The US And EU Finalize A Covered Agreement On Insurance And Reinsurance Regulation

On January 13, 2017, the US Treasury reported to Congress that Treasury and the US Trade Representative (USTR) had successfully concluded negotiations with the EU on a Covered Agreement (the Agreement) that would presumably open the markets for US and EU insurers and reinsurers, and potentially preempt state laws on collateral for reinsurance. In this alert, we explore what happened, what happens next (and when) and what this could mean for insurers and reinsurers in the US and EU.

What is a "covered agreement"?

Historically, state insurance laws have required non-US reinsurers to deposit collateral in the US sufficient to fully secure future liabilities to US insurers, and for many years the EU and other countries have strongly objected to these laws as trade barriers. Perceiving a lack of progress by the states to modify their reinsurance collateral laws to ease these burdens on non-US reinsurers, Congress, in Title V of the Dodd-Frank Act, authorized representatives from Treasury and the USTR to jointly conclude a bilateral or multi-lateral agreement with other countries or international regulatory bodies on "prudential insurance measures," including an agreement on uniform reinsurance collateral requirements. However, the Act also provides that any regulatory measure subject to a covered agreement would have to achieve a level of protection for US consumers that is "substantially equivalent" to the level of protection achieved currently under state law. The covered agreement also could not address or be used to preempt state law on such matters as rates, premiums, underwriting and sales practices, as well as state insurance coverage requirements.

What does the recently concluded Agreement do?

The Agreement announced last Friday covers three areas of "prudential insurance" oversight: (i) reinsurance; (ii) group supervision; and (iii) the exchange of insurance information between supervisors.

With regard to reinsurance, the Agreement makes clear that a signatory to the Agreement which, through preemption rules, would extend to each statecannot impose on a non-US assuming reinsurer collateral requirements that it does not also impose on a US assuming reinsurer. Thus, if reinsurers domiciled in the state of Connecticut (referred to as the "host party") are not required to post collateral when assuming risk from Connecticut-based ceding insurers, then the Connecticut insurance regulator cannot require a reinsurer domiciled in Germany...