The NAIC Continues Work on the US-EU Covered Agreement
The National Association of Insurance Commissioners (NAIC) held its 2018 Summer National Meeting August 4–7 in Boston, Massachusetts.
The meeting built on many initiatives begun or already under way in Milwaukee during the Spring National Meeting, as regulators, members of industry, and consumer representatives work to complete tasks by the end of the year.
A noteworthy matter of interest was the NAIC's continued work related to the US-EU covered agreement.
Background on NAIC Proposed Revisions to Credit for Reinsurance Models
On June 21, 2018, the NAIC Reinsurance (E) Task Force exposed proposed revisions to the Credit for Reinsurance Model Law (#785) and the Credit for Reinsurance Model Regulation (#786) (credit for reinsurance models) to address the reinsurance collateral provisions of the covered agreement, formally titled "Bilateral Agreement between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance." The public comment period ended on July 23, 2018.
The NAIC's proposed revisions to the credit for reinsurance models would eliminate reinsurance collateral requirements for qualified reinsurers that have their head office in or are domiciled in either of the following.
- An EU-member country (or any other non-US jurisdiction that enters into an agreement similar to the covered agreement with respect to credit for reinsurance) that is recognized as a reciprocal jurisdiction by the state insurance commissioner
- Any other jurisdiction deemed qualified by the state insurance commissioner to be a reciprocal jurisdiction (non-covered agreement reciprocal jurisdictions)
As currently proposed, the NAIC would do the following.
- Maintain a list of reciprocal jurisdictions that state insurance commissioners could defer to in their recognition of reciprocal jurisdictions
- Develop criteria and a process with respect to reciprocal jurisdictions that is similar to the NAIC's current process for developing and maintaining the NAIC list of qualified jurisdictions for purposes of reduced reinsurance collateral requirements
- Coordinate with the US Department of the Treasury and the US Trade Representative in this process
Notwithstanding the NAIC's list, as currently proposed, are the following.
- State insurance commissioners would have the ultimate authority to determine which jurisdictions are deemed qualified to be reciprocal jurisdictions.
- The covered agreement or another agreement or treaty with respect to a jurisdiction would not automatically make that jurisdiction a reciprocal jurisdiction.
Non-covered Agreement Reciprocal Jurisdictions
With respect to non-covered agreement reciprocal jurisdictions, the proposed revisions to the Credit for Reinsurance Model Regulation provide that the jurisdiction must meet all of the following.
- Be a qualified jurisdiction for reduced reinsurance collateral purposes (which currently include the non-EU jurisdictions of Bermuda, Japan, Switzerland, and the post-Brexit United Kingdom).
- Comply with specified requirements that ensure reciprocity for US-domiciled insurers conducting business in those jurisdictions (as the covered agreement does with respect to the European Union).
- Satisfy "additional factors as may be considered in the discretion of the commissioner."
Qualified Reinsurer Requirements
The requirements for qualified reinsurers under the proposed revisions to the credit for reinsurance models mirror the requirements for qualified reinsurers under the covered agreement. Notably, as currently proposed, qualified reinsurers would be required to meet the following conditions.
- Maintain minimum capital and surplus of not less than $250 million.
- Maintain a minimum solvency or capital ratio, as applicable, of 100 percent of the solvency capital requirement or a risk-based capital ratio of 300 percent of the authorized control level.
- Provide certain commitments to the state insurance commissioner on a new certification form (Form RJ-1), which include providing prompt notice to the state insurance commissioner in the event of noncompliance with the minimum capital and surplus and minimum solvency requirements specified above, consent to service of process, including specified collateral funding obligations in the reinsurer's reinsurance agreements, and other assurances.
- Provide annual audited financial statements and certain other financial information for the 2 years preceding entry into the reinsurance agreement, file annual audited financial statements, and regularly report on the reinsurer's reinsurance program.
- Maintain a practice of prompt payment of claims under reinsurance agreements.
- Must "satisfy any other requirements for recognition deemed relevant by the commissioner." However, to the extent that any information or agreement required by the commissioner under this authority is not required by the covered agreement or other treaty or international agreement, the reinsurer's failure to satisfy that requirement will not prevent the ceding insurer from taking credit for reinsurance ceded to that reinsurer.
As currently proposed, each state insurance commissioner would have to do the following.
- Maintain a list of qualified assuming reinsurers that have been deemed to satisfy the applicable requirements for collateral elimination.
- If an NAIC-accredited jurisdiction determined that a reinsurer was qualified, other states could (but need not) defer to that determination.
Headway on the Proposed Revisions
At the NAIC's August meeting in Boston, the Reinsurance (E) Task Force received comments on the proposed revisions to the credit for reinsurance models.
Speakers were limited to 2 minutes each, so oral comments during the meeting simply highlighted key points that each commenting organization covered in its written comments on the proposed changes. Without exception, all were in support of the overall approach and comments were focused on making specific, targeted improvements to the proposals. Common themes included the following.
- Put requirements in the model law, not model regulation. Many commenters wanted this change to limit the ability of individual state regulators to deviate from the models by adopting inconsistent regulations, taking the view that legislation is "cast in stone" and cannot be easily circumvented through administrative action.
- Eliminate disparate treatment between EU and non-EU reinsurers. Commenters objected to the different treatment of reinsurers in jurisdictions that are party to a covered agreement and those in jurisdictions that the states have accepted as qualified jurisdictions. In particular, they point to the ability of state regulators to consider factors or impose requirements not included in the covered agreement and note the disparity is inconsistent with the goal of establishing a level playing field.
- Limit discretion of regulators to establish rules other than those in the model law and rule. Similar to the above, commenters noted where the model law and regulation grant individual state insurance commissioners' discretion to add requirements or consider unspecified factors as conditions for approving reinsurers not domiciled in jurisdictions covered by a covered agreement as qualified reinsurers.
- Receivership court, not the commissioner, to require collateral for insolvent cedents. The model law authorizes the insurance commissioner to require a qualified reinsurer to post 100 percent security upon the entry of an order of rehabilitation, liquidation, or conservation against the ceding insurer. Commenters noted this is inconsistent with the wording of the covered agreement, which authorizes the commissioner to seek a court order from the receivership court.
- Equal treatment for US reinsurers. The Reinsurance Association of America pressed for consideration regarding how the changes would impact the treatment of US reinsurers, noting that they should have the same access to US markets afforded to foreign reinsurers under the regulation.
Following the public comments, New York Department of Financial Services Superintendent Maria Vullo, task force chair, indicated that the comments revealed the need to make some technical changes but not a reworking of the overall conceptual approach, and the project can stay on schedule for adoption of the changes to the models by year-end.
She reported NAIC staff would work with the task force to incorporate comments they deem necessary, with a new draft in mid-September for another public comment period. She added she would not allow the need for speed to overcome accuracy and effectiveness, but she also did not see the two to be in conflict.