What's the impact of US-EU Covered Agreement on reinsurance market?

What’s the impact of US-EU Covered Agreement on reinsurance market? | Insurance Business Asia

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What’s the impact of US-EU Covered Agreement on reinsurance market?

New framework reduces collateral for EU reinsurers, but collateral remains for older liabilities

Insurance News

By
Kenneth Araullo

Following a treaty signed in September 2017, the United States and the European Union agreed on allowing US insurers to receive full credit on their financial statements for reinsurance bought from EU reinsurers without the need for those reinsurers to post collateral.

This agreement, along with a similar US-UK agreement following Brexit, gave US states five years to amend their credit for reinsurance laws, introducing a new class of reinsurers known as reciprocal jurisdiction reinsurers. Two years after the implementation deadline, industry experts are evaluating its impact.

According to insights from McDermott Will & Emery, every US state has now adopted the National Association of Insurance Commissioners’ (NAIC) Credit for Reinsurance Model Regulation. This framework allows for the recognition of reinsurers from reciprocal jurisdictions, which include the EU, UK, Japan, Bermuda, and Switzerland, as long as they meet the capital and surplus requirement of at least $250 million.

To gain approval, reinsurers must apply through a designated “lead state.” Once approved, reinsurers can seek recognition in other states by applying for a “passport” through the NAIC’s Reinsurance Financial Analysis (E) Working Group (ReFAWG).

Additionally, the US Department of the Treasury has finalized its rules for “T-listing,” which enables certified and reciprocal reinsurers to be recognized by the Treasury. Unlike the NAIC’s passport system, Treasury listing requires a separate application process.

For non-US reinsurers, securing Treasury listing provides the benefit of enabling US insurers to claim credit for reinsurance ceded to them. Without Treasury approval, US insurers cannot claim financial credit for liabilities ceded to non-US reinsurers, highlighting the importance of this new regulatory pathway.

McDermott Will & Emery noted that more than 90 reinsurers have already been approved by ReFAWG as reciprocal jurisdiction reinsurers, allowing them to operate across multiple states. Some reinsurers have begun to wind down their multi-beneficiary reinsurance trusts, while others are reconsidering the need to maintain their certified (reduced collateral) status.

However, collateral still plays a role in the US reinsurance market, especially for non-US reinsurers that don’t qualify as reciprocal jurisdiction reinsurers or lack the minimum required capital. Collateral also remains essential for securing older reinsurance liabilities, and US ceding companies may continue to require it for commercial reasons.

While the landscape of reinsurance in the US has shifted with the introduction of reciprocal jurisdiction reinsurers, collateral is not entirely obsolete. The new regulatory framework has changed the way reinsurance is managed, but it has not eliminated the need for collateral in all cases, according to McDermott Will & Emery.

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