The announcement of a covered agreement between Europe and the US to enhance international insurance and reinsurance regulation has been long anticipated. When the IUA first began actively advocating the case for mutual recognition between authorities on both sides of the Atlantic, Hilary Clinton was First Lady of the US and everyone was worrying about the millennium bug. Now, 20 years later the case is finally being recognised at the most senior levels of government.
Before 2012 non-US reinsurance businesses were forced to post collateral equal to 100 per cent of the gross reported loss when writing US risks. The Dodd-Frank Act eventually allowed states to enact changes to this rule, reducing the collateral requirement to 10-20 per cent. Many took advantage of the opportunity, but with each state having to pass legislation individually the process has been time consuming. Some large states have not yet made any changes and the picture is far from uniform across the country.
Dodd-Frank also created a Federal Insurance Office which could represent the US industry to negotiate a bilateral trade deal on reinsurance. The IUA, in cooperation with a coalition of other industry representatives, has therefore been arguing for a covered agreement that both addresses the collateral issue and offers multiple other benefits.
At the start of this year both sides announced that such an agreement had been reached. Then last month the US Department of the Treasury and the Office of the US Trade Representative confirmed they intend to sign the Bilateral Agreement between the US and EU on Prudential Measures Regarding Insurance and Reinsurance.
This covered agreement seeks to eliminate collateral requirements for reinsurers operating on a cross-border basis in the EU and the US. There are a number of important reporting requirements and other conditions, such as the change only being prospective and regulators still being able to require collateral if the same is demanded for domestic reinsurers. However, the relief is significant and requires states with current collateral requirements to take steps to reduce them by 20 per cent a year, phasing out to zero in five years.
The covered agreement also clarifies that a re/insurance group will be subjected to worldwide group supervision only in its home jurisdiction. Finally, it encourages regulators in the US and EU to share information on a confidential basis and sets forth a model to support such cooperation.
The net result of these arrangements is to establish a more level playing field between EU and US reinsurers. Cross-border trading will become more efficient and greater global access to reinsurance services will be promoted.
Yet, ironically, the benefits of the covered agreement will not be enjoyed by the UK post-Brexit. The London Market is a major reinsurer of US risks and has long been a supporter of the deal. Now that these efforts are finally bearing fruit it would be a great shame if London firms could not benefit from the results.
An agreement on reinsurance regulation must therefore be a priority for any future trade deal between the UK and US. The recent breakthrough clearly illustrates the possibilities for more efficient global trading in reinsurance services and provides a perfect template for future negotiations. An important advantage of the UK leaving the EU is a freedom to reach new trade settlements and it should be a priority for the government to replicate the benefits of the covered agreement with the US and other countries. Certainly it sends a powerful message that that protectionist regulation is not in the long term interests of clients.