US/EU Covered Agreement Talks Begin; Solvency II Looms January 1, 2016
On January 1, 2016, the European Union (EU) will implement insurance regulatory reforms, known as “Solvency II”, which will negatively impact a non-EU insurer doing business in the EU if that insurer’s regulator is not deemed “equivalent” under the provisions of Solvency II. Without a determination of equivalence or a covered agreement, the Solvency II rules, which are stricter than U.S. rules, could apply to a U.S.-based insurer’s or reinsurer’s subsidiaries operating in the EU. The Secretary of the U.S. Department of the Treasury (Treasury), working through the Federal Insurance Office (FIO), and the Office of the United States Trade Representative (USTR) are jointly authorized pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act to negotiate a covered agreement with one or more foreign governments, authorities, or regulatory entities to recognize certain prudential measures with respect to the business of insurance or reinsurance that achieve a level of protection for consumers that is substantially equivalent to the level of protection achieved under State insurance or reinsurance regulations. Treasury publicly called for a covered agreement in FIO's 2013 Report, "How to Modernize and Improve the System of Insurance Regulation in the United States," and has now announced that, together with the USTR, it will seek recognition of certain areas of State insurance regulation to create ”equivalence” for U.S. insurers and reinsurers doing business in Europe. In addition, they will seek nationally uniform treatment of EU-based reinsurers operating in the U.S., including with respect to collateral requirements. U.S. (re)insurers with operations in the EU are concerned that without equivalence under Solvency II they will be at a competitive disadvantage.