On February 20, 2018, the National Association of Insurance Commissioners (NAIC) held a public hearing on the reinsurance collateral provisions of the Bilateral Agreement between the United States of America and the European Union on Prudential Measures regarding Insurance and Reinsurance (the “Covered Agreement”).  The Covered Agreement creates a framework for regulatory cooperation and eliminates reinsurance collateral requirements for EU reinsurers that meet certain requirements.  In return, US insurers will continue to be supervised by the states according to US standards.  US insurers will not be subject to EU Solvency II requirements and will be provided a level playing field in the EU. State laws may be preempted if states fail to implement new laws in conformity with the Covered Agreement.

The NAIC received numerous written comments prior to the public hearing on the implementation and possible approaches to reinsurance collateral reform.  Speakers at the public hearing primarily included members from US insurance companies and trade groups, and also included representatives for companies or groups from the EU, UK, Bermuda and Japan.

The focus of the hearing was a discussion of various possible methods of amending the NAIC’s Credit for Reinsurance Model Law and its Credit for Reinsurance Model Regulation to eliminate the reinsurance collateral requirements for the EU-based reinsurers who meet the Covered Agreement conditions.  The hearing also focused on a discussion of whether such reduced collateral benefits should extend to reinsurers in non-EU jurisdictions or jurisdictions that are designated as NAIC Qualified Jurisdictions, and whether there should be additional “guardrails” relative to US ceding companies, such as changes to the risk-based capital (RBC) formula to address any financial solvency risks caused by the elimination of reinsurance collateral.

The direction the NAIC will take on these issues is not known at this point.  The Commissioners present at the public hearing will now consider the comments and formulate a recommendation to the Financial Condition (E) Committee on the basics of the approach the states should take.  The plan is that this will ultimately result in a charge to the Reinsurance Task Force to draft any necessary amendments to the Credit for Reinsurance Model Law and Credit for Reinsurance Model Regulation.

The NAIC made it clear that the process of amending any of the model acts or regulations will be an open and transparent one.

We will continue to monitor the NAIC’s implementation of the changes to the reinsurance collateral provisions.