The Obama administration announced Nov. 20 its plans to negotiate a covered agreement with the European Union (EU) to deal with the potential impact of Solvency II on U.S. insurers.
A new and unconventional federal tool in the insurance regulatory world, the covered agreement could lead to the preemption of state insurance laws across the country with little or no ability for the states or even Congress to stop it.
The Dodd-Frank Act gave exclusive authority to the Office of the U.S. Trade Representative (USTR) and the Treasury to conduct the negotiations, although state regulators have been assured a voice in the process.
For well over a year, the National Association of Mutual Insurance Companies (NAMIC) has been vocal in calling on European insurance regulators to recognize the strength of the U.S. state-based insurance regulatory system. In their Nov. 20 announcement, Treasury and the USTR suggested they would do just that, telling members of Congress that they would seek to “obtain recognition by the EU of the integrated state and federal insurance regulatory and oversight system in the United States.”
Such recognition would “ensure that U.S. insurers and reinsurers will be permitted to operate in the EU on the same regulatory terms as insurers and reinsurers domiciled in the EU or in jurisdictions deemed equivalent under Solvency II.” The EU insurance regulatory reform known as Solvency II took effect on Jan. 1.
These reassuring words should not obscure the possibility that the USTR, which has no insurance expertise or authority, and the Federal Insurance Office (FIO), which is not a regulator, could return from the negotiating table with an agreement that advances the EU project of establishing global hegemony over insurance regulation while simultaneously empowering the FIO to act as a de facto federal insurance regulator.
During the 2014 NAMIC annual convention, the question of how to respond to international pressure to nationalize U.S. insurance regulation was addressed by a panel consisting of the principal players on the U.S. side — Michael McRaith, Federal Insurance Office director; Thomas Sullivan of the Federal Reserve; then-NAIC Chairman Ben Nelson; and Missouri Insurance Director John Huff.
Dubbing themselves as “Team USA,” they insisted that they would not allow developments on the international stage to undermine the state-based insurance regulatory system in the U.S. and said that they would walk away from any negotiation that would have that effect.
Just how sincere those promises were will now become apparent as actual negotiations get underway.
NAMIC has long been calling on our federal agencies participating in these international conversations to seek full (rather than partial) equivalence for the U.S. — essentially recognition from the EU that our state regulators and the rules they enforce are at least as effective as those anywhere else in the world. This is a thornier issue than it should be, however, because Solvency II requires countries to have a “national” insurance regulator.
U.S. negotiators should remind the Europeans that nearly half of the top 50 insurance markets in the world are individual U.S. states, which would seem to indicate that the scope and complexity of state-level regulation in the U.S. is, at a minimum, the equal of insurance regulatory regimes elsewhere in the developed world. The U.S. state-based regulatory structure has served and protected consumers for more than 150 years and would clearly compare favorably with the performance of any other regulator.
Still, it is entirely possible that the EU, on the pretext of reducing solvency risk, could propose additional rules derived from Solvency II — perhaps in regard to capital requirements or group supervision — and demand that the U.S. representatives acquiesce in order to receive an equivalency designation. The insurance industry should be wary of this prospect, and the FIO and the USTR should make it abundantly clear to their EU counterparts that they will leave the negotiating table rather than agree to unnecessary or bank-centric proposals that would be harmful to U.S. domestic insurers.
In 2014, Team USA members promised an open process that would allow for public comment. To their credit, in announcing the commencement of negotiations, the FIO and USTR reiterated that promise and stated explicitly that state regulators would have a voice in the process. But the devil is always in the details, so it is important for those regulators, and the insurance industry as a whole, to keep a watchful eye on progress.
As negotiations begin in earnest, it is crucial that Treasury and USTR representatives focus their efforts on achieving recognition for the existing state-based regulatory system as equivalent, rather than risking potential market disruptions by promising changes to meet European demands. Through the recent financial crisis, and those that preceded it, the U.S. regulatory system has served as the gold standard for consumer protection and solvency regulation, and it should be recognized as such.
If other issues are allowed to be injected into the conversation, it is possible that a covered agreement could ultimately undermine the functional state regulators. Even more disconcerting, as the first covered agreement negotiated under the powers granted by Dodd-Frank, it may become viewed as the precedent for a series of attempts to subvert the authority of state regulation through preemption.
Now is the time for U.S. officials to use all means necessary to avoid regulatory changes and market disruptions due to self-serving pressure from abroad. The U.S. has the power and influence to demand equivalency for our state-based insurance regulatory regime, and that should be the goal of covered agreement.
Robert Detlefsen, Ph.D., serves as the vice president for public policy at the Indianapolis-based National Association of Mutual Insurance Companies.