NAIC questions EU-US reinsurance covered agreement, considers renegotiation

The US state insurance regulator National Association of Insurance Commissioners (NAIC) is asking for clarifications on the negotiated  covered agreement between the EU and the US which removes collateral and local presence requirements for reinsurers from the opposite side of the Atlantic, and suggested that the agreement might have to be renegotiated.

The reinsurance industry has welcomed the agreement in January, noting that European reinsurers could be set for a billion-dollar windfall as they will no longer have to post collateral and see legal and capital barriers relating to re/insurance deals lowered.

US reinsurers will not have to post collateral on business written in Europe and will be subject to less stringent regulatory oversight, the Reinsurance Association of America has said.

But the NAIC, which sets regulatory standards on state level in the US and is governed by the chief insurance regulators from the 50 states, the District of Columbia and five US territories, is not convinced of the benefits of the agreement following its own interpretation. The regulator is requesting US Treasury Secretary Steve Mnuchin to engage the European Union to seek written confirmation regarding the interpretation and application of many of the Agreement’s terms.

The NAICs interpretation of the agreement differs from the Treasury’s Federal Insurance Office which negotiated the deal. Therefore, the NAIC requests, “at a minimum, formal clarification and confirmation of its terms through the exchange of formal side letters with the EU.

“Absent such assurances, we urge you to formally reopen negotiations as we are deeply concerned about the prospect of the states making significant changes to its insurance laws, regulations and procedures that inure to the benefit of the EU and its insurance sector without our sector receiving certainty surrounding their business activities in the EU,” the NAIC said.

On Feb. 16, 2017, the House Financial Services Committee’s Subcommittee on Housing and Insurance, chaired by Congressman Sean Duffy, held an oversight hearing regarding the Agreement.

At that hearing, former director of the Treasury’s Federal Insurance Office, Michael McRaith, one of the lead negotiators of the agreement, testified that the agreement “puts America’s interest first” and “US consumers, industry, and the US national economy will benefit,” according to the NAIC.

Importantly, McRaith asserted that key aspects of the agreement either recognized existing state authorities or otherwise merely obligated the states to take actions they were already undertaking, the regulator said. In McRaith’s view, “the Agreement affirms that the US supervises its insurance sector as the US deems appropriate.” In exchange for those concessions, he claimed the Agreement recognizes the current US insurance group supervision practices, prohibited Europe from extraterritorial application of its requirements on a US-based holding company or legal entity, and required certain EU jurisdictions to immediately lift their requirements that US reinsurers maintain a local presence as a condition of doing business.

With respect to the foregoing claims, these outcomes are not clear from a plain reading of the text of the Agreement, and although McRaith’s opinion is informative, it does not necessarily reflect the views or interpretation of any of the current parties to the Agreement, the NAIC said.

The NAIC’s analysis suggests that the Agreement operates differently than McRaith claimed.

First, the Agreement completely eliminates collateral requirements. Though, over the course of the past few years, states have reduced collateral requirements, they have not been eliminated. Our approach is risk-based and reinsurer collateral requirements range from 0 percent to 100 percent based on an assessment of the financial strength of the reinsurer and quality of its supervision. While there are conditions in the Agreement that reinsurers would have to meet to avoid being subject to collateral requirements, several of those conditions differ materially from current state credit for reinsurance laws.

In light of these differences, states may have to take alternative measures to ensure that ceding US insurers, and, by extension, US policyholders are protected from any risks posed by reinsurance counterparties. Second, a requirement of a group capital assessment, is ambiguous and it is not clear that the NAIC’s ongoing work to develop a group capital calculation will satisfy the provisions or the EU’s interpretation of it.

Furthermore, the Agreement suggests the states should impose a capital requirement, with specific corrective capital measures, at the group level of a US insurer, rather than at the legal entity level. Current work of the NAIC does not presently include a requirement for additional capital at either the group or legal entity level, so this could clearly add costs for US insurers unless McRaith’s assertion that our current work is sufficient to meet the terms of the Agreement as understood not just by Treasury, but by the EU.

Third, the Agreement imposes group supervisory framework that differs from existing group supervisory authorities. The Agreement appears to place conditions upon the use of longstanding regulatory authorities to protect US consumers. Finally, we remain concerned the Joint Committee established by the Agreement will invite perpetual renegotiation of the Agreement’s terms that could significantly impact the insurance sector.

Also, there is no assurance that state insurance regulators will be among the committee’s members, even though we are responsible for key components of Agreement’s implementation and would likely be responsible for implementing any decisions reached by the Joint Committee. We appreciate McRaith’s personal view that state insurance regulators should be a part of that committee, but we urge Treasury to confirm that point and also limit the Committee’s focus to discussing significant deviations to the terms of the Agreement, the NAIC said.

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