US Reinsurance Collateral Changes

Further to Bulletin LMA22-013-CM (20 April), we would like to draw the following guidance to the attention of LMA members.

As a reciprocal reinsurer, Lloyd’s syndicates (“Reinsurer(s)”) should ensure that specific funding provisions are addressed in any US reinsurance contract incepting on or after 01 October 2022 where the US reinsured requires the contract to comply with the US requirements to take credit for that reinsurance.

The funding provisions set out below are the minimum requirements under the reciprocal treaty (“Covered Agreement”) between the US and the UK to enable a reinsured to take credit for reinsurance. US regulators are not allowed to request additional security from UK reinsurers in any other circumstances (for instance after a downgrade) in order for a Reinsured to obtain credit for reinsurance:

“The reinsurer agrees to provide security in an amount equal to 100% of the reinsurer’s liabilities attributable to this agreement :

Enforcement of judgements: if the reinsurer resists the enforcement of a final judgment that is enforceable under the law of the jurisdiction in which it was obtained.
Arbitration: if the reinsurer resists the enforcement of a properly enforceable arbitration award,

whether such judgment or award is obtained by the Company or by its legal successor on behalf of its resolution estate”.

There is no definition of “Liabilities” in the Covered Agreement. We understand that this will be defined by the applicable US regulator in the event that the Reinsurer is required to post security. Reinsurers should not therefore define “Liabilities” within their Credit for Reinsurance clause but should agree to post such security as is required by the applicable US regulator to meet 100% of the reinsurer’s liabilities attributable to the Agreement.

The wording “legal successor on behalf of its resolution estate” refers to the circumstances where the Reinsured is in run off or liquidation and whatever method has been used to deal with this has resulted in the legal proceedings being brought in the name of a different party.

In addition, for clarity and protection of Reinsurers, the following language should be added to all US reinsurance contracts incepting on or after 01 October 2022. Alternatively, Reinsurers could provide this information to the reinsured prior to concluding contract:

“Closure of Lloyd’s Credit for Reinsurance Trust Funds: “The reinsurance agreement to which this clause applies does not constitute an American Reinsurance Policy as defined under the Lloyd’s US Situs Credit for Reinsurance Trust Deed or the Lloyd’s American Credit for Reinsurance Joint Asset Trust Deed and any security provided in order to allow the Reinsured to obtain credit for reinsurance will be provided separately from those Trust Deeds”.

We attach a model clause that sets out the provisions that will enable a Reinsured to be able to take credit for reinsurance and sets out that the Reinsurer will be entitled to choose the method by which it provides funds unless stipulated otherwise by the US regulator. (LMA5585 ).

Reinsurers are free to agree additional terms with their reinsured clients over and above the minimum requirements. We understand that despite the fact that it is no longer required, some Reinsureds may still ask for additional provisions such as downgrade triggers and “Credit for Reinsurance” clauses that have been negotiated over a number of years and may not wish to substantially amend these clauses. In such cases Reinsurers need to consider how they incorporate the new minimum language into existing Credit for Reinsurance clauses. We attach a model endorsement (LMA5586 ) which would achieve this.

Reinsurers can phrase these provisions in their own words provided they comply with the minimum requirements of the Covered Agreement set out above, so there is no obligation to use either the LMA clause or the LMA endorsement as presented, provided that whatever wording is used instead meets the minimum requirements of the Covered Agreement. They are also not required on run off contracts or long term contracts which are re-signed as these continue to have the benefit of the Lloyds trust funds.

Chris Mather
Senior Executive, Technical Underwriting