Lloyd’s New Director of North America, McGovern, Navigates Turbulent Waters

Addressing Changes in EU and U.S. Regulations; North American Lloyd’s Reorganization

Sean McGovern, Lloyd’s general counsel and, since February 2010, the director of Lloyd’s North America, may still have time to pursue his favorite pastime – sailing – but he may find it more difficult.

That’s because impending insurance regulatory changes in Europe and the United States, as well as Lloyd’s plans for reorganizing its operations in North America, are top priorities, he says. The United States is Lloyd’s largest market; Canada is the third largest, and both require constant attention.

“Things are moving,” McGovern said, and “there are many possibilities.” They include U.S. regulatory changes, overhauling the UK’s financial regulatory system, and Solvency II in the European Union, which will replace the current regulations with a “risk-based” regime. McGovern’s been working on that since he became Lloyd’s general counsel in 2000.

His success led to Lloyd’s CEO Richard Ward deciding that he should take over from Sue Langley as the head of Lloyd’s North American operations. “I was visiting the U.S. rather frequently to oversee U.S. regulations,” he said, so Richard decided it was logical. The region contributes around 45 percent of Lloyd’s premium income.

Changes in Regulation

The enactment of the Dodd-Frank financial reform act has “put significant factors in play,” he said. The “power to enter into international agreements on insurance regulation,” which Lloyd’s is assessing, is “potentially the most important.”

McGovern added that “we don’t have problems with state-based regulation,” and “we’re not pushing for a federal charter.” However, McGovern claims the establishment of a Federal Insurance Office (FIO) is a positive step. “It gives us someone we can talk to, and it has the authority to preempt inconsistent state regulations.”

The legislation aims to harmonize conflicting state laws with one federal standard, a step the surplus lines industry has been advocating for years. As a big player in that market – its largest activity in the United States – Lloyd’s favors an active FIO that would be able to remove some of the roadblocks the industry has to cope with.

The Dodd-Frank act might even eliminate another roadblock – the 100 percent collateral requirement for Lloyd’s reinsurance activities, its second largest activity in the United States. “Lloyd’s is the third largest reinsurer in the U.S. market,” Mc Govern said. “We take risks out of the U.S. economy, and we helped to rebuild it after the 9/11 attacks and the hurricanes Katrina, Rita and Wilma.”

However, Lloyd’s must post 100 percent collateral on U.S. business Lloyd’s reinsures as it’s considered an alien reinsurer. Lloyd’s is probably the most affected by the requirements, as it doesn’t have U.S.-based subsidiary companies; however, other foreign reinsurers are also affected when they cede premiums to their head office.

He’s not the first senior executive at Lloyd’s to point out the collateral issue, but under his watch the requirement could be abolished, or at least eased. “The NAIC has called for the system to be changed; however it hasn’t happened yet,” McGovern said, referring to proposals first taken up in 2006. Legislation on collateral requirements was ready to be introduced, but it failed to get the U.S. sponsors needed, so no action was taken.

The situation may now be more propitious. “A number of big U.S. states want change – notably Florida and New York and maybe New Jersey, so the momentum is going,” McGovern adds. States recognize that there’s really no need to protect U.S. companies from the possibility that they won’t get their reinsurance claims paid. The syndicates that write coverage are healthy and well supervised by both the Financial Services Authority (FSA), as well as Lloyd’s own Underwriting Performance Board. They’re also backed by a central fund that now tops $3 billion.

‘Equivalence’ and Solvency II

McGovern also explained that Solvency II will have an impact on insurance regulations outside the EU. Several countries, notably Switzerland, Bermuda and Japan, have begun harmonizing their insurance regulations with Solvency II. They’re on track to be accorded equivalent status, which would give their insurers the same standing as EU-based companies.

“The U.S. has not yet been given equivalent status,” McGovern said, adding that a decision could be made in November or December. No one thinks that all 50 states, or even a few of them, are going to undertake major changes in their insurance regulations to comply with Solvency II. Therefore the existence of a federal body, empowered to harmonize regulations, is an important development.

“We should respect each others’ regulations” McGovern said, adding that a certain amount of flexibility – on both sides – will be required. However, he doesn’t expect these efforts to come to fruition before 2012; as “it’s just too ambitious beforehand.”

Reorganization in North America

Lloyd’s wants to maintain and increase its North American market, and is in the process of reorganizing the U.S. market, McGovern noted. “Our first priority is to protect the licenses and the market we have; the second is to promote the Lloyd’s market.”

Market access is on three levels – retail, wholesale and through London, McGovern explained. He hopes to improve the channels U.S. insurance intermediaries can use to place their business there. “We want supplementary business to go to Lloyd’s.”

Lloyd’s is consequently expanding its participation with U.S. based organizations and brokers. Representatives attend conferences, arrange information sessions and develop relationships with wholesalers and managing general agencies. “Our aim is to give them a feeling of what Lloyd’s is like, especially younger brokers.” Interested brokers are invited to spend a week or so in London on Lloyd’s underwriting floor, observing the brokers and underwriters at work in the individual boxes where coverage is actually underwritten. “When they go back to the U.S., they remember the experience,” McGovern said.

The reorganization has divided North America into regions. The eastern United States is served from Lloyd’s headquarters in New York. In 2004 it opened an office in Los Angeles, which serves the western region. In September, Lloyd’s formed a central region with an expanded and redesigned office in Chicago, headed by Pat Talley. It is in the process of forming a fourth region to serve the southeast, concentrating on Florida, Georgia and Louisiana. Lloyd’s is an admitted carrier in Illinois and Kentucky, and it will maintain those operations, as well as its excess and surplus lines business, but McGovern said it has no plans to seek expansion of its admitted operations.

Lloyd’s has also opened an office in Toronto, headed by Deborah Moor, the president of Canadian operations.

It’s also McGovern’s responsibility to make access to the London market easier and less expensive, mainly through the use of technology.

Topics USA Legislation Agencies Excess Surplus Europe Reinsurance London Lloyd's