Best’s Briefing: Signing of Covered Agreement a Good Step for EU and U.S. Reinsurers but Five-Year Journey Ahead

Investment Weekly News

By a News Reporter-Staff News Editor at Investment Weekly News -- The bilateral "covered agreement" between the United States and European Union provides regulatory clarity and reduces the regulatory burden for U.S. and EU reinsurers operating in each other's markets.

A new briefing from A.M. Best, "Signing of Covered Agreement a Good Step for EU and U.S. Reinsurers but Five-Year Journey Ahead," notes that the United States and the EU are now progressing toward provisional application, and while some aspects of the agreement took effect when it was signed on 22 September 2017, full implementation may take five years.

Of particular importance to EU reinsurers operating in the United States is the removal of collateral requirements, subject to certain solvency standards being met. U.S. states have five years to adopt these particular reforms, and collateral requirements for current reinsurance agreements will not be affected. Catherine Thomas, senior director, said: "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."

The briefing notes that U.S. reinsurers will also welcome the removal of the obligation to establish a local presence - either a branch or subsidiary - in the EU. However, A.M. Best thinks it is unlikely that the signed agreement would lead to the desolation of legal entities, whose purpose was in part to avoid the need to post collateral. Yvette Essen, director, research & communications, added: "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."

A.M. Best's briefing also states that although the execution of the covered agreement may have implications for individual A.M. Best-rated entities, it is not expected that these will be sufficiently material to lead to rating actions. 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.

To access a complimentary copy of this briefing, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=267203. A.M. Best is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com. Copyright © 2017 by A.M. Best Rating Services, Inc. and/or its subsidiaries.ALL RIGHTS RESERVED. View source version on businesswire.com: http://www.businesswire.com/news/home/20171017006758/en/