Lloyd's of London Issues Public Comment on Treasury's Fiscal Service Bureau Notice

WASHINGTON, March 6 -- Sabrina Miesowitz, deputy general counsel at Lloyd's America Inc., New York, has issued a public comment on behalf of Lloyd's of London on the U.S. Treasury Department's Bureau of the Fiscal Service notice entitled "Surety Companies Doing Business with the United States; Request for Information". The comment was written on Feb. 13, 2020, and posted on March 5, 2020:

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We are pleased to submit these comments on your Request for Information ("RFI") relating to the Surety Bond Program on behalf of Lloyd's of London ("Lloyd's"). Throughout its over 330-year history, Lloyd's has been a pioneer in insurance, becoming the world's largest specialist insurance market. Lloyd's has a long history in the United States, stretching back over a century. Lloyd's is currently the largest surplus lines insurer in the U.S. and one of the largest providers of reinsurance capacity to U.S. ceding insurers.

Reinsurance is a mechanism for spreading risk by diversifying it across global markets. In the context of surety business, reinsurance allows insurers providing surety coverage to diversify and share their risk.

Reinsurance can be used to support all of the business an insurer providing surety coverage writes in order to enhance its financial stability and ensure that events in other lines of business, such as major catastrophe losses, do not have an outsized impact. Indeed, for many if not most certified surety companies, the global reinsurance market provides substantial protection for losses in all their lines of business -- not just their surety business. Taken together, Surety Bond Program's regulations and Annual Letter instructions purport to evaluate and allow or deny credit for the whole of each certified surety company's relationship with each reinsurer appearing in any line of business on its annual statement, not just the surety business with risks running to the United States. These certified surety companies in turn collectively represent a considerable proportion of the total risk-bearing capacity of the U.S. property-casualty insurance sector. For this reason, the Surety Bond Program's regulations relating to credit for reinsurance have implications that reach well beyond the surety market and, in fact, impact the entire U.S. property-casualty insurance market.

Reinsurance is a vital tool in helping to significantly reduce the economic impact of catastrophic events, such as natural disasters, both on those most immediately affected and for taxpayers at large. In the US, international reinsurers pay around 60% of total catastrophe losses and are therefore important to both the US insurance market and the overall economy. By diversifying US natural catastrophe risks to global markets, the US domestic insurance market, which includes insurers providing surety coverage, is more likely to remain healthy and robust following even the most significant natural catastrophe losses.

For several decades, Lloyd's syndicates operating in the United States have been participating in Treasury's Surety Bond Program as admitted reinsurers, and we are pleased to have the opportunity to offer these comments. The preamble to the RFI references the "covered agreement" between the U.S. and the European Union. Since publication of the RFI, the United Kingdom has begun its formal transition period to leave the European Union, therefore we trust that future references to the covered agreement will also include the similar covered agreement in place with the United Kingdom, to become operative upon the U.K.'s exit from the E.U. U.S. commitments under these agreements are identical, but as a U.K.based insurance market Lloyd's wishes to emphasize that, thanks to this second covered agreement, U.S. commitments to liberalize cross-border reinsurance conditions with U.K.-domiciled reinsurers will not be impacted by Brexit.

Comments on RFI Questions

3. Should Fiscal Service consider changing the approach or methodology it uses to determine the credit allowed for reinsurance and, if so, what changes should it consider?

The Fiscal Service should bring credit for reinsurance practices in line with the U.S.-U.K. and U.S.-E.U. Covered Agreements (the "Covered Agreement"). Under Article 3, Paragraph 2 of the Covered Agreement,/1 the U.S. has committed to ensure (with the 60-month implementation period) that it, as a party, as well as "its supervisory authorities" or "any other competent authorities," do not "as a condition to allow [a U.S. ceding insurer] to take credit for reinsurance ... with [a U.K. assuming reinsurer,]" "maintain or adopt any requirement to post collateral" if the result of the requirement is less favorable treatment for U.K. reinsurers than for U.S. reinsurers.

Currently, pursuant to the Surety Bond Branch's Annual Letter, a certified surety may take credit for reinsurance ceded to other certified companies and admitted reinsurers, but other reinsurance is considered "unauthorized." Credit for such unauthorized reinsurance may only be taken "to the extent of funds withheld or letters of credit or trust agreements" in place from the "unauthorized" reinsurers. Annual Letter at 8. Thus, a U.K. reinsurer that is neither a certified company nor an admitted reinsurer will be considered an "unauthorized" reinsurer by Treasury, and credit for reinsurance ceded to such an insurer will be conditioned on the reinsurer posting collateral (e.g., letters of credit or trust agreements).

4. Should Fiscal Service consider changing any aspects of the approach or methodology it uses to determine recognition of a company as an admitted reinsurer?

The Fiscal Service should remove the local presence requirement for non-U.S. reinsurers to qualify as "admitted reinsurers" so as to comply with the U.S. commitment under the Covered Agreement. Under Article 3, Paragraph 3 of the Covered Agreement, the U.S. must not "as a condition to allow [a U.S. ceding insurer] to recognize credit for [] reinsurance," "maintain or adopt any requirement for [a U.K. assuming reinsurer] to have a local presence[,]" or a "requirement with substantially the same regulatory impact... as local presence[.]"

Under 31 C.F.R. Sec. 223.12, only U.S. companies or U.S. branches of alien companies are eligible to be recognized as "admitted reinsurers." Accordingly, a non-U.S. reinsurer seeking recognition as an "admitted reinsurer" to ensure that its cedents receive credit must have a local presence (i.e., a U.S. branch) in order to even be eligible for consideration. Thus, the impact of this regulatory regime is that a local presence on the part of the reinsurer is required as a condition of allowing credit for reinsurance ceded to that reinsurer.

This is contrary to the Covered Agreement, and needs to be revised to eliminate the requirement, at least as to reinsurers domiciled in and in good standing with the supervisors in the U.K. and other jurisdictions participating in Covered Agreements.

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1/ All references herein to the Covered Agreement are to the U.S.-U.K. Agreement. In all instances discussed here, a parallel provision exits in the earlier U.S.-E.U. Agreement. Thus, the same arguments made for U.K. reinsurers apply for E.U. reinsurers.

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Conclusion

In recent years, U.S. insurance regulators have recognized that collateral and local presence requirements are not effective tools for regulating or evaluating the protection provided by reinsurance. Instead, U.S. insurance regulators have focused on the financial strength, solvency and business practices of reinsurers rather than their nation of domicile. This recognition laid the foundation for the landmark covered agreements with the U.K. and the E.U.

Due to the Surety Bond Program regulations' inconsistencies with U.S. commitments noted above, we would urge the Fiscal Service to consider allowing credit for reinsurance from any reinsurer which is designated a Certified or Reciprocal Reinsurer through the NAIC's framework adopted as part of the U.S. implementation of the Covered Agreements. Non-U.S. reinsurers provide a significant portion of the reinsurance capacity that supports the U.S. insurance industry. Allowing broader access to high quality non-U.S. reinsurers will help to ensure the financial stability of certified sureties.

Again, we are pleased to offer these comments on the RFI and would encourage you to contact us if you have any questions about the issues we have raised.

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The notice can be viewed at: https://www.regulations.gov/document?D=FISCAL-2019-0002-0005

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