Lloyd's Denies It Is 'In Jeopardy'

London Editor

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

“Already financially troubled, we believe the World Trade Center losses will sink some Lloyds syndicates, drain Lloyds Central Fund of cash, and exhaust Lloyds insurance coverage,” the report said.

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

Morgan Stanley noted that even before the World Trade Center disaster, the liquidation of several troubled syndicates would force the market to tap the Lloyds Central Fund for an estimated 150 million ($221 million at current exchange rates). Morgan Stanley said that at year-end 2000, the Lloyds Central Fund had 323 million ($474.8 million) in cash.

“Theoretically, 46 percent of this available cash would be taken up already if Lloyds Central Fund had to cover 150 million of potentially unpaid losses estimated to be already in the market” before the WTC losses, the report said. “Now comes the World Trade Center loss, to which many Lloyds syndicates are exposed through aviation, workers compensation, property reinsurance, whole account reinsurance, excess and umbrella casualty, life, disability, event covers, and other coverages.”

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

“It now appears inevitable that Lloyds security will be tapped to cover uncollectible claims, and quite possible that Lloyds security may be exhausted by those claims given the magnitude of the WTC loss,” the report asserted. (Morgan Stanleys statements about inadequacy of security are “misleading in the extreme,” said Lloyds. “Based on information presently available, Lloyds believes its exposure to the losses incurred last week to be manageable.”)

Referring to the general problem of uncollectible reinsurance that may affect the industry, Morgan Stanley said primary companies should be considering their gross losses rather than their net losses.

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

The report said this is going to be “the largest workers compensation loss in history (by multiples), the most expensive aviation disaster in history (by multiples), one of the largest property losses in history, the most expensive business interruption in history (by multiples), the largest life insurance catastrophic loss in history (by multiples), and one of the largest potential liability claims in history.”

Some of the numbers reported by companies “are likely significantly understated, mostly because they are net of reinsurance recoverables that in many cases will never be collected,” the report said.

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

“Most of the gap between the total loss estimate that is developing by consensus ($30 billion or even higher) and the net losses reported by insurers ($13.6 billion) by implication has been ceded to reinsurers,” the report said. “A $25 billion loss to the reinsurance market (including losses separately reported by reinsurers), especially if weighted toward the Lloyds market, as suggested by the property and aviation nature of this loss, would be 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 the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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Lloyd's Denies It Is 'In Jeopardy'

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