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As Lloyd's and Other Reinsurers Tally Losses from Hurricane Katrina, Debate Over U.S. Trust Funds Resurfaces
September 16, 2005 12:00am
Until finite reinsurance became the foremost regulatory issue, the requirement that non-U.S. reinsurers must maintain trust funds in the United States as collateral for the payment of claims generated some of the most heated discourse among reinsurers and regulators.
The debate typically would ratchet up after high-impact catastrophes when reinsurers were required to almost immediately post 100% of their liabilities into the trust funds.
Now, it appears Hurricane Katrina, the most expensive storm on record, has brought the issue back to the forefront -- as was the case after the terrorist attacks of Sept. 11, 2001.
Lloyd’s, among the most vocal opponents of the trust fund regulation, reiterated its opposition to the U.S. policy this week, although it insisted the company would have no problem meeting all of its Katrina liabilities.
So far, Lloyd's estimates Katrina will create a net loss of $2.55 billion on its businesses. The effect on its central fund -- available to cash-strapped syndicates that have exhausted their own coffers -- would be "immaterial," it said.
Also, "nothing suggests that Lloyd's syndicates would not be able to trade forwards as a result of the Hurricane Katrina," the company said in a statement.
Indeed, Lloyd's financial health is significantly different from what it was four years ago, after the terrorist attacks of Sept. 11, 2001, when the company couldn't meet the full funding requirement by a Nov. 15 deadline as specified in its agreement with the New York State Insurance Department, the regulator that oversees the trust fund.
"The World Trade Center attack came on top of a period of low rates and heavy losses, and there was a problem about Lloyd's meeting the funding requirement immediately after the incident," said Michael Deeny, chairman of the Association of Lloyd's Members. "I don't anticipate Katrina will create a similar crisis."
Lloyd's cash position has remained strong since 2003, the most profitable year in its history, said Deeny. "If you look at the global figures of Lloyds or individual syndicates' accounts, the liquid asset position, and if you compare Dec. 31, 2000 to Dec. 31, 2004, they are clearly in a much stronger financial position," he said.
But the fact that the market can absorb Katrina liabilities doesn't take away from the fact the trust fund requirement is unreasonable, Deeny added. "I agree it's illogical, unreasonable and highly anti-competitive," he said.
After Sept. 11, the National Association of Insurance Commissioners' Reinsurance Task Force eased the funding requirement by extending the deadline to post security. It allowed Lloyd's to fund reinsurance liabilities at 60% of the gross amount on a temporary basis. This temporary relief was made to allow reinsurers additional time to estimate their losses and arrange for the liquidity to put the required amounts in the trust fund (BestWire, Oct. 26, 2001).
As of Sept. 15, no such agreement to relax the rules in the aftermath of Katrina had been offered or was being considered, according to Massachusetts Insurance Commissioner Julianne M. Bowler, who chairs the NAIC's Reinsurance Task Force.
Lloyd's spokeswoman Louise Shield said Lloyd's hasn't yet determined how much of its Katrina losses are from U.S. ceded reinsurance, and thus can't say whether it can meet the trust fund's requirement.
"That would be the next phase of our analysis," said Shield, adding that Lloyd's is, however, "more liquid today than we were at the time of Sept. 11." She said Lloyds has until November to provide the cash infusion needed to meet the fund's requirement.
Lloyd's chairman, Lord Peter Levene, has compared the trust fund requirement to the challenges "a fresh-faced boy receives on his first day at school."
"It's not simply that this is unfair. It doesn't help the American entrepreneur, who is looking for insurance to cover a new business, if Lloyd's and other reputable foreign companies are not competing on a level playing field. How can we offer truly competitive prices if we have to compete with one hand tied behind our back?" Levene said.
Lloyd's has about $9 billion tied up in U.S. trust funds, according to the company. "Those $9 billion sit there, much of it unnecessarily covering our liabilities, when they could be used much better elsewhere. And this is despite the fact that we are already highly regulated in the U.K.," Levene said in 2003.
While there is no indication U.S. regulators are going to relax the rules anytime soon, the debate is set to be on the agenda when U.S. regulators meet in Chicago.
Before then, in about two weeks, a white paper that discusses the pros and cons of the trust fund requirement will be released and circulated among members of the Reinsurance Task Force and interested parties, Bowler said.
"The purpose of the paper is not advocate for one side or the other, but so we can have an active debate on this issue," she said.
(By David Dankwa, associate editor, BestWeek: David.Dankwa@ambest.com)
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