The temporary relief that Lloyd's of London has won from U.S. regulators in funding its U.S. reinsurance liabilities is prompting other European reinsurers to make similar pleas.

The National Assn. of Insurance Commissioners earlier this month announced it will permit Lloyd's to fund 60% of gross U.S. reinsurance liabilities related to the Sept. 11 terrorist attacks by Nov. 15, after the market expressed concerns about liquidity following the attacks. Alien reinsurers with U.S. operations normally must place 100% of their gross liabilities in U.S. credit-to-reinsurance trust funds.

John Oxendine, chairman of the NAIC's reinsurance task force, said in a statement that the temporary action was "necessary to preclude a more severe result that could lead to a detrimental effect on the market as a whole."

"Concerns were raised about the impact on market capacity that such a liquidity strain could cause, especially at a time that market availability of reinsurance is so important," Mr. Oxendine wrote in a letter to insurance industry practitioners last week. "An unintended consequence of immediately meeting the 100% funding requirement for Sept. 11, 2001, liabilities would be to place additional burdens on a reinsurance market that is already under significant strain," he added.

Mr. Oxendine, who is also the Georgia insurance commissioner, stressed that he believed Lloyd's could meet the 100% funding requirement now but said that doing so might force Lloyd's names to accept "fire-sale" prices for assets or to borrow money at unfavorable rates.

As part of the temporary relief, the NAIC will conduct an in-depth examination of Lloyd's reinsurance arrangements. The NAIC also said that it planned to increase Lloyd's funding level to 100% "in the near future"-during calendar year 2002, Mr. Oxendine said.

While the NAIC's reinsurance task force said Lloyd's liquidity problems "are substantial...we believe they are short-term."

Lloyd's estimated recently that its total exposure, including reinsurance, to the terrorist attacks is L5.4 billion ($7.82 billion). Lloyd's said it presently maintains U.S. trust funds of L1.2 billion ($1.74 billion) for surplus lines and L4.1 billion ($5.93 billion) for reinsurance claims.

Nick Prettejohn, chief executive of Lloyd's, said the temporary relief was sought "because it clearly presents a liquidity issue whenever you put a large amount of money into a trust fund (that) you can't then get at."

"Any institution faced with that issue would try to take steps to alleviate it," he said. Lloyd's has been discussing the credit-for-reinsurance trust fund issue with U.S. regulators for several years, Mr. Prettejohn said. The Sept. 11 attacks "sort of accelerated and brought into sharp relief the issue that has been on the table and on which we have been having very constructive discussions for some time," he said.

The NAIC has agreed to let Lloyd's use letters of credit as admissible assets in the trust fund, he said.

"It is not actually in the U.S. insurance industry's interest for a major reinsurer of them to be faced with a liquidity problem," said Stephen Catlin, chairman of Catlin Underwriting Agencies Ltd., and chairman of the Lloyd's Market Assn.

But the NAIC's decision has not been greeted with enthusiasm by the Reinsurance Assn. of America. "We certainly oppose any reduction in multiple beneficiary trusts, including the Lloyd's trust. We also feel that events like the World Trade Center are excellent examples of why those trusts should not be reduced," said Deborah Hall, counsel for the Washington-based RAA. The RAA would not "second-guess" the need for a temporary exception for an individual company or market because of liquidity issues, she said. But she stressed that the RAA would not support any long-term reduction in trust funds or permanent changes to the rules.

The London-based International Underwriting Assn., which represents London market insurers and reinsurers, said last week that it too was lobbying the NAIC to relax the credit-to-reinsurance funding requirements. An IUA spokeswoman said that it was asking the NAIC for dispensation similar to that granted to Lloyd's.

"We are convinced that other European reinsurers will seek the same treatment as Lloyd's," said a spokeswoman for German reinsurer Hannover Re. "But we cannot say how realistic that would be, she added.

Mr. Oxendine said he had received requests for relief from the IUA and a German regulator on behalf of German companies generally. He said he told them that U.S. regulators will only consider requests from individual companies on a case-by-case basis. "We won't throw some blanket thing out there for everybody," he said.

A spokesman for the London-based Assn. of British Insurers said he was not aware of any ABI members lobbying for trust fund relief.

"It's most appropriate to grant (Lloyd's) the relief they sought vis-a-vis funding of trust funds at this time," said Jose Montemayor, the Texas insurance commissioner and a member of the NAIC's reinsurance task force. But, he added, the funding relief should be coupled with U.S. regulators checking Lloyd's retrocessions, financial reporting and regulations.

"This issue is going to be discussed in detail Oct. 22-24 by the full membership of the NAIC at a special summit," said Kathleen Sebelius, the Kansas insurance commissioner and president of the NAIC. "At this time, neither the members nor the leadership have convened to address the issue."

But Mr. Oxendine noted that the reinsurance task force has the authority to call for such an examination, as its members did in an Oct. 12 motion. The task force includes top regulators from several states, including California, Texas and New York-the domiciliary regulator of Lloyd's trust funds.

He said details of the examination of Lloyd's would be worked out at a Nov. 5 meeting. He hoped the exam would start a couple of weeks after that meeting and that the task force would have a good idea of the state of Lloyd's reinsurance protection by the start of next year.

Mr. Prettejohn stressed that "there is nothing new in the U.S. regulatory committee coming over and kicking our tires, which they are perfectly entitled to do and we are more than happy to do," he said. "We have opened ourselves up to the closest examination by them on a number of occasions and no doubt we will do so in the future because the U.S. is an incredibly important marketplace for us and we have a pivotal part to play in that marketplace-not only the surplus lines marketplace, where we are clearly one of the leading players, but also from a reinsurance perspective."

Mr. Oxendine said that the investigation would focus on the reliability of Lloyd's retrocessional agreements. He added that the NAIC is aware of the reinsurance spiral problems Lloyd's has suffered in the past.

Both Messrs. Prettejohn and Catlin, who presided over a marketwide review of Sept. 11 losses, said they were confident that there were no looming spirals.

Mr. Prettejohn added that the security of Lloyd's reinsurance arrangements was very high. "In contrast to some of the losses in our earlier history, the losses seem to be finding their way to quality, rather than to the weaker links in the security chain in the industry," he said.

Mr. Oxendine said he was confident that Lloyd's was solvent. "I do not expect to find any solvency problems as a whole, but we are going to verify that," he said. "It remains to be seen whether any individual syndicates may face solvency problems, but Lloyd's Central Fund is there" to provide financial backup.

Lloyd's announced last week that it was making a L780 million ($1.13 billion) cash call on investors in the market to meet liabilities from the terrorist attacks. The market's 2,850 individual names will be asked to contribute an extra L246 million ($356.1 million) to meet those losses. Corporate investors will be asked to contribute the remaining L534 million ($773.0 million).

Most of Lloyd's 108 syndicates will be subject to cash calls, with the amount investors have to pay dependent on their underwriting capacity and the syndicate's exposure to the U.S. terrorist attacks.