The U.S. sent a shot acrossthe bow toward German supervisors and the reinsurance companies they regulate.
The German reinsurance market could feel the effects of retaliatoryaction of the U.S. state insurance regulatory system for its onerousrequirements for U.S. companies under Solvency II, according to an NAICofficial testifying before Congress.
NAIC Vice President Julie McPeak said German reinsurers will lose theirability to enjoy lower collateral amounts and could be required to post up to100% collateral on their reinsurance if regulators will not stand down onburdensome regulations they are imposing on U.S. reinsurers.
The effect of the NAIC action will "not be insignificant," McPeak warned. McPeakwas testifying before the House Financial Services Subcommittee on Housingand Insurance on Sept. 28 as part of a panel on the dialogue between theEuropean Union and the United States. U.S. insurance interest in Germany isone-fourth of the German interest in the U.S., she pointed out.
The NAIC is reviewing Germany's and the U.K.'s qualified jurisdiction status in the wake of recentregulatory actions taken against U.S. companies. This move, McPeak explained,could result in U.S. states demanding substantially more reinsurance collateralfrom reinsurers headquartered in those countries.
Many states offer reciprocity of treatment to foreign reinsurers injurisdictions deemed "qualified" by the NAIC. They offer lower barriers and expectthem in return. Jurisdictions are qualified if they meet certain NAICstandards. This reciprocal recognition of another country's supervisory regimepermits reinsurers to pay a reduced collateral in the 35 states that haveenacted an NAIC standard on reinsurance collateral called the Creditfor Reinsurance Model Law.
NAIC won't sit 'idly by'
As many as nine more states,including Texas, are moving forward on enacting the model law this year, McPeaksaid in an interview during a break in the hearing, so the effect on yankingGerman reciprocity would be even greater.
now enjoyed by aqualified jurisdiction's reinsurer is sometimes as low as 10%, McPeak noted inthe brief interview. Without status as a qualified jurisdiction, reinsurersfrom nonqualified jurisdictions might have to pay as much as 100% collateral,she warned.
Collateral money acts as asecurity deposit or buffer to protect policyholders against financial oroperational issues in any cash crunch experienced by the reinsurer. Stateregulators would be able to pull that money for policyholders.
The NAIC has already begunreviewing the actions of Germany and U.K. regulators to see if "sufficientreciprocity still exists," first signaling action during the NAIC Summer NationalMeeting in late August when the NAIC heard from reinsurance representativesunhappy with the growing burdensand costs in some EU countries.
Though it is not clear whatthe impact of the actions of Germany's Federal Financial Supervisory Authority,or BaFin, and the Bank of England's Prudential Regulation Authority, or PRA,will be on the U.S. insurance sector, the actions are troubling, McPeaktestified. She said "state insurance regulators are not sitting idlyby" but are instead undertaking a reciprocity review.
BaFin actions under review by NAIC
What BaFin is doing could bea violation of reciprocity, McPeak testified. BaFin is requiring U.S.reinsurers to set up branches in order to do business in Germany and requiringchanges to corporate structure, and while the PRA is offering waivers fromSolvency II, they could pull those waivers at any time, McPeak noted. She saidthat BaFin's actions are most critical and the NAIC is taking actions by BaFinand other jurisdictions "very, very seriously."
Equivalence for the U.S.under the Solvency II regime "could be determined today" by the EU,McPeak told Congress.
Currently, the EU does nottreat the U.S. as an equivalent regulatory regime, so it is on a lower rung,potentially requiring U.S. companies to beef up their corporate or capitalstructure. Some EU countries, rather than waiting for the outcome of anagreement that would grant such equivalence for the U.S., are starting toimpose more regulation as a penalty for the U.S. not being up to snuff onSolvency II.
MichaelMcRaith, director of the U.S. Treasury Department's Federal InsuranceOffice, is negotiating with the EU for a bilateral insurance agreement known asa covered agreement under the Dodd-Frank Act. He said in response to lawmakers'questions that the goal is to eliminate hypotheticals on what jurisdictionwould do what to whom, and instead reach an agreement in the near future. Thecovered agreement under negotiation involves reinsurance collateral, groupsupervision and confidentiality measures that would allow EU reinsurers to havean even playing field with reduced collateral across the U.S., and could, underfederal statute, pre-empt some state laws.
A covered agreement could"potentially resolve all of these issues" for the U.S. industry if itis successful, McRaith testified. However, he said that in the fourth andlatest round of negotiations Sept. 21-22 in Washington, D.C., the parties"did not reach agreement on key issues." Instead, they closed gapsand reached a fuller understanding of where they stood, McRaith said.
Luetkemeyer says covered agreement is important
Subcommittee Chairman BlaineLuetkemeyer, R-Mo., expressed concern for a reinsurer in his hometown district,Shelter ReinsuranceCo., which received a warning letter from BaFin on the need tocomply with Solvency II.
Luetkemeyer stressed theimportance of protecting treatment of the U.S. industry and the potentialnegative consequences of not getting it right.
U.S. companies need to stopgetting "these nastygrams from European regulators," he said.
However, he said that U.S. negotiators,both the FIO and the U.S. Trade Representative, need to be able to walk awayfrom the table if the agreement is not good enough for the U.S.
Luetkemeyer publicly andprivately expressed dismay with the USTR for not appearing on the panel for thehearing.
The USTR "blew usoff," he said to reporters after the hearing. The protocol is that theUSTR should send a surrogate since Ambassador Robert Holleyman, deputy U.S.trade representative,could not make it, but it would not do so, the Missouri lawmakersaid.
No one likes an empty chair,Luetkemeyer said.
A USTR spokesperson in an email said it received aninvitation to the hearing but could not "make the timing work."
"We look forward to continued consultation withCongress on the covered agreement," the spokesperson added.