Courtesy of Barbara C. Matthews
Implementing post-crisis reforms has created strains for the transatlantic regulatory policy community. The large number of technical standards across all major areas of the financial system collided with increased efforts to assert national policy priorities. Policy discord particularly dominated discussion of derivatives regulation, regulatory capital for banks, securitization, and cross-border resolution. In addition, the Transatlantic Trade and Investment Partnership (TTIP), a proposed trade agreement between the European Union and the United States, did not include a financial services chapter before the negotiations broke down, much to the consternation of European negotiators.
Last month, however, transatlantic policymakers may have turned a corner. After years of negotiation and promises to reach agreement, the United States and the European Union signed an international agreement (the “Covered Agreement”) formalizing substantial regulatory cooperation regarding the transatlantic insurance and reinsurance sectors.
What is a Covered Agreement? – A Short History
The Covered Agreement is a direct outgrowth from the financial crisis of 2008. Among other things, the financial crisis revealed deficiencies in the oversight of cross-border insurance companies when AIG failed. The Dodd-Frank Act sought to rectify the regulatory gaps associated with international insurance company oversight by creating a new kind of international agreement applicable only to the insurance sector: a “Covered Agreement.”
Negotiated at the federal level by the Treasury Department and the United States Trade Representative, it creates a legally binding framework for cross-border regulatory cooperation premised on a finding that the signatories have a regulatory system “substantially equivalent” to each other. Importantly, mutual recognition hinges on an outcomes-based determination regarding the level of consumer protection offered by the foreign regulatory system, rather than requiring exactly the same regulatory standards on both side of the Atlantic.
Such a finding holds important implications for foreign insurance companies. Specifically, state-level insurance regulators pledge to eliminate existing collateral requirements for foreign insurance firms. They also pledge to eliminate subsidiarization requirements and to extend national treatment to foreign insurance firms.
The Covered Agreement also holds implications for the allocation of jurisdiction regarding insurance regulation in the United States. Unlike the banking and securities sectors, the federal government currently has no authority to regulate insurance; individual states retain their exclusive jurisdiction in this area. The U.S. Constitution simultaneously assigns to the federal government exclusive authority to operate the foreign policy of the United States, which includes the authority to negotiate legally binding international agreements.
The Covered Agreement can be seen as providing a bridge between these two, otherwise conflicting, jurisdictions by providing a federal framework within which individual insurance regulators at the state level can strike legally binding international agreements with their European counterparts. The Agreement can also be interpreted as encroaching on state regulatory authority by articulating a set of insurance regulation policies as described below.
Challenges on the Horizon
The Covered Agreement establishes a legally binding framework for providing mutual recognition and national treatment to insurance and reinsurance firms seeking to conduct a transatlantic cross-border business. As such, it creates a framework for the free flow of capital – and supervisory information – in the insurance sector at the transatlantic level. This is a significant achievement, particularly amid ongoing and well-publicized cross-border regulatory policy frictions in other areas.
The Covered Agreement does not, however, create a blank check for transatlantic insurance businesses. Nor does it take immediate effect. A number of actions must still be taken by various official sector entities, both in Europe and in the United States, before the Covered Agreement can deliver on its promises.
- U.S. Congress: Congressional committees must approve the Covered Agreement before it can enter into force. However, this is a lower standard than Senate ratification. It is unclear from the legislation whether an actual vote in the committees is required. The Dodd-Frank Act required that the federal negotiators provide regular briefings to relevant Congressional committees during the negotiating period. The prospect for serious political challenge is low. The National Association of Insurance Commissioners (NAIC) has endorsed the Covered Agreement despite having raised objections regarding the negotiating process in the past. Consequently, Congressional approval should be expected.
- European Union: Article 281 of the Lisbon Treaty requires that all three European Union entities (Commission, Council, Parliament) approve the text of a negotiated Covered Agreement. Individual member states can challenge decisions through judicial review at the European Court of Justice.
- Individual States in the U.S. and Europe: Individual states at the sub-federal level must negotiate and sign a Memorandum of Understanding (MOU) with their counterparts in Europe in order to trigger the protections of the Covered Agreement. The Covered Agreement includes as an Appendix a “Model MOU,” which should serve as a guide for state-based negotiators. The Model MOU focuses on commitments to provide confidential supervisory information to counterpart regulators. It is unclear whether individual states (e.g., New York, United Kingdom) could craft additional components to their MOU once these minimum standard terms have been incorporated.
Unless and until the Covered Agreement has been approved at the federal level in the United States and Europe, and until state-level regulators have finalized individual MOUs between their jurisdictions, collateral requirements and other prudential requirements set at the state level will continue to govern the cross-border provision of insurance services. This preserves the balance of power between federal and state authorities in the United States, while providing European regulators with a legally binding international agreement.
It remains to be seen whether and how the Covered Agreement can be enforced against a reluctant state regulator in the United States. There are more questions than answers at this stage. They include: Would the EU have standing to sue a state in state or federal court? If the EU successfully sued the federal government for enforcement of the MOU, would a federal court and/or the federal government have constitutional authority to compel a state-based insurance regulator to conclude an MOU with a European counterpart? Would the U.S. federal government welcome international pressure to enforce the Covered Agreement because it would provide a pretext for creating a federal insurance regulatory framework?
The Covered Agreement represents a constructive first step towards a more positive transatlantic regulatory dynamic. Having agreed in principle to a framework, the hard work starts now. Individual regulators must now begin negotiating the terms of information sharing and other regulatory cooperation requirements normally contained within MOUs in order for their regulatory standards to change in a manner consistent with the Covered Agreement.
The challenges raised during the post-crisis implementation period over the last decade suggest strongly that the path towards implementing the Covered Agreement will not travel a linear trajectory. All eyes will be on the largest U.S. states (e.g., New York, California, Texas, Florida) to see what kinds of information sharing and other terms they agree to with their European counterparts.
Barbara C. Matthews (Duke J.D./LL.M. ’91) is a globally recognized cross-border regulatory policy expert. She is Managing Director at the firm she founded (BCM International Regulatory Analytics LLC) as well as non-resident Senior Fellow at the Atlantic Council. Her past government service includes positions as the first U.S. Treasury Attache to the European Union in Brussels as well as Senior Counsel to the House Financial Services Committee. In the private sector, she also served as the first Banking Advisor and Regulatory Counsel to the Institute of International Finance, Inc. focusing on derivatives regulation and regulatory capital regulation. Barbara can be followed on Twitter @BCMstrategy
 Bilateral Agreement Between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance. Available at: https://www.treasury.gov/initiatives/fio/reports-and-notices/Documents/US_EU_Covered_Agreement_Signed_September_17.pdf
 The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Title V, available at: https://www.govtrack.us/congress/bills/111/hr4173/text
 A covered agreement is “a written bilateral or multilateral agreement regarding prudential measures with respect to the business of insurance or reinsurance that is entered into between the United States and one or more foreign governments, authorities, or regulatory entities and relates to the recognition of prudential measures with respect to the business of insurance or reinsurance that achieves a level of protection for insurance or reinsurance that is ‘substantially equivalent’ to the level of protection achieved under State insurance or reinsurance regulation.” 31 U.S.C. §313(r)(2)
 “The term ‘substantially equivalent to the level of protection achieved’ means the prudential measures of a foreign government, authority or regulatory entity achieve a similar outcome in consumer protection as the outcome achieved under State insurance or reinsurance regulation.” 31 U.S.C. §313(r)(9).
 NAIC Responds to Covered Agreement Signing, NAIC Press Release (22 September 2017) http://www.naic.org/newsroom_statement_170922_responds_to_covered_agreement.htm
 Treaty on the Functioning of the European Union, Article 281(11).