Out-Law Legal Update | 21 Jul 2017 | 10:01 am | 5 min. read
The US Department of the Treasury and the Office of the US Trade Representative have published a notice of intent to sign a bilateral agreement between the EU and the US on prudential measures regarding insurance and reinsurance, called a covered agreement. They will issue a US policy statement on implementation in the coming weeks.
The European Commission confirmed that parts of the agreement would take effect when signed, but that other elements required the consent of the European Parliament. The text of covered agreement had been published on 13 January this year following a period of negotiation between the two regions. It remains to be seen whether the UK will seek to enter into a similar type covered agreement on re/insurance with the US in due course to ensure it does not lose the benefit of the arrangements in the covered agreement when it exits the EU.
The US Federal Insurance Office (FIO) in the Department of Treasury has authority to monitor all aspects of the US insurance sector. The FIO is authorised to negotiate with foreign governments and regulatory authorities on prudential measures in the business of insurance or reinsurance and to enter into covered agreements. Significantly, US law authorizes the pre-emption of US state insurance measures if these are considered inconsistent with the covered agreement.
The new agreement says there is a growing need for cooperation between EU and US insurance supervisory authorities; and that there is a need to address practical arrangements concerning cross-border cooperation during both times of stability and crisis. It says that there are benefits to enhancing regulatory certainty and the goal of protecting policyholders while respecting each party's system of re/insurance supervision and regulation.
It covers three broad areas: reinsurance, group supervision and exchange of information.
Under reinsurance, it will, subject to conditions, eliminate "local presence requirements" and "collateral requirements" for EU reinsurers operating in US states and vice versa.
Under group supervision, it have the effect of limiting the global prudential insurance group oversight requirements to only those of their home jurisdiction for the relevant re/insurer group operating in the host jurisdiction.
Under exchange of information, supervisory authorities in each jurisdiction are encouraged to cooperate in the exchange of information and a set of practices is annexed to the covered agreement in a model memorandum of understanding.
Non-US reinsurers are often required to post an amount of collateral against policies underwritten in the US, and EU reinsurers have historically described these as a burden and an obstacle to competition in the market. Similarly, US reinsurers often have to deal with collateral posting and local presence requirements in the EU under Solvency II. The reinsurance provisions in the covered agreement seek to remove these trade barriers and enable greater competition. Their effect is the removal of any collateral or local presence requirements that result in "less favourable treatment" for the relevant EU/US reinsurer when measured against domestic reinsurers. The principle aim of the provisions is to create more of a level playing field and enhance the competitive environment.
The collateral reduction elements are to be fully implemented within five years of the signing of the covered agreement. The US however is expected to encourage each US state to adopt an annual 20% reduction in the amount of collateral in requires from qualifying EU reinsurers from 1 January prior to the signing of the agreement (i.e. 1 January 2017). It is expected that individual US state legislation will be developed in due course to give effect to the covered agreement and to avoid federal pre-emption of state regulation (which would happen if states were not complying with the covered agreement provisions).
There are detailed qualifying criteria for relevant reinsurers including:
Importantly, only new reinsurance agreements entered into, amended, or renewed on or after the relevant effective date and involving only prospective, not retroactive, reinsurance will be able to avail of the benefits in the agreement.
Group supervision provisions
The covered agreement provides that an insurance or reinsurance group’s 'home' jurisdiction is the territory where the worldwide parent of the group has its head office or is domiciled. The group is then only subject to worldwide prudential insurance group supervision by its 'home' supervisory authority and not by the 'host' supervisory authority in the jurisdiction where it is seeking to do reinsurance business.
Certain conditions also apply including (but not limited to):
In addition to its exchange of information provisions below, the covered agreement encourages supervisory authorities in home and host jurisdictions to address matters that might arise under group supervision within 'supervisory colleges' i.e. multilateral groups of relevant supervisors that are formed for the collective purpose of enhancing efficient, effective and consistentsupervision of financial institutions operating across borders.
Exchange of Information
In a short model memorandum of understanding annexed to the covered agreement, certain practices are set out such as responding to requests from each other in a timely and full manner; using requests for legitimate purposes and using the information provided only for lawful purposes related to the work of the supervisory authority; and preserving the confidentiality of information as well as setting out the manner and format of information requests. The memorandum does not address requirements that apply to the exchange of personal data.
Although there is a lead-in time of five years until the covered agreement will officially apply, many of its provisions will be applicable on a provisional basis once finalised.
Specifically, the agreement 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.” It shall then apply on the date of entry into force, or five years from the date of signature of the covered agreement, whichever is later.
However, from the earlier of the date of entry into force or provisional application, the parties agree to "take all measures, as appropriate, to implement and apply this Agreement as soon as possible…"
The covered agreement may be terminated at any time with 180 days’ notice by written notification, following a mandatory consultation process.