LONDON-Lloyd's of London last week upped its Sept. 11 net loss forecast to £1.9 billion ($2.68 billion), while the new projections of Lloyd's exposure to the terrorist attacks have prompted questions about the market's reinsurance arrangements.

While Lloyd's increased its predicted net loss by around 45%, it raised its estimated gross loss by just 6%, to £5.7 billion ($8.04 billion).

Lloyd's said in a statement that the "primary source" of the increase is "new property claims and increasing reinsurance exposures as other primary insurers have revised their loss estimates upwards."

"The increase in Lloyd's (World Trade Center) loss figure is consistent with the adjustments made by a number of Lloyd's managing agents and other insurance companies, over the last eight weeks. In addition, it includes provision for reinsurance failure," Lloyd's Chairman Sax Riley said in the statement.

In addition, Lloyd's has increased its projected marketwide losses for 1999 and 2000 to £1.67 billion ($2.69 billion) and £1.49 billion ($2.22 billion), respectively. Previously, Lloyd's had projected losses of £1.39 billion ($2.24 billion) for 1999 and £700 million ($1.04 billion) for 2000. Some of the Sept. 11 losses will fall on the 2000 year because policies were written in that year.

Following Lloyd's announcement, Standard & Poor's Corp. said its A rating of Lloyd's would remain on CreditWatch with negative implications, and A.M. Best Co. said that its A- rating of Lloyd's would remain under review.

The marked disparity between the revisions for net losses and gross losses is raising questions about Lloyd's syndicates' reinsurance arrangements.

A Lloyd's spokeswoman explained that difference could be attributed to a change in the nature of claims being received. For example, aviation claims from the Pennsylvania and Pentagon air crashes are now less than previously expected, and reinsurance of those claims would not be exhausted, she explained. At the same time, there has been an increase in property claims-which are less heavily reinsured than the aviation claims-which may lead to the exhaustion of some reinsurance, she said.

The increased loss estimates are the result of greater accuracy in calculating claims, said Miles Trotter, insurance analyst at A.M. Best in London. Underwriters are able to make better estimates of exposure because loss adjusters have access to the WTC site, he said.

But Christopher Stockwell, chairman of the Lloyd's Names Assn. in London, said he considered Lloyd's explanation to be "very, very implausible." The LNA represents the interests of the individual investors who back syndicates.

"We are just not being told the full story," Mr. Stockwell said. He called on Lloyd's to provide details of every syndicate's gross and net loss estimates, as well as information on intersyndicate reinsurance.

"There is no doubt at all that there is substantial intersyndicate reinsurance. But how big it is, we have no idea, because Lloyd's has only been reporting (estimated) losses net of intersyndicate reinsurance," Mr. Stockwell said. "There is anxiety that what happened in the 1990s will happen again," he said, referring to the London market's excess-of-loss spiral.

The specter of reinsurer failure has also been raised in the past month.

Although Fitch IBCA in London maintained a watch on its A- rating of Lloyd's in the wake of the revised loss estimates, it said it would be monitoring Lloyd's position with regard to reinsurance recoveries.

"Lloyd's has indicated that it has examined the quantity and the quality of reinsurance arrangements in reaching its estimate for the terrorist attack loss net of reinsurance recoveries," it said in a statement. "Fitch takes comfort from this review but, given the magnitude of the loss and the likelihood that the bulk of the loss will be concentrated among reinsurers, it believes it is inappropriate to rule out reinsurer failure."

Best's Mr. Trotter said, though, that syndicates appear to be using highly rated reinsurers, giving the market a certain amount of security from any reinsurance failures. But he noted that if there are difficulties recovering reinsurance, they would not be known for some time.

"Clearly, it is a big loss, and it will have an impact on the insurance and reinsurance industry," Mr. Trotter said. "There will be some companies that fail as a result," he said. Earlier this month, Japanese reinsurer Taisei Fire & Marine Insurance Co. Ltd. collapsed because of its Sept. 11 losses, he noted.

News of Taisei's collapse was followed last week by the announcement that Danish reinsurer Copenhagen Reinsurance Group was closing its doors (see story, page 25).

Fitch also expressed concerns about unrecoverable reinsurance.

"The pure-year estimates assume that Lloyd's syndicates will not incur significant bad debts in respect of reinsurance and retrocessional recoveries. Should reinsurance collectibility become an issue for the Lloyd's market, Fitch will make further adjustments."

Mr. Stockwell of the LNA also expressed concerns that the market's Central Fund would be hard hit by the Sept. 11 losses.

"There is a series of syndicates whose parents cannot support them, so that will fall upon the Central Fund. So far as I can see, the Central Fund is facing complete wipeout," he said.

The Central Fund is backed by a reinsurance policy provided by six major reinsurers. If more than £100 million ($141.3 million) is claimed on the Central Fund in any one year, the reinsurance policy will make available £350 million ($494.6 million) to meet claims. This policy will likely be tapped "in the next couple of years," the Lloyd's spokeswoman said.

Swiss Reinsurance Co., which is the lead property insurer on the World Trade Center insurance program, is the lead reinsurer on the Lloyd's program, with a 32.5% line.