US Reinsurance Collateral Changes

What is changing?

Presently a Lloyd’s reinsurer providing protection to a US reinsured is required to provide collateral supporting that contract in the form of the Lloyd’s Credit for Reinsurance Trust Funds. This is deducted by Lloyd's from the premium received for each contract. The trust funds mean that a US reinsured can take full credit for reinsurance provided by Lloyd’s.

As a result of the UK-US & EU-US covered agreements, new rules are coming into effect in Q4 2022 eliminating collateral requirements for financially strong non-US reinsurers writing US reinsurance.

There is no requirement to post collateral if:

A reinsurer has at least €226m of own funds or capital and surplus.
A central fund contains at least €226m.
A solvency ratio of 100% SCR under Solvency II.
The assuming reinsurer provides consent to the jurisdiction of the Courts of the US (Lloyd’s does this centrally).
The assuming reinsurer consents to the host supervisory authority as agent for process of service (Lloyd's does this centrally).

Reinsurers that are approved for Reciprocal Reinsurer status are no longer required to post collateral for their US reinsurance obligations. US cedants will continue to be able to take full balance sheet credit for this reinsurance under US state credit for reinsurance rules.

The Lloyd’s market has been approved as a Reciprocal Reinsurer by US regulators and the NAIC on the basis of its financial strength and that it fulfils all other requirements for Reciprocal Reinsurer status. All US reinsurance contracts written by Lloyd’s underwriters incepting on or after 1 October 2022 will be written under the Reciprocal Reinsurer status. This means that no collateral will be posted in the Lloyd’s Credit for Reinsurance Trust Funds.

The elimination of collateral requirements is prospective only and will apply to contracts written on or after 1 October 2022. Contracts of US reinsurance written prior to 1 October 2022 will continue to be funded in the Lloyd’s US Credit for Reinsurance Trust Funds. Collateral will not be eliminated for existing US reinsurance contracts – existing collateral will continue to be adjusted on a quarterly basis as the Lloyd’s US Situs Credit for Reinsurance Trust funds run-off.

Will there be any changes to the way US reinsurance business is processed?

No. US reinsurance business will continue to be coded and processed in the same manner. However, Lloyd’s has made adjustments internally so that no funding of US reinsurance business will take place from 1 October 2022.

Is there any specific wording that will be needed for US reinsurance contracts following the change to Lloyd’s status?

Yes. US reinsurance contracts written under Reciprocal Reinsurer status are required to include a provision committing the reinsurer to post collateral if it resists enforcement of a final judgment that is enforceable under the law of the jurisdiction in which it was obtained, or a properly enforceable arbitration award. A suite of appropriate clauses has been published by the LMA to meet this requirement. It is important that the words in italics are included as their effect is that if the jurisdiction giving the judgment stays enforcement (for instance until conclusion of other proceedings which may impact the judgement), the legislation recognizes that collateral should not have to be posted until the Court dealing with the dispute gives leave for the judgement to be enforced.

It is also recommended that US reinsurance contracts incepting on or after 1 October 2022 make clear that the cedant is not a beneficiary of Lloyd’s US Credit for Reinsurance Trust Funds and has no recourse to them. A suggested wording is set out as follows: “This Agreement does not constitute an American Reinsurance Policy under the Lloyd’s US Situs Credit for Reinsurance Trust Deed or the Lloyd’s American Credit for Reinsurance Joint Asset Trust Deed and the ceding insurer does not have recourse to those trust funds.”

Chris Mather
Senior Executive, Technical Underwriting
chris.mather@lmalloyds.com

Arabella Ramage
Legal Director
arabella.ramage@lmalloyds.com