International financial services ratings agency, A.M. Best, has praised the signing of the covered agreement between the U.S. and Europe relating to insurance and reinsurance measures, highlighting benefits for both sides.
The negotiations surrounding the agreement took some time to materialise, but in late September it was announced that the agreement was to be signed, with both parties now working towards provisional applications.
A.M. Best notes that full implementation of the agreement could take up to five years, although some elements did come into effect when the deal was signed, on September 22nd, 2017.
A.M. Best senior director, Catherine Thomas, commented; “However, once implemented, the reforms will have positive implications for liquidity and the fungibility of EU reinsurers’ resources. Lloyd’s and London market reinsurers will be disappointed that this long-fought-for concession will not apply to them post-Brexit, but will hope that the U.K. will be able to negotiate a similar deal now that a precedent has been set.”
Essentially, the covered agreement provides both sides with regulatory clarity and lowers regulatory hindrances for U.S. and EU reinsurance companies that operate in each other’s markets.
For EU reinsurers that operate in the U.S., the removal of collateral requirements is of great importance, says A.M. Best. While for U.S. players operating in the EU, companies will be “relieved” their global operations are not subject to Solvency II regulations.
Furthermore, the ratings agency feels U.S. reinsurers will be pleased they are no longer obliged to establish a local presence in the EU, although it doesn’t feel this will result in the “desolation of legal entities.”
“There remains value in having a local balance sheet and presence on both sides of the Atlantic as clients view this as a sign of long-term commitment to the market and are subject to local laws and insurance regulation, for example, as regards to insurance contract wordings,” explained the rating agency.
The removal of collateral requirements for both parties when operating in the other’s market, the removal of local presence requirements for both parties, combined with the reliance on relevant home supervisor of U.S. and EU insurance groups for supervision at the international group level and, mutual support for the exchange of information between the two sides, is a good step for reinsurers in the U.S. and the EU, says A.M. Best.
The U.S. has five years to adopt reforms, and while the implementation of the agreement might impact individual rated carriers, A.M. Best does not expect this to result in ratings action.
“The impact of the agreement on (re)insurers operating in the two markets will depend on individual business models with favourable implications for some and adverse implications for others,” says A.M. Best.