Out-Law / Your Daily Need-To-Know

EU insurers will no longer have to post collateral before they can reinsure risks underwritten in the US, under the final terms of a covered agreement between the two jurisdictions.

The agreement (40-page / 4.6MB PDF), which must now be approved by US Congress and EU authorities, will "ensure ongoing robust insurance consumer protection and provide enhanced regulatory certainty for insurers and reinsurers operating in both the US and the EU", according to a statement issued by the negotiators.

Covered agreements are used by US authorities to agree prudential measures for non-US insurers and reinsurers with the relevant governments, authorities or regulatory entities.

The agreement deals with three areas of insurance regulation: reinsurance, group supervision and information exchange. It tackles both the collateral issue, which European insurers have criticised as unnecessarily burdensome, as well as enhanced EU regulatory requirements introduced last year under the Solvency II regime.

The terms of the agreement enhance consumer protection measures while eliminating existing collateral and local presence requirements for EU and US reinsurers operating in these markets.

Prudential regulation of insurance groups will be simplified, with US and EU groups operating in the other market subject only to oversight in their home jurisdiction. This will include limits on "matters involving solvency and capital, reporting and governance", although supervisors will be permitted to request and obtain information about "worldwide activities which could harm policyholders' interests of financial stability in their territory", according to the negotiators' statement.

"For the United States, this preserves the primacy of the US regulators with respect to oversight of US insurance groups," the negotiators said. "For the EU, this preserves the primacy of EU oversight of EU insurance groups."

The agreement also encourages supervisors to continue to exchange information with their counterparts on insurers and reinsurers that operate in both markets, and includes model memorandum of understanding provisions on information exchange.

Financial services expert Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com, said that the final agreement would be "welcome news for reinsurers generally". However, the impact for UK reinsurers in the medium term was unclear, given the prime minister's recent confirmation that the UK would leave the EU single market as part of the 'Brexit' process, he said.

"This will focus attention on the importance of rational transitional arrangements and equivalency rules being negotiated between the EU and the UK as part of Brexit, to enable UK reinsurers to remain on an equal footing with their global counterparts," he said.

"There will also be a knock-on effect for the banks and custodians who have previously structured these collateral arrangements, which will now likely be unwound," he said.

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