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Industry experts disagree on impact of transatlantic reinsurance agreement

17th January 2017 - Author: Staff Writer

The EU, U.S. insurance agreement has been hailed in Washington and Brussels as a deal that will greatly boost transatlantic insurance and reinsurance business, but opinions across the industry vary.

The deal is set to open up the transatlantic market to both parties as EU and U.S. authorities look to remove requirements for reinsurance companies to hold more capital against risks if they do business from the other side of the Atlantic.

In the newly negotiated agreement EU supervisors propose to accept and affirm the U.S. insurance regulatory framework; for U.S. insurers and reinsurers this would remove the costly and duplicative regulations that would otherwise be imposed under Solvency II, making competing in the EU cheaper and easier.

Leigh Ann Pusey, America’s Insurance Association (AIA) President and Chief Executive Officer (CEO), said the covered agreement “is both a win for U.S. insurers and reinsurers competing in the E.U. and a win for the U.S. state-based system of regulation.”

Pusey added that this would help U.S. insurance groups operating in Europe which had increasingly become subject to “discriminatory prudential measures due to the implementation of Solvency II.”

The American Council of Life Insurers and the Reinsurance Association of America welcomed the deal in a joint statement; “This agreement seeks to resolve significant insurance and reinsurance regulatory issues for companies doing business in both jurisdictions.”

Cristina Mihai, head of prudential regulation and international affairs at Insurance Europe, also applauded the “removal of the discriminatory collateral requirements that EU reinsurers were subject to when placing business in the U.S.”

Mihai commented both consumers and economies would benefit from; “The application of the same requirements to both EU and U.S. reinsurers placing business in each other’s jurisdictions, which will help support bilateral trade in (re)insurance.”

However, some industry players have taken a more skeptical approach to the deal, Charles M. Chamness, President and CEO of the National Association of Mutual Insurance Companies, noted that while they are yet to release a full analysis, “some provisions appear to be temporary and several areas are ambiguous.”

“This will result in confusion and potentially endless negotiations with Europe on insurance regulation.

“Because the agreement has the authority to pre-empt U.S. insurance law and regulation, this agreement must meet a very high standard,” said Chamness.

The European Commission stated that in the agreement, U.S. and EU re/insurers operating in the other market will only be subject to oversight by supervisors in their home jurisdiction, however, this comes with some limitations on “matters involving solvency and capital, reporting, and governance.”

The National Association of Insurance Commissioners (NAIC) vocally criticised the evolving playing-field, with Ted Nickel, NAIC President and Wisconsin Insurance Commissioner saying; “the potential to use this agreement as a backdoor to force foreign regulations on U.S. companies,” was a great concern.

He said it was “disappointing that…we are finally seeing the details of what purports to be a covered agreement between the U.S. and EU,” and added that the “NAIC is coordinating a thorough review of the agreement to ensure consumer protections are not compromised through the preemption of state law, and we encourage Congress to do the same.”

Morgan Stanley’s equity analysts said the agreement should “help free up some capital for the European reinsurers and the London market names,” but added that timing, scale, and whether this would only affect new business or also existing arrangements was still unclear.

The equity analysts further noted that there is likely to be limited impact, where companies have been operating from a U.S. subsidiary.

On first appearances, the agreement creates an emerging transatlantic landscape with better prospects for successful market navigation – with duplicative regulations removed and less capital required to hold against risk.

A modernised regulatory system could help transatlantic industry players reinvent themselves, becoming more competitive at a time when the market is increasingly challenged by emerging reinsurance hubs.

But zooming into the deal’s details leaves questions as to the extent of the actual impact on the industry, with the major companies already operating out of subsidiaries potentially relatively unaffected, and some elements of the deal looking to be temporary or still remaining ambiguous.

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