On Dec. 18, 2018, the Trump Administration signed a bilateral agreement on prudential insurance matters between the United States and the United Kingdom (the U.S.-U.K. Covered Agreement). This is a Brexit-friendly, U.K.-only version of the covered agreement signed with the European Union in September 2017, which entered into force on April 4, 2018. The U.S.-U.K. Covered Agreement is designed to apply if, as expected, Brexit becomes effective, and the agreement comes at a time fraught with uncertainty over Brexit and its potential impact for the global financial services sector.
The final text of the U.S.-U.K. Covered Agreement was submitted by the Administration to Congress, as required by law, on Dec. 11, 2018. Congress has 90 days from such date to act on the accord.
By way of background, Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act authorizes the Secretary of the Treasury and the United States Trade Representative to jointly negotiate a covered agreement with one or more foreign governments, authorities or regulatory entities with respect to the regulation of insurance markets and mutual recognition of insurance regulatory measures. Generally, both the U.S.-EU and U.S.-U.K. covered agreements will, subject to an implementation process (described below), impose reciprocity — as between a U.S. state on the one hand and the non-U.S. party on the other — in three areas of insurance regulation: reinsurance, group supervision and exchange of information between regulators’ jurisdictions.
The U.S.-U.K. Covered Agreement is substantially similar to the U.S.-EU accord, with differences mainly in procedural provisions such as effectiveness dates. Whereas the latter has entered into effect, the U.S.-U.K. Covered Agreement will enter into effect only after further exchanges between the parties, which can be expected to take account of any obligations of the U.K. under post-Brexit arrangements with the EU.
The Three Substantive Areas
Reinsurance. Subject to certain conditions, the U.S.-U.K. Covered Agreement prevents each of the United States and the U.K. (each referred to as a “party”) from requiring a reinsurer domiciled in the other to post collateral as a condition to (i) being permitted to enter into reinsurance agreements with a ceding company domiciled in the first party or (ii) the ceding company’s ability to take balance sheet credit for such reinsurance, where such requirement would result in less favorable treatment of such reinsurer than that of assuming reinsurers that have their head offices or are domiciled in the first party. In addition, a party where a ceding insurer is domiciled may not, as a condition of entering into a reinsurance agreement or as a condition to allowing the ceding insurer to recognize credit, require the reinsurer of the other party to maintain local presence in the first party where such requirement would result in less favorable treatment for such reinsurer.
These requirements are subject to the assuming reinsurer’s:
- Maintaining, on an ongoing basis, at least €226 million (where the ceding company is in the U.K.) or $250 million (where the ceding company is domiciled in the United States) of own funds or capital and surplus
- Maintaining a solvency ratio of 100 percent SCR under Solvency II or an RBC of 300 percent Authorized Control Level, as applicable in the territory in which the assuming reinsurer has its head office or is domiciled (which must be confirmed by the party where the reinsurer is domiciled on an annual basis)
- Agreeing to provide prompt written notice and explanation to the regulator in the territory of the ceding insurer if:
- It falls below such minimum own funds or capital and surplus, as applicable, or the solvency or capital ratio, as applicable
- Any regulatory action is taken against it for “serious noncompliance” with applicable law
- Consenting to the jurisdiction of the courts of the ceding insurer’s territory
- Consenting to the appointment of the ceding insurer’s domiciliary regulator as its agent for service of process where applicable
- Consenting to pay all final judgments obtained by a ceding insurer that have been declared enforceable in the territory where the judgment was obtained
- Agreeing in each reinsurance agreement that it will provide collateral for 100 percent of its reinsurance liabilities if it resists enforcement of a final and enforceable judgment
- Agreeing to provide certain documentation (e.g., audited financials, actuarial opinions, schedule of reinsurance recoverables) to the host regulator, if requested
- Maintaining a practice of prompt payment of claims under reinsurance agreements
- Confirming that it is not presently participating in any solvent scheme of arrangement and agreeing to provide 100 percent collateral consistent with the terms of the scheme should the assuming reinsurer enter into such an arrangement
In addition, if subject to resolution, receivership or winding-up proceedings, the ceding insurer may seek an order requiring that the assuming reinsurer post collateral for all outstanding ceded liabilities.
Each party is required to observe a specified notification procedure, which includes an opportunity for a cure period, where a reinsurer in its jurisdiction no longer satisfies any of the above conditions.
The U.S.-U.K. Covered Agreement applies only to reinsurance agreements entered into, amended or renewed on or after the date on which a measure that reduces collateral requirements takes effect, either pursuant to the U.S.-U.K. Covered Agreement or the U.S.-EU Covered Agreement, and only with respect to losses incurred and reserves reported from and after the later of (i) the date of the measure or (ii) the effective date of such new reinsurance agreement, amendment or renewal.
Prudential Group Supervision. The U.S.-U.K. Covered Agreement stipulates that, subject to participation in supervisory colleges as well as other exceptions described in the Agreement, an insurance or reinsurance group is subject to worldwide prudential insurance group supervision only by its “home” supervisory authorities (determined based on the jurisdiction of a group’s worldwide parent entity) and is not subject to group supervision at the parent level by any “host” (any other jurisdiction where the group conducts operations).
However, the U.S.-U.K. Covered Agreement makes clear that the host supervisor may exercise group supervision at the level of the “parent undertaking in its territory.”
The U.S.-U.K. Covered Agreement provides certain specified exceptions where a “host” supervisor may exercise some level of group supervision. Some of the exceptions appear intended to be linked to others, while some appear disjunctive from any other, although the exact interplay among these exceptions seems imprecisely laid out. The exceptions include the following:
- Where a worldwide risk management system, as evidenced by the submission of a worldwide group Own Risk and Solvency Assessment (ORSA), is applicable to a home party insurance or reinsurance group, and the home regulator that requires the ORSA provides a summary of the worldwide group ORSA:
- To the host supervisory authorities, if they are members of the group’s supervisory college, without delay
- To the supervisory authorities of significant subsidiaries or branches of that group in the host party, at the request of those supervisory authorities
- Where no such worldwide group ORSA is applicable to a home party group, and the relevant U.S. state or U.K. regulator provides equivalent documentation which is prepared consistent with the two sub-bullets immediately above.
- The summary of the worldwide group ORSA (or equivalent documentation) includes the following elements:
- A description of the insurance or reinsurance group’s risk management framework
- An assessment of the group’s risk exposure, and a group assessment of risk capital and a prospective solvency assessment
- If the summary of the worldwide group ORSA (or equivalent documentation) exposes any serious threat to policyholder protection or financial stability in the host jurisdiction, that host regulator may impose “preventive, corrective or otherwise responsive measures” after consulting with the relevant home regulator.
- Prudential insurance group supervision reporting requirements in the territory of the host party do not apply at the level of the worldwide parent entity of the insurance or reinsurance group unless they “directly relate to the risk of a serious impact on the ability of undertakings within the insurance or reinsurance group to pay claims in the territory of the host party.”
- A host regulator retains the ability to request and obtain information from an insurer or reinsurer pursuing activities in its territory, whose worldwide parent entity has its head office in the territory of the home party, “where such information is deemed necessary by the host supervisory authority to protect against serious harm to policyholders or serious threat to financial stability or a serious impact on the ability of an insurer or reinsurer to pay its claims” in the host jurisdiction; the host regulator “avoids burdensome and duplicative requests.”
- With respect to group to a home party insurance or reinsurance group with operations in the host party and that is subject to a group capital assessment in the home party that fulfills the following conditions:
- The group capital assessment includes a worldwide group capital calculation capturing risk at the level of the entire group, including the worldwide parent, which may affect the insurance or reinsurance operations and activities occurring in the territory of the other party
- The regulator applying the group capital assessment has the authority to impose preventive, corrective or otherwise responsive measures on the basis of the assessment, including “capital measures,” and the host regulator does not impose a group capital assessment or requirement at the level of the worldwide parent
- Where a home party insurer or reinsurer is subject to a group capital requirement in the territory of the home party, the host regulator does not impose a group capital requirement or assessment at the level of the worldwide parent
The U.S.-U.K. Covered Agreement clarifies that, notwithstanding the group supervision limitations and restrictions discussed above, such restrictions are not intended to limit or restrict the ability of U.K. or U.S. regulators to exercise authority over entities or groups that own or control credit or depository institutions, or have banking operations, in the U.K. or United States, as applicable, or whose material financial distress or the nature, scope, size, scale, concentration, interconnectedness or mix of activities has been determined to possibly pose a threat to the financial stability of the United States.
Exchange of Information and “Entry Into Force”. The U.S.-U.K. Covered Agreement includes as an annex a nonbinding model memorandum of understanding (MOU) for supervisory authorities in the United States and U.K., pursuant to which such parties should exchange information. The MOU includes best practices for time, manner and content of information requests and responses, including standards for the confidential treatment of the information. The U.S.-U.K. Covered Agreement explicitly states that the MOU does not address requirements that may apply to the exchange of personal data by supervisory authorities.
A joint committee is established between the two parties to provide a forum for consultation. The parties must consult within the joint committee within 90 days after the date on which the Agreement “enters into force,” which is then defined as the date of the “latter notification in an exchange of written notifications” certifying completion with internal requirements or “such other date as the parties shall agree.”
Implementation of the U.S.-U.K. Covered Agreement
From the date of entry into force:
- The parties are required to encourage relevant authorities to refrain from taking any measures that are inconsistent with any of its conditions or obligations; this may include, as appropriate, “exchanges of letters between relevant authorities” on such matters.
- The parties must take all measures, as appropriate, to implement and apply the Agreement as soon as possible in accordance with the “application” provisions described below.
- The United States must encourage each state to promptly adopt the following measures:
- The reduction, in each year following Nov. 7, 2017, of the amount of collateral required by each state to allow full credit for reinsurance by 20 percent of the collateral that the state required as of Jan. 1, 2017
- The implementation of relevant state credit for reinsurance laws and regulations consistent with the reinsurance provisions, as the method for adopting measures in conformity with the collateral prohibitions
Provided that the Agreement has entered into force, on a date no later than the first day of the month that is:
- Forty-two months after Sept. 22, 2017, the United States must begin evaluating a potential pre-emption determination under its laws and regulations with respect to any state insurance measure that the United States determines is inconsistent with the Agreement and results in less favorable treatment of a U.K. insurer or reinsurer than that of a U.S. insurer or reinsurer licensed in that state.
- Sixty months after Sept. 22, 2017, the United States must complete any necessary pre-emption determination
The U.S.-U.K. Covered Agreement “applies” on the later of:
- The date of “entry into force” as described above
- The date that is 60 months from Sept. 22, 2017
However, the U.S.-U.K. Covered Agreement also contemplates that each party will apply the group supervision provisions from the date of entry into force.
In addition, the U.S.-U.K. Covered Agreement provides that certain requirements, in order to be applicable to a party, are dependent on the other party’s observing certain other specified requirements (the Cross Conditions). Specifically, on the later of the date of “entry into force” and the date that is 60 months from the date the U.S.-U.K. Covered Agreement was signed:
- A party’s obligation not to impose collateral requirements for a cedent in its territory and the obligations described under “Implementation of the Covered Agreement” above are applicable only for so long as the other party is observing the group supervision requirement and the local presence requirement described above.
- The group supervision requirement and local presence requirement are applicable only for so long as the other party is observing the mandate not to impose collateral requirements.
- The local presence requirement is applicable only for so long as the other party is observing the group supervision requirement and the obligation not to impose collateral requirements.
Either party may, upon “accelerated mandatory consultation,” terminate where a party applies measures outside its territory in the event of a systemically important insurer.
The US-UK Covered Agreement also makes certain of its provisions dependent on compliance by U.S. states or determinations of pre-emption of state measures (the State Compliance Conditions). Specifically, from the date of entry into force until Sept. 22, 2022, the obligation not to impose collateral requirements on reinsurance will apply with respect to a UK reinsurer in a U.S. state on the earlier of:
- Adoption by such U.S. state of a measure consistent with such requirement
- The effective date of any determination by the United States that such U.S. state measure is pre-empted because it is inconsistent with the Agreement and results in less favorable treatment of a UK insurer or reinsurer than that of a U.S. insurer or reinsurer licensed in that state.
From the date of entry into force until Nov. 7, 2022, the U.K. may not impose a group capital requirement at the level of the worldwide parent with regard to a U.S. insurance or reinsurance group with operations in the U.K.
From the date of entry into force until Sept. 22, 2022, if a party does not meet the local presence requirements, the supervisory authorities of the other party may, after mandatory consultation, impose a group capital assessment or group capital requirement at the level of the worldwide parent on an insurance or reinsurance group which has its head office or is domiciled in the other party.
The local presence requirement must be implemented and applicable in the territory of the U.K. no later than 24 months from Sept. 22, 2017, provided that the Agreement has entered into force.
Subject to the Cross Conditions and the State Compliance Conditions, the collateral requirements must be implemented and fully applicable in all of the territory of both parties no later than 60 months from Sept. 22, 2017, provided that the Agreement has entered into force.
From the date of entry into force, the provisions (i) establishing a joint committee of the parties, (ii) relating to termination and mandatory consultation, and (iii) relating to amendment become applicable.