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Ad-nauseum: Investor group raises ire of New York regulator

The Journal of Commerce

Monday, April 20, 1998

By Ron Lent Journal of Commerce Special

A seemingly innocuous newspaper advertisement has ignited another bout of controversy involving Lloyd's of London's American investors and the New York Insurance Department.

Raising the ire of the American Names Association is the regulator's plan to reduce funding of the London-based insurance market's U.S. surplus lines business to 50% of gross liabilities. Since 1995, Lloyd's has funded at 100% of gross liabilities.

So Policyholder ReserveWatch, an ANA offshoot ran an ad in the April 15 edition of the Journal of Commerce, "Are Lloyd's of London's Policyholder Reserves Properly Protected?"

Among other things, the ad says a departmental audit found Lloyd's American trust funds, deposited in New York, to be "deficient by $18.3 billion" and that auditor Coopers & Lybrand was unable to provide an unqualified audit of Lloyd's accounts.

"Much to the consternation of nearly all other state insurance commissioners, these changes were made unilaterally, without consultation," the ad reads. "No other U.S. insurance department has followed the NYID in reducing Lloyd's reserving requirements."

ANA Executive Director Jeffrey Peterson said the ad was run because "Policyholders need to know the historical facts and current issues surrounding Lloyd's policyholder reserves accounts."

Because of its unique structure as an association of separate syndicates rather than as a company, Lloyd's does business in the U.S. on a surplus lines basis under a different regulatory structure.

Mr. Peterson's association represents 400 American "Names" who rejected Lloyd's restructuring plan. These individuals, unlike the corporations that invest in Lloyd's, have unlimited liability for any losses incurred by their underwriting syndicates.

The department "wants to change its own solution to the trust funds deficiency problem. The deficiency problem still exists."

Mr. Peterson said that the group "doesn't want the U.S. insurance industry to continue to be undermined by a lack of factual disclosures by Lloyd's and the New York Insurance Department surrounding the Lloyd's American Trust Fund."

Reaction was swift.

"This ad in the paper is full of lies and inaccuracies. It's an outrage that this would be printed like this," said John Calagna, spokesman for Superintendent Neil Levin. "The fact is New York has not reduced the funding yet to 50%."

Already working with NAIC

He said the department is already trying to resolve difference with the National Association of Insurance Commissioners, which has questioned the department's decision to act without consulting it.

"The decision to go down to 50% in early 1997 was made prior to Superintendent Levin taking the position, and they're saying in the ad that Mr. Levin made "a startlingly change. There was nothing startling about it," Mr. Calagna said. "It was a recommendation of the insurance regulatory staff of the Department."

William Pitt, Lloyd's U.S. spokesman, called the ad " seriously misleading. It's fundamentally inaccurate on a number of points."

For instance, he said, "it's not the case that ‘no other U.S. insurance department has followed the department in reducing Lloyd's reserving requirements," as the ad alleges.

A visit to London

Mr. Pitt said an NAIC task force "this year visited London to perform an on-site examination. The task Force determined (reduction) wold be prudent, and in their meeting in March in Salt Lake City they agreed to the reduction of the surplus lines funding from 100% to 50%."

He added that since Lloyd's reconstruction plan took effect in late 1996, rating firms A.M. Best and Standard and Poor's have given Lloyd's high rating. Mr. Pitt also took issue with Policyholder ReserveWatch itself, saying, "it is not a policyholder organization" since it represents a small percentage of 3000 U.S. investors.

Bob Esson, manager of the NAIC's International Insurers Department said ANA is "mixing apples and oranges. The ANA is talking about a New York Insurance Department examination in 1995, and that relates to policies prior to that date.

The deficiencies they're addressing don't relate to the various new Lloyd's trust funds in America."

He pointed out that Lloyd's syndicate liabilities on losses before 1992 would have been placed in the Equitas American Trust Fund, run by Equitas, a subsidiary, Mr. Esson said.

"The reduction in trust fund reserve requirements would affect policies written after August 1, 1995," he said.

More errors detailed

Like Mr. Pitt and Mr. Calagna, Mr. Esson saw several egregious errors in the ad.

"One is the reference to Coopers & Lybrand being unable to provide an unqualified audit of Lloyd's accounts," he said. "In fact, Coopers and Lybrand provided a qualified opinion on Equitas, not the Lloyd's syndicates to which the new trusts relate.

"Second, the New York Insurance Department's actions that the ad speaks of don't concern the Lloyd's American Trust Fund, as the ad implies."

The Department's and NAIC's actions "actually dealt with the new trust funds set up to protect policyholders for coverages written after Aug. 1, 1995," he said.

Mr. Esson said the NAIC hasn't operated in a vacuum since the trust funds reserve question first came up.

The NAIC has obtained an outside legal counsel's opinion — Jonathan Bank of Chadbourne & Parke, in Los Angeles — and an NAIC task force conducted an on-site examination of Lloyd's earlier this year.

More work is needed

"As a result of these actions," said Mr. Esson, "the NAIC surplus lines task force in March in Salt Lake City voted to allow a reduction in Lloyd's trust funds from 100% to 50%," subject to certain conditions that have not yet been met, such as modification of the wording of its trust forms to comply with the NAIC standard wordings, he said.

The NAIC will vote on the matter at its June 20-24 meeting in Boston.

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