EU-US Covered Agreement: Covering all bases—except Brexit

Re/insurance executives and trade bodies have almost unanimously welcomed the bilateral covered agreement finally signed by the EU and the US in September that will reduce red tape for insurers and reinsurers and eventually put an end to collateral requirements—freeing up capital reinsurers can then invest.

But some have also warned that, once it leaves the EU, UK re/insurers will not benefit from the agreement.

The agreement marks the final step in more than 20 years of discussions and a year of formal negotiations between the European Commission and the US Department of the Treasury and Office of the Trade Representative.

The two bodies hailed the agreement, saying it will boost consumer protection and cut costs and red tape for EU insurers and reinsurers active in the US.

In their joint statement, the EU and the US said: “The agreement represents a major step forward in US–EU cooperation on insurance and reinsurance, conveying benefits to EU and US insurers and reinsurers operating across the Atlantic, by offering them enhanced regulatory certainty, while maintaining robust consumer protections.”

In line with the objectives of the investment plan for Europe and the Capital Markets Union, the agreement will enable reinsurers to boost their investment capacity. EU reinsurers estimate that they have about $40 billion of collateral posted in the US, which could instead be invested to create jobs and growth. The opportunity cost is estimated at around $400 million per year.

The two sides said the agreement will enhance consumer protection by facilitating the exchange of information between EU and US supervisors. The agreement also brings prudential benefits: for instance, EU insurers and reinsurers will have to prepare only one risk and solvency assessment (ORSA) in light of their specific risk profile, the EU Commission explained.

This assessment will also be used by US supervisors. The signature allows parts of the agreement to become immediately applicable on a provisional basis. The European parliament and the Council will need to approve the conclusion of the agreement.

A good deal for all

Trade bodies were keen to welcome the deal and stress its advantages. Dave Matcham, chief executive of the International Underwriting Association, said that he is now hoping the agreement will be implemented quickly and provide an example to other regulators.

“The EU–US covered agreement offers a number of business advantages to both sides and I am pleased to see its signing today after several months of review and many years of formulation.

“I am looking forward now to a speedy implementation of the deal which sets an important standard for greater mutual recognition between regulatory authorities. I hope it will prove to be an example that others are able to follow creating a fairer and more efficient global insurance industry,” Matcham said.

Frank Nutter, president of the Reinsurance Association of America, agreed that the deal could be used as an example that others might follow.

“We commend the Administration for executing the agreement. It is a significant milestone and one that recognises the strength of the US state-based regulatory system and formalises the strong regulatory cooperation between the US and the EU on insurance and reinsurance issues.

“The US and EU have established a model of regulatory cooperation between well-regulated jurisdictions that others should follow,” Nutter said.

Tracey Laws, general counsel of the RAA, added: “This agreement is an important regulatory development in enhancing the competitiveness of US companies doing business internationally. We appreciate the efforts of the US and EU officials who successfully negotiated the agreement.”

Evan Greenberg, the chief executive of Chubb, also commented on the agreement. “Chubb congratulates regulators and trade officials in the EU and the US for reaching an agreement that respects the legitimacy of each other’s regulatory structure and allows insurers and reinsurers to operate on a level and more predictable playing field,” he said.

“The agreement recognises the soundness of the US state-based insurance regulatory system and allows US-supervised insurers to compete in Europe on the same basis as European insurers. The agreement also reflects US recognition of the soundness of the EU regulatory environment and will allow EU-based reinsurers to operate under the same conditions as US companies.

“We applaud the spirit and intent of this agreement, which is a de facto acknowledgment by the European regulatory community that there is indeed more than one way to regulate the insurance industry.

“This agreement represents a critically important, mutually beneficial recognition among the US and the EU that insurance and risk are often global in nature.”

A phased implementation

The abolition of collateral requirements is a key part of the deal, and could free up vast sums of money which are currently tied up. The agreement eliminates collateral and local presence requirements for qualified reinsurers and meaningfully streamlines group supervision requirements for insurers and reinsurers operating in both jurisdictions.

The change will not be overnight. Martin Membery, co-head of the insurance group at law firm Sidley Austin, explains that, provided they meet the requisite qualifying criteria (regarding financial strength and market conduct), reinsurers will benefit from a regime which will not permit compulsory collateralisation where equivalent measures do not apply to domestic reinsurers—but this could take years to be fully implemented, especially in the US.

“Putting this into the context of the current US regime, states will have a five-year period in which to change their existing laws and regulations to enable qualifying EU reinsurers to provide reinsurance to US cedants without having to post collateral.

“In the interim period, US states are also ‘encouraged’ to reduce existing collateral requirements by 20 percent each year pending full implementation,” he explains.

“In addition, local presence requirements which might otherwise require a reinsurer to establish a branch or subsidiary in order to provide reinsurance to a domestic cedant will be eliminated.”

Again with the provision that they meet the requisite qualifying criteria, Membery says all EU reinsurers that provide cover to US cedants will potentially benefit from the elimination of collateral and local presence requirements in the US insurance market.

But UK-based re/insurers should remember that this will not be the case for them once the UK leaves the EU, he warns.

“For as long as the UK remains part of the EU (or can rely upon appropriate transitional measures conferring the same benefits), UK-based reinsurers (including Lloyd’s syndicates) would receive the same benefits under the covered agreement as their EU counterparts.

“But, once the UK has left the EU, it would not automatically benefit from the covered agreement, and the UK would need to negotiate an equivalent agreement with the US on a bilateral basis in order for UK-based reinsurers to continue to receive these benefits,” he says.

He adds that, in terms of who will benefit most as things stand, EU reinsurers providing cover to US cedants, US reinsurers providing cover to EU cedants and US-headquartered insurance groups with EU insurance subsidiaries will do the best from the deal.