NAIC Updates – October 2017

Status of Covered Agreement Between EU and U.S.

The NAIC Reinsurance (E) Task Force ("RTF") held its most recent open meeting on Monday, August 7, 2017 during the NAIC 2017 Summer National Meeting in Philadelphia, Pennsylvania. During the meeting, the RTF heard a status report on the proposed Bilateral Agreement Between the European Union and the United States of America on Prudential Measures Regarding Insurance and Reinsurance ("Covered Agreement"), which was subsequently executed by the United States and the European Union on September 22, 2017. The Covered Agreement will "eliminate reinsurance 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," and allow U.S. reinsurers to do business in the EU without local presence so long as they "maintain capital and surplus equivalent to €226 million with an RBC of 300% of Authorized Control Level."

As discussed below, the NAIC had initially voiced opposition to the Covered Agreement during the negotiation process between the U.S. and the EU. However, the September 22, 2017 policy statement released by the U.S. in tandem with its execution of the Covered Agreement seems to have assuaged many of the NAIC's concerns.

Background

Prior to the execution of the Covered Agreement, the NAIC participated in a hearing on the Covered Agreement before the House Financial Services Committee's Subcommittee on Housing and Insurance on February 16, 2017, and also submitted a letter to Treasury Secretary Steven Mnuchin on March 15, 2017. During the negotiation process, the NAIC consistently voiced numerous concerns with the form of the Covered Agreement. Over the last several years, the NAIC prioritized the reduction of reinsurance consumer protection collateral requirements, and the majority of states have passed legislation to implement the NAIC Credit for Reinsurance Models. Accordingly, if Models #785 (Credit for Reinsurance Model Law) and #786 (Credit for Reinsurance Model Regulation) were adopted as accreditation standards, the NAIC believed the states would already have accomplished the goals of the Covered Agreement.

In its March 15 letter, the NAIC urged caution in considering the terms of the Covered Agreement, noting the following concerns:

1. Elimination of Collateral Requirements: The NAIC letter noted that states had taken measures to reduce, but not eliminate collateral requirements, relying on a risk-based approach with collateral requirements ranging from "0% to 100% based on an assessment of the...