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Covered Agreement

Last Updated 4/04/17

Issue: The notion of a covered agreement was included in Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) as a unique stand-by authority for the Treasury and the United States Trade Representative (USTR) to address, if necessary, those areas where U.S. state insurance laws or regulations treat non-U.S. insurers differently than U.S. insurers. A covered agreement can serve as a basis for preemption of state law under certain circumstances, but only if the agreement relates to measures substantially equivalent to the protections afforded consumers under state law.

On Jan. 13, 2017, a covered agreement between the U.S. and European Union (EU) was achieved. State insurance regulators and the NAIC have been critical of the opaque approach toward drafting the agreement and are opposed to this covered agreement as drafted. State insurance regulators can support an agreement that achieves clear and permanent mutual recognition for our time-tested state-based regulatory system, including meaningful state regulator input and transparency in its drafting and execution, and is unambiguous in its terms and finality. A clarification of the current covered agreement will lead to a better result for the U.S.

On March 15, 2017, state insurance regulators and the NAIC wrote a letter to Treasury on the covered agreement asking the Treasury to work with the EU to clarify details of the agreement and also to offer technical assistance and expertise.

Reinsurance Consumer Protection Collateral
Historically, in the area of reinsurance consumer protection collateral, U.S. insurance regulators have required foreign reinsurers to hold 100% collateral within the U.S. for the risks they assume from U.S. insurers. As reinsurers are ultimately providing insurance to other insurance companies that are directly protecting U.S. policyholders, requiring consumer protection collateral in the U.S. is intended to ensure claims-paying capital is available and reachable by U.S. firms and regulators should it be needed, particularly in the wake of a natural disaster. However, foreign reinsurers’ regulators and politicians have objected to their companies having to post consumer protection collateral in the U.S. because this makes such capital unavailable for other purposes, including investment opportunities.

Recognizing the potential for variation in requirements across states makes planning for consumer protection collateral liability more uncertain and thus potentially more expensive, state regulators have been working together through the NAIC to reduce consumer protection collateral requirements in a consistent manner commensurate with the financial strength of the reinsurer and the quality of the regulatory regime that oversees it. Recently, the NAIC passed amendments to the NAIC Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786) (Credit for Reinsurance Models) in 2011. Once implemented by a state, the amendments will allow foreign reinsurers to post significantly less than 100% consumer protection collateral for U.S. claims, provided the reinsurer is evaluated and certified. Individual reinsurers are certified based on criteria that include, but are not limited to, financial strength, timely claims payment history, and the requirement a reinsurer be domiciled and licensed in a qualified jurisdiction.

In August of 2013, the NAIC adopted the Process for Developing and Maintaining the NAIC List of Qualified Jurisdictions which established a comprehensive process for evaluating a jurisdictions’ oversight of reinsurers in order to determine whether it is a jurisdiction for purposes of reduced consumer protection. The 2011 amendments to the Credit for Reinsurance Models require an assuming insurer to be licensed and domiciled in a qualified jurisdiction in order to be eligible for certification by a state as a certified reinsurer. As of January 1, 2016, Bermuda, France, Germany, Ireland, Japan, Switzerland, and the U.K. have been placed on the NAIC List of Qualified Jurisdictions.

The NAIC has also established a peer review system surrounding the certification of foreign reinsurers by states, which provides a foreign reinsurer an opportunity for a passport throughout the U.S. As of January 1, 2017, more than, 25 foreign reinsurers have been certified under this peer review system.

Covered Agreement
In light of the progress made by the NAIC and the states to modernize credit for reinsurance rules, the NAIC is neither convinced nor persuaded that a covered agreement for reinsurance consumer protection collateral is necessary.

A covered agreement is a specific type of international agreement defined by the Dodd-Frank Act as "a written bilateral or multilateral agreement regarding prudential measures with respect to the business of insurance or reinsurance that is entered into between the United States and one or more foreign governments, authorities, or regulatory entities and relates to recognition of prudential measures with respect to the business of insurance or reinsurance that achieves a level of protection for insurance or reinsurance consumers that is ‘substantially equivalent’ to the level of protection achieved under State insurance or reinsurance regulation.”

A covered agreement is negotiated jointly by the U.S. Treasury’s Federal Insurance Office (FIO) and the USTR with foreign authorities. Such agreement must provide consumer protections substantially equivalent to those under state law. To be substantially equivalent, the outcome of the agreement must provide at least the same level of consumer protections as those contained in state laws and regulations. Further, prior to initiating negotiations, during the negotiations, and before entering into a covered agreement, the secretary of the Treasury and U.S. trade representative must jointly consult with the House Financial Services Committee, the House Ways and Means Committee, the Senate Finance Committee, and the Senate Banking Committee. A covered agreement can only enter into force when the FIO and USTR jointly submit the proposed covered agreement to the committees listed above. There is a layover period of 90 days specified in the law.

A state insurance measure can only be preempted if the FIO Director determines that: 1) The measure results in less favorable treatment of a non-U.S. insurer domiciled in a foreign jurisdiction that is subject to a covered agreement, than a U.S. insurer domiciled, licensed, or admitted to do business in that state; and 2) the measure is inconsistent with a covered agreement. FIO must follow procedures laid out in the Dodd-Frank Act to use the preemption authority.

Status: The reduction of reinsurance consumer protection collateral requirements has been a priority for the NAIC and the states for more than a decade. As of January 1, 2017, 32 states have passed legislation, representing more than 66% of direct U.S. premium, to implement the revised NAIC Credit for Reinsurance Models and an additional five states have indicated plans to do so in the near future, which would raise the total market coverage to 93%. If this provision becomes an accreditation standard, the states will have accomplished what the covered agreement purports to do.