Surety Companies Doing Business With the United States

<RULE> DEPARTMENT OF THE TREASURY <SUBAGY>Bureau of the Fiscal Service</SUBAGY> <CFR>31 CFR Part 223</CFR> <DEPDOC>[Docket No. FISCAL-2021-0006]</DEPDOC> <RIN>RIN 1530-AA20</RIN> <SUBJECT>Surety Companies Doing Business With the United States</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Fiscal Service, Bureau of the Fiscal Service, Treasury. <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This final rule amends the regulations of the Department of the Treasury, Bureau of the Fiscal Service (Treasury), regarding the corporate Federal surety bond program (the program). Treasury is amending its regulations to allow for recognition of additional companies as reinsurers. Treasury is also amending its regulations to incorporate requirements, previously published in supplemental guidance documents, for surety companies to submit information that Treasury uses to perform financial analysis of these companies. Treasury is also reorganizing the existing regulations to modernize and improve their structure. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> This final rule is effective August 9, 2024. </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Melvin Saunders at <E T="03">melvin.saunders@fiscal.treasury.gov</E> or 304-480-5108; Bobbi McDonald at <E T="03">bobbi.mcdonald@fiscal.treasury.gov</E> or 304-480-7098; or David Crowe at <E T="03">david.crowe@fiscal.treasury.gov</E> or 304-480-8971. </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">I. Background</HD> Treasury administers the corporate Federal surety bond program, which issues certificates of authority to authorized surety companies, analyzes the financial statements of applicant and authorized companies to ensure compliance, and publishes lists of companies holding a certificate authority. Treasury also reviews applications by companies to become admitted reinsurers, <E T="03">i.e.,</E> companies permitted by Treasury to provide reinsurance to certified sureties except on excess risks that run to the United States. Treasury administers the program pursuant to 31 CFR part 223 (part 223) and publishes supplemental guidance on its website. Treasury published a request for information (RFI) on December 30, 2019. <SU>1</SU> <FTREF/> The RFI sought public input on a variety of topics relating to Treasury's evaluation of surety companies, as well as the operations of the corporate Federal surety bond program. These topics included, among other things, Treasury's financial analysis methodology, its rules regarding credit for reinsurance, and the documentation it requires to perform its review of companies seeking designation and renewal as certified sureties or admitted reinsurers. The public comments informed, in part, Treasury's development of this rulemaking. <FTNT> <SU>1</SU>  84 FR 72138. </FTNT> On March 3, 2022, Treasury published a notice of proposed rulemaking (NPRM) at 87 FR 12003 to propose amendments to part 223, which implements the provisions of 31 U.S.C. 9304-9308. The NPRM proposed two main amendments to part 223. First, the NPRM proposed to add two new categories of reinsurance companies that can receive recognition from Treasury: complementary reinsurers and alien reinsurers. The proposed amendments would allow Treasury-certified surety companies to receive credit for reinsurance ceded to these companies with reduced or zero collateral, and would also allow complementary or alien reinsurers to reinsure excess risks of certified surety companies not running to the United States. Second, Treasury proposed amending 31 CFR 223.9 to describe in greater detail the financial analysis it performs related to companies applying for a certificate of authority or renewal of a certificate of authority and to incorporate certain requirements previously published in the program's annual and supplemental guidance. Additionally, Treasury proposed various amendments to part 223 to reorganize and modernize the structure of the regulations. Treasury received 13 comment letters from a cross-section of entities associated with the surety industry and other stakeholders. Seven of the comment letters were from surety companies or reinsurers, three were from surety or insurance trade associations, one was from a law firm that represents surety companies, one was from a coalition of environmental groups, and one was from an anonymous individual. Treasury has considered the comments and addresses them below. <HD SOURCE="HD1">II. Analysis of Comments</HD> The public comments were generally supportive of the NPRM's proposed changes to add new categories of reinsurers eligible for Treasury recognition, to add more detailed information regarding Treasury's financial analysis, and to update and modernize the structure of the surety regulations. Treasury did not receive any comments expressing disagreement with the key objectives described above. Several of the favorable comments regarding Treasury's proposal to add new categories of reinsurers eligible for Treasury recognition noted that these changes would benefit the surety industry as a whole by lowering the regulatory burden on surety companies and increasing the reinsurance capacity available to Treasury-certified surety companies. Commenters also concurred with the NPRM that these changes would not increase the risk to the Federal Government of surety companies being unable to carry out their obligations. A surety company commented that smaller and medium-sized surety companies, which typically have a lower underwriting limit than larger firms, might particularly benefit from greater access to international reinsurance without the posting of collateral under the proposal to recognize additional reinsurers. The same commenter also noted that these changes could lower the price of surety bonds in the marketplace, which could not only benefit smaller and medium-sized surety companies but also benefit smaller and minority-owned contractors who frequently obtain surety bonds from smaller or mid-sized surety companies. Thus, in the view of the commenter, the proposed changes could make it easier for small, minority-owned contractors to bid on construction projects for the Federal Government. Some commenters, while expressing support for the NPRM generally, suggested changes or clarifications, as discussed below. <HD SOURCE="HD2">A. Categories of Reinsurers</HD> Two commenters suggested that the NPRM's definition of the two new categories of reinsurers—complementary reinsurers and alien reinsurers—should be expanded to include additional reinsurers that are recognized under state laws that are based on the National Association of Insurance Commissioners' (NAIC) Credit for Reinsurance Model Law (Model 785) and Model Regulation (Model 786). Under the NPRM, to be recognized as a complementary reinsurer, a company must be from a non-U.S. jurisdiction that is subject to an in-force Covered Agreement, among other requirements. A “Covered Agreement” is an agreement, as described in § 223.12(i), regarding prudential matters with respect to the business of insurance or reinsurance between the United States and one or more foreign authorities, entered into pursuant to 31 U.S.C. 313-314. Per the NPRM, the company must also be recognized by at least one U.S. state as a Reciprocal Jurisdiction Reinsurer. A “Reciprocal Jurisdiction” is a jurisdiction that meets one of the following: (1) a non-U.S. jurisdiction that is subject to an in-force Covered Agreement with the United States, (2) a U.S. jurisdiction that meets the requirements for accreditation under the NAIC financial standards and accreditation program, or (3) a Qualified Jurisdiction, as defined by state law that is based on the NAIC Credit for Reinsurance Model Law (Model 785) and Model Regulation (Model 786), which meets certain additional requirements. A “Reciprocal Jurisdiction Reinsurer” is a reinsurer with its head office in or domicile in a Reciprocal Jurisdiction and which meets all capital and surplus, solvency, and market conduct requirements under state law based on the 2019 Amendments to the NAIC Credit for Reinsurance Model Law and Model Regulation. To be recognized by Treasury as an alien reinsurer, the NPRM provided that a company must be from a non-U.S. jurisdiction that is recognized by state law and the NAIC as a Qualified Jurisdiction or as a Reciprocal Jurisdiction, provided the Reciprocal Jurisdiction is not party to an in-force Covered Agreement, among other requirements. A “Qualified Jurisdiction” is a jurisdiction determined by a state insurance supervisor to have appropriate and effective supervision of reinsurance and which meets other requirements defined in state law. The NAIC also publishes a list of Qualified Jurisdictions. The NPRM also required the company to be recognized by at least one state as a Certified Reinsurer or Reciprocal Jurisdiction Reinsurer. A “Certified Reinsurer” is a reinsurer from a Qualified Jurisdiction that meets the requirements of the state insurance laws and regulations based on the NAIC models. The two commenters pointed out that these definitions of complementary reinsurer and alien reinsurer excluded some reinsurers eligible for recognition at the state level, namely reinsurers referred to as Accredited Reinsurers under the NAIC Credit for Reinsurance Model Law and Model Regulation. Under state law based on these models, an “Accredited Reinsurer” is a reinsurer meeting specific conditions, which allow it to receive accreditation from the state and to assume reinsurance from U.S. reinsurers. The commenters suggested that Treasury clarify whether the definitions of the new categories of reinsurers include Accredited Reinsurers and, if not, consider expanding the definitions to include such companies. The NPRM's goal in expanding the types of r ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 87k characters. 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