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US-EU insurance regulation agreement “levels playing field”: S&P

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The covered agreement reached between the United States and the European Union in response to the bloc’s Solvency II directive provides a more level playing field between the insurance markets and allows for additional regulatory harmonization, according to S&P Global Ratings.

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 issue that the European Commission has not deemed the United States an equivalent jurisdiction, per the E.U.’s Solvency II directive outlining a risk-based capital regime for insurers and reinsurers in Europe.

Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, 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.

“The (covered agreement) provides a more-level playing field within the world’s two largest insurance markets … We believe the (covered agreement) is a fruitful milestone in increasing U.S.-E.U. regulatory harmonization.”

The covered agreement lifts reinsurance collateralization requirements during a five-year phase-in period and permits the U.S. and E.U. to oversee prudential insurance solvency and capital, governance and reporting requirements for insurers and reinsurers based on their respective jurisdictions of their head offices, the report said.

“It also lifts the requirement for reinsurers to establish local branches or offices on the other side of the Atlantic from their home bases,” the report stated.

But the covered agreement’s success “hangs in the balance” as it faces resistance in the U.S. from the National Association of Insurance Commissioners, some insurance trade groups and certain members of Congressional committees, the report said.

The NAIC’s stance has evolved to focus on supporting key assertions made during a House Financial Services Committee hearing by Michael McRaith, former director of the Federal Insurance Office and a negotiator of the agreement, testified NAIC President-elect and Tennessee Insurance Commissioner Julie Mix McPeak during a Senate Banking Committee hearing on Tuesday.

These assertions include that the agreement affirms that the U.S. supervises its insurance sector in a way it deems appropriate and only requires states to address collateral requirements in a matter supportive of state regulatory efforts to reduce reinsurance collateral requirements, according to her written testimony.

“Candidly, we were surprised,” she said at the hearing. “Not withstanding our concerns with eliminating collateral, Mr. McRaith’s characterization of the agreement, if shared by the present Treasury Department and importantly by the E.U., is more promising than a plain reading of the text suggests.”

“We simply want to ensure that all parties agree that we have the deal that we have been told we have,” she said. “Confirmation can be achieved without renegotiation and without undue delay. Such confirmation of intent will ensure the E.U. will not be able to use the agreement’s ambiguity as a means of imposing their regulatory system and ultimately their will on our insurance sector to the detriment of U.S. insurance companies and policyholders.” 

The E.U., because “they got their way”, and insurers and reinsurers who don’t want to open local offices in E.U. jurisdictions are the winners under the covered agreement, said Stuart Henderson, president & CEO of Minneapolis-based Western National Mutual Insurance Co., who testified on behalf of the Washington-based National Association of Mutual Insurance Cos.

“The losers in my mind are the NAIC, which is already working on its own to fix some of these things and now their legs are cut out from under them, and companies like mine,” he said. “If there really is a need for a group assessment … my company has to look at capital differently. That could raise our costs and hence cost the policyholders. Most concerning … is the significance of the collateral being gone.”