A pathway for building greater trust among global regulators
April 12, 2018 by Thomas Leonardi
An important milestone for the insurance industry was achieved in September 2017 with the signing by the U.S and the EU of the long anticipated Covered Agreement on (re)insurance.
When I first became Commissioner of the State of Connecticut in 2011, many European and U.S. stakeholders consistently raised the challenges and expense of complying with U.S. regulatory requirements for reinsurance collateral. Several of my fellow commissioners and I worked hard to address this issue by developing changes to the Credit for Reinsurance Model Law & Regulation (which was subsequently adopted in an overwhelming majority of states). In light of this important development, when the Covered Agreement was initially proposed in 2013, it seemed unnecessary. But I did see the potential value of an international agreement to address this matter (and more importantly, its potential to put to rest the ongoing conflict around the Solvency 2 “Equivalence” issues as they relate to U.S. based insurers).
Now, after many years of intense regulatory and industry debate, I am pleased that the U.S. Treasury Department and the USTR ultimately were able to finalize the Covered Agreement and issue a policy statement that addressed a number of the concerns that the NAIC and other stakeholders had with the Agreement.
AIG has been a strong supporter of the Covered Agreement for a number of reasons. For AIG, as a global U.S. based insurance company with significant operations in the EU, the Covered Agreement provides regulatory certainty by confirming we will be supervised at the worldwide group level by the New York Department of Financial Services, our group-wide supervisor. As a result, the AIG group will not have to monitor and manage two different sets of global group capital, financial reporting and governance requirements. This will eliminate regulatory complexity and save additional costs, which will ultimately be a benefit to our policyholders and employees. The Agreement also importantly affirms the leading role of state regulators as supervisors of U.S. insurance groups. I have long been a vocal supporter of the U.S. state-based system of insurance, and was pleased that the agreement rightly recognizes the long-standing and highly effective work of the states in regulating the U.S. insurance industry. And on a broader level, the Agreement sets an important example of an open, competitive insurance market that brings maximum benefit to policyholders.
With respect to the NAIC’s implementation plan, I support the NAIC’s view expressed, in its recent memo, that collateral removal should only be available for reinsurers in qualified jurisdictions that also agree to adhere to the standards imposed on the EU in the Covered Agreement (i.e., reciprocal removal of reinsurance restrictions and recognition of our U.S. state based system, including group supervision and group capital). AIG is supportive of efforts that result in a more level playing field, fair competition and cross-border risk diversification. I believe removing the reinsurance collateral requirements for the qualified jurisdictions would likely have this result, and I am glad the NAIC is proposing to do this in a way that provides the U.S. insurance market with reciprocal protections and access. I also think it will be important for the NAIC to review these jurisdictions to determine if there are any other significant market access or regulatory barriers that should be removed by such jurisdiction in order to qualify for collateral removal.
It is also helpful that the NAIC is proposing changes to the qualified jurisdiction process to clarify the standards that jurisdictions will need to meet in order to qualify for zero collateral (and the process of removal of qualified jurisdiction status in the event of a breach). It’s essential to make these amendments and requirements as simple and clear as possible. However, while it will be important to have these standards built into the NAIC qualified jurisdiction process, I would still like to see the jurisdictions provide reciprocity and recognition of the U.S system in writing (ideally in a binding manner), in order to provide more certainty and clarity.
How these binding written commitments can best be achieved is still an open question. The NAIC memo acknowledged that testimony received at the Public Hearing encouraged the states to receive “firm commitments” from the jurisdictions in order to qualify for zero collateral treatment. While memoranda of understanding were suggested as a possibility, a few Commissioners at the Public Hearing questioned whether NAIC or the state governments have the authority to enter into binding, enforceable agreements with sovereign foreign governments.
I understand the NAIC’s concerns with the pursuit of additional covered agreements, given they can hold the potential for preemption of State insurance laws. However, I do think that having a legally-binding international agreement between sovereign entities that recognizes the U.S. state based prudential system of insurance could provide additional credibility to the U.S. regulatory system and also greater legal certainty. In particular, binding international agreements with other significant jurisdictions that recognize the U.S. capital regime could be helpful to support the U.S. position on the aggregation-calibration approach to group capital in the International Capital Standard discussions taking place at the IAIS. I am also hopeful that with the collaborative working relationship between the NAIC and FIO, there would be a strong role for the NAIC and the state regulators if indeed it was seen as necessary to pursue additional international agreements.
Regardless of the manner in which the NAIC chooses to achieve mutual recognition and reciprocity, I believe that the outreach and information sharing required as part of this process will lead to greater communication, collaboration, and cooperation amongst regulators of large, internationally active insurance groups. Given the global nature of our industry, this type of trust can only help to bring about more cohesive and coordinated oversight of global insurers, which ultimately would be a benefit to our policyholders.
I am confident that the NAIC and state insurance regulators will work diligently to do what’s best for the U.S. insurance community and its policyholders. AIG stands ready to engage and collaborate with the NAIC as it moves forward with its plan for implementation.
