EU-US Covered Agreement on reinsurance (2017)
An agreement signed on September 22, 2017 that removes, subject to capital and solvency conditions, the collateral and local presence required of reinsurers on either side of the Atlantic.
On September 22, 2017, the European Union and the United States sign a Bilateral Agreement on Prudential Measures regarding Insurance and Reinsurance, the covered agreement provided for by the Dodd-Frank Act. On the US side, the text targets collateral. A European reinsurer with own funds of at least 226 million euros that covers its Solvency II SCR at 100% is exempt. It no longer has to secure its obligations to a US cedant with a trust or a letter of credit. On the European side, the counterpart covers a US reinsurer with at least 250 million dollars of capital and surplus and an RBC ratio of at least 300%. That reinsurer no longer has to open a branch or post collateral to reinsure an EU cedant. The agreement also settles group supervision: each supervisor keeps control of the group for which it is the home authority. A US group is not subject to Solvency II group capital requirements for its worldwide business. The US states, which alone regulate insurance, had until September 2022 to bring their laws into line, failing which the Federal Insurance Office could have conflicting rules declared preempted under federal law. The NAIC responded with the 2019 amendments to its model law, which create reciprocal jurisdictions. The United Kingdom, on its way out of the Union, signed a counterpart on December 18, 2018, with the same thresholds. A reinsurer that no longer meets the conditions falls back into the ordinary regime, certified or at 100%. Not to be confused with Solvency II equivalence, a unilateral decision by the Commission that recognized Bermuda and Switzerland.
Textbook case: a European reinsurer has 1.5 billion euros of own funds and covers its SCR at 180%. It reinsures an Ohio cedant for 200 million dollars of obligations. Under the old regime, it tied up 200 million in trust; certified Secure-2, 20 million. Once Ohio has aligned with the agreement, it posts nothing. If a bad year brings its SCR coverage down to 95%, it must notify the cedant's supervisor and loses the benefit of the agreement. The state may then require collateral on obligations arising after that date.
EU-US Covered Agreement, Bilateral Agreement on Prudential Measures, US-UK Covered Agreement, covered agreement 2017
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