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The National Association of Insurance Commissioners has asked the new Treasury secretary to clarify provisions of the covered agreement reached between the United States and the European Union in response to the bloc’s Solvency II directive.
The covered agreement deal negotiated by the U.S. Department of the Treasury under the Obama administration 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.
Since that time, it has become clear that there is “significant confusion” about the agreement’s obligations, “purported” benefits and concessions, the NAIC said in a letter to Treasury Secretary Steven Mnuchin on Wednesday.
“As state insurance regulators would be responsible for implementing most aspects of the agreement, we respectfully request that you engage the European Union to seek written confirmation regarding the interpretation and application of many of the agreement’s terms,” the regulators said. “Such clarification is necessary not only to fully evaluate whether the agreement is in the best interest of the United States insurance sector, but also to ensure any implementation is consistent with the intent of those that negotiated it.”
The NAIC disputed former Federal Insurance Office Director Michael McRaith’s interpretation of the agreement, particularly his comments that it only required the states to eliminate collateral requirements in a manner supportive of state regulator efforts to implement changes to their credit for reinsurance laws and regulations that would reduce reinsurance collateral. The regulators argued that the agreement completely eliminates collateral requirements if reinsurers meet certain conditions featured in the agreement — conditions that are materially different from current state credit for reinsurance laws.
“Our analysis suggests that the agreement operates differently than Mr. McRaith claimed,” the letter stated.
NAIC regulators have insisted that a lack of transparency helped lead to a covered agreement that favored the bloc, but the agreement affirms their role as the primary regulators of the insurance business in the United States, according to a letter sent on Thursday to the Treasury Department by a coalition of insurance associations in support of the agreement.
“Without the covered agreement, U.S.-based reinsurers would be forced to create branches in numerous EU member states to conduct any future business, including the renewal of existing business,” the associations said. “This would require capital and potentially personnel to be moved to the EU and would subject these companies to unnecessary EU member state regulation. With the agreement, U.S. reinsurers can conduct business on a cross-border basis throughout the EU from their U.S. operations.”
But a plain reading of the agreement text does not clearly reflect the view that EU jurisdictions would be obligated to immediately lift their requirements that U.S. reinsurers maintain a local presence as a condition of doing business, according to the NAIC.
State insurance regulators are concerned about a lack of transparency in talks between federal officials and their European counterparts, as well as the implementation of new regulatory requirements in some European countries that are complicating January renewals for U.S. insurers and reinsurers and even costing them some business.