The two Covered Agreements address three primary issues for insurers and reinsurers who meet certain financial and regulatory compliance conditions:
- Elimination of US local presence requirements for reinsurers domiciled in the EU or the UK (and vice versa)
- Elimination of US collateral requirements for reinsurers domiciled in the EU or the UK (and vice versa)
- Clarification that US reinsurers operating in the EU or UK will be subject to prudential, governance and financial supervision at the worldwide level only by relevant US regulators, and that EU or UK reinsurers operating in the US will be subject to prudential, governance and financial supervision at the worldwide level only by the relevant EU or UK regulators. Each jurisdiction may still regulate the operations of non-domiciliary companies operating within their jurisdictions.
In addition to defining rules that comply with the requirements of the Covered Agreements, the new NAIC models address other topics. If adopted, the new rules will apply to assuming reinsurers that meet specific financial and solvency requirements and are domiciled in a “Reciprocal Jurisdiction.” A Reciprocal Jurisdiction is any nonUS jurisdiction that: (1) has entered into or is subject to a Covered Agreement with the US; (2) is a US jurisdiction that meets the requirements for NAIC accreditation; or (3) is a “qualified jurisdiction” so designated by a US jurisdiction as meeting certain criteria identified in the model rules and any other criteria articulated by the relevant US Commissioner. The effect of the qualified jurisdiction language is to enable reinsurers domiciled in qualifying jurisdictions outside the US, EU or UK also to benefit from elimination of the US local presence and collateral rules. The new rules require the NAIC to publish the list of Reciprocal Jurisdictions.
Through a process called “passporting,” the rules enable a US regulator to defer to other US jurisdictions’ determinations regarding whether an assuming reinsurer is in compliance with applicable financial and other requirements. This passporting process is designed to encourage uniformity across US jurisdictions and facilitate multistate recognition of assuming reinsurers.