On 13 January 2017, the EU and the U.S. announced that they have concluded negotiations on a long-awaited bilateral agreement (the "Agreement") that, if implemented, will facilitate greater transatlantic (re)insurance activity. The Agreement was entered into in accordance with Article 218 of the Treaty on the Functioning of the European Union and in accordance with the Federal Insurance Office Act 2010, which is a component of the U.S. Dodd-Frank Act. It is a product of the EU-U.S. dialogue project: 'The Way Forward' which is an initiative that began in January 2012 with the objective of enhancing understanding and cooperation for the benefit of insurance consumers, business opportunity and effective supervision. Stakeholders included the European Union, EIOPA, the U.S. National Association of Insurance Commissioners and the Federal Insurance Office of the U.S. Department of the Treasury who agreed to participate in a deeper dialogue to contribute to an increased mutual understanding and enhanced cooperation between the EU and the U.S. in the area of insurance.
Broadly-speaking, the Agreement imposes reciprocity, as between a U.S. State on the one hand and any EU Member State on the other, in three key areas of prudential insurance regulation:
- group supervision
- reinsurance, and
- the exchange of information between supervisors.
The Agreement provides that, subject to participation in supervisory colleges as well as other exceptions, an EU or U.S. headquartered (re)insurance group is subject to worldwide prudential insurance group supervision only by the supervisory authorities of the jurisdiction where the worldwide parent of the group is domiciled or headquartered. Accordingly, an EU (re)insurance group operating in the U.S. will be subject to worldwide group-level insurance prudential supervision only by their relevant home Member-State supervisor, although its U.S. operations will remain subject to U.S. group supervision in respect of the sub-group operating in the U.S. Similarly, a U.S. headquartered (re)insurance group operating in the EU will be subject to worldwide group-level insurance prudential supervision only by its applicable primary U.S. insurance supervisor, although its EU operations will remain subject to EU group supervision in respect of the sub-group operating in the EU. This should limit the extra-territorial application of the Solvency II group supervision requirements on U.S. headquartered insurance groups in respect of their worldwide operations.
Subject to certain conditions (summarised below), the Agreement prevents the US and the EU (a "Party", or together, "the Parties") from requiring the posting of collateral or a local presence (unless the collateral requirement also applied to reinsurers under the direct supervision of the host Party) as a condition to entering into a reinsurance agreement with a cedant based in the other Party's jurisdiction or that cedant taking credit for reinsurance. However, the Agreement does not limit the ability of the parties to a reinsurance agreement themselves to agree collateral or other security arrangements.
To be eligible for the collateral and local presence benefits under the Agreement, an assuming reinsurer will be subject to a number of conditions including (but not limited to):
- maintaining own funds or capital and surplus of at least €226 million (when dealing with an EU ceding insurer) or US$250 million (when dealing with a US ceding insurer);
- maintaining a solvency ratio of 100% Solvency Capital Requirement under Solvency II or a Risk-Based Capital ratio of 300% Authorised Control Level (as applicable);
- the reinsurer must consent to "service of process", where applicable, in the territory of the host Party;
- consenting in writing to pay all final judgments obtained by a ceding insurer in the courts of the jurisdiction where judgment was obtained;
- agreeing to provide certain documentation (e.g. audited financials, actuarial opinions, etc) to the host regulator, if requested; and
- maintaining a practice of prompt payment of claims under reinsurance agreements.
It is important to note that the Agreement limits the ability of reinsurers to reduce their collateral requirements on in-force business that is already reinsured and has existing collateral. Nevertheless, once implemented, the Agreement will eliminate a key barrier inhibiting cross-border expansion.
Exchange of information between supervisors
The Agreement also provides that the Parties must encourage their respective supervisory authorities to cooperate in exchanging information in accordance with the model memorandum of understanding ("MOU") annexed to the Agreement. The MOU includes best practices for time, manner and content of information requests and responses, including standards for the confidential treatment of the information. It is worth noting that the MOU does not address requirements that may apply to the exchange of personal data by supervisory authorities.
The Agreement will require approval from U.S. Congress and the European Parliament. Should the necessary sign-off be obtained, the Agreement will enter into force seven days after the Parties notify each other that they have completed their internal requirements. For international insurance groups, it will be important to monitor progress concerning the approval and implementation of the Agreement. One final consideration is that the Agreement will not apply to the UK post-Brexit although presumably, a similar bilateral arrangement can be expected. We will update further on this subject as it develops.