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Paul Zimmerman
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Looming Preemption: State Regulators Consider Ramifications of U.S. / EU Bilateral Insurance Agreement

Earlier this month at the National Association of Insurance Commissioners (NAIC) Insurance Summit, a panel of regulators – Tennessee Commissioner Julie McPeak, Maine Superintendent Eric Cioppa, and Iowa Commissioner Nick Gerhart – discussed key regulatory initiatives being addressed at the NAIC. One such issue is the role of covered agreements negotiated by federal representatives with the European Union (EU) and other foreign powers, and the effect such agreements could have on the US regulatory system. Last fall, the U.S. Department of the Treasury and the Office of the U.S. Trade Representative (USTR) announced their intention to begin negotiating a covered agreement with the EU.  Under the Federal Insurance Office (FIO) Act, the Secretary of the Treasury, through the FIO, and USTR are authorized to jointly negotiate a covered agreement with one or more foreign governments, authorities, or regulatory entities. The NAIC, as a body focused on state-based regulation, is concerned about the possible preemptive effects such agreements could have.

As explained by the panel, a fundamental philosophical difference underlies the current discussion among insurance regulators from the United States and the European Union regarding the future of insurance regulation. For example, in the EU, insurance regulators value stability and uniformity, monitor insurers at the group level, and focus on capital adequacy. In this model, an insurer that becomes insolvent or requires government intervention is viewed as a failure of regulation. Regulators do not focus specifically on policyholder protection mechanisms, relying instead on systemic stability to provide such protection.

However, in the United States, regulators prioritize protection of policyholders over company stability.  To that end, states have created guaranty funds, insurance-specific rehabilitation, conservation, and liquidation laws, and other mechanisms for protecting insureds. While U.S. regulators seek to avoid insurer insolvencies, they focus on specific legal entities, and an insurer’s insolvency is not necessarily viewed as regulatory failure. In addition, the U.S. regulatory system is decentralized, with each state adopting its own particular means of regulation. While a certain level of uniformity has developed, the differences among states allow for comparisons of various regulatory tools. 

Notably, a covered agreement can preempt state insurance regulatory law where the FIO determines that the state law treats a non-US insurer from a jurisdiction subject to a covered agreement less favorably than a US domiciled insurer licensed in that state.  Moreover, reinsurance collateral requirements imposed on non-US insurers could be subject to preemption by a covered agreement addressing such subject matter.  Historically, US state insurance regulators have imposed collateral requirements as a means of assuring access to funds for the payment of claims in the event of the insolvency of a non-US company.  EU domiciled insurers and their domestic regulators, on the other hand, view such collateral as an inefficient use of capital that is unnecessary in light of the EU regulatory regime’s focus on preventing insolvency. 

With the possibility of a covered agreement on this subject looming, the NAIC continues to take action to address the issue itself.   Specifically, revisions to the Credit for Reinsurance Model Law and Model Regulation addressing these issues will become NAIC accreditation standards on January 1, 2019.  To date, 32 states representing 2/3 of the market have already adopted them.  While these changes continue to be implemented, EU and U.S. representatives continue their negotiations.  

This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.