A U.S. company recently complained to regulators that it is on the short end of a solvency oversight regime change in Europe, negatively impacting its capacity to do business there, with a significant portion of its portfolio jeopardized.
The unidentified company, which had an estimated $119.2 million of assumed premium, with 37% originating from European Union countries, is caught in the gears of Solvency II, which is imposing higher hurdles for companies from jurisdictions, including the U.S., that it does not deem equivalent.
It and other U.S. companies and industry trade groups described the harmful impact the EU's regime was having or is expected to have on their businesses in comments to the National Association of Insurance Commissioners in a survey released in November. Responses were made anonymous to the public. The survey results are no longer online as the NAIC extended the survey response deadline to Dec. 31. However, the NAIC summarized that several respondents, including U.S. reinsurance companies, responded that the actions of one or more EU regulators have already had a "quantifiable negative impact on the capacity to do business" there.
EU countries including the U.K., Germany, Austria, Belgium and Poland have all announced interpretations of the Solvency II directive that limit the ability of reinsurers from nonequivalent jurisdictions to act as reinsurers on a cross-border basis, the anonymous company stated in the survey. Solvency II went into effect Jan. 1, 2016.
In the final weeks of 2016, many in the U.S. are pinning their hopes on the forging of an insurance and reinsurance trade rules agreement between the EU and the U.S. that will put an end to a cluster of new rules that could be expensive and burdensome. For example, the NAIC noted that Germany's regulator issued a Solvency II interpretative decision that would require countries not in accordance with the regime to establish a German branch office if they wish to carry on primary insurance or reinsurance business in Germany.
Though it is not clear what the impact of the actions of Germany's Federal Financial Supervisory Authority, or BaFin, and the Bank of England's Prudential Regulation Authority will be on the U.S. insurance sector, the actions are troubling, Julie Mix McPeak, NAIC vice president and Tennessee insurance commissioner, testified Sept. 28 before a U.S. House Financial Services insurance subcommittee.
Intense negotiations stretching into evening hours in Brussels were underway the week before Christmas on a bilateral insurance agreement negotiated on the U.S. side by the U.S. Treasury Department's Federal Insurance Office and the Office of the U.S. Trade Representative. Negotiations for such a deal began in February. The so-called insurance "covered agreement," called for by the 2010 Dodd-Frank Act, could bring relief for the U.S., industry supporters say, by granting the U.S. equivalence under Solvency II. European insurers and associations, who signed a pan-U.S.-European industry letter of support dated Dec. 13 for a mutually beneficial agreement, would get uniform treatment for reinsurance contracts in the U.S. market and an eased collateral burden under a successful covered agreement.
Without one, though, a different scenario could emerge politically, if the incoming Trump administration does not continue negotiations. The NAIC has discussed possible retaliatory measures against favored, or "qualified," EU jurisdictions, an action that would increase the reinsurance collateral their companies must post in the U.S.
The U.S. insurance and reinsurance industry, on conference calls and in commentary, has urged caution against stripping the offending countries' qualified jurisdiction status because of consequences for the complex insurance arrangements of their multinational companies and their subsidiaries, and the effect on reinsurance capacity in the U.S. The U.S. market is partially reliant on European reinsurers for natural catastrophe coverage for hurricanes and other weather-related events.
"The potential to having to post 100% collateral retroactively increases uncertainty in the U.S. life reinsurance market, limits risk diversification, emphasizes the lack of predictability in U.S. insurance supervision, and exposes our members doing business in EU member states to retaliatory actions," an unidentified insurance trade association stated in the NAIC survey, responding to the notion of upending the favored status of the EU countries making it harder to do business under Solvency II.
Qualified jurisdictions are designated by the NAIC if their reinsurance supervisory systems pass muster for supervision and cooperation under a set of principles laid out by the NAIC.
Germany, the U.K. and perhaps Ireland could be targets of contemplated NAIC retaliation, but that does not solve the problems for U.S. companies, industry representatives have noted.
The chair of the NAIC's Qualified Jurisdiction Working Group wrote in a Dec. 6 memo that the group is not undergoing any formal re-evaluation of any EU qualified jurisdiction at this point, but has been asked to report back on EU activities and await further direction from the Reinsurance Task Force if a formal re-evaluation is warranted.
"Although it is too early to consider disqualifying any Qualified Jurisdiction, it is important to understand the potential consequences to avoid any unintended outcomes," the memo stated.
In the event a covered agreement is brokered, the assumption is that Treasury and the USTR would submit the text of the agreement to the four committees of jurisdiction in Congress, said Steve Simchak, director of international affairs for the American Insurance Association.
There is a 90-day layover in Congress, and the legislative body would have to proactively legislate to strike the agreement down, as industry understands it. Unless it is wildly divergent from expectations, it is expected to go into effect, if signed and deemed in the best interest of the U.S., industry participants have said.
The European Commission presumably would have to go through its own internal processes, Simchak noted. "We hope that the process on the European side would move quickly once an agreement has been reached, and that U.S. groups will be treated fairly in the EU in the interim," he said.
"Whatever the mechanism, we do need a path to some kind of functional equivalent to equivalency between the U.S. and EU in order to keep the playing field level and both markets open to each other," said Andy Mais, who specializes in insurance regulation at the Deloitte Center for Financial Services.
Should an agreement be signed, expect the NAIC to weigh in and take action in 2017, especially if it pre-empts any state insurance laws. The NAIC believes that Europe can confer equivalency to the U.S. under Solvency II without a covered agreement and, at least in 2015, was conferring with outside counsel on the subject. McPeak told lawmakers at the September hearing that "state insurance regulators are not sitting idly by."
"Despite the fact that potential federal pre-emption is not necessary for Europe to recognize the strengths of our system, Treasury and USTR continue to negotiate behind closed doors in secret, potentially making concessions that could harm U.S. policyholders during the 11th hour of this administration," John Huff, NAIC's 2016 president and Missouri insurance director, said in a speech at the NAIC’s fall national conference in Miami earlier this month.
"Make no mistake, any regulatory loopholes created by a covered agreement will be addressed by state insurance regulators," Huff warned.