I’m in Washington DC today, for the 6th US / EU Insurance Symposium. Like many attendees, I was hoping to hear tales of progress towards an inter-continental “mutual understanding” that would remove trade barriers, and make it easier for (re)insurance groups and reinsurers to operate across the European Union (EU) and the United States (US).
The story so far:
In the US, (re)insurance supervision is State based; and most, if not all, of the US States have long required European reinsurers to post collateral in the US to protect US insurers against the risk that a valid reinsurance claim will emerge, and the reinsurer won’t have the wherewithal to pay it.
European reinsurers have been pressing for these requirements to be removed for more than 15 years; and some progress has been made. In particular, the National Association of Insurance Commissioners (NAIC) has adopted a model law which introduces a two stage collateral reduction process; and many US States have adopted it. The result is that, on a case by case basis, collateral requirements are gradually being reduced – although, until recently, progress had been slower than many would have liked.
Unfortunately, Solvency II has complicated these efforts because it has the potential to (re)introduce collateral requirements for US reinsurers doing business with European insurers – unless the EU can somehow satisfy itself that some or all of the US States are solvency II equivalent for reinsurance purposes. And that is all but impossible for now.
Without having a clue how this might happen, many market participants and regulators have long assumed that the US and EU would find a way to resolve these difficulties, and that “Solvency II equivalence”, a “mutual understanding”, or something else would materialise, which makes these problems go away before Solvency II begins to apply to (re)insurers. The first step towards this objective was the US / EU Regulatory Dialogue Project. When this project began, the EU (the Commission and EIOPA) and the US (the NAIC and, in time, the Federal Insurance Office (FIO)) fully committed themselves to finding out more about each other’s supervisory practices and processes, in the hope that they’d eventually learn to trust each other enough that they’d be able to put their differences aside. Unfortunately, we’re 4 yeas in, and those working on this project are already beginning to talk about what they’ll do in their second 5 year term, rather than about how they’ll ensure they meet their original objectives before the end of their first 5 year term.
FIO was created, at least in part, to explore whether it might be possible for the US as whole (perhaps through FIO) to enter into an appropriate agreement with the EU (as a whole) that would resolve some or all of these issues (and many more besides). Talk to any of the main regulatory players in Washington DC, and they will tell you that significant progress has been made within the US, and between the US and the EU, and that is probably true – but US / EU negotiations about these issues are still pending … and may never take place. This is, at least in part, because the European Council has only just given the European Commission a mandate to negotiate with the US / FIO about these issues (see our earlier blog, here).
Today’s symposium – a brief summary
This year’s symposium was like its predecessor’s in at least one respect: the “grown ups” were invited to sit around a central table, where microphones and refreshments were available, so they could more easily participate in very serious discussions, whilst the rest of us sat in rows behind the participating policymakers and senior industry industry figures, where we could be seen, but not heard (at least until the last few minutes of each discussion, when we were invited to ask questions, if we dared. (Few did.))
During this year’s discussions:
- EIOPA talked at the very highest level about Solvency II’s objectives, and (from EIOPA’s perspective) its undoubted benefits, before appearing, grudgingly, to accept that it might just about be possible for the EU to agree that the US reinsurance supervisory arrangements were equivalent on temporary basis … before stressing that if that happened, no-one should assume that temporary equivalence would last or be renewed;
- FIO described some of the significant progress it has made, from the days when it threw “metaphorical bombs at Solvency II”, to today – it now hopes that it will be possible to negotiate a sensible solution to the common problems of collateral requirements, so that US reinsurers can insure EU risks without having to post collateral, and EU reinsurers can insure US risks on the same basis – although it will not enter into negotiations if the best that can be achieved is temporary equivalence (only);
- The NAIC explained that its model law has already been adopted by 31 States, and that others are very close to adoption – without apparently recognising that whilst its model law is a partial solution to part of the US / EU (re)insurance supervisory problems before us, it’s not a complete solution to any of them;
- The European Commission was “unable to attend”; and
- One after another, industry panel representatives stressed how important it is that policy makers resolve their differences. The gist of this message was that “we don’t care how you do it – mutual understanding, covered agreement, equivalence or something. But you must now take an M&A lawyer’s approach to the problem: (a) get it done; (b) get it done before the end of the year; and (c) get it done in a way that sweeps away unnecessary restrictions, and gives the industry the regulatory certainty it needs – and most surely deserves, after all this time”.
During the discussions, delegates were asked what, if anything, would stop the US and EU from resolving these issues by the end of the year – and the largest number (in a secret ballot) said they thought efforts would fail because there was a lack of political will to achieve a mutually acceptable outcome.
I regret (as a European) that this morning’s discussions seemed strongly to suggest that FIO and the NAIC have been working hard to fully or partially resolve the issues, they’ve made the “great progress” they described, and they’d still like to find a way to solve these issues – if that can be done on a permanent, stable basis by the end of the year; whilst that EIOPA (at least) remains a grudging participant in the process at best. As several delegates pointed out in the margins afterwards, EIOPA “didn’t say much, but it said it loud” and long, and that was both unhelpful and disappointing. What we couldn’t tell, of course, was whether EIOPA’s position was for negotiation purposes only. Perhaps it wants to resolve the issues too – but it thinks it will get a better outcome if it hides its light under a bushel. Let’s hope it doesn’t hide it for too long.