Lord Levene Urges U.K. Reinsurers to Support Changes in U.S. Trust Fund Collateral Requirements

November 29, 2005

Lloyd’s Chairman, Lord Levene, has called on the London market’s reinsurers to play their part in European efforts to remove the current “inappropriate system” of collateralisation requirements in the U.S.

A Lloyd’s press release noted that Levene, speaking at an Insurance Institute of London’s lecture, said: “After six years, there finally looked to be movement on the issue amongst U.S. regulators, who require foreign reinsurers to place significant levels of collateral in U.S. trust funds if they want to underwrite US reinsurance business.”

Lloyd’s has a great deal of experience with the problem. Although Levene didn’t mention it, Lloyd’s had to come up with more than $2 billion in cash or equivalent in six months in order to bring its U.S. reinsurance trust fund up to 100 percent following the Sept. 11 attacks.

Lord Levene told attendees: “A year ago I told you that I believed that we were making progress, albeit slowly. Twelve months on, we still do not have a result. However, I do believe that after a six year debate with the NAIC things are finally moving to a new level.

“There are now healthy signs from the NAIC that they understand the strength of feeling on this issue. It is increasingly apparent to senior regulators not only that their own federal government – but also global regulators and governments – know that the current system is both antiquated and totally inappropriate for a global industry.”

He also noted that a task force led by European Commissioner Julianne Bowler had produced a white paper that “supports the concept of change towards a new funding model which Lloyd’s believes to be fair – one where collateralisation requirements for reinsurers are to be set according to security ratings irrespective of their country of origin.”

He issued a call to members of the London market to play their part in explaining the situation to their US business partners. “I’d also encourage those of you who work with American cedants to do what you can to influence the situation,” he stated. “One problem which we have identified is that few cedants have a clear understanding of the change being proposed, not least because of the misinformation spread by those who are opposed to change. Anything which you can do to help educate them can only help the process.”

Karel Van Hulle, who heads The European Commission’s Insurance Unit, told participants at Lloyd’s recent European Risk Forum that Europe was finally seeing a breakthrough it is efforts to end the demand in the US for collateral. “It is clear that in some areas we adopt different approaches and as such we believe we can learn from each other,” he noted “We are in discussion with the US regulators and insurance commissioners about the current collateral requirement in terms of the ‘alien reinsurers’ as currently we find the situation somewhat uncomfortable and we believe it will be resolved in the near future.” He added that Europe was seeking a solution that would take into account the reinsurer’s financial strength rating in terms of the levels of collateral required by the US.

On a related topic Lord Levene noted that Lloyd’s Director of Worldwide Markets, Julian James, and his team “have secured another very valuable agreement with US regulators – and that is the deferral of top up funding in respect of the recent hurricanes. It means that the movement of some $2 billion into the trust funds as a result of Katrina and the other hurricanes need not take place until next year, a very useful liquidity boost for the market.”

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