Sir James E Pearman, James A Pearman and R S L Pearman are partners in the Bermudan law firm, Conyers Dill & Pearman, solicitors to the BPR Bermudan empire. Mr R S L Pearman is also a director of the
Bank of Bermuda, the bankers to the Bermudan companies. Breen Ltd is a wholly-owned subsidiary of Horatio Ltd.. Horatio Ltd is incorporated in the Cayman Islands. From the period of incorporation until 31 December 1983, the shares were held by the Bermuda Trust Company as the Trustees of a Discretionary Trust established by a Bermudan national. The sole beneficiary is a charitable organisation but the Trustee has a discretion to name other beneficiaries. The LloydÆs commissioned Inquiry into BPR was informed that the intention of the Trust is to benefit adult members of Mr E E NelsonÆs family, although Mr NelsonÆs other children are among the beneficiaries.7 Jul 82
Letter from Elborne Mitchell to the asbestos underwriters concerned per the Asbestosis Working Party. We were retained some 18 months ago so that we should, when requested meet with London insurers to discuss the problems arising from asbestosis claims. We are not required to do that any longer however we remain available to advise as and when specifically requested.
Jul 82
In July 1982, Mr Shearman of LloydÆs brokers, Colburn French & Keen, placed a 18% of a run-off reinsurance of the Brooks & Dooley Marine Syndicates 89, 880, and the incidental Non-Marine Syndicate 881 of Marine Syndicate 886 with Outhwaite Marine Syndicate 317. The policy covered all risks written by the Brooks syndicatesÆ US$ Marine Time account, for the 1981 underwriting account in respect of settlements made on or after 1 April 1982 and on or before 30 September 1983. There was a deposit premium of $11,111,111 payable at inception, the reinsurers liability was limited to $17,000,000 and no claim was payable before 1 August 1983.
On 5 August 1982, the entire 18% line underwritten by the Outhwaite Syndicate 317 was reinsured by Fidentia on similar terms save that Fidentia was to pay when the reassured had paid claims in excess of $5,570,000 in aggregate and then for all further claims up to a further $11,250,000. The premium for the reinsurance by Fidentia was 18% of $5,250,000 payable at inception by special settlement. The connection between Mr Brooks and Fidentia was apparently unknown to Mr Outhwaite at that time.
From 1975 to 1979, Mr David Lindo joined B F & M Management Ltd (which managed Captive Insurance Companies) as an underwriter. He had previous experience in marine insurance with AIU and Mid Atlantic. He worked under Mr Sutton (who had replaced Mr Postlethwaite in 1974 who had replaced Mr J C Van den Bosch in 1972) in the management company.
His understanding, derived from Mr Sutton, was that all business emanating from the Brooks syndicates was to be written as a matter of course. If business was to be offered to Fidentia which did not emanate from the syndicate he would either refer the matter to Mr Sutton for a decision, or if Mr Sutton was away, refer by telephone to Mr Brooks or Mr Dooley in London. Just as in the earlier years of FidentiaÆs existence the management company would be notified by LloydÆs broker, Bellew Parry & Raven Ltd, of any fronting and retrocession arrangements to be effected through Midland Re, so in the period 1974 onwards the notifications from London would include the fronting and retrocession arrangements to be effected through the Alexander Howden Companies, Manor and Capital Marine. In relation to the use of North Atlantic (subsidiary of B F & M) as a fronting or intermediary company between the Brooks syndicates and Fidentia, the LloydÆs appointed Coleman Committee of Inquiry were clearly of the opinion that the size of their retention was agreed from time to time between Mr Brooks and Mr Sutton as implementing Bermuda Fire & Marine (B F & M), the owners of North Atlantic. Indeed, when Mr Sutton decided in 1979 to abandon North AtlanticÆs retention in the annual quota share recession and to retrocede 100% to Fidentia, he first informed Mr Dooley of his intention
The extent to which Mr Brooks exercised day-to-day control over the business accepted by Fidentia is illustrated by the evidence given by brokers who placed such business. Nearly all the brokers whose evidence was heard by the Coleman Committee of Inquiry knew, and had known for some years, that
the syndicate underwriters effectively controlled Fidentia. It was the firm understanding of one of them that all business which he was asked by the syndicate underwriters to place with companies in Bermuda, other than with Fidentia, would automatically be retroceded for the most part to Fidentia; there would be an "auto-retrocession".One broker described the operation of
business relating to Fidentia in 1974 - 1975 in this way. In order to place business or to renew business reinsured by Fidentia, it was first necessary to go to the syndicatesÆ box at LloydÆs and to ask either Mr Brooks or Mr Dooley whether the business would be acceptable. They would then take a decision in terms of "yes, we will renew it", or "no, we will not" and if the answer was yes the broker knew that he could send the papers to Bermuda confident that the business would be accepted.There was also evidence that, with the knowledge and encouragement of Mr Brooks,
Glanvill Enthoven were, in about 1977, letting it be known about the market that Fidentia would be able to provide premium stripping or relief facilities to LloydÆs syndicates to enable them to put surplus premium offshore from one calendar year to another. These transactions would be entered into by means of the placing broker approaching the Mr Brooks and indicating the amount of premium available. He would then consider the position and come back to the broker with quotations indicating the amount of repayment by way of claims for the relevant period of time. The terms of the transaction would thus be negotiated between the broker and Mr Brooks, and the broker would then formally offer them to Fidentia whose managers would then formally accept by issuing a cover note. The whole transaction was effected on the assumption conveyed to the brokers that the syndicate underwriters effectively controlled Fidentia and what business it wrote.When at the
end of 1974, Mr Dooley effected three major premium stripping banking and premium income quota share reinsurances of the syndicate through Alexander Howden & Swann which involved the payment by the syndicates in December 1974 of total premiums of US$10,550,000 and ú800,000, the business was presented to the brokers on the basis that it was to be fronted by Alexander Howden & Swann Bermudan associated company Manor Insurance Company, and then retroceded to Fidentia. The negotiations between Mr Dooley and Mr White of Alexander Howden & Swann proceeded on the basis that a package deal was there and then being set up by them involving, in the essential feature, the retrocession of the entire risk under the banking policies and of 90% under the quota share to Fidentia. Because of the very nature of these transactions, the Colman Committee of Inquiry were quite sure that they could not have been set up in this way unless Mr Dooley had first been certain that Fidentia would be bound to accept the retrocession from Manor on the terms offered. In fact, Mr Peers had almost certainly previously ascertained the bank deposit rates which Fidentia would be able to obtain on the deposit premium for the period of time prior to payment of the claim and had, on that basis, carefully calculated the aggregate liability which ought to be written into the policy.The
Fidentia was incorporated in Bermuda on 5 November 1970, through Conyers Dill & Pearman, with an initial share capital of ú25,000. The company was further capitalised through the retention of profits:-
1972 |
Paid up capital increased to |
ú 37,500 |
1973/74 |
Paid up capital increased to |
ú 250,000 |
1975 |
Paid up capital increased to |
ú 500,000 |
1976 |
Paid up capital increased to |
ú1,000,000 |
During the period
1970 to 1981, some ú27 million or around 75% of the FidentiaÆs business emanated from the Brooks syndicates; therefore, some ú39 million was channelled through the Fidentia. The estimated financial advantage gained by Fidentia is around ú7 million, of which ú6.2 million derived from the Brooks syndicates.Facultative Policies of Interest:
Year |
Broker |
Security |
Terms |
1974 |
BPR |
Fidentia |
2% Quota Share A/C Posgate |
1975 |
BPR |
Fidentia |
2.50% Quota Share A/C Posgate |
1976 |
GE |
B F & M |
2% TLO account A/C Posgate |
1977 |
GE |
North Atlantic |
Bromley Syndicate |
1977 |
GE |
North Atlantic |
MacMillan Syndicate |
1978 |
GE |
North Atlantic |
1.50% Quota Share TLO A/C Posgate |
1979 |
GE |
North Atlantic |
Sasse Stop Loss |
1980 |
GE |
North Atlantic |
Graves Whole Account |
1980 |
GE |
North Atlantic |
Graves Whole Account |
1982 |
GFK |
Fidentia |
Outhwaite Syndicate |
GFK Colburn, French & Keen
GE Glanvill Enthoven
By
31 December 1981, Fidentia had net assets of ú2,201,000 ($3,302,000) and had paid dividends of approximately ú1 million by 1981, and a further ú567,000 ($850,000) in 1982. The Coleman Committee of Inquiry stated in 1983 that they believed that it was inconceivable that any small Bermudan Reinsurance Company could achieve such growth without unusual external assistance.13 Jul 82
In June, the Chairman, Peter Green, was honoured by Her Majesty the Queen in the Birthday Honours List as a Knight Bachelor for services to the Insurance Industry. Investiture held at Buckingham Palace on 13 July.
15 Jul 82
Letter from D Tayler, Chairman, of the Asbestosis Working Party to asbestos underwriters concerned:
Confirming that the market gave support to the collection of fees being agreed solely by the two Lead Underwriters à
and advising of the administrative burdens which face Brokers in dealing with collections involving different years of account, and layers of coverage which have effectively created delays in payment.
As a result there are two specific areas which give the Working Party cause for concern. Firstly, in establishing an efficient co-ordinated servicing system between the various Attorneys involved, it has been necessary, as you are aware, to seek the co-operation of outside professional advisors to establish and maintain a databank. This has involved Mendes & Mount, with the authority of the Working Party, entering into certain contractual arrangements which, among other matters, contain specific time provisions for payment of sums that become due. In order promptly to respond to these commitments, Mendes & Mount sought an advance fee fund from the market which could be topped up from time to time.
The second area which creates perhaps more concern, relates to the reimbursement of indemnity payments due to accounts placed ion the London Market. Within a very short space of time at least three major accounts will be looking to us for prompt transmission of funds and, in the light of the severe financial pressures that are being imposed on our insureds, it is essential that we comply in a timely manner, subject of course to such coverage reservations that may be considered necessary.
From our experience to date in seeking to protect the interests of the market, it is our conclusion that the present system being operated will not satisfy the pressures that are continuing to develop, and that an alternative must be considered if we are to avert adverse criticism of our ability to respond.
Following extensive discussion in the Working Party, and with those firms of Attorneys handling these matters, it has been concluded that it will be necessary to establish a letter of credit system forthwith.
10) All claims authorities and/or Letter of Credit forms, withdrawal advices and information circulated by the Broker will be clearly marked in block letters: "Asbestos Related Claims - Special Agreement in Respect of Fees" or alternatively "Indemnity".
16 Jul 82
I R Posgate ceases underwriting any new or renewal business on Marine Syndicate 127 and Non-Marine Syndicate 126.
Jul 82
Dual market transfer of business entered into between Marine Syndicate 127 and Non-Marine 947, despite the ban on underwriting, cancelled January 1983.
16 Jul 82
Letter from H R Rokeby-Johnson to Winchester Bowring: Run-off of Sturge Non-Marine Syndicates in relation to asbestosis and other causes of loss affecting the old U.S. casualty policies, which states, in relation to Asbestosis, D.E.S., Agent Orange, Love Canal and Syndicate Re-insurance:-
I enclose herewith the statistical data for onward transmission to the SyndicateÆs reinsurers. The industry problem of the settlement of products related claims is becoming more and more important and the time has come for me to attempt to update my re-insurers about our situation.
First it must be understood that these claims may be settled on a manifestation basis, an exposure or ingestion basis, or some combination of the alternatives: it is
quite possible that the "Keene" decision in Washington DC will have an effect on settlement unattractive as it is to the insurance industry and perhaps to common sense. Obviously which theory of settlement wins the day will have a great effect on my reinsurers for the years 1969 and before and even between those who have a greater involvement in the years prior to 1967 and those whose chief interest is the years 1967, 1968 and 1969. It is perfectly possible that settlement could be reached on a different basis on different claims and even on different assureds on the same claim. Sturge keep their statistics on the exposure basis on asbestos.Secondly I would like to remind you of the extent of a LloydÆs Underwriters book of business which makes it impossible to quantify the final outcome of these huge and complex claims with any degree of accuracy
. Not only were we involved in direct writing of casualty business from the United States and, indeed, world wide, but we also had very considerable commitments in the writings of casualty treaties not only to original and excess writers but also to professional re-insurers like the General Re-insurance Corp., finally we have an involvement in the re-insurance arrangements of a few LloydÆs Syndicates and London Companies. We also have claims coming to us from the run-off of the Roylance Syndicate, which stopped underwriting in 1958 and which was written by the market at a premium which looked adequate at the time and also the Gentry Syndicate which was absorbed into Sturge in 1964.Asbestosis
The claims arising from the ingestion of asbestos fibres by all those involved in handling this material seem likely to be the
biggest claim ever to confront the Insurance Industry not only in the United States but also throughout the world. Various attempts have been made to quantify the potential final sum of all payments and some very large figures have emerged. Over 7,000 people actually die each year in the United States from asbestosis and it is expected that this figure will soon increase to 9,000 or 10,000 - these deaths and disablements will continue to be reported for the next decade or more and if it is reasonable to suggest that the average settlement of each claim is of the order of $100,000 including costs and expenses and that the number of serious claimants may reach 100,000 or more, the final claim would be $10bn at least. On these figures, it is not impossible to forecast the Sturge gross involvement at $40,000,000 - $50,000,000.D.E.S.
The claim is not going to be settled easily because of the different views of various insurers and insureds about the basis on which the claims should be handled ...Agent Orange. Although there has been some expenditure of money on defence costs this subject has been quiescent for some time. It is hard to imagine that serious claims will have to be met.
Love Canal
.There has been no particular activity on the Love Canal claims since this occurrence was mentioned before.
Syndicate Re-Insurance
When
1969 and previous years were re-insured in the autumn of 1974 my re-insurers agreed to "put themselves in my place" except for convenience we continued to handle the claims and we undertook to make good any re-insurance that was not collectable owing to the failure of SturgeÆs re-insurer. The problem confronting us is that one of the re-insurers involved is currently paying 40 cents on the dollar and there are others whose ability to survive the products-related claims is to say dubious. It would seem unbusinesslike to pay out large additional premia now with the knowledge that ultimate collection when "outstandings" turned into "paid" was unlikely in some cases as the money put up would already have been spent on other claims and we would join the creditors. I think it would not be possible to instruct the broker to present our claim and the additional premium to some of the market involved and not others and I do not believe it would be our whole account re-insurers intention with eyes wide open to pay the additional premia and come back to Sturge when there was a failure or compromise. If the decision was mine alone, I would pay the additional premia called for by the policy terms to a friendly and understanding re-insurer off-shore and collect from him as I paid the claims. Perhaps you would be good enough to consult my re-insurers about this: clearly it is quite impossible to even attempt to guess at the amount of final recovery which could be anticipated.General
We are all concerned that the run-off of our old years should at this late stage now look so bad; happily we are dealing with professionals who know from their own experience that no one could have foreseen in 1974 what has now occurred
. (On 4 October 1973, H R Rokeby-Johnson stated "Asbestos is going to change the wealth of Nations etc. etc.). My claims director made eight visits to the United States last year on the subject of products related claims and the majority of his time and a considerable part of that of his staff is devoted to matters concerning our re-insurers. Nevertheless any problem that causes friction should be removed if possible and I have become aware that, the requirement the requirement that funds should be provided in advance based on 50% of the settlement in the previous period, has become an irritant to the extent that thought has been given about interest earnings. It seems to me that Sturge should make a generous concession about this and we are prepared to accept reimbursement one month in arrears to eliminate this problem.I believe that the matter of failed re-insurers should be reviewed at the end of each year
- we are all aware that some re-insurers sometimes take time to pay while awaiting a collection of their own but slowness is not failure and I would be happy to be advised by Ian Winchester if that is agreeable to my re-insurers. [This letter, together with the letter of I November 1982 from Bowrings (GHC Wakefield and Bowrings) are to be found within the audit working papers of E&W for Syndicate 417 as at 31 December 1983].82
River Thames Insurance Company Ltd
, a Sedgwick Forbes Captive Company, purchased additional reinsurance protection against any unforeseen deterioration in the claims position arising from asbestosis or similar latent disease claims relating to U.S. liability business written prior to 1968. Exposure on U.S. casualty business written prior to 1968 was capped.23 Jul 82
The LloydÆs Act of 1982
receives Royal Assent. The Report of the Fisher Working Party reaffirmed the desirability of LloydÆs regulating those brokers who had access to the Room. The LloydÆs Act 1982, which flowed directly from Fisher provided the first statutory definition of a LloydÆs broker ("a partnership or body corporate permitted by the Council of LloydÆs to broke insurance business at LloydÆs").
23 Jul 82
An Unlimited run-off reinsurance xs ú500,000 placed
for R C W Sells, Underwriter of Non-Marine Syndicate 10 managed by Langton Underwriting Agents to incept at 1 January 1982 covering years 1968 and prior. Outhwaite wrote 100%. This policy protects Syndicate 10 in respect of their share in three run-offÆs: (1) 100% of Tardiff, 1968 and prior: (2) 5.48% of Bussell, 1968 and prior; (3) 15% of Norman, 1967 and prior.24 Jul 82
American Journal of Industrial Medicine: Nicholson, Perkel & Selikoff: Occupational Exposure to Asbestos: Population at Risk and Projected Mortality - 1980-2030.
26 Jul 82
Financial Times
: Underwriters Prepare for Huge Asbestos Claims.Insurers
face the largest series of claims in their history as victims of the disease asbestosis file suits.By the end of the Century, according to some estimates, the claims could amount to
$150 billion (ú85 billion). Insurers, including underwriters at LloydÆs of London, are already involved in or at the periphery of more than 15,000 legal actions. Special reserves are being created by underwriters to deal with the claims.The
largest series of claims LloydÆs has faced to date was that on ill-advised computer-leasing insurance. UnderwritersÆ failure to appreciate the rapid changes in technology meant that a total bill of about $500m reached LloydÆs and the London insurance market. LloydÆs dealt with 80 per cent of all claims.The
exposure of LloydÆs on the asbestosis problem is by no means as great, although underwriters there might be liable for anything up to a quarter of whatever is claimed. The likely claims against LloydÆs will exceed by a great margin the amount paid out on computer leasing liability - but the impact of the asbestosis claims will be mitigated by their being spread over many years. The computer leasing claims - more than 14,000 of them - were compressed into three years.LloydÆs identified its difficulties over asbestosis three years ago
. Along with other underwriters, those of LloydÆs face a double problem. It insured industrial companies through its own arrangements on legal liability of products and through other contracts, and it reinsured other insurers who had offered liability cover.The
main problem for underwriters is extensive litigation as asbestosis victims claim compensation in the Courts. LloydÆs say that the nightmare began in 1971 when a claim was brought in the US against a producer of asbestos.Damages were awarded because the court found that the person who brought the action had suffered disability through the inhalation of asbestos fibre. Damages were awarded on the basis that there had been a failure to warn of fibre.
There are a number of legal the inherent dangers of the difficulties about the establishment of liability for insurers. The disease is latent - it might not manifest itself for years after contraction by the employee,
The basic issue for underwriters is the decision as to who is responsible for the contraction of the disease, and when as well as the overall medical condition of the employee. Workers change jobs and companies. If asbestosis does not manifest itself for mane years, it poses innumerable difficulties in the establishment of ultimate liability between employer and asbestos manufacturer.
Liability difficulties
Moreover, there is considerable legal argument over the length of time in which employees might have been ex posed to an environment which might bring on asbestosis. Does liability attach itself whenever someone breathes in asbestos fibre perhaps over a period in a working life of up to 40 years?
Or can liability only be established when a doctor has diagnosed the disease?
Underwriters in Britain have asked U.S. courts, through 20 declaratory actions in that country, to establish a clear ruling on the extent of liability. The underwriters have noted that U S. individualsÆ claims range from $30,000 to $700,000.The
courts in various states of the U.S. have disagreed. One ruled that liability should be strictly related to the amount of time in which an employee had been exposed to the Product. Another court ruled that it should be related to when manifestation of the complaint took place. A third court ruled that the insureds could collect insurance claims on both cases,Protracted litigation
"it gives us enormous difficulties in identification of who is responsible for indemnifying the assured." said one underwriter last week.
The
protracted litigation in the U.S., however, is working to underwritersÆ advantage. While litigation is in progress payments are not made, so underwriters may bolster funds by earning investment income on those reserves which remain unused until the courts rule.The
drawback for insurers is that they are finding it difficult to arrange a fashionable form of reinsurance - retroactive reinsurance cover - on their outstanding liability to do with asbestos claims.The drawback for consumers is that insurance liability rates across the board will be more expensive for years to come, and the policies which the consumer will be offered are likely to be more stringently worded and to exclude more types of business from coverage.
28 Jul 82
New York Times
: Focus put on fees on Asbestos casesBy Stuart Taylor junior
28 Jul 82
A
run-off reinsurance $1m xs $500,000 placed for Penn, Underwriter of Syndicate 634, to incept at 1 January 1982 covering 1969 and prior years. Outhwaite wrote 50%.28 Jul 82
BURDETT RUN-OFF CONTRACT WRITTEN (417 80%, 421 20%).
Unlimited run-off reinsurance xs ú3m for L Burdett, Underwriter of Bonnalie & Partners managed Non-Marine Syndicate 490, placed by Golding Collins to incept at 1 January 1982 covering the 1979 and prior years.29 Jul 82
A run-off reinsurance placed
for T R Brooks, Underwriter of Brooks & Dooley/ Dugdale/Creegate managed Marine Syndicate 89/85, Marine Syndicates 880/993 and Marine Syndicates 886/881, for settlements between 1 April 1982 and 30 September 1983 in respect of the 1981 and prior years of account. Outhwaite wrote a line; the policy was commuted with OuthwaiteÆs share being a loss of ú676,000.82
Hardy -v- Johns-Manville Sales Corp.
Complaint made alleging contribution of damages according to a concept of "market share" apportionment.82
In Re -v- Northern District of California.
Judgement given in respect of a Dalkon Shield I.U.D. products liability action.29 Jul 82
UNARCO filed a Petition for Reorganisation under USCA Chapter 11. UNR, UNARCOÆs parent corporation, estimated that its liability in the asbestos litigation would exceed its present net worth of U.S. $100,000,000.
30 Jul 82
W I R
. Commercial Union Assurance Co Ltd London.considers asbestos litigation a major threat to the property and liability industry. It estimates liability over the next twenty 20 years
connected with deaths caused by exposure of former asbestos workers could amount to $38,000 million, and that the combined assets of the asbestos industry and their insurers would be insufficient to meet such claims. An average of $233,000 per claim settled has been estimated by a Yale University study, partly financed by Commercial Union.82
Amatex Corp.
files for technical bankruptcy under Chapter 11.Aug 82
LloydÆs Global Accounts 1981
(1979 Year of Account)R Ballantyne,
Chairman of LloydÆs UnderwritersÆ Non-Marine AssociationAsbestosis - probably no report of this nature would be complete without some reference to the serious problems which have arisen and which are likely to persist arising from asbestosis.
Many commentators have tried to put a figure on how much this will actually cost but in my opinion it is totally impossible to quantify. Policy wordings have been construed in many different ways, most of them to the detriment of insurers. Many of the syndicates in LloydÆs started underwriting after asbestosis losses had become apparent and so should be unaffected, whilst others may well have seen the danger coming and have taken steps to minimise the total impact. One thing is certain and that is the fee bills will be enormous, for instance in respect of one of the assureds, for every $1.5m being paid in indemnity, $2.5m is being paid in fees. There is some indication, however, of a slow down in advice of new claims, so we are hoping that the peak has passed". (On 31 July 1981, the Sedgwick Forbes Ballantyne Non-Marine Syndicate 47 placed an unlimited run-off reinsurance with Merrett, and took advantage to buy his syndicate out of the asbestosis situation).2 Aug 82
A W Walker,
Projections of Asbestos-Related Disease 1980 -2009, Final Report. Epidemiology Resources Inc.Estimated
18,700 excess mesothelioma deaths and 55,120 excess lung cancer deaths through the year 2009. The study foresees 5,963 new mesothelioma suits, 2,660 new lung cancer suits and 27,150 new asbestosis suits. Relied on Johns-Manville by its bankruptcy petition Estimates between 30.000 and 120,000 new lawsuits related to asbestos. Liability of between $2 billion and $5 billion.3 Aug 82
An Unlimited run-off reinsurance xs $2,865,000 placed
for C H A Skey, Underwriter of Non-Marine Syndicate 219 managed by Edwards & Payne (Underwriting Agencies) Ltd (A Sedgwick Forbes subsidiary) to incept 1 January 1982 covering 1967 and prior years. Outhwaite Non-Marine Syndicate 317/661 wrote 50%, In 1985 the following bureau signing number 219 was party to the Wellington Agreement, indicating a long tail asbestosis involvement. Skey was on the Committee of LloydÆs from 1978 to 1981 and was a Committee Member of the Asbestos Working Party set up in 1980.19 Aug 82
Post Magazine
: Innovative underwriting Ian Posgate, the æMr GoldfingerÆ amongst LloydÆs underwriters, explodes the myths behind innovative underwriting in this address given at the Third World Insurance Congress, held recently in NairobiMOST people, the laymen and the general public, think of LloydÆs as a market place for risks. Underwriters are supposed to be men (and now, at least at my box, women) with sharp pencils and sharper wits, weighing up risks on behalf of
wealthy speculators willing to put everything they own on the line. The less generous regard LloydÆs as a kind of up-market Monte Carlo, in season when the South of France is not, and perhaps best of all, as a casino open not only during the day, but even before lunch-time.When I first came to LloydÆs nearly 30 years ago this popular view was certainly the received wisdom. LloydÆs was the elegant part of the City, a place for the English amateur of good background, more for the sportsman rather than the classicist. The
classicists instead went into merchant banking, and I have not noticed any of them building for the future in the way that LloydÆs is. As you are aware, at least those of you who have been down Lime Street recently, LloydÆs will soon be housed in 21st century style in the limelight so to speak of the City. LloydÆs is, after all, now the largest single invisible exporter in Britain, and as such it is entitled to and needs modern facilities. The LloydÆs marketÆs individuality and flexibility are legendary and have always been its strength, but its strength is in danger. Like the empire, it is shrinking to the insurance equivalent of the Falkland Islands. Among the reasons why this is the case, not the least is the fact that many underwriters, like the Foreign Office, now have a tendency to retreat from their real business of providing security.It has always been said that LloydÆs started as a coffee house and grew to a market place where any imaginable risk could be placed: noses, fingers, satellites, twins, to name but a few. People believe that for every insurable risk there is at least one underwriter at LloydÆs willing to write it. It is
inferred that LloydÆs, and the LloydÆs underwriters, are innovators of insurance. I would like to consider this matter in some detail, and see whether the facts support this hypothesis.Innovation implies change, and the
truth of the matter is that, at base, underwriting has not changed at all. What, after all is underwriting and what is the underwriterÆs task?The duty of an
underwriter is neither more or less than the making of money for his Names (in LloydÆs) nor his company. The underwriter is in the trade of writing ventures, and so making money for himself and for his Names or shareholders, in the case of a company, by taking part in all sorts of different ventures.Underwriting itself is a feeling, it is an instinct. At the heart of underwriting lies one question, and
one question alone. Is this a good or bad risk ? There is an old saying æLook after the pennies and the pounds will look after themselvesÆ. The same also applies in underwriting, and any underwriter who ever writes one piece of business which he does not genuinely think will make a profit is a fool who does no service to his trade. In fact, I would go further and say that he damages his trade, as well as hurting the profits of his principals.Underwriters can co-operate with each other, if they so wish, but they
must compete for business. It is not the underwriterÆs duty to say "I will only write 50% of that good risk because I want other underwriters to share it". They are his competitors, and since he is trading as an individual in a market place, he will best serve that market place by writing as much profitable business as he can, and making other underwriters fight to do the same. And if he does that, he is actually serving the survival of the fittest.The underwriterÆs task has not changed. He must still determine the maximum amount a client is prepared to pay, and, perhaps most difficult of all, evaluate how to vary the proportion of the risk accepted. I recall that some years ago, there was an awful outcry when it was reported that there was a Greek ship corning up the Channel with a dog on the bridge and no-one else. It was later found that if the dog saw another vessel, it barked, and the first mate or the captain would come up and steer the boat on course. That was no reason for not writing the risk, thereÆs a rate for that. The biggest problem really was when the dog wagged his tail, because of a tree in front, which is the reason why some ships go aground. But these points are not important - what matters is that the underwriter mustnÆt say "I donÆt write ships that are crewed by dogs". There is no reason why he should not: it is just a matter of the rate - and dogs certainly do not have the alcoholic failings that many human crew do!
Underwriters are risk takers, and the moment risk taking is ignored or forgotten underwriting ceases, and the box at LloydÆs becomes a pawn shop, a bank. or an accountantÆs office. The principle of the survival of the fittest, which I have already mentioned, is particularly relevant at LloydÆs. But in order to survive there, does the underwriter need to innovate or merely to adapt to change ? There are some who say that the underwriter must innovate, and more and more one hears of the æinnovativeÆ underwriter.
The primary role of such an underwriter is now seen by some practitioners of the art not to be the assessment of world-wide risks but rather the management of a commercial enterprise. Indeed, if the truth be known, many-called innovative underwriters are nothing more than specialised forms of bankers, investment houses, or financial analysts, spending the greatest part of their intellectual effort in managing assets and the velocity of cash flow. Indeed, the
failure in recent years of several syndicates either to continue in business or to return favourable results is, in my opinion, at least as much a matter of spending too much time on financial judgement to the detriment of selection of risk. The underwriters of such syndicates have misunderstood their function. The most difficult task for an underwriter is to underwrite to break even, a policy which invariably results in a large loss.Unfortunately today
, the biggest and increasingly predominant business written by such underwriters is essentially reinsurance of various types. An æinnovativeÆ underwriterÆs first task would seem (however dull an exercise it may be) to understand and exploit the intricacies of reinsurance. This has meant that a large slice of income is paid away before it is even written. Losses are spread around the world, and are passed between reinsurers like hot potatoes. Looking for the æturnÆ on reinsurance has become to such underwriters the fundamental problem in their business at LloydÆs. In this, such syndicates are thoroughly and sadly misguided. Unfortunately, many syndicates have ceased to be risk takers in all but name. They write most of their lines on the back of reinsurance protection, to spread the risk, and many of their operations resemble banks more closely than underwriting syndicates. It is an awful phrase æspreading the riskÆ; there is just no way out of it. It becomes more and more important and as there has been more reinsurance, what has happened? LloydÆs share of the worldÆs capacity has gone from 10% in 1900 to 3% in 1945 and to less than 1% of world capacity in 1981.Minimising exposure
Such underwriters are less concerned with accepting risks, and more interested in
minimising exposure, In so doing they must wave goodbye to underwriting profit. There can be no profit without risk, and there should be no such thing as a non-risk-taking syndicate. Whatever people think, the risk-taking syndicates make rather more money than those where much of the premium is paid away as reinsurances.When interest rates are high it is a simple task to renew existing business, and to sit back and
enjoy the appreciation earned on capital which has been accumulated out of profits made in preceding years. This is good news for Names whilst interest rates remain high. But what does the future hold? What will happen when interest rates fall, capital appreciation decreases, and there is no new book of business to bolster profits ?In this environment of high interest rates there is increasing emphasis on cash flow or
investment income underwriting which appears to some, to be not only a permanent feature of the landscape, but a riskless form of insuring the cost of most claims. Like so many modern money managers such underwriters have a short term view of the financial markets, and are all too likely to find themselves caught between the Scylla of declining rates and the Charybdis of rising levels of claims.Among æinnovativeÆ underwriters investment income virtually displaces their judgment as underwriters.
Compelled by their investment strategy to maintain high cash flow regardless of source they begin a vicious cycle which ultimately destroys them. One can almost envisage æinnovativeÆ underwriters not simply rearranging the deck chairs on the Titanic bur trying to widen the hole in her hull in a desperate effort to maintain her stability by ever increasing volumes of premium income.What in fact does go on at LloydÆs and what has been going on for the last 300 years? We respond to the needs of the assured. We write new business, new risks, larger risks, extraordinary risks. We are as flexible and as versatile as we are asked to be, but we are
not innovative - if by that we mean are we changing the way in which we underwrite. I do not think it can be said that there are fundamentally new ways of writing a risk. Take for example Cuthbert Heath, who is regarded as the great innovator of underwriting at LloydÆs. Against the views of his fellow underwriters Cuthbert Heath continually widened the boundaries of insurable risks. A broker flippantly asked Heath if he would be prepared to cover the contents of a house against fire and theft, to which he agreed. The risk of theft had never been written before. Several years later in 1880 the first Employers Liability Act was passed and Heath again responded to requests from brokers. Accident insurance was born. But HeathÆs underwriting was not innovative as such. He still calculated and accepted risks - the risks were new but the underwriting method was the same.There is no such thing as innovative underwriting.
All we do at LloydÆs is expand the classes of business that we are prepared to write.So, if the underwriters are not the innovators, who are? There can be no doubt that most oú the true innovations come from the brokers. particularly where innovation means new or larger risks. London is the home of a very diverse market where competition is intense, encouraging adventurous brokers to look for the most suitable terms for their clients.
The broker is the key to innovation in this particular market place, as he is in contact with clients from all over the world who will require different types of insurance cover in response to changing events. I t is the hungry competitive brokers who are constantly seeking out the extraordinary, novel, and fantastic risks. Oil rigs, computers, and satellites are but a few of the risks pioneered at LloydÆs. A vast number of this nature are conceived by the broker, and planned with leading underwriters in London.Wither profits?
During my 20 years of underwriting I have
tried hard to respond to the innovations of brokers. But -where have I made profits for my Names in this period? Not I assure you on such risks as whether the Pope would come to Britain, or the American athletes go to the 198o Olympic Games in Russia, nor I assure you when I, with others, underwrote computer leasing. No, where I have made money ( I am sorry to use that phrase so often but the only basis on which to judge an underwriter at the end of the day is did he make money, for his Names at LloydÆs or his company) has been, in sequence of time, drilling rigs, super-tankers, Jumbo jets, aviation, war risks, and that marvellous old standby that has kept LloydÆs profitable for 300 years, that human frailty of war between the peoples of this world.In 1966, I was only responding to a demand when I underwrote the first drilling rig in the North Sea. Although we do not have hurricanes in the North Sea, I soon learnt that the sea could be rougher there than in the Gulf of Mexico, causing this rig and five others to sink that year. What then happened was that we
raised the rates by up to 10 times. but the assured, with the help of the broker, provided the continuity. The assured was determined to get the technology correct, because of the fortunes to be made out of North Sea oil, and spent billions of dollars on this. The underwriters to some extent went along for the ride.In 1968 there were 27 super-tankers trading in the world when three blew up, two sank and one was crippled. The total loss was raised by an average four times, but the assureds again strove with considerable time, money, and effort to solve these gas explosions, which they did with the result that underwriters made money out of the continuity.
In September 1970 we had had blowing up of three planes at Dawson Field, which heralded the start of a great amount of aviation war and hijack insurance. This profitable trade went on for some years, before my generous hosts of the Third World correctly found it to be socially and politically unacceptable, and another piece of broker s innovation became a has-been.
At a sensitive time for a Britisher to talk about war underwriting, I do not intend to say much on this subject except that you do not have to be an innovator - what you need are just steady nerves. In 1809 LloydÆs had a premium of ú5m, but one underwriter, underwriting for himself (it is such a nice thing just sitting in the Box by yourself, and entering your risk in a little book with your quill pen and no one else to worry about) would write in those days a premium of ú40,000. In 1809 there was one marvellous underwriter called Richard Thornton who really is my hero. Around that time he wrote a line on a risk of ú250,000, a good risk, probably gold from Rothschilds, and people complained about Richard Thornton writing a line of ú250,000. He said "All right if you want I will place bills of exchange in the hands of LloydÆs for ú250,000 until the venture comes home." But you must accept one thing, to be frightfully serious about this, that was some form of underwriting in a war period and if you
look at the history of LloydÆs, frankly, we have only made money out of war. You take the Napoleonic War, the Boer War, the Vietnam war, even the Arabian Gulf War and the Falklands situation - it is war that has provided for 300 years the trade that has attached to LloydÆs the worldÆs merchant ventures.Throughout the Vietnam War, I made an underwriting book out of the cargoes and vessels that traded up the Mekong Delta. Many thought me more rash than innovative. For some months we would lose several vessels, and I would think of coming out - but I was always loath to do so and thus I would raise the rates considerably. To my joy I would then have several clear months and make a great deal of money. I would begin to think I was really a rather clever underwriter (which is undoubtedly the undoing of most underwriters) but not to worry, the losses came back and the cycle would start again. It was not until after the end of the Vietnam war, that I met an agent from Vietnam who told me that in the dry season the Mekong is just an ochre stream winding between sand banks and islands - come the rains it will be more than a mile wide and the guerrillas can get nowhere near the vessels to shoot at them. Ignorance occasionally is a help to underwriters, if there is continuity, while a little knowledge can be a dangerous thing, if it is inhibiting.
In my view, the major broker innovation of the next five years will be, without any question of doubt, satellites. Two of the first satellites failed. and the rate is now 9%. They have all the makings of profitable underwriting:
original losses, high values, short tail (and thus no investment income) since the satellite is either launched or fails, an assured who by technical ability is determined at any expense to make satellites work, and a broker who can see high brokerage on $90,000,000 a shot at a 9% rate. Every ingredient for profitable underwriting.In
recent years we have seen the growth of the mega-broker, who is in a position to supply a package policy for an international corporation, by drawing on his vast resources and pools of expertise. This is, of course, beyond the capabilities of the one man band, but the one man band is at a disadvantage only when placing this type of risk and not on most others. This is for two reasons. First, LloydÆs is built up by networks of relationships between individuals and fosters close ties between brokers and underwriters. Secondly, small firms of adventurous brokers are more inclined to seek out new forms of cover, which they can market to their clients.Blame is nowadays put on the alleged hunger of brokers to place questionable business, not least because they, too, have become beguiled by the siren song of song of large flows of premium, but it is my view that it is the underwriterÆs responsibility to stop his ears to seductive voices. The most valuable contribution an underwriter can now make to the market, and to the insurance industry generally, is to say ænoÆ when there is a seemingly overwhelming clamour around him to acquiesce to the false promise of the easy life. The broker presenting questionable business is only doing his job as the advocate of the assured, but the underwriterÆs proper role is to make a sober judgment of risks on behalf of the long term interests of his Names, and to resist the temptations often put so persuasively to him. So many underwriters now treat temptation like Mae West, who said she always avoided temptation unless she couldnÆt resist it. When it comes to brokers I held with her subsequent wisdom - that it is not the men in her life that counted but the life in her men.
Aping solicitors
It has to be said that some
brokers at LloydÆs now ape the attitude of solicitors, hoarding premiums as solicitors hoard fees. I hasten to add that LloydÆs is second to none in the payment of claims. Lest I appear to be denigrating the hungry broker, let me make it absolutely clear that I am not. The hungry broker is the good underwriterÆs friend and the bad underwriterÆs enemy. If I have a criticism of the LloydÆs market at the present time, it would be that the major brokers, partly out of kindness (almost a weakness), and partly out of an insurance policy for themselves if things change in the future, have kept too many poor syndicates in LloydÆs going. As I have said earlier, in a market place the weak must go to the wall. There are weak syndicates in LloydÆs which should be allowed to fail as in any market place, but the system allows them to remain. They are not my friends. It is the brokers that are my friends - the only people I can feed off. In a jungle or a market you are only friendly with the hand that feeds you, and not with the mouth that may eat the food you want.As you can see, I really would have preferred to talk not about this mythical æinnovativeÆ underwriter, which, like the Unicorn, I have never met, but more the hungry broker. Good underwriters do nor innovate, they purely use their experience to adapt to a changing world and trade with Cassius from the brokers.
20 Aug 82
Jackson Township Municipal Utilities Authority -v- Hartford Accident & Indemnity Co
., 186 N.J. Super 156, 451 A.2d 990, Law Div., 20 August 1982. New Jersey trial court held general liability insurer was obligated to pay its insured, a municipal utilities authority, for cost of suit where complaint alleged negligent and intentional contamination and pollution by municipal authority, since, if discharge was sudden and accidental, pollution exclusion clause in policy would not bar coverage and pollution exclusion would only be applied to "active polluters." Court stated the pollution problem was "likely to recur constantly" due to the more than 10,000 chemical manufacturing facilities in the State of New Jersey alone, and the Court ordered the insurers to provide a defence for a $51.5 million class action against town for contamination of wells near a landfill.26 Aug 82
Johns-Manville made technical bankrupt under Chapter 11
of the Federal Bankruptcy Code filed in the Federal Court for the Southern District of New York.26 Aug 82
LloydÆs Global Accounts 1981
: - 1979 Year of AccountThe
Notes of the Financial Facts on "Security - Financial Facts" as at 31 December 19811. The average deduction for brokerage and commission across all markets has been estimated at ?% per cent
The Global results as announced by LloydÆs to the General Public
Year of Account |
Year of Account |
|
1979 |
1978 |
|
ú172,964,000 |
Declared post-tax profits |
ú174,392,000 |
The undisclosed additional expenses, being agentsÆ profit commission
ú 57,500,000 |
Agents Profit Commission |
ú 52,200,000 |
ú115,464,000 |
Received by Names |
ú 122,192,000 |
ú ? |
Central Fund Earmarking |
ú ? |
(
This excludes additional earmarkings of members unencumbered æFunds at LloydÆsÆ for Solvency Purposes.)27 Aug 82
Daily Telegraph
: Surprise ú173m from LloydÆs of LondonLLOYDÆS of London has surprised itself with a
profit of ú173 million for 1979, the last closed year of account, only marginally below the record profit level achieved by the previous year, despite earlier forebodings of a major set-back.But
Sir Peter Green, chairman, yesterday warned that the next year or two could be much tougher, especially as currencies and interest rates were moving against underwriters. In addition, Richard Ballantyne, chairman of LloydÆs UnderwritersÆ Non-Marine Association, said asbestosis was such a major problem it was difficult to put a figure on the risk.So far
few claims have been paid, but the "bills will start to come in any day now," Mr Ballantyne added. LloydÆs will be " flooded with claims " he forecast, and " it will be a bonanza for the lawyers."Barry Coleman
, chairman of the LloydÆs Aviation Underwriters Association, said aviation was also about to suffer deeply as the aircraft losses so fair this year are already 50 p c. up on the whole of latest year. So far 18 commercial jets, worth some $176 million have been lost and there are four months to go. If the trend is maintained this year could experience the worst ever aviation losses.Sir Peter said the 19
79 profit level "is a welcome surprise to us." A year ago he would have been " far more pessimistic", but about the next year or so "one cannot be optimistic." "The trend is likely to be to worsening results," he added.Some
70 p.c. of the profit "was derived from investment income," so in "purely underwriting terms 1979 did little more than break even," Sir Peter said. That may explain " the gloom currently being expressed in many sectors of the market."He attacked
underwriters "induced by high interest rates to write risks at premiums which by themselves could not hope to yield a profit." Sir Peter said "at this point, insurance gives way to speculation ."Underwriters may be vulnerable to
falling interest rates since that will cut their investment income, but at least it will improve world industrial performance and, after a delay, produce greater insurance business, he added.In
1979 premiums grew by 32 p.c., some of which came because "LloydÆs had actually increased market share," but unofficial estimates attribute between a third and a half of the increase to currency movements. Since then exchange rates have moved against LloydÆs.Malcolm
Rumsey, chairman of LloydÆs UnderwritersÆ Association, said there was evidence some shipowners in 1979 returned to LloydÆs for cover in search of security in uncertain times. In addition, the 1980 year was growing as fast and looked set to produce a small underwriting profit, as 1979 had done, while 1981 not only grew again but seems to be producing fewer claims.Harry
Dobinson, chairman of LloydÆs Motor UnderwritersÆ Association, said 1979 had produced good results because there had been two rate rises and 1980 will be "reasonable." But now he "canÆt see any increase in rates" and the sector is "beset by difficulties." If there is an even averagely bad winter, underwriting could show a loss.82
The DTI Report into Alexander Howden:
Assessment of open years - agency business
Until the 1979 Financial Statements the
auditors of Sphere & Drake - de Paula, Turner, Lake & Co - carried out their own assessments of the adequacy of funds in all open years (again however limited to the SD(U) writings) but generally did so using estimates of liabilities based on LloydÆs percentages (minimum levels of provision recommended by LloydÆs). After 1979 their assessments of open years followed the work of the SD(U) financial staff supplemented with broad estimates for later open years. It is generally accepted that reliance on LloydÆs percentages alone in assessing the adequacy of company insurance funds is far from ideal; indeed the auditors themselves appreciated its shortcomings. Their assessments were prepared this way simply because nothing else was available to them. (de Paula, Turner, Lake & Co were approved LloydÆs Panel Auditors and were one of the undersigned auditors party to the Neville Russell letter 24 February 1982.)Birmingham confirmed that generally until 1981 only the closing and oldest open years were assessed by management, leaving two open years unexamined. He also told us that he now considered that if open years had been properly assessed then this would have revealed deficiencies in the funds at an earlier date than they were in fact recognised. Dean, who joined Howden in January 1982 as Managing Director of Sphere and Drake following the dismissal of Turner, was more precise on this matter. He told us that he considered that a proper assessment of open years would have resulted in recognition of a need for further provisions for underwriting liabilities in the accounts of Sphere and Drake from 1975 onwards. He based this assertion on development statistics available contemporarily which showed, in his view, that open years were likely to give rise to underwriting losses for which provision should have been made, but was not. His evidence was as follows:
Q "So that it was at 31 December. 1981 where there was apparently the first overall evaluation of the build up of liability on the consolidated funds?"
A "Correct."
Q "And that must be unusual?"
A "Very much so."
Q "And the inference is that the reported profits or losses were beneficially influenced by this previous policy?"
A "Of course."
Q "Do you think that the Sphere Drake insurance funds had been inadequate for some considerable period of time?"
A "Yes, I do. ... it is difficult to decide when looking back as to when it would have been obvious that the funds were deficient ~.... It is 1974 underwriting year which would have been closed at the end of 1977, where a loss ratio was established of 117.09, which tells me that probably certainly by the end of 1975 there was an indication that there was a deficiency in the 1974 account, and provision should have been made."
With the benefit of hindsight it is apparent that some of the underwriting accounts from the mid-1970s gave rise to substantial underwriting losses for which no provision was made while the years were still open. We find it difficult to judge the extent to which this benefit of hindsight may have coloured the present views of Dean and Birmingham about when further provisions ought to have been established, and we cannot therefore accept as a matter of certainty DeanÆs assertion that a proper assessment would have resulted in provisions for insurance fund deficiencies from 1975 onwards. Nonetheless we consider that the failure to have prudent regard to the possible deficiencies in recent open years considerably delayed a full appreciation of the major problems of Sphere and Drake which we later explain.
We put our views about the failure to assess open years properly to Roy Bromley, the senior marine underwriter from 1967 to May 1982, and to Gerry Oatley, the senior non-marine underwriter from 1968 to July 1978.
Bromley told us that he would be most reluctant even to attempt to predict the outcome of an open year of account until the end of the third year (in Sphere and Drake terms the oldest open year). He told us that he did look at the oldest open year, and this is supported by evidence we have seen, but always with the caveat that his estimate could be considerably adrift. Beyond that Bromley confirmed that he played no part in assessing open years though he assumed the auditors would make some sort of estimate. Bromley also pointed out, and we agree with his analysis, that when he closed a year, he did so prudently and there was normally therefore some over-reserving in the closed years which provided some cover for open years if they developed badly.
The principal underwriting losses arose on the non-marine side which was, until 1978, the responsibility of Oatley. The development of the non-marine account in the 1970s seems to have been a disappointment generally to Howden. In contrast to BromleyÆs prudent provisions on closing the marine account years, the non-marine account years generally closed with what later proved to be inadequate reserves, which subsequently had to be topped up. We do not consider that this under-reserving of closed years was deliberate, or indeed at the time imprudent, as all the evidence suggests that the deterioration was unexpected. Like Bromley, Oatley told us that he would not like to give any opinion on the likely outcome of open years. The account that he wrote was relatively long-tail business and he neither recollected formally considering the open years of account nor anyone else doing so.
We also put the question of lack of review of open years to BirminghamÆs predecessors in the SD(U) accounting function. FlintÆs view was that the assessment of the adequacy of insurance funds on open years was the responsibility of the auditors and directors. He wrote:
"A formal assessment would be carried out at the four year closure of each underwriting year before the portfolio was carried forward to the next open year. During the course of any one open underwriting year the revenue balance or fund would be submitted to the directors and auditors with the relevant outstanding losses for assessment as to its adequacy."
In a subsequent letter Flint wrote that he did not regard it as part of his job
"...to be
concerned with the manner in which the directors or auditors approached the task of reviewing the year end revenue accounts or the nature of the discussions with the auditors."Flint pointed out that as he knew little about the nature of the JHC account in Sphere and Drake he was not in a position to perform a complete review anyway.
When Flint resigned in mid-1978 he was temporarily replaced by Gay Swain, who had dealt with the motor insurance account of SD(U) since 1975. In 1979 Birmingham joined the financial staff of SD(U). Initially he reported through Swain, but after Swain resigned in mid-1980 he reported direct to Turner. Swain therefore æfilled-inÆ between Flint and Birmingham, but before the early months of 1979 he had no involvement in the preparation of reports and accounts nor had he an accounting training. Swain sent us a memorandum which he prepared on 9 May 1979, regarding a discussion of the 1978 accounts with the auditors on the previous day, from which it appears that neither SD(U) nor the auditors of Sphere and Drake had properly assessed 1977 and 1978 underwriting years or the JHC account. It also appears that, with regard to the 1978 financial statements, the auditors of Sphere and Drake were still - some five weeks after the group accounts had been signed - seeking information on the development of the two most recent open years and indeed on the JHC writings for all years.
We also discussed the assessments of open years with Page and Carpenter. They told us that open years were considered in the overall assessments. Carpenter told us that "we took an overall view, including the open years." We asked them who carried out any assessments before Birmingham joined Howden:
"(Page) To some extent, the auditors were utilised because the accounting in Sphere Drake, prior to Birmingham coming, did not have an adequate mouthpiece on the accounting front, and that would probably have been to a degree looked at by the auditors who would have gone directly to Alan Turner or Jack (Carpenter) with the results. They would have carried it out partly from statistics and partly with the help of Mr Khair who was the Managing Director of Sphere Drake.
(Carpenter) In case Mr Page is implying Sphere Drake did not have an accountant, they certainly did. They may not have been of the calibre of Birmingham, but both of these people are now working in substantial underwriting companies in the London market. They were competent people."
and later
Q "Do you consider it would have been the duty of the previous accountants to assess the fund and whether any provision was necessary at the end of each year?"
A "(Carpenter) The normal practice would always have been applied, that the underwriters themselves would, first of all, give their own assessment. We had a very adequate claims man, probably the best claims man in the London market. He would know the outstandings and the underwriters would know the accounts they had written and they would be the first people to state what would be required for the closed and/or open years, and from that point on it would be dealt with by the accountants."
We do not accept CarpenterÆs evidence as it is clear that neither the underwriters nor BirminghamÆs predecessors took responsibility for the assessments of open years. We consider that Page was closer to the mark when he indicated that "the auditors were utilised" - although we suspect they were more often left to make their own judgements than "utilised" in a formal accounting relationship. We comment specifically on the role of the auditors in these matters in Chapter 19.
To summarise, we consider that those responsible for the Sphere and Drake financial statements were slow to account for the deterioration of the underwriting results; that, although acknowledging the difficulties of assessment, the assessments of the adequacy of open yearsÆ insurance funds until 1981 were less thorough than should have been the case; and that this resulted in a failure to recognise deficiencies in these open yearsÆ funds when financial statements were prepared in the late 1970s. We consider that a number of factors contributed to this failure. The inability of either underwriters or SD(U) accountants to look at the overall Sphere and Drake account, in view of their lack of knowledge of the JHC writings, was one factor. In our view the absence of a suitably qualified accountant in SD(U) prior to 1979 was also a contributing factor. The underwriters not unnaturally took the view that it was not possible to assess accurately the likely underwriting outcome until the end of the third or fourth year, and no review or estimates were required of them.
Until 1981 neither
the financial staff of SD(U) nor the underwriters made a full assessment of the adequacy of insurance funds. We have noted CarpenterÆ 5 remark that "we took an overall view, including the open years". We consider that until 1980 or 1981 the information produced for the purposes of the annual financial statements was quite inadequate for any proper "overall view" to be taken. We also believe that Carpenter, and latterly Page, were well aware of these shortcomings in the assessments of insurance funds, but took no action to improve the assessments. Indeed we believe Carpenter at least discouraged improvements in the insurance fund assessment procedures out of concern for what might result.Underwriting Expenses
Several of our witnesses have attributed the problems of Sphere and Drake from the
mid-1970s in large measure to what they regarded as the excessive cost of running the underwriting agency. We consider that these comments have some validity. Furthermore the accounting treatment adopted for dealing with the underwriting expenses - which were largely charged to Sphere and Drake and charged by them against the insurance funds of the latest open year - made the proper assessment of the adequacy of open yearsÆ funds yet more essential, and the failure to do so more critical.The
aggregate expenses charged by Sphere and Drake to their insurance funds, and the percentage that this represented of net premium income written in each financial year, (excluding motor business in each case) were as follows:
Year |
Expenses úÆ000Æ |
% |
1975 |
838 |
6.6 |
1976 |
1,302 |
7.3 |
1977 |
1,627 |
8.1 |
1978 |
2,805 |
20.4 |
1979 |
2,931 |
16.7 |
1980 |
2,742 |
12.2 |
1981 |
2,645 |
10.2 |
The practice of charging the current yearÆs underwriting expenses to the funds, particularly at the
exceptionally high levels in 1978 to 1980, had a material effect in eroding the fund available against future claims - a significant underwriting profit was required just to cover the expenses. As a result when finally in 1981 and early 1982 an assessment was made of the adequacy of all open years (including 1981) the deficiencies assessed in the insurance funds, which had earlier been charged with the expenses, were very substantial.In his evidence to us Grob, in our view unfairly, blamed Turner for the excessive cost of the underwriting agency activities. When Turner was recruited by Grob from the Commercial Union in 1973 it was GrobÆs intention that the SD(U) operation should be expanded and to this end an expensive administrative operation, including the elements of a branch network, was created. In the later 1970s the underwriting expenses continued to grow -partly through high inflation and the move to very expensive office space in Billiter Street - but
premium income failed to match these increases, being held back in the light of adverse market experience. By the late 1970s the problem of a high expense ratio was acute.Turner, in his evidence to us, was very
critical of the practice of charging substantially all of the expenses of the SD(U) operation to Sphere and Drake in view of the weakening effect on the insurance company funds. This policy directly enhanced the announced Howden group profits; the results of SD(U) were substantially improved (by relieving it of the expenses) whereas the results of the insurance companies were not adversely affected, because the expenses were charged to the most recent yearsÆ insurance funds and not against profits. Turner:"... the charging of expenses to the insurance companies was a fairly constantly recurring theme. I do
and later
Q "By
A "That is
right. This would have the effect of weakening the fund."Q "
Weakening the fund and also improving the results of the Howden group as a whole?"A "If you mean improving the results through the profits made in Sphere Drake Underwriting,
Contemporary memoranda support TurnerÆs evidence that he sought to have the policy for dealing with underwriting expenses altered in order to avoid further erosion of the insurance funds. He was, however, unsuccessful.
Apart from the
failure to assess as early as should have been done the development of open years of account - a failure made more critical by the treatment of expenses - the annual financial statements of Sphere and Drake were deliberately manipulated to enhance materially the underwriting results in the following two principal ways:The use of stop loss reinsurance to support Sphere and Drake
The
insurance funds of Sphere and Drake were assessed as inadequate to meet their insurance liabilities when financial statements were prepared from 1978 to 1981, despite the lack of a proper assessment of the liabilities of open years and of rollover funds until the 1981 financial statements. Over this period these estimated deficiencies were made good in part by transfers from profit and loss accounts, but were mainly disguised by placing æstop loss reinsurancesÆ into entities controlled by The Four. These reinsurances were all effected on terms which could not have been effected with an armÆs length reinsurer and which seemed to give significant benefits to Sphere and Drake in order to cover the recognised insurance fund deficiencies. We noted in Chapter 7 that this form of æsupportÆ was one of the principal reasons for the development of the Southern companies owned by The Four.Insurance fund stop loss arrangements
in an ongoing insurance company are unusual. The normal way in which shortfalls in the insurance funds are dealt with is by transfers from profit and loss account. However certain companies operating in the insurance market will accept whole account stop loss reinsurances, and frequently this type of reinsurance is used to cover the liabilities of a company which is ceasing business altogether or is ceasing to write a type of business - a run-off reinsurance. A genuine stop loss arrangement characteristically requires a significant amount of information to be provided by the reinsured to the reinsurer. Typically this information would include details of the estimated liabilities and a projected profile of claims. These liabilities would be discounted in order to assess the appropriate premium and a further sum is normally added by the reinsurer as a risk premium to cover any unforeseen problems.In contrast to this, the Sphere and Drake
stop loss policies supporting the insurance funds over the period from 1978 to 1981 were not written on commercial terms but were written simply to cover the deficiencies assessed in the insurance funds themselves. Birmingham gave us evidence about the arrangements surrounding the stop loss policy supporting the 31 December 1981 insurance fund, which he told us were similar to the circumstances of earlier years from 1978. He told us that Page indicated how much profit and dividend he wanted from Sphere and Drake and this in turn gave rise to quantification of the æstop loss reinsuranceÆ requirement, based on the deficiency assessed and the profit required. He continued:Q "
A "
Yes, it was."Q "
Creative accounting?A "Yes."
Q "And the balance, as you told us ...?"
A "In honesty, and obviously you will have seen this, a very similar situation happened the year before, which was the situation that I had come into. As you put it, back to front accounting."
Q "The balance has then got to be reinsured in order to bring the liabilities down to the fund level, is that right?"
A "Yes."
Q "So presumably you were told, were you, what you would leave in profit and loss which resulted in transfer of the balance (into the insurance fund) and then you were told to reinsure to cover the remaining shortfall?"
A "Yes."
Turner confirmed that BirminghamÆs evidence painted a fair picture of events. Indeed Turner admitted in rather a roundabout manner that he was party to some of the related discussions in earlier years, although he indicated that the idea of supporting Sphere and Drake by this form of stop loss came from Grob principally, supported by Comery, Page and Carpenter:
Q "When you say "general scenario", is that what happened? Main board directors agreeing first what profit they wanted?"
A "Yes, I think that is fair comment and I am not sure that I was a party to that. I cannot say that on every occasion I was excluded but the requirements were fairly clearly stated ..."
Q "You say you were occasionally a party to these discussions. Can you perhaps go further in precisely what you recall about those discussions when you were a party to them?"
A "It is very difficult because you are asking me to draw on memory. Certainly I could not disagree that on occasions it looked like back to front accounting. Certainly I was a main board director but I do not think it would have been realistic to consider myself as one of the main power-house members of the board and I think that is the answer that I must give you: that I have a feeling there were many discussions which I was not present at and the group was run on the lines of suggesting that this is what is required."
Turner confirmed that by the "main power-house members of the board" he meant Grob, Comery, Carpenter and Page. Turner told us that there were some very strong opinions among the senior directors of the group as to what was expected from the insurance companies by way of performance, and that the strongest views came from Grob.
We now deal in detail with the estimates prepared of the insurance fund deficiencies and related stop loss reinsurances in respect of the 1978 to 1981 financial statements. As we have noted, these estimates, until 1981, failed to recognise all the insurance liabilities. Even so, the assessed deficiencies were very material to the insurance companies and indeed to the Howden group as a whole.
The 1978 and 1979 problems
During the course of
1978 it was becoming evident that there might be deficiencies in the insurance funds of Sphere and Drake relating to their SD(U) underwriting. During the audit of the 1977 financial statements both the SD(U) accounting staff and the auditors had carried out assessments of the adequacy of the insurance funds. In each case they looked at the overall position of the 1974 underwriting year - which was to be closed - and 1975 - the oldest open year. No assessment of the later years was made by the SD(U) accountants though the auditors carried out some tests using LloydÆs percentages. It appears from contemporary papers that the assessments of the 1974 year indicated deficiencies in the insurance funds but these were largely disguised by preparing the assessments for the two years 1974 and 1975 together.No transfer
from profit and loss account was made to supplement the marine and non-marine insurance funds in the 1977 financial statements despite the apparent deficiency in the underwriting year being closed. It is apparent however that concerns over the adequacy of funds were already being expressed before these financial statements were completed. On 3 March 1978 the auditors wrote to SD(U) regarding insurance liabilities and noted:Marine Account
"The underwriting
results for 1975 and prior years appear to have deteriorated during 1977 and it may well be necessary to make transfers from Profit and Loss Account during 1978 in order to maintain adequate funds to meet outstanding losses for those years."Aviation Account
"After making transfers to
Marine Accounts at 31 December 1977 for both "Sphere" and "Drake" amounting to ú100,000 and ú75,000 respectively there appear to be deficiencies on the Aviation accounts of both Companies."FlintÆs response on 5 June 1978 noted:
Marine Account.
"Your
Aviation Account.
"Your comments are noted and it is our intention to let this
As
1978 progressed the internal SD(U) accountants continued to express concerns about the adequacy of funds. In the latter part of 1978 Page asked Simon Barker, one of his group accounting staff, to carry out a review of the adequacy of the Sphere and Drake insurance funds as a special exercise. We asked Page why he had requested this exercise. He told us that he assumed it was because he was at that time unhappy that he could not obtain reliable financial information relating to underwriting from Sphere and Drake.BarkerÆs exercise, which was started in
November 1978 though not completed until 26 March 1979, indicated aggregate deficiencies of the order of ú8 million split equally between marine and non-marine accounts. It is interesting that in his assessments he had taken proper account of the rollover policies as liabilities. His exercise only dealt: with the 1975 and earlier underwriting years; he did not assess the open years. However it also allocated underwriting expenses to early years rather than following the Sphere and Drake policy of charging them to the fund of the latest open year, and to this extent it tended to overstate the deficiencies in the earlier years assessed.In the
first quarter of 1979 Geoffrey Walden, one of the internal SD(U) accountants, carried out his own exercise to establish the adequacy of insurance funds. The work undertaken by Walden was quite comprehensive and was the only exercise to look at all the open underwriting years until DeanÆs assessment in early 1982. WaldenÆs assessment also included proper reserves for the rollover policies and made an attempt to assess the outcome of the small Posgate quota shares written by Sphere and Drake. His exercise concluded that the overall deficiencies in the insurance funds totalled approximately ú5.6 million, ú3.3 million on marine and ú2.3 million on non-marine.Walden was
subsequently reassured by Carpenter that the deficiencies he had established on the marine account could be ignored as these had made allowance for rollover policies which Carpenter said were liability-free. WaldenÆs exercise was never finalised and integrated with the 1978 financial statements.Page was evidently
most concerned at this time both about the inadequacy of reliable information within Sphere and Drake and the deficiencies which were emerging. We believe that until this time Page was quite unaware of these problems and it seems that for a short period Page tried to have matters put to rights. He was having difficulties also with inadequate underwriting information for Capital Marine, and a consequent threat of an audit report qualification; some of this inadequate information stemmed from quota shares accepted by Capital Marine from Sphere and Drake. On 29 March 1979, Page wrote a strongly worded memorandum to Turner on the matter which included the following passages:Sphere and Drake
:Non-Marine
"As you know when I was in Bermuda with Jack (Carpenter) a little earlier on we were given some information from Gay Swain to indicate that the
Non-Marine account(s) of Sphere and Drake were both showing substantial, losses and to the best of my knowledge and belief an analysis of the underwriting account was provided to the auditors to show the account divided into its years of account, i.e. 1975 and previous, 1976, 1977 and 1978, and I also understand that subsequently they were given a schedule of outstanding losses equally sub-divided and if one divided one lot from the other so far as the Non-Marine was concerned there was a substantial loss.Could you please confirm that this was the case or alternatively let me know the
information that was given to the auditors as I cannot understand from the information at present with me how on earth we were given a clear certificate in respect of the insurance companies..... I am aware that Sphere and Drake are complicated by the underwriting that Jack does for both those accounts, particularly, I believe, this would apply to the Marine rather than the Non-Marine, and I was concerned that I was able to
obtain no information at all about this underwriting and was unable to obtain any statistics and Geoff Walden, who had only just joined your unit, was unable to provide us with any information. Clearly, statistics and details as to this writing or any writing other than Sphere Drake that is written by the companies should be retained and statistics provided and I would like to examine them and it does seem to me that these should be done as at 31st December, 1978, with great rapidity so that we can see what is to be done if any difficulty should emerge.Sphere and Drake:
Marine
I am aware similarly there is a
deficit in the Marine but this is obscured by certain banking policies. ... It is likely that certain profits may emerge that would enable us to deal with these problems but clearly the problems must be identified and properly catalogued before the various funds can be allocated to solve them."PageÆs views about the
need for proper information about the JHC account are interesting, and tie in very much with our own. However, little action seems to have been taken in this matter and we have no doubt that Carpenter rather than Turner was primarily at fault. PageÆs comment about the audit report was in fact mistaken. At this date, 29 March 1979, the auditors of Sphere and Drake were far from completing their assessment of the adequacy of insurance funds and, although the Howden group accounts were signed on that day, the Sphere and Drake auditors had not yet given their opinion on the insurance funds. We consider the auditorsÆ responsibilities in this matter in Chapter 19.To cover the estimated insurance fund deficiencies for the purpose of obtaining the auditorsÆ signature to the Sphere and Drake accounts for 1978, a æstop loss reinsuranceÆ for ú4 million was written, with a premium of ú0.5 million
. The idea of some form of stop loss policy seems to date from February 1979 when it was proposed to effect a small stop loss into Capital Marine, but this idea was abandoned, probably because the deficiencies were proving larger than expected. We think that the æstop loss reinsuranceÆ actually effected was prepared shortly after PageÆs 29 March memorandum, although the documentation was dated somewhat earlier to give the impression that the æstop loss reinsuranceÆ was negotiated before the group financial statements were signed. This æstop lossÆ was written effective from 1 April 1979 and was "to pay any shortfall in the ReassuredÆs so called "Insurance Fund" for their 1978 and prior Underwriting Years" up to a maximum limit of ú4 million. As a result the 1978 accounts of Sphere and Drake were signed off without charging the estimated deficiencies against profits of that year. The stop loss policy was however on totally uncommercial terms. It was recognised that the deficiencies were likely to give rise to claims within a relatively short time scale and that it would not be possible to cover the deficiency by a stop loss policy with an armÆs length insurance company. Hence an artificial arrangement was entered into, the documentation being designed to disguise it as a reinsurance. Whilst the brokerÆs slip indicated that the reinsurance was written with SNA-Re (Bermuda) Limited, the genuine reinsurance company of which approximately 20% of the share capital was held by Howden, and which was frequently used for æfrontingÆ purposes, the premium was settled with, and the eventual claim in part met from, the æSNA-Re Captive accountsÆ, bank accounts at the Banque du Rhone controlled by The Four, the background to which we described in Chapter 7.The
premium of ú0.5 million was not actually paid over but was included in a 19 October 1979 settlement against which there was a first claim under the æstop loss reinsuranceÆ policy of ú2.266 million. This claim and the way in which it was met are discussed in paragraph 15.99.On
8 May 1979 John Risbey, the Sphere and Drake audit partner, met Walden and Swain. At this meeting Risbey indicated what he thought were the deficiencies in the insurance funds arising from the auditorsÆ own assessments. They estimated deficiencies at about ú2.8 million. This made no allowance for the rollover policy liabilities about which the auditors were never aware. Their view seemed to gain acceptance. Risbey was not advised of the exercises carried out by Barker and Walden. Risbey said that he was aware of the proposal to effect some form of stop loss to cover the estimated deficiency, but he had not at that time seen any documentation. At the meeting Swain produced a copy of the brokerÆs slip which Swain had himself only just received and, having some misgivings, had discussed with Page prior to meeting the auditors. Risbey also had some misgivings about the nature of the reinsurance and the security of the reinsurer. Swain prepared a note of the meeting which included the following:"The main focus of the discussions was the
Page subsequently took over responsibility for satisfying Risbey about the æstop loss reinsuranceÆ and on
22 May 1979 he met Risbey and explained that a broker such as Howden was able to place seemingly loss-making reinsurances because of their ability to compensate with other good business. Risbey was given a copy of the SNA-Re financial statements at 31 December 1978 which showed shareholdersÆ funds of $2.3 million - clearly insufficient to meet the losses which it was likely to suffer under the æstop lossÆ. Risbey noted on his copy of these accounts that he was informed by Page "that large part of the stop loss will be reinsured". Risbey accepted PageÆs assurances on the matter.Whilst it appeared at this stage in
1979 that the ú4 million æstop loss protectionÆ of the insurance funds should prove adequate, there remained doubts about the quantification of insurance fund deficiencies. On 23 May 1979 Swain wrote to Turner that, following the finalisation of the 1978 financial statements, it would be a priority to "quantify any deficiencies in the funds as at 31 December 1978 - including any in the open years: that examination to consider whether the escrows are significant in this connection". He also suggested that measures be taken to "avoid a similar situation arising in the future", and to this end that the expenses charged to Sphere and Drake by SD(U) should be considerably reduced and the budgets and profit forecasts amended to take account of a realistic estimate of the underwriting outcome. Despite SwainÆs views, which Turner did his best to support, no action was taken to relieve Sphere and Drake of the burden of expenses. Nor as far as we can judge was an immediate exercise undertaken to assess and quantify insurance fund deficiencies. And certainly the true significance of the escrows was not established at this time.Page was also
concerned that lessons should be learned from the experiences of closing the 1978 financial statements of Sphere and Drake. Immediately following their meeting Page wrote to Risbey confirming various matters including "that I am taking steps to get Sphere Drake to prepare statistics which can satisfy us generally". These steps included the recruitment of Birmingham and the proposal to carry out an exercise in the autumn of 1979 - in an attempt to speed up year end accounting - to assess the adequacy of funds as at 30 September 1979. This exercise was duly performed by the SD(U) accountants but was inconclusive, though it suggested that further deficiencies in the 1976 and prior underwriting years amounted to somewhat over ú1 million. Whether as a result of this exercise or for other reasons, in December 1979 the SNA-Re stop loss reinsurance cover was increased from ú4 million to ú5 million, for an additional premium of ú0.5 million.A
more comprehensive exercise was carried out by the SD(U) accountants after 31 December 1979. Following his May 1979 meeting with Page, Risbey was aware of this exercise and on this occasion the SD(U) exercises were used by the auditors as the basis for their own audit work. The auditors, making their own adjustments to the SD(U) exercise, concluded that the aggregate deficiency for 1978 and prior underwriting years amounted to about ú2 million. However this estimate was established before taking account of the 1978 Posgate quota shares written into Sphere and Drake and without making any assessment of the 1979 underwriting year. The deficiency was also established after taking credit for the first claim of approximately ú2. 266 million under the SNA-Re æstop loss reinsuranceÆ. Overall the auditors concluded that the deficiency of funds was very close to the balance of the revised stop loss cover. The reliance on- the æstop lossÆ was now of less concern to the auditors than it had been at the previous year end. They took comfort from the fact that substantial recoveries had already been made.The evidence given to us by Birmingham on the propriety of the 1978 and 1979 æstop lossesÆ of Sphere and Drake confirms his contemporary
awareness that they were quite evidently not written on commercial terms. However any enquiries he made about the exceptionally favourable terms were met by assurances that SNA-Re, the ostensible reinsurer, was being given profitable business by Howden and wrote these loss-making contracts as some form of quid pro quo. The idea of the æstop lossesÆ came from The Four and the documentation was dealt with by Carpenter and Todd. Birmingham:"They certainly did not seem to be commercial contracts in isolation. As I understood it then, from the agency point of view, when we were putting together the accounts, the companies with which the contracts were placed participated in a bouquet of business provided through the Howden empire, which would include profitable business and loss making business and, one assumes,
The
methods of providing the 'reinsuring' entities with the necessary cash flow for the purpose of meeting these claims were, in some cases, quite inventive. Carpenter told us that it was necessary to demonstrate to the auditors and others not only the existence of the stop losses, but also their substance in terms of cash recoveries. It is evident that the auditors had concerns about the security of SNA-Re, the ostensible reinsurer, and were comforted that claims were being settled. The first settlement made from the SNA-Re Captive accounts of ú1. 766 million in October 1979 (made up of the first claim of ú2. 266 million less the initial premium of ú0. 5 million) was funded in the main by two specific transfers to the SNA-Re Captive accounts:The detailed transfers to the SNA-Re Captive accounts are set out in the following table:
Date Received |
Description |
$ |
ú |
Received from |
|
15.10.79 |
æProfit-strippingÆ premiums |
862,800 |
and |
400,000 |
Capital Marine |
15.10.79 |
1979 contingency policy premiums |
703,000 |
and |
460,000 |
Group |
15.10.79 |
Loan from Capital Marine (subsequently repaid out of later æpremiumsÆ) |
500,000 _______ |
______ |
Capital Marine |
|
2,065,800 |
and |
860,000 |
|||
19.10.79 |
Currency transfer |
(1,951,705) |
906,000 |
||
Retained in SNA-Re Captive accounts |
$ 114,095 |
______ |
|||
19.10.79 |
Paid to Sphere and Drake |
ú1,766,000 |
The
loan from Capital Marine was repaid in December 1979 out of a settlement received from AHIB in respect of premiums on further æprofit-strippingÆ policies relating to Posgate Syndicate quota shares written by Howden group companies.The
funding of the second and third claims (in February and June 1981 respectively) is less specifically identifiable. These claims were met by SIR, and by this time SIR had received sufficient reinsurance premiums and other cash transfers to be able to meet the claims out of its own cash resources. These premiums should have been retained by SIR as part of its insurance funds to meet future claims relating to the policies in respect of which the premiums were received. The sources of these funds, and the approximate amounts received by SIR by 31 March 1981, were as follows:Thus,
all three claims on the 1978 and 1979 stop losses were settled by SIR and the SNA-Re Captive accounts out of unrelated reinsurance premiums which should, under normal insurance practice, either have been held in insurance funds of these entities to meet future liabilities or, in the case of the æprofit-strippingÆ policies, should not in our view have been received by these entities at all - a matter we now discuss.The 'profit-stripping' policies
When the
initial ú4 million æstop loss policyÆ on the Sphere and Drake insurance funds was put in place in the spring of 1979, it was apparent that there would shortly be claims made under the policy and that these claims would have to be met if the SD(U) accountants and Sphere and Drake auditors were to accept the effectiveness of the stop loss at the 1979 audit. At this time the overseas companies of The Four (the Southern companies) did not have resources available to meet such large claims (and the contingency policy funds at the end of 1978 were almost exhausted). Carpenter therefore devised the system of æprofit-strippingÆ policies, which involved estimating the possible profits of Posgate Syndicate quota shares of open years of account, written by Sphere, Drake and Capital Marine. These estimated future profits were then transferred, ostensibly as stop loss reinsurance premiums, into the Southern companies - the SNA-Re Captive accounts and SRAG which subsequently passed the funds to SIR. The funds were then used to settle the Sphere and Drake claims under their æstop loss reinsurancesÆ giving apparent credibility to these arrangements which were artificially bolstering profits. The premiums paid on the profit-stripping policies, on the other hand, were charged by Sphere, Drake and Capital Marine to their insurance funds of open years, and in consequence had no adverse effect on Howden group profits.Carpenter told us that he
took some care in establishing the likely settlements on the quota shares:"May I explain how those were calculated: we
The
initial assessments in September 1979 were of a likely 40% settlement - 60% profit - and the initial premiums on the 'profit-stripping' policies were calculated using estimated eventual quota share premiums and taking 80% of the estimated profits on these quota shares, using this 60% profit estimate. We put it to Carpenter that this was an extraordinary level of profit to expect; he defended the use of this estimate and said it had been based on results of earlier years.The
figures were subsequently reassessed early in 1980 as further cash flow was needed in the Southern companies. Whilst some of the expected profit percentages were reduced a little at this stage, this was more than compensated by the expectation of increased premium income, and in consequence further æprofit-strippingÆ policy premiums were paid by Sphere, Drake and Capital Marine.Between
October 1979 and March 1980, the aggregate sterling and dollarpremiums
paid by the Howden insurance companies to SRAG and SNA-Re Captiveaccounts, under the æ
profit-strippingÆ policies scheme, relating to 1978 and1979
Posgate Syndicate quota shares, were as follows:
ú |
$ |
||
Sphere |
675,000 |
and |
1,469,350 |
Drake |
450,000 |
and |
974,662 |
Capital Marine |
599,000 |
and |
1,315,600 |
ú1,724,000 |
$3,759,612 |
We are
most critical of the æprofit-strippingÆ policies designed by Carpenter, although we can understand Carpenter's dilemma in having to find cash out of the Howden insurance companies to back up the æstop loss reinsurancesÆ of Sphere and Drake. Under the normal Lloyd's three year account rules the results of the syndicate quota shares for 1978 and 1979 would not be known until early 1981 and 1982 respectively. We consider it imprudent in the extreme to attempt to assess possible quota share profits in late 1979 as was done by Carpenter - and to use an estimate of 60% profit we regard as reckless. In the event the quota shares for 1978 and 1979 settled well in excess of the estimated claim percentages; indeed the non-marine quota shares settled at an underwriting loss. As the Howden insurance companies had already anticipated profits on the quota shares (by paying away such anticipated profits under the guise of premiums and then receiving them back as 'stop loss' recoveries) this gave rise to further problems in later years. However the æprofit-strippingÆ policies had the effect, as far as The Four were concerned, of rolling forward the 1978 and 1979 deficiencies to those later years. Whilst Grob told us that Carpenter was responsible for designing the policies - "Frankly, I think the concept of them, which was Carpenter's, is a bit esoteric to say the least" - we have little doubt that it was Grob who instructed Carpenter to find a solution. It is also evident that both Birmingham and Swain were aware of the assessments of estimated profits and knew that these were paid away as premiums. We consider that Birmingham might well also have realised that these policies were providing the cash flow for the 'stop loss' recoveries.The
wording of the 'stop loss policies' under which the æprofit-strippingÆ premiums were paid was unusual, but indicated that Sphere and Drake were entitled to recover under the stop loss policies if the quota share settlement was above the estimated level; that is if the profits proved less than anticipated. However no recoveries were ever made under these policies, although they were due as the quota shares settled well in excess of the estimated figures. In March 1981, when the result of the 1978 quota share was known, the SD(U) accountants calculated recoveries due. However this expected recovery was simply credited to the 1978 insurance funds and debited to the 1980 insurance funds of Sphere and Drake. This had no effect on the overall funds of Sphere and Drake, though it did increase the insurance funds for the 1978 underwriting year - which were assessed for adequacy by both the SD(U) staff and the auditors at the 1980 audit - at the expense of the 1980 insurance funds, which were not so assessed!No attempt
was ever made to establish the 'expected' recovery under the æprofit-strippingÆ policies when the 1979 quota share results were known early in 1982. It was by this stage evident to the SD(U) accountants that no recovery could be made. The profit-stripping premiums were paid for no consideration.THE KNOWLEDGE OF THE HOWDEN BOARD ABOUT MISSTATEMENT AND MANIPULATION OF FINANCIAL STATEMENTS
Introduction
We have outlined in the previous four chapters the ways in which the financial statements of certain of the Howden insurance company subsidiaries, and the Howden group consolidated financial statements themselves, were
misstated and manipulated. We are amazed by both the extent and size of the manipulation, and the misuse of reinsurance designed by The Four to mislead many others into thinking all was well when it was not. By the late 1970s the misstatement and manipulation had become very material, with significant and increasing losses being ærolled forwardÆ in the Southern companies. We have estimated that the unrecorded liabilities at 31 December 1980 were of the order of ú15 million in Sphere and Drake (paragraph 15.156); and that the unrecorded liabilities at 31 December 1981 were of the order of ú30 million in Sphere and Drake and $20 million in Capital Marine (paragraphs 15.161 and 17.38). At both dates there was a small surplus in Atlanta arising from the NADS transfer (of about $2.7 million - paragraph 16.29) though this could not have been known at 31 December 1980. These deficiencies were fundamental compared with disclosed profits of ú17 million and net assets of ú56 million in the 1981 Howden group accounts.The
overstatement of Howden group profits in these years coincided with a period when the disclosed profits were themselves levelling off or falling, following the period of substantial profits growth in the early and mid-1970s. The manipulation therefore significantly softened the disclosed impact of a dramatic change in the fortunes of Howden. It is evident from our analysis that the responsibility for the various forms of manipulation lies almost entirely with The Four, who were central to the schemes, and who controlled the entities outside Howden into which some of the losses were æreinsuredÆ and rolled forward. In this chapter of our report we summarise our views on the responsibility of The Four for the accounts misstatement and then discuss the knowledge and roles of the other Howden main board directors. Finally in this chapter we also consider the extent to which Alexander & Alexander were told of these matters during the course of the negotiations which led up to their acquisition of Howden.The Four
We conclude that The Four bear almost the entire responsibility the accounts manipulation within the Howden group. Grob told us that ability to cover up and defer losses - "
cover the dogs" as Comery termed it - was one of the principal purposes for which SIR was set up. Grob:"This was the third reason for SIR, to provide the Howden group particularly its insurance company subsidiaries Sphere and Drake Atlanta International, with
Q
Support for what?A
For their losses, to spread their losses forward to enable them produce balance sheets which looked reasonably in line."The first two reasons given by Grob for
setting up SIR were to deal with NADS/Atlanta problem and to handle the contingency policy, both of which involved the rolling forward of losses. Grob told us that he saw noting objectionable in rolling losses forward and maintained that it was common market practice.Carpenter was equally frank that one of the
objectives of SIR was support the Howden group:Q "... you were saying earlier ... that (SIR) was
A It was a support to the Howden group as such. It was not meant to go Sedgwicks, etc., and say: "May we take business from you?", it was a support and took in losses. It was to take in the stop losses of Sphere Drake."
Comery's evidence was in similar vein.
Page also acknowledged in his evidence that SIR was used to
spread losses forward, though his evidence was generally more cautious. However evidence of others including Posgate, Birmingham and the auditors indicates Page was very much involved with the manipulation of the accounts.We are satisfied that Grob was the driving force behind manipulation and that Comery, Page and Carpenter were well aware of it played their parts in effecting it. We consider that Grob's motivation for the manipulation was mainly pride, in an attempt to
disguise the decline in Howden's profitability in his later years as Chairman. The early manipulation was regarded as containable: a smoothing of profits by rolling some losses forward. But as so often happens the disguised deficiencies just grew larger and larger.Grob told us on several occasions that all of the main board of Howden were aware of the existence of SIR, and he also maintained that if they were not aware of its ownership that was because they had not drawn an obvious inference. He told us that they were also all aware of a number of the ways in which SIR helped the group by enabling them to
spread forward unexpected losses and potential losses arising in various group companies. Grob:"The Howden group, apart from the ownership, the actual ownership, knew everything about SIR from the word go. Now when I talk about the Howden group I mean their financial, their legal, their broking, their underwriting, their top management - everybody knew about SIR. SIR was
We
do not accept Grob's evidence in this matter and consider that all of the other board members were misled by The Four, who deliberately withheld important information. Nevertheless certain other directors had at least some hint of problems, and we now consider the extent to which they were aware of the manipulation of the financial statements.Posgate
We have already indicated in Chapter 16 our view that
Posgate knew more about the way in which the NADS problem was dealt with than he has admitted to us. It is also apparent, both from his evidence to us and from contemporary memoranda, that Posgate was concerned about the possibility of overstatement of Howden group profits some time prior to the NADS problem arising. Apart from Grob and Comery, we have formed the view that Posgate was probably the strongest personality on the Howden board and the most likely to make his views known.Posgate told us that in the
latter half of the 1970s, before joining the Howden board in 1978, he simply could not believe the profit figures which were being announced by the insurance company subsidiaries of Howden. Accordingly he was concerned with the level of profit being declared by the Howden group as a whole. As an underwriter of great experience Posgate was of course in a better position than most of his colleagues to doubt the underwriting results coming through from the insurance company subsidiaries which, he told us, contrasted sharply with his own underwriting experience. He told us that he also became concerned at that time that his rollover funds might have been brought back into the Howden group as profits, a suspicion that was well founded. His evidence includes the following:"By this time, if I can just digress a little, I had
In his evidence,
Risbey agreed with us about the difficulty of assessing the adequacy of insurance funds and agreed that the SD(U) reliance on the auditors to deal with the assessment was not entirely satisfactory. He went on to say that the assessment of insurance liabilities was a difficult and complex matter and that the method adopted in 1979 and after - using internal statistics - "made far more sense." Risbey also pointed out that by the time he was responsible for the 1979 and 1980 audits as manager and partner respectively, SD(U) were preparing the assessments of SD(U) underwriting rather than the auditors.We
consider that the internal accounting resources given to the preparation of the Sphere and Drake financial statements, particularly prior to 1979, were inadequate. Taken together the two insurance companies were not insubstantial and their business required a high level of organisation and judgement in preparing financial statements. The assessment of IBNR - the unreported liabilities on business already written - is a critical area of judgement in preparing the financial statements of insurance companies and it is not one which in our view auditors should themselves undertake, particularly in the absence of discussions with underwriters. The fact that the Sphere and Drake accounting staff relied on the auditors on the question of the adequacy of insurance funds, and could contribute little in any discussion of the JHG writings, should, we consider, have led the auditors to make the strongest possible representations about the lack of adequate internally produced financial information relating to Sphere and Drake. We regard it as normal practice for an auditor to inform the companyÆs officials, and in appropriate cases its directors, of material weaknesses in internal systems and controls and instances of lack of adequate information. Indeed we think that the lack of information alone was probably sufficient grounds for considering a qualification in their audit reports on the financial statements, with regard to doubt as to the adequacy of insurance funds, when underwriting became generally less profitable in the later 1970s. Yet de Paula, during the course of their audits, did not express in writing their concerns regarding the lack of adequate internally prepared financial information; prior to 1979 they accepted, it appears with little argument, the responsibility effectively placed upon them for assessing the adequacy of insurance funds when, in our view, the information they had was inadequate for preparing a proper assessment; they never insisted that management get to grips with a complete assessment and understanding of the liabilities of the JHC writings; and their files contain no evidence that these matters were properly considered during the audits, either internally by de Paula themselves or in discussion with Howden. The first indication we have noted of these matters being discussed between de Paula and Howden was in May 1979 when Risbey met Page, who said he would take steps to get Sphere and Drake to prepare proper statistics. We noted in paragraph 15.82 that Page had in fact earlier expressed concerns about the inadequacy of underwriting statistics in a memorandum to Turner in March 1979. Birmingham joined shortly thereafter.De Paula
never indicated to Josolynes, the parent company auditors, that there were inadequacies in the internal assessments of insurance funds prepared for Sphere and Drake, although the audit questionnaires completed by de Paula for Josolynes each year gave ample opportunity for disclosure. Whilst they advised Josolynes when giving æaudit clearanceÆ that they had not yet completed their work on the adequacy of insurance funds - this was a regular occurrence - they gave no indication that this was anything other than a timetable problem.Rollover fund liabilities
De Paula were aware that, apart from the SD(U) writings in Sphere and Drake, there was a significant amount of business written directly into Sphere and Drake by Carpenter. They understood, however, that the only JHC business which mattered in fund assessments related to the Posgate SyndicatesÆ quota shares regularly placed into Sphere and Drake, and only the probable result of these quota shares was considered by them in the assessments and audits of the adequacy of insurance funds. Risbey told us that de Paula received reassurance on many occasions that there was nothing else within the JHC writings of any material consequence. He discussed this matter with the SD(U) accountants who, he told us, were confident that "no more" had to be brought in for the JHC business. Risbey went on to say that the reassurance given by the SD(U) staff was unequivocal:
Q "(Were they) relying on Mr CarpenterÆs or Mr ToddÆs say-so in taking that view."
A "No, none expressed doubts. They were confident themselves the JHC writings had been fully accounted for in outstanding liabilities. Michael Birmingham and Geoff Walden said they were happy about the position of JHC writings."
Q "If they expressed doubts to us (the Inspectors) they did not express them to you?"
A "Absolutely. If there were any doubts that the JHC writings had not been properly accounted for I would remember. There was no question of them saying: "Look, we are not sure. Go and see Jack Carpenter or Syd Todd." They were sure in their own minds the JHC business had been properly accounted for."
This evidence is in conflict with that of certain SD(U) staff who generally told us that they referred the auditors to Carpenter when questioned about the JHC writings. It is apparent that some of the SD(U) accountants were at various times themselves concerned about possible liabilities connected with the Posgate escrow or rollover policies. They also told us that they knew very little about the JHC writings. They clearly would not, therefore, have been in a position properly to give the reassurance which Risbey told us was given. Risbey told us that he was unaware of the existence of escrow or rollover policies within the JHC writings of Sphere and Drake until he read about these matters in the press long after de Paula had ceased to be the auditors. He told us, and we accept his evidence, that he did not at the time know what an escrow was and if someone had expressed to him concern about the matter specifically then he would undoubtedly have researched it. We conclude that the misgivings of some of the SD(U) accountants were not conveyed to the auditors. In their discussions with the auditors we believe the SD(U) accountants simply passed on the Carpenter view that no material liabilities existed, and that Carpenter grossly misled the auditors æby proxy.Æ
We have formed the view that although seriously misled, de Paula did not go far enough in auditing the adequacy of insurance funds relating to the JHC account. Their principal failing, already noted, was in not insisting that full and comprehensible details of these writings were prepared by management, together with estimates of outstanding liabilities. This would have given a proper basis for starting an audit of liabilities attaching to these writings. The lack of detailed knowledge of these writings by those responsible for preparing the Sphere and Drake accounts should have been evident and a matter of concern. Although the JHC writings, other than the Posgate SyndicatesÆ quota shares which were examined) did not represent a large element of the premium income of Sphere and Drake, we do not consider this section of underwriting should have been exempt from normal audit testing over so many years - as appears to have been the case. In this area we believe the assurances of management should complement rather than be a substitute for normal audit testing. It is fair to add, however, that further work would not necessarily have resulted in discovery of the liabilities attaching to the rollover policies, if management, in preparing detailed papers, did not disclose such liabilities. It was unusual at the time to find rollovers placed with London market companies, and the auditors would not have expected there to be any.
1978 and 1979 stop loss policies
It
became evident to de Paula during the course of their 1978 audits that there were probably deficiencies in the insurance funds of Sphere and Drake. We have noted that the de Paula assessment of the fundsÆ adequacy, which was by no means comprehensive, indicated a deficiency somewhat in excess of ú2 million. This contrasted with significantly higher estimates of the deficiency by Barker and Walden. De Paula became aware around April 1979 of the intention to effect some form of stop loss reinsurance to cover the likely deficiency in the insurance funds at 31 December 1978, but they did not obtain any detailed information about the form of stop loss until they met with Swain and Walden on 8 May. At that meeting Risbey was given a copy of the reinsurance slip, which noted the cover of ú4 million and premium of ú0.5 million. Risbey had a series of questions to clear at the 8 May meeting in order to understand the nature of the reinsurance, and the security of the proposed reinsurer, SNA-Re (Bermuda). Risbey had early concerns about the armÆs length nature of the reinsurance. He discussed these at his meeting with Swain:Q "What response did you get?"
A "The
Risbey told us that he then arranged a meeting with Page to discuss the SNA-Re stop loss, and prior to that meeting he discussed the whole matter with
Dagnell, his senior partner at de Paula, who had been responsible for the Sphere and Drake audits in earlier years. Risbey told us that he and Dagnell did some initial research into the background of SNA-Re, including its ownership. Dagnell also reassured Risbey that on occasions in the insurance industry it would be possible for what appeared to be non-commercial stop losses to be effected where there was other profitable business given to balance the position.Risbey (but not Dagnell) went to the pre-arranged meeting with Page on 22 May 1979. Risbey told us that Peter Benzikie, the Josolynes partner responsible for the group audit, was already in PageÆs office when he, Risbey, arrived, and was present during the course of the meeting. Risbey was given a
copy of the cover note and of the SNA-Re accounts. He told Page that SNA-Re did not look like a big company and that he was concerned about whether it was adequate security for a reinsurance of that nature - a reinsurance which was in effect transferring substantial losses. Page responded that SNA-Re had its own reinsurance programme and that a substantial part of the stop loss would be reinsured by it.Risbey told us that he took comfort from the presence of Benzikie at the discussion. He told us that BenzikieÆs presence was coincidental but that Benzikie took an active part in the discussion. Risbey:
At the end of the day he (Benzikie) formed the opinion there was nothing to worry about.
Q "You took the view he was quite happy with the proposal to stop loss?"
A "
It was a comfort to me he had taken that view."In this matter there is a conflict of recollection. Benzikie told us that he had no recollection of being at such a meeting and that the
first knowledge he had that Sphere and Drake were relying on uncommercial stop loss cover to deal with insurance deficiencies was in early 1981, which discovery led him to have a meeting with Grob because of his concerns at that time, a matter we discuss later. Although his concerns in 1981 are well documented, we believe that Benzikie did know in 1979 about the stop loss proposal, but that he did not properly appreciate its uncommercial nature until large recoveries were drawn to his attention in 1981.As regards the
propriety of what was clearly an uncommercial stop loss reinsurance, Risbey in essence accepted from Page the same form of comfort as a number of the Howden internal staff, that what was clearly a loss-generating stop loss reinsurance could be placed by Howden because of its market strength and its ability to compensate with profitable business. Risbey was also aware from the financial statements of SNA-Re that it appeared inadequate security for a stop loss of this size but he was told by Page that SNA-Re would itself reinsure the liabilities. We put it to Risbey that PageÆs explanation might have warranted further enquiry:Q "
A "
We did not feel we had that right. We felt it was quite so far away from the right we did not ask these questions. It is of course not unusual for a company to arrange its own reinsurance protection on such a risk. It is not at all surprising that SNA-Re would arrange their own protection we felt. Obviously now, looking four years back, it is a different matter. At that stage we thought there was no point in looking further to see if reinsurance protection was there further down the line."Q "If it is
duff insurance from the outset it is rather a different matter, if you see what I mean. Although in the ordinary way you would not be looking through into the reinsurance, if the insurance of itself is loss-making from the beginning I would have thought it would be interesting to know who would be stupid enough to pick up the tab?"A "We felt it would be a difficult thing to do. We did not go that far."
On balance we think it was reasonable in this instance for Risbey to accept PageÆs explanation.
The
extension of the stop loss reinsurance in the following year to cover ú5 million was not the subject of much debate. De PaulaÆs conclusion on the 31 December 1979 insurance funds was that the revised stop loss reinsurance cover of ú5 million was just adequate to cover the insurance fund deficiencies. By this stage they were aware that there had already been recoveries under the initial stop loss reinsurance amounting to ú1 .7 million, which was understandably a comfort that the stop loss reinsurance was effective.As we have noted, the cash flow for the initial recoveries under the stop loss reinsurance was provided in part by what we have termed æ
profit-stripping policiesÆ (paragraph 15.103). The premiums paid by Sphere and Drake on these profit-stripping policies were substantial, but Risbey told us that their audit had not picked up the large premiums which were funding SNA-Re. We asked Risbey whether he would not have expected substantial reinsurance premiums such as this to be drawn to his attention by his audit staff and he acknowledged that he was "a little unhappy" that they were not. However he went on to say that even if he had examined these reinsurances he would probably not at the time have linked them together with the stop loss reinsurance recoveries.The 1980 financial statements
We have noted in Chapter 15 that the
formal internal assessments, for the 1980 financial statements, of the adequacy of insurance funds of Sphere and Drake relating to SD(U) business, failed to take account of insurance fund deficiencies in the 1979 underwriting year. This was despite the fact that it was known by the internal staff of SD(U) that 1979 underwriting was developing badly. The auditors were informed of the fact that 1979 was expected to close at high loss ratios at a meeting in November 1980. The failure of management to assess 1979 underwriting was also a æstep-backwardsÆ in terms of the assessments, which by that time were prepared by the SD(U) accountants for audit by de Paula; at the previous year end the equivalent underwriting year - 1978 -had been assessed.Risbey acknowledged that no formal assessment of the 1979 underwriting year was carried out by SD(U). Instead de Paula had carried out an assessment of their own. They had also been given reassurance by the SD(U) accountants:
Q "
A "
Certainly no assessment by them, and a rough and ready one by us."Q "At the previous year end I think you had looked at the position up to
1978, is that not correct?"A "Yes, that is right. They had done that and we had reviewed their position up to
1978."Q "In the
1980 year end they had actually slipped a year in the up-to-date nature of their assessments, is that right?"A "Ye
s, they had."Q "
Have you any idea why that would be?"A "No. At the time I thought there was
nothing suspicious about <it at all. The underwriters would never go that far anyway. They, as accountants, had slipped a year. At the time I thought that was not unreasonable."Q "
It does seem a bit curious ... on 1979 the SD(U) accountants had produced some formal papers up to 1978 underwriting year but in 1980 they had not produced formal papers up to 1979 underwriting year?"A "
Certainly with hindsight it does look odd. At the time we accepted it because it is very time consuming and it seemed reasonable on the basis that 1979 did not seem too bad ..."Q "The
statement that 1979 "did not seem too bad" is rather in conflict with the meeting of November 1980?"A "That was a quote from them."
Q "Does that mean they felt more comfortable with 1979 in March 1981 than they had in November 1980?"
A "Rightly or wrongly that is what they said."
Risbey accepted the SD(U) management representations that they did
not intend to make any formal assessment of the 1979 underwriting year. We think that in view of the indication given to him in November 1980 he should have insisted that this was done, though his acceptance must be seen against the background of earlier audits, when the auditors, rather than management, looked at the open years. Shortly after the audit was complete, Birmingham was preparing calculations of very substantial deficiencies in the insurance funds and in our view Birmingham would have been quite capable of calculating similar figures at the time of the 1980 audit.In the
absence of any internal assessments, Risbey prepared his own assessments of deficiencies in the 1979 underwriting year insurance funds. His broad appraisals indicated significant further deficiencies. He estimated deficiencies in excess of ú4 million in 1979 underwriting year. And though he did not calculate a figure for 1980 underwriting year, it is evident that he envisaged further losses. None of these losses was covered by the earlier stop loss cover, as this was earmarked for deficiencies assessed in the 1978 underwriting year. The estimated deficiencies were very significant in Sphere and Drake terms.Earlier in the audit, Risbey had been involved in discussions with Birmingham and Walden at which the SD(U) accountants had
proposed that, in considering the adequacy of 1979 insurance funds, account should be taken of the "earning power of the fund." The proposition put to Risbey was that the future investment income which the insurance funds would earn should be recognised in considering fund deficiencies; if estimated future investment income exceeded the deficiencies assessed, no transfers should be made from profits to support the insurance funds. Risbey was told that Page held strong views in favour of this treatment, which represented a major change from past practice, and we believe that in putting forward these propositions Birmingham and Walden were acting on instructions from Page and Carpenter. Risbey told us that this line of argument had been given an airing the previous year, but only "very loosely" in relation to the latest open year which was difficult to assess. Risbey accepted BirminghamÆs and WaldenÆs views in this matter, and when he assessed deficiencies in the 1979 and 1980 underwriting yearsÆ insurance funds Risbey also gave thought to the companies investment income. In fact he did not look specifically at the insurance funds of these years and potential future earnings thereon. He instead estimated the total investment income of the companies and concluded that the 1979 deficiencies were roughly covered by one yearÆs total investment income, and 1980 similarly. On this basis he accepted that no transfers from profits were needed to support the insurance funds by making good the deficiencies he had estimated in 1979 underwriting. Had it not been for this change of practice, the 1980 profits of Sphere and Drake, and therefore of the Howden group, would have been at least ú4 million lower.Though we accept that Risbey
formed his own judgement in deciding that the deficiencies need not be made good, we have reservations about his performance in this matter. The æinvestment incomeÆ argument which Risbey accepted, and to which he still subscribes, did not reflect normal practice at that time in relation to general insurance business. Indeed, although there is now much debate on this topic, a synopsis of a lecture which Risbey attended in June 1979 noted that discounting (in relation to long settlement patterns), although in mind, was "not yet generally accepted." Furthermore, his calculation of future investment income relating to the fund was extremely broad brush. Whatever the merits of the investment income argument, we consider that Risbey was at fault in not discussing with any of his partners or colleagues what was a most important change of practice in considering the adequacy of the Sphere and Drake insurance funds; and in not advising the group auditors of the change of practice in a matter which had a material bearing on the Howden group as a whole. In the circumstances we consider that such a fundamental change of basis of accounting required far greater exposure and should have led to disclosure of the change of practice in the financial statements.Conclusions
We
conclude that de Paula were misled over the years in a number of ways by the SD(U) accountants, by Page and Carpenter and probably by others. They were led to believelong period over which the claims call be experienced. However, the impact upon individual companies could well be severe since there appears to be significant concentrations of coverage in a limited number of insurance companies and their reinsurers...Our work suggests that the summary companies which are involved have already done significant reserve strengthening on currently known claims and have also established loss reserves for incurred-but-not- reported claims. In the light of emerging knowledge on the business, we anticipate that additional reserve strengthening may be required in the future. On the other hand, we believe that there is a possibility that numerous
excess and reinsurance carriers may be greatly understating their potential liabilities at the present time.Specific insurance company liabilities
for asbestos claims could not reasonably be projected with any accuracy because of the many legal questions which still need to be resolved. ... In terms of primary carriers, those with the largest exposures appear to be: Aetna Life & Casualty, Chubb, Commercial Union, General Accident, The Hartford Group, INA, Liberty Mutual, Reliance, Travelers, and Zurich. On an excess basis, LloydÆs may have a potentially large exposure having provided various policies since the 1930s. Insurance companies which appear to have significant exposure on the excess layers include Aetna Life & Casualty, AIG, CNA, Commercial Union, the Home and INA. It should be pointed out, however, that these "exposures" (a) are before reinsurance considerations which in many cases result in the ceding off of substantial portions of the liability into the reinsurance marketplace throughout the world and (b) may be partially or fully reserved for already.Thus far, the courts have tended to maximise the available insurance coverages in their insurance policy interpretations.
Federal legislation, although introduced in 1979, 1980 and 1981 but with no action taken, has been silent thus far on a possible resolution of the problem of compensating victims of asbestos exposure on a federal level.The term "asbestosis" commonly applied to a number of naturally fibrous materials with "chrysotile" bring the principle variety. This mineral consists of microscopic stone fibres of various lengths which can be processed into other materials in order to provide either added strength, flexibility, corrosion resistance or protection from heat and fire. In addition, asbestos is an excellent insulating material. The following table displays a distribution of thative
machinery if the market itself is involved, or if the policyholders or LloydÆs members were in danger of losing money. But the information so far disclosed shows such major problems that it may have to get involved.Both
the Department and LloydÆs are getting a constant flow of information from John Bogardus, chairman of Alexander and Alexander, and the two bodies are liasing in their surveillance.As a result, the
DepartmentÆs insurance branch is unlikely to be involved, but its companies branch is checking to see whether breaches of fiduciary duty have occurred.8 Sep 82
After an initial indication of reluctance to become involved, LloydÆs announces that it had requested Ernst & Whinney to enquire into the various matters referred to in the recent public statements concerning certain companies within the Alexander Howden Group and to report on the implications for LloydÆs of these matters. The report was completed on 30 October 1984.
9 Sep 82
Times
: LloydÆs orders investigation into Alexander HowdenLloydÆs of London has bowed to the mounting pressure from its members and
ordered an investigation into the implication for LloydÆs of the accounting irregularities at Alexander Howden.A brief statement yesterday said that the Committee of LloydÆs had instructed Ernst and Whinney to "
inquire into the various matters referred to in the. recent public statements concerning certain companies within the Alexander Howden Group".It will report on the involvement of, or implications for, any LloydÆs firm or person, LloydÆs broker, LloydÆs underwriting agency, LloydÆs syndicate, or member of LloydÆs in any of these matters.
Mr John Bogardus, chairman of Alexander and Alexander Services, has been told of the committeeÆs decision and has confirmed that A & A and the Howden Group will continue to co-operate with LloydÆs.
The move was
welcomed by Lady Middleton, chairman of the Association of External Members of LloydÆs, which represents 16,000 members who do not work in the market, who said she was "very, very pleased" with the committeeÆs decision.She had rung the secretary general of LloydÆs last week protesting at the
statement from Sir Peter Green, chairman, that LloydÆs could act only if the matter impinged on LloydÆs. "I could not see how it did not impinge on LloydÆs", Lady Middleton said.Meanwhile, the
Department of Trade, as ultimate regulatory body of the insurance industry is still awaiting certain information concerning Howden from A & A and says it is likely to take the rest of September before deciding whether to mount its own investigation.The department is discussing measures aimed at
tightening up financial controls in the insurance industry.LloydÆs investigation, which is expected to take two weeks, will look into
the $25m of assets which the audit by Deloitte Haskins & Sells has discovered is missing from the Sphere Drake subsidiary of the Howden Group.It will also be looking at the dealings of four former Howden directors, including Mr Kenneth Grob, ex-chairman, who was involved in a
company in Panama which undertook a considerable amount of Sphere DrakeÆs reinsurance business.ú100m agency sale forecast
About
ú100m worth of LloydÆs of London managing agencies should come onto the market in the next five years, after implementation of the new LloydÆs Bill, and non-working members should be given an opportunity to purchase these syndicates, Mr John Rew told the inaugural meeting of the Association of Members of LloydÆs.The association producers the
controversial analysis of LloydÆs insurance syndicatesÆ performance and this service is to be extended to show a breakdown of managing agents commissions. (Lorna Bourke writes). (Last paragraph omitted in later editions).12 Sep 82
Shead to stay at Howden
American insurance giant
Alexander and Alexander now appears to be getting to grips with the problems uncovered at Alexander Howden, the British insurance group it took over last year for ú170 million.I hear that Jack Bogardus, the A&A boss, who was in London last week, has asked Anthony Shead, a Howden director, to stay on for two to three years to sort out the mess. Shead is understood to have accepted the challenge.
Shead joined the board in 1976 when he sold his family underwriting business to Howden. He has a reputation for keeping a cool head û which he .
13 Sep 82
Financial Times
: Call for Howden insurance inquiryTHE
GOVERNMENT has been urged to mount a full inquiry into the Alexander Howden insurance controversy and its wider implications for insurance legislation in the UK.The
surprise move bas been made by Mr Michael Meacher, Labour MP for Oldham West. He was chairman of the House of Commons committee which last year reviewed proposed legislation for improving self-regulation at LloydÆs of London, the insurance marketThis is the
first time in recent memory that a government department has been urged by an MP to examine the affairs of a group which has extensive LloydÆs of London interests. The Trade Department is gathering facts before it makes a decision, which is expected in a few weeks.In a
letter to Lord Cockfield, Secretary of State for Trade, Mr Meacher has said that a full inquiry should be set up "urgently" by the ministerÆs department."
DoesnÆt this whole affair, on top of so many other major scandals exposed over recent years in the insurance market suggest yet again the need for some statutory superintendence of the insurance market?" he has asked.The
political development follows the disclosure this month by Alexander and Alexander Services, of the US - the worldÆs second-largest insurance broker which owns Alexander Howden - that it had uncovered irregular accounting practices and business transactions in Howden.Alexander and Alexander
found that Howden, acting as insurance brokers, had entered reinsurance transactions with companies which were secretly controlled by four former directors, including the former chairman of Howden, Mr Kenneth Grob. Once discovered, the liabilities of the secretly-controlled companies were transferred to HowdenÆs insurance company, Sphere Drake. Although funds have been sought from the directors by Alexander and Alexander, the US group has not received all the amounts due.Alexander and Alexander reported that there would be a
shortfall in assets of up to $25m (ú14.6m)Mr
Meacher has told Lord Cockfield that several questions urgently need answers.Mr Meacher also
argues that the affair reveals an inadequate in the auditing system of insurance groups, Sphere Drake, he says, filed accounts with the Trade Department on June 30, only eight weeks before Deloitte Haskins and Sells, undertaking a special audit for the US group, discovered the deficiency."
How can this be acceptable," asks Mr Meacher, "when the accounts were signed by Arthur Young McLelland Moores? He says that the system of auditing is "patently inadequate" and urges reform.13 Sep 82
Financial Times
: Howden disclosure shows weakness in LloydÆs systemThe discovery of
irregular accounting practices and business transactions in Alexander Howden Group by the U..S parent company, Alexander and Alexander Services, has highlighted weaknesses in the self-regulatory structure of LloydÆs of London.What has been identified so far is that insurance companies under the management of Howden have a
shortfall in assets of up to $25m and that four former directors have secretly-controlled companies with which Howden brokers carried out reinsurance transactions.These involved lines of business from
LloydÆs largest underwriting syndicate, number 127, which is also managed by an agency company owned by Alexander Howden.The syndicates reinsured about
ú9m of its business for the 1979 underwriting account, when that account closed at the end of last year, with insurance companies owned by HowdenIn the
reinsurance programme for the syndicate Howden, acting as reinsurance brokers, has placed whatever business it intended to retain for the group with Sphere Drake, a wholly owned insurance company subsidiary approved by the Department of Trade.Sphere Drake
then sought its own reinsurance programme for liabilities which it had assumed for the syndicate and paid further money to other Howden insurance interests including the companies secretly controlled by directors.LloydÆs initially argued that its jurisdiction was limited
. It had no power to intervene in the non-LloydÆs subsidiaries of major broking groups, although the group may have had extensive LloydÆs of London underwriting and broking interests in other companies which are their subsidiaries.The
argument ignored the fact that directors of the holding companies with underwriting interests - both LloydÆs and conventional insurance companies - are usually underwriting members of LloydÆs.LloydÆs also argued
that it is the responsibility of the active LloydÆs underwriter, accepting business for the syndicate, to establish that whatever reinsurance business arranged by him is placed with good security.Again
this argument ignores the changing structure of world reinsurance markets. Almost no insurer can identify with any degree of confidence where business he has underwritten has ultimately been reinsured.The
brokers, realising the potential of the growing volume of reinsurance business, have developed a range of revenue-earning devices within their own groups so that they can retain as much of the premium as possible.As the
schemes have become more complicated the reinsurance risks have become more widely spread both among insurance groups controlled by the brokers and other independent reinsurers.In a market such as this the
underwriter is at the mercy of the broker, relying on accurate and precise information about where the reinsurance programme is arranged. If the information is withheld the reinsurance programme and the interests of an underwriter could be vulnerable, particularly if his business has not been placed with companies offering first-class security.LloydÆs has no system
for requiring that brokers and underwriters disclose the companies with which reinsurance business is arranged or the material beneficial holdings of those groups.Moreover,
LloydÆs appears to have no satisfactory monitoring system to check on the amount of inter-company trading which is carried out by the insurance brokers.The
market appears to take at face value an audit approved by recognised LloydÆs auditors. If alleged irregularities arise in any audit LloydÆs has said that the matter is one for the professional accounting bodies to consider rather than the LloydÆs market.15 Sep 82
The Committee of LloydÆs forms a special Committee, headed by Mr B J Brennan, Senior Deputy Chairman, to undertake responsibility for the scope and conduct of the Alexander Howden inquiry.
17 Sep 82
Mr J Bogardus, President of Alexander & Alexander Services Inc. advises LloydÆs of irregularities within Alexander Howden Underwriting Ltd.
20 Sep 82
The Secretary of State for Trade, Lord Cockfield, announces that he proposes to mount an investigation into the affairs of Alexander Howden Group Plc.
20 Sep 82
Alexander Howden Underwriting Ltd terminates I R PosgateÆs employment. I R Posgate suspended as Syndicate Underwriter.
21 Sep 82
Alexander Howden Underwriting Ltd appoint A J Archer, Underwriter of the Howden Marine Syndicate 868/35, as Underwriter to the Posgate Syndicates.
23 Sep 82
Financial Times
: Self-regulation at LloydÆsLLOYDÆS OF London will
never be quite the same again after the shocks of the Alexander Howden affair. Other financial markets have their problems from time to time, but they have rarely penetrated as this so deeply scandal has. Not only are the amounts of money extremely large - Alexander and Alexander has alleged that as much as $55m may have been misappropriated over a period of years - but one of the leading firms of Lloyd s brokers is involved, and in suspending Mr Ian Posgate, LloydÆs has taken severe disciplinary action against one of the members of its own ruling committee.Another strange aspect is that
several of the key figures involved took a leading part in the presentation of evidence last year to a Parliamentary Committee, during the process of enactment of new legislation to reinforce the self-regulatory powers of LloydÆs. A matter central to that debate was whether brokers should any longer be allowed to control the management of underwriting Syndicates to which they bring business, or whether the conflicts of interest were too serious.In the event it was decided that these
functions must be separated. That decision is clearly justified by recent events. Even so, it is bound to rankle in political circles that such prominent figures in the parliamentary proceedings should now be the subject of serious allegations involving precisely the misuse of underwritersÆ funds over which they had control.Concern
There must also be
concern over the manner in which the problems of Howden have come to light. It wound appear that the controversial practices at Howden are nothing new, but have been in progress for some years - since 1975, according to the allegations by Alexander and Alexander.The
facts have only come to light now because ownership passed early this year to the American group, which sent in reporting accountants.Lloyd s has a long and proud history, and is
continuing to deliver good returns to its underwriting members. Even the alleged victims of this affair, the members of the Howden-managed underwriting syndicates have never had cause for complaint about their profits. Yet with this scandal coming after a series of other smaller ones in the past few years, LloydÆs is looking not so much accident prone as chronically under-regulated.So long as LloydÆs was a
domestic market, in terms of membership, this was less obvious . But it first began to recruit foreign underwriting members, and then permitted overseas ownership of brokers. The clash of style between the LloydÆs establishment and the Americans accustomed to a quite different climate of regulation and disclosure is now glaring.Reinforced
The
conclusion must he not that self-regulation is inappropriate but that it is a much more demanding system that LloydÆs appears to have recognised. The contrast with the Stock Exchange is an interesting one.Members of the
Stock Exchange wrestle uneasily with a heavyweight rule book, and with an elaborate administrative and disciplinary apparatus which has recently been reinforced by the introduction of an investigator, with powers to inspect member firmsÆ books. It would he better if all this were not necessary. But the reputation of the Stock Exchange is, if anything, rising while that of LloydÆs declines.The
Stock Exchange has had its own scandals to cope with, and sometimes it has also taken year to uncover irregular practices. But the sums involved have never amounted to anything like the amounts now mentioned in connection with Howden, and the Stock Exchange has not usually had to rely on others to carry out its investigations for it, at any rate in connection with irregularities involving its own members.What the experience of LloydÆs show is that an
approach which may have worked well in the past may no longer be appropriate when a market become larger and takes on an international character. In those circumstances the market must either take shelter beneath an umbrella of statutory controls or, as we would prefer, face up to the problems and costs of a much more sophisticated structure of self-regulation.24 Sep 82
Financial Times
: The shadow of Howden"I AM
absolutely utterly amazed and dumbfounded that these allegations have been made," remarked Mr. David Coleridge, head of a leading underwriting agency group within the City of LondonÆs most famous commercial club, LloydÆs, the insurance market.His
reaction is typical of the many working LloydÆs professionals who are watching with alarm the mounting controversy at Alexander Howden Group - already the biggest crisis that LloydÆs has faced in modern times.This week the
institution was shocked to its very foundations when Mr. Ian Posgate, the flamboyant 50-year-old star underwriter of Alexander Howden Group and a leading figure in the LloydÆs market, was sacked by HowdenÆs American owner, Alexander & Alexander Services, as the U.S. group made public a series of dramatic allegations.Unlike any of the other recent troubles at LloydÆs over the last few years, the
Howden affair involves some of the largest groups and units within LloydÆs. Around one in five of the 21,000 members, the individuals who pledge their wealth to allow LloydÆs to function, are affected by the suspension of Mr. Posgate from underwriting and his dismissal from Howden.Mr.
Posgate, who was earning around ú323,000 a year in LloydÆs, observed this Wednesday. two days after his dismissal: "This is the dirtiest fight I have ever been in." He is determined to prove his innocence.The events leading up to this weekÆs disclosures can be
traced back to March. Then, Alexander and Alexander Services, the worldÆs second largest insurance broker, completed a ú150m take-over of Alexander Howden Group, a leading British insurance broker whose extensive LloydÆs of London interests include the management of the largest LloydÆs underwriting syndicates.Alexander & Alexander found that
four former executives of Alexander Howden Group had secretly controlled overseas companies with which Howden, acting as a broker, had placed large lines of insurance business. It named the four as Mr. Kenneth Grob, the former chairman, Mr. Allan Page, Mr. Ronald Comery and Mr. Jack Carpenter. The U.S. group attempted to recover assets from the directors but failed to do so to its satisfaction as some of the assets due to be transferred under an agreement were not received and those obtained were of less value than had been anticipated.Early in September, the U.S. group had to report that there was a
shortfall in assets of up to $25m.Alexander & AlexanderÆs allegations were contained in a document filed with the Securities and Exchange Commission under U S. law. They are as follows. Through a series of
Liechtenstein trusts and Panamanian corporations, Mr. Grob, Mr. Comery, Mr. Carpenter and Mr. Page controlled a firm called Southern International Re Company S.A. in a Panama which, according to the SEC filing, was not licensed to engage in the reinsurance business, that is to say as an insurer of another insurance group.The Americans also alleged that the four
owned Southern Reinsurance AG, a Liechtenstein company engaged in the insurance business. The four, along with Mr. Posgate - it is alleged also owned interests in New Southern Re Company S.A., another Panamanian company.According to the document,
funds totalling about $55m from as early as 1975 were channelled from Howden insurance companies and its managed underwriting syndicates at LloydÆs, where Mr. Posgate was the underwriter, to Southern Reinsurance in Liechtenstein, and Southern International in Panama. The funds included payments "purporting to be insurance and reinsurance premiums."Southern International
in Panama is alleged to have paid about $7m to New Southern Re. "The monies taken in by these entities, "say the Americans," were used in part for the personal benefit of the four individuals and Mr. Posgate. The benefits included works of art received by Mr. Posgate."LloydÆs took action and
suspended Mr. Posgate from all underwriting within the market as the allegations became public while Mr. Bogardus and Alexander & Alexander dismissed him from the group."I am
totally innocent. I have been stabbed in the back." said Mr. Posgate after the surprise rush of events and he intends to defend the legal action in the UK with his own legal counter moves.The
controversy involves one of the top five producers of insurance business for the LloydÆs market, Alexander & Alexander. And syndicates within Howden - the largest in LloydÆs - which have a total underwriting capacity of around ú11.7m have stopped accepting insurance business temporary until the Howden management sorts out the problems in the wake of Mr. PosgateÆs departure.Ian
Posgate has always been treated by the LloydÆs establishment as an outsider (he was once told "Ian you are not a LloydÆs man" by an underwriter) but even his detractors admit that he {has been a brilliant marine underwriter, consistently producing some of the best returns for the 3,800 members of LloydÆs for whom he acts. His methods are rough, tough and abrasiveIn LloydÆs, which has a market share of around
20 per cent of the worldÆs shipping insurance business Mr. Posgate has in the past infuriated the conservative members of the market, by consistently under-cutting insurance premium rates which have been established through market agreements.Not only has he
annoyed the establishment by regularly busting the cartel system in the marine market but he has brought down its wrath through over-trading. Each LloydÆs syndicate - the units into which all LloydÆs members are grouped - is supposed to accept business in relation to the amount of funds which are backing the syndicateÆs operation. Mr. Posgate has gone beyond those limits too often for the liking of the LloydÆs authoritiesIn the
late 1960s when he was an independent underwriter, he fell foul of the LloydÆs establishment - the ruling committee - which were tired of the way he seemed to be cocking a proverbial snook at LloydÆs procedures and insisted that he found someone to manage his business.He turned to
Alexander Howden Group which took over his business and allowed him to underwrite for its LloydÆs interests. HowdenÆs fortunes improved enormously. Howden was a group which had bee n largely built up by Mr. Kenneth Grob, 61.Together Howden and Mr. Posgate's syndicates thrived.
Howden developed extensive reinsurance activities, offering schemes to insure other insurers. It owned its own insurance companies in Bermuda, the U.S., Canada, and the UK.Mr.
PosgateÆs underwriting philosophy was simple. He abhorred LloydÆs move towards more and more reinsurance activity - insuring other insureds now (own) accounts for around two thirds of LloydÆs ú2-8bn of business. He regarded it as nothing more than a banking operation. He wanted to, and did, compete aggressively with the large insurance companies and other LloydÆs underwriters, directly for huge insurance risks in turn he laid off as much of his own insurance risks which he was accepting as he could with the reinsurance market outside LloydÆs,Howden
provided a useful reinsurance umbrella. Howden reinsured a large part of PosgateÆs business with its own insurance companies, earning enormous revenues for its own account,The availability of i
n-house reinsurance protection allowed Mr. Posgate to compete aggressively for business, while the availability of Mr. PosgateÆs lines of reinsurance business allowed Howden to report ever increasing revenues. Between 1969 and 1977 Howden showed an average annual compound rate of growth in pre-tax profits of 40 per cent per annum. At the time of the take-over by Alexander and Alexander, Howden group pre-tax profits totalled ú20m .However, as Mr. Posgate became more successful in LloydÆs, so his limited popularity declined. He
annoyed LloydÆs and Howden last year when he appeared before Parliament arguing that Parliament should insist that brokers should sell off their shareholding links with underwriting syndicates at LloydÆs because of conflicts of interests. Parliament agreed with Mr. Posgate. And he annoyed the establishment again when he was elected to a seat on the LloydÆs committee.For much of the time he has been on the LloydÆs committee he has had to absent himself from the committee room after the opening formal observance. This is because Howden has loomed large on the agenda.
The latest Howden affair has come at a bad time for LloydÆs. It has just gained its new Act of Parliament for improving self-regulation in the market, its first major reform in over 100 yearsà Sir Peter Green, LloydÆs chairman and the rest of the committee, will
not see the new legislative powers working until later this year once a new LloydÆs council is formed.Even then,
LloydÆs has been concerned that the market should not become over-regulated. "LloydÆs is about making lots and lots of money and no body wants to interfere with that," remarked one senior committee member some time ago observing the passage of the LloydÆs legislation.LloydÆs
envisaged the creation of a rule-book which would act as a deterrent - requiring little day-to-day implementation. The Howden affair has changed all that. As one leading broker said this week: "For years outsiders have been criticising us, and we have resented it. Something like the Howden affair shows that they were right. We will have to do something."24 Sep 82
Financial Times
: How reinsurance worksAn insurer seeking to cover (lay off) a possible claim tries to spread the risk. He approaches reinsurers. They negotiate a possible contract. Usually an insurer agrees to shoulder part of the risk up to a certain level of claims. The reinsurer - or reinsurers agree to take slices of the rest of the risk which the insurer does not wish to retain. Reinsurers in turn insure themselves with other reinsurers and the risk is spread throughout the world in a
complex and colossal daisy chain.Reinsurers make their money through premiums paid across to them by the insurer. In many cases in
broking companies, the insurers and the reinsurers are part of the same group. If brokers trade with their own companies they can earn commission many times over by threading the business through several different wholly-owned insurance subsidiaries. In this way they can strip commission out of the premium. The problems only begin if the insurance claims are large.It has become a
$40bn plus industry in terms of annual premiums, attracting a wide range of operators, from the highly respectable reinsurance companies, which are soundly based,. to the many sharks who have been drawn to the $40bn money bait.There is
little regulation of the worldÆs reinsurance industry: regulatory authorities take the view that it is important not to regulate the market too closely otherwise available reinsurance for insurance groups might dry up and in a high risk business it is also essential for reinsurance to be arranged swiftly. The authorities adopt the view that since it is a market where professionals trade with professionals, there is no "man in the street" involvement which would call for a protective attitude.In the wake of the Howden affair, reinsurers are worried that regulators around the world will now take a much more serious interest.
24 Sep 82
WIR
: Asbestos: US Government refutes liability. Manville bankruptcy details.Sep 82
The
Higgins Working Party set up on 17 March 1982 to enquire into all aspects of the Underwriting Agency System at LloydÆs and to make recommendations to the Committee and Council publishes the Working PartyÆs Consultative Paper on Ownership and Control of Underwriting Agencies.Analysis of Agencies as at September 1982
1) |
Total Number of Underwriting Agents in Market divided into |
|||
(i) |
Number of pure Managing Agents |
35 |
(11%) |
|
(ii) |
Number of pure MembersÆ Agents |
105 |
(35%) |
|
(iii) |
Number of Managing/MembersÆ Agents |
163 |
(54%) |
2)
Total Number of Managing Agents identified as having a Divestment problem
divided into:- |
||||
(i) |
Number of pure Managing Agents |
19 |
(17%) |
|
(ii) |
Number of Managing/MembersÆ Agents |
95 |
(83%) |
|
3) |
Syndicates:- |
|||
Total Number of Syndicates in LloydÆs Market |
431 |
|||
Number of Syndicates managed by the 114 Agents |
308 |
(71%) |
Sep 82
The Chairman of LloydÆs, Peter Green, accompanied by Mrs Liliana Archibald, LloydÆs Internal Affairs Adviser, attended a meeting at the US Department of Commerce in Washington where they met with Lionel Olner, Under Secretary for International Trade Administration, and Brant W Free, Acting Director, Office of Service Industries, for a discussion on LloydÆs expectations relating to the then forthcoming GATT Ministerial Meeting. Particular reference was made during the discussion to progress by the GATT Secretariat in relation to liberalisation of trade and services.
28 Sep 82
Financial Times
: Pledge of no æabnormal lossesÆ at HowdenMR JOHN BOGARDUS, chairman of Alexander & Alexander Services of the U.S., one of the largest insurance brokers,
gave assurances in London last night that the 3,800 LloydÆs members of underwriting syndicates managed by Alexander Howden Group will not face "abnormal losses."He met about
100 representatives s of underwriting agents who have introduced wealthy individuals to HowdenÆs syndicates, whose star underwriter, Mr. Ian Posgate, has been sacked from the group.Against a
background of mounting concern among hundreds of underwriting members, who are fearful that their financial interests might not be fully protected, the underwriting agents were summoned to the offices of Alexander Howden Group by HowdenÆs U.S. owners.The
members feared that funds owed to their underwriting syndicates - the units into which members are grouped by Howden for trading purposesù - will not be paid to the syndicates from HowdenÆs insurance companies.Howden
, acting as a broker, had arranged extensive reinsurance cover for the syndicates with its own insurance companies and with companies secretly controlled by former executives - Mr. Kenneth Grob the former chairman, Mr. Allan Page, Mr. Ronald Comery, Mr. Jack Carpenter and Mr. Posgate.Alexander & Alexander
has alleged that $55m (ú32.35m) have been misappropriated by the five former executives over a period of up to seven years. It is suing the former executives.Mr.
Bogardus has written to the chairman of the British Insurance BrokersÆ Association to "re-affirm that Alexander & Alexander will stand behind the financial integrity of Sphere Drake and the other UK-based Howden insurance and insurance-broking companies."Sphere Drake
has a deficiency of up to $25m, the liabilities of the secretly-controlled companies, based in Panama, having been transferred to Sphere Drake after the discovery of the alleged irregularities.In
addition Alexander and Alexander have injected $10m into Sphere Drake so that it can accept more business.As the
crisis simmered at LloydÆs, the Association of External Members of LloydÆs, which has Lady Middleton in the chair, and represents about 500 members, said that it was prepared to establish a "defence committee" of external members of LloydÆs for members of the Howden syndicates, "if a sufficient number of those members request the association to do so."29 Sep 82
Daily Telegraph
: Alexander calms LloydÆs syndicateFACED with the prospect of litigation and defection by members of its LloydÆs syndicates, Alexander and Alexander, the giant United States insurance broker attempted last night to provide reassurance that members interests would be safeguarded.
With ever-widening ripples spreading from AlexanderÆs acquisition of Alexander Howden, and subsequent legal action against former directors, the members in the Howden syndicates have been growing increasingly worried.
John Bogardus, chairman of Alexander, told the membersÆ agents that all the reinsurances have now been made valid. The polices in the Howden subsidiary,
Sphere Drake, have been made safer by the injection of Alexander capital.And
the reinsurance placed with Panamanian companies privately owned by former Howden directors have been replaced by polices with in-house reinsurance companies.Michael Glover
, chairman of Howden, said last night that none of the changes, litigation or investigation of alleged misconduct by the former directors, will affect members.Last week Alexander sacked the controversial but profitable underwriter Ian Posgate, causing further alarm among members.. Some 400 of them had threatened to resign even before Mr PosgateÆs departure.
The problems at Howden have centred on Sphere Drake and its reinsurance but Mr Bogardus said: "
All valid claims will be paid." He has also written to the British Insurance BrokersÆ Association to confirm that Alexander will stand behind the financial integrity of Sphere Drake and other United Kingdom based Howden insurance and insurance broking companies."One group of members had hired solicitors
Elborne Mitchell to ensure the would not suffer. Mr Glover said that any recoveries from the former directors - Alexander is claiming $29 million would go to the group.30 Sep 82
Alexander Howden appoint M J Harris, Underwriter of the Howden Non-Marine Syndicate 947, as Underwriter of Non-Marine Syndicate 126.
1 Oct 82
Financial Times
: A & A moves to reassure Howden membersALEXANDER & ALEXANDER
Services of the U.S., one of the world s biggest insurance brokers, has taken further steps to reassure the 3,800 LloydÆs members of underwriting syndicates under the management of the Alexander Howden Group.Alexander and Alexander has confirmed that
Howden insurance company Sphere Drake, which has taken over all reinsurance risks carried by the secretly controlled companies will meet all valid claims.Underwriting members of the
affected syndicates have also been told that they could receive a profit representing 10 per cent of premiums accepted in business.Alexander has also
accepted a proposal which allows underwriting agents who have introduced members to Howden syndicates to work with the management team. The agents say they are seeking to protect the interests of their members.The move follows
growing alarm among underwriting members who fear that they face large losses. Alexander and Alexander recently alleged that $55 million had been diverted by five former executives of Alexander Howden out of Howden-owned concerns to companies secretly controlled by the executives.Underwriting syndicate members are disturbed, however, about the
pay-out promise. They are worried that a conflict of interest exists in the relationship between Alexander & Alexander and the financial position of the syndicates.Sphere Drake
already faces a deficiency of up to $25m following its assumption of business transacted with the secretly controlled companies.The members through their lawyers
Elborne Mitchell, are seeking some way of making an independent assessment of the validity of insurance claims against Sphere Drake.Alexander Howden is to
merge syndicate 127 and the Howden syndicate 868/35 from 1 January 1993. Mr. A J Archer and Mr. M J Harris have taken over the underwriting formerly carried out by Mr. Posgate.1 Oct 82
Daily Telegraph
: Howden forms protection groupFaced with the threat of legal action by members of its LloydÆs syndicates Alexander Howden Underwriting has invited
David Coleridge, chairman of LloydÆs Underwriting Agents Association, to form a five-strong committee to protect membersÆ interests.Several hundred " names "
were preparing an injunction against Alexander Howden Group and Alexander and Alexander Services, the United States company which bought it at the start of this year. They were concerned that recoveries by AlexanderÆs legal actions might not be fairly apportioned.The legal battle was started by AlexanderÆs allegations that
five former directors of Howden drained ú32 million into privately held companies. It has asked for $29 million to be returned and solicitor Stephen Mitchell, representing the " names," wants some to go to the " names."Documents filed with the courts in connection with the lawsuits started by Alexander spell out the
details of the ú32 million the former directors are alleged to have received in illicit benefits, including a long list of works of art.In addition, to underwriter
Ian PosgateÆs much -publicised Pissarro, which was bought for $99,000, the list includes a ú58.000 Picasso (at cost), a ú86,000 Henry Moore, a $242,000 Monet, and a $29,000 Fantin Latour. There were also three Boudins costing $170,000, a Gaugin for FF520.000, a $300,000 Monet, and an Odilon Redon for ú25.000.The directorsÆ documents put the
current value of the art collection, at over $2 million. Under are agreement on Aug 14, five men (not including Mr Posgate) were to hand over $29 million worth of assets in return for AlexanderÆs undertaking to retrain from any civil action and to protect their pensions.The rest of the assets to be surrendered included
$15 million of shares and cash held at the Banque du Rhone et de la Tamise, which the men controlled. They were also to pledge Banque shares as security for $7.5 million, Mr GrobÆs Cote dÆAzur villa was valued at $3.1 million and the other art, villa contents, cash and shares made up the balance.But the
deal collapsed. The villa was revalued at $2.5 million and it was found that the sale would be taxed. Some pictures were not handed over and are said to be worth only $1.5 million.7 Oct 82
PATEMAN RUN-OFF CONTRACT WRITTEN (661 33.33%).
Unlimited run-off reinsurance xs $12,000,000 placed for R M Pateman, Underwriter of Marine Syndicate 406 Incidental Non-Marine Syndicate 679 managed by Willis, Faber & Dumas Agencies to incept at 1 January 1982 covering 1974 and prior years.9 Oct 82
LloydÆs List
: Manville used two claim assessments.9 Oct 82
Times
: LloydÆs trims Howden inquiryLloydÆs of London has
appointed a subcommittee to deal with all matters related to the Howden affair, consisting of all the members of the Committee of LloydÆs other than Mr Ian Posgate, the figure at the centre of the Howden storm.The notice posted in LloydÆs yesterday said: "
the subcommittee shall have delegated to it all the powers of the committee to receive all papers, take all decisions, and to take all such steps as are necessary in relation to matters directly or indirectly arising from, or in any way connected with the present inquiries into the Alexander Howden Group and Posgate and Denby (Agencies)". The subcommittee will report to the committee of LloydÆs.This move makes formal what has been happening in practice since Mr Posgate was suspended from duties and finally dismissed as underwriter of HowdenÆs syndicates 126 and 127.
He has been
required to absent himself from most of LloydÆs committee meetings, much of which have been involved in discussing the Howden affair.Mr Posgate and four former directors of Alexander Howden are
being sued for ú32m by Alexander and Alexander, now the owners of Alexander Howden. It is alleged that the five directors misappropriated ú55m channelling it into Liechtenstein trusts controlled by them and used for their personal benefit.Mr Posgate is expected to announce next Tuesday details of a counter-claim for damages and wrongful dismissal.
The four other directors Mr
Kenneth Grob, Mr Ronald Comery, Mr Allan Page and Mr Jack Carpenter, are expected to launch a joint counter-claim for damages.The committee of LloydÆs has no powers to sack Mr Posgate as a committee member
.YesterdayÆs formation of a sub-committee was made with Mr PosgateÆs agreement. "
It was a silly situation and it is only proper that I should be excluded from debate on these matters."Oct 82
In the USA, the
State of New York promulgated a new Regulation in October, known as Regulation No. 98. A second amendment to Regulation 20, which governs credit for reinsurance with unauthorised reinsurers, such as LloydÆs underwriters, was also promulgated to conform to the requirements of Regulation No. 98.Oct 82
The practical implications of Regulation 98 are the
responsibility of reinsurance intermediaries. These include LloydÆs brokers placing outward reinsurance business on behalf of New York licensed insurers with or without the involvement of a New York intermediary. A public hearing was held in New York prior to the promulgation of Regulation 98 and the second amendment to Regulation 20 at which representations were made in an effort to minimise the impact on the LloydÆs Market.13 Oct 82
Daily Telegraph
: Six more fight LloydÆs electionThe
Association of External Members of LloydÆs, one of the two associations representing underwriting members, is putting forward six official candidates for election to the ruling committee of LloydÆs. In all there are some 83 candidates, including eight backed by the rival Association of Members of LloydÆs, fighting for the eight vacant places on the committee.In fact, the two associations, who are now in discussions about as possible merger which could lead to action early next year, have one candidate in common, Stewart Cohen, a director of James Scott Engineering.
The list of candidates for the Association of External Members also includes
Lady Middleton, chairman of the Association until the-end-of last month, and deputy chairman Anthony Michley.The other nominations are Naim Dangoor, Donald Gay and Dr John Maxwell.
14 Oct 82
A stop loss $1,500,000 xs $1,000,000 reinsurance placed
for Andrew Weir Insurance Company to incept at 1 January 1982 covering 1965 and prior years. Outhwaite Non-Marine Syndicate 317/661 wrote 25%.14 Oct 82
A stop loss $5,000,000 xs $5,000,000 reinsurance placed
for Andrew Weir Insurance Company to incept at 1 January 1982 covering 1972 and prior years. Outhwaite Non-Marine Syndicate 317/661 wrote 25%.15 Oct 82
An Unlimited run-off reinsurance xs $3,000,000 placed
for F J Simmonds, Underwriter of Non-Marine Syndicate 469 managed by Philip N Christie to incept at 1 July 1982 covering 1978 and prior years. Outhwaite wrote 50%.15 Oct 82
Daily Telegraph
: LloydÆs stands by suspension of æMr Gold fingerÆTHE ruling committee of LloydÆs of London yesterday firmly denied accusations by one of its members, the underwriter Mr Ian Posgate, known as "
Goldfinger" in the insurance market, that it had acted against the principles of natural justice in ordering his suspension from the market last month.Mr Posgate, 50, is
seeking a judicial review of the circumstances which led up to his suspension, and an injunction to reverse it.But a Lloyds spokesman stressed yesterday that the committee stood by its decision.
He said: "We have natural justice to thousands of LloydÆs names and their money to bear in mind. If we had not acted to suspend Mr Posgate when his name became involved in this, pending an accountantÆs report to establish what actually happened, we should not have been carrying out our own responsibilities.
Mr Posgate lost his
ú361,200-a-year job after allegations that he was involved in a scandal over alleged misuse of ú32 million, and is now suing his former employers, the American group Alexander and Alexander Services, and mounting a court challenge to the authority of the LloydÆs committee.Mr Posgate maintains he was unjustly deprived of his living and said: "the main point of this is to get me reinstated, since there was absolutely no justification for suspending me."
He added that lie had not taken part in any abuse of foods and "I will do anything necessary to get back to work."
Sham share sale
Much of his case over the LloydÆs action is also concerned with a vivid description in the complaint against Alexander and Alexander of the hoard meeting at which the American company sacked him with the help of an alleged "sham" share sale
Mr Posgate had been the chief underwriter for Alexander Howden Underwriting, part of a British insurance company taken over by the American group earlier this year.
The crucial hoard meeting, states Mr Posgate, took place on Sept. 20 when Mr John Bogardus, chairman of the American group, was made a director of the underwriting company.
While the meeting was in progress, a letter was received from Sir Peter Green, LloydÆs chairman, requiring the immediate removal of Mr Posgate from his underwriting duties.
The action against LloydÆs rests on the fact that the letter was sent to the Sept. 20 board meeting which resulted in his removal acted to deprive him of "
his ability to follow his trade." He had been given no advance warning of the LloydÆs action, nor any chance to defend himself against it.Oct 82
The Resolution Group set up, which inter alia involved two London Market representatives, to bring about agreement in regard to both asbestosis coverage issues and claims handling.
19 Oct 82
Daily Telegraph
: Moran loses court fight against LloydÆs rulingA
HGH COURT judge yesterday dismissed attempts by insurance broker Christopher Moran to set aside a LloydÆs arbitration decision that he had committed "acts and defaults discreditable to him in connection with the business of insurance."Mr
Justice Lloyd refused Mr Moran leave to appeal for action to set aside the decision or to prevent a general meeting of LloydÆs members scheduled for Oct. 27 which will consider whether to expel Mr Moran, and underwriter Edward Wilson, from membership.Summarising the LloydÆs case against Mr Moran, the judge described how the special umpire, Mr Andrew Leggatt QC, now Mr Justice Leggatt had found Mr
Moran guilty of discreditable conduct on four out of ten counts. These included taking profit commission on large reinsurance deals - $3.55 million of premiums in 1979 - above the agreed limit, concealing the extent of the deals with the auditors of Aviation Underwriting Syndicate 566 and exercising inadequate control over the operations.Mr
Justice Lloyd stressed that he was ruling only on points of law, not points of fact, but commented that, in instances such as the umpireÆs finding that Mr Moran had exceeded the agreed profit level " to my mind it almost certain that he (the umpire) reached the right conclusion". And, he added, there was "nothing whatever" in the contention that the umpireÆs findings should be set aside as being unfair or inconsistent.In the course of the judgment Mr Lloyd, who ordered Mr Moran to pay the costs of the hearing and refused leave to appeal, also described the practice of issuing "
tonner reinsurance", the deals which had been investigated and which have since been banned by LloydÆs, as "gambling, pure and simple."Despite being refused leave to appeal, Mr Moran may still take the case higher in order to have the decision set aside.
19 Oct 82
The Chairman of LloydÆs, Peter Green, issues a circular letter to the Posgate Syndicate Names giving some background details under an enclosed æsummary of eventsÆ and æthe actions taken by your CommitteeÆ.
Information to Lloyds
By the beginning of September it was clear that there was cause for concern that LloydÆs firms or persons might be involved in possible irregularities. The Committee decided to institute a formal investigation and instructed the firm of accountants Ernst & Whinney to undertake an inquiry into the situation to ascertain the involvement (i.e., LloydÆs broker, LloydÆs Underwriting Agency, syndicate or Member of LloydÆs) in these matters
On 15 September the Committee of LloydÆs formed a Committee headed by Mr. B J Brennan, Senior Deputy Chairman, to undertake responsibility for the scope and conduct of these inquiries.
Action by LloydÆs
All LloydÆs Underwriting Agents were sent a copy of document 8-K Since then, there has been widespread consultation with many of the principles involved. At the same time the Managing Agents concerned have endeavoured to keep their own Names and the Members Agents, on behalf of whose Names they write, informed as to the current situation.
Action by LloydÆsÆ Underwriting Agents
(d) The
Names at present on Syndicates 127 and 126 who wish to continue underwriting for 1983 on the successor syndicates are to be given the fullest information before they take a final decision, including profit forecasts based on the latest available figures".20 Oct 82
Daily Telegraph
: LloydÆs pact with HowdenAlexander Howden Underwriting
, the insurance company at the centre of the latest scandal to rock LloydÆs of London, has agreed a series of actions with the ruling committee of LloydÆs aimed at reassuring the members of the two syndicates most closely involved and helping the syndicates resume underwriting under specified limitations, "at the earliest date."The committee is also involved in "
urgent talks" with Posgate and Denby (Agencies) with the same aim.The agreement with Alexander Howden Underwriting, described in an
explanatory letter to all LloydÆs members yesterday, includes the appointment of new auditors to Syndicate 127, the largest syndicate within LloydÆs, and 126 " subject to discussion with their present auditors. Futcher Head and Gilberts are currently auditors to Syndicate 127.Names of both syndicates
are also to be given full information including profit forecasts based on the latest available figures, before making up their minds whether to continue underwriting for 1983 on successor syndicates.The statement stresses that "
the committee is particularly concerned to see that all necessary steps are being taken for the protection of names," repeating the assurance by HowdenÆs American parent Alexander and Alexander that claims on reinsurance placed by the two syndicates will be met.The final report on the affair will still be "some time" it says but "
The committee of LloydÆs wishes to make it clear that where misconduct is alleged , it will be vigorously investigated and where proved, punished."21 Oct 82
The Chairman of LloydÆs, Peter Green, issues a notice on the future of Syndicates 127 and 126, states how future signings are to be dealt with and, that all Agents, including AHUL, will be sending each Name a letter which will set out on a formal basis full and detailed information regarding the future operations of the syndicates.
21 Oct 82
LloydÆs agreed that underwriting could recommence for the 1983 account with M J Harris underwriter for Alexander Howden Non-Marine Syndicate 126, now renumbered 923.
22 Oct 82
Alexander Howden Underwriting Ltd
advise of the following appointments to the board of Alexander Syndicate Management Ltd.
Director |
Other Directorships |
C J M Hardie FCA |
Dep Chmn Monopolies & Mergers Commission |
B Blamey |
Chief Executive Edwards & Payne, a Sedgwick subsidiary. |
M Davies FCA |
Former Non-Exec director Fenchurch Insurance Holdings Ltd |
J Donner |
Former Chief Exec Fenchurch Insurance Holdings Ltd. Chmn Donner Underwriting Agencies Ltd |
D Tudor-Williams FCA |
AHUL Accountant |
A J Archer |
AHUL Underwriter |
M J Harris |
AHUL Underwriter |
82
The Reinsurance of Pagoda Indemnity Ltd by the Merrett syndicates
.The Personal Stop Loss Contract
Apart from the
Run-Off Contracts, there is a number of other contracts forming part of the "special situations" account which did not benefit from Syndicate 421 æs reinsurance programme. One of these was the aggregate personal stop loss reinsurance policy ("the Personal Stop Loss Contract") written for the 1982 year of account in respect of Pagoda Indemnity Limited ("Pagoda"), which was transferred by way of the RITC into the 1983 year of account. For the purpose of Table I, the Committee assumed that ú45,000 was paid in respect of the 1982 RITC (being the amount Syndicate 421 Names for 1982 originally received for writing the contract).Pagoda
, a company incorporated in Guernsey,. wrote the personal stop loss for Names whose membersÆ agency was Donner Underwriting Agencies Limited. The original limit for each Name was ú100,000 in the aggregate any one loss any one member in respect of the 1982 year of account, such amount to be excess of:Pagoda had a potential exposure of ú24.7 million (being the 247 policies issued at ú100,000 per policy
.Syndicates 417 and 421
underwrote an aggregate excess reinsurance treaty in respect of the 247 policies issued by Pagoda to cover all losses in excess of ú50,000 in the aggregate; the premium of ú225,000 being allocated 80% to 417 and 20% to 421. The syndicates had therefore accepted a total exposure of ú24.65 million (comprising the ú24.7 million less the ú50,000 excess) of which Syndicate 421Æs share was ú4.93 million. In order to protect Syndicates 417 and 421, joint reinsurance was purchased for ú1 million excess of ú1 million in the aggregate, ú3 million excess of ú2 million in the aggregate and ú5 million excess of ú10 million in the aggregate. The first layer was placed 83.33%, the second layer was placed 92.15% and the third layer was placed 100%; in other words, 16.67% of the first layer was uninsured and 7.85% of the second layer was uninsured. The aggregate reinsurance premium for the three layers was approximately ú105,000, of which some ú21,000 was applicable to Syndicate 421.Thirty seven Names insured by Pagoda were on Outhwaite Syndicate 317/661 which left its 1982 year of account open due, it is understood, largely to uncertainties in respect of run-off
contracts which it had written
. In addition, 196 Names insured by Pagoda, were on syndicates formerly managed by Posgate and Denby. Claims arising from these and other open syndicates caused Names to generate substantial claims on their personal stop loss policies and hence on the aggregate reinsurance cover issued by Syndicates 417 and 421. At 31 December 1990, claims on the Personal Stop Loss Contract were expected to exceed ú10 million of which Syndicate 421Æs share was ú2 million, the next ú5 million of claims being recoverable from reinsurers.Syndicate 421Æs net loss at 31 December 1990
, after taking credit for the specific reinsurancereferred to above, was
ú1,235,000 calculated as follows:
ú000Æs |
|
Initial retention of ú1,000,000 @ 20% |
200 |
"Retention" on 1st layer: ú1m @ 16.67% @ 20% |
33 |
"Retention" on 2nd layer: ú3m @ 7.85% @ 20% |
47 |
"Retention" between 2nd and 3rd layers: ú5m @ 20% |
1,000 |
1,280* |
|
Assumed reinsurance to close premium received by 1983 year of account |
( 45) |
Cumulative loss to 31 December 1990 |
1,235 |
* Being: |
|
Paid losses |
915 |
IBNR |
365 |
1,280 |
The
loss ratio for the Personal Stop Loss Contract at 31 December 1990 was 5,315%.25 Oct 82
The Times
: Disquiet over LloydÆsSir I read Lorna BourkeÆs interview with Sir Peter Green (October 12) with growing alarm
A great deal of public attention is at present focused on an institution which likes to think of itself as exemplary.
It seems shameful that the head of that institution, whenever interviewed, appears ignorant of the true facts or deliberately evasive.I am aware that the incidence of fraud within LloydÆs is rare, but the committee fails to impose any regulation on reinsurance a arrangements the deeply incestuous nature of LloydÆs will always be regarded with suspicion.
I also found Sir PeterÆs comments regarding placing the onus onto the customer, to establish an insurerÆs bona fides, remarkable. I consider that part of a brokerÆs moral duty is to ensure the financial stability of the insurers with whom he places business.
I should not like your readers to think that Sir PeterÆs complacent, indeed cavalier attitude in any way reflects the feelings of the majority of those engaged in the British insurance industry.
26 Oct 82
Daily Telegraph
: LloydÆs completes Howden hearingsThe ruling committee of LloydÆs will later today finish its hearings on the way
that Alexander Howden Group won the broking contract for insuring Qantas, the Australian National Airline.A
special working party set up by the Council issued a detailed report on the dispute, which arose when Bain Dawes who had held the Qantas business for over 30 years, complained that Howden had used unfair practice in securing the contract, completed its investigations into the allegations last August, but Howden requested a right to put its own case before a tribunal.The
Council is expected to issue its finding either today or tomorrow, the day which will also see the special general meeting of LloydÆs members to consider whether to expel broker Christopher Moran and underwriter Edward Reid Wilson from membership.26 Oct 82
Times
: Ex-Howden men seek arbitrationThe
four former directors of the Alexander Howden Group are trying to prevent Alexander & Alexander Services from starting its legal action against them over the alleged misappropriation of $55m (ú32m) through fraudulent reinsurance transactions.They are
pressing Alexander & Alexander, which acquired Howden for ú150m this year, to accept the arbitration clause in the secret agreement signed by the four and Mr John Bogardus, chairman of Alexander & Alexander, on August 14.Through their solicitors
Theodore Goddard, Mr Kenneth Grob, Mr Ronald Comery, Mr Allan Page and Mr Jack Carpenter have issued a summons to stay the writ issued by Alexander & Alexander on October 20.The four have
agreed to return certain assets with a total value of $29.14m on the understanding that no civil proceedings would then be taken against them. Alexander & Alexander has said that it went ahead with legal action after the agreement was breached.27 Oct 82
Extraordinary General Meeting of Members of LloydÆs
to vote on the position of Mr Christopher Moran and Mr Reid Wilson. Both Members had been found guilty by Arbitrators appointed under Section 20, LloydÆs Act 1871, of acts and defaults discreditable to them in connection with the business of insurance. In the case of Mr Moran, the voting was 1,708 for expulsion and 133 against. The required four-fifths majority being obtained he was expelled from the Society. In the case of Mr Reid Wilson 610 votes were cast in favour of expulsion and 957 against. The motion was, therefore, not carried by the required majority. Christopher Moran, the LloydÆs broker expelled by the Society, was the main broker of "
tonners"; officially known as Tonner & Value Policies, tonners were a popular form of laying off risk in the late 1970Æs until they were banned by LloydÆs. They were a form of gambling, used especially by Aviation underwriters, who would take out a policy which would respond if, let us say, the number of total losses for Western Airlines exceeded a certain figure. As there was no "interest" as such in the crashes, the policy would be stamped "Policy is Proof of Interests" (PPI).28 Oct 82
Daily Express
: LloydÆs blackballs millionaire brokerJET-SETTING LloydÆs insurance broker Christopher Moran
was yesterday expelled in an unprecedented move from the insurance m a r k e t where he made his fortune.The
ex-grammar school boy who became a millionaire in his early twenties, was blackballed in a membersÆ vote that brought business to a halt in the LloydÆs underwriting room.The vote was the first of its kind to be called in this insurance marketÆs 300-year history. It followed
three years of litigation which culminated in a LloydÆs arbitrator finding him guilty of "discreditable acts or defaults."Members voted 1,708 to 113 on his expulsion. In a subsequent ballot members
voted not to expel Mr Reid Wilson the underwriter for a syndicate once controlled by Mr. MoranÆs company.Last night, Mr.
Moran vowed that he would continue his fight to stay a LloydÆs member. "The decision was unfair and unjust ," he claimed.In another controversy last night, LloydÆs authorities decided to
ban top insurance broker Mr. Peter Brewis from the insurance market until the beginning of 1984.Mr
Brewis is chief executive of the aviation division of Alexander Howden, the British insurance broker now owned by the American Alexander and Alexander group.28 Oct 82
Daily Telegraph
: Decisive vote expels Moran from LloydÆsIN its first, and probably last, exercise of special powers under an
111-year old law, LloydÆs of London yesterday expelled insurance broker Christopher Moran from its membership after a general meeting held in the LloydÆs underwriting room,More than
1,800 members of the 21,000 entitled to attend, turned up at the meeting, which was held under conditions of strict security. In the final vote after the debate, which lasted over 1 hours, 92 p.c. of those present decided to exclude Mr Moran from membership. A majority of 80 p.c. is needed for expulsion.In a second meeting, following immediately on the Moran hearing, the votes on the issue of whether to expel underwriter Edward Reid Wilson were
58 p.c. in favour, meaning that Mr Wilson remains a member.In both cases Sir Peter Green opened the proceedings by pointing out that members were not being asked to decide on whether the two men had broken LloydÆs rules, since they had already been found guilty of "discreditable conduct" in relation to insurance business. The
question at issue was simply whether the offences merited expulsion.Both men, were then given the chance to put their own case, and questions and comments were invited from the meeting. In the case of Mr Moran, who later commented that the decision was "unjust and unfair" those who spoke for him were
mainly outside members, whilst several working members spoke for Mr Wilson.Amongst those speaking at the Wilson meeting were Nicholas Parker, a candidate for the pending LloydÆs Council elections, who pointed out that members had had very time to read the large number of papers giving the details of the disciplinary hearings and also protested over the fact that
abstentions were not to be allowed, but would be treated as votes in favour of Moran and Wilson.Another speaker at the Wilson hearing was
Richard Outhwaite, who stated that be would be voting against expulsion since, in this case, it was the only sanction available to members and was too severe for the offences.When the new
LloydÆs Bill came into effect, it would be possible to have more appropriate disciplinary measures.The Committee of LloydÆs also yesterday announced in separate proceedings that it had found
broker Peter Brewis guilty of "discreditable conduct " and suspended him as an annual Lloyd s subscriber for 14 months.The decision came after a lengthy inquiry into the way that the broking account
of Australian airline Quantas had been taken over from Bain Dawes.Mr Brewis, said the Council, had told Qantas that a
certain underwriter had agreed to lead on a policy for Qantas when "he knew, or ought to have known that such a statement was false."The Committee added that Bain Dawes had acted "with the utmost propriety at all times" in connection with the account.
28 Oct 82
Posgate syndicates to obtain an unlimited run-off reinsurance.
28 Oct 82
The Insurance Companies Act 1982
receives Royal assent.0 Nov 82
A LloydÆs public information film
made prior to November 1982 stated:Underwriting syndicates at LloydÆs have one of the strictest audits in the world. Stricter than the law demands. LloydÆs has three year accounting month by month which requires great attention to detail. Every entry in the books is examined and re-examined before the final audit. This is part of the chain of security which protects the insured.
0 Nov 82
In his recent address to the
National Conference of the American Management Association in Chicago, Mr Murray Lawrence, a Deputy Chairman of LloydÆs, looked to the future and the challenges to be facedWe are all probably only too well aware of the
problems besetting our industry and the questions on everyoneÆs lips are what will cause a change in the present malaise, when will it occur and what will the business look like afterwards?The
current problem of excessive capacity, particularly in reinsurance, high interest earnings, and flat economies round the world are well known. We can all dream up our own various scenarios that could contribute to a change in this state of affairs.But what will the world look like if and when the
market change comes about? I believe it may be very different in some respects from the world we knew in the 1960s and 1970s, and it will certainly offer new challenges to us all.The first point that needs making must be that we all hope that the turnaround, when it comes, will not be too violent or traumatic. If there were to be a
serious breakdown in the chain of risk takers leading from the primary insurer to the ultimate reinsurer, perhaps involving major insolvencies, not only would this cause serious problems for insurance buyers and brokers, but would almost certainly lead to the risk of governmental intervention and increased regulation of our business, which I believe would be extremely harmful to our industry. However, one has to wonder whether the current situation has not already become so serious that these dangers cannot be entirely avoided.In
1974/5 we saw the problems caused in the market-place when insurance company surpluses melted away under the joint attack of soaring loss ratios and tumbling stock markets. It is significant that the reduction in surplus due to the underwriting losses of the first two quarters of this year, in spite of record investment gains, is estimated at some $2.6 billion.With this
background one wonders how the industry will be able to finance its own growth at even the same rate as has been necessary in the last few years, let alone at the increased rate necessary if the economic upturn that we all hope for comes about. Here it is important to stress that LloydÆs requires a growth in capacity, measured in new Names joining the market or existing Names increasing their limits, and backed by up-front deposits in the form of liquid assets, which have been considerably increased in recent years. In addition, remember that at LloydÆs at each year end underwriting agents are required to revalue all of their qualifying assets, including government bonds. In contrast to the States, this revaluation has to be at market value and not amortised value. Any deficiencies calculated on that basis have to be made good.Then there will be a continuation of the various trends that are constantly affecting risk exposure which we are asked to solve. Since the end of the Second World War, we have seen a steady development of two main threads in this area. The
number of risks in any given industry have tended to reduce and the size of individual risks has tended to increase. Ever since management in industry began to appreciate the cost advantages of size, our book of business has become steadily more unbalanced and unpredictable.In risk management we have seen the same problems. When the factory mutuals began to put their ideas of loss prevention into effect, if you could solve a problem at one plant, you could, by and large, say you had solved the problem for all the plants in that industry. All this has changed as unit numbers decrease while rapidly increasing in size with less of a blanket answer in risk management and increasingly each risk having to be looked at as an individual problem.
We have also seen an enormous leap in technology with the insurance industry sometimes finding itself being used, wittingly or unwittingly, as the guarantor of performance of that technology.
Inflation over the last ten years at unprecedented levels has led to further problems of assessing insured values, particularly if the insurance policy is expected to respond on a replacement cost basis. Many of the problems of our industry are caused as much by too little attention being paid to values at risk as to inadequate rates .In the past, the
need to keep plants in full production has sometimes led to a dangerous rundown in safety standards, and our industry has always been faced with some assureds whose management feel unable to accept the recommendations designed to improve the risk and so reduce the possibility of loss because of costly implementation and unacceptable increases in the cost of production. Certainly these problems and others will continue to plague us in the future. But it would seem that this will be against a background of what appears to be an irreversible decline in the old manufacturing industries in many of the countries of the western world which have traditionally been responsible for producing the great proportion of global premium income. At the same time, new types of risk, new exposures - some totally unthought of ten years ago - will continue to appear. They will have little or no track record against which to assess their worth. New technology has already had a major impact on our way of life, probably to a far greater degree than many of us are aware, and this will continue unabated in the future. The world will be looking for insurers willing to take on these new and untried risks, and management in our industry will be faced with having to get back to basic underwriting skills again, instead of, as all too often has seemed the case in recent years, viewing themselves as managers of investment trusts.LloydÆs will have an important part to play in responding to these challenges. We have
traditionally been the marketplace that buyers have turned to, to help them with new or untried forms of insurance. Certainly we cannot ignore the earnings from invested funds any more than the next man, but as a market we continue to put the need to produce an underwriting profit as our main priority. Certainly our willingness to innovate is not always successful - baseball strike cover and computer leasing being two recent examples. However, I can say that our brush with computers has not left us with a silicon chip on our shoulders.Overall this a challenging prospect, but an exciting one. We are bound to see a
much closer liaison, through the broker, between the insured and insurer, and much closer links on the risk management side as well. Close attention will be paid to defining more clearly the role that is expected of each party in the insurance transaction. At the moment there is still too much duplication of effort which is not cost effective. There will be increased roles to be played, but with a clear definition of whose responsibility they are, and what is the price for them. LloydÆs is well positioned to meet the challenge. The market has grown up over the years with, on the whole, an efficient and economical way of sharing with the broker the cost of the services that the assured requires. One of the main pressures will be to take steps to see that the maximum possible amount of the premium is available to meet valid claims.There is, however, a
constant need to review procedures to ensure that they really are as streamlined as they can be. I believe with the new LloydÆs Act, with the current review of LloydÆs methods and procedures, and with LloydÆs continued ability and willingness to innovate, we shall be well placed to meet the challenges that lie ahead.A Russian economist, Nikolai Kondratieff, claimed in 1926 to have discovered a recurring pattern in the worldÆs economic activity. Business, he postulated, went in 50-year cycles, a phase of growth, increasing prosperity and rising prices followed by a similar period of decline, marked by lower inflation and falling interest rates. If true, LloydÆs in its time will have experienced a number of these cycles, emerging stronger at each turn.
Yet there is nothing inevitable about it and I am reminded of an item which appeared in a Chicago paper when a well-known local building was completed. Three people were asked about the life of the building - the architect thought it would last for 200 years, the structural engineer suggested 300 years and the owner replied, somewhat tersely "for as long as it pays".
But for LloydÆs and the insurance industry in general, there are
other considerations: security, flexibility and service are no less essential if Kondratieff is right and we are to survive intact into the 21st century.Another major problem
to be faced in the future is the whole question of tort reform, to overcome some of the glaring shortcomings in the present system. I hope that this can be successfully tackled in the United States before too many of the aberrations of the present system are imported into the legal processes of the countries of western Europe, thus necessitating the need to fight the reform battle all over again there.Why should the public be entirely relieved of the effects of their own negligence;
why should a manufacturer who produces a product with all due care and diligence, to all known safety standards, be held liable for damages because a few idiots misuse that product in a way that any normal child of ten could tell would cause injury. Why should the public be faced with paying the costs of courts where lawyers are in effect speculating on the back of the contingency fee system?Clearly, we are all agreed that the courts should be freely
accessible to anyone who has been wrongfully damaged, but by developing this unquestioned principle to the absurd lengths that it has been, there is a danger of getting to the point of working against the public interest, not for it. The natural corollary of the present system, if it were to go on unchecked, would be that research and development would be severely curtailed, new products that could benefit the community, reduce costs and save lives, might never reach the market. Put it another way, I wonder whether the world would have made the giant strides in technology and medicine over the last 100 years if it had been saddled with the tort system ruling today in the States.However, maybe there is already an undercurrent of reform.
To me, it will be surprising if the difficulties surrounding the settlement of asbestosis claims do not give rise to change. It is unacceptable that policyholders are kept waiting for their