U.S. Eases Lloyd's Loss Funding Mandate
London Editor
In a story first reported on the NU Online News Service on Oct. 12, U.S. regulators have decided to lower funding requirements for Lloyds of London for its World Trade Center losses and other U.S. terrorist attack-related claims–from the standard 100 percent to 60 percent of gross liabilities.
Other alien reinsurers are still being required to pay the 100 percent gross funding requirement, which some in the market say is unfair, although U.S. regulators promised to consider further relief for selected carriers on a case-by-case basis.
Regulators are also permitting Lloyds to use letters of credit as admissible assets in the Credit for Reinsurance Trust Fund, London market sources say.
"We see this as a liquidity issue, not as a solvency issue [for Lloyds]," said John Oxendine, commissioner of Georgia and chairman of the reinsurance committee for the National Association of Insurance Commissioners.
"We feel very good about the solvency of Lloyds, but no one expected to have one loss of this size. Lloyds was simply unprepared for this big of a single loss, as everybody was," he told National Underwriter.
"I believe this is the time in which the insurance regulators and insurance companies need to work together and cooperate, and thats what were trying to do," he said.
Despite the relaxation of the requirements, Mr. Oxendine said, U.S. regulators continue to be "very strict in maintaining financial solvency" for the Lloyds market. Indeed, he announced that, beginning in November, U.S. regulators will launch a financial examination of Lloyds, which will be a multi-state effort led by Georgia. "At any time during the process of that examination, or after that examination, we reserve the right to contact Lloyds and increase the 60 percent up to any amount, including 100 percent," he said.
"We will have total unfettered access," Mr. Oxendine added. "Were going to look at every reinsurance treaty and every retrocession and trace them. Were really going to pick it apart."
The lowering of the 100 percent requirement applies to the fourth quarter only and might possibly be extended into next year, sources say.
Lloyds officials would not comment on the deal, which was struck with regulators in the middle of the week beginning Oct. 8. It was first reported on NationalUnderwriter.com on Oct. 12, after the Oct. 15 edition of National Underwriter had gone to press.
Singling out Lloyd's has ruffled some feathers in the overseas reinsurance market. Indeed, one reinsurance underwriter in the London-company market, who wanted to remain anonymous, said U.S. regulations should apply to everyone, as should the change in funding requirements.
By permitting only Lloyds to provide 60 percent of gross liabilities, "youre not creating a level playing field for alien reinsurers. Surely a regulator has a responsibility to make sure that the rules apply to everyone," the underwriter said.
Mr. Oxendine said that U.S. regulators had no plans to "do a blanket deal for companies across-the-board because every company is different and every situation is different."
However, he added, regulators will consider proposals from any individual company that is interested in similar liquidity relief. "But, as of yet, no one has come to us," he noted.
Mr. Oxendine said he received a communication from lawyers representing the International Underwriting Association in London, which represents the company market. "They indicated that some of their members were interested in relief. I told them that we would make a decision on a case-by-case basis," he said. "We would need to get detailed proposals, but at this time we have not received any such proposals."
IUA Chairman Stephen Cane confirmed that the IUA plans to apply to U.S. regulators for similar relief on behalf of the entire company market, rather than on an individual basis.
Meanwhile, Adrian Beeby, a Lloyds representative, revealed that the market is facing a total cash call of 780 million ($1.13 billion at current exchange rates), most of which relates to the World Trade Center disaster.
Individual Lloyds members, known as Names, will be responsible for 246 million ($346.7 million) of that total, and the remainder will fall on corporate members, he noted.
Mr. Beeby said that 195 million ($282.8 million) of the total cash call is connected to liquidity issues relating to U.S. trust fund requirements.
David Wharrier, insurance director at Fitch Ratings in London, said that the move by U.S. regulators will "ease the short-term liquidity strain for Lloyds." (See NU, Oct. 8, page 6, for an article in which Lloyd's Chairman Sax Riley discusses the Lloyds trust fund issues.)
Sources at Lloyds reveal that the market has had over 500 claims as a result of the WTC disaster and has paid more than $100 million to policyholders to date.
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 22, 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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