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State insurance regulators decry EU-centric rules

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A key proponent of the covered agreement reached between the United States and the European Union in response to the bloc’s Solvency II directive said state regulators were given “unprecedented” opportunities to help shape the deal, but those regulators continue to insist that a lack of transparency helped lead to an agreement that favored the bloc. 

The covered agreement deal negotiated by the U.S. Department of the Treasury and the Office of the U.S. Trade Representative, announced on Jan. 13, aims to address the fact that the European Commission has not deemed the United States an equivalent jurisdiction, per the EU’s Solvency II directive outlining a risk-based capital regime for insurers and reinsurers in Europe. 

Under Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the treasury secretary, through the Federal Insurance Office, and USTR are authorized to jointly negotiate a covered agreement with one or more foreign governments, authorities or regulatory entities regarding prudential measures with respect to insurance or reinsurance.     

U.S. state regulators have never been directly included in the negotiating delegation for a U.S. international agreement, but the covered agreement talks created an unprecedented mechanism for state regulator participation, even though it was not required by law, in recognition of the state-based regulatory system for insurance, Michael McRaith, former director of the Federal Insurance Office, who resigned his position on Jan. 20, testified at a House of Representatives subcommittee hearing last week. 

State regulators participated in every negotiating session, shared perspectives and technical insights and asked questions, he said. 

Commissioner Ted Nickel of Wisconsin’s Office of the Commissioner of Insurance, speaking on behalf of the National Association of Insurance Commissioners, acknowledged that a small “band of brothers of insurance commissioners” participated in the process, but they were not allowed to discuss the content of those discussions, even with legal and financial counsel, because of confidentiality requirements.

While some of the state regulators’ input was incorporated into the agreement, much of it was not, he said. 

Leigh Ann Pusey, president and CEO of the American Insurance Association in Washington, said the association fully support efforts to improve transparency and stakeholder consultation for these types of negotiations, but there are limitations. 

“States are not constitutionally recognized to be able to negotiate an international deal,” she said. 

There was also significant disagreement on the impact of the covered agreement.

Mr. McRaith said the agreement would remove excessive, unnecessary regulation of the global reinsurance industry in both markets, open the EU reinsurance market to U.S. reinsurers and relieve U.S. primary insurers of potentially billions of dollars in Solvency II compliance costs. 

But Mr. Nickel said the deal’s elimination of reinsurance collateral requirements — a primary goal of the EU — undermines the steps that state regulators have taken to protect U.S. companies and consumers, with the $31.4 billion in collateral posted by EU-based reinsurers in 2015 dropping to zero. 

“As regulators, now that there is no collateral … insurance regulators are going to have to trust EU reinsurers as to their financial strength,” he said. “Thirty billion will be going out the door.” 

But Mr. McRaith countered that NAIC ‘s adoption of the NAIC Model Law and Regulation as an accreditation standard, effective Jan. 1, 2019, means that all states are expected to adopt reinsurance collateral reform in the next two years. In the 32 U.S. states that have already adopted the reform, 31 non-U.S. reinsurers have received collateral relief, with 30 of those firms holding only 10% or 20% of the collateral required under prior state laws. 

“The notion that we’re going from $100 (billion) to zero is complete fiction,” he said, adding that the reduced collateral could benefit consumers as capital is redirected to improving access to insurance products. 

The agreement also does little to resolve the discriminatory actions EU member countries were taking against U.S. firms as they implemented Solvency II, Mr. Nickel said. While the agreement aids U.S. insurers and reinsurers operating in the EU by eliminating local presence requirements, it does not grant the U.S. permanent equivalence under Solvency II, giving the U.S. lesser benefits than countries such as Bermuda and Switzerland, which have been deemed equivalent, he said. 

Insurance trade associations also took very different stances on the agreement. 

Ms. Pusey said the covered agreement gives U.S. insurers and reinsurers certainty that they will no longer face discriminatory actions in the EU in the form of burdensome requirements for group global capital, reporting, and corporate governance implemented in the name of Solvency II. She also expressed concern that if the deal were scrapped in favor of reopening talks with the EU, there would be no guarantee of a timely resolution that would prevent U.S. firms from being discriminated against. 

Charles Chamness, president and CEO of the National Association of Mutual Insurance Companies in Indianapolis, said the covered agreement is ambiguous and does not provide sufficient protections and benefits for U.S. insurers and consumers. For example, the elimination of required collateral handicaps smaller insurers more reliant on reinsurance, he said. 

“The agreement represents a bad deal for the U.S. domestic property/casualty insurance industry,” Mr. Chamness said.