Lloyd’s Prepares for NAIC Audit

November 7, 2001

Lloyd’s is preparing to meet with representatives of the NAIC and the accounting firm Arthur Andersen to lay out the parameters for the audit of its reinsurance liabilities in conformity with the NAIC’s verification demands in exchange for the acceptance of a deposit of 60 percent of Lloyd’s gross reinsurance liabilities into its security fund (See IJ Website, Oct.29)

Preliminary meetings were held in Dallas earlier this week between NAIC representatives, headed by Georgia’s Insurance Commissioner John Oxendine, Lloyd’s and officials from the U.K.’s Financial Services Administration, who will take over the regulation of the entire U.K. insurance industry, including Lloyd’s, on December 1, to establish the basic parameters of the audit.

Oxendine paraphrased President Ronald Reagan’s cold-war statement, “Trust, but verify,” to describe the NAIC’s position. He told the BBC that the audit would examine the estimates Lloyd’s has given the NAIC concerning reinsurance claims from the Sept. 11 attacks, and that “We basically want to verify those figures.” He reasserted that the NAIC had “no reason to disbelieve Lloyd’s” position that any problems it has are concerned only with short term liquidity, and are not related to the market’s overall solvency.

Lloyd’s spokesman Adrian Beeby said that a meeting was scheduled to be held in London on Friday with NAIC officials and accountants from Arthur Andersen’s local branch, who will conduct the actual audit, to set up a schedule and outline procedures.

While there’s been a great deal of discussion over the difference between liquidity and solvency, Lloyd’s has a strong argument. Although it’s estimated that gross losses from the attacks are around $7.8 billion, its net estimate is under $2 billion, indicating that it needs to collect $5.8 billion from its reinsurers. The impossibility of achieving that by November 15 (the date the deposit is due), led to the NAIC’s relaxation of its 100 percent funding requirement for the reinsurance trust fund, giving Lloyd’s additional time to collect.

Beeby confirmed that the actual amount currently in the fund is £4.1 ($5.95 billion); Lloyd’s hasn’t yet revealed the amount of the additional deposit required pursuant to the agreement with the NAIC, but, even at 60 percent it will be substantial. Beeby also indicated that the NAIC had agreed to accept Letters of Credit in lieu of actual funds, which will further ease Lloyd’s liquidity problems.

The audit, which is projected to last several months, will seek to verify the recoverability of the reinsurance proceeds due Lloyd’s syndicates. Lloyd’s has previously indicated that 90 percent of its reinsurance is placed outside of the Lloyd’s market with reinsurers rated ‘A’ or better; therefore most of the amounts in question should eventually be paid.

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