Over the years, various parties – insurers and reinsurers, certain trade groups and regulators, especially from the European Union – have expressed frustration at the US reinsurance collateral requirements, under which non-US reinsurers are usually required to post 100% collateral to allow their US ceding companies to receive statutory credit for reinsurance. Recently, the European Union has increased its push for a “covered agreement” with the United States, which would seek to harmonize and reduce US reinsurance collateral requirements for EU reinsurers.
In recent years, there have indeed been efforts in the United States to address some of the concerns regarding reinsurance collateral that have been raised by the European Union and the various interested parties. Under the 2011 revisions to the NAIC Credit for Reinsurance Model Law and Regulation, non-US reinsurers from “qualified jurisdictions” can apply to become “certified”.
A “certified reinsurer” can be eligible to post less than 100% collateral for reinsurance assumed from US ceding companies (75%, 50%, 20%, 10% or 0% collateral) depending on the reinsurer’s financial strength ratings from recognized agencies and satisfaction of other criteria. Bermuda, France, Germany, Ireland, Japan, Switzerland and United Kingdom were designated as “qualified jurisdictions” as of January 1, 2015, such that reinsurers from those jurisdictions are eligible to apply to become certified.
NAIC is also continuing to work on issues regarding “passporting” of certified reinsurers in order to allow a non-US reinsurer that becomes certified in one US state to obtain certification from other states under a faster and less complex process than seeking full certification in each additional state.
However, NAIC model laws and regulations do not apply in a state unless specifically adopted by the state. Only 26 states have enacted the 2011 NAIC reinsurance model amendments – representing more than 60% of direct written insurance premiums in the United States – although additional states have legislation pending or are otherwise considering adoption of the amendments.
Nonetheless, frustration of the various parties with the US reinsurance collateral requirements remains because none of the recent changes in the reinsurance collateral requirements, including the “certified” reinsurer status described above or the provisions regarding reinsurance in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), have led to harmonization and reduction of US reinsurance collateral requirements. As a result, on April 21, 2015, the European Council directed the European Commission to seek to negotiate a covered agreement regarding reinsurance with the United States.
The US Federal Insurance Office (FIO), which was created under the Dodd-Frank Act as an advisory office for insurance within the US Treasury Department, has consistently expressed the view that reinsurance should be regulated at the federal level instead of at the state level (as almost all aspects of insurance and reinsurance are regulated). In connection with this, FIO has repeatedly stated that it would consider a covered agreement for reinsurance. Under the Dodd-Frank Act, FIO/US Treasury and the US Trade Representative have the authority to enter into such an agreement in an area in which US states’ insurance laws and regulations treat non-US insurers differently than US insurers.
The US National Association of Insurance Commissioners (NAIC) and most states oppose a covered agreement for reinsurance, not least because as a result the federal government would preempt an area that has historically been the preserve of state insurance regulation. NAIC argues that there is no need for such an agreement as the 2011 NAIC reinsurance model amendments and their adoption by states already address the issue adequately. However, because of concerns about lack of harmony among the states due to not all the states having adopted the 2011 NAIC reinsurance model amendments or those states having adopted the amendments not having done so in a uniform way, it is possible that NAIC might make the NAIC reinsurance models including the 2011 amendments an NAIC “accreditation” standard – i.e., a requirement for states to be members in good standing of NAIC, which would essentially force all states to adopt the models in a uniform way.
It seems unlikely that rapid progress will be made towards a covered agreement, given the opposition from NAIC and the states and the apparent lack of urgency on pushing this forward by FIO and the European Union. However, what might tip the balance in favor of such an agreement getting adopted is the upcoming decision about whether the United States will be deemed to be “equivalent” for reinsurance for EU Solvency II; if the United States is deemed equivalent for reinsurance, US reinsurers will have to be treated by EU insurance supervisors as EU reinsurers.
In early June of this year, the European Commission granted the United States provisional equivalence for ten years but only for solvency calculation. If the European Union uses the equivalence decision as leverage to seek a covered agreement (particularly as a requirement for
granting permanent equivalence to the United States), the United States might just walk down the road to a covered agreement with the European Union.