Under Federal Law, the Group Capital Calculation (GCC) is the means through which states put in place a “worldwide group capital calculation” to avoid the European Union from imposing a group capital requirement of its own on U.S. firms operating in the EU. On September 22, 2017 the U.S. Treasury Department, USTR, and the European Union announced that they had formally signed a Covered Agreement. The agreement requires states to eliminate reinsurance collateral within 5 years (2022) or risk preemption. In exchange, the EU will not impose local presence requirements on U.S. firms operating in the EU, and effectively must defer to a U.S. group capital calculation for U.S. entities of EU-based firms. On December 18, 2018, a similar Covered Agreement was signed with the United Kingdom (UK), with a similar effective date.
The New Jersey Department of Banking & Insurance recently adopted amendments and a new rule to conform New Jersey rules to the requirement for a “worldwide group capital calculation” pursuant to the Covered Agreements, which were executed by the U.S. government pursuant to 31 U.S.C. § 314. The adopted amendments and new rule do not exceed any minimum standards of the federal government. Below is a discussion of the significance of the GCC and context for the Department’s recent amendments.
Historically, U.S. State insurance regulators have required non-U.S. reinsurers to hold 100% consumer protection collateral within the U.S., for risk assumed from U.S. insurers. Foreign reinsurers' regulators and politicians have objected to this requirement, arguing it reduces capital available for other purposes. State insurance regulators recognizing variation across states, makes planning for consumer protection collateral liability more uncertain, and thus potentially more expensive. As such, the states, including New Jersey, have been working through the National Association of Insurance Commissioners (NAIC ) to reduce consumer protection collateral requirements in a consistent manner, commensurate with the financial strength of the reinsurer and the quality of the regulatory regime that oversees it.
In 2011, the NAIC passed amendments to the Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786). In adopted states, the amendments allow certified foreign reinsurers to post significantly less than 100% consumer protection collateral for U.S. claims.
On June 25, 2019, the NAIC Executive (EX) Committee and Plenary adopted revisions to the Credit for Reinsurance Model Law (#785) and Credit for Reinsurance Model Regulation (#786), which implement the reinsurance collateral provisions of the Covered Agreements with the European Union (EU) and the United Kingdom (UK). These revisions create a new type of jurisdiction, which is called a Reciprocal Jurisdiction, and eliminate reinsurance collateral requirements and local presence requirements for EU and UK reinsurers that maintain a minimum amount of own-funds equivalent to $250 million USD and a solvency capital requirement (SCR) of 100% under Solvency II. The revisions also provide Reciprocal Jurisdiction status for accredited U.S. jurisdictions and Qualified Jurisdictions if they meet certain requirements in the credit for reinsurance models.
As of September 22, 2022, all 56 NAIC jurisdictions had adopted the necessary laws and regulations to satisfy credit for reinsurance requirements under the covered agreement.
Under the New Jersey’s Insurer Holding Company Systems Act, N.J.S.A. 17:27A-3.k(1) (the Holding Company Act), domestic insurers must annually file enterprise risk reports on Form F to recognize risk within each of their enterprises and to establish that such risk is being addressed. U.S regulators have adopted a group capital calculation (GCC) for use in solvency monitoring which the Form F facilitates. The GCC is intended to provide additional analytical information to the lead state regulator of an insurance holding company system, for use in assessing group risks and capital adequacy to complement the current holding company analysis in the U.S. It includes information on potential risks to policyholders emanating from outside the insurance companies, as well as the location and sources of capital within the group. The calculation will help state insurance regulators perform an assessment of capital when combined with other information obtained by state insurance regulators. This includes group organizational information provided on Schedule Y, enterprise risk information on Form F, and internal risk self-assessment information in Own Risk and Solvency Assessment (ORSA) filings (where applicable to a particular insurance holding company system, based on, among other things, size).
Questions on the Group Capital Calculation, the Department’s recent amendments or its significance in U.S. insurance solvency regulation can be directed to Cynthia J. Borrelli, who directs the firm’s insurance and healthcare regulatory/transactional practice.