Regulators May Relax Lloyd's Trust Fund Mandate

By Dan Lonkevich

State regulators appear willing to give Lloyd's of London some breathing room with regard to its U.S. trust fund requirements.

At a meeting last week at the Securities Valuation Office in New York, members of the National Association of Insurance Commissioners surplus lines task force charged one of its panels to come up with a new definition for "an appropriate level" of funding for Lloyd's U.S. trust fund.

Currently, Lloyd's U.S. trust fund is required to be funded at 100 percent of its gross U.S. liabilities, or about $1.1 billion. In comparison, other London markets and foreign insurers are required to maintain a U.S. surplus lines trust fund equivalent to only 30 percent of their U.S. obligations.

Peter Lane, managing director of Lloyd's North America, explained to a fairly sympathetic panel of regulators that the 100 percent funding requirement presents a significant burden to Lloyd's, and that it has created a serious cash flow crisis for the market.

What Lloyd's would like to see is for regulators to follow the lead of Louisiana, which recently adopted the NAIC's non-admitted insurers model act and set the trust fund level at 30 percent. So far, Louisiana is the only state to adopt the model act.

The new Louisiana law also caps the surplus lines trust fund requirement at $500 million, although it gives the insurance commissioner discretion to raise the requirement after notice and a hearing. Finally, it requires Lloyd's to maintain another $100 million in an additional surplus lines trust fund.

Louisiana's move does Lloyd's little good, however, because the London market's U.S. surplus lines trust fund is situated in New York, where regulations stipulate the 100 percent funding level.

In the meantime, Lloyd's has been lobbying New York regulators to relax the requirement by the end of the year to facilitate Lloyd's syndicates being able to write U.S. business.

Mr. Lane expressed optimism that an agreement would be worked out with the New York insurance department to relax the requirement before the end of the year.

But John P. Mulhern, an attorney in the New York office of LeBoeuf Lamb Greene & MacRae, which serves as Lloyd's U.S. counsel, asserted that nevertheless, this creates a bit of a timing problem for Lloyd's.

Mr. Mulhern explained his worst fear is that the task force will do nothing. He said if the task force waits for New York to act before changing the funding requirement, it would be March or even later before Lloyd's syndicates' ability to write new business would be certain. For that reason, he urged the task force to make the necessary changes in time for the NAIC's December meeting in Seattle so the changes could be approved by the E Committee.

Mark Presser, a financial examiner for the New York department, said Superintendent Neil Levin was not unsympathetic to Lloyd's cash-flow plight. Indeed, he said "it is no longer a question of if but of when" the change would be made. Mr. Presser added that while Lloyd's would prefer Louisiana's 30 percent trust fund requirement, New York was more comfortable with 50 percent.

Sandra Morris, a financial examiner for the Delaware insurance department, told National Underwriter her state would prefer a 70 percent funding requirement.

The 100 percent funding requirement isn't entirely arbitrary. Its origins started in the problems Lloyd's had before its reconstruction and renewal program. State regulators concerned about Lloyd's solvency set the funding requirements high to protect U.S. policyholders. Today, however, Lloyd's officials argue that with Equitas Reinsurance Ltd. up and running to cover Lloyd's 1992 and prior-year liabilities, and a new and improved Lloyd's back on track, a lower percentage would be more appropriate.

While regulators listened patiently to lengthy presentations by Lloyd's officials about the tremendous changes in the regulatory structure and improvements in the general solvency policing of the market, they remained skeptical of the market's progress.

Woody Girion, a financial examiner for the California insurance department, said after only two years he wasn't quite ready for the funding requirement to fall to 30 percent.

"One of the reasons we picked 100 percent was a lack of understanding of how the market works," Mr. Girion said. "To the extent Lloyd's has transformed itself to look more like a company, it deserves to be treated like a company"-meaning with its trust fund obligation set at the 30 percent level. "But you're not there yet," he added.

New York's Mr. Presser agreed, saying "we're not discounting what you've done, but clearly we're looking at a work in progress."

Although a consensus has yet to emerge about what percentage is appropriate for funding Lloyd's trust fund, Mr. Mulhern, the Lloyd's counsel, seemed optimistic Louisiana's perspective would ultimately prevail.

He played down the remarks by New York's Mr. Presser about the 50 percent level, but declined to comment on whether Lloyd's would be satisfied with that level. Mr. Mulhern said Lloyd's will continue to lobby New York to change the funding requirement by the end of the year.

In the meantime, the NAIC's International Insurance Department Plan of Operations working group will hold a conference call this week to draft the new language defining "an appropriate level" of funding for Lloyd's U.S. trust fund. The working group is expected to have the language ready for the NAIC's December meeting in Seattle so that it can be adopted by the task force and its parent E committee.

Finally, regulators brushed aside a concern expressed by IID Director Rob Esson about whether the relaxed trust fund requirements needed to be approved by the NAIC's executive committee and plenary. "How is it going to look," he asked, "when after the requirement is relaxed, half a billion dollars is transferred overseas?"

Jim Brown, chair of the surplus lines task force and Louisiana's insurance commissioner, reminded Mr. Esson and task force members that this was likely to happen anyway once New York made its final decision.

Lloyd's Mr. Mulhern stressed, more importantly, that the move wouldn't affect the security of U.S. policyholders, just the fund's location.

In the end, it was decided that because of Lloyd's concern about the timing of the changes, executive committee and plenary approval wasn't necessary.

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