On December 18, 2018, the US Department of the Treasury and the Office of the US Trade Representative signed a Bilateral Agreement between the US and the UK on Prudential Measures Regarding Insurance and Reinsurance (the US-UK Covered Agreement). The impetus for the US-UK Covered Agreement is the UK’s exit from the European Union.
In its press release, the U.S. Treasury noted that the Covered Agreement “is an important step in maintaining regulatory certainty and market continuity as the United Kingdom prepares to leave the European Union (EU). The US-UK Covered Agreement also is an important step in affirming the competitiveness of U.S. companies in domestic and foreign markets and making regulations more efficient, effective, and appropriately tailored.”
Back on September 22, 2017, the US and the EU entered into its agreement on prudential measures regarding insurance and reinsurance originally addressing the same three areas of insurance and reinsurance prudential measures that the US-UK Covered Agreement covers: (1) group supervision; (2) reinsurance supervision, including collateral and local presence requirements; and (3) exchange of information between supervisory authorities (the Bilateral Agreement). The Bilateral Agreement with the EU contemplates eventual elimination of collateral requirements for qualifying EU reinsurers assuming business from U.S. cedents and of local presence requirements for US insurance enterprises operating or assuming business in the EU. Assuming the UK’s exit from the EU occurs in March of 2019, the UK would no longer be a part of the US-EU Bilateral Agreement.
Elimination of Local Presence and Collateral Requirements
Specifically, and subject to certain conditions described below, the US-UK Covered Agreement similarly eliminates the requirement of a reinsurer’s local presence and maintaining collateral as a condition for a ceding insurer to take regulatory credit for reinsurance. It does not prohibit requiring such conditions if the same requirements apply to reinsurance agreements between insurers headquartered or domiciled in the same territory.
To qualify for the elimination of local presence and collateral requirements, the reinsurer is required to maintain, on an on-going basis:
- at least 226 million Euro, where the ceding insurer has its head office in the UK, or 250 million U.S. dollars, where the ceding insurer is domiciled in the US, of own funds or capital and surplus;
- a solvency ratio of 100 percent SCR under Solvency II or an RBC of 300 percent Authorized Control Level, as applicable;
- consent to the jurisdiction of the courts of the territory in which the ceding insurer has its head office or is domiciled, in accordance with applicable requirements of that territory for providing such consent; where applicable for “service of process” purposes, consent to the appointment of that supervisory autho
- rity as agent for service of process;
- consent in writing to pay all final judgments, wherever enforcement is sought, obtained by a ceding insurer, that have been declared enforceable in the territory where the judgment was obtained;
- agree in each reinsurance agreement subject to US-UK Covered Agreement that it will provide collateral for 100 percent of the assuming reinsurer’s liabilities attributable to reinsurance ceded pursuant to that agreement if the assuming reinsurer resists enforcement of a final judgment that is enforceable under the law of the territory in which it was obtained or a properly enforceable arbitration award, whether obtained by the ceding insurer or by its resolution estate, if applicable;
- maintain a practice of prompt payment of claims under reinsurance agreements;
- confirm that it is not presently participating in any solvent scheme of arrangement and agrees to notify the ceding insurer and its supervisory authority and to provide 100 percent collateral to the ceding insurer consistent with the terms of the scheme should the assuming reinsurer enter into such an arrangement; and
- if subject to a legal process of resolution, receivership, or winding-up proceedings as applicable, the ceding insurer, or its representative, may seek and, if determined appropriate by the court in which the resolution, receivership, or winding-up proceedings is pending, may obtain an order requiring that the assuming reinsurer post collateral for all outstanding ceded liabilities.
The collateral elimination requirements of the US-UK Covered Agreement do not call for full implementation until the conclusion of a transition period sixty months from September 22, 2017, the same time frame as the Bilateral Agreement with the EU. In its press release, the US is encouraging each US state to promptly adopt relevant credit for reinsurance laws and regulations consistent with the US-UK Covered Agreement and to phase-out the amount of collateral required by each US state to allow full credit for reinsurance cessions to UK reinsurers. The NAIC is currently in the process of adopting revisions to the Credit for Reinsurance Model Law and Regulation in response to the US-EU Bilateral Agreement.
The US-UK Covered Agreement is prospective in that the collateral elimination requirements do not apply to reinsurance agreements that were entered into before the application of the US-UK Covered Agreement or to losses that were incurred or to reserves that were posted before the US-UK Covered Agreement’s application. Notwithstanding this requirement, the US-UK Covered Agreement does not prevent parties from negotiating and agreeing on requirements for collateral in excess of those required by law.
The US-UK Covered Agreement also limits the worldwide application of UK prudential group insurance measures on US insurers operating in the UK. It provides that US insurers and reinsurers can operate in the UK without the US parent being subject to the group level governance, solvency and capital, and reporting requirements of Solvency II. The US policy statement stressed that it does not require development of a group capital standard or group capital requirement in the US.
The US-UK Covered Agreement also encourages US insurance supervisory authorities to cooperate in exchanging information with UK insurance supervisory authorities consistent with the practices set forth in the Model Memorandum of Understanding Provisions on Exchange of Information between Supervisory Authorities in order to enhance cooperation and information sharing and at the same time respecting confidentiality protection.
The NAIC issued a statement that it is reviewing the US-UK Covered Agreement and that it was not surprised that it mirrored the terms of the Bilateral Agreement with the EU. The NAIC did not object to its use to replicate consistent treatment for the UK.
Following the NAIC’s adoption of the revisions to the Credit for Reinsurance Model Law and Regulation, the revisions will then need to be passed by the State legislators to implement the requirements of the Bilateral Agreement with the EU and the US-UK Covered Agreement.