Underwriters are looking to a bumper year at Lloyd's in 2002 as both insurance and reinsurance rates harden, with some underwriters saying rates have jumped forward to levels not expected until 2003.

Underwriters are looking to a bumper year at Lloyd's in 2002 as both insurance and reinsurance rates harden, with some underwriters saying rates have jumped forward to levels not expected until 2003.

The 1999 year of account was seen as the bottoming out of the market after several years of heavy losses, although the September 11 terrorist attacks have severely hit the 2001 account.

Editor of Lloyd's directory Chatset, Charles Sturge, says: "We must be looking at a golden era now, because rates are skyrocketing. But it depends on what capacity Lloyd's can trawl up. Underwriters are looking for a lot more capacity.

"People will know what their cash calls are and the final list of pre-emptions is out, so they will know what cash they have to find and that will be critical for both corporates and Names."

Stephen Searby, a director in the insurance division at rating agency Standard & Poor's (S&P), agrees. "Lloyd's is a good proxy for the market as a whole and, given the increases to premium rates already coming through prior to September 11 and the likely increase in the levels of those premiums after that date, one can only assume that 2002 will be a very good year.

"Obviously one has to caveat that with what will be the level of catastrophe activity, but on the basis of a normal catastrophe year, 2002 has to be much better than previous years."

He adds: "Many policies are renewed from January 1. The season this year will be very late because of the US disaster and negotiations will still be going on late in the year and perhaps even creep into the new year.

"The quantum of rate increases will not be known, but is likely to be significant. On capacity, it will not be a case of willingness - that is in place - but the ability to raise money."

S&P has reduced Lloyd's financial strength from A+ to A and placed it on credit watch, but the agency has also put 15 other insurers with exposures to the US tragedy on credit watch.

Lloyd's spokesman Adrian Beeby says the market is not expecting any big change to the projected £13bn capacity for 2002. He adds: "There is discussion by some syndicates to expand further. Underwriters see this as a re-run of 1992 to 1993, when the market went from a grim year in 1992 to a profit of £600m in 1993."

For the current year of account, capacity is £11bn and is expected to rise purely as a result of higher premiums in a hardening market.

One particular worry for Lloyd's is aviation cover, where it has about 25% of the market. National carriers such as Swiss Air have collapsed, while British Airways, Aer Lingus and the US carriers are cutting back drastically on staffing levels as business evaporates and rating is difficult.

Lloyd's relief
US insurance regulators have given Lloyd's a breathing space by reducing the amount of its liabilities on its US business that must be deposited in a trust from 100% to 60%.

However, rting agency Fitch believes Lloyd's has underestimated its World Trade Centre (WTC) losses by around £400m, not least because large catastrophe losses tend to be underestimated initially. Fitch has estimated 2001 losses at £2.1bn and, post-WTC, has downgraded Lloyd's from A+ to A- and placed it on "negative watch".

To assess its losses, Lloyd's has been using its Realistic Disaster Scenarios (RDS) system, introduced in 1995, which tests the market's exposure to a variety of major natural and man-made catastrophes. In working out its WTC exposure, Lloyd's did a further cross-check of existing RDS outcomes.

However, AM Best warns the uniqueness and severity of the WTC event, and its potential impact on the global reinsurance industry, "means the risk of unrecoverable reinsurance from outside the market must be higher than that normally factored into RDS models".

Like the war on terrorism, the insurance claims battle could be a long, drawn-out affair. Larry Silverstein, who owns the lease to the WTC, is seeking £4.5bn from insurers following its destruction, claiming the two hijacked planes that hit the building were two separately insured incidents. Over to the US lawyers - not noted for their speed in settling such issues.

Lloyd's is particularly nervous about damaging its image in the US. Back in June, Lloyd's announced that, for the first time in its 300-year history, the US is now its biggest market with 35% of gross premium, equivalent to £4.1bn, compared with a 34% share for the UK.

As another sign of market confidence, in April the first six brokers (including the first from overseas) were admitted to Lloyd's under the new direct access rules. In all, 18 brokers have been admitted to date, underlining the global importance of the market.

Lloyd's also received strong backing pre-WTC. In August, rating agency AM Best affirmed its A rating of Lloyd's and removed the negative outlook attached to it. The agency said it was a "positive endorsement of Lloyd's trading position and financial strength".

The same month, Chatset said it was "more optimistic than other commentators" in its forecasts for the 1999 and 2000 years of account.

Earlier this year, Lloyd's itself was predicting a loss for 1999 of £1.39bn and for 2000 a loss of £694m. Lloyd's said then that 1999 was "widely acknowledged to represent the low point of the global insurance market".

Lloyd's chairman Sax Riley has emphasised that "the market is open for business and trading normally following the US tragedy". Further, the estimated WTC losses of £1.3bn will be shared among more than 100 syndicates - 12% of its 2001 capacity - and Riley says this is "manageable", given Lloyd's underlying assets of more than £19bn (see box).

The losses will undoubtedly put a lot of pressure on weaker syndicates, leading to fewer but better capitalised syndicates. So in this sense, Lloyd's will actually be strengthened.

This is the view of Moody's, which says: "As long as the common security offered by central resources proves sufficient, the franchises of those trading forward will benefit significantly from the recent events."

Moody's has put under review a number of syndicates, but has made clear that it will "typically conclude with either a confirmation of the rating or one-notch downgrade. Rating downgrades of two or more notches are unlikely except in cases where actual losses are significantly higher than current estimates or other adverse trends or events becoming manifest."

Fundamental industry changes
Sax Riley adds: "This is not about Lloyd's financial security, it's about a fundamental change in the financial security of the whole insurance and reinsurance industry."

However, largely on the back of expected higher premium income, Lloyd's has increased its premium levy on all syndicates from 1.1% to 2% until the end of 2003, which should boost the Central Fund to £692m.

The failure of Cotesworth, which has traded at Lloyd's since 1855, has sent another shiver through the market. Its parent company, HIH Australia, failed to find funding next year for its marine syndicate 535 and non-marine syndicate 1688.

Markel is one Lloyd's group that is consolidating for next year, merging its four syndicates into one. It has also cancelled some policies, due to lack of reinsurance.

Markel International president Jeremy Cooke says: "Reinsurance capacity next year will be a very real issue for the market for the first time in a number of years. Clearly, limit size will be an issue, but reinsurers will be much more selective as to whom they reinsure and how they reinsure their clients.

"There will be changes in conditions, which may well include terrorism exclusions. The reinsurance market is unlikely to reinsure in the rather bundled manner that it has done so in recent years. I expect there will be a return to a disciplined specific programme - that is, marine will once again be pure marine and will not include coverage for non-marine, on-shore property within the energy account and so on."

He adds that, while reinsurance will be critical, there will be opportunities to make underwriting profits across a broad range of products.

"On a pure underwriting year basis, 2002 should be highly profitable and will offer us the sort of opportunities underwriters have been anticipating for far too long."

As the war on terrorism goes on with little prospect of an end in sight, uncertainty will continue to hang over the global insurance and reinsurance markets. However, those trading forward at Lloyd's are confidently looking to a profitable year at long last.