For insurance regulation, exciting days may be few and far between. But November 20, 2015, was one of those days.
The United States Department of the Treasury’s Federal Insurance Office (FIO) and the United States Trade Representative (USTR) jointly notified four key congressional committees that they were formally initiating negotiations with the European Union to achieve a "Covered Agreement" pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. Once complete, the Covered Agreement would establish standards on collateral requirements for reinsurance, insurance group supervision and confidentiality.
The notice came during the National Association of Insurance Commissioners’ National Meeting and on the eve of a public session of the EU-U.S. Insurance Project — giving opportunity for immediate reaction. Likewise, the timing and location made it hard to miss the Covered Agreement’s place in the ongoing consideration of the roles of the states and the federal government for insurance regulation.
At this preliminary stage, we:
- Break down and demystify the Covered Agreement process so you know what to expect next
- Identify some of the open questions and substantive forks in the road that we’ll be watching as the process unfolds
The Covered Agreement Process
FIO and USTR’s step on November 20 was just that — a step. By the terms of Dodd-Frank Title V, getting to a Covered Agreement will proceed in the following stages:
Step 1—Consultation: Before and during Covered Agreement negotiations, Treasury and the USTR must consult with four key congressional committees. The consultation must include at least:
- The nature of the agreement
- How and to what extent such agreement will achieve the purposes of Title V of the Dodd-Frank Act
- The implementation of the agreement and its effect on state laws
Friday’s letters officially mark the beginning of the consultation phase, though reportedly discussions have been underway for a while.
Step 2—Agreement: Treasury and USTR agree in principle with foreign authorities (here the European Union) to terms of the Covered Agreement.
Step 3—Submission: Treasury and USTR jointly submit the proposed agreement to the congressional committees on a session day.
Step 4—Layover: Ninety calendar days after submission, the Covered Agreement is effective (no congressional approval is needed; just lack of adverse action).
Note that preemption of a state regulation by a Covered Agreement requires further consultation, procedures and opportunity for judicial review.
Open Issues to Watch
State Regulator Involvement: The notices to Congress promised state regulators "a meaningful role during the covered agreement negotiating process," which was re-emphasized by FIO Director Michael McRaith at the EU-U.S. Insurance Project public session. Because the Covered Agreement process is a big step for the federal government’s role in insurance regulation, how FIO and USTR fulfill that pledge will be closely watched as the process unfolds.
Substance of the Agreement: After the excitement over the official notice dies down, FIO and USTR will need to fill in the substantive blanks on the topics that are the subject of the Covered Agreement. For example:
On reinsurance collateral, will the requirements baked into the agreement mirror the NAIC’s model law on the subject, tweak that model or take things in a new direction? And who will have regulatory authority to make further determinations and assessments — the states alone, or will the Covered Agreement establish a new process that would involve the federal government?
On group supervision, will the Covered Agreement build off the existing state engagement on international group supervision efforts? Or will there be a new or parallel process called for by the Covered Agreement?
Solvency II Equivalence: The driving reason for the Covered Agreement is to accelerate and achieve U.S. "equivalence" with the European Union under Solvency II. Without equivalence, U.S. insurers doing business in the EU could be required to comply with Solvency II requirements. But Solvency II implementation starts January 1, 2016. It remains unclear whether the Covered Agreement process will pave the way for some form of provisional equivalence or whether European supervisors will grant some form of forbearance. With January 1 approaching and less-than-satisfying answers at the EU-U.S. Insurance Project yesterday, this issue is top of mind for the U.S. insurance industry.
The year 2016 and beyond promise action, developments and maybe even answers to these questions and others as the details of the Covered Agreement process unfold. Stay tuned!