The U.S. Treasury Department and the Office of the U.S. Trade Representative have signed a covered agreement governing insurance and reinsurance regulation with the United Kingdom ahead of Brexit and issued a policy statement outlining its key provisions.

The federal agencies announced their intent to sign a bilateral agreement on prudential measures regarding insurance and reinsurance, otherwise known as the U.S.-U.K. covered agreement, consistent with the agreement that the United States signed with the European Union in 2017, on Dec. 12.

The covered agreement “provides regulatory certainty for U.S. insurers and reinsurers operating in the UK and is expected to reduce costs for insurers and personal and commercial policyholders in the United States while preserving important consumer protection provisions,” the agencies said in the policy statement released on Wednesday. “The United States commits to regular and substantive engagement with stakeholders throughout its implementation of this agreement. The United States will make every effort to ensure that the UK implements its obligations while carrying out the United States' own obligations.”

The U.K. is the world’s fourth-largest insurance market, and many U.S. insurers and reinsurers do business in the U.K., the department noted.

The covered agreement with the U.K. addresses the same three areas as the agreement with the European Union: group supervision, reinsurance and exchange of information between supervisory authorities. For example, the covered agreement with the U.K. also includes the elimination of collateral and local presence requirements for reinsurers domiciled in the United States — requirements that threatened to wreak havoc on reinsurance agreements before the deal was signed with the European Union in 2017. Without a signed agreement, U.S. companies would have been unable to renew or write new business in the European Union without first establishing a local presence in each EU member state in which they intended to write business.

For the United States, the collateral elimination requirements in the U.S.-U.K. covered agreement do not call for full implementation until the conclusion of a transition period and only apply with respect to reinsurers that meet the specified financial strength and market conduct requirements, according to the policy statement. The federal government encouraged each U.S. state to promptly adopt relevant credit for reinsurance laws and regulations consistent with Article 3 of the agreement, which governs reinsurance regulation, and phase out the amount of collateral required by each U.S. state to allow full credit for reinsurance cessions to U.K. reinsurers.

“The collateral elimination requirements of the agreement do not apply to reinsurance agreements that were entered into before the agreement's application or to losses that were incurred or to reserves that were posted before the agreement's application,” the policy statement noted. “Nothing in the agreement alters the capacity of parties to any reinsurance agreement to renegotiate such reinsurance agreement or to agree on requirements for collateral on a contractual basis in excess of those required by law.”

The Article 3 provisions apply to U.K. reinsurers that meet specified financial strength and market conduct requirements and clarify that the agreement does not prevent a state insurance regulator from imposing non-collateral requirements that do not have substantially the same regulatory impact as collateral requirements as conditions for ceding companies to enter into reinsurance agreements with U.K. reinsurers or to allow credit for such reinsurance, if the state insurance regulator applies the same requirements in the case of reinsurance agreements with U.S. reinsurers domiciled in that state, according to the policy statement.

The Article 4 provisions of the agreement, which govern group supervision, limit the worldwide application of U.K. prudential group insurance measures on U.S. insurers operating in the U.K., according to the policy statement.

“The agreement provides that U.S. insurers and reinsurers can operate in the UK without the U.S. parent being subject to the group level governance, solvency and capital and reporting requirements of Solvency II as incorporated, implemented or otherwise transposed into UK domestic law, and reinforces that the UK system of prudential insurance supervision is not the system in the United States,” the policy statement noted.

The European Union’s Solvency II directive outlined a risk-based capital regime for insurers and reinsurers in Europe. 

U.S. states are in the process of developing a group capital calculation intended to serve as an analytical tool for evaluating a firm's capital position at the group level – a process that is occurring through the National Association of Insurance Commissioners, which was critical of the negotiation process and of the covered agreement with the European Union as conducted and finalized by the Obama administration, namely due to a perceived lack of transparency and involvement of state insurance regulators who are primarily responsible for insurance regulation under the U.S. state-based system.

“The agreement does not require development of a group capital standard or group capital requirement in the United States,” the policy statement noted.

The NAIC's group capital calculation is expected to satisfy the group capital assessment condition featured in Article 4, according to the policy statement.

“The agreement does not require a group capital assessment with respect to U.S. insurance groups that do not have operations in the UK,” the policy statement added.