20 October 2017Analysis

AM Best welcomes provisional application of US-EU covered agreement

AM Best has issued a cautious welcome for the provisional application of the bilateral ‘covered agreement’ between the US and European Union, which provides regulatory clarity and reduces the regulatory burden for US and EU reinsurers operating in each other’s markets.

The rating agency has issued a new briefing, ‘Signing of Covered Agreement a Good Step for EU and US Reinsurers but Five-Year Journey Ahead,’ which notes the progression towards toward provisional application, whilst pointing out that while some aspects of the agreement took effect when it was signed on 22 September 2017, full implementation may take five years.

AM Best said that of particular importance to EU reinsurers operating in the US is the removal of collateral requirements, subject to certain solvency standards being met. US states have five years to adopt these particular reforms, and collateral requirements for current reinsurance agreements will not be affected.

Catherine Thomas, senior director at AM Best, 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 UK will be able to negotiate a similar deal now that a precedent has been set.”

The briefing notes that US reinsurers will also welcome the removal of the obligation to establish a local presence – either a branch or subsidiary – in the EU. However, AM 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 at AM Best, 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.”