Covered Agreement

Last Updated: 1/31/2024

Issue: A covered agreement provides stand-by authority for the U.S. Department of the Treasury and the Office of the U.S. Trade Representative (USTR) to address, if necessary, areas where U.S. state insurance laws or regulations treat non-U.S. insurers differently than U.S. insurers, such as reinsurance consumer protection collateral requirements. A covered agreement can serve as a basis for preemption of state law only if the agreement relates to measures substantially equivalent to the protections afforded consumers under state law.

On September 22, 2017 the U.S. Treasury Department, USTR, and the European Union announced they had formally signed a Covered Agreement. The agreement requires states to eliminate reinsurance collateral within 5 years or risk preemption. In exchange, the EU will not impose local presence requirements on U.S. firms operating in the EU, and effectively must defer to a U.S. group capital calculation for U.S. entities of EU-based firms. On Dec. 18, 2018, a similar Covered Agreement was signed with the United Kingdom (UK), with a similar effective date.

Historically, U.S. state insurance regulators have required non-U.S. reinsurers to hold 100% consumer protection collateral within the U.S. for risk assumed from U.S. insurers. Foreign reinsurers' regulators and politicians have objected to this requirement, arguing it reduces capital available for other purposes. State insurance regulators recognize variation across states makes planning for consumer protection collateral liability more uncertain, and thus potentially more expensive. As such, they have been working 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.

In 2011, the NAIC passed amendments to the Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786). In adopted states, the amendments allow certified foreign reinsurers to post significantly less than 100% consumer protection collateral for U.S. claims.

Status: On June 25, 2019, the NAIC Executive (EX) Committee and Plenary adopted revisions to the Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786), which implement the reinsurance collateral provisions of the Covered Agreements with the European Union (EU) and the United Kingdom (UK). These revisions create a new type of jurisdiction, which is called a Reciprocal Jurisdiction and eliminate reinsurance collateral requirements and local presence requirements for EU and UK reinsurers that maintain a minimum amount of own-funds equivalent to $250 million USD and a solvency capital requirement (SCR) of 100% under Solvency II. The revisions also provide Reciprocal Jurisdiction status for accredited U.S. jurisdictions and Qualified Jurisdictions if they meet certain requirements in the credit for reinsurance models. U.S. states must adopt these revisions prior to September 1, 2022 or face potential federal preemption by the Federal Insurance Office. To avoid preemption, the laws must be enacted prior to September 1, 2022, and must adhere exactly to the models as they have been adopted by the NAIC.

As of September 22, 2022, all 56 NAIC jurisdictions had adopted the necessary laws and regulations to avoid the issuance of a federal preemption determination by the Federal Insurance Office.

On December 9, 2020, the NAIC adopted revisions to the NAIC Insurance Holding Company System Regulatory Act (#440) and Insurance Holding Company System Model Regulation with Reporting Forms and Instructions (#450). These revisions implemented a Group Capital Calculation (GCC) for the purpose of group solvency supervision under the Covered Agreements. The GCC is intended to meet the requirement that the states have a “worldwide group capital calculation” in place by Nov. 7, 2022 in order to avoid the EU from imposing a group capital assessment or requirement at the level of the worldwide parent undertaking in accordance with Solvency II. As of September 28, 2022, 22 states had adopted the GCC, with the NAIC considering adopting it as an accreditation standard effective January 1, 2026.