On February 9, Connecticut Governor Dannel Malloy wrote a letter to U.S. Department of the Treasury Secretary Jacob Lew and U.S. Trade Representative Ambassador Michael Froman expressing his concern over their departments’ consideration of preempting state insurance regulation by potentially negotiating a “covered agreement” with foreign authorities. Such an agreement would serve to reduce requirements of collateral imposed on foreign reinsurers.
Historically, state laws required foreign-based reinsurers to post 100% collateral for assumed risks. However, this has changed since the NAIC model law in 2011 allowed for collateral reductions based on the financial strength of reinsurers and the regulatory body that is responsible for its oversight. This model law has been adopted in half of the states in just the past few years. Malloy points out in his letter that states are acting quickly to effectuate these changes and that an additional 12 states are expected to consider the legislation this year. If passed in these states, 95 percent of the market would be under reduced collateral.
Malloy’s letter was critical of the idea that the Treasury’s Federal Insurance Office (“FIO”) is considering a covered agreement which would create a nationally uniform treatment of reinsurers. The recommendation was part of the FIO’s Insurance modernization report from 2013. In the report, FIO Director McRaith noted that the covered agreement for reinsurance collateral would be modeled after the NAIC model law update known as the NAIC Model Collateral law.
In his letter, Malloy notes that the Treasury should consider the efforts that the state insurance regulators are taking to enact these changes. He urged the Treasury to not preempt state efforts through a covered agreement, but to leave it to the states to regulate these changes. You can find Governor Malloy’s letter here.