London
19 October 2017
Reporter: Becky Butcher

EU-US Covered Agreement a ‘good step’, says A.M. Best


The signing of the EU-US Covered Agreement is a “good step” for EU and US reinsurers, but full implementation could take up to five years, according to A.M. Best.

In its latest briefing, A.M. Best suggested that the signing of the agreement provides regulatory clarity and reduces the regulatory burden for EU and US reinsurers operating in each other’s markets.

The signature marks the final step in more than 20 years of discussions and a year of formal negotiations between the EU, the US Department of the Treasury and the Office of the US Trade Representative.

A.M. Best suggested that although the signing of the covered agreement may have implications for individual rated entities, “it is not expected that these will be sufficiently material to lead to rating actions”.

It stated: “The impact of the agreement on [reinsurers and insurers] operating in the two markets will depend on individual business models with favourable implications for some and adverse implications for others.”

For EU reinsurers operating in the US, the elimination of collateral requirements will “level the competitive playing field” by allowing them to operate under the same conditions as US companies.

A.M. Best said: “The liquidity and fungibility benefits that stem from this will be a positive for these entities, while the elimination of local presence requirements for US reinsurers operating in the EU improves their liquidity and the fungibility of their capital.”

However, measures that reduce the regulatory burden for foreign companies and promote the cross-border flow of business, increase competition in local markets leading to negative pricing pressure, according to A.M. Best.

The rating agency commented: “Consequently, the agreement may have a detrimental impact on the performance of domestic reinsurers operating in the US and the EU.”

A.M. Best explained that an increase in the level of competition in the local reinsurance market benefits domestic primary insurers, as they are able to take advantage of lower rates.

The rating agency added: “For US insurers, a reduction in the level of collateral posted by their reinsurers will increase exposure to credit risk and the amount of required capital, as calculated by Best’s Capital Adequacy Ratio model, is likely to increase modestly.”

A.M. Best noted that the covered agreement does not prevent those party to a reinsurance agreement from negotiating for the inclusion of collateral.

More news
The latest news from Captive Insurance Times
Join Our Newsletter

Sign up today and never
miss the latest news or an issue again

Subscribe now
XL Catlin appoints new captive director in Asia
17 November 2017 | Hong Kong | Reporter: Becky Butcher
XL Catlin has hired Shiwei Jin as its global programme and captive regional director in Asia
Advantage Insurance hires duo
17 November 2017 | San Juan | Reporter: Becky Butcher
Advantage Insurance has appointed Colin Devine to its board of directors
‘Exciting developments’ in South Carolina’s captive industry
17 November 2017 | Charleston | Reporter: Becky Butcher
Jay Branum of the South Carolina Department of Insurance has revealed the state has “very positive and exciting developments” for its captive insurance industry
‘Explosive growth’ for Tennessee’s captive market
17 November 2017 | Nasville | Reporter: Lorella Fava
After rewriting its captive statute back in 2011, the captive insurance market in Tennessee has seen “explosive growth”, according to the state’s insurance commissioner Julie Mix McPeak
L&C appoints Kate Miller as head of institutions
16 November 2017 | London | Reporter: Lorella Fava
London & Capital (L&C) has appointed Kate Miller as head of institutions
KBRA Europe registered by ESMA
15 November 2017 | Dublin | Reporter: Becky Butcher
Kroll Bond Rating Agency Europe has officially been registered as a credit rating agency by the European Securities and Markets Authority (ESMA), effective 13 November
Captive insurance scholarships awarded in Bahamas
14 November 2017 | The Bahamas | Reporter: Lorella Fava
The Bahamas Financial Services Board (BFSB) and the Insurance Commission of The Bahamas (ICB) has selected two recipients for the Associates in Captive Insurance designation scholarships