For centuries, Lloyd's of London, which began doing business insuring ship cargo in a dockside coffee house in 1688, has been the very symbol of insurance. It has expanded exponentially to insure the most dangerous and most precious of things, from North Sea oil rigs to Betty Grable's legs to Mick Jagger's voice. It has always paid its claims.
But Lloyd's has been staggered by heavy losses in the Sept. 11 terrorist attacks. Now, insurance analysts, rating agencies and regulators are raising questions about Lloyd's ability to pay its share of coverage for the attacks, the worst single disaster ever for the insurance industry.
Lloyd's is no stranger to brushes with possible insolvency. In the late 1980s and early 1990s it was socked with a string of multibillion-dollar claims from natural calamities and asbestos liability that brought it to the brink of collapse.
Lloyd's says no one should doubt its ability to pay now. But in the next week or so, US insurance regulators will begin the most thorough examination they have ever conducted of Lloyd's finances, an indication that they do not take Lloyd's promises at face value.
"We want to verify what Lloyd's says," said JohnOxendine, the insurance commissioner of Georgia, who is coordinating the work of the American regulators. "We trust them, but like Ronald Reagan said, `Trust, but verify.' We just want to be good, prudent regulators and double-check."
The regulators want to do everything possible to help Lloyd's through this crisis. A failure to pay claims would not only hurt customers and badly damage Lloyd's credibility but would also probably create a temporary shortage of commercial insurance, driving up prices as customers sought coverage elsewhere.
Million dollar examination
On Wednesday, the regulators hired Arthur Andersen, the big accounting firm, to help with their investigation, and Nov. 5 Oxendine and regulators from seven other states will meet in Dallas to discuss their next steps. Industry experts say the examination is likely to last two to three months and cost more than US$1 million. Under insurance industry practice, Lloyd's must pay the cost of the examination.
"This examination is a big deal," said a former regulator who has been closely following Lloyd's.
The problem for Lloyd's is that it is responsible for US$8 billion in claims, or 20 percent of the estimated US$40 billion in losses in the September attacks -- the largest single share of any insurer. It says it expects to be reimbursed by other insurers for all but US$1.9 billion of the losses. But the regulators are concerned about whether it can raise cash within its organization and whether the insurers that have promised to reimburse it will have problems. All of this raises the possibility that the cash might not be there when customers of Lloyd's submit claims for losses in the attacks.
Lloyd's contends that it is dealing with a cash-flow problem -- in other words, the money is coming, though not necessarily fast enough -- and that it is in no danger of sinking.
"This has always been a question of short-term liquidity, not solvency," Sax Riley, the chairman of Lloyd's, said in a statement last month.
But analysts suggest that Riley is drawing a distinction without a difference. "In our view, liquidity and solvency are inextricably linked," Alice Schroeder, an analyst at Morgan Stanley, said in a report. "Either way, if you don't have the money, you can't pay your claims."
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