discussion of a covered agreement to the U.S. thereby achieving so-called equivalence under the European Union's (EU) new Solvency II regulatory framework. Solvency II became effective in January 2016, although some aspects will be phased in over the next 16 years. The Solvency II Directive provides for the EU to make an equivalence determination for third countries in the areas of group supervision, group solvency and reinsurance. All of these equivalence determinations require that an appropriate confidentiality regime be in place. Non-EU-based companies from countries that have been deemed equivalent may be subject to less regulatory duplication to operate in the EU than those jurisdictions that have not been deemed equivalent. Importantly, EU companies do significantly more business in the U.S. than U.S companies do in the EU and many, if not all, EU subsidiaries of U.S. companies are already structured in a way to meet the new European requirements in the absence of equivalence. While a covered agreement could be one mechanism for achieving recognition of the U.S. under Solvency II, it is clear that it can also be achieved through other mechanisms, such as recognition of existing structures and processes. In fact, the European Commission issued a decision deeming the U.S. system of group solvency and confidentiality provisionally equivalent without the need for a covered agreement.
Status: On September 22, 2017 the U.S. Treasury Department, USTR, and the European Union announced they had formally signed a Covered Agreement. The agreement requires states to eliminate reinsurance collateral within 5 years or risk preemption. In exchange, the EU will not impose local presence requirements on U.S. firms operating in the EU, and effectively must defer to U.S. group capital regulation for U.S. entities of EU-based firms. The Treasury Department and USTR also released a U.S. policy statement clarifying their interpretation of the Covered Agreement in several key areas including capital, group supervision, reinsurance, and the Joint Committee. State regulators were pleased to see Treasury and USTR clarify their interpretation of the covered agreement, as we have asked, in these key areas. We had urged clarifications on these issues and had worked closely with Treasury and USTR on these clarifications and appreciate their affirmation of the primacy of state regulation. Over the coming months, state regulators working through the NAIC's transparent process will make key decisions on whether and how to modify state laws and regulations to comport with the provisions of the covered agreement.