Covered Agreements: Covered Agreement Reached With UK; Implementation of Covered Agreement With EU Slows

Carlton Fields
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On December 11, 2018, the Secretary of the Treasury and the United States Trade Representative sent the Chairs and Ranking Members of the Senate Committee on Banking, Housing, and Urban Affairs, the Senate Committee on Finance, the House Committee  on Financial Services, and the House Committee on Ways and Means the text of a new Covered Agreement agreed to by the United States and the United Kingdom concerning the business of reinsurance, with the notification letters required for such agreements by the Dodd-Frank Act.  A press release also was issued describing the new US-UK Covered Agreement.

The substantive terms of the US-UK Covered Agreement appear to be materially the same as the terms of the previously existing US-EU Covered Agreement.  The implementation provisions of the US-EU Covered Agreement were a bit complicated, and the provisions of Article 9 (“Implementation of the Agreement”) and Article 10 (“Application of the Agreement”) of the new US-UK Covered Agreement also are complicated.  For example, the agreement becomes applicable the later of the date it enters into force or 60 months from September 22, 2017.  September 22, 2017 was the date that the US-EU Covered Agreement was officially signed.  More curious is the provision of Article 9 paragraph 3.(a) of the new US-UK Covered Agreement that “[f]rom the date of entry into force of this Agreement, the United States shall encourage each U.S. State to promptly adopt the following measures: (a) the reduction, in each year following 7 November 2017, of the amount of collateral required by each State to allow full credit for reinsurance by 20 percent of the collateral that the U.S. State required as of 1 January 2017 ….”  Perhaps these provisions reflect a desire that the two covered agreements become applicable at the same time, with no resulting advantage or disadvantage to reinsurers domiciled in either the EU or the UK post-Brexit.

Meanwhile, the implementation of the US-EU Covered Agreement has slowed somewhat.  Consideration of final approval of the proposed amendments to the Credit for Reinsurance Model Act and Model Regulation, which is part of the implementation process, was on the agenda for the December 19, 2018 telephonic meeting of the NAIC Executive Committee and Plenary, but at the end of the meeting NAIC President McPeak, who was moderating the meeting, announced without comment that the consideration of the revisions to the Models was being deferred to a later date to allow for the consideration of late comments on the proposed Model revisions received from the US Treasury and the US Trade Representative.  Neither the substance of those comments nor a revised timeline for consideration of the proposed Model revisions was provided during that meeting.  It remains to be seen what the next step will be in the consideration of the proposed amendments to the Models.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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