Policyholder ReserveWatch

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Contact: Jeffrey C. Peterson June 8, 1998


Should Lloyd's Reserve Requirements Be Reduced?

Boston, MA – Next week's quarterly meeting of the National Association of Insurance Commissioners (NAIC) is likely to be the battleground for an on-going tussle over proposed changes in how Lloyd's of London is regulated in the U.S.

Upcoming NAIC Vote

State insurance commissioners will be voting on whether to reduce Lloyd's policyholder reserve requirements from 100% to 50% of gross premium at the NAIC quarterly meeting in Boston, June 13 to 15. Lloyd's is also pressing for the reduction to be retroactive to August 1995, to help alleviate what Peter Lane, Executive Director of Lloyd's North America described as a "serious cash-flow crisis" in many of Lloyd's syndicates (Nov. 10, 1997, National Underwriter). Some of the 50 state insurance commissioners are questioning whether a retroactive raid on policyholder premium trust funds and a reduction in reserve requirements for current Lloyd's policies is an appropriate regulatory response to a cash-flow crisis at Lloyd's.

Can Lloyd's New Financials Be Trusted Any More Than Their Old Ones?

In May 1995 the New York State Department of Insurance (NYID) published the first-ever independent audit of Lloyd's American Trust Funds (LATF). This report concluded that Lloyd's U.S. policyholder reserves were "deficient by $18.3 billion."

"Recent statements from Lloyd's and the NYID claim — but do not explain how — the huge, unresolved deficiencies in the ‘old' Lloyd's trust funds do not affect the ‘new,' current-year Lloyd's policy reserve trust funds," said Jeffrey C. Peterson, Executive Director of PolicyHolder ReserveWatch .

An October 1997 Moody's report concluded that Lloyd's and Equitas (the "bad bank" that manages Lloyd's old, pre-1993 claims) are "closely intertwined." "Equitas represents a material contingent risk to both the financial condition and the reputation of the Lloyd's market," warned Peterson. "The report went on to say," Peterson remarked, "that the future commercial success of the new Lloyd's is closely linked (emphasis added) with the successful management of Equitas, and the potential failure of Equitas is Lloyd's single most important threat."

"New" Lloyd's vs. "Old" Lloyd's

In the past few weeks, Lloyd's CEO Ron Sandler has twice called for drastic changes in Lloyd's capital structure. These changes include eliminating Lloyd's age-old unlimited liability individual investors, known as "Names," and relying solely on limited liability corporate capital.

"By scrapping the Names and the unique unlimited liability syndicate structure, Lloyd's becomes WEAKER than just about every other insurance company," Peterson claimed. "Without the net worth of Names OR permanent capital assets and reserves backing their policies, Lloyd's much-touted ‘Chain of Security' is reduced to only two links: limited liability corporate capital investor one-time deposits and policyholder premium reserves. These changes in Lloyd's capital structure cry out for more, not less, stringent regulation.," Peterson said.

Robert Westin, President of Victus, Inc., an insurance industry analyst, who has served as an expert witness in several U.S. regulatory actions against Lloyd's said, "The ‘new' Lloyd's — like every other insurance company operating in the U.S. — should not receive the same preferential regulatory status once enjoyed by the ‘old' Lloyd's."

"Instead, the ‘new' Lloyd's," cited Westin, "should be held to the same high standards to which U.S. insurance companies have always had to adhere, such as: certified, audited financial statements for every syndicate, every year; independent insurance ratings for each individual Lloyd's syndicate, regardless of reserve deposits held in trust in New York; and strict monitoring and enforcement of solvency requirements."

Questions Needing Answers

Westin outlined a list of questions he feels insurance regulators and Lloyd's policyholders need answered prior to approving any changes in Lloyd's reserve requirements. "The recent history of Lloyd's, including its $20 billion in losses from 1991 to 1995 and its current, admitted "cash-flow crisis," indicate that, if anything, policyholder security should be strengthened, not weakened," said Westin.

— "What would U.S. regulators do with a U.S. company that had huge, unresolved deficiencies in their reserves, extremely qualified financials, and a cash-flow crisis?

— "If Lloyd's had been backed exclusively by limited liability corporate capital from 1991 to 1995 would it have survived? Would policyholders have been paid?"

— "What could possibly have motivated the NYID to attempt, on Lloyd's behalf, such a drastic —and retroactive — reduction in Lloyd's reserve requirements?"

— "Should Lloyd's — a foreign, unregulated enterprise in a cash crunch — be permitted to take hundreds of millions of policyholder trust fund dollars off-shore?

"If the NYID's lead is followed, Lloyd's will be permitted to ‘expatriate' more than $600 million from U.S. policyholder reserve accounts to England," Westin concluded.


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