Moreover, the amount that Lloyd's must pay will be substantially higher than it is currently estimating if the first big lawsuit arising from the attacks succeeds, industry experts said. Larry Silverstein, the New York property developer who is the leaseholder on the World Trade Center, has argued that because two planes crashed into the twin towers, two events took place. If the courts agree, he would get two payments of US$3.6 billion, the amount of his coverage. Insurers say the attacks were one event.
The shortage of cash at Lloyd's has already forced it to ask regulators to bend the rules.
In exchange for an exemption from the regulatory scrutiny that American insurers receive, Lloyd's is permitted to put into a trust fund an amount of money equal to its expected claims. If it failed to pay claims, they would be paid from the trust fund. Under that arrangement, Lloyd's was required to have an amount equal to 100 percent of its September losses in the trust fund by Nov. 15. Regulators agreed late last month to let Lloyd's put up 60 percent of the money and gave it four and a half months to come up with the rest.
Lower ratings
But credit ratings agencies, which evaluate the ability of insurers to pay claims, are not as willing to give Lloyd's a break. AM Best, a ratings agency that specializes in insurance, and the Standard & Poor's rating agency have reduced Lloyd's ratings by a notch.
Other rating agencies have lowered ratings on some of the 108 Lloyd's business units, known as syndicates.
Matthew Mosher, who is in charge of property casualty ratings at AM Best, said that although Lloyd's moved from an A to an A-minus rating, it remains in the agency's secure rating category. The downgrades are significant, however, because Lloyd's could lose business. Some corporations will buy coverage only from insurers with the highest secure ratings.
The financial shock to Lloyd's from the September attacks came at a time of particular vulnerability. Lloyd's had already been weakened by four consecutive years of heavy losses, an estimated US$4.9 billion since 1997. Competition had driven down prices for the entire industry, especially for the aviation and marine coverage that Lloyd's pioneered.
In the previous crisis, Lloyd's lost nearly US$12 billion over five years beginning in 1988. At one point, analysts say, Lloyd's was about US$1.4 billion short of what it owed in claims. To raise money, Lloyd's sold its London headquarters and leased it back.
Its financing then came mainly from more than 30,000 individual investors who shared in insurance profits and had promised to pay whatever Lloyd's needed to meet its obligations. Many of the investors, known as "names," were driven into bankruptcy, and some committed suicide.
Now Lloyd's has 2,850 individual investors and gets 80 percent of its capital from corporations, mostly other insurers. The corporate investors have only limited liability to Lloyd's. Unlike the names, when Lloyd's needs more money, the corporate investors can either pay up or leave.
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