NAIC digs its claws into EU-US covered agreement

Published in: Regulation, Solvency II, US - Canada - Bermuda

Companies: National Association of Insurance Commissioners, NAIC, National Association of Mutual Insurance Companies, Namic, Federal Insurance Office, FIO, American Insurance Association, AIA

A Congressional hearing has given opponents of the covered agreement the opportunity to argue for its renegotiation under the Trump administration. Christopher Cundy reports

Signed in the final days of Barack Obama's presidency, the long-awaited EU-US covered agreement on reinsurance collateral, group capital and supervision is now at risk of being torn up.

At a hearing in the US Congress yesterday (16 February), the National Association of Insurance Commissioners (NAIC) and National Association of Mutual Insurance Companies (Namic) called for the Trump administration and Congress to reopen negotiations to obtain an agreement that provides "permanent mutual recognition" for the US regulatory system via a more transparent and inclusive process.

The hearing at the House sub-committee on housing and insurance was the first of at least three opportunities by Congress to examine the covered agreement – it will also go before the House Committee on Ways and Means and the Senate banking committee. But without further action, the agreement will by default enter into force in April.

Yesterday's hearing sought evidence from four witnesses on a handful of main points, including whether the covered agreement pre-empts the state-based system of insurance supervision; whether it gives the EU an upper hand over the US; and whether state insurance supervisors and elected officials were sufficiently involved.

The witnesses were split in their support for the agreement. Defending the deal were Mike McRaith, former director of the Federal Insurance Office (FIO), which negotiated the agreement alongside the US Trade Representative; and Leigh Ann Pusey, chief executive of the American Insurance Association (AIA).

On the attack were Wisconsin insurance commissioner and NAIC president Ted Nickel, and Namic chief executive Charles Chamness.

The witnesses and representatives in the meeting played up to the rhetoric of the current administration on trade agreements. "This is a deal that puts America first," McRaith said on more than one occasion.

Transparency and involvement

The NAIC's grievances over the process by which the agreement was reached have been aired previously.

Nickel argued that state regulators and other stakeholders had not been given a voice in the negotiations, a point strongly rebuffed by McRaith.

McRaith said the FIO had created an unprecedented mechanism for state regulators to participate in the negotiations, and liaised with the Congressional committees and insurers with international business.

"We asked the state regulators to create a small task force – we didn't tell them how many or who – they were invited to and participated in every negotiating session. We briefed them before and after every negotiating session. We shared documents with them before they went to the EU. During the negotiating sessions they were asked for technical information at the table, not in the room," he said.

Nickel countered that the seven state representatives were bound by confidentiality and they could not share their thoughts or ask for advice from anyone not already at the table.

Keith Rothfus, Republican representative for Philadelphia's 12th district, brought up the issue of whether this was a trade agreement or a covered agreement. He said he saw it as regulating commerce with foreign nations and should be classed as the former, and therefore Congress should have the power to vote on it.

McRaith was emphatic: "It's a covered agreement. If it was a trade agreement, it would be called a trade agreement. A covered agreement refers to prudential insurance and reinsurance matters."

Better than equivalence

In its original negotiating mandate, the FIO had suggested it was seeking equivalence with the EU. The lack of similar phrasing in the final text was picked on as a reason to reject the deal.

Nickel said the current agreement "does not provide for full equivalence or recognition of regulatory systems. The word equivalence is nowhere to be found in this document."

The agreement puts conditions on certain actions currently authorised under state laws, and creates potential conflicts with state reporting processes, Nickel continued.

Furthermore, the group capital provisions imply state regulators are required to adopt a group capital requirement, but also include language suggesting the EU could apply its own group capital requirement if states fail to act within five years.

McRaith said that observers should focus on the outcome achieved: "We don't want [Solvency II] equivalence, because an equivalent country like Switzerland has a global group capital requirement, global group reporting and governance requirements – exactly what we don't want."

Clause 4H of the covered agreement says the US will supervise how they deem appropriate, McRaith noted. "States have said they are developing a group capital standard. As states do that, US companies will not be subject to Solvency II."

He added that the US had surpassed the notion of equivalence "as our companies are being treated entirely fairly without group capital, reporting and governance requirements."

America first

Given the current politics, it was inevitable that the issue of whether the deal is bad for US - or better for the EU - was examined.

The concerns raised included the removal of $30bn of EU reinsurer collateral from the US market with no additional examination of the creditworthiness of foreign reinsurers, which was seen to put policyholders at greater risk.

"On the whole, [the agreement] is bad for the vast majority of US insurers that don't have operations in Europe," said Namic's Chamness. "They lose reinsurance collateral and get nothing in return other than new group supervision and regulatory uncertainty."

Those defending the agreement focused their response on the benefits of the deal for US re/insurers selling in the EU.

The AIA's Pusey said that without the agreement, US insurers operating in the EU would be forced to "upstream" Solvency II into their US parent companies, and reinsurers would be obliged to have a physical presence in the EU. "We see this as a real win for US insurers and our regulatory system," she said.

McRaith argued that the outcome saves the US industry billions of dollars of compliance costs in Europe and does not eviscerate US collateral rules, but builds on what the country is already doing.

But perhaps the biggest win for the US is that this was the first time an international agreement has recognised the US state-based system of insurance regulation, Pusey said.

"The implications are not just important today for relieving the pressure on our companies doing business there. We think it's important because it will increase the leverage that the US has at the international negotiating table," citing future talks at the International Association of Insurance Supervisors on ComFrame and the international capital standard.

"For the US to be at the table empowered by European recognition of our system… is incredibly valuable."

Going forward

The Trump administration's desire to renegotiate the agreement will be influenced by how seriously US insurers and the economy is seen to suffer as a result, and whether sovereignty has genuinely been given over to foreign powers.

Committee chairman Sean Duffy, a Republican representative from Wisconsin, summed up the session saying there was some need for clarification about the covered agreement, there were concerns about the process and the pre-emption of state rules, and the degree of Congressional involvement in future deals – some serious questions, though hardly a hammer blow.

But notable in this process has been the division among insurers, with associations like the AIA and the American Council of Life Insurers supportive and others, like Namic, opposing the deal.

Perhaps the biggest risk to the future of the deal is if the Trump administration decides that siding with the non-international insurers, typically represented by Namic, furthers its anti-globalisation agenda.

If the administration does take action, it could be many years before another covered agreement hits the table.

Chris Cundy