Reinsurance Regulation

The NAIC has published proposed revisions to the Credit for Reinsurance Model Law and the Credit for Reinsurance Model Regulation that are intended to facilitate compliance by the states with the provisions of the Covered Agreement with the European Union, and avoid the federal preemption of state credit for reinsurance laws. These exposure drafts further the implementation of the Covered Agreement discussed at the NAIC’s February 20, 2018 public hearing. The draft revisions add new sections to both the Model Act and the Model Regulation allowing a ceding insurer to take financial statement credit for reinsurance if the assuming insurer has its headquarters or domicile in what the state insurance commissioner determines is a “Reciprocal Jurisdiction,” as that term is defined in the revised Models. The proposed revisions do not change or delete any of the existing provisions of the Models, which would remain in force and effect along with the new provisions.

The proposed revised Model Regulation adds detailed requirements to the more general provisions of the Model Act, including provisions clearly intended to implement the provisions of Articles 3 – 5 of the Covered Agreement and extend the benefits of the reinsurance collateral provisions of the Covered Agreement to non-E.U. jurisdictions that have group governance, capital, supervision, solvency, and other requirements that are in compliance with those found in the Covered Agreement. For example, Section 9 of the proposed revised Model Regulation states that to be recognized by a state as a Reciprocal Jurisdiction, a non-U.S. jurisdiction must either: (1) be recognized by the state insurance commissioner as a Reciprocal Jurisdiction and be party to a treaty or international agreement with the United States regarding credit for reinsurance, such as a Dodd-Frank Act Covered Agreement; or (2) be recognized by the state insurance commissioner as a qualified jurisdiction and a Reciprocal Jurisdiction, meeting stated requirements concerning the equal treatment of insurers domiciled in the U.S. and the foreign jurisdiction, a lack of a “local presence” requirement, certain worldwide group governance, solvency, capital, and supervision requirements, and required information exchange and sharing between insurance supervisors. The proposed revisions impose requirements for credit for reinsurance in such jurisdictions that are not only consistent with but quoted from the Covered Agreement, effectively offering the terms of the Covered Agreement to countries outside the E.U. on an equal footing with the Covered Agreement’s terms for E.U. member nations. Section 9.B.(2)(d) of the proposed revisions to the Model Regulation notes that “a memorandum of understanding or similar document between the commissioner and such qualified jurisdiction” will be needed to implement the provisions concerning the exchange of information between the regulators of different jurisdictions.

The proposed revisions to the Models resolve two issues which were undecided at the February 2018 public hearing: (1) whether the reinsurance collateral reform contemplated by the Covered Agreement would be limited to U.S.-E.U. relationships, or be applicable to reinsurance arrangements with foreign reinsurers domiciled elsewhere; and (2) whether non-E.U. domiciled reinsurers would have to be subject to the group supervision, solvency, capital, and information exchange provisions of the Covered Agreement to receive the benefits of reinsurance collateral reform. The proposed revisions to the Models make the reinsurance collateral reform provisions available with respect to any reinsurer domiciled in what the state insurance commissioner determines is a Reciprocal Jurisdiction, not limiting such treatment to E.U. nations, but conditions a determination that a jurisdiction is a Reciprocal Jurisdiction on that jurisdiction having laws or regulations in place that are consistent with the group supervision, solvency, capital, and information exchange provisions of the Covered Agreement. Thus, the Covered Agreement potentially becomes a model for the worldwide reinsurance market for U.S. ceding insurers.

There is a short public comment period for these drafts open until July 23, 2018. The consideration of these proposed revisions presumably will continue on the schedule published by the NAIC earlier this year, with consideration by the Financial Condition (E) Committee at the NAIC’s August meeting and by the NAIC plenary at the November meeting.

This post written by Rollie Goss.
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President Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act into law on May 24, 2018. Section 211 of the law requires the Secretary of the Treasury, Board of Governors of the Federal Reserve System, and Director of the Federal Insurance Office (“federal regulators”) to support “increasing transparency at any global insurance or international standard-setting regulatory or supervisory forum in which they participate.” The law requires the federal regulators to achieve consensus positions with State insurance regulators through the NAIC when the federal regulators “take a position or reasonably intend to take a position with respect to an insurance proposal by a global insurance regulatory or supervisory forum.”

The law creates the Insurance Policy Advisory Committee on International Capital Standards and Other Insurance Issues at the Board of Governors of the Federal Reserve System. The Committee must comprise of not more than 21 members representing a “diverse set of expert perspectives from the various sectors of the United States insurance industry.”

The law requires the Secretary of the Treasury and the Chairman of the Board of Governors of the Federal Reserve System to submit an annual report and provide annual testimony on their efforts with the NAIC with respect to global insurance regulatory or supervisory forums. The reports must address (i) issues under discussion at international standard-setting bodies, including the Financial Stability Board (FSB) and the International Association of Insurance Supervisors (IAIS); (ii) the effects that proposals discussed at the international bodies could have on consumer and insurance markets in the United States; (iii) any position taken by the federal regulators in international insurance discussions; and (iv) efforts by the federal regulators to increase transparency at the FSB and the IAIS. The law also permits the NAIC to provide congressional testimony.

The law requires the federal regulators, in consultation with the NAIC, to complete a study and report to Congress on the impact of any final international insurance capital standard on consumers and markets in the United States before supporting or consenting to the adoption of the standard. The law provides for public notice and an opportunity for public comment with respect to the report. The federal regulators are required to submit to the Comptroller General of the United States the report for his or her review.

Finally, not later than 180 days after the date of enactment of this law (November 20, 2018), the Chairman of the Board of Governors of the Federal Reserve System and the Secretary of the Treasury, or their designees, shall submit to Congress a report and provide testimony to Congress on the efforts of the Chairman and the Secretary to increase transparency at meetings of the IAIS. S. 2155, 115th Cong. § 211 (2018).

This post written by Benjamin E. Stearns.

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