NAIC To Probe Lloyd’s Solvency After WTC Attacks, Relaxes Fund Requirements

October 16, 2001

The National Association of Insurance Commissioners intends to conduct an in depth audit of Lloyd’s financial condition following the attacks on the World Trade Center. The investigation will focus on Lloyd’s gross exposures, and the reinsurance provisions it has in place to cover them.

NAIC’s investigation was prompted by reports that Lloyd’s may face claims in excess of £7 billion ($10.15 billion). So far it has declined to state a figure for its anticipated overall loss exposure, but has indicated that it expects its losses net of reinsurance coverage to be around £1.3 billion ($1.9 billion). (See IJ Website Sept. 27 and October 3).

NAIC is concerned that the projected amounts that Lloyd’s reinsurers will be asked to bear are so large that some companies may not be able to pay them. It’s also concerned with retrocessional coverage, which in the past has come back to the cedent syndicate.

This “spiral affect” causes two problems. Initially it makes it more difficult to estimate net losses, and potentially it puts the burden back on the retrocessionaire to pay the claims. Lloyd’s spokesman Adrian Beeby indicated that while this had been a problem for Lloyd’s in the past, regulations now require that “a certain amount of risks must be reinsured outside of the Lloyd’s market.” He estimated that more than 90 percent of Lloyd’s reinsurance risks are in fact placed outside with companies rated “A” or better. While the NAIC has indicated that it believes Lloyd’s to be solvent, it will seek to verify the actual situation.

In recognition of the unprecedented nature of the WTC disasters the NAIC had previously agreed to relax its rules concerning the amounts Lloyd’s must deposit in its U.S. trust funds to cover claims. Normally 100 percent must be in the funds, which are updated quarterly, but at least for the next three months the deposit will be around 60 percent of claims estimates. The sum will still amount to several billion dollars, but will certainly ease liquidity pressure on Lloyd’s and its syndicates.

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