An updated report on the EU-US Dialogue Project on insurance regulation entitled ‘The Way Forward' and published on August 1, explains that the EU, the US Treasury, and the Federal Insurance Office will take "initial steps" on drafting a covered agreement on reinsurance collateral by year-end 2014. A covered agreement is a deal entered into between the US and one or more foreign governments that binds the states to certain prudential measures.

 

This represents a step-change in Europe's approach to the vexed issue of reinsurance collateral. In the US, state regulators, shepherded by the National Association of Insurance Commissioners (NAIC), have already made great strides towards reducing collateral requirements for certain countries.

 

However, the NAIC's approach requires the individual states to approve or veto the new model law as they see fit. As of August, 23 states had adopted the NAIC's revised Credit for Reinsurance Model Law. A covered agreement would apply to all states, harmonising collateral requirements countrywide.

 

While welcoming recent progress, trade association Insurance Europe supports a covered agreement as preferable to the current patchwork approach, and is still urging US policy-makers to go further and drop collateral requirements for foreign insurers altogether. Hannah Grant, head of international affairs and reinsurance at Insurance Europe in Brussels, says: "Our objective is to see equal treatment for EU and US reinsurers on both sides of the Atlantic. If the US were to be treated as equivalent under Solvency II, US reinsurers wouldn't be required to hold any collateral, and we expect the same treatment."

 

The proposal in ‘The Way Forward' report is for a covered agreement based on the NAIC Credit for Reinsurance Model Law. Under this law, foreign insurers are assigned a rating based on their financial strength. This rating then determines the amount of collateral they must post in order for the ceding insurer to receive statutory credit. For example, a firm with a Standard & Poor's rating of AA- to AA+ would have to post only 10% of gross liabilities as collateral.

 

The NAIC is in the process of reviewing its model law and regulation. In June, the NAIC Reinsurance Task Force issued a survey to members asking whether collateral amounts should be reduced further. An NAIC spokesperson said the results would be made public, but was unable to specify when.

 

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