Earlier this week, the European Union’s executive body gained key approval to begin negotiations with the United States on a deal aimed at cutting the minimum collateral levels required of foreign reinsurers operating in the US. The authorization to enter negotiations, which was trumpeted by European officials as the first step in a process aimed at facilitating trade and the free flow of regulatory best practices between the US and Europe, comes mere months after the Federal Insurance Office announced that Treasury was considering entering into “covered agreements” concerning reinsurance collateral requirements pursuant to the Dodd-Frank Act. While Dodd-Frank did not give the FIO regulatory authority, it did authorize it to work with the Treasury Department in negotiating agreements on behalf of the U.S. with foreign jurisdictions relating to prudential measures applicable to the business of insurance or reinsurance. Any such agreements would preempt inconsistent state laws if the Director of the FIO determines such laws would result in less favorable treatment for foreign insurers than accorded to U.S. insurers, thus setting up a potential direct conflict with established state regulation.
The concept of the FIO, in concert with Treasury, becoming the primary negotiator with foreign governments on reinsurance collateral rules has not sat well with state insurance regulators, who have been actively working with a number of foreign governments to reduce the collateral requirements for reinsurers operating in the US. At the end of 2014, the NAIC named Bermuda, France, Germany, Japan, Ireland, Switzerland and the UK as “qualified jurisdictions” eligible for reduced reinsurance collateral requirements under the NAIC’s Credit for Reinsurance Model Law, which has been adopted by a substantial number of states representing the majority of US ceded business. The NAIC is concerned that action by FIO and Treasury may undo the work that state insurance regulators have done to address this issue.