On Jan. 13, 2017, the U.S. Department of the Treasury and the Office of the U.S. Trade Representative ("USTR") released the terms of the long-awaited covered agreement between the United States and the European Union (the "Covered Agreement") on prudential insurance matters. Once effective, the Covered Agreement will have a significant impact on international insurance groups doing business in the United States and the European Union.
Pursuant to Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank"), the Secretary of the Treasury and the USTR are authorized to jointly negotiate a covered agreement with one or more foreign governments, authorities or regulatory entities with respect to the regulation of insurance markets.
Generally, the Covered Agreement imposes reciprocity, as between a U.S. state on the one hand and any EU jurisdiction on the other, in three areas of insurance regulation – reinsurance, group supervision and exchange of information between regulators’ jurisdictions.
Reinsurance. Subject to certain conditions, the Covered Agreement:
These requirements are subject to the assuming reinsurer’s:
In addition, the assuming reinsurer’s home regulator must confirm to the ceding company’s jurisdiction on an annual basis that the assuming reinsurer complies with the solvency ratio/RBC requirement listed in the second bullet above, and, if subject to resolution, receivership or winding-up proceedings, the ceding insurer may seek, and, if determined appropriate by the court, obtain, an order requiring that the assuming reinsurer post collateral for all outstanding ceded liabilities.
Each party is required to observe a specified notification procedure, which includes an opportunity for a cure period, where a reinsurer in its jurisdiction no longer satisfies any of the above conditions.
The Covered Agreement applies only to reinsurance agreements entered into, amended or renewed on or after the date on which a measure that reduces collateral requirements takes effect, and only with respect to losses incurred and reserves reported from and after the later of (i) the date of the measure, or (ii) the effective date of such new reinsurance agreement, amendment or renewal.
Prudential Group Supervision. The Covered Agreement stipulates that, subject to participation in supervisory colleges as well as other exceptions described in the Agreement, a “home party” (meaning the jurisdiction of a group’s worldwide parent entity) insurance or reinsurance group is subject only to worldwide prudential insurance group supervision by its “home” supervisory authorities, and is not subject to group supervision at the parent level by any “host” (jurisdiction where the group conducts operations but not including the home jurisdiction).
However, the Covered Agreement makes clear that the host supervisor may exercise group supervision at the level of the “parent undertaking in its territory.”
The Covered Agreement provides certain specified exceptions where a host supervisor may exercise some level of group supervision. Some of the exceptions appear intended to be linked to others, while others appear disjunctive from any other, although the exact interplay among these exceptions seems imprecisely laid out. The exceptions include the following:
prudential insurance group supervision reporting requirements in the territory of the host party do not apply at the level of the worldwide parent entity of the insurance or reinsurance group unless they “directly relate to the risk of a serious impact on the ability of undertakings within the insurance or reinsurance group to pay claims in the territory of the host party”;
a host regulator retains the ability to request and obtain information from an insurer or reinsurer pursuing activities in its territory, whose worldwide parent entity has its head office in the territory of the home party, “where such information is deemed necessary by the host supervisory authority to protect against serious harm to policyholders or serious threat to financial stability or a serious impact on the ability of an insurer or reinsurer to pay its claims” in the host jurisdiction. The host regulator “avoids burdensome and duplicative requests”; and
The Covered Agreement clarifies that notwithstanding the group supervision limitations and restrictions discussed above, such restrictions are not intended to limit or restrict the ability of EU or U.S. regulators to exercise authority over entities or groups that own or control credit or depository institutions, or have banking operations, in the EU or U.S., as applicable, or whose material financial distress or the nature, scope, size, scale, concentration, interconnectedness or mix of activities have been determined could pose a threat to the financial stability of the U.S. (i.e., insurers that have been designated “SIFIs” under Dodd-Frank).
Exchange of Information. The Covered Agreement includes as an annex a nonbinding model memorandum of understanding ("MOU") for supervisory authorities in the U.S. and EU, pursuant to which such parties should exchange information. The MOU includes best practices for time, manner and content of information requests and responses, including standards for the confidential treatment of the information. The Covered Agreement explicitly disclaims that the MOU does not address requirements that may apply to the exchange of personal data by supervisory authorities.
From the date of “entry into force” or “provisional application” of the Agreement (explained below), whichever is earlier:
Provided that the Agreement has entered into force, on a date no later than the first day of the month that is:
For these purposes, the U.S. is required to prioritize those states with the highest volume of gross ceded reinsurance for purposes of potential pre-emption determinations.
The Covered Agreement:
However, the Covered Agreement also contemplates that:
Specifically, each party must (i) provisionally apply the group supervision provisions until the date of entry into force, and then, (ii) from and after entry into force, ensure (in the case of the EU) or use best efforts and encourage (in the case of the U.S.) that its respective regulatory authorities will follow such provisions beginning on the seventh day following the completion of internal requirements for their jurisdictions.
In addition, the Covered Agreement provides that certain requirements, in order to be applicable to a party, are dependent on the other party’s observing certain other specified requirements (the “Cross Conditions”). Specifically, on the later of the date of “entry into force” and the date that is 60 months from the date the Covered Agreement was signed,
Either party may terminate where a party applies measures outside its territory in the event of a systemically important insurer.
The Covered Agreement also makes certain of its provisions dependent on compliance by U.S. states or determinations of pre-emption of state measures (the "State Compliance Conditions"). Specifically, until the later of the date of entry into force and the date that is 60 months from the date the Covered Agreement was signed, the obligation not to impose collateral requirements on reinsurance will apply with respect to an EU reinsurer in a U.S. state on the earlier of:
From the date of provisional application and for 60 months thereafter, supervisory authorities in the EU may not impose a group capital requirement at the level of the worldwide parent with regard to a U.S. insurance or reinsurance group with operations in the EU.
From the date of signature, during the 60-month period thereafter, if a party does not meet the local presence requirements, the supervisory authorities of the other party may, after mandatory consultation, impose a group capital assessment or group capital requirement at the level of the worldwide parent on an insurance or reinsurance group which has its head office or is domiciled in the other party.
The local presence requirement must be implemented and applicable in the territory of the EU no later than 24 months from the date of signature of the Agreement, provided that the Agreement has been provisionally applied or has entered into force.
Subject to the Cross Conditions and the State Compliance Conditions, the collateral requirements must be implemented and fully applicable in all of the territory of both parties no later than 60 months from the date of signature of the Agreement by both parties, provided that the Agreement has entered into force.
As from the date of entry into force or provisional application of this Agreement, whichever is earlier, the provisions (i) establishing a joint committee of the parties, (ii) relating to termination and mandatory consultation, and (iii) relating to amendment become applicable.
As to the above requirements, where a party does not comply in a timely fashion, the other party may seek mandatory consultation through the joint committee.