Lloyd's Denies It Is 'In Jeopardy'

London Editor

A controversial report from Morgan Stanley last week assertedthat “large swaths of the reinsurance market are likely insolvent”as a result of the terrorist attack on the World Trade Center, andthat “Lloyds is in jeopardy.”

“Already financially troubled, we believe the World Trade Centerlosses will sink some Lloyds syndicates, drain Lloyds Central Fundof cash, and exhaust Lloyds insurance coverage,” the reportsaid.

Lloyds issued a briefing document to inform brokers about itsposition as a result of the WTC disaster, stressing that the market“can manage the financial impact of the U.S. attacks.” Referring tothe Morgan Stanley report, Lloyds said that the report's assertionsare “totally unsubstantiated and contrary to Lloyds own currentunderstanding of our position.”

Morgan Stanley noted that even before the World Trade Centerdisaster, the liquidation of several troubled syndicates wouldforce the market to tap the Lloyds Central Fund for an estimated150 million ($221 million at current exchange rates). MorganStanley said that at year-end 2000, the Lloyds Central Fund had 323million ($474.8 million) in cash.

“Theoretically, 46 percent of this available cash would be takenup already if Lloyds Central Fund had to cover 150 million ofpotentially unpaid losses estimated to be already in the market”before the WTC losses, the report said. “Now comes the World TradeCenter loss, to which many Lloyds syndicates are exposed throughaviation, workers compensation, property reinsurance, whole accountreinsurance, excess and umbrella casualty, life, disability, eventcovers, and other coverages.”

The report added that “Lloyds has a habit of reinsuringinternally, creating reinsurance spirals among its members, and wedbet a lot of money that at least one spiral comes to light as aresult of the WTC loss.” (Lloyds said it “absolutely rejects” thisstatement. “This area is subject to rigorous regulatory scrutiny,and major losses in recent yearshave not revealed the existence ofany such spirals.”)

“It now appears inevitable that Lloyds security will be tappedto cover uncollectible claims, and quite possible that Lloydssecurity may be exhausted by those claims given the magnitude ofthe WTC loss,” the report asserted. (Morgan Stanleys statementsabout inadequacy of security are “misleading in the extreme,” saidLloyds. “Based on information presently available, Lloyds believesits exposure to the losses incurred last week to bemanageable.”)

Referring to the general problem of uncollectible reinsurancethat may affect the industry, Morgan Stanley said primary companiesshould be considering their gross losses rather than their netlosses.

The report said there is an inherent conflict between themagnitude of the disaster and the assertion by every one of the 36major companies (which had reported their liabilities at the timeof the report) that they are going to come out of the disasterfinancially sound.

The report said this is going to be “the largest workerscompensation loss in history (by multiples), the most expensiveaviation disaster in history (by multiples), one of the largestproperty losses in history, the most expensive businessinterruption in history (by multiples), the largest life insurancecatastrophic loss in history (by multiples), and one of the largestpotential liability claims in history.”

Some of the numbers reported by companies “are likelysignificantly understated, mostly because they are net ofreinsurance recoverables that in many cases will never becollected,” the report said.

Morgan Stanley said that “the implied amount ceded to reinsurersis large enough to bankrupt many reinsurers.”

“Most of the gap between the total loss estimate that isdeveloping by consensus ($30 billion or even higher) and the netlosses reported by insurers ($13.6 billion) by implication has beenceded to reinsurers,” the report said. “A $25 billion loss to thereinsurance market (including losses separately reported byreinsurers), especially if weighted toward the Lloyds market, assuggested by the property and aviation nature of this loss, wouldbe fatal to more than a trivial segment of the reinsurance market.And bankrupt reinsurers cant pay.”

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, September 21,2001. Copyright 2001 by The National Underwriter Company in theserial publication. All rights reserved.Copyright in this articleas an independent work may be held by the author.

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