Lloyd's of London chairman Lord Levene of Portsoken began the new year with a trip to the Big Apple and used the visit to launch a broadside against U.S. reinsurance rules.
He has been pressing for reform for several years, but with Lloyd's facing a bill of at least $5.25 billion for the ravages of Katrina, Rita and Wilma, his Lordship took the opportunity to turn up the volume in his campaign.
In a speech to the Downtown Association and the Insurance Brokers Association of New York in January, he attacked the current rules for putting an unnecessarily heavy burden on the capital base of international players.
The annual cost to foreign reinsurers of meeting the U.S. collateral requirements is estimated to be more than $500 million. Around $150 million of this is borne by Lloyd's, which, in common with its European peers, is required to deposit an amount representing 100 percent of the gross liabilities it reinsures--significantly more than is required of its U.S. competitors.
"In the 21st century, many European reinsurers find it difficult to interpret the current rules as anything other than sheer protectionism," said Levene, adding that he looked for a "definitive change" in the year ahead.
He believed that the capital required from a reinsurer to conduct business in any market should reflect its creditworthiness--as assessed by ratings agencies--rather than its country of origin.
"The illogical demand for collateral based on zip code, not financial health, has helped drive up the costs of reinsurance and restricted critical capacity," Levene said.
"The events of 9/11 and more recently Katrina only underscore the unacceptable burden and unintended consequences of these requirements.
"Neither effective nor efficient, the current rules distort the operation of the U.S. insurance market, leaving U.S. customers the biggest losers."
Reform would enable the global insurance industry to cope with future disasters and allow much-needed additional capacity into the market.
Reports suggest that the call for change has not gone unheeded, and Lloyd's has had some constructive negotiations with state insurance regulators. In the meantime, it has had to build a trust fund of more than $10 billion to enable it to continue doing business in the United States.
Levene also said it was evident a debate is needed on the level of risk coverage that can be provided as natural disasters become more widespread and severe.
Noting that Lloyd's helped in the reconstruction of San Francisco after its earthquake 100 years ago, he said he still believed the vast majority of natural risks remain insurable.
"We are confident that the global insurance market is well equipped to respond--as long as it is free to price risk adequately, and constantly refines its risk models," he observed.
"Our experience is that insurance markets operate most effectively and most efficiently when left to free market forces. Unlike terrorism, we should be able to model the impact of natural disasters with some degree of accuracy, so that exposure can be managed and risk spread.
"Insurers are, after all, in the risk business. It is up to us to demonstrate commitment and leadership."
February 1, 2006
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