The rating agency suggested in a new report that Dodd-Frank “empowers the Federal Insurance Office to advise the US Treasury and the US Trade Representative in international insurance negotiations, including areas of differentiating regulatory treatments”, which the covered agreement is designed to overcome.
The agreement, which was finalised in January but has yet to be signed, provides a mutual agreement of prudential supervision in the EU and the US, which will eliminate the increasing barriers to US groups operating in Europe.
Under the agreement, EU supervisors will acknowledge and affirm the US insurance regulatory framework, promising to allow US insurers and reinsurers to compete in their markets without the regulations being imposed on them under Solvency II. In exchange, EU insurers and reinsurers will receive fair reciprocal treatment and be able to compete in US markets.
The agreement covers a number of areas of prudential insurance oversight, including reinsurance, group supervision and the exchange of insurance information between supervisors.
According to a joint statement from EU and US representatives, insurers operating in the other market will only be subject to worldwide prudential insurance group oversight by the supervisors in their home jurisdiction.
Tracy Dolin, a credit analyst at S&P Global Ratings, said: "The covered agreement provides a more-level playing field within the world's two largest insurance markets, with about $1.35 trillion and $1.32 trillion in combined 2015 life and non-life premiums generated within the EU and the US, respectively. We believe the covered agreement is a fruitful milestone in increasing US-EU regulatory harmonisation.”
Dolin added: "If the covered agreement were to unravel, we would expect reinsurers and insurers headquartered in the US and EU to come out relatively unscathed with no ratings impact."
President-elect of the National Association of Insurance Commissioners (NAIC) and Tennessee insurance commissioner, Julie Mix McPeak, testified on the covered agreement before Congress today (2 May). The NAIC has expressed concerns about the covered agreement.
McPeak said: “As the states are the primary regulators of the insurance sector and it will be our responsibility to implement the provisions of the agreement, our involvement and buy-in is essential to its success. We have confidence that through the bipartisan efforts of this Congress as well as the commitment of this administration we can resolve the ambiguities and ensure that the US obtains the best deal possible for our constituents."
"The NAIC submitted to Treasury and US Trade Representative a list of provisions to be clarified before the US moves forward with implementation of the agreement. We urge the administration to expeditiously provide the needed clarity of these provisions now rather than taking an imprudent leap of faith that differing interpretations will be 'worked out' at a later date.”