Reinsurers to keep units in EU/US despite Covered Agreement: AM Best
While reinsurers are no longer obliged to have a branch or subsidiary on the other side of the Atlantic to be able to operate there after the implementation of the EU-US Covered Agreement, they are likely to keep the local units, according to ratings agency AM Best.
The EU-US Covered Agreement eliminates collateral and local presence requirements for qualified reinsurers and it meaningfully streamlines group supervision requirements for insurers and reinsurers operating in both jurisdictions.
“It is unlikely that the signed agreement would lead to the desolation of legal entities, whose purpose was in part to avoid the need to post collateral,” AM Best said in an Oct. 18 press release.
Yvette Essen, director, research & communications, added: "There remains value in having a local balance sheet and presence on both sides of the Atlantic as clients view this as a sign of long-term commitment to the market and are subject to local laws and insurance regulation; for example, as regards to insurance contract wordings."
The US and the EU are now progressing toward provisional application of the Covered Agreement. While some aspects of the agreement took effect when it was signed on 22 September 2017, full implementation may take five years, AM Best noted.
Of particular importance to EU reinsurers operating in the US is the removal of collateral requirements, subject to certain solvency standards being met. US states have five years to adopt these particular reforms, and collateral requirements for current reinsurance agreements will not be affected.
Catherine Thomas, AM Best senior director, said: "Once implemented, the reforms will have positive implications for liquidity and the fungibility of EU reinsurers’ resources. Lloyd’s and London market reinsurers will be disappointed that this long-fought-for concession will not apply to them post-Brexit, but will hope that the UK will be able to negotiate a similar deal now that a precedent has been set."
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