The solvency of the Lloyd’s market is coming under scrutiny from an unlikely source. The National Association of Insurance Commissioners (NAIC), which brings together the powerful US insurance regulators, has launched an investigation into the ability of Lloyd’s to meet its $18 billion gross exposure to the September 11 attacks.

Of particular interest to the US investigators will be the retrocession arrangements made by Lloyd’s. As we reported last week, Morgan Stanley has sounded a note of caution that too many retrocession arrangements could have been made with relatively few reinsurers.

London’s Sunday Times reported that the US investigation is receiving due co-operation from Lloyd’s, which in reality has little choice. The NAIC has the ability to make Lloyd’s operations in the US market uncomfortable. If the market is found to be unable to meet its liabilities, it could be barred from writing US reinsurance business.

The British Financial Services Authority will assist with the investigation, which will use a US accounting firm to do the maths. The establishment of just how much the market is exposed for, and what retrocession arrangements it has made, will be eagerly awaited by insurers around the world who rely on Lloyd’s for much of their cover.