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VI. Principal Regulatory Developments Affecting Insurance Companies
C. CoveredAgreement
With Solvency II now effective in Europe as of January 1, 2016, the issue as to whether the United States will be granted equivalence under Solvency II has become a topic of major concern for the U.S. insurance and reinsurance industry. As discussed in more detail in Section VI.K.1 below, equivalence for an insurance regulatory regime of a non-E.U. country under Solvency II is determined by the European Commission for three purposes: (i) the group solvency calculation; (ii) group supervision;and(iii)reinsurance. InJune2015,theE.U.granted to the United States provisional equivalence for a 10-year period exclusively with respect to group solvency. Since that date, the E.U. and the United States have engaged in a dialogue in order to better understand each other’s regulatory systems. Such understanding was considered a prerequisite to either jurisdiction determining the other’s regulatory equivalence.
On November 20, 2015, Treasury/FIO and the USTR
announced their intention to exercise their authority under the 36 Dodd-Frank Act to negotiate a “covered agreement” with the E.U. This announcement is particularly significant because it is expected that the covered agreement negotiated with the E.U. would likely serve as the basis for preempting certain state insurance laws (e.g., laws relating to credit for reinsurance ceded to a reinsurer domiciled in the E.U.), as described below. The Dodd-Frank Act generally provides that any state law that affords to non-U.S. companies fewer rights and protections than such state law affords to U.S. insurers would be subject to
preemption under a covered agreement.
The covered agreement negotiations will address the following five areas:
Obtaining “equivalent” treatment of the U.S. insurance regulatory system by the E.U. under Solvency II, effective as of January 1, 2016, so as to allow for a level playing field for U.S. insurers and reinsurers operating in the E.U.;
Obtaining recognition by the E.U. of the “integrated state and federal” insurance regulatory and oversight system in the United States (including with respect to group supervision);
Facilitating the exchange of confidential regulatory information between lead supervisors across national borders;
Affording nationally uniform treatment in the United States of reinsurers based in the E.U., including with respect to reinsurance collateral requirements; and
Obtaining permanent (rather than provisional) equivalent treatment for the solvency regime in the United States applicable to insurance and reinsurance undertakings.
A covered agreement with the E.U. will be of particular interest to E.U.-domiciled reinsurers and to U.S.-domiciled ceding insurers. Under state insurance laws, a non-U.S. reinsurer has been required to collateralize fully its reinsurance obligations to U.S. ceding insurers. In 2011, the NAIC adopted amendments to the Credit for Reinsurance Models permitting a non-U.S. reinsurer qualified as a “certified reinsurer” to post reduced collateral with respect to business assumed from U.S. ceding insurers. Approximately five years later, only 32 jurisdictions had adopted the revisions to the Credit for Reinsurance Models—and, as a result, a non-U.S. reinsurer that has qualified as a certified reinsurer is still obligated to post 100% collateral with respect to business assumed from U.S. cedents domiciled in the 19 remaining jurisdictions.
Importantly, the covered agreement with the E.U. could preempt the credit for reinsurance laws in these 19 remaining jurisdictions with respect to business ceded to reinsurers domiciled in the E.U. As a result, a reinsurer domiciled in the E.U. would potentially be able to post reduced collateral with respect to business assumed from an insurer domiciled in any U.S. state.
The covered agreement is also expected to remove certain barriers currently applicable to the operations of U.S. reinsurers operating in the E.U.
According to FIO Director Michael McRaith, if negotiations with the E.U. are successful, FIO and the USTR may also pursue covered agreement negotiations on similar or identical insurance and reinsurance topics with other non-U.S. jurisdictions soon thereafter.
Developments and Trends in Insurance Transactions and Regulation 2015 Year in Review