The NAIC Appeals to the Secretary of the Treasury Over the Covered Agreement
While the U.S. and EU governments are deliberating on whether to accept the negotiated Covered Agreement (Agreement), state insurance regulators in the U.S. are continuing to express concerns about the Agreement. In February 2017, the National Association of Insurance Commissioners (NAIC) testified before Congress against the Agreement. On March 15, 2017, the NAIC continued these efforts by submitting a letter to the U.S. Treasury Secretary Steven Mnuchin detailing the NAIC’s concerns. One of the NAIC’s central concerns centers on the “significant confusion among current and former government officials, insurance regulators and the industry regarding the nature of the obligations to be undertaken, the purported benefits that were gained, and the concessions that were made.”
The letter cites, as one example, a recent hearing before the House Financial Services Committee’s Subcommittee on Housing and Insurance in which former Federal Insurance Office Director Michael McRaith described his understanding of certain concessions on both sides of the Agreement. The U.S. agreed to make certain changes with respect to collateral requirements. In exchange, “the Agreement recognizes the current U.S. insurance group supervision practices, prohibited Europe from extraterritorial application of its requirements on a U.S.-based holding company or legal entity, and required certain EU jurisdictions to immediately lift their requirements that U.S. reinsurers maintain a local presence as a condition of doing business.” The NAIC noted that its analysis “suggests that the Agreement operates differently than Mr. McRaith claimed.”
The NAIC requested that the Treasury Department “seek written clarification regarding the interpretation and application of . . . the Agreement’s terms” given that state insurance regulators will be “responsible for implementing most aspects of the Agreement.” This clarification would also help to determine “whether the Agreement is in the best interest of the United States insurance sector” and “ensure any implementation is consistent with the intent of those that negotiated it.”
The future of the Agreement is still uncertain. This Agreement was negotiated by the Treasury Department in conjunction with the U.S. Trade Representative under authority granted by Dodd-Frank. However, both President Trump and Republican Congressional leaders have specifically stated that they wish to repeal significant sections of Dodd-Frank. Last year, during the 114th Congress, Chair of the House Financial Services Committee Jed Hensarling (R-TX) introduced the Financial Choice Act of 2016, which would significantly amend Dodd-Frank. Among other things, it would replace the Federal Insurance Office with an advisory office. This legislation has not been offered in the 115th Congress.
In the meantime, state regulators and the (re)insurance industry are waiting to see how Congressional Republicans and the Trump Administration will react to the NAIC’s concerns.