U.s. Dodd-frank act: Practical Implications for Lloyd

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U.s. Dodd-frank actPractical Implications for
Lloyds

• Joe Gunset, General Counsel, Lloyds America
• John P. Mulhern, Partner, Dewey LeBoeuf
• Steve Yates, Manager, International Regulatory
  Affairs, Lloyds
• 3.30pm,Tuesday 8th March 2011, Lloyds Old
  Library.

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Agenda

• Introduction Sean McGovern
• Reinsurance Business Joe Gunset
• Surplus Lines Business John Mulhern
• Next Steps/Communications Steve Yates
• Questions

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History A LONG JOURNEY.......

• In the 1990s post Lloyds RR
• U.S. Trust Funds established.
• 3 years lobbying to secure competitive terms for
  Surplus Lines Trust Funds
• Focus on initiating and subsequently progressing
  international lobbying effort on funding issues
• Focus during last decade on
• NAIC and model law reform
• Key states business case rationale for reform
• Need for harmonised implementation of reform at
  Federal level.
• International dimension, instigated U.S./E.U.
  dialogue

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THE PRESENT WHERE HAVE WE REACHED?

• Post financial crisis
• U.S. changing regulatory dynamic.
• Has triggered a raft of legislation.
• Lloyds well positioned to leverage opportunities
  for change
• Dodd-Frank includes key reforms
• Created Federal Insurance Office.
• Prospect of International Agreements.
• Nonadmitted and Reinsurance Reform Act (NRRA)

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Overview of dodd-frank act insurance provisions

• Created Federal Insurance Office (FIO)
• FIO has no direct regulatory authority, but is
  tasked with monitoring the insurance industry and
  assisting in the negotiation of international
  agreements
• International Agreements
• Secretary of Treasury and U.S. Trade
  Representative authorized to enter into
  international agreements on prudential regulation
• Nonadmitted and Reinsurance Reform Act (NRRA)
• Creates federal mandates regarding how states may
  regulate reinsurance and surplus lines
  transactions
• Effective 21 July 2011

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Implications reinsurance business
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Potential for Federal Level Solution

• Process for Federal Level Collateral Rule
• Treasury and US Trade Representative have
  authority to negotiate international agreements
  on prudential matters
• Once an agreement is in place, FIO Director has
  authority to examine and, if appropriate,
  pre-empt state laws that are inconsistent with
  such agreement
• Lloyds Position
• Lloyds is liaising with Treasury and US Trade
  Representative and plans to lobby for an
  agreement on reinsurance collateral
• We see a federal solution as the best option for
  nationwide collateral reduction
• However, we do not expect this process to happen
  quickly - It will likely be several months before
  any significant progress is seen
• There are a number of obstacles - FIO Director
  has not yet been appointed

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NAIC and State Based Initiatives

• NAIC
• NAIC Reinsurance Task Force has exposed for
  comment draft revisions to the model Credit for
  Reinsurance law and regulation that would allow
  for reduced collateral
• The comment period ends 23 March and this issue
  will be discussed at the NAIC annual meeting at
  end of March
• Florida and New York
• Currently have reduced collateral rules in place
• Other states are working to put in place rules
  similar to those enacted by Florida and New York
• New Jersey bill recently passed legislature and
  will become law if signed by Governor
• Indiana legislation likely to pass this year

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Florida and New York

• Since a nationwide collateral reduction rule is
  not yet in place in the US, Lloyds is taking
  advantage of the state based rules that are in
  place
• Lloyds has filed applications with Florida and
  New York to be recognized as an eligible
  reinsurer under these rules
• This will allow underwriters to take advantage of
  reduced collateral on a single cedant basis by
  providing a letter of credit for a particular
  cedant in lieu of posting collateral in the CRTF
• Cedants receiving LOCs under the reduced
  collateral rules will not be covered by the CRTFs
  or JATFs, to avoid duplication of security
• Lloyds does not intend to set up a separate MBRT
  for reduced collateral cedants at this time
• It is important to note that Florida has advised
  that approval for reduced collateral is currently
  being limited to property catastrophe business

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Summary Impact on Lloyds Reinsurance Business

• Pushing for International Agreement
• Lloyds is lobbying for an international
  agreement that would create nationwide reduced
  collateral
• Getting Approved Under Current State Rules
• Lloyds has applied to be recognized under
  Florida and New Yorks rules and expects to be
  approved soon
• Monitoring NAIC and Other State Initiatives
• Lloyds will continue to engage with NAIC
  Reinsurance Task Force and state regulators to
  encourage additional collateral reduction rules

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Implications Surplus Lines business
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Surplus lines eligibility

• Filings responsibility of both managing agents
  Lloyds
• Syndicates make individual state eligibility
  returns in May each year.
• Lloyds produces in excess of 180 U.S. returns
  including
• Eligibility returns state by state
• Supported by transactional data at state level
• Annual filing with the NAIC IID
• Quarterly and annual Trust Fund solvency filings
• Returns include a mixture of financial,
  statistical global financial details
• Trend towards increased data demands and more
  intrusive review

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Surplus lines eligibility

• Under NRRA states cannot prevent brokers from
  placing surplus lines business with insurers
  listed on IID White List
• Role of the IID office will therefore be more
  significant for alien surplus lines insurers that
  are listed on the White List
• Lloyds is liaising with IID concerning potential
  changes to the normal 15 May Lloyds syndicate
  filings

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State eligibility requirements

• Important to note that individual states may
  continue to request data.
• State regulators ultimately determine IID policy
  and may want separate data which may be deemed
  relevant to in-state activity
• There is a wide variety of state NRRA legislation
  currently pending no two bills are precisely
  alike
• State legislation needs to be changed to reflect
  NRRA but there is a lack of consistency and many
  statutes appear to conflict with NRRA.
• Examples include
• Creation of a two-tiered system whereby insurers
  that continue making state eligibility filing
  would be preferred
• Repealing MAT exemptions
• States are also proposing increases in fees and
  penalties

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Premium Taxes and Compliance for Placements

• Only the home state can tax and regulate a
  multistate surplus lines transaction.
• Home State
• Principal Place of Business or Individuals
  Residence or
• If 100 of risk located outside state described
  above, state where greatest percentage of premium
  is allocable.
• But the NRRA provides that the states can create
  an agreement to allocate tax collected on
  multistate surplus lines risks.

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Tax Allocation Proposals

• Competing proposals
• NIMA
• NAIC drafted NIMA which addresses only tax
  allocation This is opposed by industry but
  several states appear to be leaning towards
  adoption
• SLIMPACT
• More comprehensive than NIMA Supported by
  NAPSLO but fewer states seem to be following this
  approach
• Other
• Some states have introduced legislation that
  simply changes state law to bring it into
  compliance with NRRA, however, many of these
  state bills appear to have inconsistencies

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How Tax Allocation Affects Lloyds

• Not just a SL intermediary/coverholder/broker/XIS
  problem!
• Data Collection
• Currently, brokers required to report premium tax
  allocation by state. Brokers will also be
  required to begin reporting home state
• Depending on which allocation system, if any, is
  adopted by the states Lloyds may need to change
  data collection procedures
• At this point, Lloyds does not intend to change
  or reduce data collection requirements since it
  seems likely that some allocation will be
  required for multistate surplus lines risks
• NAPSLO published their intent to provide
  regulators / carriers with home state only,
  allocating premium where the home state requires.
• Deciding next steps will require careful
  consideration taking into account many factors.

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How Tax Allocation Affects Lloyds

• Premium Statistical Reports
• Lloyds currently files premium statistical
  information annually with U.S. states
• Not clear whether these requirements will change
  after NRRA becomes effective
• Since states use this information to reconcile
  broker filings and ensure they get the full
  amount of premium tax, its likely these will
  continue to be required in some form

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Effect on Lloyds Licensed Business

• Lloyds is an admitted (licensed) insurer in
  Kentucky and Illinois
• Multistate Risks
• Multistate risk surplus lines placements
  sometimes include risks located in Kentucky or
  Illinois
• For these risks the portion of the premium
  allocated to Kentucky or Illinois may be carved
  out and premium tax paid on an admitted basis for
  that portion of the premium
• Admitted Business Will Continue to be Carved Out
• Brokers will need to continue reporting Kentucky
  and Illinois admitted business and allocating
  premium so that Lloyds can pay the appropriate
  licensed tax

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Potential Implications for master policies/Group
Insurance

• Treatment of Group Insurance Under NRRA
• Our view is that the home state for a group
  insurance policy under the NRRA definition is the
  state where the master policy is issued, though
  as under current rules, not all states may agree
  with this view
• This issue will be addressed in detail as part of
  a separate presentation

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Regulatory political Backdrop

• State Legislation
• States are rushing to change their laws and
  incorporate the mandates of NRRA, but much of
  this legislation is problematic
• Political Pressures
• Extreme budgetary pressures mean states need as
  much tax premium as they can get
• Competing models for tax allocation
• Some states may simply keep 100 of the tax
• Changes in Insurance Commissioners and Staff
• New regulators may not have the background on
  Lloyds issues
• Lloyds is working to educate regulators and
  explain the market's business model

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Summary Impact on Lloyds Surplus Lines Business

• Maintain Eligibility
• For now, Lloyds is continuing to make annual
  eligibility filings with the IID and, through
  2011, individual states
• Going forward, Lloyds hopes to be able to reduce
  required filings since we are listed on the IID
  white list
• Continue Data Collection on Allocation of Premium
  Tax
• Lloyds will continue to collect data on
  allocation of premium taxes for multistate risks
  and will make premium statistical filings
• Lloyds will continue to allocate premium for
  admitted business in Illinois and Kentucky, as
  may be required, and pay the admitted premium tax

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Summary Impact on Lloyds Surplus Lines Business

• Engage with NAIC and State Regulators
• Lloyds is liaising with the IID and state
  regulators to ensure that any changes in filing
  requirements take into account Lloyds unique
  structure
• Requires that Lloyds gives greater emphasis to
  its relationship with the NAIC IID office and
  supervising regulators
• Lloyds will continue to monitor and review
  position regarding Master/Group policy business
  consult with market where necessary

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Next steps

• Lloyds will
• Continue to engage with U.S. regulators at state
  and federal level to ensure Surplus Lines
  eligibility and compliance burden on Lloyds
  market is kept to a minimum.
• Drive forward relief at state level on
  reinsurance collateral reform
• Seek Federal solution for nationwide collateral
  reduction
• Continue to monitor and review position regarding
  Master/Group policy business
• Review impact upon Kentucky Illinois admitted
  business and consult with market where necessary.

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Regulatory Communications

• Continued engagement with key sector groups in
  London U.S.
• Targeted communications advising progress
• Repository of useful information accessed via
  dedicated page under Key Projects on
  Lloyds.com Regulatory communications page.
  This includes
• Title V of the Dodd-Frank Act and summary of key
  provisions
• Regulatory updates addressing Dodd-Frank
• Letter to managing agents, dated 14 February,
  2011 detailing Lloyds response
• Detailed timeline of key events and planned
  communications
• Next planned communications

Q1 Mar Market communication Update on Lloyds state level collateral applications
Q2 Apr Market bulletin detailed guidance on practical implementation of state level collateral arrangements
Q2 May Market bulletin setting out approach to data collection after 21 July 2011, NRRA effective date
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questions
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Disclaimer This document
is intended for general information purposes
only. Whilst all care has been taken to ensure
the accuracy of the information, Lloyds does not
accept any responsibility for any errors and
omissions. Lloyds does not accept any
responsibility or liability for any loss to any
person acting or refraining from action as the
result of, but not limited to, any statement,
fact, figure, expression of opinion or belief in
this document.