Lloyd’s Urges U.S. to End Foreign Insurers’ Trade Barriers

January 11, 2006

Barriers to trade must be removed to permit foreign reinsurers to lend more support in the event of another mega-disaster such as Hurricane Katrina, Lloyd’s chairman Lord Levene told New York business leaders.

Speaking to the Downtown Association and Insurance Brokers Association of New York, Lord Levene said that insurers faced a “big agenda” in 2006 following last year’s record hurricane season, setting out a number of key challenges for the sector.

Emphasizing the increasingly globalized nature of the insurance industry, Lord Levene said it was imperative for the U.S. to reform its “credit for reinsurance” rules that force foreign reinsurers to post collateral equal to 100 percent of their gross liabilities to US companies.

“The illogical demand for collateral based on zip code, not financial health, has helped drive up the costs of reinsurance and restricted critical capacity,” Lord 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 US insurance market, leaving US customers as the biggest losers,” Lord Levene said. “In the 21st century, many European reinsurers find it difficult to interpret the current rules as anything other than sheer protectionism. We expect to see a definitive change in 2006.”

The reforms would help the global insurance industry cope with future disasters, and encourage much-needed capacity for consumers, Lord Levene said.

Also, Lord Levene acknowledged that natural disasters were becoming more severe and widespread, and it was right there was a debate about how those risks are covered.

“Lloyd’s believes that the vast majority of natural perils are currently insurable,” Lord Levene said, adding that Lloyd’s position was based on long experience of helping the U.S rebuild after catastrophes dating back to the San Francisco earthquake a century ago.

“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.

“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.”

Source: Lloyd’s

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