What Every Insurance Commissioner
Should Know About Lloyd's of London, Part II
A White Paper presented by
The American Names Association
I. Ten Questions About Lloyd's That Every Insurance Commissioner Should Have Answered:
- Do U.S. state insurance departments receive adequate information from
Lloyd's to determine the financial condition of every Lloyd's syndicate at
any given time?
- Are the financial reports used to verify Lloyd's syndicate solvency
generated internally by Lloyd's or independently by certified auditors in
compliance with U.S. accounting standards and without suspicious qualifying
- Can U.S. policyholders rest assured that proper safeguards are in place
to guarantee that Lloyd's syndicates have the financial capacity to sustain
- Is it appropriate for state insurance departments to cede all
decision-making authority concerning Lloyd's American Trust Funds to the
New York Insurance Department (NYID)?
- Has Lloyd's infiltrated the NYID by arranging for its former employees
and attorneys to hold key positions within that Department? (See Exhibits
"C" and "G")
- Has Lloyd's misled U.S. insurance regulators and insurance companies by
presenting highly qualified annual reports? (See Exhibit "H")
- Has Lloyd's misled the National Association of Insurance Commissioners
(NAIC) Surplus Lines Task Force into complacency concerning Lloyd's
internal accounting and external auditing practices?
- Is the payment of 1992 and prior long-tail health hazard policyholder
claims that were recently consolidated into Equitas adversely affected by
recent changes in the Lloyd's market structure? (See Exhibit "F")
- Was Equitas set-up illegally? (See Exhibit "I")
- Are the current procedures used to audit Equitas' accounts sufficient
to give U.S. insurance commissioners advance warning in the event Lloyd's
U.S. Trust Funds may be called upon to cover a lapse in Equitas' ability to
II. Nine Facts About Lloyd's That Every Insurance Commissioner Should Know:
- The recent metamorphosis of the Lloyd's market and capital structure renders moot all previous regulatory assumptions about Lloyd's. (See Exhibit "F")
- The majority of Lloyd's syndicates are now owned and controlled by corporate interests that are transforming the way Lloyd's operates. (See Exhibit "F")
- Lloyd's is becoming more a group of small, fixed-capital, independent insurance companies with limited liability and less a trade exchange of small interdependent syndicates backed by unlimited liability investors. (See Exhibit "F")
- Under the current structure of Lloyd's syndicates, if catastrophic or unforeseen claims exceed premium and investor reserve deposits for a given syndicate year of account, that syndicate is in danger of being unable to pay claims at 100%.
- It would be less expensive to retrieve funds for syndicate failure if reserve funds were in U.S. territory, under the supervision of each state insurance department with policyholders affected by the failure.
- In contrast to past business practices, syndicates at Lloyd's now have a very limited ability to cover excessive losses by tapping the Lloyd's Central Fund and/or the wider community of syndicates and capital providers within the Lloyd's market. (See Exhibit "F")
- U.S. policyholder confidence in Lloyd's is not yet fully restored.
- The jury is still out on whether Lloyd's has fully resolved all of its financial problems that brought it to the brink of collapse only two short years ago.
- Lloyd's Joint Asset Trust Funds for current and future U.S. business placed at Lloyd's has also been pledged to cover pre-1993 claims that Equitas may be unable to cover in the future.
III. Twelve Tough Questions Insurance Commissioners Should Ask the New York Insurance Department (NYID):
- How many times has the NYID performed an independent audit of the Lloyd's American Trust Funds (LATF) since the trust accounts were set-up in 1939?
- Has the NYID taken disciplinary action against Lloyd's following the auditor's report published in May 1995 that concluded that the LATF had a "… deficiency in the Trusteed Surplus amount[ing] to $18,379,853,922. …" (See Exhibit "A")
- Has the NYID required Lloyd's to make up the deficiencies in the trust accounts identified in the May 1995 audit report (Lloyd's trust accounts were short $18 billion gross of reinsurance/$7 billion net of reinsurance)?
- Has the NYID levied fines against Lloyd's for violating trust agreements with U.S. Policyholders and Regulators? (See Exhibit "A")
- Since the alarming shortfalls were revealed in the May 1995 audit report, has the NYID implemented rigorous changes in the frequency and intensity of independent auditing procedures for all of Lloyd's trust accounts under the supervision of the NYID?
- How has the NYID avoided conflicts of interest concerning the regulation of Lloyd's since the department hired a new General Counsel in September 1997? (See Exhibit "G")
- How many senior staff members have left the NYID in the last 24 months?
- Did the NYID give Insurance Commissioners advance notice and a request for approval of the agreement NYID Superintendent Neil Levin entered into with Lloyd's on May 7, 1998 stipulating a 50% reduction in Lloyd's surplus and excess lines reserve requirements on a retroactive basis to August 1, 1995? (See Exhibit "B")
- Did the NYID inform Commissioners in advance that the May 7, 1998 agreement with Lloyd's was "promulgated on an emergency basis on March 18, 1998 and upon application by Lloyd's?" (See Exhibit "B")
- Did the NYID inform Commissioners of the nature of the emergency that was declared on March 18, 1998?
- Have any funds been removed from any of Lloyd's U.S. Trust Fund Accounts as a result of the May 7, 1998 agreement? If so, how much money was removed and to whom was the money given?
- What is the specific language of the agreement between the NYID and Lloyd's signed in 1996 that stipulates the ongoing Lloyd's market will indemnify U.S. policyholders if Equitas ever runs out of money?
IV. Six Pro-Active Steps Insurance Commissioners Should Take to Bolster the Regulation of Lloyd's and Protect U.S. Policyholders:
- Lloyd's should now be required to keep reserve funds for surplus and excess lines of business in separate accounts held in all 50 states in proportion to the outstanding liabilities carried in each state (including reserves to cover contingent liabilities that could result from a failure of Equitas in the future).
- Lloyd's should be required to hold in reserve 100% of gross liabilities for surplus and excess lines of business written in every U.S. state.
- All Lloyd's syndicates, like all other insurance companies operating in the U.S., should each be subject to tri-annual audits.
- A new regulatory regimen should be established to track the performance of every Lloyd's syndicate on a quarterly and annual basis.
- New stricter solvency requirements should be instituted, since the current generation of syndicates marketing their services under the Lloyd's brand name are structured with limited capital reserves – a significant difference from how Lloyd's syndicates were structured in prior years.
- Since Equitas is indemnified by the ongoing Lloyd's market, U.S. insurance commissioners should be given veto power over any changes in the structure of Lloyd's that would adversely affect the ability of Lloyd's U.S. Trust Accounts and/or Lloyd's Central Fund to pay claims for current business of Lloyd's syndicates and future contingent claims that might exceed the reserves of Equitas.
Exhibit A: "Report on the Examination of Lloyd's of London as of December 31, 1993," Paul Cohen, CFE, et al., NYID; May 11, 1995.
Exhibit B: Letter Agreement to Ron Sandler, Chief Executive, Lloyd's of London, from Neil D. Levin Superintendent of Insurance, New York, May 5, 1998.
Exhibit C: "State Insurance Superintendent Neil D. Levin…," New York Law Journal, News Update, New York Publishing Company, September 23, 1997.
Exhibit D: "Regulators Take More Active Lloyd's Oversight Role," Dan Lonkevich, National Underwriter, Property & Casualty; Risk & Benefits Management Edition, August 21, 1998.
Exhibit E: "NAIC/Lloyd's Relief Criticized/NAIC Questioned N.Y. Move to Ease Security Requirements," Business Insurance, December 18, 1997; Copyright 1997, Crain Communications, File c12188076rn.
Exhibit F: Series of Letters to Superintendent Neil Levin and Deputy Bureau Chief Mark Presser from Christopher Stockwell, Lloyd's Names Association; 19 June 1998; 5 June 1998; 29 May 1998; 12 May 1998; 5 January 1998.
Exhibit G: "Comings & Goings: Bonnie Steingart, New General Counsel," Legislative Update, New York Department of Insurance; Vol. XXXVI, Nos. 9 & 10; September/October 1997.
Exhibit H: "Lloyd's Global Results and 1997 Annual Report," Author Unknown; June 9, 1998.
Exhibit I: "The Fraud at the Heart of Equitas," Author Unknown.
Exhibit J: "Regulators May Relax Lloyd's Trust Fund Mandate," Dan Lonkevich, National Underwriter; On-Line Archives; November 10, 1997.