In response to the 2009 financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act,  commonly referred to as “Dodd-Frank.” As part of Dodd-Frank, Congress passed the Nonadmitted and Reinsurance Reform Act of 2010 (NRRA) in an effort to address needed regulatory reforms for the nonadmitted (or surplus lines) insurance industry and for the reinsurance industry generally. In addition to reforms in these two areas, Dodd-Frank also established the Federal Insurance Office (FIO) within the United States Department of the Treasury (Treasury). This office is primarily designed to gather information, monitor trends in the insurance industry and provide advice to the industry. While the FIO has no regulatory authority per se, it represents the United States in international negotiations with respect to insurance regulation and has a seat on the executive committee of the International Association of Insurance Supervisors.
Last spring, the European Council directed the European Commission to negotiate a “covered agreement” regarding reinsurance with the United States. In recent years, there have also been efforts in the United States to address some of the concerns regarding reinsurance collateral raised by the European Council and the various interested parties. If this effort is successful, both parties would seek to coordinate and reduce U.S. reinsurance collateral requirements for E.U. reinsurers below the 100% level at which all non-U.S. reinsurers are generally required to post security to allow their US ceding companies to receive statutory credit for reinsurance. Thus, the announcement by the U.S. Treasury and U.S. Trade Representative in November 2015 of plans to negotiate a covered agreement on reinsurance collateral with the European Union Presidenthardly came as a surprise.
Under the 2011 amendments to the NAIC Credit for Reinsurance Model Law & Regulation (the “models”), non-U.S. reinsurers from “qualified jurisdictions” can apply to become “certified.” A “certified reinsurer” can be eligible to post less than 100% collateral for reinsurance assumed from U.S. ceding companies (75%, 50%, 20%, 10% or 0% collateral) depending on the reinsurer’s financial strength ratings from recognized agencies and satisfaction of other criteria.
Bermuda, France, Germany, Ireland, Japan, Switzerland and the United Kingdom are currently designated as “qualified jurisdictions,” so that reinsurers from those jurisdictions are eligible to apply to become certified, including Lloyd’s syndicates. The NAIC continues to work on issues regarding “passporting” of certified reinsurers in order to allow a non-U.S. reinsurer, that becomes certified in one state, to obtain certification from other states under a virtually automatic process, rather than seeking full certification in each additional state.
Currently, only 32 states have enacted the 2011 amendments. This represents more than 66% of direct written insurance premiums in the United States. Additional states have legislation pending or are otherwise considering adopting the amendments.
Despite these efforts, various parties are still frustrated with the U.S. reinsurance collateral requirements because none of the recent changes in the reinsurance collateral requirements, including the “certified reinsurer” status or the reinsurance provisions in Dodd-Frank, have led to uniform standards for reinsurance collateral reduction in the United States.
The FIO has consistently expressed the view that reinsurance should be regulated at the federal level instead of at the state level. Under Dodd-Frank, the FIO and the U.S. Trade Representative have the authority to enter into such an agreement in an area in which the various state insurance laws and regulations treat non-U.S. insurers differently than U.S. insurers and the FIO has repeatedly stated that it would consider a “covered agreement” for reinsurance under the statute’s authority to do so.
In June 2015, the FIO announced that it had commenced the process of negotiating a covered agreement with the European Commission. The NAIC and most states oppose a covered agreement for reinsurance in large part because this would constitute a federal infringement of an area of law that has historically been reserved to the states. The NAIC argues that there is no need for such an agreement since the NAIC reinsurance model amendments and their adoption by the states already adequately address these issues.
Despite this defense of the state-based insurance regulatory regime, the NAIC is mindful of the concerns about the lack of harmony among the states including the fact that many states either have not adopted the 2011 reinsurance model amendments or have done so in a disparate manner. To address these concerns, one alternative is for the NAIC to require states to adopt the NAIC reinsurance models, including the 2011 amendments, as a condition for NAIC “accreditation” – i.e., make passage a requirement for states to be members in good standing of NAIC. This would essentially force all states to adopt the models in a uniform way.
In early June of 2015, not long after FIO’s “covered agreement” announcement, the European Union granted the United States “provisional equivalence” for ten years, but only for solvency calculation. If the European Union uses the equivalence decision as leverage to seek a covered agreement (particularly as a requirement for granting permanent equivalence to the United States), the United States might enter into a covered agreement with the European Union.
Lloyd’s of London insurer Novae Group P.L.C. and insurance-linked securities fund manager Securis Investment Partners L.L.P. announced last fall that Lloyd’s syndicate 6129 had received approval from Lloyd’s to launch a special purpose syndicate focused on U.S. property excess and surplus lines business with stamp capacity of $75 million, as of January 1, 2016. The two companies said the special purpose syndicate “represents the evolution of an existing relationship between Novae and Securis, in which a portion of U.S. insurance facilities business is currently ceded to Securis on a collateralized basis.” Syndicate 6129, they said, will expand the companies’ portfolio of U.S. facilities business. Novae also operates multiline syndicate 2007 at Lloyd’s. 
On February 20, 2016, United Kingdom Prime Minister David Cameron announced that his Government would recommend to the British people that the United Kingdom should “remain” a part the European Union and that a referendum on this issue would be held on June 23, 2016. The insurance world is wary of the impact of a potential withdrawal by the United Kingdom from the European Union. There are a number of issues that arise from a possible U.K. withdrawal from the European Union including any effect that a covered agreement between the European Union and the United States might have on U.K. insurers and the possible impact on Lloyd’s syndicates that have received “certified reinsurer” status including the possible loss of certification or other negative consequences.
Another critical issue is what impact a U.K. withdrawal might have on the surplus lines industry in the United States especially given the fact that the largest surplus lines insurers in the U.S. market based on direct premiums written in 2015 were Lloyd’s syndicates, which claimed a 20.3% share of the market with $8.16 billion in direct premiums written. Some potential factors impacting this issue include:
1. The total scope of a “covered agreement”: Would any “covered agreement” be limited to reinsurance collateral or would other topics (including Lloyd’s as a surplus lines market) be included?
2. Would the reduction of reinsurance collateral requirements, across the board, indirectly encourage the U.S. surplus lines industry to lobby harder to loosen the grip of state regulators on surplus lines insurance regulation in a world where new risks, particularly in cyber risk and security or other unique, distressed and cutting edge risks, are becoming, in and of themselves, a new and more competitive aspect of insurance business?
3. Would a vote in favor of the United Kingdom leaving the European Union profoundly affect the London insurance market and put billions of dollars in premiums at risk? Could this even encourage more entrants into the surplus lines market?
U.K. Prime Minister David Cameron’s four key objectives in calling a referendum for withdrawal from the European Union are:
◾ Economic governance: Securing an explicit recognition that the euro is not the only currency of the European Union, to ensure countries outside the Eurozone are not materially disadvantaged.
◾ Competitiveness: Setting a target for the reduction of the “burden” of excessive regulation and extending the single market.
◾ Immigration: Restricting access to in-work and out-of-work benefits to E.U. migrants. Specifically, ministers want to stop those coming to the United Kingdom from claiming certain benefits until they have been residents for four years.
◾ Sovereignty: Allowing Britain to opt out from the European Union’s founding ambition to forge an “ever closer union” of the peoples of Europe so it will not be drawn into further political integration, which means, in effect, giving greater power to national parliaments to block E.U. legislation.
However, these objectives may clash with the goals of other Eurozone nations, such as France and Germany, possibly leading to referenda in either or both of these original European Union nations and, conceivably to the disintegration of the European Union, with potential adverse consequences not only to Lloyd’s syndicates but also to certified reinsurers from all three nations.
In addition to a possible U.K. withdrawal, U.S. national politics could also affect any covered agreement. A presidential election will take place in November 2016. Since its passage, Republicans have vowed to repeal the Dodd-Frank Act. This included Mitt Romney in 2012 and the current field of Republican candidates. This raises a separate question of how any repeal might impact the regulation of the reinsurance and surplus lines industries currently regulated by the NRRA. Once this is clear – uniformity and equivalence in regulation cannot help but have an impact on the surplus lines industry.
It is still too early to answer many of these questions. However, many of the answers to these issues, and so many more, will start to surface given the important elections scheduled in the United Kingdom and the United States in 2016 and any negotiations that might take place for a “covered agreement” between the European Union and the United States going forward.
* The author wishes to acknowledge the substantial contributions to this Article of Aaron J. Aisen, an associate in the Buffalo, N.Y., office of Goldberg Segalla, LLP. The author also wishes to note that an earlier and substantially identical version of this Article appeared in Insurance Day on April 29, 2016. This Article appears with the permission of Insurance Day which is published in the United Kingdom.
 Pub. L. No. 111–203, 124 Stat. 1376–2223 (effective July 21, 2011).
 Subtitle B of Title V of Dodd-Frank.
 U.S. to Pursue Covered Agreement with EU for Re/Insurers, Ins. J., Nov. 22, 2015.
 The notion of a “covered agreement” was included in Dodd-Frank as stand-by authority for the Treasury and the United States Trade Representative (USTR) to address, if necessary, those areas where U.S. state insurance laws or regulations treat non-U.S. insurers differently than U.S. insurers, such as reinsurance collateral requirements. National Association of Insurance Commissioners, Covered Agreement on Reinsurance Collateral Issue Brief (Aug. 26, 2015).
 Guy Soussan & Philip Woolfson, Towards a Three-Speed Equivalence under Solvency II, Ins. Day, Jan. 14, 2014.
 Sarah Veysey, Lloyd’s OKs Special Purpose Syndicate for U.S. Excess and Surplus Lines, Bus. Ins., Nov. 24, 2015.
 www.parliament.uk, European Union Referendum Bill (HC Bill 2), May 28, 2015; EU Referendum: Questions You Asked the BBC, BBC News, Mar. 1, 2016.
 Lloyd’s syndicates were followed by American International Group, Inc., primarily through its Lexington Insurance Company unit, which had an 11.6% share with $4.68 billion in direct premiums written.
 Q &A: What Britain Wants From Europe, BBC News, Feb. 17, 2016.
 Mitt Romney Mum on How to Regulate Big Banks, Boston Globe, May 2, 2012;Entire GOP Field Would Repeal Dodd-Frank, Return Power To Wall Street, Am. Bridge 21st Century, Oct. 28, 2015; GOP Candidates Embrace Rhetoric Against Big Banks, but Not Rules, Wall St. J., Nov. 11, 2015.