Lloyd's of London, one of the world's most respected insurance and reinsurance markets, has issued a market bulletin updating requirements around the provision of Tier 2 capital. In the Lloyd's context, Tier 2 capital typically includes letters of credit (L/Cs), bank guarantees and life insurance policies that ensure an insurer or reinsurer meets capital and risk management requirements.

The new requirements include one that stresses the importance of confirming the validity of L/Cs on a regular basis, which may be a response to the alleged widespread use of forged L/Cs in the multi-billion dollar fraud involving insurance fintech, Vesttoo (DC World News, 19 July 2023).

Six-monthly validity checks

"Lloyd's require all issuing banks to confirm the validity of each L/C issued on behalf of members on a six-monthly basis," according to the bulletin.

"If this confirmation is not provided by the issuing bank, Lloyd's reserves the right to discount the value of the L/C as part of a member's FAL [funds at Lloyds] until such time as the bank provides the necessary confirmation", it adds.

Due diligence on L/Cs

The bulletin does not mention the Vesttoo case, so the new requirement cannot be assumed to be a response to one of the insurance industry's largest frauds.

But it likely reflects heightened market awareness about the importance of conducting due-diligence on instruments such as L/Cs after the dramatic failure of existing regulatory checks and balances in the Vesttoo linked reinsurance deals where L/Cs were found to be invalid and forged.

Lloyd's is one of the world's leading and oldest insurance markets. However, it is not an insurance company but a marketplace where multiple insurance underwriters (individuals or syndicates) come together to provide insurance and reinsurance services.

Lloyd's of London's market bulletin, Revised guidance on Tier 2 capital limits; timing and open year solvency requirements, can be found here.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.