The U.S. Treasury and U.S. Trade Representative announced plans on Friday to negotiate a covered agreement on insurance with the European Union, a move it said will “level the regulatory playing field for U.S-based insurers and reinsurers.”
Insurers and regulators from the European Union have long expressed frustration at U.S. reinsurance collateral requirements – they not only must comply with EU solvency [Solvency II) rules but must also meet additional requirements when underwriting in the United States.
The EU said in April it would push harder to persuade the United States to free up the billions of euros in collateral it requires foreign reinsurers to set aside against policies.
European reinsurers, such as Munich Re and Hannover Re of Germany and syndicates on the market run by Lloyd’s of London Ltd, are put at a disadvantage to American rivals by increasing capital costs and making premiums more expensive.
The U.S. Treasury Department said it sent letters to various congressional committees to announce its intentions.
The administration said it will consult with Congress and state insurance regulators throughout the negotiation process.
The Treasury said it was seeking “certain prudential measures” that would provide “tangible benefits” for U.S. insurers and consumers. It did not provide details on what these measures would be.
“Negotiating a covered agreement with the European Union is a critical step toward leveling the playing field for American insurers and reinsurers,” said Michael McRaith, director of the Federal Insurance Office (FIO) within Treasury in a statement. Treasury publicly called for a covered agreement in an FIO report in 2013.
[The American Insurance Association (AIA) welcomed the announcement of negotiations between the U.S. and EU toward a covered agreement. Noting that the EU’s Solvency II regulations become effective on January 1, 2016, the insurer group said the provisions provide a process for non-EU countries to be determined to be “equivalent” to the Solvency II regime in terms of group supervision and reinsurance. AIA said it believes that covered agreement negotiations will be a tool for reaching an “equivalence” determination.
“Without an equivalence determination, U.S. groups in the EU could face duplication of group supervision and other regulatory burdens. It will become more difficult for U.S. insurers to operate in the European markets. We hope that insurance regulators in Europe will recognize that the launch of negotiations puts the U.S. and the EU on a path toward prudential recognition, and act accordingly as they plan for Solvency II’s implementation on January 1,” Steve Simchak, AIA’s director of international affairs, said in a statement.
Simchak said that while Solvency II was not intended to be a barrier to insurance trade and investment, “it may become so unless the outstanding issue of U.S. equivalence is addressed quickly.”
State insurance regulators generally consider a covered agreement to be a drastic step because it could potentially preempt state law and undermine the U.S. system state regulation of insurance. The National Association of Insurance Commissioners (NAIC) has for a number of years had a model law that eases the collateral requirements for foreign reinsurers but thus far only 32 states (about 66 percent of the market) have adopted it.
In response to the announcement of the plan to negotiate a covered agreement, the NAIC said it has assurances that state regulators will have “direct and meaningful participation” in the U.S.-EU discussions.]
(Additional Reporting by Sruthi Shankar.)