Insurers can benefit from covered agreements
US and international re/insurers can both benefit from ‘covered agreements’ which would likely create uniformity around collateral requirements among US States, said Franklin Nutter, president, Reinsurance Association of America (RAA).
A covered agreement is an agreement between the US and its trading partners regarding prudential, financial oversight measures with respect to the business of insurance or reinsurance. Following the 2010 Dodd-Frank Wall Street Reform Act, the newly formed Federal Insurance Office (FIO) has authority to assist the Treasury Secretary to negotiate such agreements.
“FIO has indicated that it intends to pursue such an agreement directed at statutory collateral requirements for unauthorised reinsurance which is widely used by US insurers,” said Nutter.
“This is of particular value to US insurers— and those at PCI—as such an agreement will achieve uniformity among the States on laws related to statutory collateral requirements.
“For international insurers, it will likely address how US companies doing business in the EU, for example, will be treated after Solvency II goes into effect on January 1, 2016,” he said.
Nutter explained that the National Association of Insurance Commissioners (NAIC) and the EU had agreed to pursue a process of recognition of each jurisdiction’s regulatory regime, and that a covered agreement could well become the vehicle for negotiating mutual recognition.
“If mutual recognition does not occur, US insurers seeking to do business in the EU may be subject to any requirements European individual member states choose to impose, including forming subgroup holding companies,” he said.
The process for negotiating a covered agreement includes joint authority by the Treasury Secretary and the US Trade Representative to negotiate and enter into covered agreements. It requires joint consultation with four Congressional Committees (House Financial Services; Ways and Means; Senate Banking and Finance).
A State insurance measure, such as the NAIC’s Credit for Reinsurance Model Act governing collateral for reinsurance, may be pre-empted by a covered agreement if FIO determines that the measure results in less favourable treatment of a non- US insurer that is subject to a covered agreement than of a US insurer domiciled, licensed or otherwise admitted in that State, and that it is inconsistent with a covered agreement.
However, Nutter said, there are restrictions which cannot be addressed.
“Pre-emption cannot address (a) any State insurance measure that governs any insurer’s rates, premiums, underwriting or sales practices; (b) coverage requirements for insurance; (c) the application of antitrust laws; or (d) any State insurance measure governing the capital or solvency of an insurer, except to the extent that such State insurance measure results in less favourable treatment of a non-US insurer than a US insurer,” he said.
As PCI reaches full speed, the FIO has stated that it intends to pursue a covered agreement in 2014–2015. Since a covered agreement will affect reinsurance collateral requirements at a minimum, it will be important for all US insurers to be represented in the process.
