On January 13, 2017, Federal Insurance Office (“FIO”) submitted to the US Congress a Covered Agreement negotiated with the EU addressing: (1) group supervision; (2) reinsurance; and (3) exchange of information between regulators. Once fully implemented, the Covered Agreement eliminates EU collateral and local presence requirements for US insurers operating in the EU, and eliminates US state collateral and local presence requirements for EU insurers operating in the US. The Treasury Department issued a Fact Sheet that explains the Covered Agreement.
To receive the benefit of these provisions, a reinsurer must consent to the jurisdiction of the courts where the primary insurer is domiciled, must consent to pay all final and enforceable judgments, and must maintain prompt pay operations. The Covered Agreement establishes a Joint Committee mechanism to resolve questions of interpretation or implementation, but it is not yet clear who the members of that Joint Committee will be.
The Covered Agreement also eliminates collateral, which for many years was a big issue in reinsurance litigation and arbitration between US cedents and non-US reinsurers. Parties can still agree on collateral as a term of the reinsurance agreement on a consensual basis. The Covered Agreement only applies to reinsurance contracts entered into, amended or renewed on or after the date on which a measure that reduces collateral takes effect and only for losses incurred and reserves reported from and after the later of the date of the measure ore the effective date of a new reinsurance agreement, amendment or renewal.
On February 16, 2017, the Housing and Insurance Subcommittee of the House of Representatives Financial Services Committee held a hearing on the Covered Agreement. The witnesses at the hearing were Michael T. McRaith, former Director of the FIO; Leigh Ann Pusey, President and CEO of the American Insurance Association; Ted Nickel, Wisconsin Insurance Commissioner and President of the National Association of Insurance Regulators; and Charles Chamness, President and CEO of the National Association of Mutual Insurance Companies.
Mr. McGraith and Ms. Pusey supported the Covered Agreement as negotiated, while Messrs. Nickel and Chamness urged the Trump administration to renegotiate the agreement. Some members of the subcommittee expressed support for the Covered Agreement, while others expressed concern about the absence of congressional approval requirements and the lack of consensus across the insurance industry. Several subcommittee members endorsed the suggestion that the Trump administration renegotiate the agreement. A Video of the hearing is available on the House Financial Services Committee website along with the Committee Memorandum.
Under the Dodd Frank Act, which created the FIO and authorized the negotiation of the Covered Agreement, no Congressional approval is required for the Covered Agreement. The Covered Agreement can take effect after all of the following occur: (1) expiration of the 90-day Congressional waiting period (April 13, 2017), (2) the US and the EU exchange written notice that their respective internal requirements have been met (time-frame unspecified); and (3) seven days pass after that written notice. It is not clear at this time what, if any, next steps Congress or the Trump Treasury Department will take in regard to the Covered Agreement. It is also not clear whether the collateral provisions or the reinsurer requirements for the collateral provisions will be addressed if there is any renegotiation.