EU and U.S. Negotiators Reach Covered Agreement

On January 13, 2017, former U.S. Treasury Secretary Jacob Lew and former U.S Trade Representative Michael Froman notified Congressional leaders that U.S. negotiators reached a covered agreement with EU officials entitled “Bilateral Agreement between the European Union and the United States of America On Prudential Measures Regarding Insurance and Reinsurance” (Covered Agreement). The covered agreement covers three main areas of prudential insurance supervision: 1) group supervision; 2) reinsurance; and 3) exchange of information between supervisory authorities.

The U.S. Treasury Department released a Fact Sheet explaining the key provisions of the Covered Agreement.

Article 4 – Group Supervision

The Fact Sheet highlights the following provisions:

  • The group supervision practices described in the covered agreement apply only to those insurance groups operating in both the U.S. and the EU.
  • U.S. insurance groups operating in the EU will be supervised at the worldwide group level only by the relevant U.S. insurance supervisors. EU insurers operating in the United States will be supervised at the worldwide group level only by the relevant EU insurance supervisors.
  • U.S. insurance groups operating in the EU will not have to meet EU global group capital, reporting, or governance requirements.
  • With respect to risks from outside their territories that threaten operations and activities within their territories, supervisors in both the U.S. and the EU can request information from insurance groups from the other party, and take appropriate action within their territory to protect policyholders and financial stability.

Article 3 – Reinsurance

The Fact Sheet highlights the following provisions:

  • U.S. states have 60 months (5 years) to adopt reinsurance reforms eliminating collateral requirements for EU reinsurers that meet the prescribed consumer protection conditions. The Federal Insurance Office (or any successor) will begin the process of making potential preemption determinations of state laws that are inconsistent with the provisions of the covered agreement after 42 months.
  • For a U.S. or EU reinsurer, conditions regarding financial strength, market conduct (e.g., whether the reinsurer pays claims promptly), and reporting requirements are the bases for relief from collateral and other local presence requirements. Failure to meet these conditions and requirements can result in the reimposition of collateral or other local presence requirements.
  • Within 24 months, EU member states will revise existing laws so that U.S. reinsurers can operate in the EU without establishing a branch or a subsidiary. For those reinsurers that have not yet established a branch or subsidiary but have been operating in the EU, local presence requirements will not be imposed.

The other principal feature of the covered agreement encourages insurance regulators in the U.S. and the EU to share information. This provision is, however, by its terms “non-binding.”

The NAIC issued a statement expressing skepticism about the final agreement. In that statement, NAIC President and Wisconsin Insurance Commissioner Ted Nickel said:

After more than a year of secret meetings it’s disappointing that in the waning days of the administration we are finally seeing the details of what purports to be a covered agreement between the U.S. and EU. As most state regulators were not allowed to participate in the process, the NAIC is coordinating a thorough review of the agreement to ensure consumer protections are not compromised through the preemption of state law, and we encourage Congress to do the same. Of great concern is the potential to use this agreement as a backdoor to force foreign regulations on U.S. companies.

 

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