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SEATTLE -- New York's plan to ease securitization requirements for Lloyd's of London syndicates writing U.S. business is unexpectedly encountering strong opposition from other regulators.
The National Assn. of Insurance Commissioners is seeking a new financial examination of Lloyd's of London and a formal opinion on the legality of offering the market retroactive relief.
The NAIC decided to take those steps after a behind-the-scenes faceoff last week with the New York Insurance Department during the NAIC's quarterly meeting in Seattle.
Ultimately, NAIC regulators in other states took several steps to scale back New York's Lloyd's relief plan, at least for now. However, regulators said they are willing to consider providing more relief if the examination and legal opinion support it.
Essentially, several other states refused to follow New York's lead without more proof of Lloyd's syndicates' financial soundness, though they previously had followed New York's lead on trust fund issues.
Those states are acting on behalf of themselves and the NAIC's International Insurance Department, which 14 states expressly rely on by statute to determine which non-U.S. insurers meet current standards for acceptable insurers. The names of accepted insurers are published quarterly.
At last week's meeting, Mark Presser, deputy bureau chief of New York's Property and Casualty Insurance Bureau, initially opposed the NAIC's actions as unnecessary while the issue moved through three NAIC subgroups. Mr. Presser was at the meeting in place of New York Insurance Superintendent Neil D. Levin. Mr. Levin, whose background is primarily in securities rather than insurance, rarely attends the meetings.
The issue "dominated" closed-door discussions at the start of the NAIC meeting, said Louisiana Insurance Commissioner James H. Brown, who chairs the NAIC's Surplus Lines Task Force.
On Dec. 2, Mr. Levin announced plans to ease the major securitization requirement as of Dec. 31 by allowing syndicates to fund their gross liabilities at 50% rather than the current 100%.
That easing would apply "to all surplus lines business funded by the Lloyd's United States situs surplus lines trust funds and written on or after Aug. 1, 1995," according to the New York announcement.
The New York agreement also included Lloyd's promise to increase the funding of the Lloyd's American Joint Asset Trust Fund to $200 million from $100 million effective Jan. 1, 1998.
Fueling the debate over policy was a feeling among other regulators that they should have received more notice. Several learned about New York's arrangement only a day or two before it was made public.
In addition, regulators disliked the perception that Mr. Levin was telling other insurance commissioners what to do, which "offended" them, Mr. Brown said.
Regulators' inability to reach a consensus solution underscored the contentiousness of the dispute and necessitated two postponements of the NAIC's International Insurance Department Review Group.
The issue stemmed from a request on behalf of about 150 Lloyd's syndicates writing U.S. business that the New York Insurance Department and the IID reduce their trust fund requirements for surplus lines business by year end.
Two years ago, Lloyd's' financial problems prompted New York to increase its oversight, including requiring substantial increases in U.S.-based trust funds and syndicate-specific reporting (BI, May 29, 1995).
For example, the syndicates writing U.S. business were required to fund their gross liabilities at 100% and place $100 million in the Lloyd's American Surplus Lines Joint Asset Trust Fund. Those liabilities totaled slightly more than $1.1 billion at the end of September.
At a Nov. 4 meeting in New York, Lloyd's spokesmen asked for relief by year end. According to a Nov. 19 memo by IID Manager Rob Esson, Lloyd's explained that "that the reason for the urgency was that the 1995 year of account (the first including the 100% gross surplus lines trusts) needed, by U.K. law, to be reinsured to close at the end of 1997." In addition, Mr. Esson wrote, the Lloyd's spokesman said "that the RITC process would result in severe cash flow problems for Lloyd's."
The deadline for Lloyd's syndicates to obtain the RITC for 1995 is approximately the end of February, said John Calagna, a spokesman for the New York Insurance Department.
The cash flow problems related to syndicate owners' need to pay RITC premiums and have "absolutely" no impact on their claims-paying ability, said Peter Lane, managing director of Lloyd's America Ltd.
"Lloyd's financial problems are not so serious that it would face problems in paying claims," concurred Illinois Insurance Department's Chief Deputy Director Arnold Dutcher, who represents the state on several NAIC surplus lines subgroups.
Overall, implementation of the New York agreement would have freed up roughly $600 million in cash, according to Lloyd's Mr. Lane.
In contrast, the NAIC's leaner relief proposal will allow syndicates to fund at the 50% level, but only for the 1998 year, and requested a legal opinion about the appropriateness of the retrospective reduction for their listing in 1995, 1996 and 1997.
While California supports the concept of New York's arrangement, it questions the retroactivity portion and thinks it was "ill advised" to announce the changes before bringing the issue to other NAIC regulators, said Sherwood Girion, chief of the financial analysis division for the California Insurance Department.
The New York Department's legal counsel supported the retroactive reduction, though the attorney did not write a legal brief on the issue, said Mr. Presser
In addition, the current NAIC proposal gave Lloyd's three years to double its joint asset trust fund to $200 million. However, there would be no phase-in period if retrospective reductions were allowed in the future.
The NAIC proposal also calls for Lloyd's syndicates to bring their U.S. trust funds into compliance with the NAIC trust agreement requirements "as expeditiously as prudently possible," noting that such compliance is a condition for eligibility for IID's quarterly list of eligible non-U.S. insurers.
In addition, NAIC regulators requested "an in-depth and on-site investigation of the structure and workings of Lloyd's," which will be summarized in a written report. The investigation will likely be conducted early next year.
NAIC regulators also modified IID's plan of operation to vest the rule-making authority regarding trust levels and exemptions with the chairmen of the NAIC's Surplus Lines Task Force and a Special Issues Committee, its parent.
Mr. Brown of Louisiana and a spokesman for the New York Department both had predicted the NAIC would likely adopt Mr. Levin's arrangement (BI, Dec. 8).
"What he (Mr. Levin) did was perfectly within his authority," said Alaska Insurance Director Marianne K. Burke in an interview. However, "I did feel that I did not have an awful lot of time to digest it," she said.
"The NAIC has always ceded to our judgment," said Mr. Calagna. "We don't know why there is a difference here today," apart from "turf battles."
"We welcome the steps that the NAIC is taking," said Lloyd's spokesman Mr. Lane. He is convinced other regulators also will develop the same level of confidence in Lloyd's that New York regulators have. "I think we are seeing here a coming together."
"I'm just very pleased we were able, in a short period of time, to get a lot of states up to speed" on the issue, Ms. Burke said. Also,"the lines of communication have been much more clearly delineated."