Sidley Austin
Stephanie Dobecki, partner at Sidley Austin, discusses the current status of the US-EU bilateral covered agreement, the impact of a US-UK agreement, and the tensions they are causing
A year and a half after the signing of the US-EU bilateral covered agreement, what is its current status and what is its potential impact?
The US-EU covered agreement has to be implemented by US states within 60 months of the date that it became provisionally effective. So, US states have to amend their laws to bring the credit for reinsurance laws, in particular, into compliance with the requirements of the covered agreement by Autumn 2022 or risk federal preemption of state law.
The National Association of Insurance Commissioners (NAIC) is working on revisions to the credit for reinsurance model law and model regulation, which would bring those models into compliance with the requirements of the covered agreement.
With respect to reinsurance, the significance of the US-EU covered agreement and the revisions to the credit for reinsurance model law and model regulation is that a US ceding insurer will be able to take credit for reinsurance in a transaction with a qualifying non-US reinsurer, without the non-US reinsurer being required to post collateral.
Have you got a prediction of when that process might be completed?
The NAIC recently provided an update on the status of their revisions. They started working on the revisions in February 2018 and had a public hearing and exposed a couple of drafts of amendments to the credit for reinsurance model law and model regulation. There was a very public process and two different comment periods around those proposed revisions for industry and other interested parties to weigh in on the impact of those proposed amendments.
In November 2018, the task force and the parent committee at the NAIC that were in charge of developing these amendments adopted them, and it was expected that the amendments would be adopted by the NAIC as an organisation in December 2018. That vote to adopt the amendments was delayed following the receipt of additional comments from the US Treasury and the US Trade Representative. Around the same time, the US-UK covered agreement was announced. In light of these developments, the amendments are still subject to some further revision.
In February, the parent committee at the NAIC issued a memorandum recommending that the task force consider certain additional revisions, which are really intended to address certain issues that were raised by the US Treasury, the European Commission, other regulators and certain interested parties.
The parent committee has set a fairly aggressive timetable to complete these revisions. The drafting subgroup is supposed to release draft proposed revisions in advance of the NAIC’s Spring 2019 national meeting, which is scheduled for the first weekend in April. The goal is for the task force and the parent committee to adopt the proposed amendments by May 2019. The amendments would then have to be adopted by the NAIC executive and plenary committees before they are considered formally adopted by the NAIC.
What is the importance of the US-UK bilateral covered agreement and how is it related to the US-EU agreement?
Because the UK would have otherwise been covered by the EU-US covered agreement, but will not be covered by it once it leaves the EU following Brexit, the intent of the US-UK covered agreement was to allow those jurisdictions to continue to receive the benefit of the US-EU covered agreement following Brexit. The NAIC issued a statement that so long as the terms of the US-UK covered agreement are substantially equivalent to the US-EU covered agreement, the NAIC doesn’t have any objection to extending the equivalent treatment to the UK after Brexit.
In fact, the proposed amendments to the credit for reinsurance model law and model regulation would have picked this up anyway. Under the amendments, reinsurers headquartered in a new category of jurisdictions called ‘reciprocal jurisdictions’, which include jurisdictions that become party to a covered agreement similar to the US-EU covered agreement in the future, would qualify for the reduced collateral treatment. So, if the NAIC had adopted the credit for reinsurance model law amendment before the US-UK covered agreement was entered into, upon entry into the US-UK covered agreement, those amendments would have extended the reduced collateral treatment to the UK anyway as a jurisdiction that has entered into a covered agreement with the US.
Before the US-UK covered agreement is signed in the US, it is awaiting the expiration of a 90-day notice period to Congress.
What are the main impacts or benefits that the covered agreements are providing?
With respect to reinsurance, the significance of the covered agreements and the revisions to the credit for reinsurance model law and model regulation is that these provisions will prohibit a state from imposing reinsurance collateral requirements upon a qualifying non-US reinsurer that assumes business from a US ceding insurer that would result in the non-US reinsurer receiving less favourable treatment than assuming reinsurers domiciled in the state. This means that qualifying non-US reinsurers would not have to post any collateral in order for the US ceding insurer to receive credit for reinsurance when they enter into reinsurance agreements with such qualifying non-US reinsurers.
Have the amendments caused any tensions?
There are certain places within the last round of proposed amendments which were adopted by the NAIC task force and the parent committee where there was some discretion provided to the state insurance commissioner. There’s a question as to whether or not the amendments truly conform state laws with the requirements of the covered agreements if that level of discretion is permitted. This issue highlights the tension between state and federal regulation of insurance, which is a theme that has run throughout this process. In the US, insurance is regulated on a state basis. The states have built this discretion into the amendments because they want to preserve as much jurisdiction and authority as possible over the credit for reinsurance laws that apply in their states. But, given the provisions of the covered agreements, the states risk preemption if they don’t conform the state laws within the 60 months. So, I think it will be interesting to see whether that discretion is retained in this next round of drafting.
Could these tensions slow the progress of the implementation of the amendment?
The NAIC has moved pretty quickly on this issue up until this point. To go from February to November of last year and basically have the amendments ready to be adopted, that is pretty quick. Given that the 60-month deadline doesn’t expire until 2022, there is still some time for the NAIC to work with. However, there’s been a lot of interest in these amendments, a lot of interested parties have already weighed in, and at the last national NAIC meeting in November, the scope of comments from the interested parties was fairly narrowly focused. That is to say, the issues overall have been narrowed, and so it’s unlikely that this is going to take a significantly longer period of time to resolve at the NAIC level. Of course, the NAIC has to adopt the amendments, and then the individual states have to go through their legislative process and actually adopt the revisions to their individual state laws that reflect the changes to the NAIC models. All of that will have to occur prior to Autumn 2022 deadline in order to avoid federal preemption of state credit for reinsurance laws.
