What You Need to Know About the New Classes of Treasury-Authorized Reinsurers in Advance of the August 9, 2024 Implementation Date

As we reported in our June 24, 2024 Legal Briefing, the US Department of the Treasury (Treasury) recently finalized an update to federal rules (Rule) governing the Federal surety bond program (Program), which adds two new classes of reinsurers. Pursuant to the Rule, insurers with authority to write Federal surety bond obligations (Certified Companies) can now reinsure business with “Complementary Reinsurers” and “Alien Reinsurers” for purposes of obtaining financial statement credit and for purposes of protecting certain risks in excess of the Program’s 10% underwriting limit.¹ The Rule also permits Complementary and Alien Reinsurers to post reduced or zero collateral as security for the benefit of the cedent.

Application criteria and timing considerations with respect to both classes of insurers are set forth below.

I. Complementary Reinsurers

In order for a reinsurer to qualify for Complementary Reinsurer status, it must:

• Be domiciled and licensed to write reinsurance in a non-US jurisdiction that is subject to an in-force Covered Agreement (currently the European Union and United Kingdom);
• Be recognized by at least one US state as a “Reciprocal Jurisdiction Reinsurer;”
• Meet and maintain all capital and surplus, solvency, and market conduct requirements under the applicable in-force Covered Agreement; and
• Submit an application (and fee) to Treasury.

Complementary Reinsurers are generally not required to post collateral in order for Certified Companies to receive financial statement credit for reinsurance.

II. Alien Reinsurers

In order for a reinsurer to qualify for Alien Reinsurer status, it must:

• Be domiciled and licensed to write reinsurance in a jurisdiction that is recognized by any state as a Qualified Jurisdiction (currently, Bermuda, France, Germany, Ireland, Japan, Switzerland, and the United Kingdom) or a non-Covered Agreement Reciprocal Jurisdiction (currently, Bermuda, Switzerland and Japan); and
• Be recognized by at least US one state as an “Accredited Reinsurer,” “Certified Reinsurer,” or “Reciprocal Jurisdiction Reinsurer;”
• Meet and maintain all capital and surplus, market conduct, and other requirements for eligibility as an “Accredited Reinsurer,” “Certified Reinsurer,” or “Reciprocal Jurisdiction Reinsurer” in accordance with the law and regulation of all US states granting it such recognition; and
• Submit an application (and fee) to Treasury.

Alien Reinsurers are generally only required to post collateral to the extent to which it is required by the cedent’s state of domicile, i.e., reduced or zero collateral for Certified Reinsurers that are applying for Alien Reinsurer status, and zero collateral for non-Covered Agreement Reciprocal Jurisdiction Reinsurers and Accredited Reinsurers that are applying for Alien Reinsurer status.

III. The Application Process and Timing

Treasury Department officials have informed us it is currently preparing additional guidance and application forms for Complementary and Alien Reinsurers, which will be made available on its website in the coming weeks. The Rule requires Complementary and Alien Reinsurer applicants to submit to Treasury all information provided by the applicant-reinsurer (or its domiciliary regulator) to any US state regulator in the two most recently completed calendar years.

It is expected that Treasury will begin accepting Complementary and Alien Reinsurer applications as early as August 9, 2024 (i.e., the date the Rule goes into effect). Processing and approval times will depend on the volume of applications received and the date on which the application is submitted. Accordingly, applications are likely to be reviewed on a first-come-first-served basis, and there may be a material benefit to submitting applications on or shortly after the August 9, 2024 implementation date. Please let us know if we can assist with filing your Complementary Reinsurer or Alien Reinsurer applications or answer any questions with respect to the process.

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^{1 As before, risks in excess of the Program’s 10% underwriting limit that run to US government (i.e., Federal bonds) may only be reinsured by Certified Companies.}

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