On Monday, we brought you the news that the European Union and the US had signed an agreement to update international insurance and reinsurance regulations and free up capital for investments – a significant move for the industry on both sides of the pond.
But while there has been much talk about the importance of the deal, what does it really mean in practice?
Insurance Business asked insurance lawyer Martin Membery, co-head of insurance group at Sidley Austin LLP, more about what impact the agreement will actually have.
What is the purpose of the deal?
The Covered Agreement represents a significant development for cross border insurance and reinsurance business between the EU and the US. It removes certain trade barriers and potentially reduces the costs of US reinsurers providing reinsurance cover to EU cedants; US insurance groups with EU insurance subsidiaries; and EU reinsurers providing cover to US cedants.
What does it mean broadly in practice?
The two key areas addressed by the Covered Agreement concern group supervision, and reinsurance collateral and local presence requirements.
Group supervision – As the US is not currently considered to be equivalent to the EU for group supervision purposes, absent agreeing ‘other measures’ with EU regulators under Solvency II, under the current regime US insurance groups with EU based insurance subsidiaries are potentially exposed to having their US and other non EU operations being subject to EU group supervision under Solvency II.
The Covered Agreement precludes EU insurance regulators from applying Solvency II group supervision to the non EU parts of US headquartered insurance groups. US insurance groups operating in the EU will be supervised at the worldwide group level only by the relevant US insurance supervisors, and will not therefore have to meet EU worldwide group capital, reporting or governance requirements. Equally EU insurers operating in the US will be supervised at the worldwide group level only by the EU insurance regulators.
Reinsurance collateral and local presence requirements - Provided that they meet the requisite qualifying criteria regarding financial strength and market conduct, reinsurers will benefit from a regime which will not permit compulsory collateralisation where equivalent measures do not apply to domestic reinsurers.
Putting this into the context with the current US regime, US States will have a five year period in which to change their existing laws and regulations to enable qualifying EU reinsurers to provide reinsurance to US cedants without having to post collateral. In the interim period, US States are also ‘encouraged’ to reduce existing collateral requirements by 20% each year pending full implementation. In addition, local presence requirements which might otherwise require a reinsurer to establish a branch or subsidiary in order to provide reinsurance to a domestic cedant will be eliminated.
How might it affect EU (re)insurers?
Provided that they meet the requisite qualifying criteria, all EU reinsurers that provide cover to US cedants will potentially benefit from the elimination of collateral and local presence requirements in the US insurance market.
For as long as the UK remains part of the EU, or can rely upon appropriate transitional measures conferring the same benefits, UK based reinsurers – including Lloyd’s syndicates – would receive the same benefits under the Covered Agreement as their EU counterparts. Once the UK has left the EU, it would not automatically benefit from the Covered Agreement, and the UK would need to negotiate an equivalent agreement with the US on a bilateral basis in order for UK based reinsurers to continue to receive these benefits.
Who benefits most from the deal?
EU reinsurers providing cover to US cedants, US reinsurers providing cover to EU cedants, and US headquartered insurance groups with EU insurance subsidiaries.
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