Had Lloyd's been honest about their financial situation in 1970, no reasonable person would have invested in Lloyd's syndicates thereafter, and Lloyd's and its then-Names would have gone bankrupt. It is ultimately that simple.

Financial Times: Brazilian Group seeks compromise on £1.6m claim

The Brazilian reinsurance group currently being sued by Lloyd's Underwriting Syndicate F H Sasse for claims of $3.14m (£1.6m), is seeking a compromise settlement out of court.

The move follows the arrival in London of Dr Jose Lopes de Oliveria, President of Instituto de Resseguros dio Brazil (IRB), who has discussed the matter with the group's solicitors Elborne Mitchell and loss adjusters Graham Miller.

On behalf of IRB, Elborne Mitchell yesterday issued a statement which said: "As a result of recent meetings held in London concerning the reinsurance claim made against them by F H Sasse and others, the IRB are prepared to seek a resolution of the present litigation through and in conjunction with the London insurance community.

The claim by F H Sasse arises out of 1,300 contracts made through the syndicate's Florida agents Den-Har Underwriters, by which clients were insured against damage to their buildings up to the first $500,000. The syndicate has met valid claims under some of the policies, and alleges that IRB, under the terms of reinsurance for the first $100,000, now has to meet its share of the liability. So far IRB has only settled $500,000. The F H Sasse syndicate was suspended by Lloyd's last December until the dispute was settled.

In commenting on the examples in the draft report submitted with Slaughter & May's letter of 18 September 1985 to the Lloyd's commissioned Singleton Inquiry, Mr E E Nelson stated: "No criticism is raised up until the 1 January 1980. At that time, we were first becoming aware of the disaster to hit us on Asbestos and latent diseases, and it was imperative that the funds be available for those years for which the losses would undoubtedly have fallen. In the event, this turned out to be the 1980, 1981 and 1982 years of account. The benefit of those funds allowed the Syndicate to remain in a profitable position, and I know our Names were very appreciative of the results."

E E Nelson, the BPR/Alder Non-Marine Underwriter, placed an aggregate offshore run-off reinsurance with the Chester Reinsurance Company covering known but unquantifiable asbestos liabilities. To pay in excess of $100,000 all losses in aggregate and limited to $1,575,000 in the aggregate. This was a Time & Distance policy with claims not payable until December 1986.

The Committee of Lloyd's issues a directive advising agents that Computer Leasing Losses should remain in the 1977 year of account, unless the Committee approved otherwise.

The Committee of Lloyd's has been considering the best method of handling the Fisher report, which is now expected in the Spring of 1980. The Committee has decided that Mr C A Thomas, the Secretary General, should give this subject his full attention. To enable him to do this, Mr Thomas will gradually hand over his duties as Secretary General during 1980, and will formally retire at the end of the year. Thereafter, he will continue to advise the Committee on the Fisher Report for as long as may be necessary. Mr Thomas will be succeeded by Mr J T C Hodges FCA ACIS, who has started to take over his new duties

Mr John Elser of Wilson Elser Edelman & Dicker, who were one of the four law firms handling this matter on behalf of underwriters in the United States, wrote an article reviewing the American cases on this controversial subject. In a useful way, the timing and effect of the relevant cases from Borel, Porter, Forty-Eight onwards are set out

Lord Bissell & Brook produced a further report, addressed to the interested insurers, under Bordereau No. 2 in relation to claims against United States Rubber, otherwise known as Uniroyal,, and stated inter alia:

Since our last report the number of claims filed against this assured has increased dramatically and we anticipate that the assured will be named in a substantial number of future claims. Because of this marked increase in the number of claims we are now of the opinion that it would be prudent for underwriters to establish a loss payment reserve for each of the 13 years when they were on risks for this assured. We still have not been able to obtain complete information or documentation as to the details of coverage provided by underwriters.

Asbestos cases: at the time of our last report 10 law suits involving 34 individual wrongful death and bodily injury claims had been brought against the assured as the result of its manufacture and sale of certain asbestos products. Since that time please be advised that an additional 33 asbestos-related suits involving 437 individual claims have been filed against the assured.

(80) Opinion as to liability: The asbestos-related claims as a class dearly represents serious potential exposure to the asbestos producers of the past 30 years

.(81) Reserve calculations: The problem with establishing loss payment reserves in these cases is that at this point it is uncertain as to what basis will ultimately be used to determine the applicable liability coverage for each individual loss. If the American courts eventually rule that coverage attaches on the date of the manifestation of disease, then we do not believe that underwriters will be required to make any loss payments on behalf of this assured .... If on the other hand, American Courts adopt an exposure theory of coverage then we believe that underwriters could be required to make substantial loss payments under their policies on this assured ... Underwriters will recall that at the meeting of the London Insurers' American Counsel in New York in June 1979 it was agreed that each asbestos related claim should be evaluated for reserve purposes at $75.000. It was further agreed that this assured should bear a 2% portion of this reserve or a $1,500 reserve for each claim. We therefore recommend that our gross exposure reserve on the asbestos claims ... equals a gross asbestos reserve of $2,868,000.

Mendes & Mount reported to Underwriters at interest care of Sedgwicks in relation to Johns-Manville and stated inter alia:

"With further reference to the captioned matter we held discussions with in-house attorneys and insurance personnel of Johns-Manville at their offices .... and they also participated in a one-day conference attended by all insurers from 1935 to date. Johns-Manville, legal and insurance officials and Marsh McLennan, at Marsh's office in New York. We have secured all available loss and expense reserve data from the primary insurer, the Travelers, on the in excess of 4,000 pending cases." Travelers was the primary insurer of Johns-Manville, the Home were on further upward layers, and Lloyd's underwriters stood above Home. The Travelers was the primary insurer of Johns-Manville, the Home were on further upward layers, and Lloyd's underwriters stood above the Home.

letter from Mendes & Mount to underwriters at interest C/- Sedgwick Forbes Bland Payne (N.A.) Ltd. Assured: Johns-Manville Corp.

... we have, as underwriters are aware, conferred with other legal representatives, and based upon these discussions as well as communications with underwriters, a preliminary reserve of $75,000 per asbestos claimant, 20% of which is ascribed to Johns-Manville, has been agreed. This percentage involves Johns-Manville for $15,000 per claim, which sum is strikingly close to the average contribution thus far made on behalf of Johns-Manville in the settled cases.

The litigated cases present a different picture. As an illustration, four cases tried in December in the US District Court, Virginia, involving shipyard workers at the Newport News Facility, resulted in Plaintiffs verdicts in the sum of $435,000 each. The damages recovered were compensatory only ...

Of further interests in connection with the Virginia cases generally is the fact that a Federal Judge had ruled that the US Government is not liable to asbestos manufacturers for injuries to shipyard workers at the Norfolk Naval Shipyard. Liability, the judge stated, stops as payments made by the U.S. under the Federal Employees Compensation Act. ...

As underwriters know, the Travelers' reserves are structured on the "exposure" theory which approach is concurred in by Johns-Manville. Reserves from a manifestation approach, although we have not accomplished a review of the in excess of 4,000 pending suits, would at most be minimal as far as Underwriters are concerned, for we doubt that there are any cases alleging manifestation dates arising during the period of Underwriters' coverage. Thus, we do not deem it necessary for Underwriters to establish manifestation reserves for any of these pending suits, pending our review of the individual files.

Lastly, the loss date issue is no closer to a resolution now than it was 12 months ago. The INA -v- Forty Eight Insulations case which Travelers cites as the basis for its establishing reserves on the "exposure theory", has been orally argued before the sixth circuit court of appeal. It's not anticipated that a decision will be forthcoming before the Springtime.

The case which adopted the Manifestations theory, Porter -v- American Optical, is still being briefed, thus the fifth circuit court of appeal has not as yet scheduled arguments.

[This report was supplied by Robin Jackson to W Beckett, solicitor to the Corporation of Lloyd's, on 4 December 1989 during the Donner enquiry.]

Telex from Mendes & Mount to Sedgwick Forbes.

The Travelers and J-M have agreed to the application of exposure theory for loss attachment purposes. Reserve Travelers established in accord this theory set forth in report without comment, as we have not as yet accomplished a review of the 4,000 plus pending actions. Underwriters' policies recited can only be involved if exposure theory becomes law of all asbestos cases. This issue still unresolved. Additionally Travelers has taken posture its policies or years 1951 through 1953 written on aggregate basis, but as we pointed out this also in doubt. Therefore in view a severe question regarding loss date and questions regarding aggregates for years 1951 through 1953, concluded best approach would be to leave it to each Syndicate's discretion whether or not to establish reserves consonant with those established by Travelers or on some other basis, each of which at this time could be equally appropriate.

Time Magazine: Who pays for the damage

referring not only to asbestos but to Agent Orange and Pintos - the Pinto car was an unfortunately designed vehicle which exploded when you ran into the back of it.

R F Kershaw Underwriting Agents Ltd: F.H. Sasse & Others Non-Marine Syndicate No. 762

I enclose a letter from Mr. Peter Green, Chairman of Lloyd's, dated the 2nd January. In this letter Mr. Green confirms the offer of an indemnity for all members of the Syndicate, despite the change from the proposed judicial arbitration to litigation.

Another major Californian asbestosis case involves the Plaintiff, GAF, a Delaware Company suing about 125 of its insurers including Lloyd's in the Los Angeles Court for a declaration that it was insured by them for the consequences of about 1,600 Asbestosis lawsuits with 600 more pending. The claims were against Ruberoid (an asbestos manufacturing company that GAF had taken over in 1966) in respect of which they were exposed to claims "for hundreds of millions of dollars" (para 37 of the claim). Lloyds had provided excess of loss cover for the years 1955 to 1973 and 1973 to 1976. In 1956 Sturge had underwritten 27.4% of Lloyd's share of the risk.

Reporting to the ‘exposure' underwriters on GAF were a firm of US Attorneys named Standard Weisberg Hedling & Roscow who reported to ‘underwriters at interest' through letters addressed to Sedgwick Forbes, Willis Faber, and Alexander Howden. Two of these were dated 25th January 1980 and 24th April 1980.

US Attorneys, Mendes & Mount, were acting for Lloyds Syndicates who subscribed to the ‘manifestation' theory, and they were sending through regular reports to London..

Throughout the litigation strenuous efforts were made to preserve legal privilege, hence access both to Court papers and Attorneys reports would have been restricted, though to what extent we could not tell. Although some information reached the public domain, and was reported in insurance and legal journals clearly much of it did not.

The first "claims information reports" seem to been sent through to London underwriters on 23rd November 1981.

An Unlimited xs £1,129,220 run-off reinsurance placed for Bishopsgate Insurance Company to incept at 1 October 1979 covering 1977 and prior years. Outhwaite wrote 32%.

A series of reinsurance contracts were placed for a non-related underwriter by Lloyd's broker, Bellew, Parry & Raven with a related BPR offshore company. They all came within the category of "Time & Distance" banking arrangements and brokerage was allowed of 1.50%. They were effected for years of account between 1975 and 1985 and were placed in the calendar year 1980.

The placing file clearly indicates that 75% of the anticipated investment earnings by the Reinsuring company would be included in the sum insured available on a "simple" interest arrangement.

Letter from Mendes & Mount to Underwriters at Interest. Re GAF.

Excess Insurance Group memorandum from P B Thompson to L S Doyle:

Last week the Chairman telephoned me in London to enquire as to the position regarding liabilities arising from Asbestosis in North America. I advised that I knew nothing of the situation but would institute immediate enquiries.

Having done so, it would appear that we wrote many risks, both through the North American and Treaty accounts providing Products and Liability cover to Manufacturers and Suppliers of asbestos. I also understand that there are a few policies which cover W.C.A.

In so far as the North American account is concerned, very few claims have been entered and those that have carry a reserve for legal fees only.

Underwriters in the London market as well as companies in North America have not reached agreement to deal with these claims on an exposure basis. Whenever it is expedient for them to do so, Underwriters and companies have advocated that coverage should apply at the time of Manifestation. In my view, Manifestation is an unreasonable argument but clearly there is not going to be an agreed market position. The situation is not helped by the various decisions made by the courts in North America where, in certain cases, exposure has been ruled as the criteria for determining policy coverage, whereas other courts have ruled that Manifestation determines policy coverage.

Either way, it looks as though we could be faced with very substantial reserve determinations. In order to try to determine the position as quickly as possible. ( Colin Drage will in the first instance, endeavour to obtain from the Underwriting Department a list of cases which provided for public and Products' liability to Manufacturers and Suppliers of asbestos. He will also endeavour to obtain a list of risks in which cover was provided for W.C.A., although this is obviously going to be very much a stab in the dark. We agreed the bulk of our exposure relates to the Products and Liability coverages.

Having done that, the next step will be to call for the brokers' files in order to determine what claims, if any, have been made to date, whether a ruling has been made regarding manifestation or exposure and then set up suitable reserves. Perhaps Hartford could assist us by advising whether or not there is a ruling state made with regard to coverage being applicable for exposure or Manifestation. This would, at least, enable us to set more accurate reserves. In the alternative where no ruling has been given it seems to me that we still have to establish two sets of reserves, one on the basis of exposure and the other on the basis of Manifestation, although clearly we shall only be able to show one reserve in our records. However by proceeding on the foregoing course, we should, at least, be aware of potential liabilities either under the exposure or Manifestation situations.

It looks as though the majority of the business was placed by Sedgwick Forbes, Willis Faber, Howden and C. T. Bowring

A further report will follow in due course. I assume that you will want to convey the findings to the Chairman. It seems to me however that we have got to work in very close harmony with the Treaty department and as a starting point, they should at least be doing the same exercises we are doing on the North American account to determine the number of risks in which there is potential liability.

In December 1977 the Committee issued detailed instructions to Underwriting Agents concerning the disclosure of information to be made to U.S. nationals and U.S. resident applicants for membership. In January 1979 the Committee again wrote to Underwriting Agents recommending that the same information be supplied to all Names joining an Agency and to all Names joining a Syndicate. It was also recommended that existing Names on a Syndicate be advised when information is prepared for distribution to New Names so that they might receive a copy if they wish.

It is now felt to be desirable to clarify the Committee's wish that all Names, irrespective of Nationality, should when joining Lloyd's, an Agency or a Syndicate, receive details as laid down in the Underwriting Agents Manual Section A 16.5. This Section will be re-numbered as A 17.2. The disclosure items relating to Lloyd's in general (currently A 16.5 (i) are issued in the form of the "Brochure for Applicants for Underwriting Membership".

Underwriting Agents are also reminded that, in accordance with the disclosure requirements issued in the Deputy Chairman's letter dated 23 January 1979, loss ratios and expense ratios for each of the past seven closed years should be calculated as a percentage of the premium income for the year of account, pure. The distinction between pure premium income and premiums received by way of closing reinsurances can be drawn to the attention of potential Names by reference to the Syndicate balance sheet (ref.: A 16.5 (iii) d).

Finally, Underwriting Agents are asked to draw to the attention of New Names factors which have materially affected past results or may materially affect future results, and to keep all Names informed of factors which might materially affect the results of the Syndicates.

Merrett Inter-Department Memorandum from CJ Ayliffe to RAG Jackson.

"Handling of asbestosis claims in the Lloyd's market".

You will recall that I discussed with you the developing problems that face our market in regard to long term products exposures, and also the fact that I wrote to the then Chairman of the NMA on the 10th December last year (copy letter attached) drawing attention to the developing problems in this area. Shortly before Christmas I was asked to attend an NMA meeting to generally discuss this matter and at which time it became apparent that many members of the Committee did not fully appreciate the impact which asbestosis will have with the developing momentum which we are assured will exist over at least the next 5 years.

Recent developments in connection with asbestosis tend to emphasise the need to collate the markets' approach to various problems that are developing . As you are aware there has been advice given on a broad basis by the Travelers in regard to their exposure to all their insureds involved in the asbestos industry, and it is quite possible that the course of action decided upon by their reinsurers could have some impact on other reinsurance situations with which the market will soon be confronted. In that particular involvement it would be the syndicates who led the contract in the 40's and 50's who will make the determination of London's response, and I am fearful that this will not necessarily reflect the best interests of the market overall.

Another issue which has recently been raised relates to the attitude which London wish to adopt in projecting potential exposure three or four years hence. We are advised by most major insureds that the frequency of loss reports will continue at much the current levels for at least five years to come and, to be realistic, if we accept this information as reliable, it would appear that we should now be calculating what the ultimate cost would be to the Market some five years hence. So far reserve recommendations for the Market have been based upon cases which are presently known. Lord, Bissell (& Brook), who are involved in reviewing the reinsurance of the Home for the account of Johns-Manville are seeking guidance and support from the Market to their putting up reserves to take into account a projection of something in the region of four years. Not unnaturally the size of the figures that would then be recommended would be very large and if indeed the Market wishes that the matter be dealt with in this manner it is also necessary that people such as Mendes & Mount, Peterson Ross and others also approach the problem in the same way. Inevitably the impact of projected reserves on our market will be substantial and I feel that it would be extremely difficult for the leads to make this type of determination by reason of the implications which it carries.

The other problem which presently exists is that although we have only 5,000 cases in suit at the present time most cases name all the majority companies with whom we are involved. There is, therefore, a danger that different representatives of the Market will be effectively duplicating the review work necessary to determine potential costs, dates of exposure and dates of diagnosis. It would seem much more practical to recognise this as a Market problem and to require that there be a pooling of information between those firms who are currently involved on behalf of the Market. The costs of conducting reviews on this volume of cases and setting up the necessary computer programmes can be very high and we must ensure that there is no duplication of effort of those who represent our interest.

At the same time I saw the NMA Committee it was felt that it would be beneficial for a small group to be set up who would have the ability to monitor developments as they affect the Market and to collate the different information that was coming from various sources. To date there has been no further move to set up such a Working Party. In conclusion may I stress the need for claims representation within that working group.

Dr Irving Selikoff of the Mt. Sinai School of Medicine in New York publishes "Asbestos-Associated diseases, Public Health And Preventive Medicine" being the 11th edition. At paragraph 597, Dr Selikoff estimates that between 2 and 6 million students may be attending schools wire asbestos surfaces in pupil areas, with an additional 100 to 300,000 teachers also exposed to asbestos. At paragraph 595, table 13-9, published statistics indicate that 24,827,500 tons of asbestos were consumed in the United States between 1890-1969, including 16,607,000 tons between 1940 and the latter date.

The U.S. Federal Government publications: "An Information Resource", published by the U.S. Department of Health, Education and Welfare in 1978 states at paragraph 9-10 that apparent consumption of asbestos fibre in the United States was slightly less than 4 million tons, with a similar volume of consumption anticipated for the 1976-79 period.

Business Insurance: asbestos manufacturer sues insurers.

Business Insurance Magazine: published an article about Owens Corning, another major defendant.

Product Liability International: Mr David McIntosh and Mr Bernard Seigne of Davies, Arnold & Cooper, London solicitors, have handled upwards of 1,200 cases during the last 15 years and are now involved in a further 360. They say: "The unfortunate message to be read from the UK experience of asbestosis claims is that the US explosion is likely to be even larger than has been predicted to date and that it will inevitably include many borderline cases which will need defending on diagnostic grounds." This is the view of an experienced solicitor in the London market.

Allstate Ins. Co. -v- Klock Oil Co., 73 A.D. 2d 486, 426 N.Y.S. 2d 603, 4th Dept April 8, 1980. Appellate Division of the Supreme Court of New York refused to enforce the pollution exclusion in an environmental claim. "[T]he word ‘sudden' as used in liability insurance need not be limited to instantaneous happening." Discharge of gasoline could be both sudden and accidental though undetected for a substantial period of time. Policy at issue expressly insured against risk of property damage from gasoline pumps and tanks.

Letter from Lumley, Dennant & Company Inc. We enclose a copy of the letter dated 6th December 1979 to the above assured (Owens Corning Fibre Glass) which is self explanatory and which we believe comes about because of the possibility of asbestosis claims being made under the umbrella coverage which has been written for a number of years. (Signatures on it indicate wide circulation).

Business Insurance: 9 accept asbestos settlements.

Lloyd's List: Court rulings may provoke claims flood

A flood of claims on asbestosis in the United States is expected to hit the London insurance market in future years and a recent decision by the California Supreme Court has further highlighted the trend. Several Lloyd's syndicates have already begun to increase their reserves to meet asbestos claims which may arise from cover taken out many years ago because the disease takes time to affect the worker ...

The California Court case, although it is not directly about asbestos but about the controversial drug DES, establishes a new basis of liability, called by the Court "industry wide". This has sometimes been described as "enterprise liability". Its findings mean that the person who has been injured does not have to identify specifically the manufacture of the product as long as the harm has been proved. If the Defendant manufacturers could have made the substance which caused the injury at the right time, then it and the others involved will have to share the cost of damages in proportion to their market shares ....

One of the main problems that insurers have in planning and then reserving for claims is that the illness often does not show for many years ... In Britain two leading lawyers in defending asbestos cases have predicted that there will be even more claims in the United States than originally expected. Mr David McIntosh and Mr Bernard Seigne of Davies, Arnold & Cooper, have handled upwards of 1,200 cases during the last 15 years and are now involved in about 360. Writing in the magazine Product Liability International, they say: "The unfortunate message to be read from the UK experience of asbestosis claims is that the US explosion is likely to be even larger than has been predicted to date and that it will inevitably include many borderline cases which grill need defending on diagnostic grounds".

Another major Californian asbestosis case involves the Plaintiff, GAF, a Delaware Company suing about 125 of its insurers including Lloyd's in the Los Angeles Court for a declaration that it was insured by them for the consequences of about 1,600 Asbestosis lawsuits with 600 more pending. The claims were against Ruberoid (an asbestos manufacturing company that GAF had taken over in 1966) in respect of which they were exposed to claims "for hundreds of millions of dollars" (para 37 of the claim). Lloyds had provided excess of loss cover for the years 1955 to 1973 and 1973 to 1976. In 1956 Sturge had underwritten 27.4% of Lloyd's share of the risk.

Reporting to the ‘exposure' underwriters on GAF were a firm of US Attorneys named Standard Weisberg Hedling & Roscow who reported to ‘underwriters at interest' through letters addressed to Sedgwick Forbes, Willis Faber, and Alexander Howden. Two of these were dated 25th January 1980 and 24th April 1980.

US Attorneys, Mendes & Mount, were acting for Lloyds Syndicates who subscribed to the ‘manifestation' theory, and they were sending through regular reports to London..

Throughout the litigation strenuous efforts were made to preserve legal privilege, hence access both to Court papers and Attorneys reports would have been restricted, though to what extent we could not tell. Although some information reached the public domain, and was reported in insurance and legal journals clearly much of it did not.

The first "claims information reports" seem to been sent through to London underwriters on 23rd November 1981.

In April 1980, two reinsurance policies for the Graves Non-Marine Syndicate 471, managed by R K Harrison & Graves, was placed by Lloyd's broker Glanvill Enthoven. The first, being an excess of loss policy in respect of the whole account covering settlements on or after 1 December 1980. The premium was $650,000 payable by special settlement on 30 April 1980 and no claim was to be paid before 31 March 1988. The business was underwritten as to 50% by the Fidentia as a direct reinsurer on terms that a letter of credit was to be issued and as to 50% by the Brooks syndicate. The 50% line written by the Brooks syndicate was then retroceded to North Atlantic and in turn to the Fidentia. The second excess of loss reinsurance covered losses occurring on or after 1 May 1980. The premium was $350,000 payable in full at 30 April 1980, and no claim was to be paid before 31 March 1983. The lines written and the retrocession wee identical to those in respect of the first transaction. These policies are described as premium relief operations and had banking characteristics. (T & D policies).

U.S. National Institute for Occupational Safety and Health (NIOSH)

The content of auditors' reports was governed by the Auditing Standard "The Audit Report" issued in April 1980; paragraphs 8 and 9 of the Standard related to "Emphasis of matter" and read: 8. As a general principle the auditor issuing an unqualified opinion should not make reference to specific aspects of the financial statements in the body of his report as such reference may be misconstrued as being a qualification. In rare circumstances, however, the reader will obtain a better understanding of the financial statements if his attention is drawn to important matters. Examples might include an unusual event, accounting policy or conditions, awareness of which is fundamental to an understanding of the financial statements.

Bland Welch Underwriting Ltd brochure entitled "Underwriting Membership of Lloyd's" for citizens of the United States of America (Ref. 4\80).

Under "Introducing Bland Welch Underwriting Ltd", it states that "Bland Welch Underwriting Ltd is associated with the Sedgwick Forbes Bland Payne Group. This Group of International Insurance and Reinsurance Brokers, with subsidiary and associate companies throughout the world, is the result of the merger of the Sedgwick Forbes and Bland Payne Groups. (It is proposed that, subject to the approval of the shareholders, the name will be changed to Sedgwick Group Ltd). At the time of printing this handbook discussions are taking place with Alexander & Alexander Services Inc. of New York with a view to co-ordinating the world wide businesses of the Sedgwick Forbes Bland Payne and Alexander & Alexander Groups." and further on "Bland Welch Underwriting Ltd have a major shareholding in three Managing Agencies:-

Three Quays Underwriting Management Ltd - which manages the Hazell Non-Marine Syndicate at Lloyd's, the Underwriter for which is R D Hazell.

WMD Underwriting Agencies Ltd - which manages the Davies Marine Syndicate at Lloyd's - the Underwriter for which is C E Davies.

8. G. H. Underwriting Management Ltd - which manages Tudor Motor Policies at Lloyd's, the Underwriter for which is R D Holmes.

Bland Welch Underwriting Ltd is the Joint Managing Agent of the Jackson Non-Marine Syndicate at Lloyd's.

In addition, there are two sister-companies, acting as Lloyd's Underwriting Agents, within the Group.

Edwards & Payne (Underwriting Agencies) Ltd, managing Marine, Non-Marine and Motor Syndicates at Lloyd's on which we have, and may place, Members for whom we act. This company also acts as Members' Agents.

Sedgwick Forbes (Lloyd's Underwriting Agents) Ltd, managing Marine, Non-Marine and Aviation Syndicates at Lloyd's. In its capacity as Members' Agents, this company places some of its Members with WMD Underwriting Agencies Ltd and with the Jackson Non-Marine Syndicate through the Agency of Merrett Dixey Syndicates Ltd (Joint Managing Agent with Bland Welch Underwriting Ltd).

Under "System of Accounting and Underwriting Accounts", the brochure states:-

"At the end of each of the first and second calendar years of an account, an estimate is made of the anticipated liabilities in order to determine whether the account concerned is projecting a surplus or deficiency based on the income received and claims made at those stages. A similar exercise is carried out in respect of the account which is at the end of its third calendar year. The estimated outstanding liability is calculated in accordance with the provisions of the Audit Instructions. The estimate must provide for liabilities in respect of claims reported but not settled, and claims which may have been incurred but not yet been reported with respect to policies attaching to the year of account. Once this liability has been estimated on the account at the end of its third calendar year, it must be reinsured by a valid policy of reinsurance before the account can be closed. The reinsurance will normally be accepted by the Syndicate's next year of account, but provision can be made for the reinsurance to be placed in the market or the account to remain open for a further year or years.

Under "Special Note for Prospective New Members for 1981", the brochure states:-

In the normal course of events we would be in a position to offer to prospective Members places in 2 Marine, 2 Non-Marine and 1 Motor Syndicate at the commencement of their underwriting participation at Lloyd's.

There has been, however, a very considerable increase in the total number of new Underwriting Members elected to Lloyd's in recent years, particularly for the 1977, 1978 and 1979 Underwriting Years and to a lesser extent for 1980.

The result of this rapid increase in capacity is that for 1981 the availability of suitable syndicate places is extremely limited. In fact, it is again not possible to offer places in any Marine Syndicates at all. In these circumstances we are in a position to offer places in two Non-Marine Syndicates and two Motor Syndicates, to those candidates who wish to join Lloyd's starting from 1 January 1981.

Under "Special Notes for U.S. Members", the brochure states:-

Victor B. Levitt, Managing Partner of the San Francisco and Los Angeles law firm of Long & Levitt, delivers a paper entitled "Punitive Damages: Yesterday, Today and Tomorrow" on products liability actions incurring punitive damages to the Under 30's Lloyd's Non-Marine Claims Committee. (Not published by Lloyd's).

A particular example of the insurance industry's delayed recognition of substantial exposure to losses, perhaps in years "closed" a long time ago, the asbestosis problem, is mentioned by Robin Jackson in his report. You may have seen or heard comment on recent activity in the United States Courts on the filing of numerous suits and in particular on attempts to determine whether the liability of insurers is on policies current at the time when the claimant began to contract the disease by his "exposure to the dust, or on the policies current when the claimant became aware of his disease by its "manifestation". If "exposure" is adopted there may be many claims made on policies current in the 1940's or even earlier, and it is inevitable that some insurers will have made inadequate provisions for such losses against those years. (and went on to say that) It would be prudent to suppose that other substances or work processes will increasingly be found by Courts to have damaged employees and others, and the exposure of the insurance industry to third party actions and Employers' Liability Workmen's Compensation claims against policy holders is very considerable indeed.

U.S. Federal Government publications: "(No 18) Prolonged and Variable Exposure to Asbestos Fiber (Special Listing), Current Cancer Research on Occupational and Environmental Carcinogenesis", published by the U.S. Department of Health, Education and Welfare.

Lord Bissell & Brook reported to underwriters at Interest care of Bowrings.

First and second casualty excess of loss treaties:

Assured: Johns-Manville Corporation.

Claims: Various asbestos and product liability claims,

We submit to the London reinsurers our first report concerning the asbestos-related bodily injury claims brought against the above named assured in numerous jurisdictions throughout the United States.

We have recently reviewed all of the reinsured's Home Office files and have conferred with both the reinsured and with the assured's primary insurer on several occasions concerning this risk. We have in addition discussed this assured's potential liabilities with many knowledgeable and involved scientists and lawyers throughout the country.

It is our present opinion that this risk presents grave exposure to the excess reinsurers on both the first and second casualty excess of loss treaties covering the 1963-1974 period.

The assured conducts asbestos manufacturing and mining operations in the United States, Canada and thirteen other countries. Its principal manufacturing business consisted in the production of insulations, general building construction materials and roofing products. Its principal mining businesses included mining and processing asbestos. There is no doubt but that the assured was the largest free-world producer of asbestos fibre and one of the largest manufacturers of asbestos products including insulations, pipe coverings, firebrick, textiles, brake linings, and asbestos cement and board products.

In the last year of the excess reinsurers' coverage this assured had net sales of $1-1bn with earnings of $87m. It employed 26,600 persons and operated sixty two manufacturing facilities in the US and seven in Canada. Its principal mine was in Asbestos (the delightfully-named town of Asbestos, Quebec) and another asbestos mine was owned in Timens, Ontario. This assured owned 50% of the preferred stock and 30% of the common stock of Advocate Mines Ltd, near Baie Verte, Newfoundland, Canada. It also operated and managed this latter asbestos mine.

The assured sold to outside customers more than two-thirds of the asbestos fibers it processed. It used a wide range of methods to distribute its various products including the sale of finished products to distributors, wholesalers, jobbers, dealers, railway and contractors. It also sold raw materials directly to fabricators and manufacturers.

The assured first began putting cautionary labels on its asbestos products in 1964 and claims it had no knowledge of dangers to outside users of its insulation products prior to that time. However, there is no doubt but that the assured was settling asbestos-related workman's compensation claims brought by its own employees as early as 1933. In this regard Plaintiff attorneys throughout the United States have copies of the 1976 deposition of Dr Kenneth Smith, the assured's corporate medical director between 1952 and 1966 who testified he told the assured's executives as early as 1952 that insulation workers were exposed to the same potential hazards as its own mining and manufacturing employees. Dr Smith testified that he urged the assured to use a warning label on all of its asbestos products but that his advices were rejected.

In addition Plaintiff attorneys have unearthed some letters written by the assured's executives as long ago as 1934 indicating they had direct knowledge of the hazards of breathing asbestos fibres.

The assured for several years has been attempting to diversify its product lines away from asbestos. It has been involved for many years in the fiberglass insulation business and it no longer makes asbestos insulation products. The assured's percentage of operating income based on asbestos dropped from 37% in 1976 to 19% in 1978.

We have reviewed every claim that had been advised to the reinsured as of March 1980 and can report that the reinsured's files reflect 4,323 claims in suit against this assured. The reinsured's files reflect 196 closed cases with an aggregate loss payment of $2,338,548 or an average loss per case of $14,933. These figures include cases which have been closed without loss payments.

Our review of the closed files shows that the assured has made the major contribution to the great majority of the settlements achieved. Thus there normally are ten or more defendants in these cases but the assured by agreement has been paying between 15-20% of the average settlements.

New claims against the assured are now being brought on the average of 100 per month. The primary insurer has been trying to set up a satisfactory computer loss run which, if successful, should indicate the precise position as to the number of claims and paid losses and expenses at any given moment. The reinsured will provide us with this material when available. Meanwhile the reinsured has been filing these claims alphabetically but has not yet organised the claims so that meaningful statistics could be obtained. It is for this reason that we felt it necessary to compile the enclosed Bordereau which both we and the reinsured will now use to try to stay abreast of the changing aggregate positions.

Allocation of loss payments and deductible:

Both the assured and its primary insurers between 1947 and 1976, the Traveler's insurance company, have adopted an exposure theory of coverage for the asbestos-related bodily injury claims ....

A second major problem with the primary's allocations concerns the effect being given to the loss and expense $5,000 deductible per claim carried by the assured since 1966. We have see no evidence whatsoever that such a deductible has ever been applied or collected by the primary insurer. In addition, there is a related problem that the reinsured has argued that this deductible should apply to each claim per year of exposure. Both the assured and primary insurer maintain that one deductible applies to each claim only….

The reinsured advises that there is no accurate information available as for the primary insurers underlying aggregate position at the present time. We were advised by the primary insurers several months ago that the underlying aggregate were between 20-30% exhausted in past years. However, statistics prepared by Marsh & McLennan taken from the primary's stat runs as of September, 1979 indicated on the average only loss payments by the primary in the $67,000 to $87.000 range in the 1963 to 1974 periods.

Of singular importance here is the fact that both the assured and its primary insurer now insist that the primary's separate underlying products liability aggregate has been exhausted in the 1970, 1971, 1972 and 1973 periods. In this regard we note that the assured filed suit on March 31, 1980 against the reinsured and 96 other insurance companies seeking a Clarification of Coverage issues but also claiming that it itself had paid $800,000 to 12 claimants alleging property damage. The assured maintained that the reinsured, as its product liability excess insurer, has refused to indemnify it for these paid Claims and has wrongfully asserted that it had no duty to indemnify the assured because the underlying aggregate carried by the Travelers was not exhausted.

This firm has not been instructed to investigate these property damage claims and we are not familiar with the merits of the dispute. We can advise that the reinsured admits that the primary insurers' .... property damage limits have been exhausted. Thus in any event we can expect that the reinsured will now commence making property damage loss payments allocated to at least these two years. In this connection it should be noted that the reinsured's own underlying aggregates beneath the First and Second Excess of Loss Treaties include both bodily injury and property damage loss payments as well as expenses.

Opinion as to liability:

The asbestosis cases as a class manifestly represent serious potential exposure to the asbestos producers of the past 40-50 years. It would appear that there may be convincing evidence against many of these producers to the effect that they did not take reasonable steps to warn the users of their products from the known dangers of asbestos and in some cases even purposefully concealed these dangers.

We believe that this assured is the major defendant in these cases. It was the largest producer of raw asbestos fibre and probably the largest manufacturer of asbestos insulation products used in the construction and shipbuilding industries. …

The assured, however, has additional exposure beyond the direct actions bought against it by injured plaintiffs. This is because the assured has been sued for indemnity or contribution by several other asbestos insulation manufacturers to whom the assured sold asbestos fibre.

Problems re Reserving Asbestosis Claims:

There are several difficult problems involved in recommending loss payments and expense reserves in the asbestosis cases. First of all, it is uncertain at this point at to what basis American Courts will ultimately use to determine the applicable liability coverage for each individual loss.

A second problem concerns the status of the underlying aggregates carried by the primary insurer ....

A third problem involves the applicability of the assureds deductible from 1966 onward, and a fourth problem is the ever present possibility of punitive damages in these cases. In our view it is not unlikely that American juries would return punitive damages in certain situations because of evidence tending to involve the assured in ignoring and even covering up the known dangerous aspects of asbestos.

Finally, the most insoluble problem of all stems from the fact that due to the long latency periods of the asbestosis diseases it is impossible to predict the number of claims that will ultimately be brought against the assured.

In view of the above described problems, the best we can do is to suggest a reserve to the excess reinsurers based upon the bodily injury cases filed against the assured to date. Thus our review reflects that in the 4,323 claims filed thus far there were dates of exposure alleged in 64% of the claims. We have totalled these dates of alleged exposure and have determined that there were a total of 55,616 years of exposure alleged and that 31% or 17,166 of these years were during the 1963-1974 years when the excess reinsurers were on risk.

Hence our reserve suggestion on an exposure basis for the cases filed thus far is based on 4,323 claims times $14,993 per claim equals $64,814,739 times 31% (the percentage of years of alleged exposure when excess reinsurers herein were on risk) equals $20,092,569 as a total ground up reserve for the 1963-1974 period. The per year ground up loss payment bodily injury reserve would be $20,092,569 - 11 years equals $1,826,597.

The casualty Excess of Loss Treaties include expense and our investigation indicates that the average expense of $3,308 per closed claim bears a 22% pro rata relationship to the average $14,993 average loss payment. Hence we suggest a per year expense reserve of $1,826,597 times 22% equals $401,851.

Recommendations for future handling:

We must again stress to the excess reinsurers that the above suggested per year ground up bodily injury exposure reserve of $2,228,448 relates only to those claims known by the reinsured thus far. It does not take into account future bodily injury claims to be brought against this assured. In this regard we should comment that the assured believes the number of claims has now peaked and that because of improved working conditions there should be progressively less claims in the future.

On the other hand, there are numerous well informed people who profess to believe that the claims filed to date represent only the tip of the iceberg in this asbestos litigation. The Secretary of Health, Education and Welfare of the United States [Califano] recently stated that 67,000 each year will die from exposure to asbestos during the next 30 years. We know that between 8 and 11 million workers have been exposed to asbestos in the United States since the beginning of World War II and that of these 4.5 million people have worked in shipyards. Most of these shipyard workers were heavily exposed to asbestos and it is estimated by HEW that a third of those heavily exposed have died or are likely to die of asbestos-related cancer.

Because of these factors the primary insurer has informally indicated it expects probably a total of 7,000 claims by the end of this year. And the reinsured has cautioned us that its reserve estimates as set forth in this report should be deemed interim only.

We recommend that each underwriter on the first and second and third excess of loss treaties be shown this report. We also strongly recommend that each underwriter take all of these factors into account in determining the loss reserves to be posed on these claims. (Lord Bissell & Brook recommend a specific property damage reserve. Property damage of course is said to have been not even a premonition in late 1981.)

The New York Times published an article about a school board suing asbestos product manufacturers for the cost of removing asbestos products from a school.

Travelers Indem. Co.- v- Dingwell, 12 Envtl. L. Rep. 21,072, 414 A.2d 220, 12 May 1980. Supreme Judicial Court of Maine held pollution exclusion may not bar coverage and, therefore, insurers have a duty to defend against class action seeking recovery for contamination of well water as a result of the insured's operation of an industrial waste facility.

The Fisher Working Party forward their Report "Self-Regulation at Lloyd's" to the Chairman of Lloyd's. The Working Party met on seventy-nine occasions, and received four hundred and thirty-seven written submissions all of which we have read with care. We received written evidence from Market Associations, Lloyd's Underwriting Agents Association (L.U.A.A.) and Lloyd's Insurance Brokers' Committee (L.I.B.C.); from Underwriters, Underwriting Agents and Lloyd's Brokers; from many individuals who work, or have worked, at Lloyd's including present and past Chairmen and Deputy Chairmen and members of the Committee of Lloyd's, and from many non-working Names; and from firms of Panel Auditors. We also received written evidence from a number of Brokers in the U.S.A., and from Lloyd's General Counsel in the U.S.A., Attorney in Fact in Illinois and Attorney in Canada. Seventy-two individuals accepted our invitation to appear before us in person. (A list of the witnesses who gave oral evidence is contained in Appendix 1.) We wish to express our very real thanks to all those who have given evidence to us, either orally or in writing.

A G Wrightson & Others, Non-Marine Syndicate 90, memorandum to Ray Barry of Winchester Bowring advising in relation to ‘Large Claims', i.e. Asbestos, D.E.S. and Agent Orange, that "we have taken a pessimistic view of these losses when establishing our reserves. At 31 December 1979 our reserves, including a contingent figure in addition to that suggested by our lawyers, was approximately $3m."

First approach by Winchester Bowring to R H M Outhwaite for unlimited run-off reinsurance for Wrightson Non-Marine Syndicate 90.

An Unlimited run-off reinsurance placed for the Universal Insurance Company to incept 1 January 1980 covering 1968 and prior years. Outhwaite 317/661 wrote 50%.

General Meeting of Members of Lloyd's: Statement by Peter Green, Chairman

It has now been decided to defer action upon these proposals until after the recommendations of Sir Henry Fisher have been fully considered. However, the Committee has decided-in the interests of overall security - that Members will be asked to confirm every four years that they still possess the means shown at their last Means Test. Full details of the programme for this confirmation of wealth will be given to Underwriting Agents shortly.

(In the near future approximately 1,500 Members will be asked to provide this confirmation of Means; they will be selected at random but those who have completed a Certificate of Means within the last four years, will be excluded. If any Member is unable to provide proof of assets to the appropriate value, there are a number of different courses available to Members, e.g. the Member may alter the form of assets or rearrange his underwriting commitments. He was fearful of the "Asbestos Cascade" and wanted assurance that Members had the money).

During the past twelve to eighteen months I have been engaged on a working party dealing with the Computer Leasing claims. One of the matters which has come up on several occasions are the powers given to us as your underwriting agents under the terms of our agreement. It seems that some of the duties we carry out in the normal way during underwriting and for which we have always assumed we have a mandate so to do, may not be strictly true.

In the light of these facts it is necessary that the mandate given to us under our agreement should be more clearly defined, and also in order to effect any changes recommended by the Fisher Report, I have decided to give formal notice to you to terminate our present underwriting agreement with you.

Asbestos School Hazard Detection and Control Act (Public Order No. of the USA) passed by the U.S. Congress. Asbestos Property Damage Claims have their genesis in this Act. Congress in this Act found that the presence in school buildings of "friable" or easily damaged asbestos created an unwarranted hazard to the health of school children and school employees who were exposed to such materials. Under the Act, Local School Authorities were required to inspect for the presence of asbestos within the schools and to notify parents and staff if asbestos was indeed found. There was very little activity under this Act as it soon became apparent that the inspection and the concomitant laboratory testing was very costly. The School Districts learned, in addition, that abatement activities such as removal or encapsulation or replacement of the asbestos material were so expensive that compliance with the Act was not practical. It offered technical guidance and assistance to schools who were concerned with the potential health effects of asbestos.

Sindell -v- Abbott Laboratories (Case No. 26 Cal. 3rd 588, 507 P. 2nd 924), California Supreme Court 1980. The case concerned a woman who had sustained injuries due to ingestion by her mother of the generic drug diethylstilbestrol (DES). Although plaintiff was unable to identify the manufacturer of the injury-causing product, the court held that where a plaintiff joins in a legal action those producers constituting a substantial share of the appropriate market, the cause of action may be maintained. In such instances, the burden of proof shifts to the defendants to demonstrate that they could not have made the substance which injured plaintiff. Damages are apportioned among those defendants pursuant to their proportionate share of the market. Certificate denied. This is the leading case on market share liability, introduced the concept of "market share", extending to the liability of middlemen and retailers, and sets the tone of the legal theory to be applied in DES cases. Essentially, the case shifts the burden of proof from the plaintiff to the Defendant. . However, the motion alleging contribution of damages according to a concept of market share apportionment succeeded in the Hardy -v- Johns-Manville case, dated 13 March 1981. This is a case which could be very damaging to the defence in the pollution area.

Deregulation and Money Control Act (Public Law Order No. of the USA) passed by the U.S. Congress, which removed the interest rate controls on savings accounts for commercial and Saving & Loan Institutions.

The Asbestos Health Hazards Compensation Act, re-introduced to Congress by Senator Gary Hart, but again not passed. Senator Gary Hart re-introduced this proposed legislation again in 1980, after consultation with Johns-Manville, which in 1972 had moved its world headquarters from New York to the Denver area. Hart as it would turn out, had ties to Johns-Manville and his Bill was, if anything, more favourable to the asbestos industry than Fenwick's proposed Bill. It not only proposed to bar the victims of asbestosis disease from filing suits under the tort system but left the administration of asbestos-compensation claims with the States. Since the provisions of many State Workmen's Compensation Statutes had been heavily influenced by employees and their insurers, the Statutes tended to be grossly biased against claimants. Moreover, all of them required diseased workers, or the survivors of workers who had died, to prove their claim in adversarial proceedings that could be contested by manufacturers. It is true that Hart's Bill, which the Syracuse Law Review later described as being "of questionable constitutionality", and called for the establishment of Federal minimum standards for compensating asbestos workers, providing that such compensation for total disability or death could not be less than two-thirds of a claimant's average gross weekly wage during the highest three of the five years preceding his disability or death. But it proposed that adherence to the minimum standards would be voluntary on the part of the States, and that workers who failed to receive adequate payments would have to file petitions for supplemental compensation with a Federal Benefits Review Board. Both Bills appeared to reflect a desire on the part of their author to accommodate a powerful corporate constituent and, both had been bitterly attacked as Johns-Manville's bailout bills. With such profound shortcomings, neither the Fenwick nor the Hart measures had a prayer of being enacted when they were re-introduced again in 1981.

Lloyds List: Defendants fight ship yard asbestosis case award.

Lloyd's: Circular letter from the chairman, Peter Green, to the members of Lloyd's

Whilst Parliament in the Act of 1871 said that one of the objects of the Society of Lloyd's was "the advancement and protection of the interests of the Members of the Society", it was all too clear by 1978 that the Committee was sadly lacking in the powers necessary to promote that objective. This led to the decision by Mr Ian Findlay, then Chairman of Lloyd's, and his colleagues that it was time for a thorough review of self-regulation at Lloyd's. The Committee therefore set up a Working Party under the Chairmanship of Sir Henry Fisher. The Report was received at the end of May and I enclose a copy.

First, the Committee accepts the concept of a Council and believes that the structure and purpose of such a Council as set out by the Working Party is correct, embracing as it does the provision of much enhanced powers of self-regulation.

Second, the Committee accepts the consequential transfer of authority to the Council which the recommendations imply. In particular, it welcomes this because it gives to the Membership a more effective say in the affairs of the Society through its representatives on the Council.

Third, the Committee accepts that a new Act of Parliament is essential to give effect to the recommendations.

The Committee's reaction is overwhelmingly favourable to the principles and procedures set out in the Report. Certain of the recommendations must obviously wait upon the appointment of the Council for precise formulation, approval and implementation. Much of the detail will be subject to consultation with the Market through the various Lloyd's Associations and with other interested parties, and by definition will require very searching analysis, before final decisions are made. Some however had been anticipated by the Committee such as new rules for Binding Authorities. These rules are being considered now with the intention of introducing them as soon as possible. Others, such as Premium Limits, are under constant discussion and requirements for new Members were announced last year. Ways to improve the monitoring of premium limits by using new processes are already being examined. The requirements for the annual audit are reassessed every year.

The report addresses itself to a number of aspects of Lloyd's, including its ability to govern itself, the maintenance of its leading role in the world's insurance markets, the position of members, and others. However, one particular aspect which your committee has kept uppermost in mind, id addition to the safeguarding of the policy holder, is the best interests of the underwriting members.

You will be interested in the sections dealing with Members of Lloyd's and the relationship of Underwriting Agents with their Names. Of particular interest will be the recognition that the proposed Council and Committee must play a far more active role in the overall responsibility towards Names without derogating the general principle of unlimited liability. In this connection, there are important recommendations with regard to agency agreements and the duties of Underwriting Agents to their Names.

The proposals in respect of the organisation of Underwriting Agents, and the ownership of Managing Agents present a number of practical problems. Nevertheless the Committee accepts the force of the arguments in the Report and is confident that these changes can be implemented in the time scale envisaged.

To carry out these recommendations we will strive to present a Bill to Parliament by the end of November. Failure to do so will result in a delay of twelve months. Before such a Bill is submitted we will wish to discuss its provisions at an Extraordinary General Meeting of Members. I therefore ask you to retain your copy, especially if you wish to attend the Meeting.

I am sure you will join the Committee in expressing our gratitude to Sir Henry and his colleagues who, supported by a small secretariat, have spent seventeen months in this most painstaking examination of our Society. You may well be one of those who has given evidence and to all those who contributed in any way we must also express our thanks.

An article in a very highly-regarded journal, particularly read by lawyers concerned with insurance matters, prior to the heading "products Liability Lawsuits" stated: "Studies since 1965 are numbered in the hundreds and seem only to confirm or refine the obvious - there will be tens of thousands of asbestos-related deaths over the next thirty years." And further under the heading "Products Liability Lawsuits:" "According to one estimate there are currently pending approximately 5,000 bodily injury products liability lawsuits against past and present asbestos manufacturers, distributors, and other suppliers. That is to say 5,000 plaintiffs have seen fit to seek legal recourse against (that group of defendants) and a host of other national, regional and local defendants. Secretary of State Califano ... said that an estimated 8 to 11 million .... It hardly takes a mathematical genius to appreciate the magnitude of the current problem. Do not forget that asbestos can also damage buildings by decreasing their market value and necessitating prophylactic repairs. To date, only a handful of property damage claims have been filed, but the New York City Board of Education, which plans to spend $30m in remedying the asbestos problems in its schools, is reported to be looking into legal avenues of recovery. Considering the extensive use of asbestos in the construction trades, perhaps the property damage claims will surpass the personal injury claims in economic terms."

Wall Street Journal: reported on page 1, that as of July 1980, Johns-Manville had disposed of some 600 cases at a total cost of $9m, plus about the same amount in legal fees and expenses.

Letter from RAG Jackson to EE Nelson. I have been trying to get hold of you for some time to talk about asbestosis ... Jim Ayliffe ... wrote you a letter on the 10th December about the seriousness of this problem. Since that time as you are probably aware it has become even more serious a problem particularly as the split between the exposure and manifestation ....... has become embittered ... a number of people have persuaded me to be the catalyst in getting a working party under-way and it is to this end that Jim Ayliffe and I have been speaking to a number of people in the market. A number of us, such as

and myself feel that the split in the market must be healed and that we must have a more co-ordinated effort through a small working party. The bitterness is between the Marine Underwriters representing the exposure theory and the manifestation Underwriters." And further on states "Apart from the bitterness, I am equally concerned about not only the ultimate cost of asbestosis to the London Market but perhaps more importantly that we should recognise this cost as soon as possible."

Best's Insurance Review published an article entitled "The tangled asbestos liability web. Will insurers be caught" and states under "Staggering legal costs" "Total legal costs by any count be staggering, and can be calculated only as the number of suits unfolds." Then there is a reference to between 8 and 11 million workers being exposed to asbestos as stated by the Secretary of Health, Education and Welfare, J A Califano, in April 1978.

Winchester Bowring obtained two quotations, based on separate terms, from R H M Outhwaite in respect of the unlimited run-off for the Wrightson Non-Marine Syndicate 90. Both were declined by Wrightson.

An Attorneys report to "Underwriters at Interest" care of Sedgwicks about some asbestosis claims in relation to CNA, another well-known defendant.

Letter from Attorneys to underwriters at risk. Assured: ... Nature of claim: asbestosis. Current developments in asbestosis litigation.

Reserves: Since our last report of May 28, 1980 we have received approximately 500 additional cases naming the assured as a Defendant. This brings the total number of cases in which the assured is named as a defendant to approximately 2,300 .... The average disposition cost of an asbestos claim to all defendants continues to total approximately $67 000 ... therefore, we suggest that underwriters increase the gross loss reserve to $460,000 from the ground up for each and every policy year they were on the risk.

Asbestos Litigation Reporter: at 2104, published an article stating the situation presently facing the United States District Court for the Eastern District of Pennsylvania is indicative of that in many courts throughout the country. By the latter portion of July 1980, more than 250 asbestos cases had been filed there, causing one law clerk to remark that an "administrative nightmare" had been created.

Wilson Elser Edelman & Dicker reported to "Underwriters at Interest" in relation to Armstrong Cork, another very well-known defendant, and again referred to the current state of the litigation in the United States. The penultimate paragraph states: "In a number of asbestosis suits throughout the country in which Johns-Manville is a defendant, plaintiffs have alleged that the company was guilty of a "corporate cover-up" involving known dangers of asbestos exposure. Discovery in these cases has uncovered written documentation authored by a Johns-Manville physician, containing the results of a 1949 survey at a Johns- Manville mine in Canada. The document, authored by Dr Kenneth Smith ... states that the survey found seven of 708 workers had symptoms of asbestosis. The document added "they have not been told of this diagnosis, for it is felt that as long as the man feels well, is happy at home and work, and his physical condition remains good, nothing should be said."

The California Supreme Court ruled that employees of Johns-Manville could sue Johns-Manville for concealing dangers in the work place.

Following a study by a Working Party under the Chairmanship of Mr R J Kiln, the Committee of Lloyd's decided that there would be certain benefits in permitting Syndicates to underwrite an element of their allocated premium limit in risks which are normally placed in another market at Lloyd's. These changes are described below; they affect the Marine, Non-Marine and Aviation Syndicates, but not Motor.

Winchester Bowring letter to J J Meenaghan, Executive Vice President, of the Fireman's Fund of San Francisco, which states:-

Lloyd's Market Circular letter advising of the setting up of the London Market Asbestos Working Party, with ten of its fourteen members belonging to Lloyd's, formally set up.

During the 1970's, existed as an informal association of certain leading Non-Marine Underwriters. Advice was given that reserve recommendations to the market would be based upon an average cost of $75,000 per claimant, bearing in mind that in most suits that have been issued there are multiple defendants a percentage scale was arrived at which embraced the major direct writings within the London Market. Now that matters are developing with some rapidity more Market considerations are presenting themselves of which the following represent some of the issues which require to be considered. The letter stated inter alia:-

As you are no doubt aware the problems of our markets involvement in the claims arising out of asbestosis have been gathering momentum over the past 6 months to the extent that there are now 6 declaratory relief actions pending and more could arise.

These developments have emphasised the importance of there being a co-ordinated approach within the Market to the various problems that are gradually developing in the on-going handling of the Market's interests. You should be aware that during the course of last year discussions took place with those law firms representing the Market's interest to ensure that there was a standard approach to the manner in which reserves were established, and following discussions with each of the firms involved it was agreed that for the present reserve recommendations to the Market would be based upon an average cost of $75,000 per claimant. Bearing in mind that in most suits that have been issued there are multiple defendants a percentage scale was arrived at which embraced the major direct writings within the London Markets and by application of the scale percentage attaching to any particular insured we have been able to ensure that no duplication of reserve arose in regard to the different insureds named in any particular suit.

1. The need to establish co-ordination between the four firms of Attorneys' who are representing Underwriters' interests to ensure as far as possible that there is a consistent approach to the defence effort.
2. That there be free exchange of information developed as between representatives arising out of reviews carried out of particular insureds accounts which have developed information or claimants who figure in suits issued against other insureds. ...
3. With the developing accent upon Declaratory Relief and the filing of written interrogatories it is essential that there be co-ordination between both defence Attorneys' and the named Underwriters' to ensure that as far as possible, there be a consistent approach adopted in responses made to interrogatories.
4. Bearing in mind that well informed sources indicate that the frequency with which new cases are filed is likely to continue at the present level for at least five years consideration needs to be given to the basis which we require our representatives to adopt in their reserve recommendations to the Market. Johns-Manville had indicated that in their opinion there are likely to be between 2,400 and 3,000 cases filed in each of the next ten years and similar statements, although somewhat less pessimist have been made by other firms involved in this litigation. This then raises the problem of whether or not our representatives should be taking into account in their reserve calculations forward projections of claims in regard to both direct and reinsurance business. Bearing in mind the substantial increases in costs over the coming years it will be immediately apparent that reserve projections in this manner will have a serious impact on the Market as a whole and as yet, on the other hand, not to acknowledge the fact that reserves will inevitably increase would be irresponsible.
1. Problems have and will continue to arise in regard to inward reinsurances with treaties placed in this Market, and it clearly important that there be some consistency on the attitude that may well be adopted in order that the Market can be seen to be acting in common accord.
2. Inevitably we shall soon reach a point where excess Underwriters' supporting a manifestation approach will be faced with claims presented by insureds following exhaustion of underlying limits on an exposure basis, and it is important that again consideration be given to the manner in which excess carriers respond both to their obligation to provide indemnity and defence.
3. Arising out of the Market's inability to arrive at a common agreement on the basis on which losses of this nature attach it has been necessary for there to be dual representation on each of the Declaratory Relief suits that have been filed. Bearing in mind that the costs that are likely to be incurred in handling this matter will be extremely high it is essential that careful monitoring be imposed to ensure that some control is exercised and equally to be certain that adequate reserves are established in Underwriters' books to meet on-going Declaratory defence costs.
4. Regular contact be maintained with the leading Domestic underwriting organisations.

The above items indicate some of the problems that are currently arising out of the litigation that is now being pursued, and it becomes increasingly evident that these various issues will be of considerable significance to the entire Market. This being so it is unreasonable to expect matters to be controlled by the few leads involved and it has therefore been proposed that a joint inter market working party be established which would have the responsibility of considering the day to day problems that have and will develop as this litigation proceeds. It is contemplated that the working party be made up of representatives from the Non-Marine and Incidental Non-Marine Markets and also to include a representative involved in LMX writings. It is intended that the party should include both Underwriters and claims representatives.

Advice was given that:- Lunco will be furnishing the appropriate secretarial needs.

It must be emphasised that the potential involved here is so large and the issue so complicated that we cannot allow a "muddle through somehow approach". Recently with one of the insureds, Eagle Picher, taking depositions of a number of London underwriting representatives it has become clear that the split in the market is serious and that the legal costs involved are going to be astronomical.

In 1980, Johns-Manville brought an action against its insurers for a declaration of the extent of the coverage of the policies which it had concluded since the 1940's. It had itself previously calculated its insurance protection against claims by asbestos victims at over $600m.

Pulbrook Underwriting Management Ltd and Playford Baker & Co. forward the following letter stating: "Please accept this letter as notice that Syndicates 90, 91, 92, 95, 730 and 731 subscribe to the manifestation theory of date-of-loss, and I would be grateful if you could mark your records accordingly." The letter is addressed to

R Hall of Willis, Faber & Dumas in relation to Asbestos Claims - A/C GAF;

P Crane of Sedgwick Forbes in relation to Asbestos Claims - Declaratory Actions in respect of (a) Johns-Manville, (b) G.A.F./Ruberoid, (c) Armstrong Cork;

J Jasper of L Clarkson (Insurance Holdings) Ltd in relation to Asbestos Claims - A/C Celotex;

A Mallboro of Hartley, Cooper & Co in relation to Asbestosis Claims.

Position Paper entitled "Intention of Cover Afforded by the 1966 C.G.L. Form" prepared by C J Smith, Underwriter of Non-Marine Syndicate 660, jointly managed by Fenchurch Underwriting Agencies and Birrell Smith Underwriting Agencies, which states:-

1. Prior to the introduction of the 1966 C.G.L. form, the standard policy in use was drafted to apply "only to accidents which occur during the policy period". The term "accident" was not defined and the insuring clause merely referred to bodily injury and Property Damage "caused by accident".
2. This phraseology caused no problem where Bodily Injury or Property Damage was caused by a sudden and unexpected event. It was not, however, satisfactory where injuries or damage arose from a gradual exposure to injurious conditions - for example the pollution of oyster beds over a period of year or the illness suffered by individuals who had been exposed to toxic materials for a prolonged period. There this type of loss occurred arguments were inclined to develop on two fronts: first, was the loss caused by an "accident" which some hold should be identifiable in time and, secondly, which policy or policies should respond to the claims for damages.
3. For some time the more sophisticated buyers of insurance sought to solve the problem by the use of an endorsement amending the policy to place it on an "occurrence" basis. These endorsements usually defined as "occurrence" as including a continuous or repeated exposure to conditions which resulted in Bodily Injury or Property Damage during the policy period. It was fairly standard practice to charge a 10% additional premium for this endorsement. An alternative solution used by many was to purchase "umbrella" coverage which provided similar "occurrences" protection
4. As the number of disputed claims increased the I.R.B came to the conclusion that a revision of the standard C.G.L. wording was essential. Particular concern had arisen over pharmaceutical products losses where the uncertainties over coverage intention had led to criticism of the insurance industry and a decision was taken to replace the existing wording by one which would eliminate all the uncertainties. The result was the 1966 C.G.L. wording.
5. The 1966 form abandoned the whole concept embraced by its predecessor that the policy would only apply to accidents occurring during the policy period. The revised wording stipulated that it would respond to Bodily Injury and Property Damage "caused by an occurrence". As "occurrence" is defined as "an accident, including injurious exposure to conditions, which results during the policy period in Bodily Injury or Property Damage". The intention is reinforced by the wording of the definition of policy period which stresses that "this insurance applies only for Bodily Injury or Property Damage which occurs during the policy period".
6. At the time of the publication of the 1966 form there was a mass of explanatory documentation which made the intention of the drafters quite clear. The uncertainties of the old form were to be replaced by the unambiguous fact that the new policy would be "triggered" by the occurrence of the injury or damage during the policy period. Certainty those Underwriters actively engaged in the business at the time had no doubt as to the significance of the change of format. They would now be exposed to liabilities arising from conditions which had been present for some years but which might result in injury or damage during the policy period. Suggestions were made that the insertion of a retroactive date might be provident where the new wording was being used although, for commercial reasons, this never became common practice. Another suggestion mooted in the Lloyd's Market was that the Insureds should be asked to sign a statement that they were not aware of any circumstances that might give rise to a claim at the time coverage was issued on the 1966 form. Even when the 1966 form was itself revised the I.R.B. confirms that "the former requirements that the Bodily injury or Property Damage must occur during the policy period is now handled under the definition of Bodily Injury and Property Damage".
7. By conclusion is that the only point at issue on Asbestosis claims is when the Bodily Injury occurred. This may well be for medical opinion to decide but I have no doubt whatsoever that the policies in force at the time the Bodily Injury and for which the insured is held liable, is deemed to have occurred should respond to the losses."

Insurance Monitor Magazine: reported the setting up of the Asbestos Working Party and referred to the possible total quantum of claims at that stage thought to be as much as two billion: "These are purely speculative, and no one yet knows the effect on Lloyd's, which is now beginning to feel the impact of recent American Lawsuits." And further on: "Syndicates may have to check records going back many years to find out what cover they offered, while in the meantime workers may have had several different jobs with a series of employers and worked with asbestos in various forms."

As I indicated to you in my letter of 25th June, 1980 which accompanied the Report of the Fisher Working Party, the Committee of Lloyd's accepted the principles set out in the Report: in particular the concept of the Council, the consequent transfer of authority to that Council and the promotion of a new Act of Parliament. I went on to say that much of the detail will be subject to consultation with the Market and other interested parties and will require very searching analysis before final decisions are made. Indeed, much of the implementation must of necessity await the appointment of the Council.

During the past two months the Committee has been consulting, among others, the Market Associations. All the Associations support the Committee in its view that it is necessary that a new Act of Parliament establishing a Council should be sought. The Associations did, however, express reservations about certain points and these will form part of the continuing discussions with them. The support of the Associations and further consideration within the Committee of Lloyd's have reinforced the Committee's conviction that the new Act and Council are essential if we are to have the self-regulatory powers required for the future.

The first step along the road to implementation will be the presentation of a Bill to Parliament. In order to comply with the rules of Parliament we must call an Extraordinary General Meeting of Members to seek approval of the promotion of the Bill. This meeting will be held in London on the morning of either 3rd November at the Royal Festival Hall, or of 4th November at the Royal Albert Hall. The actual date will depend on how many Members indicate an intention to attend.

Parliamentary rules require that, in order to promote the Bill, not less than 75% of those voting at the meeting must be in favour. Voting on this occasion may be in person or by proxy. It will be important to show that a considerable proportion of the membership voted.

The views that you now express are not in any way binding and cannot be counted towards the 75% majority referred to above. However, it will be helpful to me in the final drafting of the Bill to have the views and support of as many Members as possible.

I enclose an envelope for the return of the questionnaire.

Letter number ... from Attorneys to the insurers at interest. Assured: ... Claim: Asbestos-related claim review.

Even assuming no further delays on the part of the assured, it will no doubt be several months before we are able to assimilate the data on these thousands of claims and render our final report to underwriters.

Business Insurance: Waste liability spills forth Waste Liability Spills Forth

.... undefined liability for cleanup of old dumps under decade-old liability policies ... estimated 1200 abandoned waste dumps ....

Law Suits filed against Hooker by Love Canal residents have hit $3 billion ....Insurance companies are also worried about the bill. Many acknowledge they have no idea what their ultimate involvement in the cleanup will be.

Meeting of the Asbestosis Claims Working Party:

E E Nelson elected Chairman. In the Chairman's absence Mr Ayliffe opened the meeting by emphasising to members that the purpose of the Working Party was to deal with overall market problems and it was therefore important that there should be seen to be complete impartiality in regard to the manifestation/exposure attitudes that exist .... Present indications are that the rate at which law suits are being reported will continue for at least the next 5 years, and that projections indicate that by that time there will be some 25,000 cases in being .... Mr Ayliffe suggested that the first meeting should consider three issues which were:

1. The manner in which we require our attorneys to approach the question of reserves, bearing in mind the indications of the steady increase in suits over the next few years.... A general discussion followed on the three issues and the salient points were: ....

4. It was recognised that whatever approach was adopted by a particular Underwriter or Company they would undoubtedly use their discretion on posting reserves which produced to them their highest involvement, even though that reserve may not necessarily be in line with the position that they were advocating.
1. it was important not to adopt an unreasonably pessimistic approach which could mislead the Market in considering the reserve problem. Before making recommendations to the Market it was felt essential to canvass the views of all attorneys involved in this problem in order that the Working Party could digest the various views that are expressed and then formulate some responsible approach to the manner in which reserve projections should be approached if it was accepted that by the time the views of the various firms of attorneys had been received it would most probably be too late to issue any recommendation that would have the effect of materially inflating reserves for the purpose of the year end closing. Nevertheless it was felt that it was more responsible to take the time to give reasoned consideration to the problem rather than adopting the alternative course of simply setting reserves on a full projection at full costs basis....

1. A course of action to determine reserves should be recommended to the Market which, if possible, should be provided prior to the year end closing ... It was reported that Mr Orgelfinger of Mendes & Mount will be in London during the course of the coming week and has offered to generally discuss the problems of asbestosis with the Working Party and a meeting has now been set to take place on Friday 5 September.

National Institute of Environmental Health Sciences: Estimated Cancer Risk Associated with Occupational Asbestos Exposure

I recently attended the first meeting of the Working Party and one of the initial points to which we wish to give consideration to the approach which the market should be adopting towards the question of reserves: we are acutely aware that some positive instructions should be given to all attorneys involved in this matter in order that we achieve uniformity of handling. It was the view of my colleagues that it would be helpful in considering this question if each of the firms that are involved can give their own independent assessment of how they see, from the accounts which they are handling, the likely development in the future as more and more suits come in. Of equal relevance to this issue is the current reserving basis that has been adopted by the Market and the point in time that this will need adjusting upwards to take care of inflationary trends, and also the likelihood that costs incurred in defending these actions will shortly become the burden of excess Underwriters as primary aggregates become exhausted. It seems to me that the knowledge you have of the number of cases that have been filed to date and the average cost of those that have been settled, both in regard to indemnity and defence costs, should give us an initial basis on which to work. The more intangible aspects of this problem relate to development of loss reports in the future, and in this regard it would be helpful if you could relay the views that have been conveyed to you by those accounts which you are handling, and perhaps express your own feelings on how you see the future developing in this overall problem. It would be helpful if you could provide me with a response to this enquiry not later than the end of September in order that the Working Party may analyse the results of the enquiries to consider what recommendations should be made to the Market and indeed to those attorneys who are representing our interests.

U.S. Department of Labor: An Interim Report to Congress of Occupational Diseases, 1980

US Government Publication. Paragraph 96-97 sets out the cost of litigation:

Lloyd's List: Lloyd's to look into asbestosis.

A working party has been set up at Lloyd's to help co-ordinate the handling by underwriters of the thousands of asbestosis claims which are arising in the United States.

A stop loss $500,000 xs $500,000 reinsurance placed for D J Walker, Underwriter of Non-Marine Syndicate 164 managed by Gooda Walker to incept at 1 January 1978 covering the 1968 - 1975 years. Outhwaite 317/661 wrote 25%.

The publication of the American Bar Association, published a well written and entirely accurate report setting out the history of the asbestos problem. Half way down, the author states: "As we have seen, within the past few years, with the development of the asbestos industry, an entirely new and devastating element has been introduced into our environment. ...

A tremendous amount of litigation, ... It is estimated that, for the balance of this century, 20,000 asbestos workers will die annually as a result of exposure to the product. Thus, we can expect this flood of cases to continue and even to increase."

And further: "The situation is growing in another direction. These cases started out involving only insulation workers. We are beginning to get cases involving persons who were peripherally exposed to asbestos, including the wife of the asbestos worker who washes his clothes, the worker in some other trade who has worked on jobs where asbestos insulation has been installed, and even members of the general public who have simply had the misfortune to be in a locality where asbestos fibres are in the air or even in the water."

And further on: "The mere fact that we have now become aware of the hazards of asbestos, to the extent that substitute products can be used, does not afford a solution. Asbestos by its very nature is almost indestructible and there remains thousands of installations containing asbestos which ultimately will be removed, with the necessary release of asbestos fibres into the environment. I am told that there is an entire housing project in Puerto Rico built from wallboard containing asbestos. Practically every ship in the US Navy contains much asbestos insulation.

It seems to me that we are inevitably going to have to have some sort of Federal Compensation Law covering asbestos-related diseases. I would have in mind a statutory Enactment like the Black Lung Legislation." The Black Lung Benefits Act was enacted in 1976, being a scheme introduced in the United States to deal with pneumoconiosis.

WIR: Law and Regulation

The rise in the number of lawsuits presents the most serious problem facing the U.S. insurance industry, according to American Insurance Association president T Lawrence Jones. He told an AIA seminar in September 1980 that the public needed persuading to support tort reform.

You are no doubt aware of this tremendous volume of pending litigation involving asbestos, the high rate of new filings, and what appear to be increasing verdicts. These general factors, combined with the preliminary information gathered in our claims review, leads us to be concerned that the present method of reserving (as we understand it) may be under estimating the exposure of underwriters.

Interoffice correspondence from L W Biegler Inc. to Reinsurers

We recently received information from the primary carrier, Aetna Life & Casualty, regarding the many asbestos related losses presently pending throughout the nation. At present approximately 4,000 separate actions are on file. New actions are initiated at the rate of approximately 150 per month. In view of the magnitude of the litigation and in light of our level of attachment, we have elected to monitor developments on an aggregate as opposed to a specific case basis.

As the North River policy attaches at $25 million in underlying insurance, there appears no imminent threat to our layer of coverage. However, we will continue to solicit information from the primary insurer on a periodic basis in order to monitor the erosion of the aggregate limits of liability.

Peterson Ross, U.S. appointed attorneys reported to "Underwriters at Interest" in relation to Celotex and state at paragraph two:

"The uncertain corporate history of Celotex, Carey ... and their predecessors and successors makes it impossible to determine with any certainty at this time what policies are relevant and provide coverage for the Celotex Corporation. This problem is presently being litigated in .. an action in Tampa, Florida."

During the Outhwaite case in 1991, it was argued that not only were property damage claims completely unforeseeable as late as the summer of 1981, but that claims of that sort, sometimes known as the "Third Wave" claims, were something of which there was no reasonable foresight when Mr Outhwaite wrote the 51 run--off policies.

Lloyd's Log: Keith Brown fund guests at Lloyd's

At the beginning of October Mr C. H. A. Skey hosted an informal dinner marking the start of a one week study tour of the Lloyd's market by a group of seven young Americans as guests of the Keith Brown Fund. This was the second project undertaken by the fund and followed the successful study tour to New York by a group from Lloyd's in May 1979.

The seven in this year's group came from locations in the United States as far apart as San Francisco, Houston and New York and included a representative from Le Boeuf, Lamb, Leiby & MacRae and from the Lloyd's Attorney-in-Fact offices in Illinois and Kentucky. The other four members of the party consisted of brokers and underwriters from four well-known insurance organisations.

We can provide data as to the loss payments and costs incurred by certain of the American assureds thus far in the trial and settlement of asbestos claims. We believe that these statistics form a reasonable basis from which to estimate probable future loss payments and expenses to be made on behalf of these assureds. The resolution of the manifestation -v- exposure issue obviously is of monumental significance. We note that in regard to Johns-Manville, Lloyds would be on risk on 31% of all of the years of alleged exposure by the asbestos claimants. However, Lloyds would be on risk on only 7% of the claims if the manifestation rule is adopted and this percentage would no doubt decrease with future claims under the manifestation rule.

Estimate as to the number of future claims: It is widely accepted that asbestos liability will be the most significant legal and loss cost issue in the history of the insurance industry. This is because of the almost incredible widespread use of this mineral with its unique combination of heat resistant and tensile strength characteristic. It is estimated that there are as many as 3,000 different products in daily use throughout the world containing asbestos. There is no reasonably priced material which can outperform this product and its use is so necessary that despite its obvious dangers it still has not been banned by the United States government.. The number of potential fixture claims is staggering. The Secretary of the Health, Education and Welfare Department of the United States stated on April 26th, 1978 that he estimated 8 to 11 million American workers were exposed to asbestos since the beginning of World War 2. Dr Selikoff, a renowned scientist in the field, predicted 20,000 asbestos related deaths per year in the United States until the turn of the century ... Similarly in 1978 a study by 3 federal agencies projected that in the next 30 years 13-18% of cancer deaths would be asbestos related ... In any event it is our opinion that due to the long latency period of the asbestos diseases we can continue to expect thousands of new asbestos claims at least into the 1990's. This is because it does not appear that any strict safety precautions were taken in the insulation trades or asbestos manufacturing industries prior to the late 1960's and early 1970's. Most of the claims files to date have involved insulation workers in either the ship building or construction trade industries. However, there were an estimated 4 million people employed in the ship building industry during World War 2 and we believe it is reasonable to expect many additional future claims from this source. For example, we note that there have been more than 950 law suits filed in Pennsylvania Courts by former workers in the Philadelphia Naval ship yards. We are advised there are several thousand more claims likely to originate from this source. The same can be said for the 300 Suits pending in Mississippi and the 190 suits pending in Connecticut and the 1,600 suits pending in Los Angeles which all arise from asbestos diseases sustained by shipyard workers in Hawaii, but we estimate that claimant attorneys predict that 500 suits will eventually be brought in that area. We also anticipate a greater level of additional suits in the Virginia, San Francisco and Seattle areas. Similarly, very few claims have been brought to date in industrial areas such as Chicago , St. Louis, Detroit and Pittsburgh. Yet, we note that more than 270 suits have been brought in industrial New Jersey and more than 100 suits have been brought in Ohio and 82 suits have been filed in Knoxville, Tennessee. It is only reasonable to assume that a great number of claims will ultimately come from all of the major industrial areas.

Prior asbestos verdicts and settlements. Despite the 8,000 or more cases filed to date there have to our knowledge been only about 25 asbestos products cases tried to Verdict thus far. The results are surprisingly even with both the plaintiffs and defendants winning fifty percent of the time. However, Underwriters should mark the size of several of the jury verdicts in favour of the plaintiffs .... It would seem evident from the size of these awards that the asbestos claims can be presented in such a manner so that a jury believes the asbestos producers and manufacturers did not properly warn of the hazards of their products.

Prospects of indemnity relief from other sources: Several of the asbestos product manufacturers have attempted to seek indemnity or contribution relief by bringing third party actions against the companies who supplied the manufacturers with the raw asbestos. We believe these third party actions could be deemed to have merit and represent a serious potential exposure to the suppliers ... A second mode of indemnity or contribution relief attempted by the asbestos manufacturers has been against the United States Government. Underwriters should note that the Federal Government contributed substantially to the 1977 Tyler, Texas $20,000,000 settlement with 445 asbestos workers. Since that time, however, the United States Department of Justice has vigorously refused to contribute to any asbestos settlement. The Department has a staff of more than 60 attorneys defending more than 92 indemnity and contribution claims brought against the United States Government. Johns-Manville and Keene Corp. have appealed the dismissal of their indemnity claims against the U.S. Government arguing that their asbestos products were fabricated precisely as instructed by the United States Government. They also argued that it was the Government that was responsible for the unsafe conditions in the shipyards. In this regard it should be noted that the United States General Accounting Office reported to the Congress that the U.S. Navy did not follow safe work practices at the Norfolk Naval Shipyard in Virginia and at the Long Beach Naval Shipyard in California we believe it not unlikely that sooner or later courts will permit indemnity or contribution actions against the United States Government which could provide some relief to the asbestos manufacturers....

The potential claims against asbestos employers: since the early 1930's awards have been paid in workman's compensation cases for asbestos related diseases. However, it was believed until recently that the sole remedy of these employees was under the local Compensation Act. The Supreme Court of California in the Rudkin case, however, recently ruled that an employee can sue Johns-Manville directly for fraud in concealing the dangers of working with asbestos. This decision, if followed elsewhere, could open the door to a great number of suits under the employers liability policies.

The possibility of intervention by US Government: .... In 1977 an "Asbestos Health Hazards Compensation Act" was introduced into the House of Representatives but was never brought to a vote. This bill was re-introduced in 1979 in the 96th Congress calling for the establishment of a compensation program in lieu of tort remedies for persons afflicted by asbestos related diseases, which would be similar to the Black Lung Program for coal miners. Benefits would have been funded by the United States Government, asbestos suppliers, miners, manufacturers, etc., as well as by the tobacco industry. Subsequently, in June, 1980 a bill was introduced by Senator Hart of Colorado which utilised the state Workman's Compensation scheme as its basis. This bill also would eliminate third party litigation. Hearings on this bill were scheduled for September, 1980. If the state benefits currently being paid to the disabled employee would be less than the federal minimum then the difference would be paid by the last private or public employer who exposed the worker to asbestos. It is believed that support for the Hart bill is mixed in the asbestos industry and that the insurance industry has not taken a position ... It would appear that any federal relief to insurers is fairly remote at the present time.

Conclusion:

It is our view that Underwriters for the time being can continue to reserve each claim on the $75,000 basis previously suggested by their counsel. However, we believe that more sophisticated information is now available and that a reallocation of percentages among the various assureds would now be useful. As indicated we believe the number of claims will continue to increase for the next several yearsassigned to the various insulation manufacturers involved in asbestos litigation.

Protection of Trading Interest Act 1980 receives Royal Assent.

Office of Technology Assessment, U.S. Congress: Assessment of Technologies for Determining Cancer Risks from the Environment

U.S. Federal Government publications: In process of being published by the (in press).

City Forum Meeting: A Parliamentarian's view of insurance institutions

The November meeting was addressed by Jonathan Aitken MP. Mr Aitken's talk was mainly concerned with the Lloyd's market, and ranged from his previous experience as a journalist, touching on the public interest, the Fisher Report, self-recognition and fraud, and was highly topical with the meeting of Lloyd's members being held the following day at the Royal Albert Hall.

Extraordinary General Meeting of Members, of Lloyd's: Address by Mr Peter Green, Chairman

(The "Wharncliffe Meeting" held at the Royal Albert Hall to propose the Lloyd's Bill.)

In response to a request received, the Chairman then announced that there would be a Poll as required under Parliamentary Standing Orders, at which proxy votes could he cast.

These figures include 10,319 proxy votes.

Attorneys sends to RAG Jackson a copy of the recent decision in Insurance Company of North America -v-48 Insulations.

Asbestos Working Party meeting.

Letter from CJ Ayliffe to EE Nelson re: Asbestosis Working Party

My concern basically stems from the fact that all attorneys who are handling the asbestos problem are aware that the working party is giving consideration to the difficult question that is raised by the manner in which reserves should be approached ... My basic concern on this problem is that whilst I am as conscious as you of the delicate manner in which the year end reserves must be handled, and also fully agree that our obligation must be to provide to the markets sufficient background information to enable them to make the final decision, I am nevertheless concerned that reserves now are possibly lower than they would have been had the working party not come into being. In the case of matters being handled by Mendes and Mount, as I have said, it has been made clear to me that it would have been their recommendation that reserves be increased on a per claim basis and, equally, so far as Lord, Bissell are concerned the reserves they would have put forward would have taken into account some form of projection. Neither of these developments have taken place due to the belief that a Working Party would be providing guidance, and if matters were left as they now stand it would effectively mean that we would be explaining to the Market the imponderables and that any loadings that individual Boxes decided to apply would be attached to reserves which would have already been higher had we not become involved in this problem....

Peterson Ross Schloerb and Seidal, Attorneys, report to the insurers at interest. Letter number ... Assured ... Tampa claims review

… that they had put in a huge para-legal team to investigate a situation in Tampa and try to report what was going on there in relation to claims against Glen Alden Corporation and McCrory Corporation. The report states:

As we have previously noted, the assured has more than 4,000 open claims files, and this figure is growing by approximately 100 each week. In addition, there are more than 500 settled claims files, and claims continued to be settled on a daily basis. The assured claims file possess only the most rudimentary organisation, and we do not believe there is any manner of obtaining the information required by underwriters other than by proceeding with a claim by claim review of each file. Aetna Casualty is alone among the insurers in having paid a significant number of claims. Yet we can confirm that neither Aetna or any other insurer has ever reviewed the insureds claims files. We have reliable but unconfirmed information that Aetna simply paid claims in a possibly deliberate attempt to exhaust its coverage so as to be able to close its files. We are further informed that Aetna has indeed exhausted its limits for certain policy years. If this is so, any information obtained from Aetna, assuming its availability, could not be relied upon in formulating or implementing any rational claim handling policies.

Forty Eight Insulations decision:

As underwriters are no doubt aware, the Court of .Appeals for the 6th circuit has recently affirmed the decision of the lower Court in the Forty Eight Insulations case . .. In Forty Eight Insulations, the Court did not hesitate to state that it was basing its decision on a mode designed to provide the maximum available insurance coverage ... Finding that medical testimony strongly supports the exposure argument and that "cumulative disease cases are different from ordinary accidents or diseases", the Court found that the parties reasonably would have expected that coverage would parallel the theory of liability ... Liability among the insurers, says the Court, is not joint and several, but rather is individual and proportionate. Therefore, if an insurer can show that no exposure to asbestos products manufactured by its assured took place during certain years, it is not liable for those years. However, the valve is effectively closed when the Court makes the burden of demonstrating this exculpating factor purely the insurers'. This burden will be well nigh impossible to carry in many situations.

In the Outhwaite case, it was stated that: "It is absolutely extraordinary that Mr Outhwaite displayed no interest whatsoever in the mechanism whereby underlying claims accruing to the run-off policies were handled, in the competence of those handling them, or anything of that nature."

Lloyd's List:

Published an article about an argument that was put forward by some of the asbestos defendants that cigarette manufacturers should share claims.

General Meeting of Members of Lloyd's: Address by Mr Peter Green, Chairman

An extraordinary meeting of shareholders in Unione Italiana di Riassicurazione (Uniorias) on 28 November approved the doubling of the Italian reinsurance group's capital from L 15,000 million to L 30,000 million, to bring total assets of L 51,800 million. This followed a report of an increase of about one-quarter in both Italian and foreign currency exposures in the 1979 underwriting year. Total premium rose by 27% to L369. 600 million, premiums in foreign currencies by 23% to the equivalent of L158,000 million. Profit brought down was L8,200 million against L8,100 million in 1978.

Meeting of the Asbestos Working Party following the meeting of 8 November 1980.

1. The Chairman reported the outcome of a discussion with Mr Richard Von Wald, the "In-house" Attorney for Johns-Manville Corp., Ken-Caryl Ranch, Denver, Colorado 80217, U.S.A. Mr Von Wald had invited any Member of the Working Party to make contact with him to exchange views. A statistical bank of information was available but Members would be asked to preserve the "confidentiality" of any details that were received.
2. The Chairman reported that a draft agreement for the collection of fees in respect of Declaratory Relief Actions had now been approved for circulation to the Market. A similar document had been agreed for use by the London Companies.
3. The Chairman proposed that the Meeting should discuss the desirability of circulating the Market with a report for the valuation of outstanding claims for audit purposes at year end. Mr Ayliffe believed that Attorneys should make recommendations for year end purposes but it was for the individual Underwriters to determine the figures used when closing the account. He was concerned that reserves currently carried on files, were lower than would have been the case under normal circumstances. Those concerned were looking for recommendations from the Working Party before final decisions were made. This view was supported by Mr Jackson, who thought that a figure of U.S.$125,000 per average claim was more realistic than the present figure of U.S.$75,000 currently used as a yardstick. He thought Attorneys should in fact provide two sets of figures:-

1. Reserves as at 31 December 1980 on known cases.
2. The projected likely number of claims for the next five years, based on information currently available but to include an inflation allowance.

The projections should estimate the number of new claims, together with a likely settlement figure. He thought realistic totals could be provided if the Attorneys requested each Insured to state the total number of their workforce and divide that figure by the percentage of known Asbestos cases so far reported. Mr Jackson was also concerned that some Underwriters did nor appreciate the likely number of cases expected to develop. He further commented on the fact that the Audit Committee would not be making specific reference to Asbestosis reserves at year end.

Messrs Rokeby-Johnson, Skey, Tayler, Kemp and Froude thought that U.S.$125,000 was excessive and U.S.$100,000 was more realistic. They were not in favour of making projections of the eventual numbers involved, but did agree that Attorneys should provide information on this matter.

Mr Ayliffe, agreeing with Mr Jackson, asked if there was merit in inviting the Attorneys to produce a combined, rather than an individual, report. The Committee did not favour this course of action. They did, however, confirm their previous opinion that a meeting of the instructed Attorneys should take place during 1981 for an assessment of the current position.

Mr Heath was in general agreement with Mr Jackson and said that it appeared the number of new cases was more than doubling in each successive year from 1976 onwards. He also felt that at the report stage to Underwriters, the individual opinions of the members of the Working Party should be stated rather than a general statement

1. The Audit Committee were reluctant to identify individual situations for audit purposes. The Asbestosis situation was well known in the Market and they believe that the Underwriters were aware of the potential problems.

Following the issue of the Report of the Fisher Working Party, the Committee of Lloyd's set up a number of "Task Groups" to examine the various proposals of the Working Party and to make recommendations to the Committee of Lloyd's. Some 21 Task Groups were set up at various stages.

A Task Group was established in the autumn of 1980 to examine Annual Financial Reporting to members of Lloyd's and to consider the Financial and other Information that should be provided to Names and to prospective Names.

But like most underwriters, I have been known to lead the odd specialist class or two, and some personal experiences over the past 18 months have forced me to sit back and take stock. If I have had to bend my mind to the subject rather more than most, it is because my syndicate only got off the ground for the 1978 account, so that it entered the non-marine market just as it moved into a period of reducing profitability. That being the case, we have had no comfortable cushion of income from bread and butter business to sustain us through the lean years; so have concentrated on the development of new classes.

But when I pose the question ‘‘Innovative Underwriting: is it worth the effort ?" What yardstick should I use? Who is it who must benefit to make it worthwhile ? Should it be my colleagues and myself, my Names, the brokers, or the Lloyd's market as a whole ? The answer must be my Names, since they are my commercial raison d'être. Agreed, if I benefit them, the others should benefit too.

But there is nothing altruistic about Names. They, with everything at risk, can only be interested in the financial returns given them by their investment in Lloyd's. My job is to maximise that return without being unduly rash or over ambitious.

Therefore, when I say "Is it worth it?" the question I must ask is this. When an underwriter and his colleagues spend hours, weeks, sometimes months working on an innovative underwriting project, are they sure then are working to the best advantage of their Names ? In today's market place, can the potential rewards warrant the risks and the costs involved? If not, why not?; and what can be done about it?

Before one can begin to debate such questions it seems to me that a number of points must be considered. First, in our market, who initiates innovation - and why ? Secondly, is it possible to identify which new classes stand any real chance of success ? Thirdly, what are the potential financial gains and losses?

I have no hesitation in saying that the vast majority of genuinely innovative ideas are broker inspired. In fact, it could hardly be otherwise, since brokers are in the front line of those positioned to learn of the needs of the private and corporate buyers of insurance.

As to why; well, experience has taught me that just as fat cats choose not to hunt mice so, by and large, brokers need to be hungry before they are prepared to venture out and follow, with any conviction the uncertain trail of a new idea.

But when time, opportunity, and a broker's threatened bottom line combine with the appearance of an apparent new insurance need, the nettle is grasped, enthusiasm is generated and before long a coterie exists within a firm of brokers ready to convince anyone prepared to listen that they have identified the most original leap forward since Cuthbert Heath left our stage. So armed with their gem of an idea, the brokers, be they provincial, transatlantic or just plain foreign will, more likely than not, contact their Lloyd's broker. Now they, particularly if the producing broker is from the USA, may well, for one of several possible reasons, some too embarrassing to mention, feel obliged if not actually anxious, to pursue the matter with diligence. Enter the London, if not the Lloyd's, underwriter.

Now if that sounds altogether too cynical, let me counter it by pointing out, first, that no underwriter can be forced to work on a new idea and secondly, that in the pursuit of bringing a new class of insurance to the market, most of the cash costs will be borne by the broker. So it is the joint responsibility of the underwriter and the broker to determine the feasibility of any presentation.

How then can an underwriter begin to assess the commercial viability of a new idea ? The answer is, as I have found to my cost, with difficulty. Over the past year or two I do seem to have proved pretty unsuccessful at identifying the commercial shortcomings of at least five schemes involving what I would regard as genuinely innovative underwriting.

I think it is fair to say, that if income forecasts were being met on all these schemes, we would be on track to be bringing more than £10 million of new premium into the market. As it is, my expectations are now so lowered that 5% of that figure would prove a pleasant surprise.

It is not necessary for me to explain all these schemes in detail but it will help if I very briefly outline three of them so that I can use them later on to make a point. Two are personal lines policies, the other corporate.

The first is a scheme that is the dental equivalent to BUPA. It was the first of its kind in the UK, was endorsed by the British Dental Association, and vigorously marketed through individual dentists, 2,000 of whom put the promotional literature on display in their surgeries. To them we have sent no less than 175,000 application forms, of which 100,000 have been to replace those taken home by patients.

At the close of our second year we have sold a pitiful 143 policies and, of course, the claims record has been bad. It only took one rogue dentist to make it so.

There now exist at least three other very similar schemes; though my enquiries suggest that their experience has been much the same as our own.

The second scheme, Expatriates' Contingent Tax Insurance, is the least ambitious in income terms but a convenient example for me to use. The policy was designed to reimburse expatriate Britons for UK income tax for which they would become liable if they had to return home for reasons beyond their control - injury to, or illness of, themselves or their families, political unrest in most of its forms, loss of visas and so on. Now when you consider that a great many of the people who have opted to endure the deprivations of a two or three year-stint in the Middle East only do it for the very high salaries paid, which are often absolutely free of tax, and when you realise that the number of days allowed back in the UK is critical, so that one day over the top can mean that you will be deemed "ordinarily resident" and therefore subject to UK income tax at the full rate, you might agree with me that such a policy would sell. The policy sounds simple enough but of course nothing to do with tax is simple, and it was necessary, in putting the policy and application form together, to do a fair amount of reading and to spend several hours in the company of tax consultants.

When the scheme was launched it received a favourable press both in the national dailies as well as the specialist journals for expatriates. At least one financial journalist was so convinced it was no less than blatant tax avoidance that he wouldn't write on it until duly given clearance from Lloyd's Advisory Department. The brokers to the scheme, have distributed 5,000 application forms and spent hours on the telephone explaining the coverage. In the past 15 months we have sold 24 policies!

My last example is a new class of insurance launched by us in May called Tender Offer Defence Expense (TODE). Designed for the American market the product reimburses insureds for the costs incurred in fighting off unwelcome take-over bids. For a claim to succeed the defence must be successful. Pitched as it was straight at a corporate buyer's financial director and corporate attorney, who must together consider the merits of the cover being given, in the light of the prevailing climate on Wall Street, a legion of SEC regulations, the current belligerency of stockholders, and the likely high costs of mounting an effective defence, the wording and application form were technically complicated as any I have worked on. It took eight months and many meetings on both sides of the Atlantic before we had got it right. In May I went to the States to help launch the policy, and the response from the alphabet house brokers visited by myself and an American colleague was tremendous. One broker alone asked for, and got, 1,000 application forms. A high risk take-over candidate is reported to have received no less than 10 application forms from as many brokers within 14 days of our launch. The coverage in the financial Press was favourable and very wide, ranging from the Wall Street Journal to Business Insurance. Everything signalled success; yet here we are today with 83 completed application forms, and two firm orders.

Now it is much too early to write off these schemes as total disasters, but things have not exactly gone according to plan. Let me tell you where, on reflection, I think we have gone wrong.

I believe that not enough market research was undertaken. No manufacturing concern would contemplate launching a major new line without exhaustive surveys first being made of the likely response from potential buyers. You may argue that that is because manufacturers have to incur research, tooling up and marketing costs of an order not experienced by insurers.

I would disagree, and suggest that our costs have to be measured in terms of cerebral effort rather than material outlay. There is nothing more diverting than a promising new idea. But, operating as we all do in a highly technical service industry, the most valuable commodity that we have is our time. Too often we tend to forget it - so too readily we squander it. Skilled market research will save us time and, therefore, money. The dental scheme and the expatriates' tax policy are cases in point.

My second mistake has been to make products too complicated. This has been in part due to an over-estimation of the sophistication of both the private as well as the corporate buyer, and in part due to an instinct for self-preservation. In today's world where the consumer is always right we have all come to suspect that our chances of defending against unscrupulous claimants are very thin indeed, especially in North America; so it is understandable that we take great care in the preparation of our application forms and wordings. In retrospect, I feel that I may have made the former unnecessarily complicated, and the latter altogether too legalistic. For what it is worth, I am cynic enough to believe that, from a marketing point of view, it is much more important to simplify the application form - which everyone must be able to understand. Both the expatriates' tax and TODE policies have suffered from application forms that expected too much.

Lastly, I am persuaded that underwriters and brokers fail properly to consider the importance of timing. As I have said, all too often new ideas surface when markets are soft. So competition is rife, rates are falling, coverage is being broadened and the corporate buyer of insurance, the risk manager, is under pressure from his financial director to show a saving in total premium costs. When, as is the case today, soft markets coincide with a general economic recession the effect is compounded. Perhaps innovative ideas will always tend to surface during soft markets, but perhaps we should learn through market research to develop them perfect them, then tuck them away until the climate has improved and our marketing efforts are more likely to meet with success. The threatened stumbling block to this approach will be everybody's unwillingness to postpone the launch, as we will all live in fear that a competitor might learn of our product and beat us to it. The counter-argument to this is that if you launch too soon, you expose your new product to the inquisitive gaze of those very competitors and allow them, before you have assembled a book of business, to prepare their "improved" version in time to catch the upswing in the market. In retrospect, we launched TODE about six months too late, and it will now need a new wave of take-over activity on Wall Street to galvanise any real interest. With interest rates climbing again there can be little real prospect of that happening during the next six months.

Now, turning to money! What are the potential rewards and costs involved if one does become embroiled in innovative underwriting? Can the rewards justify the work, and the time or would underwriters be better employed concentrating less on underwriting, more on cash flows, ingenious stop losses and sophisticated investment policies ?

On the positive side, one can list the potential gains as follows:- the underwriting profit that flows from a successful product; the investment income and capital gains derived from the new premium; the intangible benefits which follow in the possible form of increased good business from the broker handling the successful new product, and an increased showing of new business from other brokers who may hope that a success with one broker can be repeated with them; the improved morale amongst one's colleagues that comes from being associated with success - any success.

On the debit side the list is longer, and should be considered in the dark shadow of the simple fact that for every successful new venture, you must expect several failures: - inadequate penetration of your potential market will lead to selection against underwriters and, therefore, underwriting losses; any underwriter who launches a new product in the litigious climate of today without doing a great deal of homework is a fool. Homework takes time, and time, as we have said, is expensive; time spent working on new ideas must, to some extent, mean time lost in the Room at Lloyd's. Profitable business may therefore be placed elsewhere and lost to your syndicate; the extra workload assumed by lead syndicates necessitates a greater degree of delegation. Delegation is only cost-efficient when passed to people with experience, good brains, and a decent education. Employing high quality staff, and more of them, is very expensive, there are no laws of copyright in the insurance world. A brilliant new product developed with great care over a period of months may after its launch be yours one week - everybody's the next; when competitors move in they can but reduce your profit margins, since they will offer one or a combination of the following: - lower rates, broader coverage, smaller deductibles, more commission. If they anticipate a substantial volume of premium they may be prepared to operate at minimal margins of underwriting profit.

Last and most important - all syndicates incur other additional costs, and I don't think for a moment that the market at large begins to appreciate their scale. For instance, statistics thrown up by an exercise just completed by me show that since April last year my colleagues and I have made eleven trips overseas, and on one account alone have visited 71 offices in the USA. If one includes visits to offices to talk about excess loss medical, accident and health, TODE and other miscellaneous classes the total climbs to over 100.

And in London a glance at my diary shows that in a normal week I spend an average of 12-15 hours away from the box meeting with brokers to talk about business where we are the lead or potential lead underwriter. At the box, with a staff of seven, some 75% of our total time is spent quoting and working on classes we lead.

But the point is this - syndicates leading any class of business will incur additional costs. Syndicates therefore that lead much of the business they write have a price to pay. It shows, sometimes dramatically, in their expense ratios. So, unless better than average loss ratios compensate for such increased expense ratios the Names may be better off on a non-lead syndicate. But somebody has to lead.

Lloyd's after all, is a market that derives some 75% of its income from overseas. At home Lloyd's is ill-placed in most classes of business to compete with the companies and their provincial offices. That we have succeeded over so many years is because we are the market of first call - and last resort. Apart from the soundness of the security we offer, our strength is drawn from our reputation to give coverage where others won't - and to innovate. It is that reputation which pulls business into Lloyd's. Destroy it and we are doomed.

So, if to survive we must lead, but the costs of leading have become too high, how can we correct the imbalance? Since there can be no simple way for lead underwriters to apportion their disproportionate costs over the following market, a method must be devised to give them additional remuneration.

I want to examine a couple of possible alternatives but must first stress that, in my opinion, this is an underwriting problem, so any solution must come from underwriters' pockets - not the brokers.

The first alternative could be to grant lead underwriters an overrider on premiums written. It would be simple to administer and was in fact mooted a year or so ago by underwriters leading banker's blanket bond business. At that time a number of underwriters, including myself, protested strongly against the idea. It was, as I recall, an overrider of 2% on gross premiums. For a number of reasons I still believe that it should be disallowed.

First, if an overrider became widely used, a glance at the global figures for Lloyd's non-marine syndicates would quickly demonstrate that only the most successful syndicates would survive, since the average return on net premiums over the past five closed years, including investment income, was a paltry 2.59%. So you would threaten to put the non-marine market as a whole almost on to a nil return basis.

Secondly, an overrider would encourage underwriting for volume rather than profit. With a 2% overrider on gross premium a lead underwriter could write a 10% line and sustain a 125% loss ratio on premium net of 20% brokerage without himself losing money. So bad leads would proliferate, especially in the high excess casualty field.

It seems to me, therefore, that the basis of remunerating lead underwriters has to be a compensatory share in profitability, i.e. profit commission; even though from an administrative point of view it will be much harder to introduce, and any number of anomalies will have to be recognised and accepted. It will take a better brain than mine to iron out all the problems, but as a non-marine underwriter these thoughts come to mind:-

Firstly, to keep the brokers' administrative costs within bounds facultative underwriting will at the outset need to be excluded: so profit commission should only be paid on treaties, line slips, binders and other market facilities. It is possible to argue that this would be fair because on treaties and market facilities of one sort or another the lead underwriter does carry a particularly heavy burden.

Secondly, the formula for such profit commissions should be calculated on an absolutely net basis and incorporate three deficit clauses. Included in the outgo should be an allowance for underwriters' expenses at not more than 5%.