The current U.S. regulation system must change to accept Lloyd’s as a loyal partner rather than reinsurance aliens, the Chairman of Lloyd’s of London told journalists in Washington, D.C. Thursday.
Speaking to the National Press Club, Lord Levene outlined the regulatory issue of over funding reinsurance liabilities. As a non-U.S. or ‘alien reinsurer’ under U.S. regulations, Lloyd’s is required to hold collateral in the U.S., either by way of expensive letters of credit or cash in non-working trust funds, amounting to 100 percent of Lloyd’s gross liabilities. By comparison, U.S. reinsurers reportedly fund their liabilities on a net basis, taking credit for reinsurance purchased.
Levene contrasted the fact that “As we now see on our TV screens 24 hours a day, there is an unbreakable bond which links the United States and the United Kingdom,” with the statement that, “Despite our integral role in this market throughout the past 150 years, Lloyd’s is treated as an alien insurer and reinsurer.” As he said: “Is this really how we deserved to be treated? Wouldn’t equal treatment improve the process for all parties?”
Levene called for a change in the law to allow market forces to operate freely. This, he said, would permit insurance to be priced more competitively and economically.
Lord Levene said, “Currently, we have around $9 billion tied up in funds in the U.S. We are required to deposit cash regardless of the amount or quality of reinsurance protection we have bought from other companies. This represents massive and needless over funding of our liabilities. This funding burden cannot be sustained without a cost. Ultimately that cost is passed on in the price insurance companies are charged for reinsurance cover. Insurance companies in turn must charge policyholders, so the price of these requirements are often borne by the ordinary policyholder.”
“Lloyd’s good reputation and relationship with the U.S. is built on trust,” he said, “and in our long history we have always paid valid U.S. policyholder claims.”
He added, “Demanding that all foreign reinsurers, whatever their size, strength or claims-paying record, lodge 100 percent collateral in the U.S., does not account for the fact that carriers like Lloyd’s are already subject to detailed regulatory oversight in their home country.”
Prudent regulation, he said, will sustain a robust, secure marketplace where risk is spread effectively. Prudent regulation will help create a fair, healthy and vibrant marketplace and allow funds to be used to their best effect.
“Only then can we build a global umbrella of insurance, which can protect us all – our nations, our people and our property – from the new risks we face,” he concluded.
Lloyd’s recently announced record profits for 2002 and record capacity for 2003. The U.S. is the largest international market for Lloyd’s underwriters, accounting for over a third of Lloyd’s premium income.
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