Historically, jurisdictional insurance laws in the United States governing credit for reinsurance have required non-US reinsurers to post 100% collateral in the US for risks reinsured from US ceding insurers. Many international reinsurers complained about these collateral requirements which were deemed barriers for international trade and business.
In response, the United States Congress issued, on 21 July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). This provided a pathway for relief by authorizing the US Secretary of Treasury and the US Trade Representative (USTR) to negotiate covered agreements with one or more foreign governments on the recognition of practical measures with respect to the business of insurance and reinsurance, with authority to prevent US jurisdictional insurance measures that are inconsistent with a covered agreement and result in less-favorable treatment of a non-US Insurer under the covered agreement.
The United States and its territories were required to adopt these prudential measures recognized in the “Covered Agreement” before 1 September 2022 so that state insurance laws are not displaced by the Dodd-Frank Act.
More recently, Puerto Rico adopted the provisions of the Dodd-Frank Act by way of a new law 37-2022 which amends Chapter 46 of the Puerto Rico Insurance Code called “Reinsurance Credit” to incorporate a new mode in which foreign reinsurers can be authorized to transact reinsurance business in Puerto Rico and for domestic insurers to obtain reinsurance credit.
According to the Motives Explanation Section of the new law 37-2022, the European Union, the United States and the United Kingdom signed collaboration agreements known as “Covered Agreements” in order to adopt practical measures to supervise the reinsurance business known as “Covered Agreements” included in the Dodd-Frank Act. Such collaboration agreements promote cooperative relations on the supervision of reinsurance operations within a prudent regulation that allows a substantially equivalent financial solvency regulation base between the participating countries.
This new framework will allow reinsurers domiciled in “Reciprocal Jurisdictions” to be regulated under the same conditions as domestic reinsurers, including the elimination of collateral or guarantee requirements as a condition to sign a reinsurance contract and allow the ceding insurer to recognize a credit for reinsurance obtained from such reinsurer. This would be in the benefit of the insurance market of the island since it represents the expansion of reinsurance purchase options for domestic insurers who can now obtain reinsurance capacity also from reciprocal reinsurers.
We at Kennedys have relevant experience with these types of proceedings in Puerto Rico and are in close contact with the regulator regarding the implementation of this registration.
Authors: Alex Guillamont, Partner for Latin America and the Caribbean; and Lorena Avila, Senior Associate. Miami Latin America and Caribbean hub at Kennedys.