EU/US Covered Agreement: Reinsurance Collateral Requirements · State insurance regulators ....

© 2018 National Association of Insurance Commissioners

EU/US Covered Agreement:

Reinsurance Collateral Requirements

Daniel Schelp Managing Counsel, NAIC Legal Division


Learning Objectives At the end of this presentation, you will be able to:

• Understand the History of State Reinsurance Collateral Reform

• Describe the Reinsurance Collateral Provisions of the Covered Agreement

• Identify Possible Approaches to Conform NAIC Credit for Reinsurance Models to the Covered Agreement

• Explain the Timeframe for States to Avoid Potential Federal Preemption


Covered Bilateral Agreement

• Bilateral Agreement Between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance (“Covered Agreement”) signed on Sept. 22, 2017

• Signed on behalf of US by Treasury Secretary Steven Mnuchin and US Trade Representative Robert E. Lighthizer

• Unlike treaties, not required to be approved by Congress


Provisions of Covered Agreement

• Reinsurance

• Group Supervision • Exchange of Information • Joint Committee • Implementation of the Agreement

• Termination, Mandatory Consultation & Amendment


Covered Agreement: Reinsurance

• Eliminates reinsurance collateral for EU reinsurers meeting certain requirements

• Eliminates local presence requirements for U.S. reinsurers doing business in EU

• States will need to consider reinsurance collateral reforms within 60 months or face potential federal preemption by the Federal Insurance Office (FIO)


History of State Reinsurance

Collateral Reforms • Historically, under the NAIC Credit for Reinsurance Model Law, a

U.S. ceding company was required to hold collateral equal to 100% of the reinsurance obligations ceded in order to take financial statement credit for reinsurance assumed by an “unauthorized” reinsurer, while “authorized” reinsurers were not required to post any collateral

• Authorized Reinsurer:

– Licensed in the same state of domicile as the ceding company; – Accredited by the domiciliary insurance department of the ceding

company; – Domiciled and licensed in a state with substantially similar credit

for reinsurance laws as the ceding company’s domicile; or – Maintains a multi-beneficiary trust in the U.S.


Reinsurance Collateral Debate

Reinsurance Collateral issue was debated for many years: • Unauthorized reinsurers (i.e., non-US reinsurers)

thought collateral discriminatory because it increased their costs relative to authorized reinsurers

• Non-US jurisdictions considered collateral a trade issue • Many US-ceding insurers supported mandatory

collateral requirements, because it provided leverage for obtaining collateral from larger non-US reinsurers

• State insurance regulators supported collateral, because it provided them with direct jurisdiction over capital needed to pay claims of policyholders/consumers


EU and US Divided on Reinsurance

Collateral Requirements


State & Federal Developments • NAIC Reinsurance Regulatory

Modernization Framework (2008) • Dodd–Frank Wall Street Reform and

Consumer Protection Act (2010) – Nonadmitted and Reinsurance Reform Act (NRRA) – Federal Insurance Office Act – Covered Agreement Provisions

• NAIC adoption of revised Credit for Reinsurance Model Law & Regulation (2011)


Nonadmitted and Reinsurance

Reform Act

• Prohibits a state from denying credit for reinsurance if the domiciliary state of the ceding insurer recognizes such credit and is an NAIC-accredited state (Extraterritorial application not permitted)

• Reserves to a reinsurer’s domestic state the sole responsibility for regulating the reinsurer’s financial solvency, so long as it is an NAIC-accredited state

• Facilitated state-based approach to implementation of NAIC reinsurance reforms, because states not required to adopt collateral reforms uniformly


2011 NAIC Model Revisions

• Reduced reinsurance collateral for Certified Reinsurers

• Reinsurers are subject to certain criteria in order to be eligible for certification, as well as ongoing requirements in order to maintain certification:

– Must maintain financial strength ratings from two or

more rating agencies – Maintain capital and surplus of no less than $250

million – Must be domiciled and licensed to transact insurance

or reinsurance in a “qualified jurisdiction”


Certified Reinsurers • Each state has authority to certify reinsurers for

the purpose of reinsurance collateral reduction • A state may choose to recognize the certification

granted by another NAIC-accredited state • A Certified Reinsurer is eligible for collateral

reduction with respect to contracts entered into or renewed subsequent to certification

• Certifying state evaluates a reinsurer and assigns a rating to determine collateral requirement (Ratings Matrix)

• Certified Reinsurer is subject to minimum criteria and must meet information filing requirements


Collateral Matrix

State Rating Collateral S&P Rating

Secure-1 0% AAA Secure-2 10% AA+,AA,AA- Secure-3 20% A+,A Secure-4 50% A- Secure-5 75% BBB+,BBB, BBB- Vulnerable-6 100% BB+ or lower


Qualified Jurisdictions

• Reinsurer must be domiciled and licensed in a Qualified Jurisdiction to be eligible for certification

• List of recommended Qualified Jurisdictions will be published through the NAIC committee process

• States have authority to determine Qualified Jurisdictions, but must consider NAIC list in doing so and thoroughly document justification for any deviation from the NAIC list

• Qualified Jurisdiction must agree to share information and cooperate with the commissioner with respect to all Certified Reinsurers doing business within the jurisdiction

• Enforcement of U.S. judgments


NAIC Qualified Jurisdiction Process

• Documented process and methodology for determining qualification of non-U.S. jurisdictions

• Outcomes-based comparison to U.S. financial solvency regulation. Standard is “level of effectiveness in financial solvency regulation”

• 7 jurisdictions have been approved: Bermuda, France, Germany, Ireland, Japan, Switzerland and United Kingdom (as of Jan. 1, 2015)


Reinsurance Financial Analysis

(E) Working Group (ReFAWG)

• Established to provide advisory support and assistance to the states in the review of reinsurance collateral reduction applications

• Facilitates multiple state recognition of certified reinsurers, as well as efficiency and consistency in the evaluation process

• Passporting: Permits the Commissioner to defer to a certification issued by another NAIC-Accredited state. ReFAWG facilitates this process by reviewing certified reinsurers


What is a Covered Agreement?

Under the Dodd-Frank Act, a “Covered Agreement” is defined as an agreement entered into between the United States and one or more foreign governments, authorities or regulatory entities which relates to prudential measures with respect to the business of insurance or reinsurance that achieves a level of protection for insurance or reinsurance consumers that is “substantially equivalent” to the level of protection under state law.


Federal Preemption A Covered Agreement will preempt state laws that conflict with its terms, except state insurance measures that govern:

insurers’ rates, premiums, underwriting or sales practices;

any state insurance coverage requirements; application of antitrust laws of any state to the business of

insurance; or any state insurance measure governing insurer capital or

solvency, except where state measure results in less favorable treatment of non-U.S. insurer than U.S. insurer.


Solvency II • The EU’s Solvency II Directive came into

force on January 1, 2016. Solvency II establishes a new solvency and supervisory regime for the EU.

• Certain provisions of Solvency II allow for particular elements of regulation of non-EU countries as “equivalent” to Solvency II.

• A finding of equivalence is important for U.S. reinsurers in order to do business in the EU.


Covered Agreement: Reinsurance

The Covered Agreement will eliminate state reinsurance collateral requirements for certain EU-domiciled reinsurers. U.S.-domiciled reinsurers can do business in EU without local presence requirements.


Covered Agreement: EU Reinsurers

• The Covered Agreement would eliminate reinsurance collateral requirements for EU reinsurers that maintain a minimum amount of own funds equivalent to $250 million and a solvency capital ratio (SCR) of 100% under Solvency II.

• The SCR is set at a level that ensures that insurers and reinsurers can meet their obligations to policyholders and beneficiaries over the following 12 months with a 99.5 percent probability, which limits the chance of insolvency to less than one in 200 years. SCR is a formula-based figure that considers all quantifiable risks, including non-life underwriting, life underwriting, health underwriting, market, credit, operational and counterparty risks.


Covered Agreement: US Reinsurers

• U.S. reinsurers that maintain capital and surplus equivalent to €226 million with an RBC of 300% of Authorized Control Level would not be required to maintain a local presence in order to do business in the EU.

• Certain EU countries require non-EU reinsurers to establish a “local presence” in the country in order to reinsure risks situated in that country; e.g., Germany.


Covered Agreement: Additional

Reinsurance Requirements

• Neither party can impose reinsurance collateral or local presence requirements that result in less favorable treatment for the other party’s reinsurers. In addition, neither party can maintain or adopt any new requirement with substantially the same regulatory impact on reinsurers, unless those new requirements apply equally to all reinsurers.



Requirements (Continued)

Covered Agreement retains several important concepts from the NAIC’s Credit for Reinsurance models, including:

• Enforcement of final U.S. judgments • Service of Process • Financial Reporting Requirements • Prompt Payment of Claims • Solvent Schemes of Arrangement • Posting Collateral on Cedent Insolvency



Requirements (Continued) • Notice of Regulatory Non-compliance • Overdue Reinsurance Recoverables • Process for Regulatory Revocation • Prospective Effect Only • Note: Covered Agreement does not include

Financial Strength Rating requirements, which is chief difference from Credit for Reinsurance Models


Application of the Agreement

• States have 5 years from Entry Into Force to conform state laws to Covered Agreement, or face potential preemption by FIO

• During 5 years, US to encourage states to reduce collateral requirements for EU-based reinsurers by 20% per year from current levels

• 42 months after Covered Agreement signed, US will prioritize (by focusing on gross reinsurance premium volume) non-complying states FIO determines give less favorable treatment to EU insurers than to US reinsurers

• US must complete any necessary preemption process within 60months from date Covered Agreement signed


US Policy Statement on Covered

Agreement

• Clarifies that the collateral elimination requirements do not call for full implementation until the conclusion of a five-year transition period

• Collateral elimination requirements do not apply to reinsurance agreements that were entered into before the Agreement’s application, or to losses that were incurred or to reserves that were posted before the Agreement’s application


US Policy Statement (Continued)

• Nothing in the Agreement alters the capacity of parties to renegotiate such reinsurance agreement or to agree on requirements for collateral on a contractual basis in excess of those required by law

• Clarifies that the Agreement does not prevent a state from imposing non-collateral requirements that do not have substantially the same regulatory impact as collateral requirements, provided it applies same requirements to U.S. reinsurers


How Will NAIC & States Respond

to Covered Agreement?

Putting the Pieces of the Puzzle Together


NAIC 2017 Fall National Meeting

• NAIC Commissioners agreed to request public comments on the best approach to take for addressing the Covered Agreement, and hold a Public Hearing for further discussion with both regulators and interested parties.

• Commissioners use that information to make recommendation to Financial Condition (E) Committee and present the Executive (EX) Committee with model law request providing specific direction on Covered Agreement.


Public Hearing on Covered

Agreement

• Public Hearing held in NY on Feb. 20, 2018

• NAIC received 20 comment letters, and heard from 18 speakers covering wide variety of stakeholders and interested parties


Issues Addressed at Public Hearing

• Should Credit for Reinsurance Models be amended to conform to Covered Agreement?

• Should reinsurers domiciled in NAIC Qualified Jurisdictions be provided with similar reinsurance collateral requirements?

• Consider additional “guardrails” relative to U.S. ceding companies, such as changes to the risk-based capital (RBC) formula or new regulatory approaches to help address the increased financial solvency risks caused by the elimination of reinsurance collateral


NAIC Recommendations on

Covered Agreement March 14 Memorandum from Commissioners with following recommendations: • Revise Credit for Reinsurance Models to conform

to the requirements of the Covered Agreement; • Provide reinsurers domiciled in other NAIC

qualified jurisdictions with similar reinsurance collateral requirements as Covered Agreement;

• Revisions should incorporate other standards addressed in the Covered Agreement, including recognition of State approach to group supervision, including group capital;


Recommendations (Continued)

• Address potential breach of Covered Agreement on reinsurer’s collateral obligations and the effect of a failure of a non-EU qualified jurisdiction to meet the standards imposed;

• Changes to the Process for Developing and Maintaining the NAIC List of Qualified Jurisdictions to require Qualified Jurisdictions to recognize key NAIC solvency initiatives, including group supervision, group capital standards, and information-sharing requirements;


Recommendations (Continued)

• Reinsurance Financial Analysis (E) Working Group to increase financial solvency monitoring of reinsurers with reduced/eliminated reinsurance collateral requirements per the Covered Agreement;

• Additional Charges to the Capital Adequacy (E) Task Force and the Statutory Accounting Principles (E) Working Group to address related reinsurance collateral issues raised at the Public Hearing


Additional Charges: Guardrails • Review Life and Health risk-based capital

(RBC) formulas specific to reinsurance credit risk charges based on financial strength of the reinsurer consistent with the Property & Casualty (P&C) RBC formula;

• Review Schedule F and any corresponding annual financial statement pages to determine how best to reflect the expected changes to the Credit for Reinsurance Models, giving consideration to whether an allowance for doubtful accounts is appropriate


Next Steps by NAIC

• Recommendations approved by Financial Condition (E) Committee on March 26

• Recommendations approved by NAIC Executive (EX) Committee on April 17

• Reinsurance (E) Task Force to attempt to have draft revisions to models by 2018 Summer National Meeting

• NAIC to try to adopt revisions to models at 2018 Fall National Meeting


Adopted both 785 & 786 (36: AL, AZ, AR, CA, CO, CT, DE, FL, GA, HI, IN, IA, LA, ME, MD, MA, MS, MO, MT, NE, NV, NH, NJ, NY, ND, OH, OK, PA, RI, SD, UT, VT, VA, WA, WI, WY)

No Action to Date Adopted 785 (9: DC, ID, KS, MI, NM, NC, TN, TX, WV)

Implementation of 2011 Revisions to Credit for Reinsurance Models Model Law #785

Model Regulation #786 [status as of April 3, 2018]


Send Questions to: Dan Schelp [email protected] (816) 783-8027

mailto:[email protected]

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EU/US Covered Agreement: Reinsurance Collateral Requirements · State insurance regulators ....

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