As we previously reported in June 2016, the United States and the European Union were in discussions to enter into a Covered Agreement. The Dodd-Frank Act introduced Covered Agreements as a means for limited federal intrusion into the regulation of the business of insurance and reinsurance by the states. On January 13, 2017, the U.S. Department of Treasury and the Office of the U.S. Trade Representative announced that the negotiations between the United States and the European Union for a Covered Agreement were successfully completed. The text of the announcement can be found here.

Also, on January 13, 2017, the United States and the European Union released a joint statement announcing the successful negotiations. The statement noted that the Covered Agreement “will ensure ongoing robust insurance consumer protection and provide enhanced regulatory certainty for insurers and reinsurers operating in both the U.S. and the EU.”

The Covered Agreement covers three areas of prudential insurance oversight: 1) reinsurance; 2) group supervision; and 3) the exchange of insurance information between supervisors.  The Covered Agreement contains detailed provisions, which are summarized below.

• Reinsurance collateral:  Covered Agreement is intended to enhance consumer protection and lead to the elimination of collateral for a ceding insurer to obtain credit for reinsurance and local presence requirements for EU and U.S. reinsurers operating in these markets.  To obtain this relief a reinsurer is required: (1) to maintain a stated minimum level of capital or surplus and a stated solvency ratio; (2) consent to jurisdiction in the ceding jurisdiction and the appointment of the supervisory authority of the ceding jurisdiction as an agent to accept service of process; (3) agree to pay any judgment obtained by the ceding insurer and provide 100% security for any final judgment liability it resists; (4) pay reinsurance claims promptly; and (5) confirm that it is not participating in a solvent scheme of arrangement and provide 100% collateral for the terms of any subsequent scheme.  States shall be encouraged to adapt their credit for reinsurance requirements to the Covered Agreement, and a determination will be made as to whether any state requirements are inconsistent and preempted within 60 months of the execution of the Covered Agreement.
• Supervision:  U.S. and EU insurers operating in the other market will only be subject to worldwide prudential insurance group oversight by the supervisors in their home jurisdiction, including group governance, solvency, capital and a worldwide group Own Risk and Solvency Assessment.  Under the Agreement, supervisory authorities on both sides preserve the ability to request and obtain information about worldwide activities which could harm policyholders’ interests or financial stability in their territory.  This portion of the Covered Agreement is responsive to Congressional concerns that U.S. domiciled companies may be subjected to EU capital requirements.
• Information exchange:  The Agreement also encourages insurance supervisory authorities in the United States and the EU to continue to exchange supervisory information on insurers and reinsurers that operate in the U.S. and EU markets. To support such information exchange, the Agreement includes model memorandum of understanding provisions.

The final legal text of the Covered Agreement was provided to Congress on January 13, 2017, in accordance with the Dodd-Frank Act. According to the statement, the European Union will also follow the necessary steps to also sign and formally conclude the Agreement.  If there are any surprises in this agreement it may be the extended length of time for the implementation of the collateral reform provisions and the lack of any explicit consideration of the Solvency II equivalence requirement.