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.

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