Lord Levene Castigates U.S. Failure to Reform Reinsurance Collateral Regs

October 17, 2007

He’s said it before, and he’s said again. In a forceful open letter printed in the Financial Times (FT), Lloyd’s Chairman Lord Peter Levene wrote that it is “extraordinary that the US does not offer a level playing field for global reinsurance businesses.”

Levene’s comments came in response to a previous FT article – “US insurers push for federal oversight” (October 11) about efforts to change the regulations for non-US reinsurers, such as Lloyd’s and other European companies, that “provide vital reinsurance to the US industry,” he stressed.

Levene called the U.S. state regulatory system “discriminatory, as “non-US reinsurers (charmingly known as ‘alien reinsurers’) must post 100 percent collateral in the US in respect of the reinsurance they provide to US insurers. US-based reinsurers are subject to no such requirement.”

He also pointed out that “Lloyd’s writes $12 billion of business in the US and provides coverage for a whole range of perils from terrorism to natural catastrophes. Our commitment and service to the US market is not in doubt and we have won praise from regulators and policymakers in the US for our response to claims.

“Lloyd’s has paid $8 billion in gross claims following the atrocities of 9/11 and $10 billion from claims arising out of hurricanes Katrina, Rita and Wilma. We currently have $9 billion tied up in collateral trust funds. Not only is this unnecessary, grossly inefficient and unfair but the costs involved are ultimately passed on to the US consumer.”

Levene’s frustration has been apparent since the day he became Lloyd’s Chairman. At various times he has described the collateral rules, which date from World War II, as protectionist, outmoded, barriers to free trade, unnecessary and discriminatory (See IJ web site Feb. 24, 2006). Year after year the National Association of Insurance Commissioners has taken up the proposals to change the rules, but so far no substantial changes have been made.

The most recent version of these changes isn’t enough. Levene wrote that the NAIC’s proposals for reform, revealed in September, does not materially change anything. “A European reinsurer rated ‘AAA’ would still be required to post at least 60 percent collateral whereas a US reinsurer with a ‘BBB’ rating would not have to post any collateral,” he pointed out.

Levene did recognize that “gaining consensus among 50 state regulators is undoubtedly challenging and it is hardly surprising the industry is questioning the viability of the state system.” However he also noted that there are “those, such as the New York Insurance Department’s superintendent Eric Dinallo, who appreciate the wider context and are taking a more progressive view. The failure to reform will, however, damage US interests.”

Ultimately Levene predicted that there will be increasing “domestic damage” in the U.S. reinsurance market as the country’s “need for reinsurance capacity grows with the increase in risks associated with man-made and natural catastrophes. Access to the international reinsurance market will therefore become increasingly important in meeting the insurance needs of the American people. The damage to US interests internationally will come from the failure to remove these barriers to trade.”

Levene concluded his letter by noting that in other areas of the financial services industry “co-operation and mutual recognition” has been achieved between US and EU financial supervisors.” However, he added, “it is profoundly disappointing that no progress is being made in the area of reinsurance regulation. It is pleasing that certain members of the Congress and the Senate are alive to the need to address this issue and that it is being debated in Washington. However, what we need is action and leadership before further damage is done.”

Source: Lloyd’s – www.lloyds.com

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