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LONDON-Lloyd's of London hopes that within three months it will have either a market security rating from one or more independent credit agencies or an explanation of why such a rating is not possible.
Lloyd's has been talking to A.M. Best Europe, Standard & Poor's Insurance Rating Services and other rating agencies to develop a methodology that would allow comparisons of the market's security with that of other insurers, said Roger Selleck, head of commercial policy at Lloyd's.
"We're still in the exploratory stage," he said. "But we hope to be in a position in (about) three months to have some answers. . . .Then we can announce either a rating or the conclusion that the agencies can't produce a compatible rating with our peers."
Lloyd's has never had a security rating for the market as a whole or for individual syndicates, Mr. Selleck said. S&P has "ranked" syndicate financial performance since 1992, but that ranking has not reflected each syndicate's ability to pay claims.
The S&P syndicate ranking also has been criticized for not foreseeing the demise of syndicates, such as 418, underwritten by Stephen Merrett (BI, Nov. 6, 1995).
However, S&P may make subtle changes its formula for ranking syndicates by the end of the year, a spokesman for S&P said.
S&P has expressed interest in publishing a market security rating with or without Lloyd's consent for a number of years. "They have persisted and we think that now it might be worthwhile," said Mr. Selleck, following the market's reconstruction and renewal last year that split pre-1993 liabilities into Equitas Ltd.
Lloyd's may ask more than one credit agency to rate its security, Mr. Selleck added.
Any market security rating would be based on Lloyd's chain of security for all syndicates, which includes members' deposits, corporation assets and the Central Fund. Lloyd's recently announced that it will strengthen its security by increasing in individual members' capital ratios to 50% of premium capacity by the year 2000 from the current 20% to 30%, in line with corporate membership.
The rating also would take into account:
The strength of Equitas to continue paying claims-its demise could mean that members would again have to pick up the tab for long-tail liabilities.
The 44 orphan syndicates that stopped underwriting after the Equitas cut-off date.
Runoff of the old PCW Underwriting Agencies Ltd. syndicates by Lloyd's-owned Lioncover Ltd., which have not been reinsured into Equitas.
Meanwhile, Lloyd's syndicate analyst Syndicate Underwriting Research Ltd. has revised its syndicate "qualitative" rating this year to make it easier to understand the ratings. SURL's recently published, 415-page "Lloyd's Syndicate Rating Guide and Market Review" for 1997 gives each syndicate a long-term performance rating using letters for the first time rather than numbers. The highest rating is A+ for excellent, and the lowest is C, or below average.
The performance rating is based on facts such as:
The make-up of the underwriting team and its performance, both now and historically, compared with peers.
The syndicate's portfolio of business and its strategy based on its 1997-1998 business plans; as well as its reinsurance protection.
Management controls for underwriting and claims.
The stability of the capital backing the syndicate.
SURL's guide is available for 250 pounds ($420) by contacting Mark Hewlett, Syndicate Underwriting Research Ltd., Latham House, 16 Minories, London, EC3N 1EX; 44-171-702-1234; fax: 44-171-702-4062.