Eversheds Sutherland (US) LLP

[co-author: Hugo Laing]

On January 13, 2017, the then-US Secretary of the Treasury and the then-US Trade Representative (USTR) notified Congress that they had negotiated a covered agreement with the European Union (EU). Once the Covered Agreement takes full effect (more on that below), it will eliminate collateral and local presence requirements for qualified US reinsurers operating in the EU insurance market, and will eliminate the requirement for collateral for qualified EU reinsurers operating in the US insurance market as a condition for their US cedants to take credit for reinsurance. In addition, if, as contemplated by the agreement, US states take appropriate action to establish group capital standards, the Covered Agreement provides that US insurance groups operating in the EU will be supervised at the worldwide group level only by the relevant US insurance supervisors, and EU insurers operating in the US will be supervised at the worldwide group level only by the relevant EU insurance supervisors. 

The Covered Agreement enjoys strong support from certain insurance industry segments and opposition from others. The National Association of Insurance Commissioners (NAIC) opposes it. The Housing and Insurance Subcommittee of the Financial Services Committee of the United States House of Representatives held a public hearing on February 16, 2017, to hear the different views and make its own assessment. Subsequently, 24 members of Congress, including the Chair and Vice-Chair of Housing and Insurance, wrote to the Treasury Secretary and USTR asking them not to sign the agreement without formal clarification of 10 specific points through an exchange of letters. 

The agreement’s future is uncertain—in order for the Covered Agreement to enter into force, the US Treasury Secretary and the USTR still must sign it and provide the required final written notification to the EU. Congress has no ability to scuttle the deal except through normal legislation passed by both houses and signed by the President. It remains to be seen whether this could be part of any final legislation to overhaul Dodd-Frank.

This Legal Alert examines the Covered Agreement—its genesis, what it does for insurers and reinsurers operating in both the EU and the US, its timetable and the road ahead for implementation.


The Federal Insurance Office Act of 2010 (FIO Act), which was enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), established the Federal Insurance Office (FIO) within the Department of the Treasury and authorized the US Treasury Secretary and the USTR to negotiate “covered agreements” with one or more foreign governments or authorities on the recognition of prudential measures with respect to the business of insurance or reinsurance that achieves a level of protection for insurance or reinsurance consumers that is substantially equivalent to the level of protection achieved under state insurance or reinsurance regulation. 

The FIO Act also authorizes the preemption of US state insurance measures if the FIO Director determines that the state measures are inconsistent with a Covered Agreement and result in less favorable treatment of a non-US insurer covered by the Covered Agreement than a US insurer domiciled, licensed or otherwise admitted in that state.

In the EU, Solvency II permits the European Commission to make “equivalence” determinations for third countries with respect to certain areas of prudential regulation. Three elements that may be deemed equivalent are: (1) reinsurance—reinsurance contracts concluded with reinsurers in an equivalent jurisdiction will be treated in the same manner as contracts concluded with reinsurers in the European Economic Area (EEA) (i.e., no collateral or local presence requirements will be imposed); (2) solvency assessment—an EEA insurance group may calculate the solvency of any non-EU subsidiary in an equivalent jurisdiction using the calculation methods laid down by the equivalent third country where the non-EEA subsidiary is domiciled; and (3) group supervision—insurance groups subject to supervision by a non-EEA supervisor in an equivalent jurisdiction will be exempt from certain Solvency II worldwide group-level supervision requirements.

The US has been granted provisional equivalence with regard to solvency calculations for 10 years from January 1, 2016. However, this primarily assists only European insurance groups that do not need to calculate solvency for US subsidiaries within the group using Solvency II calculations.

US insurers and reinsurers active in Europe have noted that some EU countries are raising barriers on the basis that the US does not have a regulatory framework that is equivalent to Solvency II, whereas the US, in comparison, has lower barriers to non-US reinsurers operating cross-border in the US. Specifically, US insurers and reinsurers have described difficulties with some EU member states’ implementation of Solvency II (in particular, Germany, Belgium, Austria, Poland and to a lesser extent, the UK), including the need to obtain Solvency II compliance waivers as well as collateral posting and local presence requirements. 

In the US, state insurance laws governing credit for reinsurance have historically required non-US reinsurers to post 100% collateral in the United States for risks reinsured from US ceding insurers. Global reinsurers have long complained about the collateral requirements. In 2011, the NAIC adopted amendments to its Credit for Reinsurance Model Law and Regulation (Reinsurance Models) that allow certain highly rated, non-US reinsurers domiciled in a “qualified jurisdiction” to reinsure US ceding insurers with reduced collateral. Only four EU jurisdictions have been approved as “qualified jurisdictions”—France, Germany, Ireland and the UK (the list also includes Bermuda, Japan and Switzerland, which are not EU member states). The reduced collateral requirements of the revised Reinsurance Models, which have been adopted in some form in approximately 35 US states, will become mandatory for all states as of January 1, 2019, under the NAIC’s accreditation program.

Against this backdrop, on January 13, 2017, the US Treasury Secretary, the USTR and the European Commission announced the successful completion of the Covered Agreement involving three areas of prudential insurance oversight: reinsurance, group supervision and exchange of information among supervisors. 

The Covered Agreement was the result of more than one year of negotiations that were notified in advance to the US Congress by the FIO and the USTR on November 20, 2015. Similarly, the European Council had previously directed the European Commission to negotiate an agreement with the United States.

What the Covered Agreement Does for Insurers and Reinsurers

Broadly, the Covered Agreement:

(1) Eliminates local US/EU requirements for reinsurers to post collateral or have a local presence (either as a requirement for the reinsurance placement or as a condition for receiving financial statement credit for the reinsurance); 
(2) Clarifies that an insurance or reinsurance group will be subjected to worldwide group supervision only in its “home” jurisdiction, and not in other jurisdictions where it operates; and 
(3) Sets forth practices to be encouraged for cooperation in the exchange of information among EU and US regulators. 

There are important conditions attached to these provisions that have practical implications for when they take effect and what insurers and reinsurers must do. 


The Covered Agreement provides a major benefit to reinsurers operating cross-border between the US and the EU that are currently required to post full or partial collateral or establish a physical presence. Under the Covered Agreement, all collateral requirements for US-EU cross-border reinsurance would be eliminated. EU reinsurers that currently benefit from the reduced collateral regime available for US “certified reinsurers” will no longer have to be from a “qualified jurisdiction” and will no longer be subject to the ratings-linked tiering percentages of the revised Reinsurance Models. 

However, conditions apply. Many are the same conditions for “certified reinsurers” under the revised Reinsurance Models. Conditions for reinsurers that can automatically confer credit for reinsurance include a $250 million minimum capital and surplus requirement,1 periodic financial reporting, maintaining a practice of prompt payment of reinsurance claims, agreeing to notify the host jurisdiction of regulatory actions, agreeing not to participate in any solvent schemes of arrangement involving the host jurisdiction’s ceding insurers without posting full collateral, and agreeing to fully collateralize all reinsurance for cedants in receivership upon request. Importantly, the Covered Agreement, like the revised Reinsurance Models, is available only for new and renewal business or newly amended contracts involving only prospective, not retroactive, reinsurance. 

Reinsurers and cedants should consider carefully the conditions and the relative risks of failing to meet them. This may mean that parties look to ensure that the practical arrangements are in place to monitor compliance with the conditions and contingency plans for collateral in the event that the requirements are no longer met.

Finally, it is important to note that the Covered Agreement applies to US-EU cross-border reinsurance and does not affect cedants and reinsurers operating from or in other countries. The revised Reinsurance Models will, therefore, continue to apply to such reinsurance.

Group Supervision

The Covered Agreement introduces the concepts of “home” and “host” jurisdictions whereby an insurance or reinsurance group’s “home” jurisdiction is where the worldwide parent of the group has its head office or is domiciled, whereas a “host” jurisdiction is where the group has operations other than its home jurisdiction. The Covered Agreement provides, however, that authority over worldwide group supervision is limited to the home jurisdiction only if the home jurisdiction has certain regulatory tools in place. 

In particular, groups are exempted from group capital requirements in the host jurisdiction only if the home jurisdiction applies a group capital assessment capturing risk at the level of the entire group, which may affect the insurance or reinsurance operations and activities in the other party’s territory, and has the authority to impose preventative and corrective measures based on such assessment, including requiring “capital measures,” where appropriate. There is no current authority in the US for the imposition of group capital assessments by state insurance regulators, or direct authority to require “capital measures” at the group level, and these would need to be developed by the states (or imposed by the federal government) in order to give full effect for US companies to take advantage of the exemption from the host jurisdiction group capital requirements. The NAIC formed a Group Capital Calculation (E) Working Group in 2016, which has been charged with constructing a US group capital calculation using a Risk-Based Capital aggregation methodology. Its work is ongoing.

Despite the Covered Agreement’s limitation of worldwide group supervision to the home jurisdiction of the insurance or reinsurance group, the host jurisdiction nevertheless continues (i) to be permitted to exercise group supervision at the level of a parent company within its territory, (ii) to receive Own Risk and Solvency Assessment (ORSA) summary reports, (iii) to impose preventative or corrective measures with respect to insurers or reinsurance in the host jurisdiction if the ORSA summary exposes any serious threat to policyholder protection or financial stability, (iv) to impose group reporting that directly relates to the risk of a serious impact on the ability of the group to pay claims, and (v) to request and obtain information where deemed necessary to protect against serious harm to policyholders or a serious threat to financial stability. 

Timetable for Implementation

The FIO Act provides that a covered agreement may enter into force with respect to the United States after 90 days from the date on which the copy of the agreement is submitted to certain enumerated congressional committees. This submission took place on January 13, 2017, at the time of the announcement of the concluded negotiation of the Covered Agreement. The Covered Agreement itself provides that it will “enter into force seven days after the date the Parties exchange written notifications certifying that they have completed their respective internal requirements and procedures, or on such other date as the Parties may agree.” With regard to the EU, such internal requirements and procedures require approval of the Covered Agreement by the European Council and the European Parliament. 

Certain requirements apply on a provisional basis even before the agreement enters into force. The EU agrees to “ensure” that supervisory authorities follow the group supervision provisions, while the US agrees to “encourage” supervisory authorities to follow such provisions, in each case after each notifies the other that its internal requirements and procedures for provisional application have been completed. The EU is required to begin applying the elimination of local presence requirements within 24 months once the agreement has taken effect or the parties have notified one another that their internal requirements and procedures for provisional application have been completed. 

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 reinsurance provisions are not self-implementing and require legislation or new rules by the US states. This will likely require the development of additional revisions to the Reinsurance Models by the NAIC, potentially within a newly created working group under the NAIC’s Reinsurance (E) Task Force. The FIO Director is to begin evaluating US state insurance laws and regulations for preemption within three and one-half years.

The Covered Agreement may be terminated at any time with 180 days’ notice by written notification, following a mandatory consultation process. 

Stakeholder Reaction and the Road Ahead 

On February 16, 2017, the Housing and Insurance Subcommittee of the Financial Services Committee of the United States House of Representatives held a public hearing entitled “Assessing the US-EU Covered Agreement.” The subcommittee, chaired by Representative Sean Duffy (R-WI), heard testimony from the following witnesses: Michael McRaith, former director of the FIO; Ted Nickel, Wisconsin Insurance Commissioner and current president of the NAIC; Leigh Ann Pusey, President and CEO of the American Insurance Association; and Chuck Chamness, President and CEO of the National Association of Mutual Insurance Companies. Both Mr. McRaith and Ms. Pusey were supportive of the Covered Agreement, whereas both Mr. Nickel and Mr. Chamness were opposed.

Some subcommittee members appeared to be in favor of the Covered Agreement while others were partially or wholly opposed. Some complained about the fact that it was negotiated by the outgoing Obama Administration and announced just one week before the new Administration took office. In response to criticisms on the last count, both Mr. McRaith and Ms. Pusey noted that the negotiators were under pressure to act as quickly as possible due to increasingly discriminatory regulations and market access barriers experienced by US-based companies operating in the EU since the implementation of Solvency II.

One criticism during the Housing and Insurance hearing was the absence of formal recognition by the EU that the US is an “equivalent” regulatory jurisdiction for Solvency II purposes. Commissioner Nickel labeled it as “only a form of probation,” providing limited relief from prescriptive regulation but under a continued threat where any relief could be revoked. Mr. McRaith, in turn, characterized the Covered Agreement as an “agreement of mutual respect, where the EU says, US do it how you want to do it and we say to the EU, you can do it how you want to do it.” He added that the focus of the US negotiators shifted from formal recognition of the US as equivalent to how a US company will be treated when operating in the EU without having to meet Solvency II group capital, reporting and governance standards. 

Unlike trade agreements, the Covered Agreement is not subject to an up or down vote, a point some members complained about. Representative Ed Royce (R-CA), a senior member of the subcommittee, reminded members that the power to negotiate a covered agreement had been debated and unanimously supported by the subcommittee on a bipartisan basis before enactment. 

Subsequent to the hearing, Chair Sean Duffy and Vice-Chair Dennis Ross wrote a joint letter to US Treasury Secretary Steven Mnuchin with a list of questions, including whether he plans to accept the Covered Agreement as is or require additional or implied commitments from the EU related to the operation of the Covered Agreement. The Secretary’s response, in the form a letter on March 16, 2017, from Deputy Assistant Secretary Luke Ballman, Office of Legislative Affairs, is that the Secretary, prior to a final decision to sign the agreement, has directed Treasury staff and the USTR “to continue engaging with key stakeholders to understand the views and questions of those potentially affected by the agreement.”

Perhaps in response to this invitation, 24 members of Congress, including Housing and Insurance Chair Duffy and Vice-Chair Ross, wrote to the Treasury Secretary and the USTR on April 7, 2017, to request that the Covered Agreement not be signed without formal clarifications to points in the agreement they deem to be ambiguous. They urged a formal exchange of letters, which they described as a common practice in international agreements. The points they raised echo some of those cited by the NAIC in its statements in opposition to the agreement, and include:

  • Confirming the group capital calculation currently being developed by the NAIC would satisfy the Covered Agreement’s group capital provisions;
  • Confirming that, in the absence of collateral requirements, regulators can apply other measures to the ceding insurer to address risks posed by reinsurance counterparties; 
  • Ensuring the EU recognizes the soundness of the US regulatory system and will not exert their discretionary group supervision authority over non-EU insurers absent actual concerns developed through the supervisory college process; and 
  • Clarifying the participation of state insurance regulators on the joint committee the Covered Agreement establishes to address matters related to implementation of the agreement.

In the event the Covered Agreement does move forward, it is expected that US state insurance regulators, coordinating within the NAIC, will seek to quickly develop state legislation to give effect to the Covered Agreement in order to avoid federal preemption of state regulation. Similarly, EU member states will need to revise their Solvency II implementing legislation, regulations and procedures to the extent they are not compatible with the objectives of the Covered Agreement.

In the context of the UK’s vote to exit from the European Union, many believe that along with the negotiation of its exit from the European Union and any bilateral agreement in relation to the EEA and access to the single market, the UK will seek a similar bilateral agreement between the UK and the US. Much has been made of the UK becoming an equivalent regime under the Solvency II regime (and various other single market directives in the financial services sector). Given the comments by Mr. McRaith that the focus of the Covered Agreement was ultimately not formal recognition of the US as equivalent, it is quite possible that the contents of the Covered Agreement could be incorporated into a wider bilateral trade agreement between the UK and the US. ​

1 Under the Covered Agreement this may be calculated according to the methodology of the home jurisdiction rather than US GAAP or IFRS with a GAAP reconciliation under the revised Reinsurance Models.