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Covered agreement progress made with eyes toward deal by Christmas

The U.S. Treasury and the Office of the United States Trade Representative are expected to report as early as Dec. 12 progress made on a bilateral insurance agreement between the European Union and the U.S. on insurance and reinsurance supervision matters.

No deal has been struck after negotiations this past week in Washington, according to sources, but Treasury's Federal Insurance Office is said to be optimistic there could be some draft before Christmas, these sources said.

Such a tentative agreement, commonly known as a covered agreement, should it pre-empt state insurance law, could offer a two- or three-year grace period for the states to pass reinsurance collateral model laws that offer uniformity on lowered collateral for foreign reinsurers in the U.S.

Members of the industry, as well as state regulators, held nonpublic meetings on or around Dec. 11 with FIO Director Michael McRaith at the fall national meeting of the National Association of Insurance Commissioners in Miami.

"We heard from McRaith that the negotiations are at a critical stage and are coming down to the wire," said Bob Woody, a vice president of policy with the Property Casualty Insurers Association of America. Woody was speaking before the NAIC's Reinsurance Task Force Dec. 11.

Woody said the consequences of not reaching an agreement could be quite dire.

“We are risking a trade war between two very important players in the world market here," in which "everyone will lose," Woody said. He urged the state regulators to have patience to allow this diplomacy to work. One sticking point, among others, is concern in the EU over group solvency measures, according to sources.

A covered agreement is seen as critical by some but not all of the domestic insurance industry in the face of burdensome and costly Solvency II regulatory demands on U.S. insurance companies made by some EU insurance supervisors in jurisdictions such as Germany.

The covered agreement under negotiation is designed to give the U.S. equivalent status for its insurance supervisory regime. The agreement also aims to ease reinsurance collateral requirements in the U.S. for EU reinsurers. It also would deal with confidentiality and group supervision issues of mutual interest.

The NAIC, along with some insurers, does not believe such a covered agreement is necessary. They believe the EU can choose to lift such barriers on its side by recognizing the U.S. as an equivalent jurisdiction under Solvency II. Other trade insurance groups, such as the Property Casualty Insurance Association and the American Insurance Association, are hoping for a covered agreement to be reached soon.

"The AIA and our industry colleagues are in agreement that the potential covered agreement presents an opportunity to resolve the discriminatory barriers that U.S. insurance and reinsurance groups are facing in Europe," said Steve Simchak, AIA’s director of international affairs. He said the final covered agreement will be judged on its merits and something good for the U.S. interests should deserve strong support from all stakeholders.

A covered agreement has been under negotiation since February, in various sessions, in Brussels or in Washington, D.C., with the EU.

The NAIC, in the meantime, is raising the possibility of revoking the status of some EU countries as "qualified jurisdictions" but noted in the public Reinsurance Task Force meeting Dec. 11 that it is too early to discuss the matter. A NAIC qualified jurisdiction status, among other things, affords a foreign country's reinsurers lower reinsurance collateral requirements in the U.S. Revoking that status for a country would force its reinsurers to post 100% collateral on reinsurance in the U.S.

NAIC president John Huff, whose term as Missouri insurance director ends this year, said in a speech before the NAIC that the organization would address any loopholes created by a covered agreement, if one is reached. He has criticized the negotiation process as being secretive and happening behind closed doors.