The covered agreement (1) eliminates local presence and collateral requirements on reinsurers imposed by either the EU or the US supervisory authorities; (2) outlines the supervisory authorities’ role with respect to prudential group supervision; and (3) provides for mutual support between US and EU supervisory authorities for the exchange of information. 

Subject to provisional application, the covered agreement will take full effect sixty (60) months after the agreement is signed by the parties.  In the US, there is a ninety (90) day waiting period before signing the agreement, and in the EU, the covered agreement must be first approved by the European Parliament and the EU member states.  We understand that the EU approval process could take as little as three months.  Notwithstanding the sixty (60) month timeframe, the US is required to encourage US states to begin to reduce collateral requirements by twenty (20) percent per year and to consider possible preemption of state laws after forty-two (42) months.

Reinsurance 
Subject to certain conditions described below, the covered agreement eliminates the requirement of a reinsurer’s local presence and maintaining collateral as a condition for a ceding insurer to take regulatory credit for reinsurance.²

To qualify for the elimination of local presence and collateral requirements, the reinsurer³ is required to:  

(a) maintain at least €226 million (EU reinsurers) or $250 million (US reinsurers), of “own funds” or capital and surplus; 
(b) maintain a solvency ratio of 100 percent SCR under Solvency II or an RBC of 300 percent Authorized Control Level, as applicable;
(c) consent to the jurisdiction of the courts of the ceding insurer’s territory; 
(d) consent to the appointment of the ceding insurer’s domiciliary supervisory authority as agent for service of process; 
(e) consent to pay all final judgments obtained by a ceding insurer;
(f) agree in each reinsurance agreement that it will provide collateral for 100 percent of the assuming reinsurer’s liabilities if the assuming reinsurer resists enforcement of a final judgment; 
(g) maintain a practice of prompt payment of claims under reinsurance agreements; and
(h) confirm that it is not presently participating in any solvent scheme of arrangement and agree to provide 100 percent collateral consistent with the terms of the scheme should one be entered into.⁴

The covered agreement applies prospectively, but does not prohibit the contract parties from renegotiating their reinsurance agreement.⁵

Group Supervision
The group supervision provisions apply only to those insurance groups operating in both the US and the EU.  US insurance groups operating in the EU will be supervised at the worldwide group level only by the relevant US insurance supervisors and, thus, US insurers will not be required to meet EU global group capital, reporting, or governance requirements.⁶  Conversely, EU insurers operating in the US will be supervised at the worldwide group level only by the relevant EU insurance supervisors.⁷ 

Exchange of Information
The covered agreement encourages, in a non-binding manner, insurance supervisors in the US and the EU to share information on insurers and reinsurers that operate in each of their markets.⁸

Application of the Covered Agreement
Subject to provisional application of certain provisions noted below, the covered agreement will take full effect sixty (60) months after the agreement is signed by the US and EU.⁹

Following immediately upon signature, the US will encourage each US state to promptly adopt measures reducing the amount of required collateral by twenty (20) percent per year, and, after forty-two (42) months, the US, through the FIO, will begin the process of making potential preemption determinations of state reinsurance laws that are inconsistent with the covered agreement.¹⁰  EU local presence requirements must be eliminated within twenty-four (24) months of signature.¹¹

Finally, group supervision requirements will be provisionally applied (after internal requirements and procedures have been satisfied) until such time as the covered agreement becomes fully effective.
The covered agreement does not alter the US treatment of non-EU insurers.

1 Pursuant to 31 USC Section 313 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Secretary of the Treasury, through the Federal Insurance Office (FIO), and USTR are authorized to jointly negotiate a covered agreement with one or more foreign governments, authorities, or regulatory entities. A covered agreement is a written bilateral or multilateral agreement regarding prudential measures with respect to the business of insurance or reinsurance.