Background and Key Dates
The Dodd Frank Act created the Federal Office of Insurance (FIO) in the US Treasury Department, and authorized FIO to negotiate with foreign governments and regulatory authorities in regard to “prudential measures with respect to the business of insurance or reinsurance” and to enter into an agreement called a “Covered Agreement.” Notably for the US state-based regulatory system, in some circumstances, Dodd Frank also gives FIO the authority to preempt state laws that are inconsistent with the terms of a Covered Agreement. Dodd Frank requires that after a Covered Agreement is negotiated, it must be submitted to Congress for 90 days before it becomes effective. Dodd Frank, however, does not require Congressional approval of a Covered Agreement.
On January 13, 2017, FIO submitted to Congress a Covered Agreement negotiated with the EU addressing: (1) group supervision; (2) reinsurance; and (3) exchange of information between regulators. On February 16, 2017, the Housing and Insurance Subcommittee of the House of Representatives Financial Services Committee held a hearing on the Covered Agreement.
February 16, 2017 Congressional Hearing
Witnesses at the hearing were: Michael T. McRaith, former Director of the FIO; Ted Nickel, Wisconsin Insurance Commissioner and President of the National Association of Insurance Regulators; Leigh Ann Pusey, President and CEO of the American Insurance Association; and Charles Chamness, President and CEO of the National Association of Mutual Insurance Companies.
Mr. McRaith and Ms. Pusey supported the Covered Agreement as negotiated, emphasizing that it preserves the regulatory authority of both US and EU regulators and will save US companies operating in the EU millions of dollars in compliance costs. They emphasized that, once implemented, the Covered Agreement: (1) eliminates EU collateral and local presence requirements for US insurers operating in the EU and (2) eliminates US state collateral and local presence requirements for EU insurers operating in the US.
Messrs. Nickel and Chamness did not support the agreement as negotiated and urged the Trump Administration to renegotiate the agreement. Their primary objections were to the failure of the EU regulators to recognize the US state regulatory system as “equivalent” to the EU system under the EU’s Solvency II standards, and to the ultimate elimination of reinsurance capital requirements for EU companies doing business in the US.
Several witnesses also commented on a new NAIC accreditation standard state regulators must comply with by January 1, 2019, which will reduce some reinsurer collateral requirements.
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.
What Is Next?
Under Dodd Frank, no Congressional approval is required. 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; 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.
Copies of the witnesses’ written testimony, the House Committee Memorandum for the hearing, and a video of the actual hearing are available on the website of the House Financial Services Committee. The text of the Covered Agreement and a Fact Sheet about it are available on the Treasury Department website.