The NAIC has published proposed revisions to the and the that are intended to facilitate compliance by the states with the provisions of the Covered Agreement with the European Union, and avoid the federal preemption of state credit for reinsurance laws. These exposure drafts further the implementation of the . The draft revisions add new sections to both the Model Act and the Model Regulation allowing a ceding insurer to take financial statement credit for reinsurance if the assuming insurer has its headquarters or domicile in what the state insurance commissioner determines is a “Reciprocal Jurisdiction,” as that term is defined in the revised Models. The proposed revisions do not change or delete any of the existing provisions of the Models, which would remain in force and effect along with the new provisions.
The proposed revised Model Regulation adds detailed requirements to the more general provisions of the Model Act, including provisions clearly intended to implement the provisions of Articles 3 – 5 of the Covered Agreement and extend the benefits of the reinsurance collateral provisions of the Covered Agreement to non-E.U. jurisdictions that have group governance, capital, supervision, solvency, and other requirements that are in compliance with those found in the Covered Agreement. For example, Section 9 of the proposed revised Model Regulation states that to be recognized by a state as a Reciprocal Jurisdiction, a non-U.S. jurisdiction must either: (1) be recognized by the state insurance commissioner as a Reciprocal Jurisdiction and be party to a treaty or international agreement with the United States regarding credit for reinsurance, such as a Dodd-Frank Act Covered Agreement; or (2) be recognized by the state insurance commissioner as a qualified jurisdiction and a Reciprocal Jurisdiction, meeting stated requirements concerning the equal treatment of insurers domiciled in the U.S. and the foreign jurisdiction, a lack of a “local presence” requirement, certain worldwide group governance, solvency, capital, and supervision requirements, and required information exchange and sharing between insurance supervisors. The proposed revisions impose requirements for credit for reinsurance in such jurisdictions that are not only consistent with but quoted from the Covered Agreement, effectively offering the terms of the Covered Agreement to countries outside the E.U. on an equal footing with the Covered Agreement’s terms for E.U. member nations. Section 9.B.(2)(d) of the proposed revisions to the Model Regulation notes that “a memorandum of understanding or similar document between the commissioner and such qualified jurisdiction” will be needed to implement the provisions concerning the exchange of information between the regulators of different jurisdictions.
The proposed revisions to the Models resolve two issues which were undecided at the February 2018 public hearing: (1) whether the reinsurance collateral reform contemplated by the Covered Agreement would be limited to U.S.-E.U. relationships, or be applicable to reinsurance arrangements with foreign reinsurers domiciled elsewhere; and (2) whether non-E.U. domiciled reinsurers would have to be subject to the group supervision, solvency, capital, and information exchange provisions of the Covered Agreement to receive the benefits of reinsurance collateral reform. The proposed revisions to the Models make the reinsurance collateral reform provisions available with respect to any reinsurer domiciled in what the state insurance commissioner determines is a Reciprocal Jurisdiction, not limiting such treatment to E.U. nations, but conditions a determination that a jurisdiction is a Reciprocal Jurisdiction on that jurisdiction having laws or regulations in place that are consistent with the group supervision, solvency, capital, and information exchange provisions of the Covered Agreement. Thus, the Covered Agreement potentially becomes a model for the worldwide reinsurance market for U.S. ceding insurers.
There is a short public comment period for these drafts open until July 23, 2018. The consideration of these proposed revisions presumably will continue on the schedule published by the NAIC earlier this year, with consideration by the Financial Condition (E) Committee at the NAIC’s August meeting and by the NAIC plenary at the November meeting.