1982

Jan 82

Journal of Products Liability: Article by Gerald Oshinsky Insurance coverage for asbestos tort liability litigation.

2 Jan 82

Peter Cameron-Webb retires from PCW.

Jan 82

Formal take-over of Alexander Howden Croup by Alexander & Alexander Inc.

8 Jan 82

Minutes of DirectorsĂ meeting of Pulbrook Underwriting Management Ltd 1979 Account Pulbrook Non-Marine Syndicate 90:-:

  1. The overall strain on old years of account during October amounted to ˙465,852 net after ˙530,753 in respect of asbestosis claims. The lower net overall figure stemmed from credit items received during the month;
  2. The aggregate strain for the ten months to October 1981 amounted to ˙1,042,071 (1980 - ˙711,950; 1979 - ˙940,612).
  3. Additional Asbestos claims totalling approximately US $4.5m were expected during the months of November and December 1981.
  4. The adjusted combined 1979 account incurred loss ratio at the end of the thirty-fourth month was 86.72%, an increase of 0.05% during the month;
  5. The 1980 account experienced a disappointing month in October with an increase in the incurred loss ratio of 3.24%. This was due more to an increase ion the numbers of losses rather than to any one exceptional loss;
  6. The 1981 account loss ratio was 9% better than in the corresponding period for the 1980 account. The expected additional asbestos claims totalling US $4.5m for December, was in addition to the US $1.3m increase for the month of October. The rate of claims reported had doubled to over US $2m per month.

8 Jan 82

LeBoeuf, Lamb, Leiby & MacRae, LloydĂs U.S. Counsel

telex to Paul Schooling, Deputy Secretary of the LloydĂs Non-Marine UnderwritersĂ Association (LUNMA), which states:- "Re Asbestos - Second Report

First: Our teamĂs continued inquiries have revealed general acceptance that asbestos related insurance and reinsurance issues are or at least will be in the near future major problems. Many major insurers, however, still proclaim that the problem is not theirs but Šother companiesĂ.

Second: Recent exposure of unreleased study of Labor Department with its conclusions paralleling Commercial UnionĂs strong warnings of 20,000 Asbestos-related deaths annually in late 80Ăs will undoubtedly increase awareness and possibly interest in confronting insurance impact. We are obtaining full copy of study and will transmit to you.

Third: Commercial Union has apparently accepted recent advice of Washington Counsel that Federal Asbestosis Fund or Bailout is not feasible at present time. Current emphasis by Commercial Union will turn to support of Tort reform in product liability field now identified with Sen. KastenĂs exposure draft previously sent to LloydĂs. We are close to, but not identified as special interest, this and other legislative efforts.

Fourth: Federal Consumer Product Safety Commission may soon propose creation of a ŠChronic Hazardous Advisory Panel on AsbestosisĂ in recognition of massive problems.

Fifth: Initial sentiment in Congress does no suggest that any Asbestosis Bills will move quickly.

Sixth: Our investigation is continuing with Broker and Company visits."

Regards,

Havens/Murphy/Greene

9 Jan 82

Winchester Bowring approached M J Meacock, Underwriter, of Non-Marine Syndicate 727 to participate on the unlimited run-off reinsurance of the Pulbrook Non-Marine Syndicate 90, that they were trying to place. M J Meacock considered the risk for about ten days and wrote a line in pencil on the placing slip on 19 January Šsubject to acceptanceĂ.

11 Jan 82

Meeting of the Asbestos Working Party. Notes of comments made:-(The notes of comments made at a meeting of the AWP recorded that no one knows what the real reserve situation is).

C H A Skey:

"The information is thus based in the complete Š....Ă and data available. This is only on direct business - no-one can forecast cash flow or when policy payments incept".

W W Maitland:

"We have to educate. Underwriters will not know how to read the reports and advise - interpretation - we have a duty here in the area which falls outside the information produced by the computer".

D P Tayler:

"Some reports are self-explanatory. They point out that (the position) is getting worse plus escalating legal fees".

W W Maitland:

"Reports do not adequately suggest the action underwriters should take .... future reserving. Marine underwriters have asked how do we assess their closing of accounts".

D P Tayler:

"I agree we should be guiding but the reports are quite good and must be left to individual underwriters. No-one knows what real reserve situation ".

W W Maitland:

"What is LUNCO to do? Should it have any duty here to warn that in future - would be an exposure."

12 Jan 82

Charles W Havens 111 of LeBoeuf, Lamb, Leiby & MacRae, LloydĂs U.S. Counsel, letter to Paul Schooling, Deputy Secretary of the LloydĂs Non-Marine UnderwritersĂ Association (LUNMA), stating:-

In accordance with my telex of 8 January 1981, enclosed please find two copies of the study entitled ŠDisability Compensation for Asbestos-related Diseases in the United StatesĂ, for your use and for forwarding to Mr Don Tayler. [The 650 page report for the period October 1978 to June 1981 was published in June 1981, the final report of 691 pages for the period October 1978 to June 1982 was published in June 1982].

Asbestos-Associated Diseases:

  1. Asbestos is a virtually indestructible fibre which, when inhaled into the lungs, tends to persist indefinitely. The major health effects now linked to asbestos exposure include asbestosis, a chronic lung disease, and various types of cancer. Once established, asbestos disease may progress even after exposure is terminated and no specific treatment exists. The latency period before initial clinical problems averages 10 - 20 years.

The two major asbestos-related cancers are lung cancer and mesothelioma. Lung cancer resulting from asbestos exposure has a latency period of 15 to 40 or more years and may result from relatively low-dose exposure. Mesothelioma is an otherwise rare form of cancer of the lining of the lung and abdominal cavity and has no known cause other than exposure to asbestos. In many cases, it appears that very little asbestos can produce the disease. Asbestos exposure is also associated with increased risk of cancer of the oesophagus, larynx, oropharynx, stomach, colon, rectum and with kidney cancer.

Population at Risk of Asbestos-related Disease

  1. Estimates of dose-response relationships and mortality and morbidity projections from exposure to asbestos are primarily derived from studies of workers occupationally exposed to asbestos. We estimate that there are presently more than nine million American workers, survivors of over thirteen million workers in primary and secondary manufacturing industries, shipyards, construction work and a number of other industries and occupations who, in the past forty years, were significantly exposed to asbestos. Among those workers, we estimate that 8,500 to 12,000 excess deaths from asbestos-associated cancer will occur for each of the next twenty years, aggregating over 200,000 deaths by the end of the century, due to asbestos exposure from the 1940Ăs to the present. Still other cancer deaths will occur from family contacts of asbestos workers and as a result of exposure in consumer use of asbestos products, from environmental exposure, and from exposure in the armed forces. They have not been included in these projections nor have anticipated deaths of asbestosis. Due to the long period during which asbestos ingestion remains latent before symptoms are detected, the Report states that

(5) asbestos exposures beginning in the 1960Ăs/1970Ăs will be reflected in diseases associated with asbestos first becoming apparent in the decades from 1980 through to 2010. The industries manufacturing and using asbestos expanded massively during the late 1950Ăs, 1960Ăs and through to the 1970Ăs.

Outcome of workersĂ compensation claims

  1. The Report states that nearly all the survivors of asbestos insulators who filed workerĂs compensation death claims ultimately received benefits.

Product liability lawsuits

(10) The Report concludes that the majority of product liability law suits commenced by third parties most commonly ended in out of court settlements. Settlements for deaths occurring from 1967 to 1976 ranged from $1,000 to $300,000 with an average settlement of $72,000. The average legal fee in these settlements was $28,500; the average ratio of legal costs to total recovery was 37%.

Asbestos-associated disease Asbestosis

  1. The Report states that in one prospective study of 17,800 asbestos insulation workers , asbestosis was the cause of death in approximately 7%. In contrast, in the same group, 20% died of lung cancer.

Asbestos disease of recent concern

(29) Starting in 1964 there has been extension of concerns about disease hazards associated with asbestos exposure, in that there has been increasing attention to risks among individuals not classified as asbestos workers (mining, milling, asbestos product manufacturing) but rather those who could inhale dust in the course of other work "asbestos breathers" rather than "asbestos workers".

Shipyards

(29) In 1968, the possibility that asbestos-associated disease might be an important problem in shipyard workers was suggested. P B Harries, in his 1968 publication "Asbestos hazards in naval dockyards", reported five cases of pleural mesothelioma among civilian employees of the Royal Navy Dockyard in Devonport. Although isolated cases of shipyard asbestos disease had previously been described, his information was disturbing in that none of the patients was an "asbestos worker". Rather, they were people in other trades (boilermakers, shipwrights, labourers, welders, etc.) who worked in shipyards together with asbestos workers but did not themselves often use asbestos. In the same year, Stumphius described similar findings at the Royal Schelde yard in the Netherlands. Again, the mesotheliomas were among workers other than those in the usual asbestos trades. By 1973, Harris had seen 55 cases of mesothelioma at Devonport, 2 in asbestos

workers, 53 among men in other trades, and by 1979 the number had reached 115.

Maintenance and repair:

  1. From 1890 to 1970 some 25,000,000 tons of asbestos were used in the United States,

approximately two-thirds in the construction industry. From 10,000 to 20,000 tons of asbestos were applied annually as thermal insulation to pipes, boilers and other high temperature equipment in factories, refineries, power plants and even homes. Much of this material is still in place. Additionally, more than 40,000 tons of fireproofing material, containing from 10-20% asbestos, were sprayed annually in high rise buildings in the decade 1960-1969. Somewhat less had been used for decorative purposes over a longer period of time. Thus, perhaps 1,000,000 tons of friable asbestos material is in place aboard ships and in buildings and industries across the United States. The maintenance, repair and removal of this material pose enormous control problems for the future, especially since proper procedures and precautions have yet to be fully

developed for these activities.

Brake repair and brake maintenance:

  1. Growth in the use of -passenger cars and trucks in the United States from approximately 30,000,000 to 130,000,000 in the last 40 years has carried with it increased frequency of asbestos exposure associated with brake repair and maintenance, since most brakes contain considerable amounts of asbestos, often 50% or even more. Replacing and repairing such brake linings has been a matter of increasing concern. There is little substantial information concerning the total number of workers in these trades over the years, in view of variable turnover rates, intermittent brake maintenance and part-time employment. In the 1970Ăs somewhat more than 1,000,000 men were engaged in regular or intermittent brake maintenance work at any one time. Initial clinical surveys indicate that x-ray changes of asbestosis are not uncommon . Instances of mesothelioma have been reported, but there are as yet no useful data concerning overall mortality experience.

Shipboard asbestos disease

(32) Abnormalities associated with asbestos used in ships may not be restricted to the shipyard workers who constructed vessels, or are still engaged in their repair, renovation, maintenance or demolition. Maritime personnel, particularly those employed in engineering categories, may also be at risk. Both pleural and parenchymal x-ray changes have been found among them and mesothelioma has been seen. When repairs have to be made in engine rooms or mechanical equipment, removal of asbestos insulation is often initiated at sea (in cramped ship spaces), to shorten turn-around time in port.

Family contact asbestos disease

  1. In 1965, Newhouse reported eleven cases of mesothelioma whose only known asbestos exposure was apparently associated with previous residence in households of asbestos workers . Additional cases have been reported since . Recognition of the mesothelioma "signal" has alerted us to the important problem of family contact disease. Its full extent is not yet known, since the mortality experience of groups of family contacts is only now being studied as commented on above. Similar concepts attend upon considerations of asbestos exposure with consumer products or other environmental circumstances, as with friable asbestos surfaces in schools and public buildings .

Disease with fugitive dust exposure

  1. Disease with indirect-occupational exposure has been well recognised in recent years (see "shipyards" for example). It has also been recognised that some instances of asbestos disease (signalled as mesothelioma) have occurred among individuals who had lesser exposure, as with neighbourhood exposure or by exposure presumed to have occurred in some way while employed in facilities where asbestos was used, albeit at some distance (office workers) . New data have now appeared raising the question whether this last type of exposure might be more important than hitherto believed. Should this prove to be so, it might significantly increase the number of workers who will be eligible for disability compensation.

Population at risk: Identification of industries and occupations at risk

Mining and Milling

Primary manufacturing

(52) The Asbestos Information Association has estimated that there are upwards of 3,000 discrete uses of asbestos. A selection of major asbestos products and their uses is presented in Table 2-1.

Asbestos products industry

Gaskets, packing and sealing devices industry

Building paper and building board mills

Secondary manufacturing

Heating equipment except electric and warm air furnaces

Fabricated plate workers (Boiler Shops)

Industrial process furnaces and ovens

Electric housewares and fans

Shipbuilding and repair

Construction

(57) Thirty percent of the water distribution pipe sold in the United States in 1974 was asbestos-cement.

Electric, gas and combination utility services

Asbestos and insulation workers

Automobile body repairers and mechanics

Engine room personnel, seagoing vessels, United States Merchant Marine

Maintenance employees: Chemicals and petroleum

Steam locomotive repair

Stationary engineers, stationary fireman, and power station operators

Population at risk: Occupational exposure to asbestos 1940-1979

(69) The results of the estimation of employment and new-hires at risk are shown in Table 2-12, indicating that approximately 13,207,000 individuals were potentially exposed to asbestos from 1940 through 1979 in the occupations analysed to include asbestos and insulation workers, stationary engineers, stationary firemen and power station operators and automobile body repairers and mechanics. The uncertainties in estimating this number have been described previously, but they cannot be over-stressed. The number is an uncertain one. Further it includes a large number of individuals whose potential exposure to asbestos would have been of low intensity or of short duration because of high Labor turnover (see section on lower risk population). Finally the term potential should be emphasised. In categorising a segment of a workforce (such as all production shipyard workers) as being potentially exposed to asbestos, some individuals will be included with no actual exposure. On the other hand, individuals in other jobs (such as management) who do have exposure were not counted. The numbers may or may not balance. These uncertainties will be compensated for ion the estimates of mortality by using data on the mortality or morbidity of representative workforce segments which will also include the full spectrum of exposure circumstances.

It should also be noted that a large number of asbestos exposed individuals are not included in the estimates of Table 2-12. Important groups with identified risks include family contacts of asbestos exposed workers, engine room personnel aboard U.S. Navy ships in World War 11, and individuals exposed environmentally to asbestos by virtue of residence or work near the use of asbestos.

Of those exposed, 18,800,000 of the total and 14,100,000 of those alive on 1 January 1980 were estimated to have had an exposure greater than 2-3 f-yr/rml. Such exposures carry significant risk of asbestos disease. Further, some risks of asbestos disease exists for the 6,900,000 alive on 1 January 1980, estimated to have experienced lesser exposure.

Cancer from occupational asbestos exposure: projections 1965-2030.

Summary and Conclusions

(125) Estimates have been made of the number of cancers that are projected to result from past exposure to asbestos in a number of occupations and industries. Only those potentially exposed by virtue of their employment have been considered. Additional deaths will result from exposure among family contact (household contamination), from environmental exposure, from exposure during consumer use of asbestos products, and from exposure while in the armed forces, particularly in engine rooms of naval ships. No estimates have been made of deaths resulting from asbestosis. These estimates indicate that:-

1. From 1940 through 1979, 13,200,000 individuals had significant potential asbestos exposure at work. 9,200,000 are estimated to have been alive on 1 January 1980.

2. Approximately 8,500 asbestos-related excess cancer deaths are currently occurring annually. This will rise to about 10,000 annually by the year 1990.

  1. Thereafter, the mortality rate from past exposures will decrease, but still remain significant for another three decades.

These projections are from past exposures to asbestos. Over 1,000,000 tons of friable asbestos material is in place in buildings, ships, factories, refineries, power plants, and other facilities. The maintenance, repair and eventual demolition of these facilities provide opportunities for continued significant exposure. If such work is not properly done, or if asbestos is otherwise used with inadequate controls, the burden of disease and death from past exposure will be increased by the environmental exposures of the future.

Current experience - Awareness of the relation between disease and prior asbestos exposure

(512) This awareness has greatly increased in the past decade among many groups - physicians, attorneys, Labor unions, scientists, industrial management, the mass media, law schools, science institutions and others. For example, the U.S. Social Security Administration mailed information notices about asbestos disease to approximately 30,000,000 recipients of Social Security checks in 1978, and the Surgeon General sent a detailed descriptive letter about asbestos effects to the countryĂs more than 350,000 physicians in the same year. The U.S. Department of Health, Education and Welfare, HEW Publication No. 78-10320 dated September 1978 "About Asbestos".

Success of tort litigation cases

(515) Our survey studied asbestos-related deaths in insulators who died between 1967 and 1976. Ninety percent of the suits for these deaths were filed before 1978; thus, the data collected represent the outcomes among a pioneer group involved in asbestos tort litigation. The results of 107 suits whose status was known in 1980 are summarised in Table 7-3. Virtually everyone whose suit was resolved received some money. The average award or settlement in the 60 cases for which we had data was $72,000; the average lawyerĂs fee was $26,900, leaving the plaintiffs an average of $44,100. Only one case was denied in court. The case was dismissed along with many others in the New York courts but was still active pending an appeal of the StateĂs statute of limitations rule.

When the proceeds from tort settlements or awards were received it made a considerable difference in the survivorsĂ standard of living. Of 194 widows of insulation workers for whom estimated losses and compensatory replacement ratios could be calculated in 1979, 26 (13%) had received tort settlements or awards. The tort income replaced 45% of the survivorsĂ lost income for that year.

Among those who received no other compensatory transfer payments, the tort proceeds replaced about one -fourth of the widowĂs net loss in 1979. For those who had received both tort income and other compensatory transfer payments, the tort income replaced half of the net loss.

Tort Litigation in relation to nature of disease

(518) Our study of insulation workers found that the cause of death influenced whether a tort suit was filed. Survivors of those who died from mesothelioma initiated the highest proportion of suits (22%). Survivors of lung cancer victims filed in only a slightly smaller proportion (17%). The smoking issue did not seem to drastically influence the likelihood of filing. Asbestosis and gastro-intestinal cancer patients filed somewhat fewer claims. For other diseases less commonly associated with asbestos, no suits at all were filed (Table 7-4 ).

Punitive damages

(519) In spring 1981, plaintiffs were awarded punitive damages for the first time, particularly ominous decisions for the asbestos industry. Punitive damages, unlike compensatory damages, are not usually covered by product liability insurance policies but must be paid directly by the asbestos manufacturer. Previously, judges had not allowed juries to consider punitive damages. However, in March and April 1981, punitive damages were awarded in Illinois, Pennsylvania, and Ohio. An award of punitive damages indicates the judge and jury have been persuaded of culpability beyond that needed for awarding compensatory damages under strict liability. Punitive damages involve charges such as callousness, wilfulness and reckless indifference. Punitive damages are often awarded in proportion to the financial resources of the company; large companies are assessed higher amounts to inflict the same degree of punishment.

Extraordinary burden on insurance industry

(521) The insurance industry has claimed that the proliferation of asbestos litigation and the money that must be expended for legal costs and damages threaten the financial stability of many of the carriers. While it is impossible to assess exactly the total liability that the insurance industry will be forced to bear, data have been compiled as to past actions and estimates have been made as to future claims. The Insurance Services Office has stated that, for the period between July 1976 and 15 March 1977, the average payment in an asbestos case (for settlement and jury awards) was approximately US $170,000. It was then extrapolated that if one million asbestos claims would to be resolved at that average value, the insurance industry liability would be $170 billion.

(The figure of US $170,000 was the same figure as that quoted in the Commercial Union Report of 12 May 1981 yet inexplicably, the market was never informed that the average claim per person had increased to US $170,000. In fact, the LloydĂs market as a whole was still under the misapprehension that the likely claim per person was somewhere in the region of US $75,000, as stated in the letter of 5 August 1980. LloydĂs, the AWP and the LloydĂs UnderwritersĂ Non-Marine Association (LUNMA) failed to warn the market of the true scale of impending asbestos-related claims and, by their silence, allowed the vast majority of underwriters, namely all those who were not privy to up to date information, to rely on advice which was completely inaccurate)

Inefficiency in providing compensation

(522) Further, it has been asserted that asbestos tort litigation is an inefficient manner to use funds for compensation. A substantial portion of the amount recovered by claimants-traditionally, as much as 33 or 40% goes for legal fees and related costs. Medical and other expenses are paid out of the same source. For the defence, an average of one-third of what is expanded is paid for defence costs, including attorneysĂ fees. When the case is decided by a court verdict, the costs are much higher an average of ninety-five cents is expended in defence costs for every dollar paid for the bodily injury claim. In addition to these legal expenses, there are the normal administrative expenses of the insurer.

"Costliness of the litigation system can be best understood by the following example. Assume that the plaintiff receives a jury verdict for $100,000. Of this amount, he will likely pay $33,000 for attorneysĂ fees, perhaps an additional $9,000 as reimbursement for his workersĂ compensation payments and some $10,000 to repay incurred medical expenses. The defendantĂs insurer will spend as much as $95,000 to contest the claim. Thus the insurance company defending the case will expend $195,000 to deliver a sum to the plaintiff of only $52,000 an amount that is received some two, three or more years after the case has commenced. These amounts, of course, do not include the administrative costs required to run the court system itself."

The matter is further complicated by the fact that the outcome of litigation is inconsistent and uncertain, because of the adversial nature of the judicial system and the differing rules and standards that vary from jurisdiction to jurisdiction. Hope of receiving a tort award is counterbalanced by the possibility of losing the suit and receiving nothing. Widows of the insulators had to rely primarily on the judgement of their attorneys. The long delays and financial pressures may have persuaded widows to settle for much less than if their claim had been pursued further. Whenever tort compensation was received, it usually came too late to allow the widows to maintain their standard of living without a period of financial uncertainty and distress.

  1. The result of the law suits are discussed. Of the sample of 107 law suits studied, 67 resulted in judgement for the plaintiff or an Out of Court Settlement involving payment to the plaintiff. Numerically, this is 62.6%. The mean value of such settlements was US $72,000 and legal fees on an average amount came to US $16,600.

Applying these figures to a population of 13,207,000 exposed to asbestos , 27% of whom die from an asbestos linked disease, 17% of whom commence an action and 63% of whom achieve an award or settlement at an average cost of US $72,000 and US $16,600 legal fees; the cost is a staggering US $33-6bn, involving only 381,704 plaintiffs.

Table 7-1 of the Report, lists the companies involved in asbestos litigation;

Table 7-2 of the Report, lists the Asbestos Litigation involving UNARCO up to 1 November 1979.

Table 7-6 of the Report, lists the Asbestos companies and insurance firms involved in cases with "manifestation theory" versus "exposure theory".

12 Jan 82

A $5m run-off reinsurance xs $800,000 placed for N P Compton, Underwriter of the Philip N Christie Marine syndicate (764) Incidental Non-Marine Syndicate 763 to incept at 12 January 1982 covering 1979 and prior years. Outhwaite wrote 50%.

13 Jan 82

Extraordinary General Meeting of Members of LloydĂs to elect new Committee Member to replace R J Kiln. I R Posgate, aged 49, elected.

Jan 82

The LloydĂs market was notified of the Rocky Mountain Arsenal (RMA) claim. RMA is a 180 acre site, located outside Denver, Colorado. The site is owned by the U.S. Army and was leased to the Shell Oil Company. Chemicals were dumped in unlined pool and subsequently seeped into the area surrounding the RMA. On 25 April 1984, Ralph Rokeby-Johnson (Sturge) wrote to Winchester Bowring Ltd. with statistical data for reinsurers, identified various areas of concern, and stated that "One case that has received certain publicity is U.S. Army -v- Shell at Rocky Mountain Arsenal claiming $-8bn .... but again evaluation of this problem will take time".

14 Jan 82

Financial Times: Controversial LloydĂs man wins

Mr Ian Posgate, one of the most controversial underwriters in the Lloyds of London insurance market, was elected to the ruling committee of LloydĂs yesterday after stiff opposition.

In a rare by-election to fill a place on the committee created by the surprise resignation of Mr Robert Kiln at the end of last year, Mr Posgate polled 1,264 votes. His challenger for the committee place, Mr Peter Daniels, of Lambert Brothers. the underwriting agents, polled 1,237 in a near record poll.

Mr Posgate has angered the LloydĂs -insurance broking community by financing a parliamentary petition which caused Parliament to insist that brokers should sell off their shareholding links with underwriting syndicates because of conflicts of interest.

In evidence before a Commons committee, chaired by Mr Michael Meacher, Labour MP for Oldham W. Mr Posgate detailed a series of abuses which he claimed arose in the close relationships of brokers and underwriters.

Underwriters are critical of Mr PosgateĂs business methods and claim that he undercuts prices established within LloydĂs through informal market agreements. His syndicates are among the most profitable at LloydĂs.

Most of those voting in yesterdayĂs election work in the market. Only a few of the 16,000 or so members who put up the capital to allow the market to function attended. Those that did were entertained by their underwriting agents.

Mr Posgate, who once described the underlying wealth of the membership which was supporting LloydĂs operations as "becoming middle class," is entitled to serve four years on the committee.

But a new LloydĂs ruling council is to be formed once the LloydĂs legislation is passed in Parliament, and Mr Posgate could emerge as one of its senior members.

15 Jan 82

Meeting of LloydĂs Panel Auditors

E E Nelson Committee member and Chairman of the Asbestos Working party, and R J Kiln were present. The position as regards asbestosis and Products Liability was addressed. In particular, the following points were made:-

  • There is no specific instruction on this in the LloydĂs Audit Instructions for 1981 (other than reference along the lines of "attention is drawn to the incidence of late claims arising from product and disease insurances");
  • Asbestosis will almost invariably arise in Syndicates which have reinsured other Syndicates (with specific reference to reinsurance protection effected to cover running off Syndicates);

15,000 asbestos claims had been notified but increasing at 400 per month and it was suggested that, by the mid to end 1980Ăs, the total would have risen to some 25,000 (only five years of reserves at 5,000 claims per year);

It was suggested that, on the basis of available statistics, loss reserves on an average claim should be U.S.$125,000 (plus $10,000 expenses per claimant) which means anticipated claims of some U.S. $2-025bn (15,000 notified claims at $135,000 = $2,025,000,000: an IBNR of only 25,000 future claims expected by the mid to end 1980s = $3,375,000,000; Probable loss = $5,400,000,000. London Market share nearer 40%). About 40% is thought to fall on the London Market on an exposure basis whereas on a manifestation basis it is thought to be 10%; and attention was drawn to three other cases requiring attention:

Agent Orange

[Agent Orange was a defoliant used in the Vietnam War. A class action suit was issued against three manufacturers of the product on the grounds that it contained dioxin, a suspected carcinogenic substance.]

Love Canal

[This case concerned the leakage of toxic industrial chemicals from an old landfill site in the Love Canal section of Niagara Falls. The leakage caused chromosome damage, requiring the whole area to be evacuated. The early estimates of loss increased rapidly: an estimate in Business Insurance of 14 January 1980 estimated a potential liability to Hooker Chemical and Plastics Corporation of $10 billion.]

D.E.S.

[Diethylstilbestrol was a drug given to pregnant women and, in 1977, it was being blamed for cancer problems in the womensĂ daughters.]

(At 31 December 1980, Johns-Manville, just one of the 40 known major US asbestos producers, had approximately 14,900 aggregate plaintiffs; by 31 December 1981 the aggregate number of plaintiffs had increased to 27,700 with Johns-Manville being a named defendant in an average of 400 cases per month).The Committee members and Auditors who attended:-

R J Kiln

Audit Committee Chairman

E E Nelson

 

K E Randall

Underwriting Agents & Audit Department

M Bowmer

Underwriting Agents & Audit Department

   

Panel Accountant

Panel Auditor

A W Dyer

Neville Russell & Co

A M Blake

Neville Russell & Co

P B Milne

Littlejohn & Co

and 19 other panel auditors.

18 Jan 82

Notes of a Panel AuditorsĂ Meeting on 15 January 1982, prepared by A M Blake of Neville Russell for the benefit of LloydĂs auditors to explain the likely effect of latent disease claims, in particular Asbestosis.

Introduction

Ted Nelson explained that there were four substantial latent disease claims that were affecting the London market at present:

  1. Agent Orange: Relating to a defoliant used in the Vietnam War that was affecting war veterans and was a dioxin manufactured by five or six chemical companies.
  2. Love Canal: A claim on Hooker Chemical (a subsidiary of Occidental) relating to the dumping of chemicals causing contamination over a large area.

3. DES: A drug causing cancer in female children at the age of puberty.

4. Asbestosis: Claims on 200 companies involving asbestos. 40 of these companies were principally involved in using asbestos in manufacture. The remainder were involved in distributing.

The first three of these claims were not covered in detail at the meeting.

Asbestosis

Of the 40 companies principally involved in the claims, 19 were directly insured in the London Market. In respect of 15 of these 19 companies, details of the insurers have been established.

The basis of claim is that of products and legal liability where it was established many years ago that a manufacturer is liable for failure to warn users of a dangerous substance. It is likely that they were aware of the dangers in the war, but suppressed this information due to the war effort. They were undoubtedly aware in the late 1940s of the dangers but took no action. Safety precautions were only introduced in the 1950s and 1960s.

The total period concerned with these claims is 1945 to 1975. The policy form changed during the middle 1960Ăs so that instead of covering any one occurrence, aggregate limits were covered.

Litigation

15 Declaratory relief actions were filed in the U.S.A in order to decide who is liable to the insured. These include:

1

I.N.A. -v- 48 Insulators

Damages were pro-rated over the period of exposure. The Appeal Court confirmed judgement.

2

Eagle Picher

Was a declaration in Massachusetts. The claim was agreed on a manifestation basis.

3

Keene

Two months later the Keene case where it was agreed that the insured can collect on both bases, exposure and manifestation, whichever gave them the biggest recovery under their insurance.

4 There is a good chance of an appeal to the Supreme Court, but this has been turned down so far. There is a ruling due in California soon when four cases are going to be heard together.

Action by LloydĂs

It was agreed that the normal methods of resolving claims by LloydĂs could not cope with the enormity of this particular problem, and a Working Party was formed with Ted Nelson as Chairman up to December 1981. The Working Party set up a data base using input from adjusters and attorneys calculating losses on both an exposure and manifestation basis. An office in the LUNCO complex is being used for this purpose. This produces details in respect of the 15 major insureds and also includes details of facultative insurers of which there are a great number, and also the underwritersĂ line and reference. During 1982 it will be possible to establish the reinsurers of the direct and facultative insurers and it is possible at the moment to roughly establish the net loss.

Extent of Loss

So far 15,000 cases have been notified with an average loss of $125,000 plus $10,000 in expenses. The exposure in the London Market is estimated as 30% to 40% on an exposure basis, and under 10% on a manifestation basis. Ted Nelson said that claims were increasing by 400 per month at present with the peak likely during the late 1980Ăs. He also stated that 25,000 extra claims were expected by the end of the decade. His arithmetic was not queried at the meeting.

Reinsurance

The basis on which reinsurers pick up the liability is not yet clear. Where it has been established that reinsured companies will have a retention of 1 insurer per year it is likely that reinsurers will operate in the same way, but this has not yet been agreed.

IBNR

The meeting was told that Underwriters have different views on to what extent and whether claims should be reserved for in the future. The matter was not pursued any further at the meeting.

19 Jan 82

M J M Meacock, Underwriter, of Non-Marine Syndicate 727 wrote a line in pencil Šsubject to acceptanceĂ on the unlimited run-off reinsurance of Pulbrook Wrightson Non-Marine Syndicate 90, being placed by Winchester Bowring.

19 Jan 82

Asbestos Working Party letter.

The chairman has asked us to inform you that, in view of the absence of members abroad, there will be no Working Party meeting on Monday 25 January.

In these circumstances, the next meeting will be on Monday 8 February, unless there are developments which necessitate an earlier meeting.

We enclose a copy of the telex message of Mr. Don Greene which is his second report on the subject of political involvement.

Also enclosed are draft notes of the last Working Party meeting.

The Asbestos Working Party

D P Taylor (Chairman)

Pulbrook Wrightson

H R Rokeby-Johnson - Deputy Chairman

Sturge

C J Ayliffe

Claims director, Merrett

P A Froude

Janson Green

J R Heath

Weavers/PCW

L E Kemp

Claims director, Lambert Bros

W W Maitland

Janson Green

E E Nelson

BPR/Alder

C H A Skey

Edwards & Payne

A Taylor

Turegum Insurance Company

25 Jan 82

AWP meeting cancelled in view of the absence of members abroad. Rescheduled for 8 February. D P Tayler appointed chairman as of 1 January 1982, replaces Ted Nelson who previous chairman up to 31 December 1981.

25 Jan 82

Note of a Panel Auditors Meeting on 15 January 1982. Memorandum to LloydĂs audit partners and staff from PB Milne of Littlejohn & Co.

Marine syndicates - War Account - Audit instructions at 31 December 1981, will require the noted out-standings test as an alternative for minimum percentages in respect of open years.

  1. Audit at 31 December 1981 - Advance notice is given that for the audit at 31 December 1981, syndicates will ... ... to provide noted out-standings as a gross ... ... , the anticipated recoveries will require ... ... companies, with companies being ...
  2. Re: LloydĂs audit 31 December 1981: Ted Nelson advised on asbestosis:
  1. No special instruction ... ... than a reference along the lines of "attention is drawn to the incidence of late claims arising from product and disease insurances".
  2. Asbestosis arises from Direct but more predominantly from Facultative Reinsurance business. (Excess loss of Syndicates and companies). In addition it will almost inevitably arise in Syndicates which have been reinsured by other syndicates. Care must, therefore, be taken to enquire from Syndicate clients the details of all syndicates reinsured by them and in turn, where RI protection has been effected specifically to cover the running off syndicate, the specific RI protection acquired....
  3. Asbestosis is a latent risk, but has spilled over into both the Marine and Aviation market. It is predominantly a US liability, but it is in other countries. So far as is known, the ... liability is not very great and probably can be ignored for the time being.
  4. Liability arises under Products Legal Liability policies and claims arise through the failure of warnings to consumers of the latent danger. Policies giving rise to claims were issued between 1945 and 1975, with a certain number going back prior to 1945. Up to the mid 1960Ăs policies were issued on an "any one incidence basis" but after that date on an "aggregate basis" within a policy year.
  5. There has been some 15,000 claims notified, but they are increasing at the rate of 400 per month. It is difficult to guess what the final number will amount to, but it was suggested by the mid to end 1980Ăs we should expect some 25,000 in total. (An aside by someone stated that the Prudential were guessing at a figure of 2,000,000. Nelson said he considered this figure to be well wide of the mark.)
  6. To date there are some 200 court actions against dealers, but more importantly, there are 60 actions against manufacturers. From researches it has been ascertained that 19 risks were insured in the London Market of which 15 placing slips have been located with high hopes that the remaining 4 slips will be located shortly.

(Presumably, this relates to the judgement concept of "market share" apportionment, given in the Sindell -v- Abbott Laboratories, involving D.E.S. (1980); Hardy -v- Johns-Manville Sales Corp. (1982). Clearly certain Underwriters and certain Panel Auditors were at a disadvantage as considerable material fact was in the hands of the brokers, who required considerable time to assemble the documentation, and who took advantage of the "uncertainties" within the LloydĂs Market to buy themselves out of the asbestosis situation).

  1. Court actions to date have taken the form of 15 Declaratory Actions to determine whether insurers are liable to assureds. Courts have ruled in three actions:-

(i)

INA -v- 48 Insulators

Decided that liability arises on an exposure basis spread over period of exposure;

(ii)

Eagle Picher

Decided that claims should be on a manifestation basis;

(iii)

Keene

Collect on both an exposure and manifestation basis to ensure that the maximum amount accrued to claimant.

Firstly the foregoing decisions are a bit of a nonsense and the London Market is currently in the process of appealing to the U.S. Supreme Court to obtain a sensible ruling.

There is also a move in California to make a Consolidated Declaratory Action in four major cases

(h) The Committee of LloydĂs have set up a Database whereby the full details of all known Syndicates liable are stated.

There is full computerised information on both an exposure and manifestation basis. The information is available in the LUNCO area but auditors must obtain written Authority from Syndicates clients before the information will be made available to them. At the moment the loss reserves have been set up on a basis of an average cost per claim, based on the statistics available, of $l25,000 plus expenses of $10,000 per claimant. Currently this means a total claim of $2,025,000,000. On an exposure basis 40% is with London companies and LloydĂs whereas on a manifestation basis it is 10%. Loss reserves do not take into account syndicates own protection arrangements ...

(i) The syndicates have their own attorneys preparing reports and guidance should be provided in the form of a reserve view. As far as the IBNR factor is concerned, it is suggested that a view should be taken as to what can come forward within the next 5-6 years. Since it is likely that large figures will arise it is important to ensure that policy limits are not exceeded.

  1. Nelson also reminded us of 3 of the product claims requiring consideration:

(a) Agent Orange - Bodily injury claims against 5/6 major chemical manufacturers including Dow and Monsanto. Since policies were written with a war exclusion clause and manufactured expressly at US Government instructions the claim could well be passed back to the US Government. However, this pass back would not include children.

  1. Love Canal - Bodily and Property damage from waste. Hooker Chemical Co.
  2. Des - Bodily injury - 12 US chemical manufacturers involved but principally Upjohn.

5. Any queries on the foregoing to PBM or FFDS. It has been decided to require each syndicate client to answer a questionnaire on asbestosis. The format will be decided after our visit to LUNCO and in conjunction with the other main panel auditors.

25 Jan 82

Mr R Kiln sent a LloydĂs internal memorandum to the partners and staff of the LloydĂs Auditing firms.

82

Mr J C Nevitt, underwriter of the BPR/Alder Aviation Syndicate 950, purchased a "Time & Distance" policy protecting the syndicate in respect of the run-off of the 1979 year of account of J P Tilling Aviation Syndicate 340, jointly managed by Fenchurch and McClelland & Tilling Underwriting Agencies.

By way of background, Mr Nevitt had by 1982 become concerned at the deterioration of this run-off contract and John Tilling recognising the problem agreed to purchase a "Time & Distance" policy and assign the proceeds over to syndicate 950. He was prepared to pay a premium of up to $200,000 and obtained a quotation from First State of Boston, Massachusetts, via LloydĂs brokers Bradstock Blunt & Crawley. The initial negotiations were carried out by him but I ultimately felt that the limit offered was insufficient and agreed to pay a further $115,000 on top of the amount paid by J P Tilling.

By letter of 9 August 1985, Bradstock Blunt & Crawley set out the investment policy of First State of Boston from which it can be calculated that the syndicate was credited with about 61.50% of the investment income, after deduction of costs. Mr Nevitt purchased a further policy in excess of the above which was on similar terms.

82

The BPR Baby Non-Marine Syndicate 973, Underwriter A J Stratton, achieved the rare feat of underwriting a negative premium income for the 1979 year of account, currently being closed. The syndicate is understood to have been profitable from 1972 to 1978. The ˙10,000 standard share returned a profit ˙2,837 in 1976 and ˙3,808 in 1978.

Jan 82

In January and February 1982, the Chairman of LloydĂs, Mr Peter Green, carried out an informal investigation into the "Unimar Affair" which involved Mr DĂAmbrumenil. During the course of this investigation, the Chairman interviewed Mr DĂAmbrumenil on several occasions and was deliberately misled.

28 Jan 82

TAYLER RUN-OFF CONTRACT WRITTEN (317 50%, 727 ?%)

Unlimited run-off reinsurance xs $26,969,321 placed for D P Tayler Underwriter of Non-Marine Syndicate 90 managed by Pulbrook Underwriting Management to incept at 1 October 1981 covering 1974 and prior years. Outhwaite wrote 50%, Meacock Syndicate 727 also participated, based on placing information prepared prior to the first approach to Outhwaite in June 1981. Winchester Bowring never informed either Mr Outhwaite or Mr Meacock that the provisions in respect of asbestosis-related claims had increased recently by some US $5.8m. The run-off policy was disputed, referred to Arbitration, and subsequently compromised. R H M Outhwaite put his stamp on the Winchester Bowring placing slip on 28 January 1981; the Meacock Syndicate 727 put their stamp on the placing slip on 29 January 1981 in the absence of M J Meacock who was away on holiday. D P Tayler was the Chairman of the Asbestos Working Party, and had visited New York in September 1981.

Jan 82

Sometime in January or perhaps early February, Anthony Blake of Neville Russell telephoned Ken Randall, Manager of LloydĂs Underwriting Agents & Audit Department. Mr Blake said that Neville Russell were concerned and wished to discuss asbestos related claims and asked for a meeting.

A meeting was held at LloydĂs between Mr Ken Randall , accompanied by Mr M Bowmer one of his assistant Managers, and Mr Blake accompanied by representatives of several firms of the panel auditors.

The panel auditors expressed grave concern regarding the question of reserving for asbestos related claims and said they wanted to give me advance notice of a formal approach to LloydĂs for guidance. They said that, if auditors took a proper view of the reserves needed by syndicates as at 31 December 1981, auditors would not be able to sign-off reinsurance to close the 1979 account of many syndicates facing asbestos claims and these syndicates would have to leave the 1979 account open. Mr A Blake and his colleagues said that, for auditors to be satisfied that the provisions were sufficient to meet claims incurred but not reported, the provisions for future asbestos claims would be so large that the entire LloydĂs market would be bankrupt. The auditors were in a dilemma. If they insisted upon syndicates creating proper reserves, the market would be bankrupt. If the syndicates could not create reserves large enough to meet future claims, very many syndicates would not be able to close their 1979 years of account.

0 Feb 82

LloydĂs issues the "Instructions for the Guidance of Auditors", covering the audit of the 1981 year. A prime responsibility of the syndicate auditor was to "satisfy himself that all investments and cash taken into account in arriving at the MemberĂs Syndicate result are held in trust in accordance with the provisions of a Deed of trust approved by the Secretary of State" Until the post-1982 reforms no standard accounting or audit practices or rules in relation to disclosures have applied. LloydĂs has tended to encourage agents and underwriters to consult Auditors on matters where advice is required rather than giving that guidance themselves. Prior to 1982, the LloydĂs Market had few rules which impinged significantly on its insurance activity or on accounting for it, and such control that was exercised was often informal rather than mandatory.

The Syndicate Accounts Audit

The syndicate accounts audit is a requirement of the LloydĂs Manual for Underwriting Agents. For the audits 31 December 1968 and each year to 31 December 1981, the Manual states that the managing agent of a syndicate shall send to the names annual accounts, which should include underwriting accounts together with a syndicate balance sheet. These shall be sent with a certificate from the auditors certifying:-

  1. That in their opinion the books have been properly kept
  2. That they have examined the balance sheet and underwriting accounts with the books and that they have been properly drawn up in accordance with the books.
  3. That they have verified the investments and cash balances.
  4. That they have received all the information and explanations they have required.

The Manual states that the auditors may amplify their report to any extent required, to cover for example such items as the basis on which the auditor has accepted the reinsurance to close, or whether the accounts are drawn up in accordance with the agency agreements. The reports of the PCW Auditors up to 31 December 1979 did in fact contain the amplification that the accounts were drawn up in accordance with the agency agreements. For the underwriting years up to 1976, the PCW agency agreements gave little guidance as to the form of accounts.

For the underwriting years from 1977 there is a provision that the agent shall keep such usual and proper underwriting books, accounts, and memoranda as are kept by underwriting agents at LloydĂs

The Syndicate Solvency Audit

The solvency audit is a requirement of the Insurance Companies Acts and also of LloydĂs Under Section 83 (4) of the Insurance Companies Act 1982 the auditor "shall furnish a certificate in the prescribed form to the Committee and the Secretary of State". Prior to the 1982 Act, there were similar requirements laid down by the Insurance Companies Act 1974, and before that by the Insurance Companies Act 1958.

The prescribed form of the certificate for the audits up to 31 December 1980 was given in the Assurance Companies Rules 1950, S.I. 1950 No. 533, under which the auditors were required to report inter alia that:-

  1. They have examined the books in accordance with the current Instructions for the Guidance of LloydĂs Auditors.
  2. In their opinion the assets shown in the books ...... belonging to each underwriter are correctly valued and available to meet his liabilities as therein shown, and to wind up his underwriting accounts, and to report to the Committee of LloydĂs if the reserves appear to have been inadequate
  3. The liabilities attaching to the underwriting accounts have been calculated on the basis set out in the current Instructions for the Guidance of LloydĂs Auditors.
  4. They have verified the investments and cash and confirmed that they are held in trust in accordance with approved deeds of trust
  5. They have compared the brokersĂ balances with the ledger, provision having been made for any debts of which the recovery in full is doubtful.
  6. All the information they required has been supplied and the books appear to them to have been properly kept.

For the audit as at 31 December 1981, the form of certificate was different and was given in LloydĂs (Audit Certificate) Regulations 1982, S.I. 1982 No. 136.

The Instructions for the Guidance of LloydĂs Auditors have statutory force in view of the wording of the certificate required by the Insurance Companies Acts. The Instructions have remained largely unchanged for each audit from 31 December 1970 to 1980. The Instructions included among their requirements that the auditors shall:-

  1. Examine premiums, returns, claims, recoveries and reinsurances, in order to agree the totals.
  2. Agree the list of ledger balances with the ledger.
  3. Examine the settlements in relation to the reserves created at previous audits to wind up the underwriting accounts, and to report to the Committee of LloydĂs if the reserves appear to have been inadequate.
  4. Make sure that the audit reserves are calculated in accordance with the Instructions. These include the requirement that the auditor should form a view as to the adequacy of the reserves for outstanding liabilities as at the audit date, which must include an element to take care of unnoted and unknown liabilities.
  5. Ascertain that amounts with LloydĂs brokers have been reconciled.
  6. Report to the Committee for audits as at 31 December 1975 and later all cases where a syndicateĂs outward reinsurance exceed a particular percentage of gross premiums less brokerage.
  7. Report to the Committee if in the opinion of the auditor the underwriting books of any syndicate have been badly kept.

For the audit as at 31 December 1981, these requirements all remained in force or became more stringent. One new requirement was that the auditor must satisfy himself that the underwriting records appear to have been properly kept. For the distinction between books and records see under "The Requirement for Books to be Properly Kept". The DTI Inspectors appointed to investigate the PCW affair define in their report to the Department of Trade & Industry the meaning of certain of the requirements listed above. They did this at some length, as differing views have been expressed to them.

What is meant by an Audit

In many instances the documents described in respect of the syndicate accounts and syndicate solvency audits refer to "Auditors" or "Audit". Furthermore, the reports by the auditors in respect of the syndicate accounts audit were headed "Auditors Report". It is thus in our view clear that the auditors were expected to carry out an audit. This was not however what is sometimes called a full scope audit. Such an audit involves an expression of an opinion on the financial statements of the business, including the balance sheet and profit and loss account or other form of income statement. In the case of the syndicate accounts audit, the auditors were not required to express an opinion on the financial statements of the syndicates, but only on the specific matters described under "the Syndicate Accounts Audit". While not required to carry out a full scope audit, they were in our view required to carry out an audit in respect of these matters. Likewise, for the Syndicate Solvency Audit, the auditors were required to carry out an audit in respect of the specific matters they reported on under the prescribed form of the Certificate for audits up to 31 December 1980 , which was given in the Assurance Companies Rules 1950, Statutory Instrument 1950 No. 533. For the audit as at 31 December 1981, the form of Certificate was different and was given in LloydĂs (Audit Certificate) Regulations 1982, Statutory Instrument 1982 No. 136. We consider that any exercise constituting an audit should involve some scrutiny of at least three more material underlying transactions and balances. An auditorĂs duty goes beyond checking just the arithmetic. The auditor should examine the underlying documentary evidence, and obtain independent corroboration.

The Requirement for Books to be Properly Kept.

This requirement derives from several sources:-

  1. The Certificate required for the solvency audit states that "the books appear to us to have been properly kept".
  2. The Instructions for the Guidance of LloydĂs Auditors for the audit as at 31 December 1981 require the auditor to satisfy himself that the accounting records appear to have been properly kept. For previous years, there was no such requirement, but the auditor was required to report to the Committee of LloydĂs if in his opinion the underwriting books have been badly kept.
  3. The PCW agency agreements for the underwriting years onwards contain a provision that the agent shall keep such usual and proper underwriting books, accounts and memoranda as are kept by underwriting agents at LloydĂs. These requirements raise the question of what is meant by properly kept books, by properly kept records, and by proper books.

The Requirement to Examine.

As already described, there are numerous requirements for the auditor to examine particular matters. For example:-

  1. Examine the books in accordance with the current Instructions for the Guidance of LloydĂs Auditors, see item 1 under the Syndicate Solvency Audit.
  2. Examine premiums, returns, claims, recoveries and reinsurances in order to agree the totals see item 1 under the Instructions for the Guidance of LloydĂs Auditors.
  3. Examine the settlements in relation to the reserves created at previous audits to wind up the underwriting accounts, see item 3 under the Instructions for the Guidance of LloydĂs Auditors.
  4. Examine the balance sheet and underwriting accounts with the books see item 2 under the Syndicate Account Audit.

The Oxford Dictionary defines "examine" as "to investigate or to scrutinise". It defines "investigate" as "to examine or to inquire into", and it defines "scrutinise" as "to look closely at". In our view there is a positive onus on the auditor to inquire into or look closely at these matters. This is consistent with our interpretation of the meaning of "audit": we conclude that an audit involves some scrutiny of at least the more material underlying transactions and balances, see "What is Meant by an Audit". For example, the requirements in the Instructions for the Guidance for LloydĂs Auditors to examine premiums, returns, etc., in order to agree the totals means that there is a need to carry out some audit work on the underlying transactions in addition to arithmetical checks.

The Requirement for Assets to be Correctly Valued

The Certificate for the solvency audit states that in the auditorĂs opinion the assets shown in the books are correctly valued and available and sufficient to meet the liabilities as therein shown and to wind up the underwriting accounts, see item 2 of the Syndicate Solvency Audit. In our view this requires the auditor to carry out sufficient work to ensure that assets shown in the books are not materially overstated or understated.

The Reinsurance to Close

The Certificate for the solvency audit states that the liabilities attaching to the underwriting accounts have been calculated on the basis set out in the current Instructions for the Guidance of LloydĂs Auditors, see item 3 of the Syndicate Solvency Audit. The reinsurance to close is usually one of the largest items affecting the syndicate balance sheet, and the Instructions for the Guidance of LloydĂs Auditors set out the basis for its calculation. This varies slightly between different types of business, but for Non-Marine business the reserve should be the greatest of:-

  1. The aggregate of the reserves based on specified percentages of net premium income. The Instructions set out different percentages for different years and categories of business.
  2. The total of estimated outstanding liabilities as at the audit date, which must include an element to take care of unnoted and unknown liabilities.
  3. The amount of the reinsurance premium charged to close the account, including any previous years reinsured into that account.

It is thus necessary for the auditor to consider each of these three methods of calculation. In order to do this, the auditor would have to carry out sufficient work to ensure that the net premium income is materially correct and that the element included in respect of unnoted and unknown liabilities is adequate. While these liabilities are difficult to assess, the auditor will clearly need to have a reasonable degree of knowledge of the business underwritten by the syndicates and of the reinsurance programme of the syndicate, including noting the terms of the more significant reinsurances policies.

The Conduct of the Audits

It is apparent that the PCW Auditors took a restricted and narrow general approach to the requirements of the Instructions for the Guidance of LloydĂs Auditors, which have statutory force in view of the wording of the Certificate required by the Insurance Companies Acts, and the Assurance Companies Rules 1950, Statutory Instrument 1950 No. 533. We have commented on the meaning of some of these requirements and the need to carry out an audit, and we consider in some detail below a number of ways in which the auditors failed to carry out their responsibilities properly.

Reinsurance to Close

We have considered the requirements in respect of the reinsurance to close, see above, and we concluded that the auditors would have to ensure that the net premium income is materially correct and would need a reasonable degree of knowledge of the business underwritten by the syndicates and of the reinsurance programme of the syndicates, including noting the significant terms of any major reinsurance policies. As we describe below, under Reinsurance of Syndicates, the PCW Auditors knew little of the reinsurance programme. Their work on net premium income was also limited. We accept that the reinsurance to close draws on the experience and judgement of the underwriter. The auditor should however consider the way in which the underwriter has formed his judgement. Yet the PCW Auditors did not meet the underwriters to discuss the reinsurance to close, except probably for two meetings with Mr Cameron-Webb. Meetings were held with Mr Dixon, but he was not an underwriter.

Reinsurances of the Syndicates

There is no evidence of the PCW Auditors carrying out any work on the quota share reinsurances, the Intermediate Programme reinsurances, or indeed any of the other more significant reinsurances of the syndicates. Indeed there is little evidence of the PCW Auditors being aware of these reinsurances. Mr Reynolds told us that they became aware of the quota shares, but he was unable to say when they became aware. The only documentary evidence provided to us of this awareness is a single schedule dated 22 May 1982 which made a reference to quota share adjustments. Yet these reinsurances were of major importance to the syndicates. The quota shares for example were typically about 10% of the whole account. The PCW Auditors should have known about these matters from the point of view of the reinsurance to close, see above, and from their audit work generally.

Reconciliation of Brokers balances

Particularly in the earlier years, very little audit work was carried out on the reconciliation between the figures shown in the books of the syndicates for the balances with brokers, and the figures shown by the LloydĂs Central Accounting system. Yet this is one of the items which the auditors are required to check, see item 5 under the Syndicate Solvency Audit and item 5 under the Instructions for the Guidance of LloydĂs Auditors. The PCW Auditors have expressed the view to us that they were required to check that reconciliations had been carried out, but in the absence of anything untoward they were not required to carry out any work on the reconciling items. Furthermore they have taken the view that they were under no duty to make any inquiries as to the security of the reinsurers of the syndicates, even though the amounts owing by reinsurers formed part of brokersĂ balances. In our view this is too narrow an interpretation of their responsibilities. The wording of the audit certificate, see item 5 of the Syndicate Solvency Audit, is not consistent with such an approach, particularly in view of the need for provision against doubtful debts. Also our interpretation of an audit , see above, means that some scrutiny of the underlying documentary evidence was required. Furthermore the requirement for assets to be correctly valued, see above, means that work should be carried out to ensure that amounts owing from brokers are not materially misstated.

Year End Adjustments

Large numbers of adjustments were put through the books at 31 December each year between the initial set of computer figures and the figures which ultimately appeared in the syndicate accounts. These adjustments were of major importance. For example, adjustments were put through relating to the closings on the quota shares, and also to the inter-syndicate transfers and adjustments between one syndicate and another, particularly between the main and the baby syndicates. In earlier years we have found no evidence that the PCW Auditors carried out any work on these year end adjustments. In later years they attempted to carry out work, but found it difficult to do so because of the poor quality of the records. As a result the PCW Auditors were not in a position to state, as they did in the audit certificates, that the books had been properly kept, or that all the information they required had been supplied. These adjustments should in any case have been scrutinised, and unusual or material items, together with a sample of other items, checked with the underlying documentary evidence as part of the audit.

The Syndicates and the Agency Companies

We have described in chapter 15 a number of ways in which the affairs of the agency companies were improperly conducted. These ways are summarised :-

  1. Excessive benefits to participants in the schemes involving "agency companies".
  2. The relationship between the companies and the syndicates involving interest free financing provided to the companies and improper charges made by the agency companies to the syndicates.
  3. The relationship between the companies and other parties and organisations outside the LloydĂs market, involving transactions between these related organisations, frequently not on armĂs length basis.
  4. These matters constituted improper conduct of the affairs of the "agency companies". Ultimately it was the Names on the syndicates who bore the cost of these matters. We criticise the PCW Auditors for their conduct of the audits of these companies. However we consider that they also failed in their responsibility as syndicate auditors. There is little evidence that they ever considered the reasonableness of charges between the syndicates and agency companies. They did consider the equity of some charges between one syndicate and another, but having identified a problem, did nothing effective about it.

Conclusion on the PCW Auditors

We have described a number of ways in which in our view the PCW Auditors failed to carry out their responsibilities as syndicate auditors. Some of these matters were of major importance. If the PCW Auditors had carried out their responsibilities, it is likely that it would have been more difficult, and perhaps impossible, for the quota share schemes and most of the other matters described in our report to have operated. It has been said to us that there were other firms of LloydĂs syndicate auditors at the time who took a similar approach to the PCW Auditors. Also, as we say in the next heading, the rules and regulations of LloydĂs were unclear and fell well below what was required. Nevertheless, we consider that there was a serious failure by the PCW Auditors to carry out their duties.

Conclusion on LloydĂs

A LloydĂs public information film made prior to November 1982 stated that:

"underwriting syndicates at LloydĂs have one of the strictest audits in the world. Stricter than the law demands. LloydĂs 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".

Probably this corresponded to the general public perception of a LloydĂs syndicate audit at that time. In fact the situation was quite different. As we have stated, it was in many respects unclear what was required of a LloydĂs syndicate auditor. We have criticised the PCW Auditors. Moreover, we also criticise LloydĂs: their rules and regulations were unclear and fell well below what was required to ensure that the Names on the syndicates received adequate assurance from the audit that all was well.

Manipulation of syndicate accounts

The PCW Intermediate Programme lent itself easily to manipulation of the syndicate accounts in a number of different ways, all of which were resorted to at one time or another:-

1. If a syndicate wished to recover money which was not covered by the terms of the Intermediate Programme policies, an additional clause would be written in to cover it.

2. Another method was to invite the reinsurer to reassess the risk and agree to a refund of premium.

3. The syndicate results could be artificially depressed by delayed claims on the Intermediate Programme or not making them at all.

4. The results could also be depressed by the payment of excessive premiums or additional premiums.

These manipulations, together with the manipulations of the reinsurance to close, were wholly improper and resulted in the syndicate accounts being either meaningless or positively misleading. Mr Cameron-Webb said in his evidence to us:-

"Let me just say this: that in doing the accounts for all the syndicates we always made a decision as to what profit we wanted to pay on all the syndicates, not just the babies. If that required a return from intermediate funds, such return was organised on whatever years that might have occurred. On those years where sufficient profit had been made it was left, and those years where we didnĂt really want to pay out as much profit in that, we organised the reinsurance to close to produce those figures that we wanted to get to."

While it is no doubt true that some Names prefer to have a regular rather than a fluctuating income from their membership of LloydĂs, the fact is that these manipulations resulted in equity between different underwriting years of account. A Name leaving a syndicate could find himself paying premium to the Intermediate Programme which could be used to pay claims for later years. Conversely, a Name joining a syndicate could find himself paying increased premiums to top up the fund in order to pay claims in years before he joined. To an extent such inequities are a feature of the LloydĂs syndicate system which is difficult to avoid altogether. Nevertheless, they were accentuated by the way the Intermediate Programme was operated. Furthermore, any prospective Name would be misled by the syndicate accounts as a guide to the performance of the syndicate unless he knew of the existence of the Intermediate Programme and understood in considerable detail how it operated.

1 Feb 82

Instructions for the Guidance of LloydĂs Auditors: audit of the 1981 year

LloydĂs Accounting Practices

Some understanding of the Šthree yearĂ basis of accounting, of open years and of the procedures for reserving for outstanding claims is necessary. Traditionally, insurance companies writing a marine account follow the same three year approach for that class of business. In addition, many writing a LloydĂs-style non-marine account have also followed this approach. Sphere and Drakes the two principal UK insurance company subsidiaries of Howden, adopted a four year basis but in other respects the system was similar to that of the three year basis.

In essence the three year accounting rule means that each calendar year of account is treated as a single entity, and the results relating to that yearĂs underwriting are identified separately. Because the composition of a syndicate changes from year to year (some Names leave and others join) each year has to be viewed as a discrete unit. However no profit (or loss) is struck until 24 months after the end of the relevant underwriting year of account.

The basic reason for the tradition of the three year account is that insurance claims are often not reported until well after the end of the year of account to which they relate. In some cases it may be ten years or more before major cases are settled, particularly in respect of long-tail business, when it may take some considerable time for the loss to be advised to insurers - even longer before it is advised to all the reinsurers - and longer still to settle. In some extreme cases it may be much longer before claims are reported: one particular type of risk where this has occurred recently, particularly in the LloydĂs market is in respect of latent diseases such as asbestosis, where claims are only now being made on policies written between the wars. Even when a loss or provisional loss is reported, a further period of time may elapse before the loss crystallises as a final amount. The three year accounting convention recognises this difficulty in that it allows LloydĂs underwriters to await the development of their account before they have to assess losses not yet reported (known as Šincurred but not reportedĂ - ŠIBNRĂ). By the end of the third year it is assumed that there will be a sufficient claims experience, and knowledge of the particular pattern of claims in any line of business within the market, to be able to estimate reasonably what provisions for remaining unreported claims ought to be made. At the end of the three years, therefore, a profit or loss is struck. Insurance companies writing a LloydĂs-type account will adopt the three year basis broadly following many of these principles suitably adapted for a company (rather than a syndicate) environment. The only difference of substance is that companies, because they account annually, can - and should - recognise losses on open years when these are foreseen.

LloydĂs, through the accounting and auditing rules ŠInstructions for the guidance of LloydĂs auditorsĂ, regulates this procedure by requiring a minimum provision to be applied to each class of business for both open and closed years. At the end of the three year period the balance is struck by way of the Šreinsurance to closeĂ whereby estimated outstanding liabilities of the closing year of account are reinsured (usually) into the next oldest year, a substantial premium passing to pay for the claims and potential claims as assessed relating to the closing and earlier years of account. The calculation of the reinsurance to close is complex but relies principally on the judgement of the underwriters concerned. In the LloydĂs market this has traditionally been agreed with the auditors, the only benchmark being the audit guidance notes which provide set minimum percentages, to which are normally added further provisions necessary in the context of the underwriting pattern of the particular syndicate. The reinsurance to close has been said to be the ultimate underwriting judgement. Included in the reinsurance to close, since the operation is repeated each year, are outstanding premium income and claims (reported or just estimated) theoretically from every year from the inception of the syndicate. The reinsurance to close includes not only claims notified but a provision for IBNR - which is where a greater element of judgement arises. With a syndicate writing traditional business, where the nature of the account changes little over a period, it is not normally difficult to establish a pattern of settlement which will assist in the formulation of the reserves necessary for IBNR. In some of the newer- and more unusual risks, such as computer leasing where the estimates of overall losses were subject to considerable speculation, estimates of future claims arising can vary considerably from one year to the next. The reinsurance to close will also have regard to the availability of reinsurance protection covering that year of account and may also take some account of any rollover funds.

The financial statements of the various syndicates have taken a number of different forms, since until recently there have been no generally accepted standards for presentation of these statements or for the level of disclosure which is appropriate. Accordingly, agencies have tended to disclose little in the syndicate accounts which they present to members and, the three year rule and associated provisions apart, accounting conventions have varied widely. In part, this may have resulted from the lack of interest shown by most of the users - the Names - whose main interest not unnaturally has been in the size of their annual cheque. When this is satisfactory - and by and large Names seem to have been content with the return on their risk capital - there has been little need to examine accounts in detail. The accounts themselves have often been difficult to understand except by LloydĂs professionals; reliance on membersĂ agents in this and similar matters has tended to be encouraged by the working community of LloydĂs as a whole.

Syndicate Audit

A LloydĂs public information film made prior to November 1982 stated:

"Underwriting syndicates at LloydĂs have one of the strictest audits in the world. Stricter than the law demands. LloydĂs 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."

Probably this corresponded to the general public perception of a LloydĂs syndicate audit at the time. In fact the security of the insured. A prime responsibility of the syndicate auditor as set out in the audit guidance dated 1 February 1982 (covering the audit of the 1981 year) was to "satisfy himself that all investments and cash taken into account in arriving at the Member's Syndicate result are held in trust in accordance with the provision of a Deed of Trust approved by the Secretary of State". A number of additional requirements are stated, the majority relating to verification of assets, although the auditor must also "satisfy himself that the accounting records appear to have been properly kept."

In addition, the auditors have important responsibilities for agreeing the reinsurance to close, checking to see that the provisions made at the end of 36 months are at least in line with the minimum reserves required by Lloyd's. In practice considerable judgement and detailed knowledge of the underwriter's account is necessary to form any view as to the adequacy of, in the words of the audit instructions, "outstanding liabilities as at 31 December l9xx (which must include an element to take care of unnoted and unknown liabilities) ..."

However, the auditors' responsibility in relation to the assessment of the reinsurance to close was not fully defined until February 1983.

0 Feb 82

LloydĂs Log: A View of the Non-Marine Market. Speaking at a recent meeting of the Insurance Institute of London, Mr. Lawrence, a Deputy Chairman of LloydĂs, sought a consensus view of prospects for the coming year.

In adopting a new approach to the popular meetings of the Insurance Institute of London, Mr. Murray Lawrence, a Deputy Chairman of LloydĂs, sought the participation of his audience in analysing the state of the Non-Marine Market.

His audience, which included a large number of senior London underwriters and brokers gave their views on a number of leading issues, the object of the exercise being to identify a common or majority reaction to topics ranging from the state of the 1981 underwriting year to prospects and growth in 1982.

The questions put by Mr. Lawrence (general reactions in brackets) follow:

  1. What do you think will be the outcome of 1981 year/year of account after taking into account expenses, but before investment income/capital appreciation? (up to 10% loss net).
  2. What do you think investment income/capital appreciation for 1981 underwriting year will be as a percentage of net PI? (10% -20%).
  3. Combining everything, what do you think the outcome of the 1981 underwriting year will be? (up to a 10% profit with a substantial number expecting a break-even result).
  4. With regard to the renewal season just ending, how do you think in broad measure the terms for 1982 will compare with 1981 terms?

1) For direct insurance rates? (up to 10% reduction).

2) For reinsurance terms and conditions? (up to 10% reduction).

  1. Given level rates of exchange in major currencies between 31.12.81 - 82, what growth, if any, in gross P.I. do you expect 1982 to show over 1981? (There was a diversity of opinion with some expecting a reduction, some a growth of up to 10% with the majority expecting no change).
  2. What percentage growth do you expect 1982 to show over 1981 expenses? (up to 10% increase).
  3. What percentage of gross Pl do you reinsure at the moment? (25% - 50%).
  4. What percentage of gross Pl do you expect to pay in 1982 by way of reinsurance compared with 1981? (slightly more say + 5%).
  5. How do you think that interest capital appreciation earnings in 1982 will compare to 1981? (slightly higher).
  6. What do you feel is the likelihood (0-100) of existing loss reserves having to be added to during the next three years in respect of what are today closed underwriting years? LloydĂs 1978 and prior; companies 1980 and prior. ( 50 - 95)

In viewing the market in more general terms, Mr. Lawrence said:

The Market

"The market has tremendous advantages but it also has some disadvantages. One of the latter is that it tends to develop a momentum or a common appreciation of things that takes an awful lot to alter. For the last several years on property business and the last few years on casualty business, the market has been faced with requests for improvements in terms that have stemmed from the basically profitable accounts that we enjoyed for a lot of the 1970s, although you wouldnĂt think it looking at the non-marine market results in the LloydĂs global returns. The market has gone into a defensive frame of mind used to being asked to give, and agreeing to give, concessions but this attitude has gone on now for so long that, although I believe on the whole we have fought a good defensive battle or rearguard action, the concessions we have already given have taken us past the start line or break even point in pure underwriting and, yet, as a market we donĂt appear to have realised it as we continue to give further concessions. This leads on to a second point.

Growth

Such has been the growth in the market over the last 10 years that today there are many, often in positions of considerable responsibility, who have never been through really traumatic times such as the middle and late 1960s and there appears among some people an almost blind belief that our business is cyclical and all we have to do is hang on and be around long enough and it will all somehow come right in the end. This to my mind is just not so. To change things I believe needs a conscious effort from everybody in the market - obviously the main responsibility will fall on the leaders in the market but it also needs a proper appreciation by all the market or business will continue to be placed in fragmented pieces, in spite of any stand the leaders may have taken in an effort to halt and reverse the remorseless slide.

How then can we achieve this change in attitude and what conscious steps can we or should we be taking? Let me suggest a few that I believe may be in the right general direction: Of course first of all it is necessary to appreciate what oneĂs present position is, as an understanding of how dire or not the present situation is, is the greatest spur on all of us to do something about it. From the general consensus we have reached today, it would seem there is no problem amongst all of us on this point!

Service

We have to get back to some first principles. What are they? Remember we are a service industry. No one owes us a living. No one sends us business so we can make a quick killing. They come because we have ALWAYS offered a service: Flexibility; initiative; speed of decision; security. If ever we forget this, our days are numbered as the leading market of the world. Let us just look at those points again:

Service does not mean quibbling over every claim or even refusing to pay an original assured his just claim because you cannot collect from your own reinsurers.

Flexibility and initiative

Flexibility and Initiative do not mean doubling the cover, cutting the premium and widening the perils. It may make you an instant hero with some brokers but who are you kidding in the long run? Innovative underwriting it may be - but it only has one end - tears! Speed of decision does not mean giving a reply in two minutes flat without proper underwriting information either because its 10 to one and you want to go to lunch or because the broker is in a hurry or because you think by doing so you will show what a gifted underwriter you are. Security certainly does not mean backing up a LloydĂs policy carrying with it unlimited liability with 100% reinsurance with a 7+% O/R, with that well-known company from Alaska.

Integrity

Integrity in our underwriting and in particular the proper use of reinsurance. Obviously reinsurance used responsibly and backed up with proper underwriting information and based on mutual confidence is a vital and perfectly proper way of spreading the risk, or laying off excessive liability of one sort or another. However, undoubtedly some reinsurance today goes a lot further than that. I regret that all too often original underwriting seems to be done flagrantly and blatantly on the back of and at the expense of reinsurers and, to my mind, this behaviour can only have one inevitable result. Reinsurance generally will become a dirty word and good reassureds will suffer with the bad but the real long-term damage will be to the market-place itself. We have already seen instances where brokers and underwriters alike have been too ready to take massive and ruthless advantage of soft markets with deep pockets. Remember that the inadequacy of original terms and conditions compounds the further you get away from the original business. If we here believe our present terms and conditions are so many per cent below what they ought to be, just think for a moment what the inadequacy of the terms and conditions are of the reinsurers of the reinsurers of those who reinsure us. Fair game some of you may say - but is it? Such action is certain to, and already has, rebounded on the reputation of this market and makes some clients, and long-term ones, think twice whether they wish to continue to send their business here.

What is the dividing line between the acceptable and unacceptable use of reinsurance? Difficult question with no easy and certainly no one correct answer but I offer you this as a possible cock shy. When original gross underwriting standards are thrown overboard or seriously compromised because of the availability of stupid reinsurance. Once we lose sight of and discard gross line underwriting integrity, I believe we are lost. What grounds have we for holding ourselves up to being an underwriting, risk taking market offering continuity? If we ever lose our gross underwriting integrity, we will simply become another wheeling and dealing market which will never know what continuity it can offer because it will be totally dependent on the availability of reinsurance, and remember, this works both ways.

Cheap reinsurance

OK when reinsurance is ridiculously cheap and you are a hero offering gross lines at cheap gross rates on the back of that reinsurance, but have you stopped to consider what happens when cheap reinsurance markets dry up and, to try to recoup their losses, they charge too much for the reinsurance. The only way you can then react is by in turn either charging too high original rates in order to continue to make your margin and thereby probably losing the business or writing that business at a negative margin until reinsurers, having recouped their losses, bring their prices down to a more reasonable level.

Continuity

Another facet of reinsurance that concerns me is that we are at the moment very often selling our security - one of our greatest assets - on the back of what may turn out to be a fragile pack of cards. We may today be heroes accepting millions on an individual risk or writing catastrophe accumulations of tens of millions but what happens if one day, say, one third of the security on which those gross lines are based refuses to renew - what sort of hero do we then look to our clients - what price then continuity?

I have believed for some time now that the future prestige of the London market will depend on how it reacts after the next big bang, whenever and however it occurs, on two points: First, the speed with which our clients are funded their claims by us, regardless of whether we have been reimbursed by our reinsurers, and, second, the degree to which we stand up and are counted for our same gross lines when we may have lost a considerable percentage of our own reinsurances. So then, let us concentrate on and, where necessary, get back to gross line underwriting - other competitors do this and they will leave us far behind in the future if we fail to do so.

Improving and giving more thought and time to the education of the young - not only in matters of detail but also in matters of standards of behaviour. Example is one of the best ways to influence people.

Modernisation

To conclude, these are difficult and rapidly moving times. In addition to the problems we have talked about so far, there are certainly two other major revolutions taking place.

Modernisation of our business - whichever way you like to look at it, we are either dragging ourselves into the 20th century or preparing ourselves for life in the 21st century. Learning to live with the micro chip and understanding how to turn it to our use. A complete overhaul of the traditional horse and cart ways in which we conduct our business after we have underwritten it from the point of view of speed of flow of premiums to the market, and claims to assureds and reassureds. Preparation of and the speed with which assureds receive their policies and other evidence of insurance. I venture to suggest that by the end of the 1980s we will look back with disbelief at the way we used to do things. If I turn out to be wrong in this assumption, I have considerable fears for the standing of the London market at that time because I do not see how we can continue as we are and still retain the pre-eminent position we do in the world today. An overhaul and updating by the City in general, and LloydĂs in particular, of the self regulation process. We have seen the Wilson and Fisher reports which have added impetus to this movement. Whatever private or public views may be held about certain aspects of, and recommendations of, the Fisher Report, there is I believe general agreement that the disciplinary procedures in the LloydĂs market are totally out of date and inadequate to deal with present-day situations and problems though this should be corrected when the LloydĂs Bill becomes law. So far as the companies are concerned, I do not believe that, following the prolonged publicity that has surrounded the LloydĂs Bill, the Department of Trade will not be looking before too long at some increased regulation of insurance companies in the London market.

Determined effort

But the point I want to finish on is to go back to what we met here to discuss, the state of the non-marine market, and I want to make as forcibly as I can the point that, forget cycles, forget Fisher and self regulation; for the market to change course it needs, first, a realisation by all of us in the market that it needs to do so and, second, a determined conscious effort by all of us to see that it does. Sitting back, doing nothing, waiting for it to happen on its own or for somebody else to do something about it, turning bad business into something vaguely liveable with by the ruthless exploitation of naive reinsurance markets, will not do - the position is too serious and all of us I presume do wish to hand on to our successors at least as healthy and thriving an inheritance as we received from our predecessors - well if so, we had all better do something about the present situation and quickly".

Feb 82

Mr K Randall reported the meeting with several of the Panel Auditors to Robert Kiln, Chairman of LloydĂs Audit Committee, and to Murray Lawrence, Deputy Chairman of LloydĂs with responsibility for the annual solvency test of Names.

Feb 82

Mr Randall discussed the auditors warning privately with Peter Green, the Chairman of LloydĂs, and Murray Lawrence, a Deputy Chairman of LloydĂs. There was great anxiety that the LloydĂs market should not appear incapable of paying claims and that auditors should not be given directions which would prevent them from signing solvency reports for syndicates.

82

Mr Outhwaite wrote 51 run-off policies which fall into the 1982 year of account. Of those 51 policies, 19 were written in earlier years (that is, 1974 to 1981) and have been reinsured into the 1982 year of account as a result of the RITC. The remaining 32 were signed into the 1982 year of account although 11 were actually written in 1981 or December 1980. Of the total of 51 policies, Mr Outhwaite led 47 and took a 100% line on 20. Not all the policies upon which a less than 100% line was taken were fully placed in the LloydĂs Market so that Mr Outhwaite may have been the only Underwriter signing. It has not been possible to determine exactly how many run-off policies were placed in the LloydĂs market generally in 1981/2. Certainly there were some run-off policies placed that did not involve OuthwaiteĂs syndicates. However, those syndicates which have also been underwriting such policies do not appear to have very many on their books and it is clear that Outhwaite took lines on a sizeable majority (perhaps in excess of 80%) of all run-off policies annually placed in that period.

Mr K E Randall, a previous Manager of LloydĂs Underwriters Agents & Audit Department, forwarded a letter, dated 9 January 1990, to Mr R A C Hewes , head of LloydĂs Regulatory Services, which stated inter alia:-

  1. That the absence of a "true and fair" requirement, inevitably took away some of the pressures (especially for agents and auditors), to research syndicate exposures;
  2. That many syndicates had "rollover" funds offshore and "off balance sheet". Doubtless, there was some (at least notional), netting off of potential deterioration against the undisclosed offshore funds. If, in such cases, the RITC figures were used also for placing a run-off, the reinsurers
  3. (i) were not advised of the true exposures at the time and

    (ii) did not get the benefit of the rollover funds when they came back onshore (or, at least, I have seen no evidence to suggest that they did).

  4. That there was no doubt about the developing problem of Asbestos, not least because of market meetings sponsored by the Audit Committee, chaired by Mr Murray Lawrence. Run-off reinsurers should have been able to assume that LloydĂs instructions had been followed. Finally,
  5. My real concern about standards of disclosure and trust (see end of your minutes) is that LloydĂs operates in a market of high volumes where professionals, working together, take short cuts. In such an environment, the most strict standards must be applied or the market will cease to function.

1 Feb 82

Daily Telegraph: LloydĂs group in split over reform Bill

A DEEP division split LloydĂs apart over the weekend with the formation of a committee comprising top underwriters and brokers to co-ordinate opposition to the LloydĂs Bill due for its third Parliamentary reading on Wednesday.

Following the backing for the Bill by the market associations on Friday, a group of senior LloydĂs people have formed a group to ensure the measure is amended. They are so strongly opposed to the legal immunity demanded by LloydĂs that they are prepared to sacrifice some of the gains they have already made through changes In the draft Bill.

The committee is meeting today to establish its tactics. The next step is to collect backing from other senior LloydĂs people before WednesdayĂs debate.

The threat is that these top market men will make it clear to Parliament they would rather lose the Bill than have one which deprived so many people of their legal rights. The Bill might then be talked out by a group of Conservative MPs who already oppose the legal immunity provision.

Richard Needham, one of the M Ps who have criticised the measure, last night attacked the chairman of LloydĂs for his handling of the Bill. "I do not believe that the genuine objections of those opposed to various measures in the Bill have been handled by some of the present leadership as sensitively as they might have been." he said.

He added that "the deep divisions" within LloydĂs should not "provoke a fillibuster which might destroy the Bill."

But Mr Needham hopes "a consensus might still emerge."

He also said he respected the view that the "Bill lacks the correct framework for successful self-regulation within the market." With opposition to immunity growing, it is thought that even if the Conservative MPs do not talk it out, the fight over the Bill will continue in the Lords.

2 Feb 82

Letter from Malcolm Pearson and David Springbett

During the last few days, the following facts have become clear:

  1. Mr. KilnĂs resignation from the Committee of LloydĂs has profoundly shocked the market, and, together with the airing of many opposing viewpoints in front of the Parliamentary Committee, has finally served to concentrate the marketĂs mind on the form of Bill that it does in fact need. The overwhelming consensus is now in favour of Mr. KilnĂs Bill, not Sir Henry FisherĂs straightjacket.
  2. Mr. Ian Posgate, whose evidence alone convinced Parliament that it must insist on full divestment, now accepts that FisherĂs "Measures short of compulsory divestment", backed by reserve powers with the Secretary of State, would be adequate to deal with the conflicts of interest in question. It is this statesmanlike gesture which makes the present consensus possible.
  3. During at least the past year the Chairman of LloydĂs and Mr. Peter Miller have not been keeping the Committee of LloydĂs informed of important documents put forward by those objecting to the Bill in its present form. Examples of these are:
  1. A letter written by us to the Chairman on 15th January 1981 offering to bring critical Members of Parliament and External Names to a meeting at LloydĂs to compromise on the Bill and thus avoid the Petition to Parliament which, in the absence of such meeting or compromise, was subsequently laid. The compromises suggested in that letter reflect the consensus in the market today, and all the intervening disagreement has therefore been an expensive waste of time.
  2. The legal opinions put forward by our side three weeks ago suggesting compromises on Clause l4 (Immunities), which has always been the BillĂs main stumbling-block.
  1. Either the Chairman of LloydĂs and Mr. Peter Miller are not telling the truth when they inform the press that the Chairmen of all the Market Associations gave full support to the Bill last Friday and Saturday, or some of the latter are not telling the truth when they tell us that they have done no such thing.
  2. The only two people in the LloydĂs community who still passionately want the Bill to succeed in its present form are the Chairman and Mr. Peter Miller.
  3. The Chairman is mistaken when he opines that this Government will not give the Bill time in the next session of Parliament if it fails in debate or is withdrawn.
  4. If it is true that the majority of the Committee and community of LloydĂs would be relieved to see this Bill fail or be withdrawn, then it is wrong and dangerous to waste more of ParliamentĂs time with it until it has been appropriately amended.

2 Feb 82

Paul W. McAvoy: The Economic Consequences of Asbestos Related Disease.

By 2015 would be between 154,000 and 450,000 excess deaths from asbestos. Future compensation would be between $8 billion and $87 billion, with most likely estimate being $38 billion.

4 Feb 82

Mr D P Tayler, the current Chairman of the Asbestos Working Party and the Pulbrook Non-Marine Underwriter of Syndicate 90

advises that he has visited the Elborne Mitchell office utilised by the AWP as a central data base and the focal point to provide the necessary information to the LloydĂs market and that it was to quote his own words "A little chaotic in that a lot of the data sheets were not stored properly and there were not enough filing cabinets, etc., and that the woman seemed a little disorganised".

In September 1979, Elborne Mitchell & Co had provided two partners, an articled clerk and the necessary support staff to handle the computer leasing documentation. There was discussions as to a letter from the AWP to the market giving details of asbestos claims and referring to the material held at the LUNCO office. Mr D Tayler said that the letter could be discussed at the next meeting stating that the LUNCO office was operational.

8 Feb 82

London Market Asbestos Working Party Meeting:

Meeting of the Asbestosis Working Party attended by Elborne Mitchell

2. Reserve Information at the LUNCO Office.... Mr Ayliffe agreed to draft a letter informing Underwriters that the office was now open. The letter should also deal with the following matters:

  1. Auditors would only be given access to the information if accompanied by syndicate representatives;
  2. The information at the office was merely support for the reports already sent to the Market.

3. Panel Auditors. The Chairman reported that some auditorsĂ questions were proving difficult for Underwriters to answer on the information available. It would appear that the Audit Committee had not yet given any directions to the auditors.

  1. Other Assureds. Mr Ayliffe reported that the accounts of Eagle-Pitcher had been qualified by their auditors.

Present: C J Ayliffe

8 Feb 82

The LloydĂs (Audit Certificate) Regulations 1982, Statutory Instrument 1982 No. 136 issued by the Secretary of State in exercise of his powers under Section 73 (4), 85 (1) and 86 (1) of the Insurance Companies Act 1974

(a). It specified in considerable detail the steps to be taken by Underwriting agents in calculating reserves to be carried by syndicates in respect of asbestos related claims at 31 December 1981 for the closing of the 1979 year of account. The previous requirements remained in force or became more stringent. Among the changes, was a new requirement that the auditor must satisfy himself that the underwriting records appear top have been properly kept; and an increase in the number of classes for which an individual account is rendered. In the past, there were only five such categories whereas now there are nine. In addition a five year summary of the main operating highlights is given and for the first time a full description of the accounting policies used at LloydĂs. Another important innovation is the inclusion in the underwriting accounts of separate figures for the reinsurance provision made to close the 1980 and previous accounts.

12 Feb 82

Leeds Castle meeting: Lloyd's Underwriters' Non-Marine Association - The Leeds Castle meeting dealing with asbestosis

A one-day seminar. Believe present at meeting, Committee of Lloyd's Member E E Nelson ,a leading non-marine Underwriter of American non-marine reinsurance business and, Lloyd's Deputy Chairman, Murray Lawrence.

A San Francisco Attorney, Peter Keane, had already expounded on the subject of asbestos by stating "you guys had better wake up, asbestosis is going to be the most diabolical thing that has ever hit the insurance industry." Keane reported to Lloyd's that asbestosis claims were running at 400 a month and could reach 50,000 by the end of the decade.

A new U.S. arrangement, the Wellington Agreement, was formulated to settle these claims on a less complicated basis. This and the change in U.S. Tort Law meant that henceforth they would be settled more quickly and on a big scale; a piece of information of burning importance to any Underwriter of U.S. Liability business.

14 Feb 82

New York Times: You too will pay for asbestos

Article by Paul Macavoy

Feb 82

A letter from the AWP to all interested underwriters stated that in view of the uncertainties of the future, it is difficult to provide any meaningful projection of the developments that are likely to take place over the coming years in regard to this problem and added that the number of claims is likely to escalate and future deterioration is inevitable.

16 Feb 82.

Letter from D P Tayler, Chairman of the Asbestos Working Party to all interested underwriters (informing them that an office had been established to hold centrally details of asbestos claims and AttorneysĂ advices, which were available for inspection by interested parties, at the office of Elborne Mitchell).

The arrangements are complete for the establishment of an office at LUNCO where documents and computer print outs can be inspected by underwriters.... Your auditors may also want to see the information, however, in view of the need for confidentiality it will be necessary for them to be accompanied by your own representative. It was emphasised to you in the circulation of year end reserves that, in view of the uncertainties of the future, it is difficult at this stage to provide the market with any meaningful projection of the developments that are likely to take place over the coming years in regard to this problem. However, the number of claims is likely to escalate and for this reason I must emphasis that future deterioration is inevitable.

22 Feb 82

An Unlimited run-off reinsurance xs $1,500,000 placed for J A Oliver, Underwriter of Marine Syndicate 17 Incidental Non-Marine 16 managed by Stewart & Hughman to incept at 1 January 1982 covering 1978 and prior years. Outhwaite Non-Marine Syndicate 317/661 wrote 100%. The premium was $575,000, Marine Syndicate 17 carried a reserve of $1,437,736.

22 Feb 82

Financial Times: LloydĂs Chairman closes Reinsurance Investigation

Mr Peter Green, the Chairman of LloydĂs of London, the insurance market, has completed a rare personal investigation into a reinsurance contract arranged by one of the largest underwriting groupĂs at LloydĂs. He concluded that no further action is necessary. More than 1,000 Underwriting Members who participate on underwriting syndicate numbers 810 and 869 have been told by PCW

Underwriting Agencies, the group looking after their affairs, that the contract "contained errors which most regrettably were perpetuated throughout the lifetime of the contract". Substantial refunds are being made to the syndicates and the amount involved could be more than ˙400,000. Mr Green carried out his investigation following rumours within the LloydĂs market about the contract. He studied a Quota Share Reinsurance Treaty arranged for the underwriting syndicates by Unimar, a Monte Carlo firm of brokers and Seascope, a firm of LloydĂs brokers. Seascope held a 10% shareholding in Unimar. Unimar stood to earn ˙130,000 per annum for producing substantial premium income to the syndicates. In the event, according to PCW Underwriting Agencies, Unimar will get ˙20,000 per annum from 1978 when it first started arranging reinsurances for the syndicates. The reinsurance scheme with Unimar was not renewed for the 1982 account.

Feb 82

The Committee of LloydĂs established a Committee of Enquiry under the chairmanship of Mr Anthony Coleman QC and Mr Stephen Hailey FCA, of Arthur Andersen & Co, to investigate the relationship of Mr Raymond Brooks and Mr Terence Dooley with the Fidentia. Refunds are being made to the syndicate.

Feb 82

Matthew Leng Jnr, of the U.S. College of Insurance, published a booklet entitled "Environmental Pollution: Liability and Insurance". The purpose of the 60 page publication was to discuss "the major law, regulations and international conventions in the area of environmental pollution and outlines the major forms of insurance coverage available". The booklet included the following comments:

  • "No insurance problem existed regarding pollution prior to 1966, because there was no pollution exclusion in any liability policy. Coverage was on an "accident" basis, and therefore somewhat restricted since it provided no protection against gradual pollution. "Occurrence" coverage was available at a modest additional premium, but relatively few insureds purchased it.
  • In view of ... increasingly serious and unpredictable environmental problems, the insurance industry developed a contamination or pollution exclusion which became part of the standard language in the 1973 revision of the Comprehensive General Liability policy. That policy says it does not apply:

Š... to bodily injury or property damage arising out of the discharge, dispersal, release or escape of smoke, vapours, soot, fumes, acids, alkalis, toxic chemicals, liquids or gases, waste materials, or other irritants, contaminants or pollutants into or upon land, the atmosphere or any water course or body of water; but this exclusion doe not apply if such discharge, dispersal, release or escape is sudden and accidental.Ă

While the language of the exclusion clause does not completely exclude coverage for pollution liability, it does require the pollution to be both sudden and accidental to be covered. What is not covered is gradual pollution: the pollution which comes from the regular, continuing discharge of smoke, vapour, soot, etc.

  • The ACT (RCRA) and its amendments were not passed without reason. The EPA estimates that there are 30,000 to 50,000 hazardous waste dump sites, with 2,000 of them constituting imminent hazards to public health. There are estimated to be 1,200 abandoned hazardous chemical dumps, with those in Love Canal, N.Y. and the "Valley of the Drums" in Kentucky being the most well known."

[It should be noted that the extent to which pollution losses are recoverable under insurance policies is still the subject of litigation. Insurance coverage often results from the U.S. courts interpretation of the policy wordings and, in particular, on pollution exclusion clauses. Contrary to the opinion expressed in the first extract above, numerous pollution advices have now been made on 1966 and prior policies. Cases have gone both in favour of and against insureds].

Under the heading of "Problems created by Superfund", the article went on to state:-

  • There are a number of serious problems which Superfund creates for insurers. Reference was made earlier in a letter from Dennis R Connolly, Senior Counsel of the American Insurance Association, to the Treasury Department in which he said that Superfund represents an unreasonable restriction on the market.. In the letter, he points out a number of problems:
  • The provision that a claimant has a right of direct action against insurers;
  • The imposition of retroactive liability on both the insurer and insured;
  • The use of strict liability instead of the normal rules of negligence;
  • The fact that the strict, retroactive liability is joint and several, making any one insured or insurer responsible for the acts of all who might have contributed to whatever damage or injury occurred;
  • The fact that once an insurance company becomes a guarantor, it is limited to the few defences available to an owner or operator; acts of God, acts of war and unrelated third party acts or omissions under certain limited circumstances, and the additional defence of wilful misconduct by the insured. This may be interpreted to negate all the exclusions of the policy, leaving the insurer subject to unlimited liability for all claims authorised by the Act;
  • The ambiguity of the language, which creates uncertainty as to the actual extent of the liability it imposes."

The article concluded:

"Environmental pollution and liability will be major issues of this decade. Sins of the past are now coming home to roost as old landfills and dumps are impairing water supplies and otherwise affecting the health of entire communities. This is happening in an era of liberal judicial interpretation, with Judges creating new legal theories to hold defendants responsible. It is happening in an era when the theory of entitlement is accepted by many courts. It is happening when many courts are awarding large punitive damages to plaintiffs. In addition, legislators are defying the tradition of the common law and are passing statues imposing strict liability on a retroactive basis, thus completely changing the rules after the game has been played. All this poses severe liabilities which did not exist when they collected their premium dollars in earlier periods. The result will be increased loss ratios, lowered surplus and reduced capacity."

22 Feb 82

Financial Times: LloydĂs chairman closes reinsurance investigation

Mr Peter Green, the chairman of LloydĂs of London, the insurance market, has completed a rare personal investigation into a reinsurance contract arranged by one of the largest underwriting groupĂs at LloydĂs. He concluded that no further action is necessary.

More than 1,000 underwriting members who participate on underwriting syndicates 810 and 869 have been told by PCW Underwriting Agencies, the group looking after their affairs, that the contract "contained errors which most regrettably were perpetuated throughout the lifetime of the contract."

Substantial refunds are being made to the syndicates and the amount involved could be more than ˙400,000.

Mr Green carried out his investigation following rumours within the LloydĂs market about the contract. He studied a quota share reinsurance treaty arranged for the underwriting syndicate by Unimar, a Monte Carlo firm of brokers, and Seascope, a firm of LloydĂs brokers. Seascope held a 10 per cent shareholding in Unimar.

The reinsurance was requested by Mr Cameron-Webb, the active underwriter concerned with syndicate 810. Under the planned arrangement Unimar would participate in arranging reinsurances for the two syndicates and in return Unimar would provide other business for the syndicates to reinsure. In LloydĂs this is known as a "reciprocal arrangement."

It was hoped that Unimar would have been able to generate business on a significant scale in relation to the ˙42m total premium income of the syndicate. But Unimar was unable to generate the business in the way envisaged.

Moreover problems arose over the wording of the contract. The terms describing the commission agreements between the syndicate and Unimar were open to different interpretations; and questions arose over whether the syndicates could be entitled to a return of any of the brokerage from Unimar if the scheme was unsuccessful.

Unimar stood to earn ˙130,000 per annum for producing substantial premium income to the syndicates. In the event, according to PCW Underwriting Agencies, Unimar will get ˙20,000 per annum from 1978 when it first started arranging reinsurances for the syndicates.

Refunds are being made to the syndicate. The reinsurance scheme with Unimar was not renewed for the 1982 account.

Although Mr Cameron-Webb requested that the errors in the documentation should be corrected in 1979, it was only recently that the corrections were made. As a result of the misunderstanding over the wording of the commission terms "a plan of business development which was original in its conception was made to look unnatural in its implementation," Seascope has told Mr Cameron-Webb.

24 Feb 82

Neville Russell: Letter addressed to LloydĂs Audit Dept

We are writing this letter, not only on behalf of ourselves, but also on behalf of the following firms of panel auditors:

  • Arthur Young McCelland Moores & Co.;
  • de Paula, Turner Lake & Co.;
  • Ernst & Whinney;
  • Futcher Head & Gilbert; and
  • Littlejohn & Co.

A substantial proportion of our syndicate clients have losses, or potential losses, arising from asbestosis and related diseases.

It appears that although, in respect of direct insurance of the main carriers and reinsurance of American insurers, Syndicates have received some notification of outstanding claims, they are unable to quantify their final liability with a reasonable degree of accuracy for the following reasons:

(i) You have informed us that there have been approximately 15,000 individual claimants, total exposure to the problem appeared to be considerably in excess of this figure:

(ii) the Courts have not yet finally decided on whether the exposure or manifestation basis is applicable;

(iii) losses are being apportioned over carriers on an "industry" basis. If one of the carriers has losses in excess of its insurance cover, as seems likely, then it could go bankrupt. It appears that its share of the "industry" loss could be apportioned over the remaining companies;

(iv) most syndicates are not certain of their reinsurance recoveries; and

(v) most syndicates will incur losses on their own writings of reinsurance. Very little of this has been advised so far.

(The letter then specifically referred to clause 3 of the LloydĂs Instructions for the Guidance of LloydĂs Auditors and stated:)

"...if there are any factors which may effect the adequacy of reserves, then the auditor must report to the Committee and obtain their instructions before issuing his syndicate solvency report"

We consider that the impossibility of determining the liability in respect of asbestosis falls into this category and we accordingly ask for your instructions in this respect".

24 Feb 82

Ernst & Young, in commenting on a draft of the Merrett 421 loss review report indicated to the Committee that the letter issued by Neville Russell should be seen in the following context:

"Representatives of the Panel Auditors referred to in the Neville Russell letter met on 24th February 1982. It was agreed at that meeting that, in the light of the information provided by LloydĂs on 15th January 1982, LloydĂs needed to take action to ensure that managing agents were in a position to determine their syndicatesĂ reserves in time for the syndicate auditors to report, in approximately two monthsĂ time, on the syndicatesĂ solvency. It was decided that the best way of provoking such action on the part of LloydĂs was to ask the Committee for instructions pursuant to clause 3 of the 1981 Instructions, using the information provided by LloydĂs as the justification. It was agreed that Neville Russell would write to LloydĂs seeking general instructions pursuant to clause 3, on behalf of all the auditors at the meeting. Neville Russell wrote to LloydĂs later the same day.

Accordingly, by making the general statement, concerning the impossibility of determining the liability in respect of asbestosis, Neville Russell was using what appeared to be the effect of what the Panel Auditors had been told by LloydĂs, to provoke LloydĂs into taking action. The auditors had not concluded at their meeting on 24th February that their respective clients would be unable to determine their syndicatesĂ asbestos reserves, nor was this Ernst & WhinneyĂs view in relation to syndicate 421. At the stage at which the letter was written, auditors did not yet know their respective clients positions."

Feb 82

Mr Brian T G Nicholson, joint Managing Director of the Observer, has joined the Board of LloydĂs of London Press Ltd.

1 Mar 82

Meeting of the Asbestosis Working Party.

3. Reserve information at the LUNCO Office. The Chairman stated he was concerned over the reaction from Underwriters regarding the opening of the Claims Office at LUNCO and thought it was fair comment to say there was some disappointment, in particular, many had envisaged the Office would be capable of informing them of individual syndicate participation in respect of the numerous Assureds. Mr Ayliffe stressed that the information would improve, and the lady employed was going through the slips relating to a number of Assureds with the object of drawing up schedules.

4. Panel Auditors. The Chairman raised the question of the letters which had recently been circulated to Underwriters by the Panel Auditors. He believed the Auditors appreciated that it was not possible for Underwriters to be precise in their reply although he was disturbed at the ignorance displayed by certain syndicates on the question of asbestosis generally. ...

8. Owens Illinois. Mr Ayliffe reported that this Assured had recently found evidence of insurance placed in the London Market on their behalf by brokers, Edwards Lumley. The periods in question being 1957 - 1960 and 1960 - 1963...

9. Home Insurance Co. Mr Rayment reported that the Home had exhausted its retentions regarding Johns-Manville.

Present:-

C J Ayliffe

1 Mar 82

An Unlimited run-off reinsurance xs $55,000,000 placed for Murray Lawrence, Underwriter of Non-Marine Syndicate 362 jointly managed by C T Bowring Underwriting Agencies and Fairway Underwriting Agencies to incept at 1 January 1982 covering 1978 and all prior years. Outhwaite Non-Marine Syndicate 317/661 wrote 66.67%. In 1985, the following bureau signing numbers 362, 3460, 361, 610, 823, 854 & 910 were party to the Wellington Agreement, indicating that the Bowring Lawrence Non-Marine Syndicate had a long tail asbestosis involvement. Murray Lawrence was a Deputy Chairman of LloydĂs

2 Mar 82

Meeting of LloydĂs Audit Committee

Apologies for absence were received from Mr R J Kiln and Mr E E Nelson. Seeking instructions under the provisions of Clause 3 of the Audit Instructions with regard to the reserves to be created by those syndicates which had a liability for asbestosis and other latent diseases. (Clause 3 of the instructions requires that if there are any factors which may affect the adequacy of the reserves, then the auditor must report to the Committee and obtain instructions before issuing their syndicate Solvency Reports).

Mr Chester said that he had spoken to Mr Nelson with regard to this matter who had put forward the following suggestions:-

  1. With regard to direct business, underwriters should reserve their known claims plus a margin of 30% and their expenses.
  2. With regard to reinsurance assumed they should allow for one loss per assured per each year of account.
  3. On underwriters own reinsurances it was suggested that they approach the matter on the same basis as (b) above; Mr Nelson thought that this would be the basis on which the excess of loss market would settle any claims. With regard to the question of whether claims should be reserved on an exposure or manifestation basis it was considered that whichever basis produced the worst result would be adopted.
  4. The letter from the auditors also stated that the losses were being apportioned over carriers on an "industry basis", if one of the carriers had losses in excess of its insurance cover then it could go bankrupt. It appeared to auditors that its share of the industry loss might then be apportioned over the remaining companies.
  5. The auditorsĂ letter also stated that many syndicates lacked information regarding their reinsurance recoveries. Mr Nelson considered that recoveries might be determined on the formula for reinsurance assumed business as set out above.

Having discussed Mr NelsonĂs views, the Audit Committee considered that it would not be possible or desirable for them to give a definite answer as to the amount or basis of reserves syndicates should carry. It was a matter for the underwriter of each syndicate to determine his potential liability and agree this with the auditor. It was, however, necessary for a full discussion to take place with Panel Auditors so that where possible general guidance could be given and it was agreed that a meeting should be arranged in this regard at the earliest opportunity.

Mr Chester then raised the question of the reinsurance of underwritersĂ asbestosis liability in the LloydĂs Market (i.e.) effectively amounting to reinsurance of the asbestosis "tail" and expressed concern that such liabilities could fall on comparatively few syndicates. Mr Merrett considered that it would be inappropriate for such reinsurances to go unnoted and unreserved by Panel Auditors and that it would be improper for a syndicate taking such reinsurances without telling its own Names. It was stressed that Auditors should make any enquiries they deemed necessary with regard to the open years and that they should ensure that what ever position they consider is necessary should be created over and above the minimum percentage reserves.

It was agreed that this matter should also be raised with Panel Auditors at next weekĂs meeting.

The Committee members who attended:-

A H Chester (in the Chair)

 

C D D Gilmore

 

V V Hudson

 

S L R Merrett

 

K E Randall

Underwriting Agents & Audit Department

M Bowmer

Underwriting Agents & Audit Department

A F Parkington

Research & Development Department

Absent

 

R J Kiln

 

E E Nelson

 

The meeting was not empowered to reach a decision as the Committee of LloydĂs had reserved sole authority for decisions and communications relating to asbestos.

3 Mar 82

House of Commons: Letter from Sir Nicholas Bonsor, Bt., MP to Lady Middleton

Lloyds is a great financial institution. It has come to Parliament with a request for support in giving it statutory powers of self-regulation; no-one is keener that it should obtain that support than I am.

However, there is a fundamental issue arising from the Bill which causes me great concern, both as a member of Lloyds and as a barrister. If the Bill were to be passed in its present form, the Council and Committee of Lloyds would be given immunity from suits of negligence and tort (including libel and slander) by any member of the Lloyds community. This community includes not only working and external members of Lloyds, but also a large proportion of the 72,000 employees within the organisation.

The immunity to which I refer is contained in Clause l4 of the draft Bill. I would invite you to consider the merits of the argument by reference to the debate in the Lower House, which took place on Monday, 22nd February; further, Michael Mann QC and Stephen Ruttle have given joint Opinions in which they establish and explain why the Lloyds council should not be given the immunities it requested. I will willingly provide you with a copy of these Opinions if you would like to see them.

In Michael MannĂs words: "we are of the Opinion that great personal hardship (my emphasis) could be caused by denying the right of suit. Only in the event that the disadvantages to LloydĂs of permitting such suits were overwhelming, should such potential hardship be permitted. Th our view these (hardships) are only apparent. They cannot justify the immunities sought."

I would be most grateful if you felt able to attend the debate in your House to ensure the safe passage of the Bill but with this Clause deleted. Whether you consider an amendment such as that which I proposed on the 22nd February is appropriate, or whether you feel that no special protection should be given, thus keeping the Lloyds council in line with other regulatory bodies, I hope you will agree that Clause l4 as it stands is not acceptable.

8 Mar 82

Porter -v- American Optical Corp., rehearing denied, 455 U.S., 1009, Court of Appeals for the Fifth Circuit reversed District CourtĂs application of the manifestation trigger of coverage and applied the exposure trigger for asbestos bodily injury claims. Court expressly concurred with the 6th Circuit Forty-Eight Insulations decision and held that insurance liability would be prorated among all insurers on risk during exposure period. The insured was held strictly liable under Louisiana products liability law for the manufacture of a respirator that did not protect worker from asbestos. The manufacturer had supplied such respirators to the company since 1953.

8 Mar 82

Keene Corp. - v- I.N.A, 513 F. Supp. 47, District of Columbia Circuit Court , 30 January 1981. Revised 667 F.2d 1034, District of Columbia Circuit Court, 1 October 1981. Cert. denied, 455 U.S. 1007, 8 March 1982. Rehearing denied, 456 U.S. 951, 26 April 1982. District Court applied exposure theory to trigger coverage. District of Columbia Circuit Court of Appeals applied the triple/continuous trigger of coverage and found a duty to defend and coverage for the over 6000 asbestos bodily injury suits against the insured. Court held that "INAĂs duty to defend Keene in underlying asbestos cases ceases upon the exhaustion of indemnity limits under the pre-1966 policies in question". Court found unambiguous policy language specifically limiting KeeneĂs duty to defend any suit "with respect to such insurance as is provided by the policy".

9 Mar 82

Meeting of LloydĂs Panel Auditors.

As a result of the Neville Russell letter, a meeting was held between the firms associated with the Neville Russell letter. The purpose of the meeting was to discuss with Panel Auditors the content and the issues arising from that letter which had been received from them with regard to the reserving for asbestosis at the 31 December 1981 audit. ...The notes of that meeting indicate that the principal points arising from the meeting were:-

  • The auditorsĂ main concern was for a consistent approach throughout the LloydĂs market;
  • Mr. Nelson told the meeting that at present 400 new claims per month were being advised and that if this were projected over a 10 year basis would lead to approximately 50,000 claims.

Mr Chester then asked auditors for their comments. The main worry raised by auditors was the widely differing views taken by syndicates and that the real purpose of their letter was an attempt to seek some uniformity in the LloydĂs market for dealing with this matter. They considered that it would be grossly unfair for syndicates on basically the same risk to treat their reserves on an entirely different basis. Auditors were also concerned that not only may they reserve too little but that they may ask the closing year to carry too great a reserve. Part of the auditorĂs job was to ensure that there was equity between the account accepting the reinsurance and the closing account.

  • Henry Chester agreed to discuss the question of guidelines with the Deputy Chairman of LloydĂs, Murray Lawrence, and report back to auditors in due course;
  • Henry Chester asked auditors for their opinion on leaving the 1979 account open. Auditors thought that, although this would solve the problem of equity between years of account, it would still leave the problem of quantification in that Names could still be asked to put up substantial sums of money;
  • Mr. Nelson added that in his view a figure of 50,000 new claims over the next 10 years would seem to be realistic and that reports of up to 2 million new claims could well be an exaggeration.
  • Ken Randall then suggested that LloydĂs could consider issuing guidelines on the basis of the 50,000 figure and that, where asbestosis formed a material part of the syndicateĂs account (say 10%), consideration should be given to leaving the account open. Auditors said that they would be reassured with guidance of this sort. It was, however, suggested that in those cases where consideration was being given to leaving the account open applications should in any case be made to the Committee for instructions....
  • Henry Chester then raised an ancillary matter which was the writing by certain LloydĂs Syndicates of the reinsurance of other SyndicatesĂ asbestosis liability. He said that this could lead to the funnelling of a large amount of liability into a small number of Names. He went on to say that consideration was being given to asking the market to stop writing such reinsurances in the open years.

The Committee members and Auditors who attended:-

Audit Committee

R J Kiln

A H Chester

E E Nelson

M Bowmer

LloydĂs Underwriting Agents and Audit Dept

K E Randall

LloydĂs Underwriting Agents and Audit Dept

Panel Accountant

Panel Auditor

A W Dyer

Neville Russell

A M Blake

Neville Russell

M Bolger

Ernst & Whinney

P B Milne

Littlejohn & Co

and approximately 20 other panel auditors.

In his evidence as to the context in which the Panel Auditors meeting should be seen, Ken Randall stated:

"... one can be terribly cynical about these things. My impression at the time, as I recall it, was that this was quite a difficult problem for the auditors and it would have been jolly convenient for them to have been able to step back from the problem and merely say to LloydĂs, "You tell us what we should do in the circumstance."

and went on to say

"I cannot remember exactly what I said at the meeting. It would have been my normal style to say, "You have your responsibilities as auditors, LloydĂs will clearly have to think about what it needs to say to the market about what their side of the job is."

Mar 82

Association of Members of LloydĂs (AML) formed.

11 Mar 82

Ernst & WhinneyĂs internal letter from M A Bolger to partners and managers involved in syndicate audits.

( referred to the fact that in the White Letter accompanying this yearĂs LloydĂs audit instructions the attention of auditors is drawn to risks which include liability for latent diseases and products liability when assessing the adequacy of reserves. Major losses under these categories have been known in the LloydĂs market for some time. The letter also stated the following. It is understood that there are 40 insureds of which 19 are direct in the London market. In respect of 15 of these, all the slips placed in the London market have been found. The total number of cases in litigation is in the region of 15,000 and this number is growing by approximately 400 per month. The product was readily available between 1945 and 1975. The pattern in LloydĂs is that up to 1962 syndicates have insured American carriers direct, and thereafter they have covered American companies by reinsurance in the London market. The size of the asbestosis problem became apparent some two years ago when it was agreed that normal assessments of settlements were not suitable. Estimates have been made on the basis of an average cost per claim together with an estimate of expenses. The average was said to be $125,000 plus $10,000 for expenses).

In the white letter accompanying this years LloydĂs audit instructions the attention of auditors is drawn to risks which include liability for latent diseases and products liability when assessing the adequacy of reserves. The fact that there are major losses under these categories has been known in the LloydĂs market for some time and syndicates have created reserves in respect thereof. The subject was raised at a meeting of advisory panel of auditors in November 1981 at which it was decided to hold a special meeting to provide further information for auditors. The special meeting was held in January under the chairmanship of R J Kiln and auditors were addressed by Mr Ted Nelson, the immediate past chairman of a LloydĂs committee set up to investigation asbestosis losses. The meeting was told that asbestosis was one of a group of diseases which are referred to as latent diseases. These comprise Agent Orange, Love Canal, Des and asbestosis. These losses are principally in US $ and can mainly be classed as products liability claims. The LloydĂs market is meeting claims in non-marine syndicates, in marine-syndicates writing non-marine business and also in aviation syndicates. The losses can arise from direct writings, from the reinsurance of particular US companies, from other reinsurance contracts and in some cases by the acceptance of running-off accounts... It is understood there are 40 insureds of which 19 are direct in the London Market. In respect of 15 of these, all the slips placed in the London Market have been found. The total number of cases in litigation is in the region of 15,000 and this number is growing by approximately 400 per month. The product was readily available between 1945 and 1975. The pattern in LloydĂs is that up to 1962 syndicates have insured American carriers direct, and thereafter they have covered American companies by reinsurance in the London Market. The current state of litigation suggests some uncertainty as to who is liable, Courts in the USA having settled cases on both an "exposure" and a "manifestation" basis. There is apparently the possibility of an appeal being made to the Supreme Court but this has, so far, been turned down. The size of the asbestosis problem became apparent some 2 years ago when it was agreed that normal assessments of settlements were not suitable. A committee was set up and in April 1981 a data base was established on computer.. Estimates have been made on the basis of an average Cost per claim together with an estimate of expenses. The average was said to be $125,000 plus $10,000 for expenses.. an office has now been established within LUNCO and the records can be examined by auditors provided they are accompanied by an underwriter... In compiling reserves for asbestosis reports have been made available to underwriters by brokers in the usual way setting out policies which have covered the various asbestos insureds... this information has enabled underwriters to calculate their maximum exposure on direct writings. The data base which is also limited to direct writings is available as a back-up to records compiled by individual underwriters. Syndicates will have to assess liability on facultative and treaty reinsurance and on any run-off business accepted, and then see what reinsurance protection they have available. In the office, a questionnaire has been prepared which has been sent to clients inviting a representation to us on how reserves have been established for latent disease liability. The questionnaire is similar to one which certain other firms of panel auditors have sent to their clients, there having been some liaison between firms following the panel auditors meeting. As a result of problems that have arisen in quantifying reserves for asbestosis, further meetings between panel auditors and the audit committee at LloydĂs have taken place.

15 Mar 82

Colin Murray, a leading LloydĂs underwriter, wrote to Murray Lawrence, as Chairman of the Audit Committee of LloydĂs, in respect of the 1979 RITC. The letter, which was headed " 1979 Reinsurance to Close" read as follows:

There has obviously been much discussion within the market regarding asbestosis and other potential loss developments on old years. These problems obviously present difficulties to the Underwriter closing the account, and to the Managing Agent and Panel Auditor. I have, however, heard that one or more Panel Auditors have approached the LloydĂs Audit Committee for specific guidance with regard to the figures which should be allocated to asbestosis claims, and I am sufficiently disturbed by the possibility that this should be true for me to write this letter.

I am concerned because a request for your guidance in this matter seems to suggest:

a) that it is possible to set a figure to close an account that will be proved closely accurate in the future.

b) that one or more Panel Auditors may have lost confidence in their own abilities.

The reinsurance to close has surely two basic constituent elements:

a) The figure that will certainly be spent in discharging recorded and quantifiable claims and return premiums.

b) The additional figure which in all the circumstances appears proper to take care of not only foreseeable IBNR but also unforeseeable and/or unquantifiable potential cash movements.

In that the second figure is based mainly upon subjective judgement of many variable factors, it is not only difficult but actually impossible to set this figure with the expectancy that it will prove ultimately to be very accurate. This second figure must obviously take account of the classes of business written, the size and age of the account, the size of lines, the nature of the reinsurance programme and possibly other factors. Underwriters, Managing Agents and Panel Auditors must obviously work with integrity and diligence so that the final figure agreed appears likely to have adequate margins. It is after all part of the total reinsurance premium which at this year-end the 1980 Names will in most cases be charging the 1979 Names for taking over liability from them. Ultimately the Underwriter is surely the best judge through his knowledge and experience, but regardless of this all of us should surely acknowledge that even our best endeavours may be found to be far too much or far too little at some later date."

and a post scriptum stated:

"I hope also that Panel Auditors will enjoy a restoration of courage. Let them if need be look for this to their forbears and think of Bannockburn, Crecy or the parting of the Red Sea (dependent upon ancestors."

17 Mar 82

The LloydĂs Working Party, chaired by A W Higgins, set up with the following terms of reference: Having regard, inter alia, to:-

(a) The recommendations in the Fisher Report;

(b) Divestment requirements contained in LloydĂs Bill;

(c) The long term interests of Underwriting Members and those actively employed in the Underwriting function at LloydĂ

(d) The Undertakings given to Parliament; to enquire into all aspects of the Underwriting Agency System at LloydĂs and to make recommendations to the Committee and Council".

The Working Party:-

Committee Members

Occupation

Agency

A W Higgins (Chmn)

Broker

Crowe/Higgins

D L Stebbing (Dep Chmn)

Senior Partner of Freshfields

Solicitors

G W Hutton

Marine Underwriter

Hutton

S R Merrett

Marine Underwriter

Merrett

P T Daniels

Agent

Lambert Bros

G R Merton

Agent

Merton

C G V Davidge

External Member

Philip N Christie

E G Kulukundis

External Member

Miller

R N D Langdon

Senior Partner of Spicer & Peglar

Chartered Accountants

Mr Hutton was a former Member of the Fisher Working Party.

18 Mar 82

Murray Lawrence letter, LloydĂs Deputy Chairman, to all Underwriting Agents and active Underwriters, with copies for information to Panel auditors. These letters are quoted in full supra in Appendix 2.

The letter to active underwriters and underwriting agents attached to Ken RandallĂs letter, which was also dated 18 March 1982 and signed by Murray Lawrence in his capacity as Deputy Chairman of LloydĂs, included the following:

Potential claims arising in connection with Asbestosis represent a major problem for insurers and reinsurers. It is therefore all the more important that the reserves created in the LloydĂs Audit at the December 1981, fairly reflect the current and foreseeable liabilities of all syndicates.

I should stress, that the responsibility for the creation of adequate reserves rests with Managing Agents who will need to liaise closely with their Auditors. Clearly, individual circumstances will vary, but it is felt that the following broad guidelines may be helpful to Underwriters, Managing Agents and Auditors in agreeing equitable reserves as at 31st December 1981, and ensuring, so far as possible, a reasonably consistent approach to this problem.

1. Reserves for Asbestosis liabilities should be separately identified and disclosed to Auditors. This applies for both the closing and open years.

2. Substantial information has been built up in the LUNCO Office regarding direct business and all Underwriters should check the information available to ensure that their own records are as complete as possible. This information should also be made available to the syndicate auditors.

3. It is in the area of reinsurance writings that the information available may be least complete. Nevertheless, the Committee believes that some information is now available within the Market and Underwriters and Managing Agents should discuss with their Auditors the steps they have taken to quantify and reserve for losses which may arise on an Excess of Loss or Pro Rata basis as a reinsurance of American or other insurers. In this connection, Underwriters should attempt to identify reinsureds on whom Asbestosis claims are likely to fall and to seek their opinion as to the basis on which they intend to submit claims on their reinsurance contracts together with the reserves which they are carrying at the present time and an estimate of possible future liabilities.

4. The Committee is aware of the legal argument whether liability arises on the basis of "exposure" or "manifestation". It is not, however, for the Committee to express an opinion as to which is correct. For the purpose of reserves at 31st December 1981 Managing Agents are strongly advised to carry a reserve which is the higher of the alternatives.

5. An IBNR "loading" should be carried for those claims not specifically advised but which could come to light in the years ahead. The decision regarding the appropriate IBNR percentage is a matter for the Agent and his Auditor to resolve dependent upon the circumstances of each case. It would be inappropriate for the Committee to lay down a minimum loading but, it appears that this loading should be substantial to reflect unreported cases on the direct account and incomplete information on the reinsurance account. Credit may, of course, be taken in respect of reinsurance recoveries, but Agents should verify, so far as possible, that reinsurers have been identified and have agreed to accept claims on the basis submitted. In the event that there are any disagreements with reinsurers these should be discussed with Auditors. (The normal guidelines regarding the admissibility of reinsurance recoveries obviously will apply).

6. A syndicate which has written a run-off or stop loss in respect of an Asbestosis account which has been signed into an open year, should advise the details to its Auditors and where appropriate, the open year reserves should be increased.

7. A syndicate underwriting London Market Excess of Loss business should make particular and comprehensive efforts to ascertain the extent of its possible liability going beyond those claims which have been advised at 31st December 1981, and these should be fully disclosed to and discussed with Syndicate Auditors. The same requirement should apply to specialist Personal Stop Loss syndicates.

8. Where the reserve for Asbestosis represents a material proportion of the total reserves of the syndicate, Agents should consider whether or not to leave the account open. It is the AgentĂs responsibility to ensure that the reserves provided for Asbestosis are sufficient to meet the SyndicateĂs liabilities regardless of whether the account is closed or left open.

9. Managing and Members Agents are strongly advised to inform their Names of their involvement with Asbestosis claims and the manner in which their syndicatesĂ current and potential liabilities have been covered.

I would urge you to discuss the contents of this letter with your Auditor before deciding what further action, if any, is necessary for you to take.

If you should have any inquiries with regard to this matter would you please contact Mr. M Bowmer or Mr. K E Randall.

This letter has been sent to all Underwriting Agents and Active Underwriters, with copies for information to all Panel Auditors.

18 Mar 82

After consideration by the Committee of LloydĂs and in response to Neville RussellĂs letter of 24 February 1982, Ken Randall, in his capacity as manager of Underwriting Agents and Audit Department at LloydĂs, wrote to all Panel Auditors on 18 March 1982. These letters are quoted in full supra in Appendix 2. The letter read:

Several Panel Auditors have approached the Committee for instructions under Clause 3 of the Instructions for the Guidance of LloydĂs Auditors regarding the basis on which syndicates should provide for Asbestosis liabilities in their accounts at 31st December 1981.

I attach a copy of a letter [the Murray Lawrence letter of 18 March 1982] which is being circulated to all Active Underwriters and Underwriting Agents setting out broad guidelines which should be followed in this regard.

The Committee has decided that it is inappropriate to specify a minimum IBNR loading to apply across the Market; the IBNR loading is regarded as a matter for Managing Agents to resolve depending upon the particular circumstances of each syndicate. Nevertheless the Committee wishes me to stress that, unless there are sound reasons to the contrary regarding any specific case, the loading should be very substantial to reflect unreported cases on the direct account and, possibly, incomplete information on the reinsurance account. The Committee also believes that the reserve (including the IBNR loading) should be maintained in full and not discounted to reflect possible future investment earnings.

One of the main reasons why the Committee does not feel it is appropriate to lay down a specific IBNR loading factor is that in a number of cases syndicates will have reserved up to the maximum of policy limits and a substantial IBNR loading, in addition to this figure, might be regarded as excessive.

Auditors will no doubt give special attention to the question of whether or not the Agent has decided to leave an account open in cases where the reserve for Asbestosis represents a material proportion of the total reserves of the syndicate or where there is a wide margin for error in the basis of calculation of the closing reserves due to a lack of current information.

Where it is decided that an account should be left open, your attention is particularly drawn to Clause 6 Note 1 of the Instructions for the Guidance of LloydĂs Auditors regarding the reserves which are being created for the purposes of assessing MembersĂ solvency.

If you should have any queries with regard to this matter would you please contact Mr. M Bowmer or myself."

19 Mar 82

Ernst & Whinney internal memo from N F Holland to insurance partners and managers underwriting department. Herewith the latest epistle on asbestosis. I cannot believe that at some stage we are not going to find a syndicate where there is a major problem. If any partner is unhappy about a particular situation I suggest he lets me know and we will try and organise a PSP type meeting so that a view can be formed and the partner can then talk to his clients knowing he has the full backing of his colleagues.

22 Mar 82

A stop loss $1m xs $1m reinsurance placed for E Ryan, Underwriter of Non-Marine Syndicate 164 managed by Gooda Walker Ltd to incept at 1 December 1978 covering 1977 and prior years. Outhwaite 317/661 wrote 20%.

24 Mar 82

An Unlimited run-off reinsurance xs $7,500,000 placed for I N Thomson, Underwriter of Non-Marine Syndicate 33 managed by Roberts & Hiscox to incept at 1 January 1982 covering 1974 and prior years. Outhwaite Non-Marine Syndicate 317/661 wrote 100%.

Mar 82

Johns Manville filed their accounts for the year ended December 1981 with the Securities and Exchange Commission. Whilst repeating much of what was stated in the note on the accounts to 31 December 1980 the essential message is one of continuing, significant deterioration. The following is an extract from Note 5 to the accounts:

"... As of 31 December 1981, J-M was a defendant or co-defendant in approximately 9,300 asbestos-health suits brought by approximately 12,800 individual plaintiffs. This represents an increase over the 31 December 1980 level of 5,087 cases (brought by approximately 9,300 plaintiffs) and a substantial increase over the 31 December 1979 level of 2,707 cases (brought by approximately 4,100 plaintiffs) and the 31 December 1978 level of 1,181 cases (brought by approximately 1,500 plaintiffs). During 1979, J-M was named as a defendant in an average of 141 cases per month (brought by an average of 196 plaintiffs) as compared with an average of 65 cases per month (brought by an average of 83 plaintiffs) in 1978. During the first three quarters of 1980, J-M was named as a defendant in an average of 194 cases per month (brought by an average of 382 plaintiffs); this rate increased to an average of 304 cases per month (brought by an average of 403 plaintiffs) in the fourth quarter of 1980 and to an average of 400 cases per month (brought by an average of 525 plaintiffs) during 1981. During 1980, J-M disposed of 401 claims at an average disposition cost of $22,600, and during 1981, a total of 802 claims were disposed of, with J-MĂs share of disposition costs being an average of $15,430 per claim. All disposition cost references exclude legal expenses, and the verdicts in approximately 20 cases which are presently on appeal (where the average judgement against J-M is approximately $223,360). Substantially all of these disposition costs have been charged to applicable insurance. The 1980 and 1981 level of disposition costs represents a significant growth from the pre-1980 level of approximately $13,000 per claim and results in an increase in the overall disposition cost per plaintiff through 31 December 1981 to approximately $15,640. The growth in these two areas (volume and costs) has significantly increased the uncertainties as to the future number of similar claims which J-M may receive, and the future disposition costs of the pending and future claims. During 1980, to resolve uncertainties as to the correct interpretation of a number of provisions in the various policies of insurance maintained by J-M and applicable to these claims, it was necessary for J-M and to bring declaratory judgement action to have such issues resolved by a court of law. While it continues to be J-MĂs opinion that its position with respect to these issues is sound and in accord with the weight of judicial precedent, any litigation involves uncertainties to some degree.

Because of the uncertainties associated with the asbestos-health litigation, and in spite of the substantial defences J-M believes it has with respect to these claims, the eventual outcome of the asbestos-health litigation cannot be predicted at this time and the ultimate liability of J- M after application of available insurance cannot be reasonably determined in accordance with Financial Accounting Standards Board Statement No. 5, "Accounting for Contingencies". No reasonable determination of loss can be made and no liability has been recorded in the financial statements. Liabilities relating to asbestos-health litigation will be recorded in accordance with generally accepted accounting principles when such amounts can be determined. Depending on how and when these uncertainties with respect to J-M are resolved, the cost to J-M and thus to Manville Corporation could be substantial.

Costs associated with asbestos-health claims are presented separately in the 1981 financial statements because of the increased activity related to such claims. The 1980 financial statements, which have not been reclassified to conform to the 1981 presentation, include approximately $8.5 million of similar costs that is reflected in cost of sales and selling, general and administrative expenses. Amounts relating to 1979 were not material.

The auditors of Johns Manville, as for 1980, qualified their opinion on the companyĂs accounts for 1981. The audit report. stated inter alia:

"As discussed in Note 5 to the consolidated financial statements, Johns- Manville Corporation (a wholly-owned subsidiary of Manville Corporation) is a defendant in a substantial number of asbestos-health legal actions. The ultimate liability resulting from these matters cannot presently be reasonably estimated."

Merrett, in commenting on a draft of this report, stated that:

"... it was widely known that the company Johns Manville] would exhaust all of its insurance protections since it was acknowledged that they provided only a relatively low level of cover, and no doubt that was the fundamental reason for the auditors to qualify their opinion on the companyĂs accounts in 1981."

As a result of the claims which it had received, in common with other manufacturers of asbestos products, from asbestosis related deaths and injuries, Johns Manville filed for a technical bankruptcy order in the US Courts on 26 August 1982 and this fact was widely publicised at the time; two other US asbestos producers, UNR Industries and Amatex Corp., subsequently filed for technical bankruptcy orders in 1982.

A summary of the asbestosis litigation involving Johns-Manville

A. Notifications

Year

Named Defendant

Brought by

Named

Brought by

 

or Co-defendant in

Approximate

Defendant

Approximate

 

No. of Asbestosis

No. of Plaintiffs

in average

No. of Plaintiffs

 

Suits

 

No. of cases

per month

     

per month

 

1978

1,181

1,500

65

83

1979

2,707

4,100

141

196

1980

5,087

9,300

194*

382*

1980

   

304**

403**

1981

9,300

12,800

400

 

1980

aggregate total

14,900

   

1981

aggregate total

27,700

   

* First three quarters of 1980

** Fourth quarter of 1980

B. Claims Disposed

 

Average No. of

Average Disposition

Year

Claims Disposed

Cost, excl. legal expenses per Claim

1979

$13,000

1980

402

$23,300

1981

802

$15,430

 

1,204

 

Mar 82

Keene Corporation

The annual accounts of certain companies other than Johns Manville contained disclosures about asbestos related litigation but the materiality of this varied from case to case. For example, the 1981 account of Bairnco, the new holding company formed to acquire Keene Corporation, contained extensive disclosures on asbestos related litigation, including the following comments in the ChairmanĂs statement:

"During the year we have kept you informed of the status of damage suits resulting from alleged injuries caused by asbestos in products made by a former subsidiary of Keene Corporation. In October [1981], a Federal court of appeals ruled that insurance companies which provided KeeneĂs product liability coverage should be held fully liable up to the limits of their policies for the costs of KeeneĂs asbestos damage suits. The insurance companies involved are seeking a review of the decision by the U.S. Supreme Court, which in December [1981] refused to review another appeals courtĂs decision relating to asbestos insurance coverage litigation. We should know by mid-1982 whether the high court will also refuse to review and thereby let stand the appeals court decision which is favourable to Keene."

Due to the obstinacy with which the problems of asbestos producers liability and their insurance coverage were fought out, the settlement of claims by asbestos victims was becoming slower and slower. The backlog was made worse by new actions by persons who had fallen ill in the meantime. There was a dramatic deterioration in the situation when Johns -Manville Corp., the biggest asbestos producer in the US, made an application on 26 August 1982 for the protection provided by Chapter 11 of the Bankruptcy Act and was subsequently granted such protection, with the result that 16,500 claims pending against it were suspended. In this situation there was a joint initiative to seek a way out. The asbestos victims, represented by specialised trial attorneys, wanted to achieve quick settlement of their claims, the producers wanted a low-cost settlement procedure eliminating so far as possible the risk of punitive damages to asbestos victims, together with recognised, effective insurance coverage, while the insurers finally wanted above all to see an orderly end to the increasingly difficult dispute about the meaning of the definition of the occurrence in relation to latent physical impairment after the exposure to asbestos and , if possible, to avoid claims by asbestos producers on the ground of refusal in bad faith to give coverage (bad faith claims). Last of all, asbestos producers and insurers had a common interest in counteracting the negative publicity surrounding them as a result of the failure to pay compensation to asbestos victims.

Apr 82

The Estate Protection Plan launched by brokers John Holman & Sons Ltd and Holman Wade Ltd. The plan has been devised in consultation with Messrs Neville Russell, LloydĂs Panel Auditors, and is approved by both the Inland Revenue and the LloydĂs Underwriting Agents and Audit Dept. (Presumably, LloydĂs was concerned at any bad publicity over executors not being able to wind up deceased MembersĂ estates, and wished to prevent a tidal wave of resignations from the older Members). M J Wade was a Committee Member of LloydĂs from 1988 to 1991.

Apr 82

Peter Green commenced "The Tour of 1983" and covered some 25,500 miles and visited Singapore, Kuala Lumpur, Bangkok, Sydney, Canberra, Melbourne and Hobart. The party also included C K Murray.

12 Apr 82

Alwen Hough Johnson placed an Unlimited run-off reinsurance xs $20,000,000 for M J Harris, Underwriter of the Alexander & Alexander Inc./Alexander Howden Non-Marine Syndicate 947 to incept 1 January 1982 covering 1976 and prior years. Outhwaite 317/661 wrote 50%. Alexander Howden Non-Marine Syndicate 126 30%, Posgate & Denby Non-Marine Syndicate 701 20%. The policy was processed through the LloydĂs Policy Signing Office by 25 April 1982 for LloydĂs solvency as at 31 December 1982; and the reinsurers benefit from a NERCO ŠT & DĂ policy placed circa January 1982 with a financial sum insured of $20m for premium $7,285,000 with commutation not before 1 January 2000. The Alexander Howden Non-Marine Syndicate 391, commenced 1976 and was closed down on 31 December 1980. M J Harris was appointed underwriter in mid 1980 and the business of 391 was reinsured into HarrisĂs own Syndicate 947 from 1 January 1981. Syndicate 391 had a deficit of nearly ˙1.1m, syndicate accounts were fudged, and 947 had a U.S. $1m reserve shortfall due to asbestosis type claims. In 1985, the following bureau signing numbers 391, 947, 126, 129 were party to the Wellington Agreement, indicating a long tail asbestosis involvement. Alexander Howden/A & A commenced to monitor asbestos-related claims as one of the "big 5 claims" in about 1975 and have voluminous (sic) files in connection with asbestosis and their reserves. The Dolling Baker/Davies 544 placing information included "Projected Settlements" for the period 1981-1995 and a note including a description of the syndicates reinsurance programme and stating that "the syndicate have a voluminous [sic] file in connection with asbestos and their reserves" - a summary of possible involvement was attached. The involvement of the A & A managed Posgate 126 syndicate as a reinsurer was first disclosed to Names in the accounts as at 31 December 1989, dated 26 April 1990, under the disclosure requirements of the Run-off Years of Account Byelaw No. 17 of 6 December 1989. Details of this was omitted from the A & A offer of restitution of 19 December 1985 as was any reference to Wellington Agreement signed on 19 June 1985, some six months earlier.

15 Apr 82

A $625,000 xs $1,870,662 run-off reinsurance placed for J H Barder, Underwriter of Marine Syndicate 62 Incidental Non-Marine Syndicate 60 managed by Wigham-Richardson & Bevingtons Underwriting Agencies to incept at 1 January 1982 covering 1976 and prior years. Outhwaite wrote 50%.

16 Apr 82

An Unlimited run-off reinsurance xs ˙500,000 placed for B P D Kellett, Underwriter of Non-Marine Syndicate 993 jointly managed by B P D Kellett & Co and Wigham-Richardson & Bevingtons Underwriting Agencies to incept at 1 January 1981 covering years 1968 to 1976. Outhwaite wrote 100%. This policy protects Syndicate 993 in respect of their share in the Bracey Syndicate run-off.

16 Apr 82

Ernst & Whinney internal memo from N F Holland to insurance partners. Asbestosis.

In view of the well publicised problems in estimating outstanding liabilities in respect of the above claims, and the subjective judgements involved therein, it is imperative that our audit files are adequately documented this year. In particular:-

  1. All syndicates were asked to supply certain specific information in relation to asbestosis and other latent diseases. We must insist on clients supplying this information this year in view of the letter issued by LloydĂs on 18 March 1982.
  2. The 18 March 1982 letter on asbestosis was issued by the deputy chairman of LloydĂs to the market in which broad guidelines are laid down in arriving at equitable reserves for these risks. Insofar as these guidelines go beyond the information requested in our letter then this information should also be recorded on the file. In particular the following points are covered in LloydĂs letter and do not appear to be specifically covered by our letter.
  1. Confirmation that LUNCO office has been visited to check that underwriters records are as complete as possible.
  2. Managing agents are strongly advised to carry a reserve which is the higher of the alternative bases (manifestation or exposure).
  3. A syndicate which has written a run off or stop loss in respect of an asbestosis account which has been signed into an open year should increase the open years reserves accordingly.
  4. Syndicates writing London Market excess of loss and personal stop loss should make comprehensive efforts to ascertain the extent of its possible liability beyond losses advised at 31 December 1981.
  5. Where the reserve for asbestosis represents a material proportion of the total reserves of the syndicate, agents should consider leaving the account open. However, it is still necessary to ensure that sufficient reserves are set up if any client leaves an account open.

17 Apr 82

Washington Post: Hazardous asbestos likely in many of areaĂs old homes.

26 Apr 82

Keene Corp. - v- I.N.A, 513 F. Supp. 47, District of Columbia Circuit Court , 30 January 1981. Revised 667 F.2d 1034, District of Columbia Circuit Court, 1 October 1981. Cert. denied, 455 U.S. 1007, 8 March 1982. Rehearing denied, 456 U.S. 951, 26 April 1982. District Court applied exposure theory to trigger coverage. District of Columbia Circuit Court of Appeals applied the triple/continuous trigger of coverage and found a duty to defend and coverage for the over 6000 asbestos bodily injury suits against the insured. Court held that "INAĂs duty to defend Keene in underlying asbestos cases ceases upon the exhaustion of indemnity limits under the pre-1966 policies in question". Court found unambiguous policy language specifically limiting KeeneĂs duty to defend any suit "with respect to such insurance as is provided by the policy".

27 Apr 82

The Washington Post: The asbestos mess.

The likelihood of bankruptcies among manufacturers and insurers, the lack of remedy for the victims and the unmanageable legal mess that is burdening court schedules make it imperative for Congress to stop its endless studying of the problem - this has been going on for years - and take action.

27 Apr 82

An Unlimited stop loss reinsurance xs $2,000,000 placed for M J Harris, Underwriter of the Alexander & Alexander Inc./Alexander Howden Non-Marine Syndicate 947 to incept at 1 January 1982 covering 1976 and prior years. Outhwaite 317/661 wrote 33.33%. Premium $750,000 to cover losses and loss expenses in respect of the 1976 and all prior years settled in each of the calendar years 1982, 1983 and 1984 excess of $2m each year. It has expired with a claim (for 100%) of $353,000.

27 Apr 82

Letter from the Asbestosis Working Party and the chairman of the Non-Marine Reinsurance Sub-Committee.

The non-marine reinsurance sub-committee has recommended that the Asbestosis Working Party make arrangements to add treaty reinsurance asbestosis-related claims to the existing computer programme. As the working party has no authority to handle treaty reinsurance matters, this will be a record keeping exercise only. The proposed addition to the computer programme will enable the legal firms handling treaty claims to assess more accurately reinsurersĂ involvement.

28 Apr 82

An Unlimited run-off reinsurance xs ˙500,000 placed for B P D Kellett, Underwriter of Marine Syndicate 993 jointly managed by B P D Kellett & Co and Wigham-Richardson & Bevingtons Underwriting Agencies to incept at 1 January 1982 covering years (1) 1972 to 1977 and (2) 1966 to 1975. Outhwaite wrote 100%. This policy protects Syndicate 993 in respect of their 32% share in the Bishopsgate Insurance Company run-off. This policy protects the Bishopsgate in respect of their share of: (1) Weaver Agencies 1972 - 1977: (2) C R Driver 1966 - 1977 limited (1) $15,000 (2) ˙30,000 any one loss.

0 May 82

Asbestos related property damage claims developed from an order made by the US Environmental Protection Agency ("EPA") in May 1982 which required that all schools and similar public buildings constructed prior to January 1979 be tested within 12 months to determine the presence of friable (i.e. flaking) asbestos. There may have been isolated instances of property damage claims before this order, but this was the origin of the bulk of the subsequent property damage claims.

0 May 82

The National Westminster Bank issued a secret report, Serious Liability Problems for LloydĂs, which was forwarded to the Bank of England and to the Committee of LloydĂs. This was seen by all Committee Members of LloydĂs and Peter Green personally dealt with the response.

13 May 82

Financial Times: Perils of US Asbestos litigation: (The tale goes on and on. It seems better not to have anything to do with asbestos), and inter alia states:-

Asbestos claims are the latest and fastest-moving product of the US litigation industry. They run into tens of thousands, necessitate the appointment of additional judges to deal with them, and present a potential threat to [the solvency?] of manufacturing and insurance companies alike. The legal issues generated by these claims are largely unresolved - or, to be more exact, have been resolved differently by different appellate courts.... The refusal of the Supreme Court to review the [Keene] case leaves the lower courts free to go their own way, and manufacturers and insurance companies uncertain about their liabilities and claims... That decision represents a financial threat to industry and insurers of such a magnitude that it could be handled only within the assistance of public funds. Commercial Union estimates that, as a result, liability over the next 20 years connected with deaths caused by previous exposure of former asbestos workers could amount to some $38 billion. To this would have to be added claims for injuries that do not result in deaths and claims by others, for example those using asbestos products. The combined assets of the asbestos industry and of their insurers would, it is evident, not be enough to meet such claims.... The Court [in Keene] went so far as to say that insurers were liable to Keene even during the period its insurance may have lapsed. ... (and the article concluded) The tale goes on and on. It seems better not to have anything to do with asbestos.

In commenting on a draft of this report, Merrett stated:

"For reasons connected with the stance adopted by the Commercial Union in the US, in particular its attempt to procure the intervention and financial support of Congress, its predictions were at the time regarded as self-serving."

and went on to say:

"The suggestion that the combined assets of the asbestos industry and their insurers was not enough to meet these claims does not accord with the study carried out by Conning and Co in 1982 which stated that the impact on the insurance industry was not expected to be catastrophic because of the long period over which the claims would be experienced."

14 May 82

Peter Dixon, Chairman of PCW , letter to a PCW Name which states inter alia:-

The LloydĂs market, in common with the insurance market in general, is still in the midst of a very difficult period and the 1979 underwriting account, in light of the problem of over capacity, high levels of inflation, an increased incidence of losses and higher court awards, closed with a very satisfactory profit. The Syndicates benefited from a substantial increase in investment earnings.

The profits of the various syndicates together with the results for a "standard Name" are:

           

Syndicates

1979

A/c

˙

1978

A/C

˙

P.I. Limit

˙

Results

1979

˙

Results

1978

˙

810

5,388,915

4,562,980

40,000

7,944

7,534

869

746,758

595,972

10,000

726

955

157

1,055,395

830,210

10,000

2,224

2,123

174/175

1,843,761

2,131,727

10,000

1,145

1,486

918

570,490

988,853

40,000

3,038

6,209

940

135,243

N/A

10,000

660

N/A

859

-37,085

29,660

10,000

-108

110

The profit transferred to Names is before any deduction for Agency Salaries, Profit Commission, LloydĂs subscriptions, other NameĂs personal expenses and tax on investments which are all detailed on your Personal Account Statement.

We consider that the provisions at present held are sufficient to meet the estimated "Computer Leasing" losses. Therefore the 1977 accounts of syndicates, 618, 346 (both of the 810 group) and 918 have been closed. A profit of ˙4,054 for the 810 Syndicate group and ˙527,308 for Syndicate 918 has been transferred to NamesĂ personal accounts which represents an additional gross profit of ˙8 for a 1977 account 810 marine Syndicate Standard Name and ˙4,469 for a 1977 918 non-marine Syndicate Standard Name.

The 1979 accounts of Syndicates 618, 408, 346 (all part of the 810 group), 918 and 175 have been left open because of the uncertainties surrounding the ultimate liabilities with regard to "Asbestosis" claims for which specific provisions amounting to ˙1,882,964 for the 810 Syndicate group, ˙747,813 for Syndicate 918 and ˙294,175 for Syndicate 175 have been made in addition to our reinsurance to close. These additional provisions have of course reduced the anticipated 1979 account profits of the Syndicates involved. These funds and the investment income earned thereon will be available to meet losses when they arise.

Asbestosis is one of a number of lung conditions caused by exposure to and inhalation of asbestos dust, which may not become manifest until as many as thirty years after exposure, but which is in the end fatal to the victim.

Thousands of claimants are suing for damages from the companies who manufactured asbestos and many thousand more claims are anticipated. The manufacturers, in turn, are looking to their products liability insurers, including in some cases our Syndicates for indemnity.

There is much litigation, particularly in the United States, involving insurers, to determine whether the claims the manufacturers have to pay to the victims can be collected upon policies written during periods of the victimsĂ exposure or upon policies in effect at the time the asbestosis manifests itself. Neither of these bases would be expected to create difficulties from our Syndicates in light of the impact which the anticipated pattern of claims would then have upon the years from 1968 to 1979. The U.S. courts may, however, uphold some alternative principle of allocating liability to insurers, with wider implications of loss to our Syndicates.

It is expected to be months, perhaps years, before the litigation is concluded, because in a case which is widely predicted to present the biggest problem the world insurance market has had to contain, the stakes are too high for early or easy compromise.

We have examined the available evidence and have established what we regard to be appropriate provisions. However, there are enough unknown factors to make us think the right course is to keep open the 1979 accounts where the greatest potential lies, namely the incidental non-marine Syndicates and the 918 non-marine Syndicate, until the position becomes clearer over the next year or so.

You will see from Adrian HardmanĂs report that our underwriters are endeavouring to lessen the potential danger from this kind of liability in the future.

It will be apparent to you that during a time of high interest rates the effect on underwriting must be a continual pressure on the rating structure caused by the demand for cash flow on which to earn income. Our policy has always been to endeavour to write a profitable insurance account and top it up with investment income. At present this relationship between underwriting and investment income is reversed and will continue until the anticipated drop in interest rates actually happens or the unlikely event that the market returns to realistic rating in pure underwriting terms despite high interest rates.

Syndicates 810 and 869 - J A W I Hardman (Marine Underwriter)

For the third year in succession I am writing this report against a background of depressed rates and poor underwriting results throughout the world. I am afraid that it is becoming boringly repetitive to mention again the world wide competition that we continue to face and the high interest rates that continue to encourage our competitors to write for cash flow rather than underwriting profit. Regrettably the situation has not changed during the last twelve months. Ó..

I referred in last yearĂs letter to our position as the leading underwriters on the cargo policy of the Salem, which was the tanker involved in the fraudulent sale of crude oil to South Africa and which was subsequently scuttled of West Africa. You may have read in the newspapers that we won our case in the Court of Appeal against the innocent owners of the cargo when Lords Denning, May and Kerr unanimously found for the underwriters on t e question whether ShellĂs loss was covered under the limited terms of the cargo insurance. We have heard recently that Shell have decided to take their case to the House of Lords, so it will not be until early next year that the final outcome is known. One frustrating aspect is the reluctance of the countries, where the perpetrators are residing, to take any action against them despite underwriters having provided the full information to the appropriate departments of justice. This reluctance does little to discourage others who may be considering similar acts. Ó.

We are seeing a fall in our incidental non-marine premium income. This is a result of the stand we are taking over the health hazard exposure which we are no longer prepared to provide to major American manufacturers without some certainty as to the coverage being provided.

The trend of court decisions in recent years, particularly in the United States, has been to impose upon industries, including the insurance industry, the burden of compensating, and sometimes over compensating, for injuries which might otherwise have been borne by the individual or the State. This trend, of which asbestosis is a good example, has resulted in insurers being fixed with liabilities which were not generally foreseen when the risks were written and which have emerged only because of the change in recent years towards "consumerism". Some underwriters appear to ignore these developments but in our view to do so is short-sighted.

The Computer Leasing claims are settling within the latest estimates and we feel that the syndicates are adequately reserved for their outstanding liability.

Syndicate 840 - D B Hill (Marine Underwriter)

As I forecast last year the underwriting outcome of the 1979 account has shown a deterioration as compared with the 1978 account. This, as previously explained, is attributable to a world-wide over capacity which in turn leads to pressure on rating levels. A high level of inflation resulting in both increased cost of repairs and court awards together with an increased loss incidence has resulted in the current parlous state of the insurance market.. Prudent underwriting has become an exception rather than the rule; it seems that a large part of the underwriting fraternity have a thirst for premium for cash flow purposes and its resulting investment income potential, rather than creating a balanced portfolio of properly rated business.

Another factor which has had a marked effect on underwriting results in general is the attitude of the broker; whilst it has to be admitted and accepted that the broker is the agent of the Assured it is, nevertheless, in the long term interest of both broker and the Assured that a balanced, stable and profitable underwriting market is maintained. Most of the large broking houses are publicly quoted companies and accountable to their shareholders. I question whether they have not concluded that it is more important to satisfy the latter rather than the former.

I had hoped to be able to report an improvement in the general climate within the market since writing to you last year. This, in my opinion, has not happened.

There are indications that parts of the secondary Excess of Loss market are in a loss situation and that the number of defaulters is on the increase. This will cause our reinsurers to have to pay more premium for their protection, who in turn, will call up-on the original market for greater premiums. This increase in our reinsurance costs will have to be passed on to our Assureds by way of increased rates. Ó

The cargo account continues to show unsatisfactory results and the steps taken in the market as a whole during the last twelve months do not lead me to believe that this situation has yet been corrected. We have cancelled those contracts which we consider will continue to be unprofitable.

The sensitive international situation has brought losses on our war and politically related risks account, which of course has effected our overall settlement. However, we had purchased specific reinsurance to mitigate this situation.

Our Rig Account has been under extreme competition owing to its past level of profitability. Much of the competition has been reckless and is ill-informed.

This syndicate is involved in asbestosis losses and I will not elaborate on this as the subject is fully covered by the Chairman.

I am hopeful that the 1980 account will show some improvement against the 1979 account and that when writing this report next year I should be able to be more encouraging with regard to the future.

Syndicate 930 - I C Agnew (Marine Underwriter)

The 1979 account has concluded with a small but satisfactory underwriting profit in the light of the difficult market conditions that have existed now for several years. The premium income received in that year was similar to the 1978 year. Ó

The Hull Account has broken even for 1979 and remains a small part of the overall account. 1980 will most probably lose money, although the effect of this eventuality will be mitigated by reinsurance protection bought by the syndicate. Hull underwriting continues to be extremely difficult, but very gradually the market is tightening its belt in this area.

The cargo account is looking very sick in both 1979 and the open years. I am closing 1979 with a loss, but cargo only represents about 10% of the overall premium, so although it is of great concern that the settlement should be so high, it is not too damaging. Unfortunately, 1980 shows no improvement and I see no immediate hope of cargo underwriting returning to the profitability of previous years. We have taken steps to come out of those areas of the account which have proved to be unprofitable, especially the diamond trade and cash carrying operations where losses are not met with sufficient premium rises.

The oil rig section of the account is showing a reduced profit and the international and inter-LloydĂs competition for that business continues unabated, with increasing downward pressure on rates. I fear this may remain so for at least another year

Our Marine Liability account is expanding. The USA competition is a continuing problem, but although some business is lost, we find that the rating structure of the account has stood up quite well. This side of our operation is maintaining its past profitability and we hope to defend that position.

I am hopeful that the general level of profitability or lack of it, both throughout LloydĂs, and overseas, is such that we may well be writing of a happier picture by this time next year. There are signs at last in some areas of underwriting of a firmness that might halt the slide of rates and help to return us to the sound underwriting profits for which we all strive.

Syndicate 174/175 - C E Davies (Marine Underwriter) - LMX

As I indicated in my report last year, the 1979 year of account sustained more and greater major and catastrophe losses than had been suffered in preceding years.

The greatest of these losses concerned the three Liquefied Natural Gas Tankers at the Avondale Shipyards, the losses arising from the Iran Islamic revolution, the exceptional explosion of the French tanker "Betelgeuse" and Oil Terminal at Bantry Bay, the collision in the Caribbean of the two super-tankers, the "Atlantic Empress" and the "Aegean Captain" and the loss of the American Airlines DC 10 at Chicago Airport. In addition, there were many losses, including two hurricanes in the United States Gulf, "Frederic" and "David", which were significant in size.

It is, therefore, most pleasing to report that the 1979 underwriting year has resulted in a satisfactory profit. The 1980 year, during which several large losses also occurred, although not to the same degree of severity as those suffered in 1979, presently shows a marginal improvement compared to 1979. The 1981 year currently shows a further improvement compared to the two preceding years.

The SyndicateĂs main area of operation is in the field of Excess of Loss Reinsurance and here rates have been substantially increased in those areas which have sustained the major and catastrophe losses which occurred in such numbers during 1979 and 1980. Stringent efforts are made to secure the best balance within Excess of Loss Account underwritten and the achievement of such a balance is instrumental in enabling the account to absorb a succession of losses in the future such as those described above with a degree of impairment which is sustainable.

The SyndicateĂs participation in the field of direct insurance continues to be the lesser part of the SyndicateĂs total operation and the results achieved in this area, whilst being only modest, are acceptable. The desire to search for premium in order to secure an investment income benefit while interest rates remain relatively high, continues to depress the rating of direct insurance although here and there, early signs of a potential resurgence may be detected which may or may not develop and come to fruition.

To date, the SyndicateĂs structure has effectively withstood what must be regarded as a period of exceptionally severe loss experience during 1979 and 1980 and thus confidence is reinforced that viable underwriting, financial and reinsurance policies are being pursued. Consequently, the syndicateĂs present current underwriting attitudes and policies will continue in the foreseeable future.

Syndicate 859 - G A Haynes (Aviation Underwriter)

Unfortunately as forecast and in common with the majority of direct Aviation Underwriting AccountsĂ, the 1979 Account has closed with an underwriting loss. This loss is due to the continuing intense world-wide competition for aviation business from underwriters and brokers which leads to uneconomically low rates and also to the large number of jet airline losses amounting to 19 in all and amounting to US $211 million in that particular year. The corresponding passenger fatalities amounted to 879, some 200 more than in 1978.

In 1982 the aviation market is still in a state of change and although the overall capacity has lessened slightly, there is still a tremendous amount of competition, particularly for airline business. Whilst we are now able to get reasonable rate increases on airlines that have losses, those that have good records can still manage either to renew their insurances at the same rates or even in some cases obtain reductions. The brokers always seem to be able to think of some reason for this and because of the financial position of many of the airlines there is every incentive for them to push for and gain premium savings. Also, unfortunately in 1982 a Marine market Syndicate quoted renewal terms for one of the worldĂs most desirable airlines. Their terms undercut considerably those quoted by the existing leaders. Although this attempt to lead business away from the aviation market failed through lack of support, action of this sort does not help to provide stability in our market.

As forecast in last yearĂs report the increase in deductibles, the monetary amount the insured bears himself in the event of a loss, has greatly diminished the number of claims that we are receiving annually. These increases apply to risks renewed on or after 1 January 1981. We believe that the deductibles should now be increased again to fall in line with the rate of inflation and there is a hope that this will be achieved in July this year. Payment of premiums is still extremely slow although, recently, there has been a slight improvement.

A welcome spread of business is being provided by the increase in satellite insurance in which all LloydĂs markets are participating. This agency is involved in this class of business and it will form an important part of its portfolio in the future. It is interesting to note that about two hundred satellites will be launched in the next seven years - each with a value of up to $150 million.

The future will not be easy and the situation is not helped by the eagerness of some people to become leaders in the belief that this action will enable them to achieve their premium more easily. One must hope that the lesson of the seventies has not been completely forgotten and the aviation market can return to profitability.

Syndicate 918 - J A W I Hardman/M Jackson (Non-Marine Underwriters)

The Non-Marine Syndicate closed the 1979 account with a lesser profit than the previous year after taking into account the additional provision made for "Asbestosis", but when analysed in comparison to the premium income and the increasing size of court awards throughout the world it should not be considered to be totally unsatisfactory.

During 1979 the market watched anxiously as two hurricanes, "David" and "Frederic" grew in intensity at sea and then hit America, neither of these two occurrences caused us any significant loss. ..

The open year 1980 is reflecting views expressed in previous reports of a falling income. The reason for this being the hunger for premium income at any price of our largest competitor, the United States domestic market. So long as interest rates remain high it appears that they will continue to undercut our policy rates.

The specialised short tail sections of our account are expanding and continue to remain profitable, hopefully equalising the fall in profits from the reduced liability account premium income.

Peter Dixon continues:-

I will now turn to the results of our investment activities during 1981. Ó

The syndicates have also benefited from the drop in value of the pound to the dollar, as the sale of dollar profits and investment income have resulted in a larger receipt of sterling. This does not apply to the aviation syndicate as they had to buy dollars to meet deficiencies in this currency. Ó

Predicting future results is always very difficult and has to take into account factors which we are not able to control., such as the levels of inflation and interest rates. However, I do not expect underwriting profits to show any substantial improvement for the next two years despite indications, in some sections of the market, that the problems which have beset us in recent years are being solved. If these signs are indeed the turning point then my report next year could be somewhat more encouraging.

The AuditorĂs are Arthur Young McClelland Moores & Co.

25 May 82

DOLLING-BAKER RUN-OFF CONTRACT WRITTEN (417 40%, 421 10%, 661 50%).

Unlimited run-off reinsurance xs $9,138,222 for Davies, Underwriter of the Alexander & Alexander Inc./Alexander Howden Non-Marine Syndicate 544, placed by Winchester Bowring, to incept at 1 January 1982 covering 1978 and all prior years. Syndicate 544 had agreed to "front" an Unlimited Reinsurance of another Alexander Howden Syndicate and had the benefit of a NERCO "T & D" policy with a financial sum insured $5,050,000 in excess of $5m in the aggregate, less claims incurred of $911,788. The premium paid was $975,000 and Syndicate 544 carried a reserve of $5,125,352. Merrett challenged the validity of this contract, the original excess $9m was revised to $30m and the unlimited policy was capped at $90m. By the agreement dated 8 May 1990, payments due were deferred for amounts in excess of $14m above the new excess point $30m until after 31 May 1995 and for amounts in excess of $31m until after 31 May 2000. The settlement was subject to confidentiality but the 1989 Dolling Baker accounts disclosed that:

The difference between the current settlement of $13,571,466 and the new excess point of $30,071,466 is $16,500,000. Of this $7m is being paid by Winchester Bowring, the original placing broker, and the balance will be borne by the syndicate."

The position from 1 January 1982 can be summarised as follows:

First

$13,571,466

settled at 31 December 1989 by Syndicate 544

Next

$ 7,000,000

cash to be paid to Syndicate 544 by 31 May 1990 by Winchester Bowring

Next

$ 9,500,000

to be paid by Syndicate 544

 

$90,071,466

New Excess point

Next

$60,000,000

_________

To be paid by Syndicates 661, 417, 421 under a controlled deferred payment formula

 

$90,071,416

Unlimited policy capped at $90m

In 1985, the following bureau signing number 544 was party to the Wellington Agreement, indicating a long tail asbestosis involvement

27 May 82

TOOMEY RUN-OFF CONTRACT WRITTEN (417 85%, 421 15%). Unlimited run-off reinsurance xs $2,250,000 for L Toomey, Underwriter of Non-Marine Syndicate 640, 130 & 133, managed by A B Dick-Cleland Underwriting Agencies, placed by Golding Collins to incept at 1 January 1982 covering the years 1966 - 1970.

Jun 82

Dr Selikoff and others: Study for US Department of Labor entitled "Disability Compensation for Asbestos-associated Disease in the United States", prepared by Mount Sinai School of Medicine, New York for the Assistant Secretary for Policy, Evaluation, and Research (Labor), Washington DC. The report contains some 691 pages, is for the period October 1978 to June 1982 and supersedes the June 1981 report.

"Asbestos-associated diseases"

Asbestos is a virtually indestructible fibre which, when inhaled into the lungs, tends to persist indefinitely. The major health effects now linked to asbestos exposure include asbestosis, a chronic lung disease, and various types of cancer. Once established, asbestos disease may progress even after exposure is terminated and no specific treatment exists. The latency period before initial clinical problems averages 10 - 20 years.

The two major asbestos-related cancers are lung cancer and mesothelioma. Lung cancer resulting from asbestos exposure has a latency period of 15 to 40 or more years and may result from relatively low-dose exposure. Mesothelioma is an otherwise rare form of cancer of the lining of the lung and abdominal cavity and has no known cause other than exposure to asbestos. In many cases, it appears that very little asbestos can produce the disease. Asbestos exposure is also associated with increased risk of cancer of the esophagus, larynx, oropharynx, stomach, colon, rectum and with kidney disease.

Population at risk of Asbestos-related disease

Estimates of dose-response relationships and mortality and morbidity projections from exposure to asbestos are primarily derived from studies of workers occupationally exposed to asbestos. We estimate that there are presently more than 21 million American workers, survivors of over 27.5 million workers in primary and secondary manufacturing industries, shipyards, construction work and a number of other industries and occupations who, in the past forty years, were significantly exposed to asbestos. Among those workers, we estimate that 8,200 to 9,700 excess deaths from asbestos-associated cancer will occur for each of the next twenty years, aggregating over 200,000 deaths by the end of the century, due to asbestos exposure from the 1940Ăs to the present. Still other cancer deaths will occur from family contacts of asbestos workers and as a result of exposure in consumer use of asbestos products, from environmental exposure, and from exposure in the armed forces. They have not been included in these projections nor have anticipated deaths of asbestosis.

More recent exposures to asbestos; i.e. those exposures first occurring in the 1960Ăs and 1970Ăs, have been found to be associated with significant prevalence of asbestosis. Given the long latency periods of asbestos-associated cancer deaths it is too early to project the number of such deaths resulting from more recent exposures. Asbestos exposures beginning in the 1960Ăs and 1970Ăs will be reflected in asbestos- associated disease that will first become manifest in the decades 1980-2010 or later.

Outcome of workersĂ compensation claims

The Report states that nearly all the survivors of asbestos insulators who filed workerĂs compensation death claims ultimately received benefits.

Product liability lawsuits

The Report concludes that the majority of product liability law suits commenced by third parties most commonly ended in out of court settlements. Settlements for deaths occurring from 1967 to 1976 ranged from $1,000 to $300,000 with an average settlement of $72,000. The average legal fee in these settlements was $28,500; the average ratio of legal costs to total recovery was 37%.

Asbestos-associated disease Asbestosis

The Report states that in one prospective study of 17,800 asbestos insulation workers , asbestosis was the cause of death in approximately 7%. In contrast, in the same group, 20% died of lung cancer.

Asbestos disease of recent concern

Starting in 1964 there has been extension of concerns about disease hazards associated with asbestos exposure, in that there has been increasing attention to risks among individuals not classified as asbestos workers (mining, milling, asbestos product manufacturing) but rather those who could inhale dust in the course of other work "asbestos breathers" rather than "asbestos workers".

Shipyards

In 1968, the possibility that asbestos-associated disease might be an important problem in shipyard workers was suggested. P B Harries, in his 1968 publication "Asbestos hazards in naval dockyards", reported five cases of pleural mesothelioma among civilian employees of the Royal Navy Dockyard in Devonport. Although isolated cases of shipyard asbestos disease had previously been described, his information was disturbing in that none of the patients was an "asbestos worker". Rather, they were people in other trades (boilermakers, shipwrights, labourers, welders, etc.) who worked in shipyards together with asbestos workers but did not themselves often use asbestos. In the same year, Stumphius described similar findings at the Royal Schelde yard in the Netherlands. Again, the mesotheliomas were among workers other than those in the usual asbestos trades. By 1973, Harris had seen 55 cases of mesothelioma at Devonport, 2 in asbestos workers, 53 among men in other trades, and by 1979 the number had reached 115.

Maintenance and repair

From 1890 to 1970 some 25,000,000 tons of asbestos were used in the United States, approximately two-thirds in the construction industry. From 10,000 to 20,000 tons of asbestos were applied annually as thermal insulation to pipes, boilers and other high temperature equipment in factories, refineries, power plants and even homes. Much of this material is still in place. Additionally, more than 40,000 tons of fireproofing material, containing from 10-20% asbestos, were sprayed annually in high rise buildings in the decade 1960-1969. Somewhat less had been used for decorative purposes over a longer period of time. Thus, perhaps 1,000,000 tons of friable asbestos material is in place aboard ships and in buildings and industries across the United States. The maintenance, repair and removal of this material pose enormous control problems for the future, especially since proper procedures and precautions have yet to be fully developed for these activities.

Brake repair and brake maintenance

Growth in the use of -passenger cars and trucks in the United States from approximately 30,000,000 to 130,000,000 in the last 40 years has carried with it increased frequency of asbestos exposure associated with brake repair and maintenance, since most brakes contain considerable amounts of asbestos, often 50% or even more. Replacing and repairing such brake linings has been a matter of increasing concern. There is little substantial information concerning the total number of workers in these trades over the years, in view of variable turnover rates, intermittent brake maintenance and part-time employment. In the 1970Ăs somewhat more than 1,000,000 men were engaged in regular or intermittent brake maintenance work at any one time. Initial clinical surveys indicate that x-ray changes of asbestosis are not uncommon . Instances of mesothelioma have been reported, but there are as yet no useful data concerning overall mortality experience.

Shipboard asbestos disease

Abnormalities associated with asbestos used in ships may not be restricted to the shipyard workers who constructed vessels, or are still engaged in their repair, renovation, maintenance or demolition. Maritime personnel, particularly those employed in engineering categories, may also be at risk. Both pleural and parenchymal x-ray changes have been found among them and mesothelioma has been seen. When repairs have to be made in engine rooms or mechanical equipment, removal of asbestos insulation is often initiated at sea (in cramped ship spaces), to shorten turn-around time in port.

Family contact asbestos disease

In 1965, Newhouse reported eleven cases of mesothelioma whose only known asbestos exposure was apparently associated with previous residence in households of asbestos workers . Additional cases have been reported since . Recognition of the mesothelioma "signal" has alerted us to the important problem of family contact disease. Its full extent is not yet known, since the mortality experience of groups of family contacts is only now being studied as commented on above. Similar concepts attend upon considerations of asbestos exposure with consumer products or other environmental circumstances, as with friable asbestos surfaces in schools and public buildings .

Disease with fugitive dust exposure

Disease with indirect-occupational exposure has been well recognised in recent years (see "shipyards" for example). It has also been recognised that some instances of asbestos disease (signalled as mesothelioma) have occurred among individuals who had lesser exposure, as with neighbourhood exposure or by exposure presumed to have occurred in some way while employed in facilities where asbestos was used, albeit at some distance (office workers) . New data have now appeared raising the question whether this last type of exposure might be more important than hitherto believed. Should this prove to be so, it might significantly increase the number of workers who will be eligible for disability compensation.

Population at risk: Identification of industries and occupations at risk

Mining and Milling

Primary manufacturing

The Asbestos Information Association has estimated that there are upwards of 3,000 discrete uses of asbestos. A selection of major asbestos products and their uses is presented in Table 2-1.

Asbestos products industry

Gaskets, packing and sealing devices industry

Building paper and building board mills

Secondary manufacturing

Heating equipment except electric and warm air furnaces

Fabricated plate workers (Boiler Shops)

Industrial process furnaces and ovens

Electric housewares and fans

Shipbuilding and repair

Construction

Thirty percent of the water distribution pipe sold in the United States in 1974 was asbestos-cement.

Electric, gas and combination utility services

Asbestos and insulation workers

Automobile body repairers and mechanics

Engine room personnel, seagoing vessels, United States Merchant Marine

Maintenance employees: Chemicals and petroleum

Steam locomotive repair

Stationary engineers, stationary fireman, and power station operators

Population at risk: Occupational exposure to asbestos 1940-1979

The results of the estimation of employment and new-hires at risk are shown in Table 2-12, indicating that approximately 27,500,000 individuals were potentially exposed to asbestos from 1940 through 1979 in the occupations analysed to include asbestos and insulation workers, stationary engineers, stationary firemen and power station operators and automobile body repairers and mechanics. The uncertainties in estimating this number have been described previously, but they cannot be over-stressed. The number is an uncertain one. Further it includes a large number of individuals whose potential exposure to asbestos would have been of low intensity or of short duration because of high Labor turnover (see section on lower risk population). Finally the term potential should be emphasised. In categorising a segment of a workforce (such as all production shipyard workers) as being potentially exposed to asbestos, some individuals will be included with no actual exposure. On the other hand, individuals in other jobs (such as management) who do have exposure were not counted. The numbers may or may not balance. These uncertainties will be compensated for in the estimates of mortality by using data on the mortality or morbidity of representative workforce segments which will also include the full spectrum of exposure circumstances.

It should also be noted that a large number of asbestos exposed individuals are not included in the estimates of Table 2-12. Important groups with identified risks include family contacts of asbestos exposed workers, engine room personnel aboard U.S. Navy ships in World War 11, and individuals exposed environmentally to asbestos by virtue of residence or work near the use of asbestos.

Of those exposed, 18,800,000 of the total and 14,100,000 of those alive on 1 January 1980 were estimated to have had an exposure greater than 2-3 f-yr/rml. Such exposures carry significant risk of asbestos disease. Further, some risks of asbestos disease exists for the 6,900,000 alive on 1 January 1980, estimated to have experienced lesser exposure.

Cancer from occupational asbestos exposure: projections 1965-2030.

Summary and Conclusions

Estimates have been made of the number of cancers that are projected to result from past exposure to asbestos in a number of occupations and industries. Only those potentially exposed by virtue of their employment have been considered. Additional deaths will result from exposure among family contact (household contamination), from environmental exposure, from exposure during consumer use of asbestos products, and from exposure while in the armed forces, particularly in engine rooms of naval ships. No estimates have been made of deaths resulting from asbestosis. These estimates indicate that:-

  1. From 1940 through 1979, 27,500,000 individuals had significant potential asbestos exposure at work. Of these 18,800,000 had exposure in excess of that equivalent to two months employment in primary manufacturing or as an insulator. 21,000,000 of the 27,500,000 and 14,100,000 of the 18,800,000 are estimated to have been alive on 1 January 1980.
  2. Approximately 8,200 asbestos-related cancer deaths are currently occurring annually. This will rise to about 9,700 annually by the year 1990.3. Thereafter, the mortality rate from past exposures will decrease, but still remain significant for another three decades.

These projections are from past exposures to asbestos. Over 1,000,000 tons of friable asbestos material are in place in buildings, ships, factories, refineries, power plants, and other facilities. The maintenance, repair and eventual demolition of these facilities provide opportunities for continued significant exposure. If such work is not properly done, or if asbestos is otherwise used with inadequate controls, the burden of disease and death from past exposure will be increased by the environmental exposures of the future.

Current experience

Awareness of the relation between disease and prior asbestos exposure

This awareness has greatly increased in the past decade among many groups - physicians, attorneys, Labor unions, scientists, industrial management, the mass media, law schools, science institutions and others. For example, the U.S. Social Security Administration mailed information notices about asbestos disease to approximately 30,000,000 recipients of Social Security checks in 1978, and the Surgeon General sent a detailed descriptive letter about asbestos effects to the countryĂs more than 350,000 physicians in the same year. The U.S. Department of Health, Education and Welfare, HEW Publication No. 78-10320 dated September 1978 "About Asbestos".

Success of tort litigation cases

Our survey studied asbestos-related deaths in insulators who died between 1967 and 1976. Ninety percent of the suits for these deaths were filed before 1978; thus, the data collected represent the outcomes among a pioneer group involved in asbestos tort litigation. The results of 107 suits whose status was known in 1980 are summarised in Table 7-3. Virtually everyone whose suit was resolved received some money. The average award or settlement in the 60 cases for which we had data was $72,000; the average lawyerĂs fee was $26,900, leaving the plaintiffs an average of $44,100. Only one case was denied in court. The case was dismissed along with many others in the New York courts but was still active pending an appeal of the StateĂs statute of limitations rule.

When the proceeds from tort settlements or awards were received it made a considerable difference in the survivorsĂ standard of living. Of 194 widows of insulation workers for whom estimated losses and compensatory replacement ratios could be calculated in 1979, 26 (13%) had received tort settlements or awards. The tort income replaced 45% of the survivorsĂ lost income for that year.

Among those who received no other compensatory transfer payments, the tort proceeds replaced about one -fourth of the widowĂs net loss in 1979. For those who had received both tort income and other compensatory transfer payments, the tort income replaced half of the net loss.

Tort Litigation in relation to nature of disease

Our study of insulation workers found that the cause of death influenced whether a tort suit was filed. Survivors of those who died from mesothelioma initiated the highest proportion of suits (22%). Survivors of lung cancer victims filed in only a slightly smaller proportion (17%). The smoking issue did not seem to drastically influence the likelihood of filing. Asbestosis and gastro-intestinal cancer patients filed somewhat fewer claims. For other diseases less commonly associated with asbestos, no suits at all were filed (Table 7-4).

Punitive damages

In spring 1981, plaintiffs were awarded punitive damages for the first time, particularly ominous decisions for the asbestos industry. Punitive damages, unlike compensatory damages, are not usually covered by product liability insurance policies but must be paid directly by the asbestos manufacturer. Previously, judges had not allowed juries to consider punitive damages. However, in March and April 1981, punitive damages were awarded in Illinois, Pennsylvania, and Ohio. An award of punitive damages indicates the judge and jury have been persuaded of culpability beyond that needed for awarding compensatory damages under strict liability. Punitive damages involve charges such as callousness, wilfulness and reckless indifference. Punitive damages are often awarded in proportion to the financial resources of the company; large companies are assessed higher amounts to inflict the same degree of punishment.

Extraordinary burden on insurance industry

The insurance industry has claimed that the proliferation of asbestos litigation and the money that must be expended for legal costs and damages threaten the financial stability of many of the carriers. While it is impossible to assess exactly the total liability that the insurance industry will be forced to bear, data have been compiled as to past actions and estimates have been made as to future claims. The Insurance Services Office has stated that, for the period between July 1976 and 15 March 1977, the average payment in an asbestos case (for settlement and jury awards) was approximately US $170,000. It was then extrapolated that if one million asbestos claims would to be resolved at that average value, the insurance industry liability would be $170 billion.

(The figure of US $170,000 was the same figure as that quoted in the Commercial Union Report of 12 May 1981 yet inexplicably, the market was never informed that the average claim per person had increased to US $170,000. In fact, the LloydĂs market as a whole was still under the misapprehension that the likely claim per person was somewhere in the region of US $75,000, as stated in the letter of 5 August 1980. LloydĂs, the AWP and the LloydĂs UnderwritersĂ Non-Marine Association (LUNMA) failed to warn the market of the true scale of impending asbestos-related claims and, by their silence, allowed the vast majority of underwriters, namely all those who were not privy to up to date information, to rely on advice which was completely inaccurate.)

Inefficiency in providing compensation

Further, it has been asserted that asbestos tort litigation is an inefficient manner to use funds for compensation. A substantial portion of the amount recovered by claimants-traditionally, as much as 33 or 40% goes for legal fees and related costs. Medical and other expenses are paid out of the same source. For the defence, an average of one-third of what is expanded is paid for defence costs, including attorneysĂ fees. When the case is decided by a court verdict, the costs are much higher an average of ninety-five cents is expended in defence costs for every dollar paid for the bodily injury claim. In addition to these legal expenses, there are the normal administrative expenses of the insurer.

"Costliness of the litigation system can be best understood by the following example. Assume that the plaintiff receives a jury verdict for $100,000. Of this amount, he will likely pay $33,000 for attorneysĂ fees, perhaps an additional $9,000 as reimbursement for his workersĂ compensation payments and some $10,000 to repay incurred medical expenses. The defendantĂs insurer will spend as much as $95,000 to contest the claim. Thus the insurance company defending the case will expend $195,000 to deliver a sum to the plaintiff of only $52,000 an amount that is received some two, three or more years after the case has commenced. These amounts, of course, do not include the administrative costs required to run the court system itself."

The matter is further complicated by the fact that the outcome of litigation is inconsistent and uncertain, because of the adversial nature of the judicial system and the differing rules and standards that vary from jurisdiction to jurisdiction. Hope of receiving a tort award is counterbalanced by the possibility of losing the suit and receiving nothing. Widows of the insulators had to rely primarily on the judgement of their attorneys. The long delays and financial pressures may have persuaded widows to settle for much less than if their claim had been pursued further. Whenever tort compensation was received, it usually came too late to allow the widows to maintain their standard of living without a period of financial uncertainty and distress.

Table 7-1 of the Report, lists the companies involved in asbestos litigation;

Table 7-2 of the Report, lists the Asbestos Litigation involving UNARCO up to 1 November 1979 Table 7-6 of the Report, lists the Asbestos companies and insurance firms involved in cases with "manifestation theory" versus "exposure theory".

At page 541, the result of the law suits filed before 1978, involving asbestos-related deaths in insulators who died between 1967 and 1976 are discussed. Of the sample 107 law suits studied, which involved single tort actions or actions combined with a workersĂ compensation suit, 67 were settled, which resulted in judgement for the plaintiff or an Out of Court Settlement. Numerically, this is 62.6%. involving payment to the plaintiff. However, 38 were still pending, which numerically is 35.5%; only 2 suits were either dropped or denied. The average award of such settlements was US $71,000, the average lawyerĂs fee was $26,900, leaving the plaintiffs an average of $44,100.

Applying these figures to a population of 27,500,000 exposed to asbestos, 27% of whom die from an asbestos linked disease, 17% of whom commence an action and minimum 63% would achieve an award or settlement at an average cost of $71,000 with an additional minimum $26,900 legal fees for the defence; the cost on the then settled ratio i.e. 63% is a staggering $77.85 billion to the insurance industry, involving only 795,217 plaintiffs.

Applying a combined indemnity and claim expense factor of $195,000 per claimant, the cost on the then settled ratio of 63% is a staggering $155.07 billion to the insurance industry, involving only 795,217 plaintiffs.

14 Jun 82

GOODA MAIN RUN-OFF CONTRACT WRITTEN (417 85%, 421 15%). Unlimited run-off reinsurance xs ˙2,500,000 for K L Fullick, Underwriter of Marine Syndicate 299, Incidental Non-Marine Syndicate 297, managed by, Gooda & Partners, placed by Golding Collins to incept at 1 January 1982 covering the years 1956 - 1977. The policy was subsequently extended in 1984 to cover Marine Syndicate 299 and Marine syndicate 298 for K L Fullick, for the 1956 and prior years.

14 Jun 82

Wall Street Journal: Policy Fight: Suits Over Asbestos Touch Off a War Among Insurance Firms Over Who Will Pay Billions

.... Some 16,000 damage suits have already been filed against these companies and new cases are piling up at the rate of more than 450 a month. A few experts contend that some insurers could collapse under the weight of asbestos claims ... asbestos has been widely used for years in such things as construction products, insulation and brake linings. Between 1940 and 1980 an estimated nine million workers still alive today were exposed to it... Since the hazards of asbestos have emerged, steps have been taken, in manufacturing and installation, to reduce the publicĂs and asbestos workersĂ exposure, but its uses remain pretty much the same.

The flood of legal cases is likely to grow. According to a study done for the Labor Department by Dr Irving Selikoff ... at least 8,500 workers ... will die each year until the end of the century from asbestos-related cancers. (The figures havenĂt yet been published by the government.).

... The fight among insurance companies is likely to get worse. The U.S. Supreme Court has refused to decide between the conflicting theories of liability. This leaves standing a series of often contradictory state and federal court decisions........

Insurers typically assert that they have adequate reserves to handle the huge asbestos bills, but that view has been challenged by a Yale University economist, Paul W. MacAvoy. Mr MacAvoy .... predicts in a study that payments to asbestos disease victims by employers and their insurers are likely to (?) $38 billion - and possibly as much as S90 billion - over the next I5 years. Some insurers, he says, may well face financial ruin.

Others call such talk nonsense. "As far as I know," says Floyd H. Knowlton, a Travelers vice president, "no carrier, major or minor, is threatened by insolvency." Some outside observers,

too, tend to dismiss talk of doom

.... some critics discount it ...

Mr MacAvoyĂs estimates may or may not be good ones, but they are the only estimates around. None of his critics come up with their own figures, and the individual insurers wrap their asbestos liabilities in a veil of secrecy. "Nobody on the outside knows what the companiesĂ liabilities are," says John Head III, a principal of Morgan Stanley & Co., the securities firm. Even when an insurer such as Commercial Union is known to face extensive asbestos claims, Mr Head notes, analysts canĂt be sure, "how much went out the back door" to reinsurers .......

The workers; compensation system of the states was designed to handle job-related injuries, disease or death. But a University of Connecticut researchers, .... found that only 30% filed for death benefits under workersĂ compensation. One reason WorkersĂ compensation awards donĂt match the hefty awards made by some juries. Some publicised awards have been substantial: one Texas jury awarded a worker S3 million. But insurers say most claims have been settled out of court for much less.

14 Jun 82

Wall Street Journal: U.S. schools are facing the costly task of locating, fixing asbestos hazards

The EPA estimates that up to 14,000 public and private schools may have potential asbestos hazards. ... Estimates of the cost of either covering up or removing potential asbestos hazards in the nationĂs schools run as high as $400 million to $900 million....

18 Jun 82

Washington Post: Floor tiles cited as source of airborne asbestos fibres.

French research report.

23 Jun 82

General Meeting of Members of LloydĂs: Statement by Sir Peter Green, Chairman".

When I look back over the past two and a half years, I realise that much of what I have said and written has centred around the Fisher Working Party and the LloydĂs Bill. I make no apology for that, for the Bill is indeed of great importance to the future of LloydĂs; but of course it is not the only matter that has taken up our time. The every day business of the Coffee House has to proceed and I propose to start this morning by touching upon some important developments in this area.

I begin with this Room in which we are meeting this morning. As I am sure that those of you who spend every day in the Underwriting Room will have realised, the Premises Department carried out a very satisfactory spring cleaning exercise, with I hope the minimum disruption to the underwriters. I must also mention the division of our main luncheon facilities on the second floor to provide a waitress service in the CaptainsĂ Room and a self-service in the Club Room. These changes have proved very popular, but it seems a number of people in the Market are still unaware of them. The CaptainsĂ Room Department is responsible for all the catering facilities within the building, including the Angerstein Bar and the Wine Bar, and will shortly be circulating a note to the Market to ensure that everyone is aware of the range of facilities that are now available. I am sure you need no reminding that the CaptainsĂ Room facilities arc available to all Members of LloydĂs.

It will have been increasingly apparent week by week and even day by day that the construction of our new building progresses apace. Approximately 25% of the first basement slab has been completed and a similar proportion of the lower ground floor is now cast. The bases of several of the main columns are in position ready to be extended during the superstructure phase of the programme. Part of one of these columns was cast by Her Majesty Queen Elizabeth The Queen Mother on November 5th last year at an inaugural ceremony which happily so many of the members of the Market were able to see and enjoy. You will also be pleased to know that drawings of the building are among the exhibits of the Summer Exhibition at the Royal Academy.

Considerable progress has been made on the detailed design of the interior of the building. In the next few months your Committee will be able to examine full size mock-ups and other models of the ArchitectĂs proposals for various parts of the new LloydĂs Building.

During recent months the Redevelopment Committee has been assisted by a Working Party in a study of the design of underwriting boxes to ensure that electronic equipment can be effectively accommodated and the air conditioning system will be adequate for our needs in the new Room. The Working Party includes a number of Market representatives. The arguments in favour of converting existing boxes or of providing new ones have been carefully studied. It is the conclusion both of the Box Design Working Party and the Redevelopment Committee that there is an overwhelming case in favour of providing new boxes. Whilst it is of course possible to convert, and some boxes may be suitable for conversion, to the majority of underwriters the inconvenience this will cause during the next few years and the great practical difficulties in moving boxes from the existing to the new Room within an acceptable period of time are just two reasons which have led us to our conclusion. I mention this because your Committee is most anxious for underwriters to understand the reasoning behind the approach we favour. You may wish to discuss the matter with your representatives on the Working Party They are:- Messrs. Maitland, L.U.A.; Rome, L.U.A; Cockell, N.M.A.; Pritchard, N.M.A.; Avery, Aviation; Harwood, Motor; Hiscox, Agents; Adamson, Brokers.

I would like to thank them on your behalf for the time they have given to finding a solution to this important and difficult problem.

To keep as many people as possible informed on the progress of the new building, a video film was shown to the Market last month. This was clearly a very helpful and useful way of getting the information to the Market and we propose that similar reports will be made in the future. Despite delays caused by the very bad winter and more particularly by the discovery of areas of concrete and steel foundations which were not recorded in any of the original drawings of the 1928 building, I am pleased to report that the redevelopment project is within the overall programme and the contracts placed so far have been within the cost plan.

The Systems and Communications Policy Board has had a busy year in this most important area. The Board published recently a report drawing attention to its task and encouraging firms in the LloydĂs community to work together in planning future developments. It will be in everybodyĂs interest if those making their own plans in this area will liaise with the BoardĂs Market Relations Team. The Board proposes to keep the Market informed as to its plans as they are developed which will be helpful to firms when formulating their own.

In September we will be staging together with some of our major computer suppliers and advisers, an exhibition which will be our contribution to the GovernmentĂs Information Technology Year. This exhibition will be opened by the Minister for Industry and Information Technology.

I am happy to report that development work on the redesign of the Central Accounting System is proceeding successfully and an important second phase of the Membership Computer System is underway.

On the 1st April, 1982 the 1936 LloydĂs War and Civil War Risk Exclusion Agreement was replaced by a new Agreement which has been signed by all LloydĂs Active Underwriters. All the UnderwritersĂ Associations participated in the drafting of the new Agreement which was the first major review of the Agreement since 1936, and which was made in the light of present day considerations. T he War Risk Agreement Standing Committee, the Insurance CompaniesĂ War Board, gave its full concurrence to the changes between the 1936 and the new Agreements insofar as they affect the joint understanding that exists between LloydĂs and the British Insurance Association.

It is more than ever appropriate, bearing in mind the recent successful action in the South Atlantic, that LloydĂs should wish to maintain its close links with the Royal Navy and following the paying-off of H.M.S. Ark Royal you will recall we agreed to adopt HMS Illustrious, a sister ship of H.M.S. Invincible. In May your Committee agreed to send ˙2,500 (the maximum allowed under Bye law 42) to the Captain of H.M.S. Illustrious towards the shipĂs closed circuit television system, used for operational briefings as well as for recreational purposes. This meeting today will be asked to approve a further contribution of ˙7,500 to cover the balance of the cost of the television system together with other recreational facilities.

I would like to tun now to more domestic matters, namely the flow of funds between assureds, brokers and underwriters. The Terms of Credit Committee have done much to improve the flow of premium to underwriters within the limitations of our present arrangements which have evolved over many years. Your Committee has initiated a review of current practices and of the ways in which the payment of both premium and claims monies can be made more speedily by taking the fullest advantage of the technology which will be available in our new building and is available in the world banking system for the transfer of funds electronically.

Meetings are already in progress with the Market Associations to explain our objectives and the changes that will be required. If we are to improve our performance to the level that modern business demands and our assureds have a right to expect, it is vital that brokers and underwriters co-operate willingly from the outset to study the problems involved and to evolve new systems which will produce a fair balance between the proper interests of underwriters, brokers and assureds

At the General Meeting last November, l reported that it was intended to introduce a Central Solvency System to assist in the Annual Solvency Test of Members of LloydĂs. I am pleased to report that the system has now been designed, tested and brought into operation for the Annual Audit just completed. This facility is intended to bring together in one place particulars of the MembersĂ various assets held at LloydĂs along with their syndicate surpluses and deficiencies.

A Working Party has been set up to look into improved procedures for controlling premium limits and to formulate an effective system to give an early indication of potential overwriting.

In recent months there has been much comment in both the technical and national press concerning the information which is provided to Members in connection with their underwriting affairs at LloydĂs. The disclosure of information is a matter which the Committee has been examining most carefully. Following publication of the Fisher Report, a Working Party, which includes representatives of Panel Auditors, Underwriting Agents and Corporation staff, has produced a most thorough Report which makes recommendations with regard to future standards of accounting and auditing of MembersĂ affairs at LloydĂs, and sets out guidelines for Šminimum disclosureĂ in Reports prepared by Managing and MembersĂ Agents. The Committee is currently studying these proposals and it is expected that the Report will be issued as a discussion paper to the various LloydĂs Market Associations and the Consultative Committee of Accountancy Bodies in the very near future. Whilst on the subject of information I shall resist the temptation to predict the outcome of LloydĂs 1979 account. Others, I notice, have recently succumbed with the result that two newspapers, one not a million miles from Lime Street, have drawn quite opposite conclusions. The trouble with straw polls is that until all the returns are in, one never knows the relative length of the straws on which the sample has been based.

This year 1,296 new Members started underwriting compared with 880 in 1981. It is estimated that this year the applications for membership will be over 1,700. Nevertheless, it is your CommitteeĂs firm decision to continue with individual rotas. During the past six years, Membership of LloydĂs has grown from 8,500 to more than 20,000 and the Membership Department staff has expanded considerably to deal with an ever growing range of membership affairs. Because of the growth in membership and the demands on the Membership Department, the structure of the Membership Group has been changed. The old Membership Department has been divided into three specialist departments: one retains the name of Membership Department and is responsible for all regulatory matters affecting Members, including Underwriting Arrangements and the election of New Names. The second, the Deposits Department, as the name implies, undertakes all aspects of the trusteeship of MembersĂ LloydĂs deposits. The third department will oversee the development of the Membership Group computer and word processing systems and will be responsible for central Membership records and for administration services to the Group.

May I now turn to the situation with regard to the Sasse Syndicate The notes on the 1981 Accounts include a reference to the indemnity which was given to 110 Names in Syndicate 762. It is anticipated that the monies already provided by the 1980 Membership and Sasse Agents, plus recoveries due or being negotiated, will prove sufficient to meet all losses covered by the indemnity. I would, nevertheless, like to remind you that in the event that these recoveries should prove to be materially insufficient, it will be necessary to collect further contributions from the 1980 Members as part of their future subscriptions.

Until January of this year, the legal proceedings relating to the affairs of Sasse Syndicate 762 had remained virtually dormant. In January, however, the solicitors acting for two of the Names excluded from the settlement took steps to have the adjourned summonses restored before the commercial judge so that a date could be fixed for the hearing of the various actions including their own claim against LloydĂs and other parties. Those involved appeared before the judge on the 23rd March and, as a result, the trial has been fixed to commence on Tuesday, 12th April 1983 and is expected to last twenty weeks. The actions are complex and include many claims and counterclaims. If the matter goes to trial, the cost of the proceedings will be considerable and your Committee will continue to explore ally means which are available for keeping these costs to a minimum.

I must refer briefly to the tour of Australia and south-east Asia which I carried out in April, supported by my wife, Mr. & Mrs. Colin Murray and the Secretary General, Mr. Joe Hodges, my Personal Assistant, Mrs. Penelope Wyatt and Mr. Richard Keene of the Press Department. I am very grateful for the help given by Mrs. Liliana Archibald in Thailand. All of you that see LloydĂs Log will have been able to read in the June edition a full account of the tour, its objectives and results. I am deeply grateful to all of those in London and in the countries we visited who did so much to make this tour a success and I am particularly conscious of the pleasure shown by LloydĂs Members overseas at having the opportunity to meet representatives of the Committee. Once again it was brought home to us that it is vital for Underwriting Agents to maintain close contacts with their overseas Names. These tours are time consuming but it has become clear over the years that they are an established part of the process of maintaining and initiating contacts and sustaining that unique reputation that LloydĂs has, and upon which we depend so much.

Following my visit to the USA last year, the LloydĂs Training Centre arranged a seminar in October for LloydĂs underwriters and brokers on American Insurance Law and Practice as it affects the placing of business at LloydĂs. On 18th May, 1982 a further seminar took place on the subject of Surplus Lines Legislation and I would like to thank NAPSLO (National Association of Professional Surplus Lines Offices) for providing a panel of distinguished speakers, all acknowledged experts in their field. We are greatly indebted to our American friends for their willingness to help in our general programme of imparting knowledge to the London Market on American Insurance Law and Practices. Further seminars are planned on Claims handling, Premium Financing and Reinsurance legislation.

A proper understanding of LloydĂs and its procedures is essential in maintaining the flow of business from overseas and I was particularly pleased that following my recent visit to Malaysia we were able to welcome to our annual two week course for insurance staff from overseas, Mr. Yahaya Basah, Assistant Director, Insurance Division, Ministry of Finance, Malaysia, who won the Sir Henry Mance Memorial Prize.

The LloydĂs Training Policy Board is now exploring further ways of training students from overseas, especially those from the developing countries and I know from preliminary discussions that their work is likely to lead to some encouraging developments.

I have already spoken at some length without so far dealing with the Bill at all! I propose to go on a little further because, as became clear when the Deputy Chairman, Mr. Murray Lawrence, kindly took my place at the convention of the American Association of Managing General Agents at the Greenbrier, West Virginia on May 11th, there is very real interest around the world in hearing about what the Bill will not do as distinct from what it is proposed to do. This was a very healthy thought for although I began by saying that the Bill is of great importance to our future, there still remains an immense amount of work to be done during a period of very rapidly changing economic circumstances and technical innovation. The primary objective of the Bill is to modernise and bring up to date our ability to self-:regulate our affairs in a manner that is seen to be efficient, speedy and just.

Soon after the Fisher Report was accepted in principle, 21 Task Groups were set up. These comprise leading members of the community, senior members of the Corporation staff and many external professional advisers. The results of the studies carried out by these Working Parties have been appraised first by the Committee of LloydĂs and are now under the detailed scrutiny of the Market Associations. They will then be subjected to further study by the Committee of LloydĂs before being presented in due course to the Council. The majority were initiated by the wide ranging work of Sir Henry, but by no means are all their recommendations necessarily contingent upon the passing of the Bill.

The Bill is not intended to, nor will it(although there are those who fear it may) result in a mass of inflexible rules and regulations which could choke the MarketĂs freedom and speed of action and stifle its individuality and initiative. Your Committee is determined to ensure that whilst we will have a better self-disciplined market, we will remain a flexible, responsive, innovative and competitive market of impeccable security.

For the benefit of those Members who are not involved in LloydĂs on a day-to-day basis it is important to stress that the examination of our rules and procedures is continuous and many changes were likely to have been made whether or not Sir Henry Fisher had made his Report and whether or not we had placed a new Bill before Parliament.

May I turn now to the Bill itself. The LloydĂs Group has spent 18 days before the House of Lords Committee during which Mr. Peter Miller and myself gave evidence ably supported by Mrs. Irene Dick, other members of the Corporation staff and our professional advisers, both solicitors and counsel. This Committee is chaired by Lord Nugent of Guildford, and consists of Baroness Denington, Lord Foot, Lord Redcliffe-Maud and Lord Thomas of Swynnerton. I do not imagine that when they assembled on May 4th for the first day of hearings they quite realised the size of the task that they assumed.

The Select Committee has been considering three aspects of the Bill. First, they have heard an argument supported by one witness against the proposed division of Members of LloydĂs into Working and External Members on the grounds that it is unfair and divisive.

The second aspect of the Bill which has been carefully examined by the Select Committee is Clause 14 - the Restraint on Suit Clause. There has been considerable discussion of this clause during the BillĂs passage through Parliament and indeed Lord Lloyd of Kilgerran put down an Instruction to the Select Committee that they should pay particular attention to this clause. One witness gave evidence for the petitioners against Clause 14 suggesting that E & O insurance would be an acceptable alternative protection. During its passage through the House of Lords Committee an amendment was made to remove libel and slander from the ambit of the clause.

By far the largest amount of the time spent before the Select Committee has been taken on the subject of Divestment. You will recall that at the request of the Parliamentary Committee in the House of Commons I returned to you this time last year to ask your permission to promote what are now Clauses 10, 11 and 12 of the Bill and thereby make Divestment mandatory. These clauses were petitioned against before the House of Commons Committee in December last year and have again been examined in detail by the House of Lords Select Committee.

We hope the Select Committee will give their decisions by the end of this month. This leaves us sufficient time before Parliament rises for the Summer Recess for the remaining stages in the House of Lords to be completed and for us to return to the House of Commons for agreement to the amendment to Clause 14.

In the meantime, the Working Party under the Chairmanship of M r. Alec Higgins which is enquiring into the Underwriting Agency system at LloydĂs, has made a good start to its work, having already met on six occasions . Written evidence has been received from 103 sources and the Working Party is about to take oral evidence from certain invited witnesses.

The first subject being addressed by the Working Party is that of divestment and the regulation of ownership and control of Agencies. The initial aim the Working Party has set itself is to produce a "green paper" for consultation purposes on this subject. Publication of the "green paper" will have to await the final wording of LloydĂs Bill. After considering these subjects, the Working Party intends turning its attention to the remainder of its brief.

All of this amounts to a great deal of work, and I am pleased to say that Mr. D. L. Stebbings has kindly agreed to act as Deputy Chairman of the Working Party to assist Mr. Higgins with his onerous task.

Assuming we will proceed to the Royal Assent during this session of Parliament, a Task Group under the direction of Mr. V.V. Hudson has been working on the programme for the election of the new Council, the organisation of the information that Members of the new Council will need to have and the development of timetables for meetings to permit the speedy implementation of those parts of the Fisher Working Party Report which are contingent upon the new legislation.

Once the LloydĂs Bill has become an Act of Parliament we have to establish the new Council of LloydĂs as laid down by Schedule 4 of the Act. As you know the Council will comprise, in addition to the sixteen members of the 1983 Committee of LloydĂs, eight External Members of the Society and three nominated members who cannot be Members of the Society. These latter will be appointed by the Working and External Members of the Council but the External Members of the Council must themselves be first elected by means of a postal ballot of all External Members of the Society.

Arrangements for this postal ballot will be notified to External Members shortly after Royal Assent at which time the relevant documents will be dispatched. We then have four months to proceed to the ballot. Candidates for the election will have to be sponsored by sixteen other External Members and must appreciate that, if elected, they will be required to devote a substantial amount of time to LloydĂs affairs. In this connection I would like to emphasise three points. First, there are eight seats to be filled. Your Committee is concerned not that there will be too few candidates but that there may be so many that the election will become over complicated. I am sure it is wrong for the Committee of LloydĂs to become involved either in the selection of candidates or promoting one candidate over another. But I do believe underwriting agents have an important part to play. Indeed Fisher said in Chapter 4 paragraph 30:

"We expect that, to start with at any rate, Underwriting Agents will play a part in finding candidates and securing nominations. We see no objection to this provided that it is done openly."

With the ready co-operation of the LloydĂs Underwriting Agents Association I have already spoken to all agents explaining what they can do to help External Members in this most important matter. Agents from their personal knowledge of their Names are perhaps the people who can best judge those who could make a valuable contribution to the deliberations of the Council and who will have the time to give to the Council. I have no desire to deter anyone from standing for election but I sincerely hope we shall have a list of manageable proportions from which External Members can make their choice. I therefore strongly urge all those who are thinking of standing for election to discuss the matter with their agents and to do so as soon as is convenient.

Secondly, I must make clear the amount of time the Committee believe will have to be given to Council work, especially in the first year, and maybe for longer, when the Council will be exceptionally busy. The Council will in the early stages have to meet at least twice monthly, for a full day meeting. Perhaps after six to nine months these meetings could be reduced to one a month and eventually to a longer interval. In preparation for Council meetings there will be a large amount of reading to be done. To start with there are the reports of the 21 Task Groups. Some of these are very lengthy and include new Bye-Laws and regulations in draft form on some of which there are long and closely argued legal opinions.

I am certain we must arrange some two or three day courses for Council Members to assist them in learning about LloydĂs procedures, the functions of the Corporation and its relationship with the Market. For many of those who work in LloydĂs much of this is only imprecisely known. How much more difficult will it be for those who have an important duty to perform and at this time may know even less. Here again I feel agents have a role to play in helping their Names and explaining the heavy demands that membership of the Council will make on peopleĂs time and energy.

Lastly, members of the present Committee receive no fees. The future Council will have to decide what if any fees or expenses it considers can be properly paid to its members .

We are indeed in an era of immense change, a new Bill, a new building, new Market forces. May I conclude by saying how deeply I appreciate all the support that I have been given during my tenure of office by my Deputies, all my colleagues on the Committee, the Corporation staff and all those other members of the Community who have worked literally unceasingly on your behalf.

Jun 82

The combined annual declared profit of the two PCW "baby" syndicates:

Year of

Underwriting

Investment Income

 

Total Year

Account

Profit ˙

Appreciation ˙

Profit ˙

Paid

1970

37,535

3,699

41,234

1973

1971

42,960

30,185

73,145

1974

1972

58,887

67,464

126,351

1975

1973

121,674

87,138

208,812

1976

1974

57,846

125,004

182,850

1977

1975

40,881

110,164

151,045

1978

1976

123,856

84,730

208,586

1979

1977

203,006

100,810

303,816

1980

1978

324,592

295,086

619,678

1981

1979

400,525

269,164

669,709

1982

 

1,411,782

1,173,444

2,585,226

 

The total profit shown is the sum of the underwriting profit and the investment income and capital appreciation for the combined individual years to 1979, which was the last year of account to be closed prior to the appointment of the DTI Inspectors in November 1982. In addition to these declared profits, monies were paid out of Marine Syndicate 954 by means of "Tonner" policies and out of Non- Marine Syndicate 986 by means of a quota share.">

10.00

Jasuns Ltd

Bermuda

20,000

8.00

Murdoch & Company

Bermuda

16,666

6.67

G D I Gordon

Bermuda

8,334

3.33

James A Pearman

Bermuda

5,000

2.00

   

250,000

100.00

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 LloydĂs commissioned Inquiry into BPR was informed that the intention of the Trust is to benefit adult members of Mr E E NelsonĂs family, although Mr NelsonĂs 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 LloydĂs 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 syndicatesĂ 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 FidentiaĂs existence the management company would be notified by LloydĂs 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 LloydĂs 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 AtlanticĂs 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 syndicatesĂ box at LloydĂs 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 LloydĂs 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 ˙800,000, 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 ˙25,000. The company was further capitalised through the retention of profits:-

1972

Paid up capital increased to

˙ 37,500

1973/74

Paid up capital increased to

˙ 250,000

1975

Paid up capital increased to

˙ 500,000

1976

Paid up capital increased to

˙1,000,000

During the period 1970 to 1981, some ˙27 million or around 75% of the FidentiaĂs business emanated from the Brooks syndicates; therefore, some ˙39 million was channelled through the Fidentia. The estimated financial advantage gained by Fidentia is around ˙7 million, of which ˙6.2 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 ˙2,201,000 ($3,302,000) and had paid dividends of approximately ˙1 million by 1981, and a further ˙567,000 ($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 Ó

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 SyndicateĂs 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 LloydĂs 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 LloydĂs 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 SturgeĂs 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 LloydĂs Act of 1982 receives Royal Assent. The Report of the Fisher Working Party reaffirmed the desirability of LloydĂs regulating those brokers who had access to the Room. The LloydĂs Act 1982, which flowed directly from Fisher provided the first statutory definition of a LloydĂs broker ("a partnership or body corporate permitted by the Council of LloydĂs to broke insurance business at LloydĂs").

23 Jul 82

An Unlimited run-off reinsurance xs ˙500,000 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-offĂs: (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 (˙85 billion). Insurers, including underwriters at LloydĂs 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 LloydĂs has faced to date was that on ill-advised computer-leasing insurance. UnderwritersĂ failure to appreciate the rapid changes in technology meant that a total bill of about $500m reached LloydĂs and the London insurance market. LloydĂs dealt with 80 per cent of all claims.

The exposure of LloydĂs 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 LloydĂs 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.

LloydĂs identified its difficulties over asbestosis three years ago. Along with other underwriters, those of LloydĂs 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. LloydĂs 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. individualsĂ 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 underwritersĂ 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 cases

By 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 ˙3m 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 OuthwaiteĂs share being a loss of ˙676,000.

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, UNARCOĂs 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

LloydĂs Global Accounts 1981 (1979 Year of Account)

R Ballantyne, Chairman of LloydĂs UnderwritersĂ Non-Marine Association

Asbestosis - 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 LloydĂs 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 LloydĂs 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 ŠMr GoldfingerĂ amongst LloydĂs underwriters, explodes the myths behind innovative underwriting in this address given at the Third World Insurance Congress, held recently in Nairobi

MOST people, the laymen and the general public, think of LloydĂs 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 LloydĂs 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 LloydĂs nearly 30 years ago this popular view was certainly the received wisdom. LloydĂs 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 LloydĂs is. As you are aware, at least those of you who have been down Lime Street recently, LloydĂs will soon be housed in 21st century style in the limelight so to speak of the City. LloydĂs is, after all, now the largest single invisible exporter in Britain, and as such it is entitled to and needs modern facilities. The LloydĂs marketĂs 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 LloydĂs 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 LloydĂs willing to write it. It is inferred that LloydĂs, and the LloydĂs 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 underwriterĂs task?

The duty of an underwriter is neither more or less than the making of money for his Names (in LloydĂs) 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 ŠLook after the pennies and the pounds will look after themselvesĂ. 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 underwriterĂs 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 underwriterĂs 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, thereĂs 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 mustnĂt say "I donĂt 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 LloydĂs becomes a pawn shop, a bank. or an accountantĂs office. The principle of the survival of the fittest, which I have already mentioned, is particularly relevant at LloydĂs. 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 ŠinnovativeĂ 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 ŠinnovativeĂ underwriterĂs 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 ŠturnĂ on reinsurance has become to such underwriters the fundamental problem in their business at LloydĂs. 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 Šspreading the riskĂ; there is just no way out of it. It becomes more and more important and as there has been more reinsurance, what has happened? LloydĂs share of the worldĂs 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 ŠinnovativeĂ 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 ŠinnovativeĂ 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 LloydĂs 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 LloydĂs. 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 HeathĂs 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 LloydĂs 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 o˙ 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 LloydĂs. 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 LloydĂs 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 LloydĂs 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 LloydĂs had a premium of ˙5m, 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 ˙40,000. 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 ˙250,000, a good risk, probably gold from Rothschilds, and people complained about Richard Thornton writing a line of ˙250,000. He said "All right if you want I will place bills of exchange in the hands of LloydĂs for ˙250,000 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 LloydĂs, 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 LloydĂs the worldĂs 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, LloydĂs 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 underwriterĂs 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 ŠnoĂ 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 underwriterĂs 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 couldnĂt 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 LloydĂs now ape the attitude of solicitors, hoarding premiums as solicitors hoard fees. I hasten to add that LloydĂs 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 underwriterĂs friend and the bad underwriterĂs enemy. If I have a criticism of the LloydĂs 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 LloydĂs going. As I have said earlier, in a market place the weak must go to the wall. There are weak syndicates in LloydĂs 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 ŠinnovativeĂ 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

LloydĂs Global Accounts 1981: - 1979 Year of Account

The Notes of the Financial Facts on "Security - Financial Facts" as at 31 December 1981

1. The average deduction for brokerage and commission across all markets has been estimated at ?% per cent

The Global results as announced by LloydĂs to the General Public

Year of Account

 

Year of Account

1979

 

1978

˙172,964,000

Declared post-tax profits

˙174,392,000

The undisclosed additional expenses, being agentsĂ profit commission

˙ 57,500,000

Agents Profit Commission

˙ 52,200,000

˙115,464,000

Received by Names

˙ 122,192,000

˙ ?

Central Fund Earmarking

˙ ?

(This excludes additional earmarkings of members unencumbered ŠFunds at LloydĂsĂ for Solvency Purposes.)

27 Aug 82

Daily Telegraph: Surprise ˙173m from LloydĂs of London

LLOYDĂS of London has surprised itself with a profit of ˙173 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 LloydĂs UnderwritersĂ 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. LloydĂs will be " flooded with claims " he forecast, and " it will be a bonanza for the lawyers."

Barry Coleman, chairman of the LloydĂs 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 1979 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 "LloydĂs 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 LloydĂs.

Malcolm Rumsey, chairman of LloydĂs UnderwritersĂ Association, said there was evidence some shipowners in 1979 returned to LloydĂs 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 LloydĂs Motor UnderwritersĂ Association, said 1979 had produced good results because there had been two rate rises and 1980 will be "reasonable." But now he "canĂt 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 LloydĂs percentages (minimum levels of provision recommended by LloydĂs). 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 LloydĂs 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 LloydĂs 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 DeanĂs 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 BromleyĂs 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 BirminghamĂs predecessors in the SD(U) accounting function. FlintĂs 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 Šfilled-inĂ 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 CarpenterĂs evidence as it is clear that neither the underwriters nor BirminghamĂs 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 yearsĂ 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 yearsĂ 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 CarpenterĂ 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 yearsĂ 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 ˙Ă000Ă

%

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 yearĂs 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 GrobĂs 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 yearsĂ insurance funds and not against profits. Turner:

"... the charging of expenses to the insurance companies was a fairly constantly recurring theme. I do not know whether this has come out in evidence, but probably I would imagine it has, because to me it is a fundamental that the tendency was to charge all the unallocated expenses directly to Sphere and Drake Insurance Companies. ... Undoubtedly that practice had the effect of weakening the base of those companies. In one particular year - and I could not be specific as to which year it was - I did get agreement from the Chairman that some expenses would in fact be charged back to Sphere Drake Underwriting and effectively be taken off its pre-tax profit, so as to reduce the burden of expenses on the two Howden-owned insurance companies. That certainly was something that was discussed, and I can recall on one occasion being told, during the course of the year: "IĂm sorry, but although weĂve agreed in principle that there will be a charge-back of expenses to Sphere Drake Underwriting, it doesnĂt fit the corporate objective, itĂs not working out that way, and you will have to accept that it wonĂt happen in this particular year." There were other discussions of this sort, in the course of my time with Howden Ó"

and later

Q "By charging the expenses to the insurance companies they were not in fact charged to profit and loss account but to the (insurance) fund, is that right?"

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, yes."

Contemporary memoranda support TurnerĂs 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:

  1. In Chapter 2 we explained the nature of rollover funds of LloydĂs syndicates, being in very simple terms amounts set aside by the underwriters of those syndicates in good underwriting years which would be available to those syndicates when the underwriting results were poor. Whilst these transactions are normally documented under the guise of stop loss reinsurance, they are in our view essentially banking transactions whereby the cumulative premiums paid under the policy, usually together with interest at a rate agreed between the underwriter and reinsurer, are at some future date returnable to the syndicate and accordingly represent a continuing liability of the reinsurer. The Posgate Syndicates had substantial rollover funds (known in Sphere and Drake as ŠescrowĂ policies) held by Sphere and Drake, but for several years up to and including 1980 these policies were treated by Sphere and Drake in fund assessments as being liability-free for financial statements purposes. They failed to account for the liabilities to the Posgate Syndicates.
  2. The insurance funds of Sphere and Drake from 1978 onwards were assessed as inadequate to meet the insurance liabilities calculated for the purpose of preparing the annual financial statements. These shortfalls were assessed despite no proper assessment of the liabilities of open years and of rollover funds. But instead of charging to profit these assessed deficiencies in the insurance funds, the excess estimated liabilities of Sphere and Drake were dealt with by placing spurious Šstop loss reinsurancesĂ with entities controlled by The Four. These ŠreinsurancesĂ had no real substance, but gave the impression to those not in the know that the insurance funds had stop loss protection.

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 Šstop loss reinsurancesĂ into entities controlled by The Four. These reinsurances were all effected on terms which could not have been effected with an armĂs 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 ŠsupportĂ 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 Šstop loss reinsuranceĂ requirement, based on the deficiency assessed and the profit required. He continued:

Q "It was really back to front accounting?"

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 BirminghamĂs 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 LloydĂs 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 ˙100,000 and ˙75,000 respectively there appear to be deficiencies on the Aviation accounts of both Companies."

FlintĂs response on 5 June 1978 noted:

Marine Account.

"Your point is taken here and I can confirm that the senior management of the Insurance Company have this for review during 1978."

Aviation Account.

"Your comments are noted and it is our intention to let this run during 1978 under review. The position will then be considered at the interim stage.- My feeling was that this account isolated from Marine was not in deficit but we will examine the underwriting to establish 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.

BarkerĂs exercise, which was started in November 1978 though not completed until 26 March 1979, indicated aggregate deficiencies of the order of ˙8 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 DeanĂs assessment in early 1982. WaldenĂs 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 ˙5.6 million, ˙3.3 million on marine and ˙2.3 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. WaldenĂs 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."

PageĂs 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. PageĂs 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 auditorsĂ responsibilities in this matter in Chapter 19.

To cover the estimated insurance fund deficiencies for the purpose of obtaining the auditorsĂ signature to the Sphere and Drake accounts for 1978, a Šstop loss reinsuranceĂ for ˙4 million was written, with a premium of ˙0.5 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 Šstop loss reinsuranceĂ actually effected was prepared shortly after PageĂs 29 March memorandum, although the documentation was dated somewhat earlier to give the impression that the Šstop loss reinsuranceĂ was negotiated before the group financial statements were signed. This Šstop lossĂ was written effective from 1 April 1979 and was "to pay any shortfall in the ReassuredĂs so called "Insurance Fund" for their 1978 and prior Underwriting Years" up to a maximum limit of ˙4 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 armĂs length insurance company. Hence an artificial arrangement was entered into, the documentation being designed to disguise it as a reinsurance. Whilst the brokerĂs 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 ŠfrontingĂ purposes, the premium was settled with, and the eventual claim in part met from, the ŠSNA-Re Captive accountsĂ, bank accounts at the Banque du Rhone controlled by The Four, the background to which we described in Chapter 7.

The premium of ˙0.5 million was not actually paid over but was included in a 19 October 1979 settlement against which there was a first claim under the Šstop loss reinsuranceĂ policy of ˙2.266 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 auditorsĂ own assessments. They estimated deficiencies at about ˙2.8 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 brokerĂs 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 reinsurance of the funds effected with SNA. We produced to the auditors a copy of the AHIB slip, obtained from Syd Todd. The following points arose:

  1. they wished to know the relationship of SNA with the Howden Group and we assured them that it is not a subsidiary. Further, they wish to assess the quality of the security provided by SNA and we have undertaken to supply them with the last published annual report and accounts of that company (Syd Todd is assisting). They sought an explanation of how it was that a reinsurer was prepared to undertake this particular risk and we assured them that there had been no lack of disclosure
  2. we confirmed that the total premium payable for the contract is ˙500,000 and that there was no question that the description of the contract as being continuous inferred an annual payment
  3. we clarified the intention that the reinsurance contract would only pay the net underwriting shortfall, i.e. its computation would take account of profits as well as losses, over companies as well as accounts."

Page subsequently took over responsibility for satisfying Risbey about the Šstop loss reinsuranceĂ 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 shareholdersĂ funds of $2.3 million - clearly insufficient to meet the losses which it was likely to suffer under the Šstop lossĂ. 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 PageĂs assurances on the matter.

Whilst it appeared at this stage in 1979 that the ˙4 million Šstop loss protectionĂ 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 SwainĂs 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 ˙1 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 ˙4 million to ˙5 million, for an additional premium of ˙0.5 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 ˙2 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 ˙2. 266 million under the SNA-Re Šstop loss reinsuranceĂ. 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 Šstop lossĂ 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 Šstop lossesĂ 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 Šstop lossesĂ 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, overall profitable business. Precisely what business I wouldSIZE=2>, let alone subjected insurance funds to audit.

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 ˙1. 766 million in October 1979 (made up of the first claim of ˙2. 266 million less the initial premium of ˙0. 5 million) was funded in the main by two specific transfers to the SNA-Re Captive accounts:

  1. the ŠexpectedĂ profits on 1978 and 1979 underwriting year quota shares of Posgate Syndicates, written by Capital Marine, were calculated and transferred to the SNA-Re Captive accounts by means of so called 'profit-stripping' policies. The premiums on these policies, which were paid out of open year insurance funds, represented anticipated profits on the quota shares, mainly based on expected claims ratios of up to 50% - in our view a most optimistic forecast but according to Carpenter based on Posgate's past track record. The policies were written in the form of stop losses on the quota shares. Under the normal accounting method adopted by the Howden insurance companies any such 'profits' (which in the event never materialised) would not be taken until the syndicate years closed at the end of 1980 and 1981 respectively. This type of policy is discussed in more detail in paragraphs 15.103 et seq
  2. premiums on the 1979 group contingency policy were also paid to the SNA-Re Captive accounts, as discussed in Chapter 14.

The detailed transfers to the SNA-Re Captive accounts are set out in the following table:

Date

Received

Description

$

 

˙

Received from

15.10.79

ŠProfit-strippingĂ 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 ŠpremiumsĂ)

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

   

˙1,766,000

 

The loan from Capital Marine was repaid in December 1979 out of a settlement received from AHIB in respect of premiums on further Šprofit-strippingĂ 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:

  1. quota share reinsurance premiums received from the Posgate Syndicates relating to quota shares written into SIR (Chapter 7) (approximately $0. 8 million and ˙0. 2 million received)
  2. group contingency policy premiums for 1980 and 1981 (Chapter 7) (approximately $1.1 million and ˙1. 1 million received)
  3. transfers from SRAG when SIR was set up (Chapter 7) (approximately $1. 741 million cash and $1.134 million investments most of which related to premiums paid to SRAC in March 1980 on 'profit-stripping' policies on 1978 and 1979 quota shares of Posgate Syndicates written by Sphere, Drake and Capital Marine. As with the other Šprofit-strippingĂ policies, these premiums were paid out of open year insurance funds).

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 Šprofit-strippingĂ 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 ˙4 million Šstop loss policyĂ 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 Šprofit-strippingĂ 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 Šstop loss reinsurancesĂ 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 discussed ... the estimated premiums that these policies that we reinsured would produce, premium-wise. We went back through the history of the accounts to find out what the average settlements had been on the previous years."

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 Šprofit-strippingĂ policy premiums were paid by Sphere, Drake and Capital Marine.

Between October 1979 and March 1980, the aggregate sterling and dollar

premiums paid by the Howden insurance companies to SRAG and SNA-Re Captive

accounts, under the Šprofit-strippingĂ policies scheme, relating to 1978 and

1979 Posgate Syndicate quota shares, were as follows:

 

˙

 

$

Sphere

675,000

and

1,469,350

Drake

450,000

and

974,662

Capital Marine

599,000

and

1,315,600

 

˙1,724,000

 

$3,759,612

We are most critical of the Šprofit-strippingĂ 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 Šstop loss reinsurancesĂ 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 Šprofit-strippingĂ 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 Šprofit-strippingĂ 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 Šprofit-strippingĂ 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 Šrolled forwardĂ in the Southern companies. We have estimated that the unrecorded liabilities at 31 December 1980 were of the order of ˙15 million in Sphere and Drake (paragraph 15.156); and that the unrecorded liabilities at 31 December 1981 were of the order of ˙30 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 ˙17 million and net assets of ˙56 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 ŠreinsuredĂ 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 support policies....

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 never in the market to write outside business, that it was a prop or support to the Howden group.

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 formed in early 1980 and the .... executive committee of the company knew they now had a vehicle which was essentially for their benefit."

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 become convinced that ever since the 1975 year when Alexander & Alexander were courting Howd de Paula appear to have accepted that these were profitable and, with the exception of some calculations they prepared in relation to Posgate quota shares within the JHC account, no full formal assessments of the liabilities attaching to the JHC writings were ever prepared or audited by de Paula, even after 1978.

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 companyĂs 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 Šaudit clearanceĂ 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 SyndicatesĂ 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 CarpenterĂs or Mr ToddĂs 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 Šby proxy

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 SyndicatesĂ 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 fundsĂ adequacy, which was by no means comprehensive, indicated a deficiency somewhat in excess of ˙2 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 ˙4 million and premium of ˙0.5 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 armĂs length nature of the reinsurance. He discussed these at his meeting with Swain:

Q "What response did you get?"

A "The response which you often get in the insurance industry - you can do this sort of thing because of the might of Howdens. "We can get good business one way if we take bad business in another direction."

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 PageĂs 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 BenzikieĂs 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 PageĂs explanation might have warranted further enquiry:

Q "Did you make any inquiries as to who they proposed reinsurance with -"they" being SNA-Re?"

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 PageĂs explanation.

The extension of the stop loss reinsurance in the following year to cover ˙5 million was not the subject of much debate. De PaulaĂs conclusion on the 31 December 1979 insurance funds was that the revised stop loss reinsurance cover of ˙5 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 ˙1 .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 Šprofit-stripping policiesĂ (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 Šstep-backwardsĂ 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 "It would be fair to say, would it, there was no formal assessment of 1979 prepared?"

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 "Yes, 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 ˙4 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 BirminghamĂs and WaldenĂs views in this matter, and when he assessed deficiencies in the 1979 and 1980 underwriting yearsĂ 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 yearĂs 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 ˙4 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 Šinvestment incomeĂ 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, LloydĂs 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.

  1. Overview

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 LloydĂs 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 LloydĂs 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 DepartmentĂs 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, LloydĂs 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 LloydĂs of these matters. The report was completed on 30 October 1984.

9 Sep 82

Times: LloydĂs orders investigation into Alexander Howden

LloydĂs of London has bowed to the mounting pressure from its members and ordered an investigation into the implication for LloydĂs of the accounting irregularities at Alexander Howden.

A brief statement yesterday said that the Committee of LloydĂs 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 LloydĂs firm or person, LloydĂs broker, LloydĂs underwriting agency, LloydĂs syndicate, or member of LloydĂs in any of these matters.

Mr John Bogardus, chairman of Alexander and Alexander Services, has been told of the committeeĂs decision and has confirmed that A & A and the Howden Group will continue to co-operate with LloydĂs.

The move was welcomed by Lady Middleton, chairman of the Association of External Members of LloydĂs, which represents 16,000 members who do not work in the market, who said she was "very, very pleased" with the committeeĂs decision.

She had rung the secretary general of LloydĂs last week protesting at the statement from Sir Peter Green, chairman, that LloydĂs could act only if the matter impinged on LloydĂs. "I could not see how it did not impinge on LloydĂs", 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.

LloydĂs 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 DrakeĂs reinsurance business.

˙100m agency sale forecast

About ˙100m worth of LloydĂs of London managing agencies should come onto the market in the next five years, after implementation of the new LloydĂs 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 LloydĂs.

The association producers the controversial analysis of LloydĂs insurance syndicatesĂ 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 ˙170 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 ű which he .

13 Sep 82

Financial Times: Call for Howden insurance inquiry

THE 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 LloydĂs of London, the insurance market

This 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 LloydĂs 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 ministerĂs department.

"DoesnĂt 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 worldĂs 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 HowdenĂs 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 (˙14.6m)

Mr Meacher has told Lord Cockfield that several questions urgently need answers.

  • He suggests that the affair might demonstrate the need for some "statutory check" on reinsurance business arranged by brokers with their own companies.
  • He argues that the events at Howden call for full disclosure of the extent to which companies arrange in-house reinsurance.
  • He suggests that there is an "alarming gap" in controls, which allowed four Howden senior executives including the ex-chairman, to hold shares in a Panamanian company which was servicing the reinsurance programme of the largest underwriting syndicate at LloydĂs, also managed by Howden without "apparently any disclosure of this important fact." The situation, he says "reveals a certain incestuousness of interests."
  • He says that the transactions, with an offshore company registered in Panama, by the directors are therefore outside the Department of TradeĂs supervision. He suggests that the discovery of the transactions has "blown a huge hole in the whole framework of insurance protection legislation."

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 LloydĂs system

The 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 LloydĂs 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 LloydĂs largest underwriting syndicate, number 127, which is also managed by an agency company owned by Alexander Howden.

The syndicates reinsured about ˙9m of its business for the 1979 underwriting account, when that account closed at the end of last year, with insurance companies owned by Howden

In 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.

LloydĂs initially argued that its jurisdiction was limited. It had no power to intervene in the non-LloydĂs subsidiaries of major broking groups, although the group may have had extensive LloydĂs 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 LloydĂs and conventional insurance companies - are usually underwriting members of LloydĂs.

LloydĂs also argued that it is the responsibility of the active LloydĂs 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.

LloydĂs 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, LloydĂs 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 LloydĂs auditors. If alleged irregularities arise in any audit LloydĂs has said that the matter is one for the professional accounting bodies to consider rather than the LloydĂs market.

15 Sep 82

The Committee of LloydĂs 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 LloydĂs 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 PosgateĂs 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 LloydĂs

LLOYDĂS 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, LloydĂs 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 LloydĂs. 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 underwritersĂ 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, LloydĂs is looking not so much accident prone as chronically under-regulated.

So long as LloydĂs 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 LloydĂs 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 LloydĂs 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 firmsĂ 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 LloydĂs 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 LloydĂs 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 LondonĂs most famous commercial club, LloydĂs, the insurance market.

His reaction is typical of the many working LloydĂs professionals who are watching with alarm the mounting controversy at Alexander Howden Group - already the biggest crisis that LloydĂs 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 LloydĂs market, was sacked by HowdenĂs 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 LloydĂs over the last few years, the Howden affair involves some of the largest groups and units within LloydĂs. Around one in five of the 21,000 members, the individuals who pledge their wealth to allow LloydĂs to function, are affected by the suspension of Mr. Posgate from underwriting and his dismissal from Howden.

Mr. Posgate, who was earning around ˙323,000 a year in LloydĂs, 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 weekĂs disclosures can be traced back to March. Then, Alexander and Alexander Services, the worldĂs second largest insurance broker, completed a ˙150m take-over of Alexander Howden Group, a leading British insurance broker whose extensive LloydĂs of London interests include the management of the largest LloydĂs 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 & AlexanderĂs 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 LloydĂs, 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."

LloydĂs 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 LloydĂs market, Alexander & Alexander. And syndicates within Howden - the largest in LloydĂs - which have a total underwriting capacity of around ˙11.7m have stopped accepting insurance business temporary until the Howden management sorts out the problems in the wake of Mr. PosgateĂs departure.

Ian Posgate has always been treated by the LloydĂs establishment as an outsider (he was once told "Ian you are not a LloydĂs 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 LloydĂs for whom he acts. His methods are rough, tough and abrasive

In LloydĂs, which has a market share of around 20 per cent of the worldĂs 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 LloydĂs syndicate - the units into which all LloydĂs members are grouped - is supposed to accept business in relation to the amount of funds which are backing the syndicateĂs operation. Mr. Posgate has gone beyond those limits too often for the liking of the LloydĂs authorities

In the late 1960s when he was an independent underwriter, he fell foul of the LloydĂs establishment - the ruling committee - which were tired of the way he seemed to be cocking a proverbial snook at LloydĂs 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 LloydĂs interests. HowdenĂs 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. PosgateĂs underwriting philosophy was simple. He abhorred LloydĂs move towards more and more reinsurance activity - insuring other insureds now (own) accounts for around two thirds of LloydĂs ˙2-8bn 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 LloydĂs 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 LloydĂs,

Howden provided a useful reinsurance umbrella. Howden reinsured a large part of PosgateĂs business with its own insurance companies, earning enormous revenues for its own account,

The availability of in-house reinsurance protection allowed Mr. Posgate to compete aggressively for business, while the availability of Mr. PosgateĂs 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 ˙20m .

However, as Mr. Posgate became more successful in LloydĂs, so his limited popularity declined. He annoyed LloydĂs 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 LloydĂs 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 LloydĂs committee.

For much of the time he has been on the LloydĂs 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 LloydĂs. It has just gained its new Act of Parliament for improving self-regulation in the market, its first major reform in over 100 yearsÓ Sir Peter Green, LloydĂs chairman and the rest of the committee, will not see the new legislative powers working until later this year once a new LloydĂs council is formed.

Even then, LloydĂs has been concerned that the market should not become over-regulated. "LloydĂs 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 LloydĂs legislation.

LloydĂs 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 works

An 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 worldĂs 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 LloydĂs and to make recommendations to the Committee and Council publishes the Working PartyĂs 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 MembersĂ Agents

105

(35%)

 

(iii)

Number of Managing/MembersĂ 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/MembersĂ Agents

95

(83%)

3)

 

Syndicates:-

   
   

Total Number of Syndicates in LloydĂs Market

431

 
   

Number of Syndicates managed by the 114 Agents

308

(71%)

Sep 82

The Chairman of LloydĂs, Peter Green, accompanied by Mrs Liliana Archibald, LloydĂs 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 LloydĂs 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 Šabnormal lossesĂ at Howden

MR 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 LloydĂs 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 HowdenĂs 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 HowdenĂs U.S. owners.

The members feared that funds owed to their underwriting syndicates - the units into which members are grouped by Howden for trading purposes¨ - will not be paid to the syndicates from HowdenĂs 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 (˙32.35m) 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 BrokersĂ 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 LloydĂs, the Association of External Members of LloydĂs, 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 LloydĂs 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 LloydĂs syndicate

FACED with the prospect of litigation and defection by members of its LloydĂs 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 AlexanderĂs 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 membersĂ 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 PosgateĂs 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 BrokersĂ 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 members

ALEXANDER & ALEXANDER Services of the U.S., one of the world s biggest insurance brokers, has taken further steps to reassure the 3,800 LloydĂs 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 group

Faced with the threat of legal action by members of its LloydĂs syndicates Alexander Howden Underwriting has invited David Coleridge, chairman of LloydĂs Underwriting Agents Association, to form a five-strong committee to protect membersĂ 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 AlexanderĂs legal actions might not be fairly apportioned.

The legal battle was started by AlexanderĂs allegations that five former directors of Howden drained ˙32 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 ˙32 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 PosgateĂs much -publicised Pissarro, which was bought for $99,000, the list includes a ˙58.000 Picasso (at cost), a ˙86,000 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 ˙25.000.

The directorsĂ 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 AlexanderĂs 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 GrobĂs Cote dĂAzur 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

LloydĂs List: Manville used two claim assessments.

9 Oct 82

Times: LloydĂs trims Howden inquiry

LloydĂs 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 LloydĂs other than Mr Ian Posgate, the figure at the centre of the Howden storm.

The notice posted in LloydĂs 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 LloydĂs.

This move makes formal what has been happening in practice since Mr Posgate was suspended from duties and finally dismissed as underwriter of HowdenĂs syndicates 126 and 127.

He has been required to absent himself from most of LloydĂs 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 ˙32m by Alexander and Alexander, now the owners of Alexander Howden. It is alleged that the five directors misappropriated ˙55m 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 LloydĂs has no powers to sack Mr Posgate as a committee member.

YesterdayĂs formation of a sub-committee was made with Mr PosgateĂs 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 LloydĂs 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 LloydĂs 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 LloydĂs Market.

13 Oct 82

Daily Telegraph: Six more fight LloydĂs election

The Association of External Members of LloydĂs, one of the two associations representing underwriting members, is putting forward six official candidates for election to the ruling committee of LloydĂs. In all there are some 83 candidates, including eight backed by the rival Association of Members of LloydĂs, 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: LloydĂs stands by suspension of ŠMr Gold fingerĂ

THE ruling committee of LloydĂs 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 LloydĂs 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 accountantĂs report to establish what actually happened, we should not have been carrying out our own responsibilities.

Mr Posgate lost his ˙361,200-a-year job after allegations that he was involved in a scandal over alleged misuse of ˙32 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 LloydĂs 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 LloydĂs 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, LloydĂs chairman, requiring the immediate removal of Mr Posgate from his underwriting duties.

The action against LloydĂs 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 LloydĂs 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 LloydĂs ruling

A HGH COURT judge yesterday dismissed attempts by insurance broker Christopher Moran to set aside a LloydĂs 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 LloydĂs members scheduled for Oct. 27 which will consider whether to expel Mr Moran, and underwriter Edward Wilson, from membership.

Summarising the LloydĂs 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 umpireĂs 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 umpireĂs 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 LloydĂs, 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 LloydĂs, Peter Green, issues a circular letter to the Posgate Syndicate Names giving some background details under an enclosed Šsummary of eventsĂ and Šthe actions taken by your CommitteeĂ.

Information to Lloyds

By the beginning of September it was clear that there was cause for concern that LloydĂs 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., LloydĂs broker, LloydĂs Underwriting Agency, syndicate or Member of LloydĂs) in these matters

On 15 September the Committee of LloydĂs 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 LloydĂs

All LloydĂs 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 LloydĂsĂ 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: LloydĂs pact with Howden

Alexander Howden Underwriting, the insurance company at the centre of the latest scandal to rock LloydĂs of London, has agreed a series of actions with the ruling committee of LloydĂs 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 LloydĂs members yesterday, includes the appointment of new auditors to Syndicate 127, the largest syndicate within LloydĂs, 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 HowdenĂs 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 LloydĂs 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 LloydĂs, 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

LloydĂs 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 Šs 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 ˙45,000 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 membersĂ agency was Donner Underwriting Agencies Limited. The original limit for each Name was ˙100,000 in the aggregate any one loss any one member in respect of the 1982 year of account, such amount to be excess of:

  • 10% of the allocated premium income limit per member not exceeding ˙20,000; or
  • the maximum tax recovery per member whichever is the greater: all as more fully described in the original policy.

Pagoda had a potential exposure of ˙24.7 million (being the 247 policies issued at ˙100,000 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 ˙50,000 in the aggregate; the premium of ˙225,000 being allocated 80% to 417 and 20% to 421. The syndicates had therefore accepted a total exposure of ˙24.65 million (comprising the ˙24.7 million less the ˙50,000 excess) of which Syndicate 421Ăs share was ˙4.93 million. In order to protect Syndicates 417 and 421, joint reinsurance was purchased for ˙1 million excess of ˙1 million in the aggregate, ˙3 million excess of ˙2 million in the aggregate and ˙5 million excess of ˙10 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 ˙105,000, of which some ˙21,000 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 ˙10 million of which Syndicate 421Ăs share was ˙2 million, the next ˙5 million of claims being recoverable from reinsurers.

Syndicate 421Ăs net loss at 31 December 1990, after taking credit for the specific reinsurance

referred to above, was ˙1,235,000 calculated as follows:

 

˙000Ăs

Initial retention of ˙1,000,000 @ 20%

200

"Retention" on 1st layer: ˙1m @ 16.67% @ 20%

33

"Retention" on 2nd layer: ˙3m @ 7.85% @ 20%

47

"Retention" between 2nd and 3rd layers: ˙5m @ 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 LloydĂs

Sir I read Lorna BourkeĂs 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 LloydĂs is rare, but the committee fails to impose any regulation on reinsurance a arrangements the deeply incestuous nature of LloydĂs will always be regarded with suspicion.

I also found Sir PeterĂs comments regarding placing the onus onto the customer, to establish an insurerĂs bona fides, remarkable. I consider that part of a brokerĂs 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 PeterĂs 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: LloydĂs completes Howden hearings

The ruling committee of LloydĂs 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 LloydĂs members to consider whether to expel broker Christopher Moran and underwriter Edward Reid Wilson from membership.

26 Oct 82

Times: Ex-Howden men seek arbitration

The 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 (˙32m) through fraudulent reinsurance transactions.

They are pressing Alexander & Alexander, which acquired Howden for ˙150m 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 LloydĂs

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, LloydĂs 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 LloydĂs 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 1970Ăs until they were banned by LloydĂs. 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: LloydĂs blackballs millionaire broker

JET-SETTING LloydĂs 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 membersĂ vote that brought business to a halt in the LloydĂs underwriting room.

The vote was the first of its kind to be called in this insurance marketĂs 300-year history. It followed three years of litigation which culminated in a LloydĂs 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. MoranĂs company.

Last night, Mr. Moran vowed that he would continue his fight to stay a LloydĂs member. "The decision was unfair and unjust ," he claimed.

In another controversy last night, LloydĂs 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 LloydĂs

IN its first, and probably last, exercise of special powers under an 111-year old law, LloydĂs of London yesterday expelled insurance broker Christopher Moran from its membership after a general meeting held in the LloydĂs 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 LloydĂs 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 LloydĂs 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 LloydĂs Bill came into effect, it would be possible to have more appropriate disciplinary measures.

The Committee of LloydĂs 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 LloydĂs public information film made prior to November 1982 stated:

Underwriting syndicates at LloydĂs have one of the strictest audits in the world. Stricter than the law demands. LloydĂs 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 LloydĂs, looked to the future and the challenges to be faced

We are all probably only too well aware of the problems besetting our industry and the questions on everyoneĂs 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.

  1. Under reserving - particularly due to the problems of latent disease and other late developing losses.
  2. One really large, or a number of smaller disasters, could put an intolerable burden on a reinsurance market-place already running at approximately 115 per cent loss ratio and without a major catastrophe. With all the funding problems that such a loss or losses could bring.
  3. Adverse cash flow, highlighting the absurdity of writing business purely for premium income, regardless of profitability, and brought about by continued deteriorating results against a background where the recent sharp drop in interest rates might be only temporary.
  4. A recovery in economic activity which might once again test the insurance industry to come up with the capacity required by the buyers.

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 LloydĂs 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 LloydĂs 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.

LloydĂs 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. LloydĂs 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 LloydĂs Act, with the current review of LloydĂs methods and procedures, and with LloydĂs 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 worldĂs 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, LloydĂs 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 LloydĂs 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