WTC Update from Lloyd’s

We don’t have to hold our breath any longer. The following Lloyd’s Press Releases officially peg the WTC losses at $1.9 billion. This is considerably less than
we estimated. It is a lot of money, but it is a giant market and this figure is only about 12% of the market’s capacity for 2001!

News sources have irresponsibly and recklessly guessed at Lloyd’s and other insurers financial responsibility. The year 1991 is not so far removed from memory that the humiliation suffered by the TV Magazine, “60 Minutes” for predicting the demise of Lloyd’s then should have been recognized by the “experts” before the misguided release from Morgan Stanley of their prediction of Lloyd’s demise as a result of the WTC disaster.

$1.9 BILLION WILL NOT SINK HMS LLOYD’S!

Since 1536, Lloyd’s has essentially operated the same way. In the interim years this market has operated daily without interruption, even through the war
years. It has been exposed to every economic, political and financial condition during those 465 years and survived. There is no assemblage of facts and no
exposure to events that comes close to the accumulative knowledge in that premier house of underwriting experience.

We are as amazed at the resilience of Lloyd’s and to it’s appropriate response to every unforeseen event it encounters. There is no panic in the British Psyche. There is always a calm, rational reaction to the matter at hand. We are reminded of seeing the City of London 1980. It was 35 years after World War II. Buildings were still showing the bombing damage. We visited Churchill’s underground war rooms for the first time. The sense of danger these people endured was understandable. The people had resolved that Hitler would not defeat them. In all of Europe only France and Russia remained unoccupied by Nazi’s. The devastating rocket bombs had become a reality and were now being lobed across the English Channel. The rockets were even more frightening then the hoards of bombers that relentlessly came every night. At least the bombers could be heard. The rockets arrived silently, ahead of it’s own eerie sounds. Somehow, some way, these brave and determined people endured Hitler’s all-out assault and proudly survived.

Lloyd’s has often been tested before. A poignant response has always been forthcoming.

We are not prognosticators. We can only report what we have experienced. In a horse race between Lloyd’s and the field, our bet would unhesitatingly be
placed with Lloyd’s.

Best’s and S&P are downgrading nearly all insurers. This is probably not necessary, but as a rating business, those firms have to display some reaction to the terrorist attack. Among the many insurers rating’s adjustment announcements, Best’s has changed Lloyd’s rating from A to A- and S&P from A+ to A. This is still within the no fright zone.

IT’S BUSINESS AS USUAL AT LLOYD’S
LLOYDS PRESS RELEASES FOLLOW

 

Press Release

LL70/01 26 September 2001
LLOYD’S CONFIRMS LEVEL OF EXPOSURE TO US ATTACKS
Lloyd’s of London, the world’s leading insurance market, has now been able to complete a more detailed analysis of its liabilities arising from the attack on the World Trade Center. This study collated and analysed estimated losses from over 100 syndicates, examined the quantity and quality of reinsurance arrangements, and worked through the solvency issues for thousands of members – both corporate and individual. A further cross-check of existing Realistic Disaster Scenario outcomes was also undertaken.

The estimate at this time shows that Lloyd’s net exposure arising from the attacks is £1.3 billion (US$1.9 billion). This exposure is equivalent to 12 per cent of the market’s 2001 capacity.

Commenting on the estimate, Lloyd’s Chairman Sax Riley said:
“Arriving at an estimate for a marketplace as complex as Lloyd’s was always going to take longer than for a single insurance company – especially for a situation which is still changing rapidly.

“While a figure of this size will have a significant impact on the Lloyd’s market, the market’s strong capital base will absorb this loss. The size of our asset base, the spread of the losses and the resilience of the reinsurance programmes in place are important in coming to this conclusion.

“The long-term impact of the US attacks on the insurance industry is yet to be fully appreciated. Lloyd’s is open for business and trading forward. Clearly there will be a contraction of global insurance capacity which will fuel the premium rate rises we’ve been seeing since the last quarter of 2000.”

Notes to editors

1. Lloyd’s claims paying ability falls into three segments (A, B & C below). Each segment provides capital to meet claims. The three elements, in the order in which they are utilised, are:

(A) Syndicates’ Premium Trust Funds – Total value £10.6 billion

Each syndicate has a premium trust fund that is its working capital. Insurance premiums are
paid into these accounts; claims and expenses are paid out of them.

(B1) Funds at Lloyd’s – Total Value £7.3 billion

In order to underwrite at Lloyd’s, the market’s members – both corporate and private – must
deposit funds with Lloyd’s for security.

(B2) Other assets – Total Value £212 million

Members’ funds above those deposited with Lloyd’s

(C1) Lloyd’s Central Fund – Total Value £323 million

A central security fund available to meet claims. All Lloyd’s syndicates pay into this fund annually at a rate set by Lloyd’s centrally. The rate for 2002 is one per cent of capacity.

(C2) Central Fund reinsurance policy – Total Value £500 million (£350 million in a single year)

The Central Fund is reinsured by six major international reinsurers. If more than £100 million is claimed from the Central Fund in any single year, an additional £350 million is made available to meet claims through the reinsurance policy.

(C3) Central Fund Callable Layer – Total Value £300 million

Further funds that Lloyd’s can call upon from syndicates’ Premium Trust Funds

2. Realistic Disaster Scenarios are scenarios used to test the market’s exposure to a variety of major natural and man-made catastrophes. They were introduced to the Lloyd’s market in 1995.

3. 80 per cent of capital backing the Lloyd’s market is now provided by corporate members – companies which underwrite with limited liability. Lloyd’s has 890 corporate members – many of whom are major insurance companies – and 2,800 individual members.

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