In addition to maintaining reserves to meet outstanding and Incurred But Not Reported (IBNR) claims, when a new claim from a US insurer is received, Lloyd’s must deposit further funds equivalent to the full liability of the claim into these trust funds – even though reinsurance protection is likely to be in place and the claim may not be settled for years.
For alien reinsurers, including Lloyd’s, these onerous requirements tie up capital unnecessarily and create a significant extra cost of doing business in the US.
After 9/11 Lloyd's had to pay $3.6 billion into its US trust funds, despite reinsurance being in place to cover two thirds of those claims, 93% of which was with reinsurers rated A or higher. After the US hurricanes of 2005 Lloyd's had to transfer more than $2.5 billion to US trust funds, again regardless of its own reinsurance cover.
Discriminatory and anti-competitive
Conservative estimates suggest that the annual costs of meeting the US collateral requirements are in excess of $500 million per year for international reinsurers. For Lloyd’s alone, the bill is in the region of $150 million.
Meanwhile US domestic reinsurers are not required to hold collateral in separate trust funds. No other major insurance market in the world imposes such collateral rules.
In today’s global market for reinsurance, to require one group of reinsurers to fund its liabilities in this way impacts the competitiveness of those reinsurers and so distorts the market. Whatever value these laws had when they were first established, things have moved on.
