On January 13, 2017, the Secretary of the Treasury (“Treasury”), the U.S. Trade Representative (“USTR”) and the European Union (“EU”) took the industry and regulators alike by surprise when they issued a press release announcing the completion of negotiations and the finalization of the “Bilateral Agreement Between the European Union and the United States of America on Prudential Measures Regarding Insurance and Reinsurance (the ‘Covered Agreement’).”
When the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) was adopted in 2010, it created a new office, the Federal Insurance Office (“FIO”), within the U.S. Treasury Department. The FIO does not have general supervisory or regulatory authority over the business of insurance, clearly leaving the regulation of the business of insurance to state regulation. In addition to the specific roles FIO is authorized to play under Dodd-Frank, FIO is specifically authorized, along with the USTR, to negotiate and enter into Covered Agreements, a term created under Dodd Frank.
The Dodd-Frank Act provides that “The Secretary and the United States Trade Representative are authorized, jointly, to negotiate and enter into covered agreements on behalf of the United States.” (31 U.S.C. § 314). The Act then states that a “Covered Agreement” is a written agreement between the U.S., a foreign government(s), or regulatory entity(ies), concerning “prudential measures” with regard to the business of insurance and reinsurance and protects insurance and reinsurance consumers to a level that would be “substantially equivalent” to the protection afforded under state insurance regulation. (See, U.S.C. §313(r)).
Covered Agreements are not considered to be treaties and therefore technically do not need the approval of Congress. They are, however, required to be submitted to certain Congressional committees and cannot become effective until after 90 days from the date on which the final version is submitted to Congress. Although a Covered Agreement does not need Senate confirmation as does an international Treaty, Congress can amend or reject the Covered Agreement within the 90-day period, otherwise the Covered Agreement becomes effective on the 91st day. Likewise, the EU must file the Covered Agreement with the Council of the European Union and the European Parliament and it must be formally signed to make the Covered Agreement effective.
Why the need for a Covered Agreement and the urgency to get the agreement finalized as soon as possible following the November 2015 announcement? The U.S. insurance industry feared the implementation of Solvency II, which was to become effective January 1, 2016. The EU had not, as of the date of the announcement of the intent to enter into negotiations, granted “equivalence” to the U.S. and therefore U.S. insurers and reinsurers doing business in the EU would be subject to additional strict regulatory requirements under Solvency II. The NAIC and state regulators insisted that the capital and reinsurance requirements under the current state regulatory scheme should be enough to grant “equivalence” to the U.S. and therefore concluded that a Covered Agreement was unnecessary.
For the full article, refer to page 11 in the Spring 2017 issue. https://www.airroc.org/assets/docs/matters/AIRROC%20Matters%20Spring%202017%20No%2013%20Vol%201.pdf