FACT – After extensive research on the subject, an astute insurance industry analyst concluded a few years ago that "if Lloyd’s were to cease writing coverage in the U.S. tomorrow, the void left in the marketplace would be the same size as the hole left in a glass of water after an inserted finger is removed."

FACT – There are dozens of executives at insurance/reinsurance companies and trade associations who will confirm that more than enough expertise and capital is available to cover any risk currently underwritten by a Lloyd’s syndicate.

FACT – No self-respecting supply-side business proponent apprised of the facts would ever entertain as true the notion that any one company (or insurance market or franchise operation) is indispensable in today’s sophisticated, highly competitive and well-capitalized insurance marketplace.

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FACT – If Lloyd’s failed to bring collateral held in its reinsurance trust fund to the proper level and lost its accreditation in New York or the entire U.S., companies still wanting to place coverage with Lloyd’s could use accepted alternatives to trust fund collateral to take credit on their balance sheets for reinsurance recoverable from Lloyd’s. One way is for the ceding company to retain unearned premium. Another is for Lloyd’s syndicates issuing reinsurance cover to post a Letter of Credit payable to the cedant equal to 100% of written premium.

Of course, these alternatives are only appropriate if implemented at the inception of coverage. Once actual losses have materialized, sufficient collateral must be on deposit in Lloyd's US Reinsurance Trust funds to pay outstanding claims in full.

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FACT – An aggregate of $8.1 billion (As of December 31, 2004) in reinsurance recoverables from Lloyd’s are listed in the "Schedule F" portion of annual Convention Statement filings of U.S. insurance companies.[3] The current, aggregate Schedule F recoverables from Lloyd’s for U.S. insurers represent the de facto minimum of outstanding liabilities that should be fully collateralized by cash or equivalent deposits in Lloyd’s U.S.-situs trust fund.

It is reasonable to accept a small margin of error between the balance in Lloyd's US-situs reinsurance trust fund collateral account and the aggregate Schedule F reinsurance recoverables held as assets on US insurers' balance sheets. There is a necessary and dynamic ebb and flow created as new liabilities are notified and outstanding claims are satisfied. However, a swing of more than 5 to 10% between Lloyd's estimates and US ceding insurers' actual reinsurance recoverables due from Lloyd's indicates a collateral deficiency.

The Schedule F figures are part of the annual Convention Statements filed - under oath - by senior executives of US insurers' with their state insurance departments. They provide insurance Commissioners/Departments with a convenient and cost-effective tool, using figures already in hand, to ensure that Lloyd's US reinsurance trust fund collateral levels are adjusted annually in accord with its known liabilities. The Schedule F figures are a reliable, independent benchmark that supercedes Lloyd's interim estimates.

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FACT – Lloyd’s and other non-U.S. carriers can forgo the supposed burden of holding collateral in U.S. trust accounts equal to 100% of outstanding liabilities by domesticating their reinsurance operations in the U.S. If they did that, instead of posting collateral in U.S. trust funds, they would simply have to comply with the same auditing, capitalization and reserving requirements as their U.S.-domiciled competitors. This would create the truly "level playing field" Lloyd's chairman Peter Levene has been pleading for.

FACT – It defies imagination why U.S. regulators allow Lloyd’s to continue writing coverage in U.S. markets and not comply with either the 100% collateral requirement for non-admitted alien reinsurers, or the laws and regulations governing U.S. domiciled reinsurers.[4] One of Lloyd’s rationales for not conforming to either of these U.S. standards is that the U.K. Financial Services Authority ("FSA") is "regulating Lloyd’s," and that this should exempt them from complying with U.S. laws.

FACT -- Other state insurance departments should take a hard look at their reliance on the NYSID to supervise Lloyd's U.S. trust fund accounts. Recent amendments[4] to New York's Regulation 20, governing credit for reinsurance in that state, appear to give the NYSID superintendent broad discretion in granting ceding insurers credit on their balance sheets for reinsurance from non-admitted reinsurers like Lloyd's. It is not clear, however, why such discretion is necessary, unless Lloyd's reinsurance trust fund does not contain a balance equal to their current outstanding reinsurance liabilities.

FACT – It is naïve and arguably negligent for any U.S. regulator to assume that the FSA and/or Lloyd’s Franchise Board and/or Lloyd’s Council will ensure compliance to standards that are anywhere close to those mandated under U.S. law. Such a position would also require U.S. regulators to ignore Lloyd’s abysmal loss/profit history over the last seventeen years.

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MYTH – Lloyd’s and Equitas’ U.S. outstanding liabilities and trust
fund balances do not need to be audited by U.S. insurance regulators
because both of these enterprises are "regulated" by the Financial
Services Authority ("FSA") of the U.K. Treasury Department.
Additional scrutiny/oversight would be duplicative and inefficient.

FACT – A New York State Insurance Department ("NYSID") "Report of Examination" (i.e. audit) dated May 1995, revealed an $18 billion deficiency in Lloyd’s U.S. trust funds.[5] Additionally, Lloyd’s suffered $12 billion in marketwide net losses from 1997 to 2002. Nonetheless, neither Lloyd’s nor Equitas’ outstanding U.S. liabilities and corresponding trust fund balances have been audited again by the NYSID.

FACT –The FSA does not audit the outstanding liabilities of Lloyd’s syndicates (the groupings of actual insurers and reinsurers), nor Equitas (the reinsurer of all Lloyd’s non-life liabilities on 1992 and prior years of account), nor their respective U.S. or U.K. trust fund account balances.

FACT – The publicly available information on the FSA’s mandate has been modified numerous times in recent years. A careful reading of the 'Financial Services and Market Act, 2000' and its subsequent modifications, however, reveals that the FSA’s remit with regard to Lloyd’s is still in reality limited to assuring itself that Lloyd’s Corporation and Council (the regulatory authorities within the "Society of Lloyd’s") have a suitable set of guidelines for overseeing the brokers and underwriters within their market. In other words, the FSA delegates the actual supervision of the syndicates to "Lloyd’s". [6]

Consequently, this does not result in supervision anywhere close to the standards called for under U.S. law. It amounts to a continuation of the same "self-regulating" regime that was in force during the 1988 to 2002 period, during which Lloyd’s publicly admitted net losses of more than $25 billion.[7]

To date, outstanding liabilities totalling more than $30 billion remain unpaid:

• $8.3 billion from the 1992 and prior years of account [Equitas], and
• $13.0 billion from 1993 to 2002 [attributable to more than 100 syndicate-years-of-account in run-off] [8], plus
• a large portion, estimated at upwards of $10 billion, of Lloyd's gross liabilites of $15 billion-plus resulting from hurricanes in the southeastern United States in 2005.

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FACT – One need only look at the difficulties facing U.S. companies with claims against Lloyd’s 1992 and prior year policies and treaties that are still unpaid by Lloyd’s and/or Equitas to measure the impact of allowing Lloyd’s to operate in the U.S. without regular audits verifying that its U.S. trust account balances equal or exceed its outstanding liabilities.[9]

FACT – One adverse consequence of the current policy of the NAIC and NYSID that allows Lloyd’s to avoid complying with the 100% collateral requirement is that a severely under-collateralized Lloyd’s, and its alter ego Equitas, are able to motivate both insureds and reinsureds to settle claims or commute policies at cents on the dollar due to the fear that no money will be left at the end of prolonged litigation.[10] Lloyd’s directly, and via Equitas, cries poor to policyholders, cedants and claimants, and simultaneously tells regulators, legislators and rating agencies that their solvency is secure and their reinsurance collateral requirements should be reduced by 50% or more.[11]

FACT – There are numerous insurers and reinsurers that have a reputation for paying claims fairly and timely, not only matching, but surpassing Lloyd’s reputation in this regard. And, they do it while complying with applicable U.S. regulations.

FACT – U.S. domestic companies have been put into receivership for proportionately smaller deficiencies than Lloyd’s currently has, even though those companies were paying claims in a timely fashion.

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FACT – Lloyd’s is a marketplace in which a few dozen groupings of capital providers known as "syndicates" underwrite insurance risks via separate, annual venture enterprises. Each Lloyd’s underwriter, whether an unlimited liability individual or limited liability corporate trader, is only responsible for a specific, several share of any risk covered by a Lloyd’s direct policy or reinsurance contract in a given syndicate year of account. Since underwriting Members subscribing to a profitable syndicate in the past two years were not necessarily on loss-making syndicates in prior years, it is uncertain to what degree a present-day marketwide profit impacts unmet liabilities from the past.

FACT – In news stories and speeches beginning in 2003, Lloyd’s executives have promoted the idea that generating a profit should be the primary measure of the financial health of an insurance enterprise.[12] This position may be opportune at present, but it raises serious questions about how to view Lloyd’s tens of billions of dollars in losses from 1988 to 2002, and how to deal with Lloyd’s when it slips back into a loss-making mode.[13]

FACT – When U.S. regulators do not subject Lloyd’s to regular audits and require them to comply with laws governing collateralization of their U.S. trust funds there is no assurance whatsoever that Lloyd’s claims of profitability are correct.

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FACT – It is nonsense to think that a Lloyd’s annual venture syndicate can improve or supplement the fortunes of a poor performing syndicate from a prior year of account. This makes it doubly important that U.S. regulators make certain that Lloyd’s keeps collateral in its U.S. reinsurance trust account equal to 100% of all its syndicates’ outstanding reinsurance liabilities and 30% of their surplus lines liabilities.

FACT – Making matters worse are Lloyd’s declared net losses of approximately $9.5 billion for coverage issued from January 1, 1997 to September 10, 2001, which were apparently not properly collateralized before the World Trade Center towers were toppled.[14] These losses are in addition to the $8 billion gross / $3 billion net losses Lloyd’s estimated its syndicates incurred on 9/11/01.[15]

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FACT – As the ANA documented in a series of letters in 2004 between the Chairman of Lloyd’s and the Chairman of the ANA, and in numerous White Papers and presentations to U.S. insurance regulators and legislators, the transformation of Lloyd’s from a "market" into a so-called "franchise" operation absolves its capital providers for post-2004 syndicates of any contractual obligation to provide funding for its so-called New Central Fund, which covers unmet obligations of Lloyd’s syndicate years of account from 1993 to 2004 inclusive.[16]

FACT – Most of Lloyd’s underwriters that provided capital for Lloyd’s 1993 to 2004 syndicate years of account, have a limit to their liability to policyholders and cedants from that period.[17] Any comfort that regulators, policyholders or cedants may have derived from the existence of Lloyd’s New Central Fund is based on the illusion that someone would be obligated to continue replenishing that fund until claims are fully paid for the still open syndicates from 1993 to 2004 years of account. The lack of ongoing funding for more than 100 open syndicate years of account from this epoch has created a situation similar to that which led to the creation of Equitas in 1996, but this time there is no pressure on Lloyd’s from U.S. insurance regulators to gather billions of dollars to fund an Equitas-like pool from which to pay these outstanding claims.[18]

The result is that, like Equitas, under-collateralized Lloyd’s syndicates can leverage U.S. policyholders and cedants to accept cents-on-the-dollar adjustments to their outstanding claims from these past years of account.[19] Ironically, this behavior is occurring at the same time that managing agents for Lloyd’s current capital providers are writing new business (and renewals) using the same trade name and some of the same capital that was used to write what we now know was under-funded coverage in those prior years.

Would U.S. regulators permit a U.S. domestic insurer or reinsurer to address solvency issues in this way, and still continue operating in U.S. markets?