On November 20, 2015, the US Department of the Treasury (“US Treasury”) and the US Trade Representative (“USTR”) sent letters to the Financial Services and Ways and Means Committees of the US House of Representatives and the Banking, Housing, and Urban Affairs and Finance Committees of the US Senate to notify the Committees that the US Treasury and USTR intend to commence negotiations for a “covered agreement” with the European Union.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) of 2010 gives the US Treasury and the USTR the authority to negotiate covered agreements — i.e., bilateral or multilateral agreements regarding prudential measures with respect to insurance or reinsurance with foreign governments, authorities or regulatory entities.

In the November 20th letters, the US Treasury and USTR stated that the covered agreement negotiations with the European Union will cover the following goals: “(1) obtain treatment of the US insurance regulatory system by the EU as ‘equivalent’ to allow for a level playing field for US insurers and reinsurers operating in the EU; (2) obtain recognition by the EU of the integrated state and federal insurance regulatory and oversight system in the United States, including with respect to group supervision; (3) facilitate the exchange of confidential regulatory information between lead supervisors across national borders; (4) afford nationally uniform treatment of EU-based reinsurers operating in the United States, including with respect to collateral requirements; and (5) obtain permanent equivalent treatment for the solvency regime in the United States and applicable to insurance and reinsurance undertaking”.

Given that insurance is regulated primarily by the states in the United States, the US Treasury and USTR note in the November 20th letters that state insurance regulators will be given a “meaningful role” in the negotiations for a covered agreement with the European Union. However, the National Association of Insurance Commissioners (“NAIC”) and US states generally have opposed a covered agreement, as it would preempt any contrary state laws and would signal (further) federalization of insurance regulation in the United States. With respect to reinsurance collateral requirements, the NAIC amended its Credit for Reinsurance Model Law and Regulation in 2011 to allow non-US reinsurers from “qualified jurisdictions” (currently, Bermuda, France, Germany, Ireland, Japan, Switzerland and UK) to become “certified reinsurers” and therefore be eligible to post less than 100% collateral based on their ratings. However, as of August 2015, only 32 states had adopted the amendments allowing for certified reinsurers, and even the states that have adopted the amendments have not always done so exactly in accordance with the NAIC models. As a result, European and other non-US reinsurers and regulators as well as many parties in the United States remain dissatisfied with the lack of uniform reinsurance collateral requirements across the United States. Based to a great extent on this lack of uniformity, the European Union has not yet deemed the US insurance regulatory system to be “equivalent” for reinsurance for Solvency II purposes; wanting the United States to be deemed equivalent for Solvency II is a significant motivation for the US Treasury and USTR to pursue a covered agreement with the European Union.

The process and timing for the negotiation of and entry into the proposed covered agreement is unknown at this time. The Dodd-Frank Act itself sets forth various requirements for the US Treasury and USTR, including consultations with the Committees of the US House and the US Senate to which the November 20th letters were addressed. Beyond those requirements, however, it remains to be seen what type of agreement will take shape during the negotiations and, further down the road, whether covered agreements will eventually be entered into with other jurisdictions.