Credit for Reinsurance Model Law and Regulation: Amendments to Incorporate Covered Agreements

April 5, 2019

At its April 8 meeting in Orlando, the Reinsurance Task Force will be discussing comments it received on proposed amendments to the NAIC Credit for Reinsurance Model Law and Model Regulation ("CFR Model"). The amendments are necessary to incorporate the reinsurance requirements of the so-called "Covered Agreements" — the Bilateral Agreement Between the United States of America and the European Union on Prudential Measures Regarding Insurance and Reinsurance, signed in September 2017, and a similar agreement between the U.S. and UK signed in December 2018. The Covered Agreements prohibit states from requiring collateral as a condition for cedents to obtain credit for reinsurance placed with assuming insurers in the EU/UK that are not authorized to transact insurance in the U.S. In turn, neither the UK nor an EU member country may impose "local presence" or other similar restrictions on U.S. reinsurers.

By way of background, the Reinsurance Task Force and its parent, the Financial Condition (E) Committee, already passed amendments to the CFR Model at the last National Meeting (in November 2018) and the NAIC's Executive/Plenary Committees were to have considered them during its December 19, 2018 meeting. However, the amendments were dropped from the meeting agenda after U.S. Treasury and others expressed concern that they didn't strictly follow language in the Covered Agreements. A drafting group was formed to make additional changes, which culminated in the current draft, exposed on March 7, 2019 for a 25-day public comment period that ended April 1. On April 2, the Reinsurance Task Force published nine letters, representing 14 different interested parties, submitted as comments on the current draft.

Overall, the current draft restricts the discretionary authority of state insurance commissioners, attempts to more closely follow the language of the Covered Agreements and makes technical changes concerning effective date and service of process on state insurance commissioners.


As noted, states can no longer require collateral for insurance placed with certain assuming reinsurers, including those licensed and domiciled (or having their head office) in a "Reciprocal Jurisdiction." The prior version of the CFM Model amendments defined "Reciprocal Jurisdiction" as one that entered into a Covered Agreement with the U.S. and was complying with it as determined by state insurance commissioners. Under the current draft, state insurance commissioners no longer have the authority to determine compliance. Non-US jurisdictions are automatically considered reciprocal if the U.S. has entered into a Covered Agreement with them and they are complying with the agreement, without reference to who evaluates such compliance.

In their letters submitted to the Reinsurance Task Force, most commenters agreed with this change. Others (such as the insurance representative for the European Commission in Brussels) are requesting that all references to compliance be removed, such that being a party to a Covered Agreement is enough to be considered a Reciprocal Jurisdiction (apparently, without verification of actual compliance).


If a Covered Agreement is not in place, a state insurance commissioner can still treat a jurisdiction as a Reciprocal Jurisdiction as long as the jurisdiction satisfies the CFR Model's existing requirements for "Qualified Jurisdictions" and "any additional requirements" specified by state insurance commissioners.

In their comment letters, trade associations representing Bermuda, Japanese and Swiss reinsurers asked that the "additional requirements" language be removed in order to ensure a level playing field between reinsurers in jurisdictions with Covered Agreements (Reciprocal Jurisdictions) and jurisdictions that do not have Covered Agreements, but are already eligible as "Qualified Jurisdictions" under the current CFR Model. Trade groups representing U.S.-based reinsurers also urged a level playing field and suggested new language that would place accredited and other reinsurers on the same footing as those located in a jurisdiction with a Covered Agreement.


Under the prior draft, a cedent could only take credit for reinsurance agreements entered into, renewed or amended on or after the date the assuming insurer satisfied the requirements set forth in the amended CFR Model, and could not take credit for reinsurance of losses incurred, or reserves reported, before such date. The current draft follows the time frame in the Covered Agreement — a cedent may take credit for reinsurance with respect to agreements entered into on or after the date on which a measure reducing collateral takes effect (i.e., a state law or regulation passing the amended CFR Model) and only with respect to losses incurred and reserves reported on or after the later of: (i) the date the assuming insurer has met all eligibility requirements; or (ii) the effective date of the new reinsurance agreement, amendment or renewal. The current draft also clarifies that an assuming insurer cannot withdraw or reduce security already provided in connection with a reinsurance agreement except as provided by the terms of the reinsurance agreement. The parties to a reinsurance agreement are, however, free to renegotiate the reinsurance agreement.

In its comment letter regarding the Effective Date, the International Underwriting Association of London asked the Reinsurance Task Force to include agreements entered into in contemplation of long-tail losses, such as adverse development coverages that are signed after losses occur. The Effective Date currently focuses on agreements under which "losses are incurred after" the date CFR Model legislation is passed, or the effective date of new reinsurance agreements. The IUA suggests giving states authority to approve reduced (or zero) collateral for adverse development coverages and that doing so will not contravene the Covered Agreements.


Reinsurance agreements are no longer required to include a reinsurer's consent to appointment of the state insurance commissioner for service of process. Under the current draft, the commissioner may require that service of process be provided to the commissioner and included in the reinsurance agreement.


The prior draft required that assuming reinsurers promptly notify, and provide an explanation to, state insurance commissioners if: (i) capital/surplus or the solvency ratio falls below the required minimums; or (ii) any regulatory action is taken against the assuming insurer for serious noncompliance with applicable law. The current draft maintains this language, but eliminates the list of specific events that were included in the prior draft as examples of serious noncompliance (violating capital adequacy conditions, having a license revoked or suspended, being subjected to a fine/penalty.) The list was removed because the Covered Agreements do not expressly include such conditions.


Amendments to the CFR Model will not likely be finalized at the Orlando meetings. First, we do not yet know if U.S. Treasury will consider the current draft sufficiently compliant with the Covered Agreements. Second, it remains to be seen whether state insurance commissioners will push back against efforts to reduce their discretionary authority, especially to determine compliance with the Covered Agreements. Most likely, there will be intense discussions at meetings of the Reinsurance Task Force and Financial Condition (E) and Executive Committees, as well as side discussions throughout the meeting, with final amendments being considered by Executive/Plenary via a conference call meeting in late Spring or early Summer.