John Darkin
Lloyd’s
The USVI Insurance Guaranty Association (the Association) has assisted the USVI insurance market and its policyholders for more than 20 years. The Association is now faced with a new challenge; the USVI Government is proposing to replace the entire balance of the Guaranty Fund (the Fund), administered by the Association, with a Letter of Credit.
The Association was established by US Virgin Islands law in 1984 to:
Provide a mechanism to pay claims arising under certain insurance policies issued by insurers who become insolvent.
Avoid excessive delays in paying claims.
Avoid financial loss to claimants or policyholders because of such insolvencies.
The Association also assists in the detection and prevention of insurer insolvencies, and assesses the cost of such protection.
The Association maintains the Fund, which derives its money primarily from a 5% gross premiums tax on all types of insurance (except annuities) transacted in the USVI or covering risks resident, located or to be performed in the USVI. Once the balance in the Fund reaches $50m, excess amounts are deposited in the Government’s General Fund. Lloyd’s, like all admitted insurers in the USVI, is automatically a member of the Association and presently provides the Board Chair.
During 2007, USVI Senator Carlton Dowe proposed legislation that would allow the Government to replace the entire balance of the Fund with a Letter of Credit (LoC). This would enable the Government to pay a portion of about $398m in retroactive wages owed to its employees and retirees.
The Board of the Association objected in principle to use of the Fund for any purpose other than paying valid claims. However, it agreed to assist in drafting amendments to the proposed Bill, which would enable the Government to achieve its objectives, but without undermining the integrity of the Fund. It was particularly important:
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To clarify arrangements around the payment of any claims that may arise once a LoC is issued.
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To avoid member insurers being assessed in the event of insufficient monies being in the Fund as a result of the withdrawal of monies for the LoC.
On 22 December 2007, Bill No. 27-0131 was signed into law as Act No. 6984 by Governor John de Jongh. The Act authorises the Government to substitute a secured LoC for $45m of the $50m in the Fund. It requires that the LoC must be provided by a federally insured lending institution rated investment grade or higher. The LoC will be used to provide financial liquidity for payments by the Association, which may draw upon the LoC when required. Funds drawn under the LoC will be a debt of and must be repaid by the Government of the USVI.
Once the LoC is issued and there is a transfer of the $45m, no further monies deposited in the Fund may be transferred or used, except to pay claims and Association expenses, until the balance is restored to $50m. The LoC must remain in place until the Fund balance is restored to $50m, and no member insurer may be assessed until a total of $50m has been paid from the Fund or funds advances under the LoC.
The Fund will continue to be replenished in the normal way (ie from gross premium taxes), and once the Fund has been restored to $50m, the LoC will be cancelled. It should be noted, however, that before a LoC can be issued, there is a need for further legislation to identify a funding source for repayment by the Government of the $45m to the financial institution that will issue the LoC.
Contact
Lloyd's International Trading Advice on +44 (0)20 7327 6677 or LITA@lloyds.com for more information.
