The National Association of Insurance Commissioners (NAIC) held a public hearing in New York on February 20, 2018, to receive comments on the steps it should take to address 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 (Covered Agreement).
The Context. The Covered Agreement eliminates US reinsurance collateral requirements for qualified reinsurers domiciled in European Union (EU) member countries and gives US states five years to implement new rules. Otherwise, current state credit for reinsurance laws and regulations imposing such requirements will be pre-empted. For additional background on the Covered Agreement and its genesis, see our Legal Alert: US-EU Covered Agreement: An Overview.
The preemption threat tests the states’ ability to work collectively to preserve the primacy of state regulation of insurance. The Covered Agreement also raises a number of issues for states to resolve as they work on amendments to existing laws and regulations to bring them into conformity with the Covered Agreement. Prior to the hearing, the NAIC solicited comments on these issues—namely, whether the existing credit for reinsurance model law and regulation need to be changed, whether they should accommodate future possible covered agreements, whether similar treatment should be extended to reinsurers in other jurisdictions that qualify as “qualified jurisdictions” under the current rules, whether changes to the criteria for evaluating “qualified jurisdictions” should be changed, and whether additional “guardrails” for US ceding insurers should be established to address increased financial solvency risks caused by the elimination of reinsurance collateral.
Maria T. Vullo, Superintendent of the New York State Department of Financial Services and NAIC Reinsurance (E) Task Force Chair, touched on these themes in her opening remarks. She expressed the belief that preemption should be avoided and said there are a variety of paths states could follow in order to conform with the Covered Agreement. She noted that new regulatory approaches for US ceding insurers was a topic for consideration on a complementary track, commenting that the Covered Agreement has compelled redefinition of state solvency regulation of reinsurance as insurers face additional solvency risk by not taking into account the solvency risk of EU reinsurers.
Public Comments. Representatives from 17 different insurance groups and trade associations, from both the US and abroad, testified over several hours (with several more interested parties providing only written testimony). Given the broad range of US and international interests represented, there was a striking number of consistent themes among those testifying. Common themes included:
Some meeting participants did raise concerns:
Next Steps. NAIC President, Commissioner Julie Mix McPeak (TN) announced the NAIC’s proposed timeline for adopting any necessary amendments to the Credit for Reinsurance Model Law and Regulation:
While this timeline may seem aggressive, it may be necessary to avoid federal preemption of state credit for reinsurance rules that are inconsistent with the Covered Agreement. The reinsurance collateral reduction elements of the Covered Agreement are to be fully implemented within five years, but the US is required to encourage states to adopt phase-in provisions for the gradual elimination of collateral requirements (a 20% annual reduction from current levels). The Director of the Federal Insurance Office (FIO) is also to begin evaluating US state insurance laws and regulations for preemption within three and one-half years. With the US having signed the Covered Agreement in September and the EU Parliament scheduled to vote on adoption of the Covered Agreement on March 1, the clock may soon begin ticking for state insurance regulators.