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US insurance regulators grapple with covered agreement, look ahead to new pacts

Insurance industry representatives urged state regulators to extend the benefits of the recent bilateral insurance pact between the European Union and the U.S. to other countries that meet high solvency standards — garnering recognition for the U.S. system and its industry in the process.

The so-called covered agreement was officially signed by U.S. agencies and the EU in September 2017, giving the states five years to implement the reinsurance collateral provisions in it or face pre-emption by the federal government.

At a hearing Feb. 20 in New York, U.S. and foreign insurers said that also removing statutorily mandated collateral requirements for certified reinsurers from other jurisdictions such as Switzerland, Bermuda, Japan, and perhaps a post-Brexit U.K., would be a good opportunity for the U.S. insurance system. A level playing field would strengthen competition as well as give the state system the chance to gain global recognition for its group capital calculation, according to insurance industry players.

The National Association of Insurance Commissioners hosted the hearing, which featured a panel of state insurance commissioners while members of the U.S. Treasury and the U.S. Office of the Trade Representative were seated nearby.

The NAIC already evaluates other countries' solvency oversight of reinsurers, giving seven jurisdictions the status of "qualified jurisdictions," and 26 foreign reinsurers special status. A 2011 revised credit for reinsurance model law allows these reinsurers to post much less than the normally required 100% collateral. The new federal covered agreement goes even further and reduces EU reinsurers' burden to zero collateral, but state laws must be amended to make way for its provisions. In turn, U.S. companies gain recognition for their country's regulatory regime while operating in the EU. Otherwise, the U.S. insurers would fall under more severe Solvency II strictures.

"Access to the U.S. market on a collateral-free basis is your No. 1 asset — please, please, please do not give it away," Jeff Alton, CNA Financial Corp. vice president of financial regulation, told the panel of assembled state regulators. "It is imperative that you receive, in return, mutual recognition."

The qualified jurisdictions to which the U.S. states could extend collateral relief are "very important voices" at the International Association of Insurance Supervisors, Alton said. The IAIS is crafting an international capital standard primarily on a market valuation basis, an approach that differs from the U.S. methodology for group capital calculation.

Tracey Laws, general counsel for global government and industry affairs in the U.S. for Chubb Ltd., said it is critical that the U.S. group capital approach gain acceptance as an equivalent to the IAIS approach. If other countries with major insurance markets recognize the U.S. group capital approach, "that is pretty hard to beat," she said.

American Insurance Association Associate General Counsel Steve Bennett told regulators that the trade group's members are strongly in favor of a level playing field where qualified foreign reinsurers can compete for ceding business in the U.S. under the same collateral standards.

Bennett's colleague, AIA Chief International Counsel Stephen Simchak, testified that there are three ways for the NAIC to approach extending collateral benefits to other qualified jurisdictions. One is through a new, binding covered agreement, which would require high-level federal negotiations. A second option would use the existing covered agreement and have the EU and the U.S. negotiate for others to join it. The third would be for the NAIC to go it alone, with tailored memoranda of understanding in the qualified jurisdictions.

State regulators at the hearing appeared to heavily favor the third, NAIC-led approach, but, as New York Department of Financial Services Superintendent Maria Vullo said in a chat afterward, the question will be how to enforce the agreements.

Not all stakeholders agreed that less collateral from well-capitalized companies in highly regulated regimes would be better for the U.S.

Kevin Spataro, senior vice president of accounting research at Allstate Corp., expressed concern that if any of these well-capitalized foreign reinsurers became insolvent but had posted no collateral, U.S. companies could be left in the lurch.