Reinsurance Association Issues Public Comment on Treasury's Fiscal Service Bureau Notice

WASHINGTON, March 6 -- Karalee C. Morell, senior vice president and general counsel at the Reinsurance Association of America, has issued a public comment on the U.S. Treasury Department's Bureau of the Fiscal Service notice entitled "Surety Companies Doing Business with the United States; Request for Information". The comment was written on Feb. 13, 2020, and posted on March 5, 2020:

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The Reinsurance Association of America (RAA) appreciates the opportunity to submit comments in response to the U.S. Department of Treasury's Bureau of Fiscal Service Request for Information relating to surety companies doing business with the United States. RAA is a national trade association representing reinsurance companies doing business in the United States. RAA membership is diverse, including reinsurance underwriters and intermediaries licensed in the U.S. and those that conduct business on a cross-border basis. The RAA also has life reinsurance affiliates.

Background

The U.S. Department of Treasury, through the Bureau of Fiscal Service, is responsible for approving corporate sureties that may issue or reinsure federal bonds. A number of federal laws require the posting of a surety bond or a fidelity bond as a condition for doing business. The requirements for obtaining a certificate of authority as an approved issuer of federal bonds are set forth in the Code of Federal Regulations, 31 C.F.R. 223.1 et seq., and in an Annual Letter to Executive Officers of Surety Companies reporting to the Treasury (the "Annual Letter").

The process for obtaining U.S. Treasury approval as a reinsurer is similar to achieving accredited reinsurer status in any given state. U.S. Treasury approval of corporate sureties impacts not only upon an insurer's ability to issue or reinsure federal bonds, but also the ability to issue or reinsure surety bonds at the state or local level, because some states and many municipalities simply defer to the U.S. Treasury standard. U.S. Treasury requirements differ from state insurance laws in two important respects. The first concerns the valuation of assets and liabilities on an insurer's balance sheet, while the second concerns the maximum amount of risk an insurer may retain with regard to any one policy. In each case, differences between U.S. Treasury and state credit for reinsurance laws make it more difficult for an insurer to obtain a certificate of authority from U.S. Treasury as an approved insurer or reinsurer of federal bonds.

Schedule F Credit for Reinsurance. U.S. Treasury Regulations allow credit for reinsurance if the reinsuring company holds a certificate of authority from the Secretary of the Treasury or has been recognized as an admitted reinsurer. The Regulations, however, only give recognition to a reinsurer that is a U.S. company or a U.S. branch of an alien company. The Treasury Regulations do not contemplate reduced collateral requirements for large assuming reinsurers in good financial condition. Thus, a ceding insurer may receive no credit or less than full credit from the U.S. Treasury for business ceded to an alien reinsurer that is permitted by a state to post security for less than the full amount of its liabilities.

Credit for Reinsurance of Excess Risks. State insurance laws uniformly prohibit an insurer from retaining risk on any one subject of insurance in an amount exceeding 10% of the insurer's policyholder surplus. U.S. Treasury Regulations contain a similar underwriting limitation equal to 10% of an insurer's paid-up capital and surplus. Treasury imposes this limitation not only upon surety bonds, but on all policies of insurance written by an insurer regardless of whether the Federal government is a party to the bond or policy. Unlike states that afford a credit for reinsurance by an approved reinsurer, U.S. Treasury requires protection of the excess risk by coinsurance, reinsurance with a U.S. Treasury approved reinsurer, or the deposit of assets in trust for the protection of the domestic insurer. Thus, U.S. Treasury will not give recognition to business ceded to an alien reinsurer approved by a state or the NAIC, where such insurer is not also approved by the U.S. Treasury.

In general, RAA's members do not believe that broad changes to the Treasury Regulations or Annual Letter are necessary or appropriate. The surety market is healthy and operating well. Fiscal Service should limit any changes to the Treasury Regulations to two issues: (1) synthesizing the regulation with the U.S. approach to collateral as evidenced by the NAIC Credit for Reinsurance model law and regulation and the Covered Agreement; and (2) modifying the regulations to level the playing field regarding how companies seeking a certificate of authority are evaluated.

Covered Agreement and State Law Regarding Collateral

Under the authority granted by the Dodd-Frank Act, on September 22, 2017, the United States and the European Union signed the Bilateral Agreement Between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance ("Covered Agreement"). The Covered Agreement was negotiated by the Department of Treasury's Federal Insurance Office and the U.S. Trade Representative (USTR), with strong participation and involvement by state insurance commissioners. Although the Covered Agreement addresses local presence, collateral and group supervision requirements, only those relating to collateral treatment are relevant here. Specifically, the Covered Agreement eliminates collateral requirements on a prospective basis for reinsurers that meet requisite supervisory capital and surplus requirements, maintain specified solvency ratios, and meet other specified requirements, including reporting requirements relating to financial, solvency, claims and reinsurance information. The Covered Agreement states that parties to a reinsurance agreement are explicitly still free to negotiate for collateral. Pursuant to the agreement, the U.S. has five years from the date of execution to conform its laws to comply with the agreement.

On June 25, 2019, the National Association of Insurance Commissioners (NAIC) adopted revisions to the Credit for Reinsurance Model Law and Credit for Reinsurance Model Regulation that incorporate relevant provisions of the Covered Agreement. The 2019 NAIC model law and regulation are intended to replace the 2011 model law and regulation, which are currently in effect in all U.S. states. In addition to addressing treatment of EU jurisdictions as required by the Covered Agreement, the 2019 NAIC model law and regulation is written more broadly to include other jurisdictions that meet the NAIC's assessment of regulatory strength. A reinsurer from any jurisdiction deemed to be a Reciprocal Jurisdiction (currently EU member states, Bermuda, Switzerland and Japan) that meets the solvency and reporting requirements is eligible to be a "reciprocal reinsurer" and thus can get the benefit of zero collateral treatment.

The 2011 model law and regulation reduced (but did not eliminate) reinsurance collateral requirements for eligible reinsurers domiciled outside of the United States pursuant to a sliding scale based on the reinsurer's solvency and financial ratings. Although the 2011 rules initially were viewed with trepidation, experience has proven that allowing reduced collateral has had no adverse consequences for the insurance industry. The Covered Agreement, and the 2019 NAIC model law and regulation, continue the process of eliminating collateral requirements in light of the strong reinsurance market and ample reinsurance capacity for the U.S. ceding market. The robust U.S. state regulatory framework provides ample protection to U.S. ceding companies.

Application to Surety Regulations

As noted above, the RAA supports targeted changes to the Treasury Regulations and Annual Letter consistent with the U.S. approach to collateral as evidenced by the 2019 NAIC Credit for Reinsurance model law and regulation and the Covered Agreement. Specifically, we support the removal of mandatory collateral requirements where the company seeking to operate under a certificate of authority meets minimum specified solvency requirements and provides sufficient information to allow the Fiscal Service to evaluate/confirm that those requirements have been met. In addition, the RAA supports a level playing field for qualified companies to receive a certificate of authority. The principles recognized in the Covered Agreement advanced by the Department of Treasury as well as the 2019 NAIC rules include both recognition that mandatory collateral is unwarranted when strong solvency requirements are met and support for equal treatment of financially strong reinsurers from well-regulated jurisdictions. Modifications to the Treasury regulations consistent with these concepts will align the Treasury regulations with both state law and the Covered Agreement.

Conclusion

We appreciate the opportunity to offer comments and work with the Bureau of Fiscal Service on ways to modernize and improve its process for evaluating surety companies doing business with the United States. We support regulations that allow Treasury to carefully evaluate security of reinsurance purchased by U.S. ceding companies who also write surety business in favor of the federal government but urge Treasury to consider modernization of its approach consistent with state law. Please do not hesitate to contact us with any questions or concerns.

Sincerely,

Karalee C. Morell

SVP & General Counsel

Reinsurance Association of America

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The notice can be viewed at: https://www.regulations.gov/document?D=FISCAL-2019-0002-0009

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