Outgoing Obama administration insurance trade representatives have negotiated a deal that could let the Federal Insurance Office preempt state collateral requirements imposed on European Union-based reinsurers starting around 2022. 

Related: FIO in negotiations with European regulators

The deal, a “covered agreement” negotiated under the authority the FIO, calls for that agency to encourage each U.S. state to phase out any reinsurance collateral requirements it imposes on EU-based reinsurers over a five-year period.

The FIO would begin to deciding whether to preempt any remaining state collateral requirements imposed on EU-based reinsurers 42 months after the agreement takes effect, and the FIO would decide to preempt the requirements 60 months after the agreement takes effect, according to a copy of the agreement posted by the FIO.

The main thrust of the agreement would be to leave regulation of insurance groups active in both the United States and the EU under the oversight of the regulators in their home jurisdictions. A U.S. insurer with an affiliate operating in the EU would not have to make the entire global group comply with the EU’s strict solvency and financial requirements.

The Washington-based American Council of Life Insurers and other insurer groups put out statements welcoming the agreement.

The Manasquan, New Jersey-based National Conference of Insurance Legislators blasted the agreement. NCOIL said state legislators lacked proper representation in the deal negotiations. 

Covered agreements

The federal FIO Act is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Congress created the FIO, an arm of the U.S. Treasury Department, to help the department understand the insurance industry.

The FIO is also supposed to give the United States a national body that’s able to participate in international insurance trade negotiations on an equal level with other countries’ national insurance regulatory agencies.

Under FIO Act rules, when the FIO negotiates a covered agreement, the agreement is supposed to take effect 90 days after the Treasury secretary submits the final legal text to the House Ways and Means and House Financial Services committees, and to the Senate Finance and Senate Bank, Housing and Urban Affairs committees, while Congress is in session, according to an analysis of covered agreements posted by the ACLI. To block a covered agreement, Congress must get a bill through Congress.

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The ACLI, member life insurers, and property-casualty insurers and p-c groups have been working on reducing or eliminating state collateral requirements for non-U.S. reinsurers for years.

States’ rights fight

Collateral requirements dictate that reinsurers use cash, letters of credit or other instruments to ensure that they have the funds available to make good on reinsurance obligations. States have argued that these rules are necessary to protect the interests of the individuals and organizes that have bought the insurance coverage being reinsured.

Reinsurers and many insurers have argued that the collateral requirements are unnecessary if the insurers and reinsurers are being supervised properly.

A task force at the Kansas City, Missouri-based National Association of Insurance Commissioners noted when the NAIC was working on the issue in 2006. It deducted that few jurisdictions outside the United States imposed collateral requirements on reinsurers, and that the list of countries with no reinsurer collateral requirements included Bermuda, Japan, Switzerland and the United Kingdom. Those countries “do not have major problems with uncollectible reinsurance,” the authors of the report wrote.

Related: Panel breaks alien re collateral logjam

Many states have eliminated or reduced collateral requirements for non-U.S. reinsurers since then. A speaker from Aon Benfield presented a slidedeck at an Insurance & Accounting Systems Association event in Ohio in November 2015 that many states had already adopted or were in the process of adopting reinsurance collateral reform laws.

The requires appear to affect p-c reinsurers much more than life reinsurers. But the ACLI, state insurance regulators and state legislators have treated the battle issue as a test case for determining how much clout the FIO might have to preempt state insurance laws and regulations.

The ACLI welcomed the completion of the covered agreement but said it was reviewing the details.

Steve Riggs, the president of NCOIL, and Tom Considine, the chief executive officer of the group, put out a statement saying the agreement raises serious concerns.

The announcement “represents an intrusion by the federal government, and by extension international authorities,” Riggs said.

Considine described the new agreement as an incursion into state insurance regulation.

Related:

Governors express concern about FIO report

FIO report released at last

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