On Friday, November 20, 2015, the U.S. Department of the Treasury and the U.S. Trade Representative (USTR) notified the chairs of the U.S. House Financial Services Committee, House Ways and Means Committee, Senate Banking Committee and Senate Finance Committee of their intent to initiate negotiations to enter into a covered agreement with the European Union (EU) in accordance with Section 314(b)(1) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). The notices were issued in the midst of the National Association of Insurance Commissioner’s (NAIC) Fall National Meeting and three days before a public forum on the EU-U.S. Insurance Project, and less than six weeks before Solvency II group supervision requirements are scheduled to take effect in the EU.  

The November 20 letters state that the covered agreement negotiations with the EU will “seek to address the following prudential measures: (1) obtain treatment of the U.S. insurance regulatory system by the EU as ‘equivalent’ to allow for a level playing field for U.S. 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.”  

If implemented as proposed, a covered agreement would address concerns of U.S. insurers doing business in Europe that the United States will not be deemed “equivalent” under Solvency II. In the absence of such equivalence, insurance regulators in EU member states will be required to apply various Solvency II rules to the U.S. insurers’ worldwide group as if it were based in the EU, unless “other methods” are applied that allow the objectives of group supervision under Solvency II to be achieved. Solvency II is scheduled for implementation on January 1, 2016.  

Covered Agreement Under Dodd-Frank  

Dodd-Frank authorizes the U.S. Secretary of the Treasury, with assistance from the Federal Insurance Office (FIO), and the USTR to negotiate “covered agreements” regarding the recognition of prudential measures with respect to the business of insurance and reinsurance with foreign governments that achieves a level of protection for insurance and reinsurance consumers that is substantially equivalent to the level of protection achieved under U.S. state insurance or reinsurance regulation. Dodd-Frank further defines the level of protection to be substantially equivalent if it achieves a similar outcome in consumer protection. Dodd-Frank authorizes the preemption of state insurance law if the FIO Director determines that: (1) the state law results in less favorable treatment of an alien insurer domiciled in a jurisdiction that is subject to a covered agreement than of a U.S. insurer domiciled, licensed or otherwise admitted to do business in that state; and (2) the state law is inconsistent with a covered agreement.  

As a check against an unbridled assertion of Federal authority to displace existing regulation, Dodd-Frank includes requirements for the Treasury Secretary and the USTR to consult with Congress before initiating negotiations for a covered agreement, during the negotiations, and before entering into a covered agreement. Friday’s notice was issued to comply with that requirement. Dodd-Frank also requires a 90-day waiting period between a final covered agreement being submitted to these committees and the implementation of the covered agreement.  

NAIC Fall National Meeting and the EU-U.S. Dialogue Project  

Since Dodd-Frank’s enactment, various state insurance regulators have expressed concern with a covered agreement on reinsurance collateral requirements because it is viewed as an unnecessary encroachment by the Federal government (and non-U.S. insurance regulators) on the U.S. state-based system of insurance regulation. State regulators maintain that the reduced collateral requirements available to certified reinsurers under the amended Credit for Reinsurance Model Law and Regulation (Reinsurance Models) have alleviated any need for a covered agreement. To date, 32 states have adopted laws allowing reduced collateral requirements.  

During the NAIC’s Fall National Meeting (just one day before Treasury and the USTR issued their notices to Congress), the NAIC Financial Regulation Standards and Accreditation (F) Committee agreed in principle to make the reduced collateral provisions of the amended Reinsurance Models an NAIC state accreditation standard—a move clearly intended to prevent Treasury from pursuing a covered agreement that would preempt state law on reinsurance collateral. A number of regulators and industry representatives noted this fact during the Committee meeting, with one industry representative noting that adopting reduced collateral as a state accreditation standard would “preserve, protect and defend” state insurance regulation from a covered agreement that would “stab state insurance in the back.”  

Despite this ongoing debate, imminent Federal action on a covered agreement has seemed increasingly likely. In April 2015, the European Council announced that it would direct the European Commission to negotiate a covered agreement with the United States on reinsurance collateral requirements for non-U.S. reinsurers. In addition, in September 2015, FIO issued its Annual Report, which noted that the United States and the EU have “continued progress on procedural prerequisites defined by each jurisdiction’s processes towards commencing negotiations on a covered agreement,” and that formal notice of its intent to begin negotiations was “expected in the coming weeks.” That FIO would eventually pursue a covered agreement was foreshadowed in its 2013 Report to Congress on modernizing insurance regulation in the United States.1    

On Sunday, November 22, the NAIC and the European Insurance and Occupational Pensions Authority (EIOPA) jointly hosted a public forum on the EU-U.S. Insurance Project. Speakers included FIO Director Michael McRaith, NAIC President Monica Lindeen, NAIC President Elect John Huff, NAIC Chief Executive Officer Ben Nelson, Florida Office of Insurance Regulation Commissioner Kevin McCarty, EIOPA Chairman Gabriel Bernardino, Nederlandsche Bank Director of Insurance Supervision Thijs van Woerden, and UK Prudential Regulation Authority Manager of Insurance Policy International Team Edward Forshaw. Three insurance industry representatives also spoke.  

During the forum, the U.S. regulators emphasized the changes to U.S. regulation since the 2008-09 financial crisis, noting in particular advancements on supervisory colleges, enterprise risk management, own risk solvency assessments, corporate governance and reinsurance collateral reform. Several commented that the concept of equivalence should embrace regulation that delivers similar outcomes without a need for similar regulatory processes. They also emphasized that similarities between EU and U.S. regulation outweigh the differences. Handouts for the meeting included an overview of 2015 activities by the EU-U.S. Project’s Technical Committee on Group Supervision (TC2) and aReport on Key Elements of Regulations and Supervisory Practices in Respect of Group ORSA.  

Commissioner Lindeen opened the forum with the comment that it is not clear how U.S. companies will be treated under Solvency II, which “greatly concerns us,” and it ended with unanswered questions from the audience on whether there will be a grace period or suspension of application of group supervision rules to U.S. insurers while negotiation of a covered agreement is underway. Although the European regulators appeared to telegraph a receptivity to proposals from individual companies that would meet the “other methods” standard, the repeated refrain was that they could not ignore legal requirements.  

The FIO/USTR notice letters state that state insurance regulators will have a meaningful role during the covered agreement negotiating process. Director McRaith reiterated in his remarks that stakeholders interested in the negotiations will participate in the process, noting in particular that state insurance departments would have a direct and meaningful role, though he did not shed light on any details on how stakeholders would be allowed to consult or participate when asked.