United States: NAIC Updates – October 2017

Status of Covered Agreement Between EU and U.S.

The NAIC Reinsurance (E) Task Force ("RTF") held its most recent open meeting on Monday, August 7, 2017 during the NAIC 2017 Summer National Meeting in Philadelphia, Pennsylvania. During the meeting, the RTF heard a status report on the proposed Bilateral Agreement Between the European Union and the United States of America on Prudential Measures Regarding Insurance and Reinsurance ("Covered Agreement"), which was subsequently executed by the United States and the European Union on September 22, 2017. The Covered Agreement will "eliminate reinsurance requirements for EU reinsurers that maintain a minimum amount of own funds equivalent to $250 million and a solvency capital ratio (SCR) of 100% under Solvency II," and allow U.S. reinsurers to do business in the EU without local presence so long as they "maintain capital and surplus equivalent to €226 million with an RBC of 300% of Authorized Control Level."

As discussed below, the NAIC had initially voiced opposition to the Covered Agreement during the negotiation process between the U.S. and the EU. However, the September 22, 2017 policy statement released by the U.S. in tandem with its execution of the Covered Agreement seems to have assuaged many of the NAIC's concerns.

Background

Prior to the execution of the Covered Agreement, the NAIC participated in a hearing on the Covered Agreement before the House Financial Services Committee's Subcommittee on Housing and Insurance on February 16, 2017, and also submitted a letter to Treasury Secretary Steven Mnuchin on March 15, 2017. During the negotiation process, the NAIC consistently voiced numerous concerns with the form of the Covered Agreement. Over the last several years, the NAIC prioritized the reduction of reinsurance consumer protection collateral requirements, and the majority of states have passed legislation to implement the NAIC Credit for Reinsurance Models. Accordingly, if Models #785 (Credit for Reinsurance Model Law) and #786 (Credit for Reinsurance Model Regulation) were adopted as accreditation standards, the NAIC believed the states would already have accomplished the goals of the Covered Agreement.

In its March 15 letter, the NAIC urged caution in considering the terms of the Covered Agreement, noting the following concerns:

1. Elimination of Collateral Requirements: The NAIC letter noted that states had taken measures to reduce, but not eliminate collateral requirements, relying on a risk-based approach with collateral requirements ranging from "0% to 100% based on an assessment of the financial strength of the reinsurer and quality of its supervision." Noting that the conditions required of EU insurers under the Covered Agreement "differ materially from current state credit for reinsurance laws," the NAIC expressed concern that "states may have to take alternative measures to ensure that ceding U.S. insurers, and, by extension, U.S. policyholders are protected from any risks posed by reinsurance counterparties."

2. Group Capital Assessment: The Covered Agreement "suggests the states should impose a capital requirement . . . at the group level of a U.S. insurer, rather than at the legal entity level." As the NAIC does not currently require additional capital at either level, the NAIC is concerned that this requirement could result in increased costs for U.S. insurers.

3. Group Supervisory Framework: The Covered Agreement could disrupt "existing group supervisory authorities," as it "appears to place conditions upon the use of longstanding regulatory authorities to protect U.S. consumers." Essentially, the Covered Agreement would limit supervision of EU reinsurers, even those operating in the U.S., to EU supervisory authorities.

Progress of the Covered Agreement

As required by Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), the Covered Agreement was submitted to Congress on January 13, 2017 by the U.S. Department of Treasury ("Treasury Department") and the Office of the U.S. Trade Representative ("USTR"). In an open meeting on April 9, 2017, the RTF explained that if Congress took no action against the Covered Agreement within the 90-day congressional review period required by Dodd-Frank, the Treasury Secretary would be authorized to execute the agreement. On April 13, 2017, the 90 days elapsed, and Congress had thus far not taken any action.

Against the NAIC's advice, plans to execute the Covered Agreement continued to move forward under the Trump administration. On July 14, 2017, the Treasury Department and the USTR issued a joint statement of intent to sign the Covered Agreement in the near future, and on September 22, 2017 both the United States and the European Union executed the Covered Agreement. That same day, the U.S. released a policy statement to offer clarity on some of the Covered Agreement's more contentious provisions:

With regard to the elimination of collateral requirements, the U.S. policy statement clarified that the Covered Agreement "does not prevent a state insurance regulator from imposing non-collateral requirements that do not have substantially the same regulatory impact as collateral requirements as conditions for ceding companies to enter into reinsurance agreements with EU reinsurers or to allow credit for such reinsurance, if the state insurance regulator applies the same requirements in the case of reinsurance agreements with U.S. reinsurers domiciled in that state."

As to group capital requirements, the "United States expects that the NAIC's group capital calculation will satisfy the 'group capital assessment' condition" of the Covered Agreement, and the Covered Agreement "does not require a group capital assessment with respect to U.S. insurance groups that do not have operations in the EU."

With regard to supervisory requirements, the policy statement also clarified that "U.S. insurance supervisors are able to obtain information about the EU parent of insurers that are active in the United States, if necessary, to protect against serious harm to U.S. policyholders, or a serious threat to financial stability, or a serious impact on the ability of an insurer to pay its claims in the United States."

In addition, the Covered Agreement provides for a "Joint Committee" which "will serve as a forum for consultation and to exchange information on the administration and proper implementation of the [Covered] Agreement." The policy statement recognized the important role of U.S. state insurance regulators, noting that because they "will be largely responsible for implementing the Agreement, the United States is committed to the direct involvement of state insurance regulators, including their staff, in the work of the Joint Committee. To this end, the United States will consult with state insurance regulators, and will establish a robust consultative process to ensure that discussions in the Joint Committee will be well-informed of the views and interests of state insurance regulators."

This policy statement was well-received by the NAIC, and seems to have addressed several of the NAIC's concerns. Shortly after the policy statement was issued, NAIC President and Wisconsin Insurance Commissioner Ted Nickel released a statement on the NAIC website noting that the NAIC is "pleased to see the Treasury and USTR clarify their interpretation of the covered agreement," and that the NAIC has "worked closely with Treasury and USTR on these clarifications and appreciate[s] their affirmation of the primacy of state regulation." However, the NAIC generally disfavors the use of covered agreements as a mechanism to set U.S. insurance policy and, in his own statement in response to the U.S. policy statement, NAIC CEO Mike Consedine thanked the Treasury and USTR for "working constructively" to "resolve [NAIC] concerns with the [C]overed [A]greement," but "caution[ed] against using this mechanism in the future."

Looking Forward

Now that the agreement has officially gone into effect, U.S. states have "five years to implement its reinsurance provisions or face potential preemption by the Federal Insurance Office." The RTF noted, and the U.S. policy statement confirmed, that the Covered Agreement will not apply retroactively to contracts that are already in force, and will only be available to new or renewal business or newly amended contracts involving only prospective reinsurance. While it reduces the reinsurance collateral to 0% for many EU reinsurers, the Covered Agreement retains "several important elements from the NAIC's credit for reinsurance models, including requirements with respect to enforcement of final U.S. judgments, service of process, financial reporting requirements, prompt payment of claims and solvent schemes of arrangement." Finally, now that the Covered Agreement has been executed, the NAIC plans to form a specific structure to oversee its implementation along with the RTF, which will also play a crucial role in the process.

Qualified Jurisdictions

At its Summer Meeting on August 7, 2017, the RTF heard the report of the Qualified Jurisdiction (E) Working Group. At the 2016 Summer National Meeting, the Working Group had been charged with the task of studying and reporting on the implementation of Solvency II by the European member-states, and to assess the potential impact on the Qualified Jurisdiction Status of France, Germany, Ireland, and the UK. The Working Group was advised by NAIC leadership to hold off on any public recommendations given the uncertainty surrounding the Covered Agreement, which, if executed, would render the Qualified Jurisdiction status of EU member states moot.

Given the public statement of intent to sign the Covered Agreement issued by the Treasury Department and USTR on July 14, 2017, the RTF determined that the Working Group should discontinue work on the report unless and until it becomes relevant again. As the Covered Agreement was officially executed by both the U.S. and EU on September 22, 2017, it is unlikely that work on the report will be reinitiated.

Despite the execution of the Covered Agreement, the Working Group's charge is still relevant in at least one respect. As the Working Group noted at the RTF's August 7, 2017 meeting, the CoveredAgreement includes a five-year grace period for U.S. states to come into compliance. Accordingly, the states now have 60 months to adopt reinsurance reforms removing collateral requirements for EU reinsurers that meet the prescribed consumer protection conditions, and until the states have done so, the Qualified Jurisdiction status of the EU member states will remain relevant.

The designation as a Qualified Jurisdiction is valid for five years, and all seven current Qualified Jurisdictions (Bermuda, Japan, Switzerland, France, Germany, Ireland, and the UK) were approved as of January 1, 2015. As such, each must be re-evaluated no later than December 31, 2019. Because the five-year compliance period of the Covered Agreement will still be in effect at that time, the RTF charged the Working Group with performing a re-evaluation of all seven Qualified Jurisdictions, including those in the EU, before the current designations expire on December 31, 2019.

Finally, the Working Group reported that it has received an application from another EU member state requesting designation as a Qualified Jurisdiction. It was noted that the "evaluation process is very time-consuming and can take up to a year to complete," but because the Covered Agreement has essentially validated Solvency II as an effective supervisory system, the Working Group may be able to make a recommendation as early as the Fall National Meeting in December of 2017, with a proposed effective date of January 1, 2018. Taking into account the five-year compliance period of the Covered Agreement, the RTF agreed that evaluation of the EU applicant as a potential Qualified Jurisdiction remained worthwhile, and directed the Working Group to proceed in preparing a recommendation.

Download >> NAIC Updates – October 2017

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.