NEW YORK -- State insurance regulators resolved a major tussle over who can set the rules for Lloyd's of London when they agreed to share regulatory authority over Lloyd's U.S. trust funds for surplus lines risks.

The Surplus Lines Task Force of the National Assn. of Insurance Commissioners detailed the arrangement in the new Standard Form Trust Agreement for those Lloyd's trust funds, which they formally adopted during an NAIC quarterly meeting in New York. Pending approvals, the effective date of the agreement is Sept. 16.

The agreement requires joint approval from the NAIC's International Insurance Department and the New York Insurance Department for future changes. Previously, New York regulators were the sole overseers of the trust funds, which are based there.

Resolution of this oversight issue ends a dispute between New York's regulators and those of other states whose policyholders depend heavily on Lloyd's for coverage (BI, March 23).

Evidence of some lingering uncertainties surfaced during the task force's meeting, when California Insurance Commissioner Chuck Quackenbush asked New York Insurance Superintendent Neil Levin to acknowledge -- in writing -- his willingness to abide by the joint oversight arrangement. Mr. Quackenbush's department sent a letter Sept. 15 requesting Mr. Levin's confirmation of that.

However, the NAIC's oversight policy limits the International Insurance Department's authority to approving changes to trust funds to bring them into compliance with terms and conditions already adopted by individual state insurance commissioners, who comprise the NAIC. The IID still must seek specific commissioner approval for any exemptions to the terms and conditions of the requirements.

Under the new trust fund agreement, Lloyd's has 90 days to obtain the approvals of the Council of Lloyd's, Her Majesty's Treasury and Mr. Levin to bring them into line with the newly adopted wordings.

If Lloyd's obtains those approvals, the NAIC will allow syndicates writing U.S. surplus lines business to continue funding the trusts at 50% of gross liabilities so the syndicates can remain listed on the NAIC's "Quarterly Listing of Alien Insurers."

If Lloyd's fails to get the approvals, the funding requirement would revert to 100%, according to the NAIC motion.

In other action at the meeting:

* NAIC members formally adopted the "Regulatory Re-Engineering of Commercial Lines Insurance White Paper."

The white paper discusses several proposals to simplify regulation of commercial lines. They include: relying more heavily on competition; relaxing regulatory requirements for prior approval of rates, forms and market access for certain sophisticated insurance buyers; and addressing problems that multistate policyholders face because of differences among state requirements.

"States today gained a tool that outlines an efficient allocation of scarce regulatory resources and shifts the emphasis of those resources to where they are most needed," said the NAIC's Glenn Pomeroy, who is also the North Dakota insurance commissioner.

* The Commercial Lines Property & Casualty Insurance Committee agreed to re-establish a working group to monitor regulation of risk retention groups, including revising the NAIC's Risk Retention and Purchasing Group Handbook to reflect new legal decisions.

The current handbook for regulators provides "bad advice" by suggesting that regulators have authority to charge fees to such groups, said Jon Harkavy, vp and general counsel of USA Risk Services Inc. in Arlington, Va.

The working group will include representatives of insurance departments in Kentucky, Illinois, New York and Vermont and will report to the committee, which is meeting jointly with the Personal Lines P&C Committee.

* The NAIC proposed a 2% increase in its 1999 expense budget, with projected spending totaling nearly $41.7 million.

It projected that revenues would climb nearly 4.5% to almost $44.5 million.

The NAIC scheduled a Nov. 5 public hearing on the budget in Kansas City, Mo., but asked that written comments be sent by Oct. 26 to its headquarters there.

* The NAIC awarded second-round accreditation certificates to four states -- Arizona, Illinois, Maine and New Hampshire.

The NAIC's accreditation program requires accredited insurance departments to undergo a review every five years to assure they still meet the baseline standards. There are now 49 accredited departments, including 18 that have already received their second-round certificate.