Lloyd’s has issued revised guidance for members and members agents on Tier 2 capital limits, which encompasses the use of letters of credit (LOC) in the marketplace and in it has stressed how important it is that LOC’s have their validity confirmed on a regular basis.
Previously, the Lloyd’s insurance and reinsurance market had not mentioned checking the validity of letters of credit (LOCs) within its guidance documents related to Tier 2 capital.
We’ve searched through the extent of Lloyd’s documentation available and cannot find a single, clearly stated mention of this (it was probably taken as a given anyway).
But, in updating the LOC guidance for members and members agents today, the re/insurance market states, “Lloyd’s require all issuing banks to confirm the validity of each LOC issued on behalf of members on a six-monthly basis.
“If this confirmation is not provided by the issuing bank, Lloyd’s reserves the right to discount the value of the LOC as part of a member’s FAL until such time as the bank provides the necessary confirmation.”
Of course, we cannot confirm whether the inclusion of this text in the guidance is in direct response to the Vesttoo fraud issue.
But it does likely reflect the heightened level of awareness the market now has, about the importance of performing due-diligence on instruments such as letters of credit (LOC), after so many checks and balances were seen to fail in the case of the Vesttoo linked reinsurance deals where LOCs were found to be invalid and forged.
As a reminder, at our recent insurance-linked securities (ILS) market conference in London the Chief Financial Officer (CFO) of Lloyd’s, Burkhard Keese, called on the industry to be more diligent in light of the fraudulent LOC issue surrounding insurtech Vesttoo.
Numerous parties in the chain of risk transfer had not spotted the brazen fraud and so this has brought to light the fact processes around LOC’s and checking their validity could be improved, industry-wide.
The inclusion of this text in the latest LOC guidance notes for Lloyd’s members, whether in response to the Vesttoo fraud or not, shows that the market won’t take any chances with the quality of collateral posted, which should help to give confidence at a time when use of the LOC has come under increasing scrutiny.