The landmark EU/US “covered agreement” (Agreement), a product of a year-long negotiation, is at risk of falling apart after various US stakeholders voiced serious concerns over the Agreement’s ambiguity and balance in favour of the EU.
From the US perspective, the aim of the Agreement was to put in place prudential measures for the business of insurance or reinsurance that achieve a level of protection for insurance or reinsurance consumers that is substantially equivalent to the level of protection achieved under state insurance or reinsurance regulation. The European council recently authorised the signing of the Agreement and it is now with the US to enact but this is proving far from easy due to significant controversy over its wording.
The Agreement was pursued in the light of the US’ perceived inadequacy of Solvency II to US insurance entities active in the EU and EU’s perceived strict requirements of the US on EU insurance groups. Solvency II permits the European Commission to make equivalence determinations for third countries with respect to certain areas of prudential regulation; which provide for three elements that may be deemed equivalent, that is, reinsurance, solvency assessment and group supervision. Since 1 January 2016 the US has been granted provisional equivalence status for a period of 10 years but this only extends to EU insurance groups with US subsidiaries. However, US insurance entities have described difficulties with some EU member states’ implementation of Solvency II, which has led to some that are active in the EU to argue that some EU countries are raising barriers on the basis that the US does not have a regulatory framework that is equivalent to Solvency II, whereas the US, in comparison, has lower barriers to non-US reinsurers operating cross-border in the US.
This led to the landmark Agreement and the parties’ agreement on three areas of prudential insurance oversight, reinsurance, group supervision and exchange of information among supervisors. In summary, the covered agreement no longer requires reinsurers to post collateral or have a local presence, confirms that groups will be subjected to worldwide group supervision only in their home jurisdiction and lays the foundations for the exchange of information among EU and US regulators. The Agreement applies to US/EU cross border reinsurance and does not affect cedants and reinsurers operating from or in other countries.
While the European reinsurance market is supportive of the proposed arrangements and is keen to have the agreement finalised and in force, the same cannot be said for their US counterparts. The National Association of Insurance Commissioners in the US (NAIC) has sought clarification over the Agreement’s interpretation due to its perceived ambiguity and claims there is significant confusion among stakeholders as to the scope of the agreement. There is a real risk that, should the NAIC not get the assurances it is seeking, both sides may need to go back to the negotiating table in circumstances where neither party has the appetite to commence another round of long and demanding negotiation.
As an aside but by no means an unimportant point, the UK may seek a similar bilateral agreement with the US due to the UK’s imminent departure from the EU, which could potentially be incorporated into a wider bilateral trade agreement between the UK and the US; but that discussion is outside the scope of this article.