Lloyd's finance director Luke Savage has said he is 'absolutely' comfortable with the market sourcing around half of its funding from letters of credit (L/Cs).

His remarks respond to perceptions that the British insurance and reinsurance market's reliance on L/Cs is a weakness.

Deposit requirements

Lloyd's requires each member to maintain a deposit, which must consist only of approved assets, which include L/Cs, bank guarantees, cash, securities, stocks and shares.

The deposit is available to meet claims, but in practice it is a fund only drawn upon as a last resort.

Concerns

Ratings agency S&P says Lloyd's high utilisation of L/Cs to support its capital needs is a relative credit weakness.

According to the rules that S&P says are applicable to Lloyds, at least 50 per cent of its regulatory capital requirement should be met by Tier 1 capital.

Additional risk

The ratings agency has pointed out that L/Cs are only eligible as Tier 2 capital and at times have represented more than 50 per cent of members' funds.

Moreover, they say nearly all of the L/Cs are provided by a handful of banks, which S&P sees as a market concentration risk.

No concerns

But in an interview with Insurance Insider, Savage said that L/Cs work well for Lloyds and the insurance market.

"As far as we're concerned, a L/C is as good as cash," he reportedly said.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.