NAIC Backtracks On Lloyd's Treatment

State insurance regulators have backtracked and decided not to grant preferential treatment to Lloyd's of London on funding requirements for claims resulting from the Sept. 11 terrorist attacks.

During a roundtable discussion last week, the National Association of Insurance Commissioners, meeting for a Washington, D.C. summit, withdrew its earlier recommendation to allow Lloyd's extra time to put aside 100 percent of the funding needed for World Trade Center losses. The reversal came about while the NAIC membership and the Reinsurance Task Force discussed the need to fully evaluate liquidity issues on a syndicate-by-syndicate basis before granting an extension to the entire Lloyd's market.

Earlier in the week, a committee of regulators had confirmed an earlier decision to allow Lloyd's to set aside only 60 percent of its share of the estimated costs. But days later, the task force declared that the requirement of 100 percent funding by Nov. 15 applied to all multiple beneficiary trust reinsurers.

“The World Trade Center disaster has brought into sharp relief the fact that current requirements for 100 percent funding [of gross reinsurance liabilities] are onerous and clearly amount to double counting, resulting in liquidity issues that are unnecessarily penal for all alien reinsurers,” said Stephen Cane, chairman of the London-based International Underwriting Association and chief executive officer of Alea London.

“Whatever the outcome of the current debate [at the NAIC], it is clear that what the alien market has been calling for over the last 18 months is relevant and necessary,” he said.

Alien reinsurers have been calling for a reduction in the 100 percent funding requirement. One suggestion that has been posed is that funding requirements be less onerous if a company has a higher security rating.

In announcing the decision on Lloyds, the NAIC said that if any funding levels of less than 100 percent should occur, the task force will work closely with the New York Insurance Department, as domiciliary regulator of the trusts, to perform the necessary analysis and identify appropriate remedies.

The task force also reported that an examination of Lloyd's would take place before Dec. 31 to analyze and verify loss estimates prepared by Lloyd's. The NAIC said that the purpose of the examination is to assess the security provided to U.S. insurers who transfer risk to Lloyd's.

In a statement clarifying the Task Force's position, the NAIC said today that 100 percent of funding of gross liabilities “has been and continues to be the legal requirement for credit for reinsurance” for the Lloyd's syndicates.

The NAIC added that New York State Insurance Superintendent Gregory V. Serio will handle implementation of funding requirements and will “exercise his prerogative to determine in the first instance if funding requirements are met.”

According to Georgia Insurance Commissioner John Oxendine, who chairs the Reinsurance Task Force, “Each state regulator also has the authority to determine if credit for reinsurance requirements are met in his or her respective state.”

“However, state regulators are in continuing discussions with Lloyd's of London regarding the appropriate implementation of funding requirements,” he added.

Commenting on the Task Force's current decision, Mr. Oxendine remarked that the NAIC has “always seen the funding issue as a liquidity concern for Lloyd's, not as a solvency issue.” He stressed that the NAIC remains “positive about the solvency of Lloyd's.”

He also indicated that the Task Force has received “detailed submissions” from Lloyd's on the gross and net exposures of syndicates and reinsurance recoverables. He noted that the loss is spread over more than 130 Lloyd's syndicates.

Additionally, submitted documents indicate that Lloyd's has extensive protection from reinsurers rated “double-A” or better by Standard & Poor's, Mr. Oxendine said.

Separately, last week, Standard & Poor's in London said that Lloyd's gross loss relating to the Sept. 11 attacks in the United States is estimated to be 5.4 billion ($7.7 billion), net of inter-syndicated reinsurance.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 29, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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NAIC Backtracks On Lloyd's Treatment

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