August 21, 1998

Regulators Take More Active Lloyd's Oversight Role

By Dan Lonkevich

A task force of state insurance regulators has adopted changes to Lloyd's U.S. Situs excess or surplus lines trust deed, which appears to be a rebuke to the New York insurance department and could end up being onerous to the London market, regulatory officials contend.

Jim Brown, chair of the National Association of Insurance Commissioners Surplus Lines Task Force, said the task force adopted the language at a recent meeting in New Orleans. The language will take effect on Sept. 15, the last day of the NAIC's fall meeting in New York, he noted.

Mr. Brown, who also is Louisiana's insurance commissioner, said the changes mean the New York insurance department no longer has sole authority to set the minimum amount of the trust fund, which is held for U.S. claims. Currently, the trust fund stands at around $777 million.

"New York has been protective of its oversight authority over the trust fund," Mr. Brown said. "They think they've done an excellent job. I agree and most task force members agree."

However, he said, regulators in California and Alaska believe that times have changed and that the old regulatory scheme under which authority to regulate Lloyd's was delegated to New York needs to be changed as well. He added that they argue state regulators are more sophisticated than ever before and are now well equipped to oversee Lloyd's activities in their states.

"We're willing to delegate to New York, but we want some approval or veto authority over future changes" to the trust fund's minimum amount, he said. Last December, the New York department's decision to lower the minimum amount of the trust fund to 50 percent from 100 percent of gross U.S. liabilities angered many regulators because it was done without seeking their input.

Greg Serio, New York's first deputy insurance superintendent, called the task force's action "premature at least." He said it would have been better to wait until next month's NAIC meeting in New York and let everyone have their legal staffs review the proposed changes to the trust deed.

"We had a problem with moving on matters that were not properly discussed," Mr. Serio said. "There also are some unresolved issues and legal questions."

Mr. Serio said the New York department was concerned about the task force taking such a precipitous action when there was no real crisis and Lloyd's is stable. "We don't think it was prudent," he said.

In addition, Mr. Serio asserted that the move could have a burdensome effect on Lloyd's operations in the United States.

"It creates a regulatory camel," he said. "[It creates] a bifurcated and duplicative regulatory scheme with multiple hurdles and humps."

Mr. Serio played down any dissatisfaction task force members may have had with New York's 60-year history of regulating Lloyd's, saying, "nobody complained about New York's efforts."

Finally, Mr. Serio stressed that any change made to the trust agreement ultimately is not a New York issue. "This is an issue for Lloyd's and the NAIC and the efficient operation of state regulation," he said. "And camels just don't do it."

Jose Montemayor, a Texas associate insurance commissioner, said although the changes to the trust deed will complicate regulatory issues for Lloyd's, it is a reality of the post-reconstruction-and-renewal world for Lloyd's. He said the R&R program, which was adopted by Lloyd's to solve its spiraling pre-1993 asbestos and environmental liabilities, was a wakeup call to state regulators. He said they no longer feel comfortable delegating their responsibility to New York.

However, Mr. Montemayor said, after the task force's trip to London in the spring, many regulators have a greater comfort level with Lloyd's as well as a greater understanding of how it should be regulated in the future.

Louisiana's Mr. Brown also conceded that the task force's move wasn't necessarily good news for Lloyd's because it could escalate the turf war. In addition, he said in the future if New York adopts changes to the trust deed that the other states refuse to endorse, Lloyd's might have to sign sidebar agreements with some states.

"If New York pushes the issue, you could see states prospectively require Lloyd's to put money for future claims in a new trust fund," he said.

Mr. Brown said because the changes in the trust deed adopted by the task force don't take effect until Sept. 15, there is still some room for negotiation with New York. He characterized the unfolding negotiations as "a big chess match."

New York's Mr. Serio said the department didn't plan to take any further action on the matter.

Al Skwiertz, chief counsel for Lloyd's America in New York, said from an administrative standpoint the new language of the trust deed is troublesome for Lloyd's. He said if the language isn't amended for clarity's sake, it will make the regulatory process more cumbersome and the amendment process more complex. "Hopefully it won't be so complex that it's unworkable," he said.

Mr. Skwiertz said Lloyd's has been assured by regulators that they will be open minded about additional changes in the language to clarify how the trust deed will work in terms of future changes to the minimum amount of the trust fund as well as investments.