Update On NAIC Action To Implement The Covered Agreement

Carlton Fields
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We recently posted a Special Focus article on a hearing held by the NAIC’s Reinsurance Task Force concerning the implementation of the reduced collateral for reinsurance provisions of the Covered Agreement between the U.S. and the E.U. The NAIC is attempting to move quickly on the implementation of the Covered Agreement, with a recent flurry of activity.  At the NAIC Spring National Meeting earlier this week, the Reinsurance Task Force approved and forwarded to the Financial Condition (E) Committee a Memorandum report on the February 20, 2018 public hearing, which also contained a number of recommendations for action.  The next day the Financial Condition (E) Committee adopted those recommendations and included them in its report to the Executive (EX) Committee, which “received” the report of the (E) Committee the following day.

The description of the hearing in the report of the Task Force and its recommendations are consistent with the discussion in our Special Focus article.  The basic approach in the Task Force’s Memorandum report is to revise the Model Credit for Reinsurance Model Law and Model Regulation so that they comply with the requirements of the Covered Agreement, and to extend the reduced collateral benefit of the Covered Agreement to reinsurers domiciled in the non-E.U. NAIC-approved Qualified Jurisdictions, on condition that those jurisdictions agree to the group supervision, group capital, and information-sharing provisions in the Covered Agreement.  Qualified jurisdictions outside the E.U. that would benefit from this approach include Bermuda, Japan, Switzerland, and, after Brexit, the United Kingdom.  This portion of this process is anticipated to be completed by the NAIC’s 2018 Fall National Meeting in November of this year.  The concern raised in the context of the public hearing concerning the possible need for “guardrails” due to the increased credit and collection risk to which ceding insurers would be exposed as a result of reduced collateral resulted in recommendations by the Reinsurance Task Force for review and monitoring of the financial and risk impact of the collateral changes, and recommendations for modifications to the Models, risk-based capital rules, and financial statement presentation requirements, if needed, with this portion of the process to take longer, with target completion dates for different aspects of this part of the implementation process of the NAIC’s 2019 and 2020 Fall National meetings.

The Task force made a number of specific recommendations to the Financial Condition (E) Committee, which took the following action:

  1. Adopted the Reinsurance Task Force’s request for the development of revisions to the Model Credit for Reinsurance Model Law and Model Regulation to bring the Models into compliance with the terms of the Covered Agreement.  The NAIC has a process for the development of model laws and regulations.
  2. Adopted charges to the Reinsurance Task Force, the Qualified Jurisdiction (E) Working Group, and the Reinsurance Financial Analysis (E) Working Group, which would have to develop processes to implement the anticipated revisions to the Models.
  3. Adopted charges to the Capital Adequacy (E) Task Force and the Statutory Accounting Principles (E) Working Group to address related reduced reinsurance collateral issues.

Details of the actions of the Financial Condition (E) Committee are found in the Reinsurance Task Force’s Memorandum report.  This process anticipates a very aggressive schedule, with the proposed revisions to the Models (and possibly other changes) being ready for consideration by the Reinsurance Task Force at the NAIC’s 2018 Summer National meetings in August, and by the NAIC’s membership at the NAIC’s 2018 Fall National meetings in November.  One possible timing complication is that any agreement of non-E.U. Qualified Jurisdictions to the group supervision, group capital, and information-sharing provisions in the Covered Agreement might have to be documented through a Memorandum of Understanding with each such jurisdiction, which might take more time to negotiate and finalize.  It was the clear sense of the participants in the public hearing, and of the Reinsurance Task Force’s subsequent Memorandum report to the Financial Condition (E) Committee, that reinsurers domiciled outside the E.U. should not have the benefit of reduced collateral for reinsurance without there being an agreement with their domiciliary jurisdictions with respect to group supervision, group capital, and information-sharing issues.  Absent such an agreement, reinsurers domiciled in non-E.U. jurisdictions would, from the standpoint of the United States and U.S. domiciled ceding insurers, have a more favorable agreement than those domiciled in Covered Agreement jurisdictions.  There is likely to be great resistance to such a potential scenario

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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