Latest air disaster piles on the agony at Lloyd's of London

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The Independent Online

Lloyd's of London faced a fresh crisis yesterday when an aeroplane, which it had partly insured, crashed just outside John F Kennedy airport in New York.

The historic London insurance market said it had "some involvement" in the insurance of the American Airlines plane, which went down with a feared loss of more than 250 lives.The event will accentuate current problems at Lloyd's. It already faced cash flow problems and potential difficulties with solvency after the attacks of 11 September created the biggest financial losses the market has ever seen.

There are also worries that substantial numbers of Names, individual members of Lloyd's, will opt out of writing new business next year on the grounds it is too risky. This is expected to lead to more muted growth of Lloyd's as a whole at a time when it was hoping to return to profit and significant growth after a period of losses.

Early estimates suggest the insurance cost from yesterday's crash could be about $800m (£548m), including the cost of the hull of the plane and the life insurance policies from passengers. Lloyd's will not have covered all of this loss, but analysts said at least $100m of the final bill is likely to end up in the London market. Axa also said it had exposure. This sum is not large by the standards of Lloyd's, which faces a final bill of £1.3bn after 11 September and had to pay £929m following Hurricane Hugo in 1989. But it adds to already heavy liabilities which the society has to pay this year.

That process begins this week when the organisation has to put up the first tranche of capital, estimated at about £3.5bn, to assure US regulators it can meet US claims over the course of the next few months.

Rob Jones, director of the ratings agency Standard & Poor's, said: "I think a lot of individual unlimited liability Names will be calling it a day. They were probably looking forward to taking advantage of increased premiums next year but may well change their minds in view of this year's losses."

Names only account for 15 per cent of the market. But if substantial numbers leave or decide they cannot afford to underwrite new business, the effect could be to destabilise corporate Lloyd's underwriters and drive some of them to take business away from London and place it at another international market such as Bermuda.

David Wharrier, a director of the ratings agency Fitch, said: "We have Lloyd's on negative outlook because we will find out in the next month or so whether members can afford to pay for their losses."

The next few weeks are crucial to the financial strength of Lloyd's next year. On 29 November, capital providers – both individuals and institutions – who have already indicated how much cash they will provide to syndicates for 2002 must formally pledge their level of backing. This will determine Lloyd's capacity and will address whether the organisation, which is a relatively small player in the global insurance market, can compete successfully.

Most analysts believe that members will be able to pay up on this year's losses. Lloyd's has capital funds of £8bn. This is made up of a pooled levy from syndicates and Names' investments in safe assets such as bonds and cash deposits.

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