The policy was taken out by Lloyd's to cover its central fund, which exists to pay policyholders in the event of any of the 71 individual underwriting syndicates in the market being unable to do so.

Although up to £290m ($452m) is at stake in the arbitration, Lloyd's said on Wednesday its financial position would remain robust, even if it lost, while insisting it remained confident of the outcome.

Last year the central fund was £476m, against £280m in 2001. Lloyd's central assets rose 55 per cent to £63m and are forecast to reach about £800m by the end of this year. The central fund policy, taken out in 1999, will have cost Lloyd's £78m in premiums by the time it expires at the year-end. The reinsurers that wrote the policy are units of Swiss Re, GE Employers Reinsurance, Hannover Re, St Paul, Chubb and XL Capital.

Swiss Re said the reinsurers had entered into the contract to pay policyholders' claims in the event that a Lloyd's syndicate became insolvent, and the central fund could not cope.

But the Zurich-based group said Lloyd's had submitted claims for discretionary payments from the central fund used to protect members' solvency and to fund liquidity requirements, particularly in the US. "This is not the purpose for which the insurance cover was intended and as such the reinsurers strongly dispute these claims."

The reinsurance revelation overshadowed the market's expected return to profit, with Lloyd's reporting a pro-forma profit of £834m last year on an annually accounted basis, compared with a loss of £3.1bn in 20001 - mainly due to September 11. Its initial projection for 2002 on a traditional three-year accounting basis was a profit of £1.48bn. On the same basis, it forecast a loss of £1.65bn for 2001 and confirmed a loss of £2.4bn for 2000.