The following article, by Lloyd's Chairman Lord Levene, appeared in the Wall Street Journal on Monday explaining why Lloyd's supports equal collateralisation rules for foreign and domestic reinsurers.
Facing a $60-billion-industry loss from hurricanes Katrina, Rita and Wilma, a number of leading insurance executives are convinced the answer is no. Some even want a taxpayer bailout fund to cover future losses from major catastrophes - whether a magnitude 8 earthquake rocking Los Angeles or a category 5 hurricane slamming into Miami. Lloyd's believes there is a better answer: Remove the protectionist constraints that are handcuffing the global reinsurance companies.
Reinsurers provide backup for insurance companies, covering, for example, potential liabilities from enormous natural catastrophes they cannot reasonably afford to cover on their own. The world's top 10 reinsurers - Lloyd's ranks sixth - account for about 60% of this $200-billion industry.
While reinsurance is global, regulation is local. And, unfortunately, ill-conceived legal regulations in the US are undermining the ability of Lloyd's and other foreign reinsurers to respond when disaster strikes. The laws, called "credit for reinsurance," are arcane. But simply put, they require "alien" reinsurers -- those based outside the US - to post collateral equal to 100% of their gross liabilities. The collateral must be posted regardless of the reinsurer's financial strength. US reinsurers, on the other hand, are not required to secure their liabilities with collateral - even if they are financially weak.
These regulations help drive up costs and restrict the ability of reinsurers to respond to crisis, exactly at the time when the response is needed most. In the days after 9/11, Lloyd's was forced to immediately increase its collateral by more than $3 billion - a significant sum for any business, but especially when money is urgently needed to make claims payments. Katrina forced Lloyd's to top up its funds on deposit to over $10 billion: That's $10 billion which cannot be put where it most belongs -- in the hands of policyholders who have suffered losses. Conservative estimates suggest that the annual costs of meeting the US collateral requirements are in excess of half a billion dollars a year. For Lloyd's alone, the price tag stands at more than $150 million.
Keen to protect their competitive advantage, some US reinsurers are fighting hard to maintain the status quo: Yet when Brazil considered adopting collateral requirements, they could barely contain their fury. This is bad public policy, and unnecessary. The blunt fact is that the largest insurance markets, including London, Bermuda, Zurich, Munich and Tokyo, operate smoothly without collateral requirements.
Lloyd's has pushed for regulatory reform at the state level for more than six years. It's the work of Sisyphus. The moment you think you are getting somewhere, mischief from industry rivals, shifting state priorities, and political leadership changes roll you back to square one.
The White House, congressional leaders and state regulators have long recognized the need for a level playing field. State regulators will have an opportunity to embrace reform once and for all in a series of meetings beginning this month. Lloyd's and other foreign reinsurers expect them to agree to proposed changes that would rate all US and foreign reinsurers by financial solvency. The move would improve creditworthiness, increase underwriting capacity, bring down rates and smooth US - European trade relations.
In the frightening aftermath of the San Francisco earthquake a century ago, Lloyd's underwriter Cuthbert Heath famously cabled his agents: "Pay all claims." In that same spirit, Lloyd's paid out a record $3 billion to help Manhattan recover after 9/11, and is looking at another record bill of over $5 billion as it assists the people and businesses of the Gulf pick up the pieces today. Robust foreign reinsurers such as Lloyd's should be seen as a benefit to the US economy and the businesses which underpin it -- not as a threat.
