The Good, the Bad and…the Potentially Ugly?
Every day President Trump seems to sign new executive orders, shifting not just the sands in Washington but entire islands of political norms.
To write something that will be relevant when it hits your inbox (pretty much eliminating fruitful discussions of Obamacare repeal and replace and tax reform).
So let’s revisit the current state of FATCA and NARAB. And, we’ll review a “covered agreement” the Obama administration finalized with the EU. The Trump administration will implement it (or not). If it does, we will see how the new guard may deal with international regulatory issues.
The new administration and the likelihood of tax reform this year create two opportunities to reverse the Obama Treasury Department’s decision to subject p-c insurance transactions to the FATCA (Foreign Accounts Tax Compliance Act) regime.
The regulatory provision exempting so-called foreign-to-foreign transactions from FATCA expired January 1. That means insurance brokerages and carriers globally are technically subject to the FATCA requirements if they place coverage that insures any U.S.-based risk even if none of the parties (broker, carrier, client) is physically in the United States. U.S. brokerages with foreign offices or affiliates cannot place any coverage with a carrier that isn’t compliant with FATCA. Foreign competitors may not feel so constrained, because they likely are beyond the reach of the IRS and therefore have a competitive advantage.
We have traction in Congress soliciting support for a complete exclusion of p-c insurance transactions from FATCA. I’m hopeful enactment of that exclusion is achievable soon.
Legislation authorizing the creation of the national licensure clearinghouse, the National Association of Registered Agents & Brokers (NARAB), on which we worked so hard for years, was enacted in 2015. Now, all we need is for the president to appoint the board so we can get it up and running.
The cumbersome nomination process saw many of the insurance commissioners who had been asked to serve bowing out before completion. President Obama did formally nominate a sufficient number of members to constitute a quorum, which would have allowed NARAB to actually get started. Unfortunately, the Senate failed to confirm any of those nominees.
So we start again. And the NARAB board is not exactly at the top of the new administration’s priority list. President Trump has a slew of political appointments that must be made first, including the new director of the Federal Insurance Office (FIO). President Obama’s director did the legwork creating the initial list of candidates and shepherded that process, all of which means we are now waiting—again.
One of the primary powers the FIO has under the Dodd-Frank Act is the ability to enter into “covered agreements” with other countries that concern carrier-related oversight and regulation. An agreement struck between the U.S. and the EU in January would address three main areas:
- Group supervision of insurance and reinsurance groups domiciled in the U.S. or EU
- Reinsurance, specifically with respect to local presence and collateral requirements
- Information sharing between supervisory authorities.
The stated purposes of the agreement are to:
- Eliminate, if certain conditions are met, local presence and collateral requirements for reinsurers domiciled in the other party’s jurisdiction as a condition of entering into a reinsurance agreement with a domestic insurer and/or as a condition of recognizing credit for the reinsurance
- Establish worldwide prudential insurance group supervision authority for the “Home Party” (domicile of the worldwide parent) without prejudice to group supervision of the “Host Party” (where the group has operations, but not the parent’s domicile)
- Establish best practices and promote the exchange of information between supervisory authorities of different parties.
The primary U.S. goal is to ensure continued U.S. insurer and reinsurer access to the EU, which has been cast into doubt by EU “equivalence,” which the U.S. does not satisfy. The primary EU objective is to eliminate U.S. individual state collateral requirements for foreign reinsurers. Both the U.S. and the EU largely achieved their objectives.
The real question now is what the Trump administration will do with the covered agreement. Under Dodd-Frank procedural requirements, the proposed agreement was submitted to Congress for a 90-day layover period. When that expires, the U.S. can execute the agreement, with five years to ensure state requirements are compliant or have been preempted.
The National Association of Insurance Commissioners already is publicly opposing the agreement. Small and regional carriers are wary of proposed new group supervision requirements. And some of the large carriers are not satisfied, because they still would not qualify under the agreement for the full privileges and benefits of EU “equivalence.”
The Trump administration can derail the agreement by:
- Simply withdrawing it from congressional consideration (as with the Trans-Pacific Partnership)
- Refusing to sign the agreement after the layover has expired
- Withdrawing from the agreement at any time, as the agreement permits
- Not effectuating the agreement once it is in place.
Of course, I have no idea what will actually happen. So we continue to wait and learn from what transpires. I can’t wait to see what that is.