The Asbestos Hazard Emergency Response Act:

Its purpose was to provide for the establishment of Federal regulations which required inspection for Asbestos-containing material and implementation of appropriate response actions with respect to asbestos items containing material in the Nation's school in a safe and complete manner, to mandate safe and complete periodic re-inspection of school buildings follow response actions, where appropriate, and to require the administrator to conduct a study to find out the extent of the dangers to human health posed by asbestos in public and commercial buildings and the means to respond to any such danger.

1 Jan 86

Effective 1 January 1986, a number of changes were made in the CGL Policy wording, including the exclusion of all pollution whether "sudden and accidental" or "gradual" or any other kind. The changes were made by the American Underwriters. However, this came to no avail as the underwriters were prevailed upon by the State Insurance Commissioners to reinstate it on the basis that they could not act as a monopoly and not provide coverage to the public.

1 Jan 86

London Databank/CIS

Adverting to the London Databank/CIS expenses, due to the advent of the Facility which includes the establishment of a Facility databank, the Working Party concluded that it would be in the Market's best interests to discontinue the London Databank, relying for future needs upon reports generated by the Facility. Insofar as 1985 is concerned that is a concluded year during which the London Databank was in operation. As at January 1, 1986, we commenced phasing out the London Databank, thus for the near term we require sufficient funds to satisfy outstanding statements and the balance of the loan that we executed in order to carry expenses for an interim period, which may be satisfied by a commitment of 50% of the 1986 projection.

7 Jan 86

Sir Peter Green sent a letter to the Janson Green Names in which further disclosures were made in relation to the offshore rollovers placed with Imperial Nassau and Imperial Cayman. The letter included a note prepared by Mr Valentine, and a memorandum entitled "Imperial" written by Sir Peter. The said disclosures were in breach of agency law duties, inaccurate, misleading and inadequate. Sir Peter pleaded not guilty, but was found guilty of the charge.

13 Jan 86

The Disciplinary Committees (Amendment) Byelaw (No. 1 of 1986, 13 January 1986).

13 Jan 86

Meeting of Ernst & Whinney under the chairmanship of M Bolger.

Numerous points were covered on the agenda and brief notes were included extracts from journals were handed out (202). An article appearing in post magazine of 19-26 December 1985 was handed out. A document entitled "industrial diseases" by Dr J Underwood was handed out. A comparison was made between specimen syndicate accounts of A Beckett and M Black.

13 Jan 86

Article by Dr JG Underwood industrial disease problems (undated but circulated at Ernst & Whinney meeting on 13 January 1986 (D12/202)) and the article contains a section on insurance problems asbestos diseases. With a description of some of the US legal issues (232-233) it contains predictions of annual deaths.

21 Jan 86

Annual General Meeting of the Institute of London Underwriters: Statement by the Chairman - Mr. D Town

Following the colourful and exciting centenary year of 1984 it would have been reasonable to think that 1985 might have been something of an ant-climax. I found that not to be so - rather that 1985 was the unusual busy and interesting year, the centenary celebrations in 1984 having provided a very colourful and spectacular bonus.


21 Jan 86

Mr. Holland's lecture entitled "Setting the scene" as part of an Ernst & Whinney seminar for clients, "The RITC process":-

‘True and Fair' requires a realistic presentation. It requires that it is done in an objective manner. It has to be pertinent to the operations of the entity. It has to be based on the best information available and it has to be arrived at after reasonable enquiry. ... We think it is important at the end of the work on the reinsurance to close that the underwriter and managing agent should prepare a memorandum to summarise the work that has been undertaken, the assumptions that have been made, the evidence that was available in support of those assumptions , the tests that were carried out and the conclusions that were reached on those tests... When they [the working papers] are gathered together for filing and are reviewed, I would hope that there would be clear proof that in arriving at the amount of the reinsurance to close equity, prudence and consistency have all been applied. Equity means that the underwriter in particular, has to look at that premium and decide that for the year being closed it is a fair premium for the Names concerned to be paying for their outstanding liabilities to be assumed by somebody else. I think he then has to walk round the other side of the table and look at it afresh from the point of view of the assuming Names as to whether or not it is a fair premium to accept for writing that liability. I think there needs to be evidence that he is satisfied on both those aspects.

The materials referred to above, while distinguishing between the respective functions of the managing agents/underwriter and the auditors, show the interplay between those functions.

0 Feb 86

Lloyd's Newsletter: Chief Executive appointed Alan Lord to take up post in March

Mr Alan Lord has been appointed as a Deputy Chairman and Chief Executive of Lloyd's in succession to Mr Ian Hay Davison. Mr Lord will take up his appointment from 1 March, 1986.

Nominated at a special meeting of the Council of Lloyd's held on 18 February, Mr Lord's appointment has the approval of the Governor of the Bank of England and means that he will be one of the four independent nominated members of the Council. The terms of reference accepted by Mr Lord are the same as those under which Mr Davison took up the original appointment, other than that Mr Lord's contract is for five years.

At the time of the announcement of his appointment, Mr Lord was a non executive director of Allied Lyons plc and the Bank of England. He has held a wide range of senior appointments within Whitehall and the Inland Revenue. He is a former deputy chairman of the Board of the Inland Revenue, and second permanent secretary at the Treasury. He left Whitehall in 1977 to join Dunlop Holdings and subsequently became chairman of Dunlop Ltd.

Deep sense of debt

At a press conference held immediately after the announcement, Mr Peter Miller, Chairman of Lloyd's, said that Mr Lord was a man of the highest calibre and had been selected from a field of the highest quality. His experience in Whitehall and in industry made him an especially apt choice for the task ahead.

Paying tribute to the contribution Mr Ian Hay Davison had made, Mr Miller said that Lloyd's owed a very deep sense of debt to Mr Davison for his very important part in the evolution of a successful system of self-regulation at Lloyd's.

"The many of us who have been reformers, at Lloyd's, for a long period, knew what we had to do, I am not sure that we knew how to do it and that's Ian's great contribution, particularly in the field of the underwriting agency system at Lloyd's to which Fisher paid such attention. Ian has shown us the way and his ideas will, I am sure, be of benefit to the Society for many years to come;' he said.

Lloyd's a national asset

Answering questions, Mr Lord said that Lloyd's was a national asset and would be a challenging place to work. He saw his priorities as firstly to gain the required knowledge and then to address his attention to the administration of the Corporation and to maintaining the momentum already achieved in self regulation.

He was firm in the belief that Lloyd's should remain outside the scope of the Financial Services Bill and that the Lloyd's 1982 Act should be given a chance to work. Mr Lord said he would be: "troubleshooting in difficult times"

On administrative matters, Mr Lord said that it was an area that required a high priority and should be ‘an effective and rapidly responding machine'.

Asked how he felt about his lack of experience in the insurance industry he said that knowledge was essential and he proposed to acquire this as soon as possible.

0 Feb 86

Lloyd's Newsletter: Names Advisory Committee report issued

Of the 42 cases considered by the Names Advisory Committee (NAC) since its formation in February 1985 13 related to complaints against underwriting agents. The balance comprised variously of requests for advice or complaints relating to members' rights, stop loss policies, improvements in Lloyd's rules or practices and requests for investigations into syndicates formerly managed by the PCW and Brooks & Dooley underwriting agencies.

In the report, which was considered by the Council of Lloyd's at its meeting of 10 February, it was stated that complaints made against agents arose from exceeding premium income limits, lack of communication between members and agents and allegations that members had been misled by their agents.

The Committee said that most cases had been satisfactorily dealt with and where the agent was felt to have acted unfairly they had been reported to the Underwriting Agents Registration Department at Lloyd's.

NAC chairman Lord Kimball said: "The Committee is an advisory body which seeks to act constructively to assist those members who believe that they have a justifiable case which they have been unable to resolve satisfactorily in discussion with their agent. I believe that in its first annual report, the NAC has been able to demonstrate its effectiveness by the manner in which it has dealt with those cases which have been referred to it"

The NAC is composed of three external members of the Council of Lloyd's, Lord Kimball, Mr Eddie Kulukundis and Mr John de Courcy Ling, and considers questions or complaints from members concerning members' agents or their underwriting agents. It offers advice to the parties involved where this is in the interests of reaching an early settlement of a dispute on mutually acceptable terms. Where serious differences persist the Committee considers what other courses might assist in reaching an agreement

The NAC does not involve itself in giving rulings of a legal or professional nature.

0 Feb 86

Lloyd's Newsletter: Trust deed approved

The Council of Lloyd's has endorsed the recent approval, given by the Secretary of State for Trade and Industry, to a new form of Premium Trust Deed to be introduced from 1 January 1987.

In line with the requirements of the Insurance Companies Act 1982 there are two types of Premium Trust Deed, one for general business and another for long term business where premiums must be held in a separate trust. There will be four forms of Deed; separate general and long term Deeds for new Names and separate general and long term Deeds for existing Names. The latter will amend existing Names' present Deeds to comply with provisions applying to new Names who start underwriting at the beginning of next year.

The introduction of the new Deeds is seen as further strengthening the position of Lloyd's policyholders who already enjoy a degree of security second to none in the international insurance market.

0 Feb 86

Lloyd's Newsletter: New undertaking

The Council of Lloyd's has approved the introduction of a new form of general undertaking between the Society and its membership. All members of Lloyd's will be required to enter into the new undertaking which ensures that disputes within the membership as a whole are subject to English law and to English courts. Disputes arising will now be resolved in one place, by one method and in accordance with one legal system. Members of Lloyd's will now be assured of consistent treatment of their legal rights.

The Council also approved the following recommendations relating to the constitution of the Lloyd's Deposit: The restrictive range investment rule is abolished for all members, providing their means and deposits are in line with current requirements. To ensure that a reasonable spread of investments is achieved a minimum of three investments must be held, no one of which should constitute more than 50 per cent of the admitted valued of the deposit. (This does not apply to British Government dated securities.) The rule requiring overseas members to provide their deposits in the form of Letters of Credit or bank guarantees has been removed.

Finally, the Council agreed that premium income limits for Names should be expressed as gross premium income limits as proposed by the Bird Working Party. This will be effective from 1 January 1988 when the so-called ‘franchise' will cease. All Names must by that time be in line with current Lloyd's requirements.

0 Feb 86

Lloyd's Newsletter: ALM rejects SIB

In a letter to the Secretary of State for Trade and Industry, Mr Paul Channon, the chairman of the Association of Lloyd's Members (ALM), Mr Anthony Haynes, said that the association had, ‘after most careful consideration', come to the conclusion that the inclusion of Lloyd's in the Financial Services Bill would be against the interest of Lloyd's Names.

Commenting on the association's decision Mr Haynes said that: "The Lloyd's system does not seem always in the past to have given enough care to the providers of its capital - the Names.

"However, this is all changing and, in our view, what matters now is that the momentum of change should be kept up, and that the management of change should be effective.

"We believe that putting Lloyd's under the SIB would add nothing and only slow things up."

0 Feb 86

Lloyd's Newsletter: Lloyd's issues writs

Lloyd's have issued writs against Mr Peter Dixon, former chairman of the PCW Underwriting Agency, and Mr Raymond Brooks, former chairman of Brooks & Dooley Underwriting Agency. The action has been taken to retrieve the £1 million fine imposed on Mr Dixon by the Council of Lloyd's last year together with £215,000 costs. In the case of Mr Brooks the Council seek payment of £39,688 plus interest.

Mr Dixon is believed to be living in the United States at present and Mr Brooks in Italy. A High Court judge has ruled that the writs may be served outside the jurisdiction of the English courts.

0 Feb 86

Lloyd's Newsletter: Action call in US

President Reagan has called for urgent action on the crisis in the US insurance industry. In his legislative programme he seeks to alleviate the situation where insurance rates have soared in the face of high damages awards by the US courts. (See Litigation Lottery, page 4.)

0 Feb 86

Ernst & Whinney: Press release concerning a seminar on reinsurance to close organised by them "recently".

Mr Bolger emphasised that prudence remains all-important, especially vital in the circumstances surrounding long-tail business such as losses arising from asbestosis, pollution and waste disposal. On the related subject of discounting, Mr Nigel Holland, the London-based chairman of the Ernst & Whinney International Insurance Committee. warned: "discounting should not be applied in the reinsurance to close calculation unless the amount of the future liability and the timing of the payment can be ascertained to a high level of accuracy. Given the many uncertainties which surround long-tail business, our view is that discounting such reserves can only compound the problem". Ernst & Whinney is one of the five largest international firms of accountants, advisers and consultants and in the UK has one of the largest insurance practices.

For further information: Charles Watts, Nigel Holland, Michael Bolger, Ernst & Whinney. [There follows an account of the seminar. Nigel Holland gave an introductory paper. Another speaker stated]

(239) as Nigel has stated and Charles Watt will reinforce from the tax viewpoint, it is most important that reinsurance to close is properly calculated and fully documented. As indicated on the slide an underwriter must identify what records he requires to document his reinsurance to close. The records must be adequate, they must be retained as part of the syndicate accounting records and they must be fully reconciled as between box records and those maintained in the agent's office. What should the records to document the RI to close comprise? Inevitably the calculation will be claims based and so as a start the records will include summaries or calculations of: claims reported - outstanding claims; claims not reported - IBNR; reinsurance recoveries in respect of the two other components... I turn now to what the component parts are and how these should be arrived at and recorded, remembering that it is the agent's responsibility to prepare them and to assess the R1.

Claims reported: records should be maintained on a case by case basis and estimates should be prepared and reviewed so that claims are evaluated at the cost of settling the claims together with direct expenses and in particular legal costs...

The outstanding claims should be summarised and the underlying records be readily available for

inspection. Statistics should also be maintained to compare reserves established with the eventual cost of settlement of the claims.

Claims not reported (IBNR): this represents the most judgmental area of the reinsurance to close calculation. The objective of the overall calculation is to arrive at the ultimate cost of settling liabilities attaching to the business written for a year of account and earlier years reinsured into that year. Different methods are used in the market to arrive at reinsurance to close:- Projections of paid claims; projections of incurred claims (paid and outstanding); projections based on premiums written in order to arrive at an ultimate loss ratio from which a deduction is made of claims settled to date. No one method can give the right answer but the more bases that are used the more confidence can be placed on the answers obtained. Projections should be carried out gross in the first place. Reinsurance protection is another variable... The size and importance of the IBNR will be determined by the nature of the business written. Therefore projections should be carried out separately on different areas of the account segregating major classes and currencies. Care should be taken to ensure that any changes that have occurred in the business mix of the account are fully reflected in the calculations. What is of paramount importance is that the quality of the data used in any of the exercises performed is good and clear and can be readily reconciled to and is consistent with the financial data... As I have already said alternative methods should be used and documented in the reinsurance work file. Furthermore the exemptions taken and conclusions drawn should be challenged in the light of current circumstances...

(245)1 was amused to receive from one of our underwriters a missive at the conclusion of the discussions on his reinsurance to close the 1982 account during which we had debated what reserves should be established for the Shell Rocky Mountain Arsenal claims. It was in the form of a photostat of a cartoon depicting two in-mates of one of Her Majesty's prisons. One says to the other "the long and short of it was that generally accepted accounting practises were not as generally accepted as I thought". The underwriter had added a little note to me which read "SRMA to you!"...

True and fair:... the tests to be applied as to whether or not the annual report has been prepared to a true and fair standard are the fundamental principles shown on the screen, which we have discussed earlier and of course the reinsurance to close is an integral part of the closed year underwriting account... Discounting - provision for future investment income:... Against this background our view is that discounting should not be applied in the reinsurance to close calculation unless the amount of the future liability and the timing of the payments can be ascertained to a high level of accuracy. Given the many uncertainties which surround long tail business, our view is that discounting such reserves can only compound the problem. Lloyd's adopts a three year accounting system and in many cases liabilities which are still outstanding at the end of that period are likely to contain uncertainties as to amount and timing...

Time and distance policies. Two types.

Conclusion: I should like to conclude this paper by emphasising the need to prepare a comprehensive set of schedules to demonstrate how the reinsurance to close has been calculated that the fundamental accounting principles have been considered in preparing the calculations and their proper disclosure is made to syndicate members in the annual report.

2 Feb 86

Syndicate Intelligence Report: Meeting with Stewart & Hughman Re. Outhwaite

J M Gordon and C D Spence met with Peter Stilwell of "Tyser" Aviation Syndicate who was handling the Stewart & Hughman Marine and Non-Marine Syndicates' reinsurance collection from Outhwaite.

The position is that Outhwaite, through Winchester Bowring, wrote unlimited policies 100% for the Non-Marine part of the Marine Syndicate 16/17 and for Non-Marine Syndicate 15. In respect of the Non-Marine Syndicate the paid claims have already penetrated the excess layers so that £1m was due on January 20th. Outhwaite, through lawyers, is attempting to refuse the claim on a number of grounds which include insufficient disclosure of information at the time of the placing of the contract in 1981, quibbling over whether the IBNR was or was not included in the assumed amount outstanding and also questions whether the level of claims actually paid is correct.

Stewart & Hughman take the position that they gave the fullest possible disclosure at the time through their brokers and that they complied with all reviews. Following the first review in early 1983 they have agreed to a premium adjustment. With a rough order of magnitude these two run off policies, which were apparently small have increased six-fold in terms of the size of the outstanding amount compared with the estimate made in 1983, i.e. from £2m to £13m and they could rise to as high as £20m.

The problem is that apart from the £66m in Syndicate investments the remaining assets of the 1982 open year of Outhwaite are the Time and Distance policies which at the earliest will mature in 1995. Speedy asbestosis claim settlements have put him in difficulties. It is known that immediate payment is also due to Cockell who has instructed Norton Rose to act on his behalf.

There are thought to be 40 other Lloyd's Syndicates with protection of this type with Outhwaite who, although they have not yet formally penetrated their excess layers, may be put in the position by their Auditors of having to regard the run off policies with him as a doubtful asset. This could lead to all these 40 Syndicates being forced to keep 1984 open until the matter is resolved.

We all agreed that keeping these years open would be a major market disaster and that on the evidence that is presented the likelihood is that Outhwaite will have to pay in the end. Peter Stilwell has been to see Murray Lawrence and we know that Peter Miller has requested the files. He asked us to see Peter Miller and we agreed that we would independently do all we could to ensure that the Committee focus on this problem as rapidly as possible. Although we have Names on the 1982 account of 317 we cannot see that it is in their interests as Members of Lloyd's to have Outhwaite refusing a valid claim on their behalf simply to achieve a postponement of the injection of cash that they will almost certainly have to make; particularly if this action results in problems for the other Syndicates that they are on.

Feb 86

Lloyd's prohibits the continuation of the discounting method in the establishment of syndicate reserves which, inter alia, relate to Lloyd's Global Solvency.

Feb 86

A meeting between Lloyd's and recognised auditors was informed of the following.

In the non-marine market, the ACF which was signed in June 1985 by 34 producers will lead to a revision in reserves at 31 December 1985. There are at present about 46,000 claims in the market. Claims are being notified at the rate of about 1,000 per month but now appear to be "cheaper". On expense costs, as a result of the ACF, defence costs have fallen to about 20-25% but the Facility is making a charge of about 10% which is to be borne in the direct market only. The Johns Manville money invested in New York includes a London Market share of about $110m. This money is soon to be dispersed and this will represent a large cash outflow in 1986 on both direct claims and retrocessions.

The meeting was told that asbestosis will also extend into property damage claims.

The meeting was told that Environmental Pollution claims will see an uplift of about 5% for legal costs. 1985 is not expected to see much movement on the Shell Rocky Mountain claim but the years 1986-1988 should see a greater movement.

18 Feb 86

Memorandum from Mr Bolger of Ernst & Whinney to insurance partners referring to a recent meeting between Lloyd's and recognised auditors.

In the non-marine market, the asbestos claims facility which was signed in June 1985 by 34 producers will lead to a revision in reserves at 31 December 1985. There are at present about 46,000 claims in the market. Claims are being notified at the rate of about 1,000 per month but now appear to be "cheaper". On expense costs, as a result of the facility, defence costs have fallen to about 20-25% but the facility is making a charge of about 10% which is to be borne in the direct market only. The Johns Manville money invested in New York includes a London Market share of about $110m. This money is soon to be dispersed and this will represent a large cash outflow in 1986 on both direct claims and retrocessions.

It was reported that asbestosis will also extend into property damage claims.

Environmental Pollution claims will see an uplift of about 5% for legal costs. 1985 is not expected to see much movement on the Shell Rocky Mountain claim but the years 1986-1988 should see a greater movement.

20 Feb 86

PCW: Re Lloyd's - RBUA.

The Steering Committee and myself have received Part One of Tom Engel's written Opinion and Appreciation as to proceedings in the United States. Part Two, which I understand will consist of detailed legal reasoning, will be forthcoming shortly, and I will therefore be in a position to give you a more detailed resume in perhaps two to three weeks' time.

His Opinion is hard-hitting and optimistic in tone, and he would propose and advise that proceedings be taken in the American courts against Lloyd's, the brokers involved, and others, under four main heads:

1. RICO proceedings, in which triple damages, costs and expenses would be claimed, and which in particular would involve Alexander & Alexander, which is of course an American corporation;

2. Proceedings on behalf of American Names only under the Security and Exchange Commission legislation, which would cause great difficulties to Lloyd's operations in the United States;

3. Interpleader proceedings, whereby he would seek to join the insureds in America, and which would involve a declaratory judgement that Names were not liable under these policies for a variety of reasons including fraud, non-disclosure and breach of duty on the part of the brokers involved in such policies;

4. Proceedings at common law against Lloyd's and the other defendants mentioned in (1) above for negligence, fraud and breach of duty. This aspect of any claim would follow closely the lines of the English Statement of Claim now before Lloyd's and the other defendants.

With regard to the English Statement of Claim, some talks have taken place between Ashurst, Morris, Crisp & Co. and Lloyd's and others, but I am not able to say as yet that anything concrete has emerged. The question of the standstill is being kept most closely under consideration, and if it becomes necessary Names will be consulted as to action to be taken

I know that most of our Group have contributed to the American action, and I would urge those who have not as yet contributed to consider this most carefully, as only those who do contribute will be included in any action to be taken over there should this become necessary. The contribution that has been made by most Names in our Group has been £1500. I know I speak for many Names in the Group whose feeling is that we need to show the strongest possible hand and resolve if this affair is to be brought to a satisfactory and reasonably early conclusion, and I hope that those of you who have not as yet contributed will feel able to do so.

21 Feb 86

Letter from Lloyd's to all Active Underwriters, Underwriting Agents and Accountants approved by the Council of Lloyd's. Re: annual solvency test of underwriting members - 31 December 1985.

25 Feb 86

Letter from the Environmental Claims Group to insurers at interest.

(In our last letter dated 19 November 1985 the ECG said that there were more than 15 declaratory judgement actions involving London underwriters already proceeding in various US courts. There are now more than 20 such actions. One of the differences between pollution and other matters currently facing underwriters is the great diversity of the problem. Where in asbestos we are concerned with the bodily injury and property damage claims brought in respect of the products of some 20 major assureds, pollution involves potentially hundreds or thousands of different assureds being sued by many different parties in respect of different types of injuries and damage. Underwriters have already been asked to give discovery of documents in the Shell Rocky Mountain litigation, Diamond Shamrock Dioxin litigation and a number of others. [Mr. Ayliffe, the Merrett claims director, was a member of the ECG] ).

You may recall that in our last letter dated 19 November 1985 the Environment Claims Group (ECG) said that there were more than 15 declaratory judgement actions involving London Underwriters already proceeding in various US Courts. There are now more than 20 such actions.... Where in asbestos we are concerned with the bodily injury and property damage claims brought in respect of the products of some 20 major assureds, pollution involves potentially hundreds or thousands of different assureds being sued by many different parties in respect of different types of injuries and damage. Underwriters have already been asked to give discovery of documents in the Shell Rocky Mountain Litigation, Diamond Shamrock Dioxin Litigation and a number of others. Members of the ECG: inter alias CJ Ayliffe, Merrett Syndicates Limited.

Feb 86

The Financial Requirement, that the deposits of non U.K. residents must be in the form of a bank guarantee or a letter of credit rescinded by the Council of Lloyd's. Non U.K. resident Names now permitted to provide their deposits by way of acceptable U.K. securities and/or sterling to be held in the Lloyd's Group Account Scheme. (In instances of draw down, this eases the pressure on foreign banks when faced with the dilemma of allegations of fraud and massive non-disclosure of material fact).

26 Feb 86

Peter Miller, Chairman of Lloyd's, writes to a Name stating:-

One of the reasons which led Sir Henry Fisher to recommend the creation of the Council of Lloyd's and which influenced the then Committee of Lloyd's to seek the new Lloyd's Act was the recognised need to obtain power to provide Members of Lloyd's "with protection which they can justifiably expect".

The enquiry established under the Chairmanship of Patrick Neill will be examining the protection offered to Names under the 1982 Act and comparing it with the protection to be offered to investors under the Financial Services Act.

The position Mr Lord, Chief Executive of Lloyd's, has adopted is the same as that taken by the Government. The Financial Services Bill is not the correct vehicle for ensuring that self regulation at Lloyd's works effectively. If a proper enquiry highlights deficiencies in the 1982 Act then this will be a matter that both Lloyd's and the Government will wish to see remedied.

26 Feb 86

Fax to Willis Faber Dumas, Lloyd's brokers. Re: Mendip Insurance and Reinsurance Co Ltd.

Further your telecom

1. Previously known as "MIRCO" Montague Insurance & Reinsurance Co Ltd.

2. No longer associated with Conyers Dill and Pearman. Lawyers now: Appleby Spurling and Kempe

3. Very much still in operation;

4. Managed out of Sedgwicks in Bermuda office: Sedgwick Group Overseas Management Services Co Ltd

5. Beneficial owner Sedgwicks;

6. Major source of business Lloyd's underwriters also some sizeable commercial clients;

7. No known plans to close up.

8. Original, and to be highly respected, "Brains" - Andre Lubuff (ex Bland Welch/Bland Payne). Lubuff still with Sedgwick Group (Bland Payne Co.) London, although nearing retirement. Also same department:

Andrew Martin

Lloyd's Manager

Geoff Verey

Commercial Co.

Russell Wilmer


9. Mendip London end is spin off Co., associated with Sedgwick Risk Management Services Ltd, Aldergate; C.E.O. John Smith (ex Wighams) who replaced Colin Formby who resigned to join Gallaghers.

10. "Seen" to be totally managed/operated out of Sedgwicks in Bermuda i.e. Policy signing, negotiations and investments using Principal Banks/Merchant Banks world-wide.

11. Advised that despite Lloyd's underwriters' problems with roll-overs etc. and still alive and well

12. Sure Sedgwicks would want to keep Mendip "alive and well" as contributes substantial profit to group.

As you can see your question "hit the jackpot" as have extremely close past business links and present connections.

Kind Regards,

Heddington Brokers, Bermuda

(In September 1994, Sedgwicks sold Mirco/Mendip for £28.4m, less £7.4m deferred payment, for a £8.5m profit.)

28 Feb 86

"Bond Washing" outlawed.

28 Feb 86

The Chairman of Lloyd's, Peter Miller, forwards a circular letter to Members which states inter alia "The Government's position is that it has established the Committee of Inquiry under Sir Patrick Neill to examine the protection offered to Members of Lloyd's under the 1982 Act and to compare it with the protection to be offered to investors under the Bill. The report of the inquiry will be published and the Government will then take action, should it conclude that action is necessary, whether by legislation or some other means".

28 Feb 86

Ian Hay Davison formally resigns.

1 Mar 86

Mr Alan Lord CB was appointed to succeed Mr. Ian Hay Davison and took up his appointment as a nominated member of the Council and Deputy Chairman and Chief Executive with effect from 1 March 1986, the appointment having been confirmed by the Governor of the Bank of England. This followed the resignation submitted in November by Mr Ian Hay Davison, the Society's first Deputy Chairman and Chief Executive.

10 Mar 86

The Related Parties Byelaw (No. 2 of 1986, 10 March 1986).

This regulates the ownership by managing agents of interests in insurance companies and the placing of syndicate insurance business by managing agents with insurance companies or through non-Lloyd's brokers which are in either case related to the managing agent.

10 Mar 86

The Membership (Amendment) Byelaw (No. 3 of 1986, 10 March 1986).

Amendment No 1 to the Membership Byelaw (No 9 of 1984) was passed by the Council, giving the power to take action where a member fails to comply with a condition or requirement relating to the member's membership or underwriting.

Mar 86

In mid March 1986, the Californian Appellate Court reversed a summary judgment order by Judge Brown in the Californian Co-ordinated proceedings, holding that the law of California controls awards of punitive damages against insurers, rather than the law of the insurer's domicile. Thus, English law with regard to underwriters, and Pennsylvania law with regard to INA, both of which prohibit punitive damages against insurers, will not be applied.

21 Mar 86

Ashurst Morris Crisp & Co's letter to Administrative Suspension Committee, Corporation of Lloyd's, Re: Suspended PCW Names:

On behalf of those Names who have contributed funds to the PCW 1985 Committee and with reference to your letter of the 5th March 1986, we make the following representations and reservations:-

1. Your Committee has no information upon which to justify any decision as to the suspension or continued suspension of PCW Names.

The accounts and auditors' certificates, which have been produced for the various PCW Syndicates, and which have been supplied by Lloyd's to the Secretary of State for Trade and Industry and have been used as the basis of the administrative suspension of PCW Names are known to be wrong and are meaningless in the context in which they have been used. The reasons for this include: uncertainties as to the proper basis for allocation between syndicates of reinsurances (particularly Chiltern); the effect of acknowledged frauds; the manipulations of past accounts identified by Price Waterhouse; doubts as to past reinsurances to close; and now the more recent problems identified by Additional Underwriting Agencies No. 3 Limited.

For the same reasons, it is not possible for there to have been produced, or to be produced, any statement of assets and liabilities or any such account or certificate in respect of any individual PCW Name which is right or which complies with Lloyd's alleged requirements or those of the Secretary of State pursuant to the Insurance Companies Acts.

2. Without any admission as to the right to suspend there are reserved against Lloyd's, its Council or any of its Committees or members thereof all rights to seek damages in respect of any suspension thus far made, now to be made, or which may be continued.

3 Apr 86

Standard Asbestos Manufacturing & Insulating Co. -v- Royal Indemnity Ins. Co., No. CV-80-14909, Missouri Circuit Court Jackson County. Missouri Court applied bodily injury-in-fact trigger and commented with regard to the asbestos coverage issues: "One of the problems in insurance law is that it is result oriented. In an effort to compensate litigants, the courts have manipulated concepts of contract law and interpretations of insurance contracts and have vastly expanded theories of liability and contractual relationships. While the motive may be laudable, the result is that there is no stability in the law and no one can predict the result in any given case."

7 Apr 86

The DTI Inspectors appointed to investigate PCW, submit their Interim Report on Unimar to the Secretary of State. This was published on 24 July 1986.

16-18 Apr 86

Paper entitled "Asbestos: The London Response'" presented in Berlin by representatives of the London Market to the European Product Liability Congress of the Cologne Re., stated in relation to the Keene decision:

"No single decision has had so much impact upon the insurance industry, for although the Court was solely addressing asbestos related claims, the decision has gradually been extended to apply over a much wider area, and particularly in respect of latency claims arising out of pharmaceutical products. In virtually every coverage litigation involving latency filed subsequently to Keene insureds seek the ‘triple trigger ruling".

Address by Robin Jackson on 17 April 1986:

(Mr. Jackson in an Address stated that the reinsurance industry is facing the greatest crisis in its history).

As is clearly indicated from the enclosures, the London Market as long ago as 1980 recognised the potential problems that could arise for the reinsurance industry out of asbestos related bodily injury claims. The unique position occupied by London in the International Reinsurance Community has tended to emphasise our predominant involvement for many decades, and it was our perception that in the interests of the reinsurance community it was necessary for London to be seen to be providing leadership in addressing the problems that would arise in the context of asbestos related claims.

(249) we must remember that particularly in the USA an insureds vulnerability to litigation is not only determined by his guilt or involvement in any loss situation, but by the depth of his pocket also. Do not equate the US judicial system with justice..

(25I) Our reinsurance industry is facing the greatest crisis in its history. We cannot allow any continuing bitterness, or any unwillingness to face these problems, to distract us from today's task of dealing with the many other threats to our corporate survival.

0 May 86

Fire figures down

During the first quarter of 1986 fire in Great Britain (England, Scotland and Wales) cost an estimated £105.5 million according to the Association of British Insurers. This was slightly less than during the corresponding period of 1985 which cost £119.0 million.

The largest fire during the quarter was at manufacturers in Eastern England and cost an estimated £2.75 million. There were six other fires which cost £1 million or more during the quarter and a total of 10 costing over £750,000. The losses include both insured and uninsured damage but do not take into account consequential loss, lost orders and exports.

1 May 86

Posgate & Denby agree to some delegation

On 1 May it was reported that, as a result of the failure of Posgate & Denby (Agencies) Ltd to obtain E & O cover, the board of Posgate & Denby had put forward the following proposals for delegation of the management of some of Posgate & Denby's business to which the Committee has raised no objections. These comprise Posgate & Denby's members' agent to Nelson Hurst & Marsh Agencies Ltd, the company's marine and incidental non-marine syndicates 609/786 to Philip N Christie & Co. Ltd, and the company's motor syndicate 827 to David Holman & Co. Ltd.

These changes are effective from 1 May, 1986.

In respect of the two remaining syndicates managed by Posgate & Denby Agencies, namely marine syndicates 488/532 and non-marine syndicate 839, Posgate & Denby would not write any new or renewal business with effect from 1 May, but would continue to service existing business. The Committee of Lloyd's directed Posgate & Denby to this effect.

On 8 May Posgate & Denby (Agencies) Ltd confirmed the errors and omissions cover had been obtained in respect of the management of syndicate 8839 and accordingly the Committee of Lloyd's agreed that the syndicate could recommence underwriting.

2 May 86

Disciplinary charges served by Lloyd's on Messrs Grattan-Bellew, Parry, Raven, Nelson and Stratton.

2 May 86

A revised list of recognised auditors, as at 2 May 1986, has been sent to all underwriting agents at Lloyd's under the provisions of Lloyd's Syndicate Audit Arrangements Byelaw (No 10 of 1984). Three additional firms appear in the list:-

Clark Whitehill

Pannell Kerr Forster

Stoy Hayward

9 May 86

Abex Corp. -v- Maryland Casualty, 790 F.2d 119 (D.C. Circuit. Court applied "injury-in-fact" trigger under New York law (rejecting Keene's triple trigger as inapplicable since case arose under N.Y. law).

12 May 86

Lloyd's Disciplinary Proceedings, case No 8502/3, "Fidentia", commences in the matter of Messrs B C Peers, J R Parry, F C Raven and Miss M M Brooks, which involves inter alia Bellew, Parry & Raven Ltd, Lloyd's brokers.

12 May 86

Corporation of Lloyd's Annual Report at 31 December 1985

Statement by Mr. Peter Miller, Chairman of Lloyd's

The Council and Corporation of Lloyd's maintained their high level of activity during 1985. The reform of our regulatory system continues to occupy a large amount of Council time. Reflecting that activity eight new byelaws were enacted during the year, covering subjects as diverse as agency agreements and multiple syndicates. Considerable progress was made in the re-registration of Lloyd's underwriting agents - which is at the centre of the process of reform at Lloyd's - and during the year one hundred and seventy nine applications were received. It is estimated that this is likely to represent about two-thirds of those agencies which will seek re-registration.

Meanwhile, members will be encouraged by the fact that several major disciplinary and appellate proceedings, including those referred to as the "Howden" and "PCW" cases were concluded during 1985.1 was pleased to note that the format of our disciplinary processes closely resemble those recently recommended by the Roskill Enquiry in the context of reform of the fraud trials system.

The central settlement agreed last autumn with the Inland Revenue is reflected in the Extraordinary Charge in the Accounts. I have already written at length on this subject but I repeat that it is the Council's intention to ensure that this provides a basis for an improved relationship with the Inland Revenue.

During the year our new building was virtually completed. Its fitting-out is well in hand and the market is now moving into its splendidly controversial new home.

These last two events were primarily responsible for our continued high level of borrowing. It is not appropriate for a Society such as Lloyd's to incur long-term debt and I am therefore pleased to be able to report that current financial projections suggest that these borrowings should be cleared during 1990.

Last year, I reported that it was Council policy to place greater emphasis upon formulating policies which are directed towards enhancing the level and quality of support to the Lloyd's market. This area continues to absorb much of the Corporation's attention and details of the progress made, especially in the market services and systems and communications areas, are set out elsewhere in this report.

The Council and I were greatly saddened by the death, on the 21 February 1986, of Mr Collwyn Sturge, formerly Chairman of Lloyd's of London Press Ltd. His staunch support of the Lloyd's market will be missed.

In November 1985, the Deputy Chairman and Chief Executive, Mr Ian Hay Davison resigned from his position. Mr Alan Lord CB has taken up his appointment as Mr Davison's successor. This appointment reflects a second stage in the development of the Corporation's ability to service the needs of the Lloyd's market. The Council is committed to the continued improvement of the scope and quality of the regulatory and administrative services for which it is responsible and which are provided by the Corporation. Both Council and Corporation are always mindful of their paradoxical roles both as regulators and as servants of the market. The Council and myself look forward with confidence and enthusiasm to further major progress being made in 1986 across the wide spectrum of our responsibilities.

Finally, I record my sincere thanks on behalf of the membership to the staff of the Corporation and its subsidiaries for their continuing support towards the securing of our objectives during a period of great change in the regulation of the Society's affairs.



Postal ballots were held for six seats on the Council of Lloyd's for 1986 in respect of both working and external members - four working members and two external members. The Electoral Reform Society conducted the ballot.

There were seven candidates for the four working members' seats vacated by the retirement (by rotation) from the Council of Mr Frank Barber, Mr David Barham, Mr Terence Higgins and Mr Peter Miller. Mr John Greig, Mr Richard Hazell and Mr Gordon Hutton were elected and Mr Peter Miller was re-elected to serve a further four year term.

Of the eight candidates who contested the election of two external members of the Council following the retirement (by rotation) of Mr John Marks and Mr ‘Eddie' Kulukundis, Mr John de Courcy Ling MEP was elected and Mr Kulukundis re-elected to serve a further four year term.

Sir Kenneth Berrill, KCB, one of the four nominated members of the Council who retired, by rotation, was re-appointed to serve for a further period. His appointment was confirmed by the Governor of the Bank of England.

The Council elected Mr Peter Miller as Chairman for 1986 and Mr Murray Lawrence and Mr Michael Cockell as Deputy Chairmen for the same period.


In September the Council established a working party under the Chairmanship of Sir Kenneth Berrill to review the structure and staffing of the Corporation in relation to the existing and future needs of the Society. The working party's recommendations were considered by the Council in March and April 1986 and many of them have been implemented.

Mr David McWilliam took up his appointment as Head of Regulatory Services in August 1985 on the retirement of Mr Philip Brown CB.

Mr Ian Hay Davison, the Society's first Deputy Chairman and Chief Executive, submitted his resignation in November.

Mr Alan Lord CB was appointed to succeed him and took up his appointment as a nominated member of the Council with effect from 1 March 1986, the appointment having been confirmed by the Governor of the Bank of England.


Postal ballots were held for six seats on the Council of Lloyd's for 1986 in respect of both working and external members - four working members and two external members. The Electoral Reform Society conducted the ballot.

There were seven candidates for the four working members' seats vacated by the retirement (by rotation) from the Council of Mr Frank Barber, Mr David Barham, Mr Terence Higgins and Mr Peter Miller. Mr John Greig, Mr Richard Hazell and Mr Gordon Hutton were elected and Mr Peter Miller was re-elected to serve a further four year term.

Of the eight candidates who contested the election of two external members of the Council following the retirement (by rotation) of Mr John Marks and Mr ‘Eddie' Kulukundis, Mr John de Courcy Ling MEP was elected and Mr Kulukundis re-elected to serve a further four year term.

Sir Kenneth Berrill, KCB, one of the four nominated members of the Council who retired, by rotation, was re-appointed to serve for a further period. His appointment was confirmed by the Governor of the Bank of England.

The Council elected Mr Peter Miller as Chairman for 1986 and Mr Murray Lawrence and Mr Michael Cockell as Deputy Chairmen for the same period.


In September the Council established a working party under the Chairmanship of Sir Kenneth Berrill to review the structure and staffing of the Corporation in relation to the existing and future needs of the Society. The working party's recommendations were considered by the Council in March and April 1986 and many of them have been implemented.

Mr David McWilliam took up his appointment as Head of Regulatory Services in August 1985 on the retirement of Mr Philip Brown CB.

Mr Ian Hay Davison, the Society's first Deputy Chairman and Chief Executive, submitted his resignation in November.

Mr Alan Lord CB was appointed to succeed him and took up his appointment as a nominated member of the Council with effect from 1 March 1986, the appointment having been confirmed by the Governor of the Bank of England.


The number of members of the Society at the beginning of 1986 was 28,944 (1985 26,050); this represented an increase of 11 per cent compared with a year earlier.

Almost 9,000 members (34 per cent of the membership) increased their premium income limits and this increase combined with the number of new members generated an overall increase in the market's capacity of 29 per cent.

During 1985, the preparation of the new underwriting agreements, forum agreements and premium trust deed was completed. These documents will take effect on 1 January 1987. They have recently been distributed to agents for discussion with Names. The intention of the new documents is to provide a better protection for Names and assureds, and to ensure that Names are treated equitably in their dealings with their agents. They also reflect the developments which have occurred since the 1982 Act.

The Names Advisory Committee under the chairmanship of Lord Kimball dealt with 42 cases during 1985, its first year of operation. A wide variety of issues were referred to the Committee. Where the cases fell within its terms of reference it was able to provide assistance to the Names. However, where a number of cases already involved actual or imminent legal action by certain parties, they fell outside the Committee's terms of reference.


The pace of legislative reform flowing from the Lloyd's Act 1982 was maintained by the Council during the year and a number of new byelaws were promulgated.

The Binding Authorities Byelaw (No. 4 of 1985) and its accompanying Code of Practice were introduced. The code has been designed to reflect recommended practice for the operation of binding authorities which should, ideally, be incorporated in all binding authority agreements.

Rules as to who may place reinsurance to close and a requirement for it to be signed at Lloyd's Policy Signing Office were defined in the Reinsurance to Close Byelaw (No. 6 of 1985). In addition the Council took the opportunity to issue practical guidance dealing with reinsurance to close, and in particular the documentation to be prepared to evidence this important aspect of a syndicate's operation.

Regulation of multiple syndicates has been addressed under the provisions of the multiple Syndicates Byelaw (No. 7 of 1985) and its accompanying Code of Practice. This byelaw prohibits the operation of relatively small syndicates unless specific consent thereto is given by the Council.

Furthermore, the Council's concern to improve the standards of competence of new entrants to the Lloyd's market was reflected in its promulgation of the Lloyd's Introductory Test Byelaw (No. 8 of 1985). The byelaw requires that everyone conducting business in the underwriting Room for the first time from the beginning of 1986 should pass the Test within a 15 month period in order that they may continue trading or working at Lloyd's - unless the Council is satisfied that they have sufficient experience in the conduct of insurance business.

The process of re-registering existing agents and registering new agents began in earnest in 1985. Over half the agents who are expected to register have completed the process and it is anticipated that most of the remainder will achieve registration by 31 May 1986. The registration process has placed particular strains upon the resources of underwriting agents, Corporation departments and the Council's Underwriting Agents Registration Committee. That such substantial progress has been made in a relatively short period reflects the level of co-operation and assistance extended by all involved in this exercise.

Following the implementation of new rules on syndicate accounting during 1985. registration of those firms which may carry out the audit of Lloyd's syndicates has also been undertaken. This process of syndicate auditor registration is intended to ensure that only firms with necessary resources and experience are active as recognised auditors. However it is also the Council's objective to increase the number of recognised auditors eligible to audit syndicates in view of the benefit this will bring to the market. As a result of this programme the list of recognised auditors is likely to comprise some twenty firms.

During 1985, comments were received on the report of the long term review working party under the chairmanship of Mr. Patrick Bird. The report, and the comments, were very wide-ranging and it was therefore decided that it would be best to deal with the urgent issues while consideration of the longer term topics continued. As a result, Names' underwriting will be measured on a ‘gross' basis including franchise. with appropriate adjustments to the deposit and means ratio with effect from 1 January 1988. From the same date, all members will be required to maintain means and deposits in line with the current requirements.

During 1985, the report of the working party on extended warranties and consumer guarantees under the chairmanship of Sir Kenneth Clucas was completed. The report was issued for consultation and comments have been invited from interested parties. The main recommendation of the report was that a code of practice should be established for extended warranty business transacted at Lloyd's and that compliance with the code would be reviewed and monitored by the Corporation.

Several major disciplinary and appellate proceedings, including those referred to as the ‘Howden' and ‘PCW' cases, were concluded during 1985. In these proceedings, the full range of disciplinary penalties have been imposed ranging from reprimands to expulsion from the Society. Periods of suspension have also been imposed on a number of defendants, and. in one case, a fine of £1 million was imposed. Costs in favour of the Society involving several hundred thousand pounds have been awarded. The Society is determined that all these sums will be recovered and defaulters will be pursued with the utmost vigour.


In November, the Government published the Financial Services Bill which gave effect to its proposals which were contained in the White Paper, "Financial Services in the United Kingdom: A New Framework for Investor Protection," published in January 1985.

The Bill, which completed its Committee stage shortly before Easter 1986, specifically exempts from its provisions the Society and persons permitted by the Council to act as underwriting agents at Lloyd's, in respect of investment business carried on in connection with, or for the purpose of, insurance business at Lloyd's.

However, in the context of Parliamentary discussion of the Bill, the Government announced in January 1986 the establishment of a Committee of Inquiry into Regulatory Arrangements at Lloyd's. Its purpose is to consider whether the regulatory arrangements which have been implemented under Lloyd's Act 1982 provide protection for the interests of members of Lloyd's comparable to those proposed for investors under the Financial Services Bill.

The Committee, under the chairmanship of Sir Patrick Neill QC, has been asked to report by the summer of 1986 and issued an invitation for submissions, to be made by 27 March. Lloyd's expressed its willingness to assist the Committee and detailed evidence has been submitted.

Lloyd's Law Reform Committee has been closely involved in protracted discussions concerning changes in the law relating to disclosure of facts by the insured in warranties and insurance policies. These discussions, which have also involved the Association of British Insurers and the Secretary of State for Trade and Industry, have led to the adoption of a New Statement of Insurance Practice which was announced by the Secretary of State in February this year.

As foreshadowed in last year's report, Lloyd's Log was re-launched in May as a prestige bi-monthly publication and the new monthly Lloyd's of London Newsletter was launched at the same time. Both publications have attracted favourable comment from members of the Society.


The hand-over of the new building by the contractor to Lloyd's has been progressing in stages since autumn 1985. Parts of the services areas and of the underwriting Room have been handed over for fitting out work to begin; the hand-over of the majority of the building is scheduled to take place before the middle of 1986. Progress on the underwriting Room, to a difficult programme, did not justify a move at Easter and, accordingly. the move was deferred. A visitors' viewing gallery and exhibition area is scheduled to open later in 1986.

The commercial letting programme has proceeded satisfactorily with the majority of the available space already having been reserved by tenants.

Planning continues for the refurbishment of the 1958 building with work on the conversion of the Room for Corporation of Lloyd's staff accommodation due to begin in the middle of 1986.


The market services development department continued to work closely with market interests to establish future business requirements.

More than thirty issues have been identified and there is continuous discussion and communication between the Lloyd's market and relevant Corporation departments to determine priorities. The market remains determined to improve both claims payment and documentation performance.

A system of slip registration received wide market support and will be introduced as soon as possible in 1986.

During 1985 a major re-organisation of the operating departments of the Lloyd's Policy Signing Office was undertaken in conjunction with a wide-ranging review of the procedures for preparing, checking and issuing insurance documentation at Lloyd's. This review, undertaken in conjunction with selected Lloyd's brokers, is seen as a necessary preliminary towards an acceleration of the delivery Lloyd's policies and other documentation to assureds.

A procedure whereby premiums and claims can be settled between brokers and underwriters on a weekly basis was made available during the year and has been instituted in the non-marine market. This represented part of an important long term initiative to accelerate the cash flow of Lloyd's business and improve cost efficiency and security.

Following a pilot study, a new computer system for providing underwriters with full details of outstanding marine claims is being programmed and due for full implementation in 1986.

In 1985, two Lloyd's Agents recorded centenaries of their appointments: Catoni Maritime Agencies S.A., of Iskenderun in June and Fisher Shipping Agency, Warren point, Northern Ireland in December.

Meetings of Lloyd's Agents in Australia, New Zealand and Northern Europe were held in Sydney; Auckland and Hamburg. The inaugural meeting of Lloyd's Agents in the Far East was held in Hong Kong in October and was chaired by Mr Gordon Hutton, chairman of the Lloyd's Agency Committee. This meeting was attended by representatives of 30 Agencies. During 1985, 36 Agencies were inspected in South Africa, the Indian Ocean, the South Pacific, China, India, United States of America, Canada, Gibraltar and North Africa, and visitors from some 143 Agencies were received in London. Staff from five Agencies participated in longer visits and received training to assist in maintaining the standard of Agency services.

The versatility of Lloyd's aviation department surveyors was reflected in losses handled world wide ranging from wide-bodied airliner disasters, airliner hi-jackings, to balloon accidents.

Last year saw the first publication of the satellite type and prices handbook which describes all the commercial satellites in current use or projected for the near future.


Progress towards the definition of the initial business processing system for use by the Lloyd's market continued during the year. There has been particular emphasis on consultation with all sectors of the market in order to ensure that the requirements of all users are met as far as possible. A large number of differing views have been received and it is hoped to agree on the first stages of implementation shortly. The systems and communications group is also involved in reviewing procedures at Lloyd's Policy Signing Office to determine the extent they will need to change to accommodate the new systems.

A pilot system to display, in High Street brokers' offices, premium rates being offered by motor syndicates at Lloyd's has been developed and operational running is scheduled to commence in mid-1986. A record keeping system for the temporary life market has also been developed and is gradually being implemented.

A major task being undertaken by the group is the development of an integrated suite of programs for the membership area. Three priority areas have been identified as requiring the development of modern systems. These are systems for monitoring members' deposits, special reserve fund and process control: members' standing information and underwriting arrangements: and systems for solvency and premium income monitoring.

During 1985, some 120 development projects were completed. These included the first three phases of the new North American taxation system, introduction of a new weekly settlement system for Lloyd's Non-Marine Association. a late settlement reporting system and a purchasing system. During the year the organisation of the systems and communications group underwent further development designed to increase the overall levels of efficiency of the group and to ensure the effective use of manpower. The group now operates in three branches. These are:

systems planning - responsible for identifying users detailed needs and converting these into systems plans with related manual procedures: for user training and implementation help: for office automation: and for organisation and methods;

systems development - responsible for converting these systems plans into computer programs; also for all communications work including the new building: and computer operations - responsible for the day-to-day operation of the computer centre at Chatham and for hardware/software planing.

Staff numbers within the group are expected to be maintained at between 320-350 reflecting the volume of development work being undertaken in the systems and communications area over the next three years.


Reflecting developments in the transportation field - especially maritime - the company reinforced its emphasis on expanding overseas markets and more than 40 per cent of sales were generated from outside the United Kingdom. However, despite increased turnover, net profit before tax was marginally lower thin in 1984 at £762.000. This reflected the impact of higher costs associated with the development of the company's activities in Hong Kong and New York, which are essential if the company is to retain its dominant position in the maritime, transportation and insurance publishing sectors.

During the year the founder-chairman, Mr Collwyn Sturge, retired and was succeeded by Mr. Brian Brennan. The Chairman of Lloyd's, at a luncheon to honour Mr. Sturge, paid tribute to the 12 years he had given to the company during which the product range was greatly expanded, its turnover increased tenfold and previously substantial losses were converted into continuing profits.


Mr Ian Winchester took tip his appointment as chief executive of the company, in New York, early in March 1985. Initially, one of his principal concerns was the motivation of the company's existing personnel. In addition, several new staff appointments were made with a view to improving the range and quality of the services which Toplis and Harding can offer to both the Lloyd's community and many of its other valued clients.


1985 was a year of significant expenditure by the Corporation. Expenditure on the new building was virtually completed. This represents the Society's largest ever investment. In October, the Council agreed a payment of £43 million to the Inland Revenue on behalf of the members of Lloyd's in settlement of a dispute concerning certain reinsurances.

Staff costs increased by £3. 5 million in 1985 reflecting the planned expansion to meet the increased responsibilities of our self regulation and the continuing drive to maintain our highly competent staff. Overseas operating expenses decreased, in Sterling terms, as a result of the strengthening of Sterling in relation to the US Dollar during the year and the reduction in certain trustee fees incurred in North America,

Net surplus for the year, before the extraordinary charge, was £25 million which is in line with the forecast long term requirements,


The momentum of reform of the Society's regulatory machinery was maintained during 1985. Very significant progress has been made since the Council of Lloyd's met for the first time in January 1983: thirty nine byelaws, twelve amendments, four regulations and two codes of practice have been promulgated over the three year period.

Considerable progress has been made in the registration and re-registration of underwriting agents as a consequence of the divestment of managing agents from ownership by Lloyd's brokers as required under the provisions of the Lloyd's Act 1982. Against the background of the evolution of a comprehensive framework of modern regulation which has been facilitated by the 1982 Act, the Council and departments of the Corporation will be increasingly concerned to liaise closely with all sections of the Lloyd's market in the identification and implementation of services and systems to ensure the market's continued efficiency and effectiveness.

These initiatives, together with the further strengthening of the Corporation's organisational structure, provide a sound basis for the future development of the Corporation and for the Lloyd's market.


The Chairman undertook a number of overseas engagements on behalf of the Society. In March he visited Brussels accompanied by the Deputy Chairman, Mr David Coleridge. Meetings were held with Lord Cockfield, Vice President of the EEC and other senior officials of the Community.

In April, Mr Miller addressed the American-Swiss Chamber of Commerce in Geneva and the following month, accompanied by Mr Colin Murray and senior members of the Lloyd's broking community, he paid an official visit to The People's Republic of China. In Beijing the Lloyd's party met the Chairman of The People's Insurance Company of China, Mr. Shang Ming and other leading officials of the PICC before being received by Vice Premier, Tian Jiyun and Madam Chen Muhua, State Councillor and President of The People's Bank of China.

The visit, which was the first made to China by a Chairman of Lloyd's, had been arranged at the invitation of the PICC and included Tianjin, Xian, Guangzhou, Xiamen, Fuzhou and Shanghai covering, in all, some 7,000 miles. Returning via Hong Kong, Mr Miller addressed the local Shipowners' Association and Insurance Institute.

In May the Chairman, accompanied by Lord Kimball, addressed the National Association of Insurance Brokers at its conference in Sea Island, Georgia. Proceeding via Kentucky to San Francisco, where he was joined by Mr Michael Cockell, the Chairman participated in the annual meeting of the American Association of Managing General Agents. Finally, after a brief visit to Los Angeles, Mr Miller addressed a plenary session of the National Association of Insurance Commissioners in Kansas.

The Chairman paid two further visits to North America during 1985. In September he spoke at the Thirteenth Annual Marine Insurance Seminar in

Houston and in November he addressed the Insurance Brokers' Association of Ontario in Toronto.


During the year the Council and Committee of Lloyd's entertained many distinguished visitors. They included The Earl of Stockton PC; the Mayor of Lisbon, Sr Krus Abecasis; The Rt. Hon Leon Brittan MP, then Secretary of State for Trade and Industry; the Speaker of the House of Commons, The Rt. Hon Bernard Weatherill MP; the Governor of Texas, Mr Mark White; and the Ambassadors of Italy, Switzerland, Japan, The People's Republic of China, Sweden, France and the High Commissioner of Australia.

12 May 86

Mr Alan Lord, Chief Executive of Lloyd's, said at press conference recently that any move by Names to sue Lloyd's in the American courts would be fought ‘inch by inch'. The action has been proposed by a steering committee acting on behalf of some 400 PCW Names and lawyers have been instructed to draw up a writ under the Racketeer, Influenced and Corrupt Organisation Act (RICO).

Describing the move as ‘monstrous', Mr Lord compared the American action with the pending litigation in the UK which has been postponed by a standstill agreement while the search for a settlement continued. Lloyd's would challenge the US action on grounds of jurisdiction, said Mr Lord, and he doubted whether the claim would be made substantive.

14 May 86

Additional Underwriting Agencies (No. 3) Ltd. Letter

You will be aware that following a study of the principal documents signed by Underwriting Members, the Council decided that new forms of Underwriting Agency Agreements, Premiums Trust Deeds and a General Undertaking should be signed by all Members who participate in the 1987 account. The documents will be effective from the 1st January 1987.

We are studying with Lloyd's the effects of these documents for Names who participated in any syndicate managed by PCW/RBUA for any year of account which remains open - as shown on the enclosed schedule. We will not submit these documents to you until the matters at issue have been clarified. Therefore, there is no action that you need take but as most Members of Lloyd's will be receiving these documents shortly, I thought I should keep you informed.

19 May 86

Draft notes signed by SG Hill of Ernst & Whinney on the operation of the asbestosis facility.

19 May 86

Lloyd's Disciplinary Committee, being Messr's H Dunn QC., Chairman, P L Foden-Pattinson, M R Lester, in the matter of B C Peers, M M Brooks, J R Parry, F C Raven and Bellew Parry & Raven Ltd, informed by Counsel for Lloyd's as to the position of Bellew, Parry & Raven Ltd.

When the proceedings started on May 12 Bellew, Parry & Raven Ltd. were a Defendant to the proceedings. On 21st May we were informed by Counsel for Lloyd's that on Monday of that week, namely the 19th May the Deputy Chairman of Lloyd's had decided that Bellew, Parry & Raven

Ltd. be de-registered with effect from the 19th May. We were informed that the effect of that was that Bellew, Parry & Raven Ltd. are no longer Lloyd's Brokers, they have come off the register and in consequence that our jurisdiction over them ceased albeit in the middle of these proceedings. We were informed that this was consequent to the provisions of the Lloyd's Act 1982 in connection with the procurement of the mandatory divestments of Brokers and Managing Agents.

Accordingly we had no further jurisdiction in respect of Bellew, Parry & Raven Ltd. It was submitted on behalf of Mr. Parry and Mr. Raven that the costs claimed by the Council should be reduced by an amount, it was suggested of one-third, to reflect the waste of having included Bellew, Parry & Raven Ltd. in the proceedings and then taken steps which had the effect of dropping them from the proceedings after four days. We doubted if the costs had been increased in any significant way to either side by the inclusion of Bellew, Parry & Raven Ltd. over and above Mr. Parry and Mr. Raven. However we considered the point to be valid to a limited extent particularly as Bellew, Parry & Raven Ltd. must have incurred some costs themselves and we toot this matter into account to a small extent in reducing Lloyd's claim for costs to £55,000 in all.

We appreciated that we had no jurisdiction directly in respect of Bellew, Parry & Raven Ltd. consequent to the de-registering order with effect from the 19th May but we accepted the Defence point that Bellew, Parry & Raven Ltd. having been originally included and then dropped, it would be appropriate to give sum of costs to be awarded to Lloyd's.

We noted that there was nothing claimed in the bill of costs by the Council of Lloyd's in respect of costs for the preparation of the case against the company. (The Deputy Chairmen of Lloyd's in order of seniority were W M N Lawrence and M H Cockell. The investigations committee reports directly to the Council of Lloyd's).

20 May 86

Additional Underwriting Agencies (No. 3) Ltd. Letter

You may have seen publicity which followed a press conference given last week by Mr. Alan Lord, Deputy Chairman & Chief Executive of Lloyd's.

On the same day that these statements were made, which followed the meeting of the Council of Lloyd's held on the 12th May, the Chairman, Mr. Peter Miller, and Mr. Alan Lord met the Board of this Company to explain the Council's views on three matters. I describe the points which were discussed below:

1. Possible Legal Action in the United States

Lloyd's is not prepared to enter into any "standstill" agreement (as it has in the United Kingdom) which involve allegations under the Racketeer Influenced Corrupt Organisations Act and at the same time participate in settlement proposals. The reasons for this were explained by Mr. Lord in the press.

2. Solvency

The matter of Solvency for Members participating in PCW/RBUA Syndicates was discussed. As you know from our earlier letters, we are continuing with our efforts to produce results for these syndicates as at the 31st December 1985 both for Solvency and accounting purposes. We will write as soon as there is an indication of the figures which Members can use in deciding whether or not to fund any deficiency on their account. We will also explain the basis upon which these figures have been prepared. We have stated already that we anticipate that final figures will not be available until the latter part of June and therefore we have sought from the Council an extension of the date by which Members must meet the Solvency requirements: 30th June.

3. Settlement of the PCW/RBUA Affair

As widely reported, the Council is committed to seeking to arrange a settlement as soon as results at the 31st December 1985 for the syndicates and years of account can be made available.

We were pleased to see the public statement that Lloyd's is firmly committed to seeking a settlement of the PCW/RBUA affair. We accept Lloyd's position on the U.S. "standstill" agreement because we remain convinced that a speedy settlement would be far more attractive to most Members than the alternative which is years of litigation and uncertainty. However, until specific proposals have been formulated none of the parties concerned can assess the position nor can they be certain, at this stage that a settlement can be achieved which is acceptable to all of them. Therefore, we continue to seek legal advice here and in the United States, in the protection of the Names' rights.

I will write again immediately there is any clear indication of the results for any of the syndicates under our management.

20 May 86

Letter from W.M.D. Underwriting Agencies Limited to all WMD Agents: Re. 1983, 1984, 1985 Years of Account. ANNUAL SOLVENCY TEST - PCW SYNDICATES 540/542 and 847.

I regret to say that the results of Syndicates 540/542 and 847 as at 31 December 1985, are not yet ready for distribution, nor for input to the Lloyd's Central Solvency System. I do, however, expect that the results will be available by the end of May. There are two basic reasons for the delay.

Firstly, until now we have been unable to verify the Underwriting Statistics upon which Patrick Fagan relies when calculating the RI to Close the 1983 accounts. The Underwriting Statistics are based upon figures previously processed by Richard Beckett Underwriting Agencies Ltd (‘RBUA') on our behalf, which were corrupted on transfer to a new computer bureau during 1985. The figures became further corrupted by the allocation at LPSO of business to the wrong year of account or to the wrong Syndicate (not the fault of the LPSO). A fuller explanation is given in my letter to Lloyd's on 29 April, a copy of which is enclosed. Patrick Fagan should receive verified figures today, when he will be able to start calculating the RI to Close.

Secondly, the board of WMD are not yet in a position to decide how to account for the Whole Account Quota Share Reinsurance ceded to RBUA Syndicate 157 out of the 1978 to 1983 Underwriting Accounts. Although these Quota Shares are supported by Line Slip Policies processed through the LPSO, their authenticity is being challenged by Additional Underwriting Agencies (No. 3) Limited (‘AUA3') who now manage Syndicate 157. We have sought guidance from Lloyd's Auditing and Accounting Review body on this matter.

It is our custom to have the Premium Income and Settlement figures audited as at 31 December each year, before sending them to you. These figures are extracted from the Underwriting Statistics, the late production of which has delayed the audit. I regret, therefore, that the Premium Income and Settlement Percentage figures for the year ending 31 December 1985 will not be with you before the end of May.

Please accept our apologies for this delay. We are, possibly, more frustrated by it then you.

30 May 86

Toplis & Harding (Market Services) Ltd letter to Insurers at Interest, signed by R A G Jackson.

(It is too early at this stage to project the reserve movement the London market is likely to see at the coming year-end, however there are now in excess of 40,000 claims outstanding, and new suits filed over the past year have reached a level of 1,000 filings per month. There has in addition been an increase in the average per case settlement level achieved by the ACF, which is in part affected by the recent resolution of a major class action in Texas. If no relief develops in these trends, it is likely that reserves will see a further deterioration).

(and referred to the growing asbestos property damage problem).

I forwarded to you under cover of my letter of 7 May a copy of the presentation made on behalf of the London Market to the European Product Liability Congress in Berlin on 16/18 April 1986....

(254) It is almost a year since the inauguration of the Facility and, bearing in mind the problems that inevitably arise in setting up such a major undertaking, remarkable progress has been made in addressing asbestos claims....

It is too early at this stage to project the reserve movement the London Market is likely to see at the coming year-end, however there we now in excess of 40,000 claims outstanding, and the rate of new suits filed over the past year has reached the level of 1,000 filings per month. There has in addition been an increase in the average per case settlement level achieved by the facility, which is in part affected by the recent resolution of a major class action filed in Texas. If no relief develops in these trends, it is likely that reserves will see a further deterioration, particularly when coupled with-the growing asbestos property damage problem, which will impact on IBNR. provisions already established.

30 May 86

The Auditors Notes to the 1980, 1981 and 1982 open years of account to 31 December 1985, of the Posgate Non-Marine Syndicate 126 restrict the True and Fair statement to the net result of each Member, whereas the annual report has been properly prepared only in accordance with the requirements of the Lloyd's Syndicate Accounting Rules. The True and Fair requirement is given for the first time, and is precisely five months after the Alexander Howden Offer of Restitution, whereby approximately 83% of the offshore rollovers were credited to the Marine Syndicate 127.

30 May 86

Seminar held in London on Insurance and Reinsurance Insolvency.

0 Jun 86

Ernst & Whinney INSIGHT No. 32. (492) Audit brief- Lloyd's syndicate.

(An Ernst & Whinney Insight stated that it is understood that by about the end of March 1986 some 8,000 claims had been cleared from an initial notification to the Facility of about 52,000 claims).

In March 1986 the Auditing Practices Committee of the Consultative Committee of Accountancy Bodies issued an audit brief dealing with Lloyd's syndicates.... The issue of this brief, however, has not given rise to any changes in the Ernst & Whinney audit approach for Lloyd's syndicates....

The Asbestosis Facility: This facility was set up following the finalisation of an agreement on asbestos-related claims (dated 19 June 1985) in an attempt both to speed up the payment of compensation to claimants and to reduce legal costs associated with such claims. ...

When a claim is settled, it is allocated to those participating in the facility using a complex formula; this recognises the involvement in each policy year to which the settled claim is deemed to relate. There is no distinction as to a definitive producer to whom the claim relates as this is almost impossible to determine accurately, because the claimant may have been exposed to asbestos products from different producers over the relevant time period. Obviously such a basis does mean that certain producers and their insurers are going to contribute towards claims which do not relate to them; however, it must be borne in mind that they will not be bearing the full cost of a claim which does relate to them because of the sharing mechanism .... ...

It is understood that, by about the end of March l986 some 8,000 claims had been cleared from an initial notification to the facility of about 52.000 claims.

10 Jun 86

Lloyd's Disciplinary hearings took place between 10 June 1986 and 7 January 1987 in the matter of the BPR Affair involving Grattan-Bellew, Parry, Raven, Nelson and Stratton.

There were six preliminary hearings which took place between 10 June 1986 and 7 January 1987, seven sets of instructions were given, some of these being accompanied or followed by written reasons, in particular the reasons for the Chairman's conclusion on 29 July 1986 that the Chairman has, under the Disciplinary Committees Byelaw, power in certain circumstances to order disclosure of relevant documents by the Council of Lloyd's or the Defendants.

The substantive hearing commenced on 2 February 1987 and continued until 11 March 1987, at which time the hearing of the evidence had been concluded. The hearing recommenced for trial speeches on 7 April 1987, and was concluded on 14 April 1987. The hearing lasted 32 days.

The documents put before the Committee (together with the written submissions of Counsel and the daily transcripts) were contained in over 60 files, most of these being lever arch files. Many of the files were not in chronological order, and documents relevant to a particular charge or matter were in some instances scattered throughout many of the files. Many of the relevant documents on which the Defendants relied were not produced in accordance with the Chairman's instructions, but at much later dates, thereby causing inconvenience to the parties and to the Committee.

Each of the defendants was not an impressive witness. In this assessment, the Committee had regard, not only to the print of the transcripts of their evidence to the Singleton Inquiry and before us, but also to the demeanour of each of them before us which the print of the transcripts can only partially record. Each of them sought to diminish his role and his knowledge, in certain of the matters the subject of the Charges, to an extent which we found not credible. Each of them was lacking in frankness and evasive in the evidence to the Singleton Inquiry and before us.

Each of the BPR Principals showed a serious lack of appreciation, even at the most elementary level, of the duties owed by a director of a company, whether that company is in England, the IOM, Bermuda or Cayman. It was their own evidence that they did not attend Board meetings, receive copies of Board Minutes, receive or approve accounts, or approve major transactions of certain of the overseas companies, though in material respects we do not accept all this evidence.

11 Jun 86

City of Greenville & Greenville Water Sys. -v- W.R. Grace for South Carolina, 640 F. Supp. 559, D.S.C., 11 June 1986. Affirmed, 827 F.2d 975, 4th Circuit, 28 August 1987. United States District Court and Court of Appeals for the Fourth Circuit upheld jury verdict of $6.4 million in actual damages and $2 million in punitive damages against asbestos manufacturer. The decision was limited to the law of South Carolina which State had given jurisdiction in all asbestos cases to one judge.

12 Jun 86

Daily Telegraph: Legal move holds up Lloyd's PCW report

AN INJUNCTION has prevented circulation of an internal Lloyd's report on the scandals surrounding the PCW syndicates. Arthur Andersen which acted as auditor from the beginning of 1983, has prevented even the ruling council of Lloyd's from seeing the results of the Davis committee's investigations.

Just a year ago John Davis vice-chairman of Lloyd's Bank was asked to chair a fact-finding committee to investigate what continued to go wrong with the syndicates after the misappropriations were stopped and the people responsible removed.

The committee's report was ready by the end of May to send to the council but according to today's Accountancy Age magazine an ex parte injunction by Andersen put a stop to it. The main hearing is now to be in the High Court on July 11.

Lloyd's yesterday said the injunction would be "vigorously contested" and threw doubt on the validity of the Andersen claims. But the accountancy firm said some of the points in the report require further discussion and elaboration before publication.

The council of Lloyd's is committed to sending the report both to members of the syndicates and to the Department of Trade and Industry. An action group of members has delayed its threatened litigation until the report was ready, but the impending actions against Lloyd's, brokers, agents and auditors has made people involved extra sensitive.

Now not even the council has been able to see the report. It is thought that in addition to Andersen several other people involved had been criticised enough for them to be sent a draft copy in case they wished to rebut the accusations.

The legal department of Lloyd's is advising the Davis committee and will be fighting the court action. One of the points at issue is the accounts of Richard Beckett Underwriting Agency which took over the PCW syndicates. These were signed by Arthur Andersen and Arthur Young but subsequently qualified following a report by Price Waterhouse.

Ian Hay Davison, while he was chief executive of Lloyd's used to advocate the sun that drives way the mist as the argument for greater disclosure. On his resignation from Lloyd's he returned to Arthur Andersen as a partner.

13 Jun 86

Letter from W.M.D. Underwriting Agencies Limited to all WMD Agents: Re. 1983, 1984, 1985 Years of Account. PCW SYNDICATES 540/542 and 847 - ANNUAL AUDIT AS AT 31 DECEMBER 1985.

Enclosed, herewith, is Form CS3 showing the results of the Closed 1983 Account and Solvency Reports on the Open 1984 and 1985 Accounts of Syndicate 847, only. These have today been submitted to Lloyd's Central Solvency System.

I regret, though, that we are not able to submit Form CS3 in respect of Syndicates 540,/542. We have not yet been able to resolve how to interpret the Slip Policies, under which Syndicate 542 (previously Syndicate 175) ceded business to PCW/RBUA/AUA3 Syndicate 157. Patrick Fagan and I hope to see the Chairman of Lloyd's today in a final attempt to resolve the matter. The Slip Policies covered the Years 1978 to 1983 inclusive and, since !982, have been accounted for as Whole Account Net Quota Shares. Up to 31 December 1984, Syndicates 175 and 542 had ceded sums of money totalling £5.9m (at 31 December 1985 exchange rates). This cession represented premiums payable of £6.4m less claims recoverable of £0.5m. In assessing the RI to Close the 1983 account of Syndicate 542, we have relied upon Syndicate 157 for security in respect of a net quota share of anticipated claims (settled, outstanding and IBNR) amounting go £4.8m. Of that sum £0.6m is due now in respect of claims settled, less premiums due, as at 31 December 1985.

However AUA3 is not in a position to agree that the Slip Policies represent a Whole Account Quota Share Treaty, though AUA3 does accept that the Slip Policies do record some form of reinsurance arrangement. Without a resolution to the problem, both Syndicates must reserve the full £4.8M - Syndicate 157, in case it has to pay it, and Syndicate 542 in case it cannot recover it. £4.8m is thus removed from the assets available for the Solvency Test. This is particularly pertinent to the 413 Names (61% of the Capacity of Syndicate 540/542) who are Members of both Syndicate 542 and 157.

Neither we, nor our auditors, are in a position to agree the final accounts of Syndicate 540/542 until an interpretation of the Slip Policies has been agreed. £4.8M is too significant a sum to ignore, being equal to 40% of Syndicate Capacity. If we can rely on the Quota Share, then a 1983 Name, with a £20,000 share in Syndicates 540/542, will have a £1,500 surplus for Solvency purposes; whereas he will have a deficiency of £5,800, if we can't.

This controversy will also, I regret to say, delay the circulation of the Syndicate accounts beyond the deadline of 15 June. We have, however, sought from the Council of Lloyd's specific dispensation from this requirement and hope to circulate accounts by 30 June 1986.

Finally, at the request of Bill Goodier of AUA3, I must correct an erroneous statement in my letter to you of 20 May. AUA3 are not challenging either the ‘existence' or the ‘authority' of the Slip Policies. They are thus not responsible for the delay in the submission of the accounts of Syndicates 540/542. It is our inability to prove that the Slip Policies are in fact Whole Account Net Quota Shares which is causing the delay.

Please accept our apologise for all this uncertainty.

25 Jun 86

General Meeting of Members of Lloyd's: Statement by Mr. Peter Miller, Chairman

Those of us who worked in the 1958 Lloyd's building will always, I think, remember it with affection and nostalgia. We were there for 28 years, give a day or two. Over that period £40 billion worth of business was transacted. Some 16 million policies were issued, upon none of which did we fail to honour a valid claim.

In 1958 Lloyd's had 4,500 members all of whom were British. Today the members of our Society are six times as numerous and include representatives drawn from more than seventy nations. Then, as now, eighty per cent of our business came from overseas and we have maintained a healthy and constant positive contribution to this country's balance of payments. The premium income which the market wrote in 1958 is written in today's market in ten working days. However, the last decade of our time in the 1958 building was a time of storms and tempests different from those which we as insurers are normally required to face; it is not too fanciful to see the move to this new building as the start of a new era at Lloyd's.

In some respects of course, the move to this building marks the end of the beginning, coming as it does three years after the creation of the Council of Lloyd's. Much has already been said and written - possibly far too much - about the events of those last three years. Today, as far as possible, I want to look forward. We are at the end of the beginning in the constitutional sense; in the physical sense we have of course moved into this splendid new building. About that, I have little to say save that I regard it as potentially a very practical marketplace. But we are all aware that this - like any new building - has its teething problems. Nevertheless I am convinced that it was as correct from a financial point of view as it was correct from the market's point of view, to move' when we did without delaying further (just as with a new house it seems one has to move in to get; the:; builders out). Of course that means that there are remaining problems of concern to all of us . I emphasise that these will be dealt with by our staff with vigour and with expedition. I can assure those of you who work here, that difficulties and shortcomings are being identified and will be resolved.

To be precise, my main concerns for the market are the present slowness of physical movement between the various trading galleries where I anticipate a great improvement as all lifts come into service. We are not satisfied with the standard of the appearance of the Captains' Room and I have requested a meeting with the architect and the designer in order to seek improvements. Finally, we will watch with care the way the four principal markets are at present divided. We must be certain that this is the best method of trading -although we will not seek an answer to that until the passage of one major renewal season at the end of this year. Meanwhile, this is an appropriate occasion to record your Council's great appreciation for the splendid generosity of those who have presented paintings and other items of fine art to commemorate the occupation of our new building. It would be invidious of me to refer today to the benefactors by name. I would, however, like to take this opportunity to express the Society's particular gratitude to the members of the Lloyd's broking community for their generous gifts and the financial promises which will enable us to enrich the Adam Room with suitable pictures.

Before leaving the subject of fine art, you will be interested to know that the Council commissioned the highly acclaimed American artist, Jim Dine, to produce a modern representational study of this building. The painting, which was delivered to us a short while ago, will be displayed on the lower ground concourse immediately following the close of this meeting.

Progress of Reform

Before I turn to various market issues, I would like to review with you the various further market reforms which are necessary.


The cornerstone of our reform of the underwriting agency system is, together with disclosure and improved auditing standards, the re-registration of underwriting agents. This is a painstaking business to which the Council and the Corporation are paying the greatest attention. Our continuing objective must be to strengthen still further the underwriting agency system. Wherever it is possible we try to assist agents to meet the Council's requirements by encouraging them to strengthen their board, their management, their organisation, as well as their capital structure where these appear to be deficient. Certain underwriting agents for whatever reason, will not wish to re-register and others will be unable to satisfy the Council's stringent requirements.

On 14 May, 1984, the day the Underwriting Agents' Byelaw was enacted, the number of registered agents under the old byelaw was 306. At 31 May this year 162 agents were already re-registered and a further 78 were expected to complete the process. I estimate that when we complete this fundamental exercise we shall have perhaps some 240 underwriting agents. Those who observe our efforts should remember that it was only divestment which we were called upon by Parliament to complete by July 1987: It was we who set ourselves the task of re-registering every underwriting agent by that time. But, as you all know, the process of re-registration is not and cannot be the end of the matter. It has always been the intention of the Council, once re-registration was completed, that there should be both a continuing monitoring process of all agencies together with spot or random checks from time to time as seems appropriate.

There can be no going back in this matter. I am satisfied that the careful work of the Underwriting Agents Registration Committee has improved the standards of the underwriting agencies very materially. This is a continuing process and your Council is determined that it should be maintained.

Since I addressed the General Meeting of Members in November 1985, two important byelaws have been passed which relate to underwriting agencies; namely, the Multiple Syndicates Byelaw and the Related Parties Byelaw. The former, taken together with the disclosure provisions of the Disclosure of Interests Byelaw and the stricter auditing requirements of the Syndicate Auditing Byelaw, effectively puts an end to any abuse by way of so-called "preferred underwriting." The latter, by controlling interests in insurance companies and forbidding transactions with related insurance companies, brings a further sensible discipline into our affairs.

Lloyd's Brokers

I had hoped that by this stage we would have begun to turn our attention to the regulations applying to Lloyd's brokers. I know that the many responsible members of the broking community were looking forward to working with us to modernise the regime which surrounds our marvellous selling arm. It is in the interests of Lloyd's that the title ‘Lloyd's broker' should remain one in which the holders can take pride and which can be obtained only by those who can display the proper degree of managerial efficiency and professionalism. Unfortunately, we have had to concentrate our resources on other vital matters, notably the Berrill Report and the Neill Inquiry and it has not proved possible to move as quickly as I, or the Council would have wished. If I may express a personal view, I would put forward three areas which are likely to concern us when we seek an improvement in the current registration procedures of Lloyd's brokers:

  • first, an application of the concept of ‘fit and proper' to those who seek to trade as Lloyd's brokers, and carry our name;
  • second, the extension of the concept of preferential creditor status to all the broking accounts which a broker holds; and
  • third, the application of a code of conduct to embrace the many relationships in which a Lloyd's broker is involved which, though they themselves fall outside the scope of our responsibilities, can and do affect the world's perception of a Lloyd's broker. What I have in mind is that one of our brokers could be involved in a situation where a related company (not a Lloyd's broker) made an error. The similarity of name and the closeness of the relationship could lead in the world's eyes to a diminution of the respect for the name of Lloyd's which is so fundamental to our continued business success. We must therefore legislate for this. At the same time we must not over-stretch our resources into regulating that which we have no right, or indeed ability, to regulate. It seems that we must deal, very possibly by way of code of conduct, with the effect that relationship might have upon the body which we are called upon to regulate. I am sure that together we shall find a proper and effective solution.

There is a fourth point which I should mention which arises because of the general hardening of the insurance market. There is clearly a desire by underwriters to tighten the terms of trade upon which they operate. This should cause no dismay and indeed is understandable, inevitable and desirable following a decade in which terms of trade moved sharply in favour of the insured and his agent, the insurance broker. It may well be that we shall now see a speeding up of the flow of premiums to underwriters who will remain well aware that the quid pro quo for that is to speed up the payment of claims.

Those of you who have studied the report of the Berrill Working Party will, I think, have found it a clear and illuminating document. Certainly I welcomed it and its timeliness in that it provided a blue-print for the newly appointed Chief Executive whom on your behalf I would like today to welcome to his first Lloyd's General Meeting. He brings to the management of our affairs a formidable intelligence and an executive ability which will be of great importance. Much is expected of the Corporation of Lloyd's and rightly so. As Mr. Lord said upon his appointment:

"The momentum of self-regulation and the administration of the Corporation are very high on anybody's priorities."

His efforts in the three months he has been with us have shown what can be done.

If I may, I would like to touch upon the Committee of Inquiry - the Neill Inquiry. I understand that the Committee hopes to report to the Secretary of State for Trade and Industry in the autumn. Lloyd's has welcomed the opportunity which the Inquiry provides to place the reforms which we have achieved and our plans for the future under the scrutiny of eminent persons from outside Lloyd's. We would hope for a report, sooner rather than later. It may be inevitable that critics of what we are doing are more vocal than supporters: we are content to rely upon the objective assessment by the Committee of the evidence put in front of them. We look forward to receiving the report ourselves, and of course, we will pay the closest attention to whatever suggestions may be put forward.


Last November I referred briefly to the establishment of Additional Underwriting Agencies (No. 3) Limited to administer the affairs of the troubled PCW syndicates. I would have liked to have been able to say more at this stage, nevertheless the affairs of the syndicates are proceeding as satisfactorily as can be hoped in the appalling circumstances which surround them. Let me set out some of the principles which guide the Council in this matter.

First, it is our aim to approach a settlement without the complication of adherence to a deadline inherent in the solvency test. We believe that it will be possible to arrange for PCW Names to pass the solvency test on a basis which will leave open the possibility of a settlement before the end of this year. Second, in any possible settlement it is the Council's duty to ensure that those who have contributed in any way to the misfortunes of these syndicates or who have had a moral or legal responsibility in their management, should make a just contribution. Third, we, the Council have made it plain that we are not prepared to negotiate on the basis of a claim being made against us under the Racketeer Influenced and Corrupt Organisations Act in the United States. Finally, I note with interest, what one Member of Parliament (if he will forgive me for paraphrasing slightly) said during the second reading debate on the Financial Services Bill:

"The Cameron-Webb Names are not entitled to evade their responsibility in the final analysis to pay the calls upon them."

The position thus expressed is exactly the same as that of the Council of Lloyd's. It must be that Names respond to losses justly and properly established, however they may have arisen. At the same time, it must be the wish of us all to see a fair and early settlement of this matter. The alternative would be five or more years of litigation here and perhaps in the United States, which would be expensive, of no assistance to our good name and might well cast doubts on our ability to deal with our own problems within the framework of the Society.

The Market

May I now turn to market matters. The recent growth in membership and in the capacity of the market is encouraging. The figures which I gave you in November as to the likely increase in the market for 1986 have, in fact, turned out to be conservative in that the overall increase in sterling terms was not the 25 per cent I indicated but 29 per cent. In the last three years we have doubled our capacity to accept risk, calculated on the basis of our permitted maximum premium income volume, rising from £4.3 billion in 1983 to £8.6 billion in 1986. During this period our membership has increased from some 21,000 to almost 29,000. Thus, you will see that a 33 per cent increase in membership has coincided with a 100 per cent increase in capacity. The size of the increase, therefore, has come about only because the existing membership has materially increased its commitment to the Society.

I have said previously and often that Lloyd's could not fully avoid the dreadful insurance results of its competitors when we shortly report our own results for 1983. It is apparent that some syndicates will have made losses and some, substantial losses. Nevertheless, others will have made substantial profits. As I have previously indicated, 1983 is likely to be the bottom of the trough, but while I will not at this stage anticipate the overall result I believe that we shall prove to have been in the black at a time when many of our competitors were not. 1984, and to a greater extent 1985 show some improvement in some of the most critical areas where we operate.

May I now look forward and examine some of the other issues which we must address.

The Electronic Market

First we must harness the use of electronics and modern methods of data-processing and information storage, to the benefit of our business. In spite of the best efforts of the Systems and Communications Committee and the other market Committees concerned with this subject, progress has been slow. Perhaps this is for the best because things move so fast in this world that technology and systems which are right on one day have been improved by the next. The reason for the slow progress is quite simply because Lloyd's is a marketplace and not an insurance company. In a company with a command structure, decisions taken can then be imposed. At Lloyd's this neither is nor can be so. It is a question therefore of persuading the market, educating the market into establishing for itself what is best for it - and then putting it into operation. I believe that at last we are moving forward. Your Committee and Council have recently considered and approved plans for the introduction of the first phase of our electronic systems. It is our aim to have in place a basic system upon which individual agencies can build as they wish; fundamentally it is designed to improve the flow of information to underwriters. Additionally, the introduction of a slip registration scheme which should improve the flow of premiums will establish a flexible system whereby varying terms of trade, when agreed on between policyholder and underwriter, can be enforced through the broking system. In all these matters I think we must remember the basic reason for the use of technology rather than allowing ourselves to become bewitched by the technology itself. In the context of Lloyd's I would say that there are three such basic reasons:

  • first, that information may flow to underwriters the more readily, quickly and easily, and may efficiently replace masses of paper by storing information in a more modern method;
  • second, that it should enable the market to be more efficient in the speed with which premiums flow one way and claims flow the other; and
  • third - and this is a completely different objective - that modern technology can help us to improve on the out-dated systems which we use in, for example, the preparation of policies and the way in which we handle the affairs of the members of the Society.

Premium Income Limits

A second area of importance concerns premium income limits. The Council recently debated and decided upon various proposals put forward concerning these limits. This has proved in the past one of the most difficult topics for many members of Lloyd's to understand. In an attempt to improve understanding an article was published in last month's issue of Lloyd's of London Newsletter which explained how the principle of premium income limits actually works and what Names can expect of it and what they cannot. I believe that at last we have achieved an important clarification of this particularly difficult issue.

The third area which is in the field of regulation is of course the underwriting agency system where we have accomplished so much, but clearly where we have not yet finished all that we have to do. We shall be alert to any suggestions which the Neill Inquiry may put forward. In this context nobody but a fool would believe that any constitutional structure is totally perfect - indeed it may not be possible to make it so, though we shall try our best. One area which remains to be dealt with is the various suggestions of the Long Term Working Party report known compendiously as ‘Bird'. The Council has already enacted several of the report's recommendations and the Security and Solvency Committee recently completed a review of the remaining suggestions. Many of these are detailed and I will not deal with them today. However, they will involve considerable work over the next months.


The final area in which we will have to concentrate is education and training. 1986 has been designated ‘Industry Year' as you will be well aware. Lloyd's is playing its part in the activities associated with Industry Year and the basis of the thought behind it is, I think, the necessity of communication. In that connection, I look forward very much to the completion of the exhibition and viewing area in this building which, I believe, will materially help in communicating to the public generally Lloyd's significant role in the world insurance industry.

As to training, I do not think that either Lloyd's specifically or the insurance market in general pays enough attention to formal insurance education. Personally, I would like to see more people taking the insurance exams. I would like to see a higher rate of success for those engaged in the Lloyd's Introductory Test: of the 56 people who took the first test, 42 passed. I would like to see more people taking part in and greater use made of the teaching seminars at Lloyd's on the underwriting agency system and other allied subjects. We intend to pursue the development of our training policies with vigour.

Market Prospects

May I now turn to market conditions and again mention four things; the growth in membership and market prospects generally, and the progress of the tort law reform in the United States of America and the attitude of Lloyd's to the Common Market, both of which affect those prospects.

I referred earlier to the huge increase in membership and in the market's capacity since 1983. I believe that this accurately reflects the confidence in and support for what we, the Council, have achieved in the regulatory sphere as well as an appreciation of the very significant improvement in market conditions. This year, the indications are that we shall not have such a growth in capacity - not so much because Names are not coming forward which they most certainly are, and existing members not wishing to increase their commitment, which they most certainly are -but rather because it is not yet possible to find the necessary underwriting outlets to attract them. It may be no bad thing if the previous rate of growth pauses for a moment while we consolidate our position. In terms of the market, what I believe matters is that the non-marine underwriters in our midst should prove that they can make profits. It is in this area that we must look for our major growth rather than in the marine section which has been profitable in the immediate past. In the marine field it is clear that underwriters are faced with the combination of recession in their chief premium areas, namely ships and the oil and energy industry. It is, therefore, to the non-marine area, with its much smaller present share, though growing, of the world market that we must look for growth and profit.


The third market area of importance that I would like to mention to you is the European Economic Community. As many of you know, four cases are currently before the European Court and the provisional opinion put forward by the Advocate General to the Court indicates an outcome entirely favourable to Lloyd's interests in general and in particular, to our concept of the Freedom of Services within Europe in connection with insurance. Recently, Lloyd's has tried, in various speeches, to clarify our attitude to the Common Market. It is worth re-stating, since I believe that there are both certain misconceptions and a certain lack of perception as to why we are so strongly in favour of Freedom of Services within the Common Market. We approach this subject, not parochially from merely an insurance viewpoint, but rather from the point of view of the overall good of the Community. It is worth noting that the widened EEC has a population of 321,000,000 which is larger than that of the United States of America with 237,000,000 and of Japan with a population of 120,000,000. But if we look at the gross domestic product of these three areas, on a per capita basis we can see the following:-

United States






We are behind and falling further behind. Lloyd's approaches Freedom of Services in insurance within the EEC, therefore, within the context of the completion of the common internal market in all areas and not just in insurance, as part of the wider task of making Europe more competitive and more prosperous. If we can offer to industry and commerce in the EEC the efficient insurance services which are our hallmark; we shall thereby reduce their costs for the cover they need and increase their ability to compete against the outside world. Of course we shall in the process somewhat increase our business; but nevertheless, it must be realised that even full Freedom of Services within Europe would not immediately bring an enormous influx of business to Lloyd's. These matters will take time though we believe that Freedom of Services will be of benefit to our market and that we will eventually obtain a larger share of the European market. It is encouraging to be able to report that our application to trade on an establishment basis in Italy has been approved. While the final details still have to be resolved, at least it is another, though small perhaps by itself, step forward along the long road to what we have so long fought for within Europe.

United States of America

Finally, in market terms I should mention briefly the efforts which Lloyd's has been making in the United States to further the cause of tort law reform in the American liability system. Of course, we as outsiders must always be properly moderate in our expressions of concern at the legal system of another country. However, our criticisms are those of a close friend connected with the United States by ties both of sentiment and of business. I am glad to say that it does now appear that there is a widespread realisation in the United States of the necessity for a measure of tort law reform if the insurance of certain activities is not entirely to disappear. Politically understandable though it may be, it is nevertheless in business terms quite unacceptable when such reform is allied with threats and demands that insurance rates should be halved if tort law reform is to be promoted within a given State Legislature. Given the downward progress of insurance rates over the last decade and the absurdly small premiums at which heavy liabilities have been written in the past, such suggestions are frankly unrealistic and unproductive.

The Society

This brings me to the perception of this Society from outside. Never was the reference to the prophet not without honour save in his own country more appropriate. Our voice is heard in international insurance matters with considerable respect. I am often asked how it is that we can be so criticised at home and what we can d6 to improve our image. On this I have two things to say. The first is that it is up to all of us to make clear to the world at large the sea-change which has taken place within our Society; in the protection of Names within the underwriting agency system; in the independence gained from our benevolent broking masters of the past; in the practice of the art of underwriting; in the dealing with major problems like the asbestos is crisis. When people fully realise what has been achieved and the extent of the sea-change then, and only then, will our public standing improve. And the second thing that I have to say is that it is up to all of us to be able to point out to the world at large the very real successes that we have achieved, the contribution to the balance of payments which we make, the increasing numbers of people which we employ.

I would like to end as I began by a reference to what we are building: to look ahead rather than look back. We all know the great problems we have had to face. In physical terms this building is most securely founded upon the most advanced building techniques to ensure that our market prospers. However, there is more to it than that. Our market must be based, like the house built upon rock, rather than the house built upon sand, on a firm foundation of law which is itself based on a morality and a code of daily conduct accepted by all of us because we can see not only their moral necessity but also their practical usefulness. Self-regulation at Lloyd's is on trial-and I could as easily have expressed that sentiment, self-regulation is on trial at Lloyd's. The Council of Lloyd's is in this matter a regulator and nothing more. We can lay down a framework within which the market can operate but only you, the market, can make it work properly.

Ladies and gentlemen the task is not easy. Given the devotion to what we are trying to do on the part of the Council, the Corporation and the market, to all of whom I extend my most sincere thanks, I believe that we shall succeed.

26 Jun 86

Financial Times: Lloyd's may aid PCW names

THE AUTHORITIES of the Lloyd's insurance market may provide aid for the 1,525 underwriting members who have been hit by the troubles at the controversial PCW underwriting agency.

The hint of the move came yesterday at a general meeting of Lloyd's members from Mr. Peter Miller, chairman of Lloyd's.

In the PCW affair up to £80m of the underwriting members' funds were misappropriated by former executives of the agency. Further insurance losses of up to £250m are directly linked to past irregularities claim the underwriting members (names).

Attempts are being made by the Lloyd's authorities to reach a settlement with the names, many of whom are planning extensive legal action against Lloyd's and numerous other parties involved in the affair.

The settlement discussions have been complicated by Lloyd's internal market procedures. Each year al Lloyd's underwriting members have to demonstrate, through a solvency test, that they have enough personal assets to meet insurance liabilities incurred in their trading at Lloyd's.

Many of the PCW names face financial ruin because of the troubles.

Mr. Miller said yesterday that it was Lloyd's aim to approach a settlement without the complication of adherence to a deadline inherent in the solvency test.

" We believe that it will he possible to arrange for PCW names to pass the solvency test on a basis which will leave open the possibility of a settlement before the end of this year."

He declined after the meeting to elaborate on the type of arrangement that Lloyd's planned. In Lloyd's there is speculation that bridging loans, secured against Lloyd's own funds, might be arranged for members who would otherwise fail the solvency test.

Such a scheme would not be without precedent. When 110 members, whose affairs were managed by Mr. Frederick Sasse, faced financial difficulties a few years ago Lloyd's arranged bridging finance.

In any possible settlement Lloyds had a duty "to ensure that anyone contributing in any way" to the misfortunes of the names' syndicates should make a just contribution, Mr. Miller said.

But Lloyd's would not negotiate settlement if the members took their threatened action against Lloyd's in the US, he warned.

  • Sir Nicholas Goodison has been re-elected as chairman of the Stock Exchange for the ensuing year.

26 Jun 86

Financial Times: Tough insurance law for Guernsey

A COMPREHENSIVE law to control insurance business in Guernsey was approved yesterday by the island's parliament and is due to come into force on January l.

Under the law, insurance companies operating in or from the island - except companies already authorised in an EEC country or exempted bodies such as friendly societies - will have to be approved by, and registered with the Guernsey authorities. Similar controls will apply to insurance managers.

28 Jun 86

AUA3 letter to Syndicate Names on PCW NON-MARINE SYNDICATE 847, MARINE SYNDICATE 540/542

I enclose copies of two letters from the Managing Agents of these Syndicates, WMD Underwriting Agencies Limited, addressed to those Members' Agents whose Names participate in them. I comment below:-

Non-Marine Syndicate 847

You will see from the letter of 13th June that the 1983 account has been closed in the usual way. A profit has been declared of approximately £750 for Members whose share represent a premium income allocation of £15,000. I will send you exact details as soon as we receive the underwriting accounts.

Marine syndicate 540/542

In Sir Ian Morrow's letter of the 19th June, he mentioned that in past years substantial amounts of premiums, claims, and outstanding liabilities had been transferred between syndicates managed by PCW/RBUA under "Slip Policies". These transfers have affected materially the results of syndicates and therefore, we are studying both the principles of the policies and their operation, before deciding what action should be taken this year. You will see from WMD's letter that a Slip Policy exists between Incidental Non-Marine Syndicate 542 and Non-Marine Syndicate 157 which is under our management and upon which substantial losses have been sustained in the past.

Following the meeting to which WMD refer in the second paragraph of their letter of the 13th June we have explained to Lloyd's our understanding of the transfers which have been made in the past under the Slip Policies and we have shown them the evidence to justify our contention that they should not be regarded as whole account quota share reinsurances.

We are studying ways by which Members of the affected syndicates can meet the Lloyd's Solvency requirements and will write to you again as soon as possible.


The Audit Brief was published by the Auditing Practices Committee ("APC") of the Consultative Committee of Accounting Bodies ("CCAB") in 1986 and was specifically addressed to the auditing of Lloyd's Syndicates. The status of this document was described in the revised Explanatory forward to the Auditing Standards and Auditing Guidelines issued in January 1989 in the following terms:

"Audit Briefs are issued by the Auditing Practices Committee. They are informative publications on subjects of topical interest and are intended to assist auditors in the discharge of their duties or to stimulate debate on important auditing issues. They do not require the approval of the Councils of the Accountancy Bodies for issue, and they do not have the same authority as either Auditing Standards or Auditing Guidelines."

The Audit Brief provided inter alia:-


33. Byelaw No. 7 of 1984 requires an annual report to be prepared in respect of each member of the syndicate although these may be presented in a combined form for groups of members comprising the whole or part of the syndicate. This combined reporting represents a device of convenience and should not, of itself, influence the auditor's perception of materiality. In selecting materiality levels, the auditor should have regard to the impact of syndicate transactions on the personal account of each syndicate member. That is to say, he should look behind the syndicate to its constitution, as well as to the syndicate as a whole, in making judgements relating to materiality...

Reinsurance to close

43. The auditor will need to be satisfied that the premium for the reinsurance to close a year of account is equitable as between the names on that account and those on the accepting year of account. The determination of the premium for the reinsurance to close involves the exercise of significant professional judgement and draws on the full experience of the underwriter. The managing agent should ensure that adequate documentation is prepared showing what has been taken into account and what judgement has been exercised. Because of the significance of the reinsurance to close, Lloyd's has issued explanatory notes to Byelaw No. 7 of 1984 giving guidance relating to its computation and the related documentation. More detail on the audit of this area is given in paragraphs 71 to 79...

54. The solvency test requires the estimation of further liabilities relating to open years of account in accordance with instructions issued by Lloyd's. Although the auditor's work on the solvency test position falls outside the scope of the audit of the annual report the approach adopted will be similar to that applied to the audit of the outstanding liabilities underlying the reinsurance to close...

Audit evidence

60. Paragraph 4 of The auditor's operational standard states that "the auditor should obtain relevant and reliable audit evidence sufficient to enable him to draw reasonable conclusions therefrom". Since the audit report on syndicate financial statements is expressed in true and fair terms, the auditor will need to ensure that he has gathered evidence of sufficient quality to support such an opinion...

Reinsurance to close

71. The reinsurance to close a year of account is normally the area of greatest audit difficulty, because it is derived with the benefit of a substantial degree of underwriting judgement. In common with all accounting estimates, it is one of a range of possible outcomes and the audit approach should recognise that the objective is to ensure that the reinsurance to close is within a zone of reasonableness rather than an arithmetically accurate figure.

72. The degree of subjectivity involved in the estimation of the reinsurance to close will vary from syndicate to syndicate, and the auditor will need to consider such matters as the nature of the syndicate's business, the overall size of the syndicate, the impact of the reinsurance protection programme, and the accuracy of previous estimates as a part of his assessment of the appropriate range within which he would expect the premium for the reinsurance to close to fall.

73. There are two basic components of the reinsurance to close. The first is an assessment of the amount of known outstanding claims, and the second is an estimate of the amount of claims which have not yet been notified to the underwriter, but which will emerge in the future (claims incurred but not reported).

74. The auditor's approach to known outstanding claims may include the following procedures:

  1. checking a listing of outstanding claims against the underwriter's claims records and any supporting documentation;
  2. confirming estimates have been made in respect of business derived from binding authorities, line slips and covers;
  3. reviewing movements in claims during the year and since initial notification;
  4. reviewing the records for the period subsequent to the year end to ensure there are no material claims notifications or other information which would affect the assessment of the reinsurance to close;
  5. reviewing completeness of reinsurance recoveries due on outstanding claims;
  6. checking in detail calculations where reinsurance recoveries are due on outstanding claims by reference to cover notes/closings.

75. The auditor's approach to claims incurred but not reported may include the following procedures:

  1. testing and evaluating the quality of the statistical information available to the underwriter. Run-off statistics should be prepared on a consistent basis. They should be analysed by year of account, class of business and currency. The auditor's testing of the run-off statistics should include a reconciliation back to the accounting records;
  2. consideration of the provision made by the underwriter in the light of the statistical information and reinsurance protection available, and particularly the assumptions adopted by the underwriter.

76. The results derived from statistical techniques should be treated with a degree of caution, since historically derived data may not be an accurate guide as to uncertain future events. Furthermore, the statistics may be distorted by changes in the pattern of business, alterations in settlement experience, variations in premium and exchange rates and changes in underwriter. The auditor should, therefore, ascertain from the underwriter the underlying basis for his estimate of claims incurred but not reported, so that appropriate additional evidence can be collected to support the computation.

77. In assessing the reinsurance to close, the auditor will also need to consider the impact of the syndicate's reinsurance protection programme. He should satisfy himself that all premiums have been paid or provided for against these policies in the reinsurance to close. In particular, the auditor should consider whether outstanding amounts have been provided where a burning cost or reinstatement premium exists or is likely to arise.

78. In considering the amount of credit taken for reinsurance recoveries, the auditor should have regard to their collectability. Therefore in reviewing the security provided by the syndicate's reinsurance programme, the auditor will need to consider the nature and quality of the protection offered by the reinsurers.

79. Other matters the auditor might consider as a part of the audit of the reinsurance to close include the following:

  1. The syndicate may have reinsured the run-off of other syndicates or companies and the auditor must satisfy himself that due account has been taken of the liabilities which are likely to arise under such contracts. This evidence will usually take a similar form to that relating to the syndicate's own business.
  2. Where the determination of the premium for the reinsurance to close in relation to long tail business by the underwriter involves discounting technique (either explicitly or implicitly), the auditor should review the reasonableness of all underlying assumptions and ensure full disclosure of the basis adopted..."

1 Jul 86

Toplis & Harding (Market Services) Ltd letter to Insurers at Interest, signed by R A G Jackson.

In my letter dated 30th May I informed you that the first annual meeting of the Asbestos Claims Facility was to take place at Princeton on Tuesday, 3rd June. Considerable progress has been made ever the first year of operation to establish the necessary organisational requirements to handle effectively the large volume of outstanding asbestos claims. With effect from September 1985 the Facility took over the handling of all claims on behalf of member producers, and by May 1986 had concluded settlement on 3,300 claims at a total indemnity cost of $220,000,000. Although considerable antagonism was experienced initially in dealing with the plaintiff bar, a respect has now developed for the expertise of management and their advisors, and this is particularly so with the State courts.

The management team is now closely working with the Board to develop positive ways in which to bring about a reduction in the average level of settlements so far achieved, which are in any event somewhat high due to the need to address the more serious cases at this early stage of the Facility operation. Increasing use is now being made of the Green Card procedure, and discussions are underway with various state authorities aimed at establishing a Pleural Register of persons who are suffering minor pleural dysfunction. It is reasonable to assume that the average cost of settlements will gradually fall in the long term, provided courts do not further move towards class certification. The approval of a class action for some 750 claims in Texas by Judge Parker enabled the court to impose undue pressure on all defendants to effect settlement or face punitive damage awards. The Facility members exposure appear likely to be capped at a total sum of $93,000,000 payable over a three year term, which is of course far higher than it would have been had the cases been capable of individual negotiation. There has been some Indication that the courts in Mississippi are considering adopting the same process, but presently face strident opposition from all defence counsel.

It will have been evident to you that the rate of expenditure by the Facility has been greeter than originally projected for the first years of operation. For the coming year it is not anticipated that there will be any substantial increase in cash flow but the objective will be to dispose of more claims with average settlement levels and future legal costs being reduced.

A special meeting of the Facility Board took place on 17th June to review the manner in which the Facility has been financed in order to fund settlements during this initial phase of its operation and, more particularly to consider the changes that now need to be made to increase future efficiency. Initially the Facility established a line of credit in the sum of $15,OOO,OOO, which was later increased to $30,000,0000, from which settlement commitments were funded pending reimbursement from insurer billings. Whilst this system has operated in a satisfactory manner, its effectiveness is dependent upon prompt response to billing requests in order to re- establish the line of credit. Additionally, not only are operating costs increased due to the interest charges that are incurred, but also the Facility effectively assumes the credit risk for up to a sixty day period.

Now that the Facility operation is fully established and processes substantial sums per month, the Board considers that a change is required to make the procedure more cost effective and less vulnerable to the credit risk arising from the default of a Facility member. Final details of these changes are still under review but the basic concept will he for members to take a one month payment advance in order to provide the necessary monies to satisfy settlements that have been agreed but yet to be paid. Effectively, the fund so established will replace the existing line of credit, although the arrangement will continue in being to address any abnormal payment patterns that arise.

To enable these changes to be effected the billing made to any insurer member will be doubled for one month and allocated to each individual account on the spread experienced to date up through the involved layers of coverage. The next billing request received by our attorneys will reflect the actual allocation over each account based on the exposure data for those claims settled out of the advance fund and any adjustments that are necessary will be shown in the information provided. The practical effect of this change is that up to 30 days will elapse before the final allocation and accelerated cash flow figures are available to you. I will ensure that you are given advance notice when this change is likely to be put into effect, but in the meantime I would emphasise you are not going to be asked to provide funds to meet claims that have yet to be agreed. The object of the change is to revert to the use of members funds to make payment on claims for which settlement terms have already been agreed

To date the insurer response to billings has been satisfactory and although the London Market is not necessarily the last to pay as our reimbursement is almost always satisfied within a 21 day period. However, the Board has drown to my attention delayed payment at an unacceptable level is still arising with a small number of London based companies to whom I shall shortly be writing. Where an insurer fails to satisfy a payment request within 30 days of receipt the Board will expect the involved insurer to bear a 10% interest penalty thereafter up to the time funds actually reach the Facility. In this way the Board considers the extra interest being incurred on the line of credit will fall more appropriately to the late payer rather than the entire membership. In the event that a late paying insurer has still not responded after a 60 day period, the Facility reserve the right to Insist upon the deposit of some form of financial security to guarantee both past and future settlement commitments. The Board intends that these arrangements will operate in respect to all overdue receivables as part of the strict security rules applicable both to insurer and producer members.

May I now turn to another matter which has been under constant consideration of the Working Party. The problems created by certain reinsurers writing outward London reinsurance do not appear to be easing at present, and it has been made clear to me that certain London cedants have reached a stage where they need legal advice preparatory to embarking upon litigation or arbitration. I have more than once reported that the Working Party are unanimously of the view that there is a commonality of interest between the cedant and the London Market as a whole, and that those interests are best served by co-ordination. Not only does this address pursuit of recoveries that on an economic base would be too small to pursue, it will also ensure that a consistent approach is adopted with containment of legal expenses that are incurred.

In order to attain this objective discussions have been held with Barlow Lyde & Gilbert to determine whether they would be available to assume the role of legal co-ordinator. As I am sure you are aware that firm is well versed in reinsurance practice, and the operation of the London Market and, more particularly, has an awareness of the type of problems that we are encountering. I am therefore pleased to report that Barlow Lyde & Gilbert have now confirmed that they are free to take on the role contemplated, and discussions are now underway on the most effective way in which matters can be administered. Meanwhile, we recommend that any Market cedant who feels that his negotiations have reached a stage where legal advice is necessary should consult this firm of solicitors. Either Mr. Croly or Mr. Arthur should be approached at the outset. However, may I emphasise that the Working Party consider that it is premature to give serious consideration to contractual redress, unless a reasonable level of information has been provided to the reinsurer to support the reimbursement request.

I have already advised you that the most common complaint arising from world-wide reinsurers is the inadequate level of information provided by the London Market. There is no doubt that our failure in this regard has given certain reinsurers grounds for issuing their own questionnaires which go beyond what a reinsurer may reasonably expect of the cedant. In order to address this problem, I am now enclosing for your information a copy of a Reinsurance Advice Form in respect of asbestos related claims. This form has been drawn up in co-operation with members of the Working Party, and the principle London reinsurance brokers and has received the support of a number of reinsurance interests in the Marine and Non-Marine Markets. It is the strongest recommendation possible of the Working Party that this new advice form be adopted as the standard document to be used on all outward London Market asbestos reinsurance advices. Arrangements are now in hand for the necessary printing, and copies will shortly be available from your reinsurance broker, who will be able to provide any advice you may require on the information to be supplied.

Let me emphasise to you that all members of the Working Party are concerned at the increased burden imposed by the new advice form, but at the same time we are convinced that more information must be provided if we are to obtain the substantial reinsurance recoveries to which we are due. Arrangements are being set up to ensure that to the extent possible Toplis & Harding (Asbestos Services) will assist in providing descriptive information on contracts in which you participate for direct writings, direct inward reinsurance or retrocessions. In addition, information of this nature will be repeated in all year end reinsurance reports.

In conclusion, I would like to comment upon the changing role in the service afforded the Market by Toplis & Harding (Asbestos Services). With the developing environmental problem and the coverage litigation that is now gathering momentum, the Working Party has been working closely with the Environmental Claims Group to ensure that the service company continues to provide the Market support you have come to expect. In view of the increasing complexity of the pollution problem it was decided that a Manager of the Asbestos//Environmental Claims Office be appointed, and I am pleased to advise you that this post has now been accepted by Dr. Malcolm Aitken. Dr. Aitken was formerly with Clarkson Puckle running the E.I.L. programmes, and is well versed in pollution matters. He will become actively involved with the Environmental Claims Group in the increasing volume of claim situations that are developing, and will be available to assist in problems experienced by Market participants, particularly in understanding this growing problem. It will also be necessary that further staff be employed to maintain standards of service needed and to relieve some Market people who have given up so much of their time in recent years.

With the changes that are now taking place in the nature of the claims being processed by the service company, and operating costs are being carefully monitored to ensure that overheads are allocated to the work undertaken. From a budgetary viewpoint it is estimated that the volume created by environmental issues will soon exceed that presently experienced for asbestos related matters, and this will be reflected in the billings and reports you receive from the handling counsel.

4 Jul 86

Letter from Peter Miller to a Name

Thank you for your letter of 30 June 1986. As far as I am concerned the whole world can read the Cromer report. Before I agree to publication, however, I merely wish to establish the basis upon which submissions were made and information given to the Cromer Committee.

Since I became Chairman the whole thrust of all that the Council has done has been based on the doctrine of full disclosure. It would hardly be consistent with that approach if we were to keep secret a document which is 17 years old.

8 Jul 86

Lloyd's Disciplinary Proceedings were brought against Sir Peter Green and Mr Valentine. These commenced on 29 July.

9 Jul 86

Financial Times: European Court rules out nationalisation compensation claim

THE EUROPEAN COURT yesterday ended a long and bitter dispute between several UK companies and the UK Government by rejecting compensation claims relating to shipbuilding and Aircraft companies nationalised by the last Labour government.

A group of former shareholders in the nationalised companies, including Vickers and General Electric (GEC), said that the original compensation of about £130m was far too low. If met, their claims for extra money would have been around £500m.

Rejecting arguments that payments had been inadequate, the court said while the taking of property without compensation "reasonably related to its value" would normally constitute a violation of Article One of Protocol One of the European Convention of Human Rights, the state had a wide margin of discretion in deciding what was in the wider public and national interest.

The court rejected arguments that inflation and the companies' performance should have been considered between the compensation reference period and "vesting day" in 1977, when the businesses passed into the public sector. Nor was it impressed by suggestions that large or controlling shareholders merited a special premium payment.

The judgment which had been generally expected to be in the Government's favour, has important implications for the present Government's privatisation programme, since it opens the way for re-nationalisation without the threat of later action by shareholders.

The judgment came as a blow to creditors of Vosper, the hovercraft and engineering company. The receivers said that any extra compensation would have made possible a payout to them, as well as to shareholders.

Vosper had been claiming around £50m compared with the £5.3m paid under nationalisation.

The extra compensation claimed by Vickers could have totalled around £300m. Other plaintiffs were: Vosper, now in receivership and former owner of the Vosper Thornycroft warship yard, Yarrow, whose former yard is now owned by GEC, Dowsett Securities and Prudential (who owned the Brooke Marine yard), and Banstonian Company and Northern Shipbuildings and industrial Holdings (owners of the Hall Russell yard).

Sir William Lithgow, one of the principal claimants, who was in Strasbourg yesterday, said angrily outside the court that "the Government has scored the biggest political own goal in current political history."

Sir William, a former shareholder in the John G. Kincaid marine engine company said the judgment could pave the way for re-nationalisation of British Telecom by a future Labour government without adequate compensation.

He added: "It's bye-bye to privatisation and bye-bye to the Hong Kong Treaty, which depends on respect for Western-style property rights."

Sir William wanted £4m above the £1.07m he received for his 28% stake in Kincaid. He is going ahead with another claim for the Scott Lithgow yard, in which he owned nearly half the shares.

"You can hardly expect Marxists in Peking to pay decent compensation for property rights, when the Government has pleaded that no such rights exist in Britain," He said on the situation in Hong Kong, where Britain's lease expires in 1997.

As for British Telecom, which the Labour Party has said it intends to take back into public ownership, he advised shareholders to sell their holdings immediately.

Sir William and the other claimants argued that the original compensation paid after nationalisation of the assets in l977 was "grossly inadequate." They said the way their holdings were valued by reference to a six-month period at the end of 1973 and start of 1974 was unfair.

It constituted a violation of Article One, effectively a guarantee of individual property rights, they complained. The Government has argued that legislation to increase compensation would be unfair to those who sold shares on the original terms.

Vickers, whose share price fell 25p yesterday to 453p, said it was "disappointed but not surprised" at the decision. It received £47.5m, as did GEC, for its half-share in British Aircraft Corporation and £14m for its Vickers yard.

9 Jul 86

Financial Times: Ridley shelves legislation on councillors' conduct

THE GOVERNMENT is to shelve the Widdicombe report on the conduct of local government until after the next general election.

Mr Nicholas Ridley, Environment Secretary, has decided the proposals in the 314-page report aimed at preventing councillors misusing party political power to raise issues which will have to be carefully considered and which are too wide-ranging for legislation before the next election. Consequently the consultative period will be long.

Mr Ridley has said the subject should be looked at comprehensively and it would be wrong for ministers to pick out particular sections which appeal to them, as had been considered by environment ministers.

The report from an inquiry chaired by Mr David Widdicombe, QC, was published three weeks ago. It proposes statutory backing for a fair party balance on council committees, strengthening the role of chief executives, raising of council discretionary spending limits and a ban on senior local authority employees sitting as councillors on other councils.

Instead of tighter controls over councils, Mr Ridley favours increasing local accountability through reform of the rating system as set out in the consultative green paper this year.

Mr Ridley will, however, bring forward a local government bill in the next parliamentary session. This will include powers to require local authorities to seek competitive tenders on contracting out council manual services such as catering and refuse collection and to see whether present in-house arrangements are commercially justified.

The bill will also seek to outlaw discrimination by local authorities against contractors on political grounds. Lord Hailsham, the Lord Chancellor, feels such legislation is unnecessary in view of a Law Lords ruling that local councils could be subject to judicial review on grounds of reasonableness, but environment ministers believe some declaratory clauses are needed.

No decision has been taken on whether to introduce this section of the bill.

An overhaul of the system of capital controls by Whitehall over local authorities may be included in the bill after discussion with the Treasury.

It will include a reversal of the House of Lords amendments concerning political publicity to this year's Local Government Act. The original provisions will be reintroduced to ensure the banning of material in local authority advertisements which could reasonably be regarded as likely to affect public support for a political party.

They will also seek to provide an obligation on local authorities to have regarded to a departmental code of recommended practice on publicity.

The bill is intended to tidy up a number of local authority issues without breaking important new ground as would be the case with legislation either on the Widdicombe report or on the reform of the rating system in England and Wales. Both are to be introduced after the election.

The decision not to legislate on Widdicombe, which follows the dropping last week of plans on water privatisation, reflects both Mr Ridley's fresh look at the whole of his brief and the caution of the Government's business managers who do not want divisive legislation just before a general election.

9 Jul 86

Financial Times: Lloyd's plans fund aid for members in solvency test

THE AUTHORITIES of the Lloyd's insurance market plan to use a £167m fund, designed to protect the interests of Lloyd's policyholders, to help the 1,525 underwriting members hit by the troubles at the PCW underwriting agency.

The underwriting members face insurance losses of up to £250m, which they claim are directly linked to past irregularities at the PCW agency, in which up to £80m of their funds was misappropriated by former executives .

Details of Lloyd's moves emerged yesterday as Additional Underwriting Agencies Number 3, the company formed by Lloyd's to protect the interests of the PCW members, contacted the members affected.

The move follows assurances by Mr. Peter Miller, Lloyd's chairman, in the past few weeks that Lloyd's was exploring ways in which the members could pass the annual solvency test at Lloyd's.

Each year Lloyd's members have to pass the test, in which they have to demonstrate that they have enough assets to meet their insurance liabilities.

Because of the troubles at PCW, many members face financial ruin and Lloyd's has been seeking ways in which the members could pass the solvency test while talks of a formal settlement were still in progress.

Sir Ian Morrow, chairman of Additional Underwriting Agencies, Number 3, said in a letter yesterday that " an asset for solvency purposes will be provided by Lloyd's equal to the aggregate net losses declared as at December 31 1985" for 10 syndicates into which the members were grouped.

Although he did not specify the type of assets that Lloyd's could use, lawyers involved in talks about the PCW affair said he arrangement would involve the Lloyd's central fund.

14 Jul 86

At a Special Meeting of the Council of Lloyd's, the Council confirmed the penalties of a 12 month exclusion, a 2 year suspension imposed by a Lloyd's Disciplinary Committee and upheld by the Lloyd's Appeal Tribunal, with the costs payable reduced to £90,000, upon Mr J Wallrock. The Report of \Lloyd's Disciplinary Proceedings was forwarded to those Names involved on the syndicates.

14 Jul 86

The findings of Lloyd's Disciplinary Proceedings, Case No 8401/W, (PCW) in respect of J Wallrock published.

14 Jul 86

The Central Fund Byelaw (No. 4 of 1986, 14 July 1986).

This replaced the Central Fund Agreement of 1927 as the instrument governing the levying, administration and application of Lloyd's Central Fund. The byelaw empowers the Council to prescribe the amount of the annual contribution to the Fund and to levy: additional contributions should these be necessary. The primary purpose of the Fund is the protection of policy holders, but it may be applied for any purpose where in the opinion of the Council it is expedient for the advancement and protection of the interests of the Names in connection with their underwriting business.

16 Jul 86

Financial Times: Lloyd's to use central fund to help members

A MULTI-MILLIION pound fund designed to protect the interests of people who buy insurance from Lloyd's of London will be used to protect the interests of the underwriting members or investors in the market.

Although Lloyd's will continue to use its central fund, which amounts to more than £200m, to meet insurance claims of policyholders if a Lloyd's member cannot meet them, the fund is intended to be used to help Lloyd's members who face problems in the market.

The controversial move announced yesterday is seen as an attempt by Lloyd's to deal with the troubles surrounding the 1,525 underwriting members whose affairs were once managed by the PCW underwriting agency.

The PCW members have discovered that up to £80m of their money has been misappropriated by former managers of the agency and that they face up to £250m in insurance losses, which they allege are directly linked to the earlier irregularities.

Lloyd's is trying to reach a settlement with the PCW underwriting members, who plan to sue Lloyd's and a range of other commercial interests in the Lloyd's market.

But before a settlement can be reached all the affected members have to demonstrate that they have enough funds to meet their outstanding insurance liabilities in the annual Lloyd's solvency test .

Lloyd s plans to earmark money from the central fund for members failing the greatest hardship to ensure they pass a solvency test before any settlement.

The plan is likely to provoke considerable argument.

All of Lloyd's 29,000 members contribute by an annual levy to the central fund. which was designed as a fund of last resort designed to protect the policyholders.

No other compensation fund for policyholders exists at Lloyd's and there is no separate fund to protect the underwriting members against the sort of problems the PCW members face.

In Lloyd's there were fear that the wider underwriting membership would object to its funds being used to help n the stricken underwriting members.

Lawyers argued yesterday that Lloyd's had effectively mutualised an important fund in the market in a way which could lead to a conflicting interests between the market's policyholders and the underwriting membership.

However, the broad constitutional change on the general use of the fund was implemented by byelaw after a lengthy meeting of its ruling council on Monday.

16 Jul 86

Financial Times: Former chairman of Minet expelled

MR JOHN WALLROCK, the former chairman of Minet Holdings, one of Britain's largest insurance brokers, has been expelled as a member of the Lloyd's insurance market after being found guilty of misconduct by the market's authorities in a number of insurance deals.

Lloyd's has outlined, in an 88-page disciplinary report, various insurance schemes with which Mr Wallrock was involved and which he used for his personal benefit.

Lloyd's authorities have concluded that at Mr Wallrock's request underwriting members' funds of which had been transferred to the Banque du Rhone et de la Tamise, a Swiss bank, were used in the following way:

  • In November 1976, $79,762 (£53.838) was paid to a Liechtenstein anstalt, a financial trust code-named New Fam, which had been formed for Mr Wallrock and which the beneficial owner was an undisclosed member of Mr Wallrock's family.

This money was used by Mr Wallrock to purchase a one-third share in the motor yacht Cardigrae VI. The money had been transferred from another anstalt set up for Mr Wallrock by the Banque du Rhone, code-named "Papix."

  • On June 13 1978 £54,869.55, debited to Papix as $99,984 was paid to New Fam and used by Mr Wallrock to buy out the shares in Cardigrae VI owned by the beneficial owner of New Fam.
  • On June 14 1978, $28,808 was paid to Mr Wallrock to a York and Geneva jeweller for the purchase of jewellery.
  • On October 5 1979, $75,000 was paid to New Fam and used for repairing a yacht named Gloria II (subsequently called Albacara or Totolla) bought by Mr and Mrs Wallrock and his brother in 1978 when the Cardigrae was sold; and Mr Wallrock's brother's living expenses on the Albacara at Palma, Majorca.

Other funds were used to pay for repairs of the Albacara, the buying out of shares in the yacht; taxes on the yacht, legal expenses for the marriage break-up of a business associate, Mr Peter Cameron-Webb, the professional underwriter at the PCW agency.

The disciplinary proceedings have taken place after the discovery of irregularities at the controversial PCW underwriting agency, a subsidiary of Minet, nearly four years ago.

It was alleged that Mr Wallrock was guilty of dishonest misappropriation through reinsurance schemes involving members of Lloyd's funds.

In total seven charges were brought against Mr Wallrock. Under charge 1 Mr Wallrock was alleged to have dishonestly misappropriated funds from Lloyd's and on charge 7 he was alleged to have deceived Lloyd's when inquiries started.

On the latter charge it was alleged that he had failed to disclose important information relating to the transactions and misled Lloyd's into thinking that he had had no involvement in the transactions.

On charges I and 7 the disciplinary committee found Mr Wallrock guilty and imposed penalties of exclusion from Lloyd's.

Under charge 2, which alleged receipt of personal benefits, the disciplinary committee imposed a penalty of suspension from Lloyd's which runs for two years.

Under charges 3 and 6 which covered failure to account for personal benefits, the committee imposed penalties of suspension from Lloyd's for 12 months,

The disciplinary committee also ordered that in respect of costs incurred by Lloyd's, Mr Wallrock should pay the sum of £125,000.

This was reduced on an appeal by Mr Wallrock to £90.000 although the appeal committee upheld the verdicts.

The disciplinary committee had been studying; a scheme in which Mr Wallrock was allocated a 5 per cent to 6 per cent of the insurance business accepted by the PCW syndicates, into which the Lloyd's members were grouped, under a reinsurance scheme.

The arrangements had been set up, it was suggested before the disciplinary committee, to enable the syndicates not to breach their financial limits. Under Lloyd's rules, syndicates are only allowed to accept a certain level of business which is strictly related to their underlying capital.

16 Jul 86

Financial Times: Ex-Howden chief censured

IN SEPARATE disciplinary proceedings published yesterday a Lloyd's disciplinary committee censured Mr Michael John Ascroft Glover a former chairman of Alexander Howden ‘insurance Brokers, writes .John Moore.

He faced a charge which stated that in 1976 and 1977, Mr Glover, was then chairman of Alexander Howden Insurance Brokers and a director of Alexander Howden Group, the parent company of the brokers, had failed to disclose the receipt or funds from Alexander Howden Group.

It was alleged that sums totalling $50,000 had been paid into a Liechtenstein anstalt named Dengan, set up by officials of the Banque du Rhone et de la Tamise on the instruction of Mr Kenneth Grob. chairman of the Howden Group.

Dengan was beneficially owned and ultimately controlled by Mr Glover.

The disciplinary committee found that Mr Glover was guilty of dishonourable conduct and ordered that a notice of censure should he posted at Lloyd's. He was ordered to pay £14,250 in costs, and although he appealed, the appeal was dismissed.

19 Jul 86

Meeting of the Asbestos Working Party.

Mr Ayliffe reported on the recent annual meeting of the Asbestos Claims Facility in Princeton on 3 July....

Asbestos personal injury claims.

At present there were 40,700 outstanding cases. 4,050 new cases had been notified to the Facility during the months of January to April. This was continuing the l,000 new cases a month rate which had been experienced at the commencement of Facility operations. This was unexpected. It had been felt that notifications of new cases would fall off once the facility was established.

IC Fibreboard :

... the potential share of costs already incurred which would fall on the London Market, if their policies respond is $15 million. This is by far the largest sum outstanding against the facility. With this and other outstandings the facility will be unable to pay further settlements.

  1. Environmental matters:

The subject of lobbying was discussed. Mr Jackson reported that he had spoken to the Chairman of Lloyd's on the subject of lobbying.

24 Jul 86

The Unimar Interim Report published by the DTI and on sale at HMSO Bookshop's. This report was submitted to the DTI on 7 April 1986, as an interim report, by the DTI Inspectors appointed in November 1982 to investigate the PCW Affair.

Following the publication of this report, Lloyd's instituted disciplinary proceedings against Mr d'Ambrumenil, one of the principle persons involved. Eight charges were brought against him. He was found guilty on three charges of discreditable conduct, and he was suspended from Lloyd's for two years. The charges on which he was found guilty were in general terms that:

  1. He acted dishonestly in the role he played in procuring that money which had come from the PCW syndicates was advanced to a project known as IRIS from which he and Mr Cameron-Webb hoped to derive financial advantage.
  2. He concealed the Unimar arrangements from the reinsurers.
  3. He misled Sir Peter Green, the then Chairman of Lloyd's, who carried out an inquiry into Unimar in early 1982.

30 Jul 86

Ashurst Morris Crisp letter to P N Miller, Chairman of Lloyd's: Re: Solvency 1986 - PCW Syndicates

As you are aware, we represent the PCW 1985 Committee and the interests of some 400 PCW Names ("Supporting Names"). On behalf of Supporting Names generally we write to make reservations and on behalf of those who are currently subject to a direction of administrative suspension, and who may wish to continue to underwrite at Lloyd's ("Suspended Names") we write to make representations as to why such suspensions should be withdrawn forthwith.

We have obtained copies of the Deed executed by the Society on 18th July ("the Deed") the Syndicate Results & Solvency Reports signed by Spicer & Pegler on 18th July, and the Central Fund Byelaw 4 of 1986.

It is our opinion, confirmed by Counsel, that there are substantial doubts as to whether Clause 10 of Byelaw 4 of 1986 or in particular clause 4 of the Deed are intra vires the Lloyd's Acts 1982 or enforceable.

In addition as we have previously stated in correspondence with the Corporation Solicitor it is our view that it will not be possible without litigation or a settlement of the PCW Affair for an accurate account of the alleged assets and liabilities of any individual PCW Name to be produced.

Accordingly in our opinion Clause 3 of the Deed is inoperable, or potentially inoperable and it follows that it will not be possible for Lloyd's to make any direction of application out of appropriated funds pursuant to Byelaw 4 of 1986 or Clause 4 of the Deed. We have so advised AUA 3.

In addition and in any event and without prejudice to what we say above no admission is made and all rights are reserved on behalf of Supporting Names as to the validity or enforceability or effect of Byelaw 4 of 1986 and/or the Deed or any part or parts thereof as well as in respect of the retention of any asset provided in 1985 or any earmarking then allegedly effected and in respect of the alleged locking in of profits assets or reserves forming part of the "solvency asset plan".

Subject to the above we make the following submissions on behalf of any Suspended Names who wish to have their administrative suspension lifted. These submissions are made without prejudice to any allegations by Suspended Names that Lloyd's and/or any one else is liable to them for damages directly or indirectly arising out of their alleged suspension:-

  1. The combination of the Byelaw and the Deed has allegedly re-written the rules for the solvency test. In 1985 PCW Names were administratively suspended for failure to cover alleged "deficiencies" without recourse being made to the Central Fund.
  2. For the 1986 solvency test, the Central Fund has allegedly been made available as an asset for solvency purposes. Suspended Names must therefore now be judged afresh on the new basis.

  3. The Syndicate Solvency Report signed by Spicer & Pegler declares a "nil deficiency" for all Names on all open years of account of the relevant syndicates.
  4. The alleged solvency asset purports to provide a solvency asset in respect of all PCW Names, including suspended ones, and there is no question of Suspended Names having to produce or show any asset.
  5. At the time of the 1985 administrative suspensions and their renewal in 1986 we made submissions to the Administrative Suspension Sub-Committee ("ASSC") as to why PCW Names should not be suspended. It would seem that the main thrust of what we then said has proved to be correct.

This letter is addressed to you in the first instance, but if the administrative suspension function has been delegated to the ASSC or another body we would be obliged if you would forward this letter to the appropriate quarter.

30 Jul 86

Letter from Guardian Royal Exchange to RAG Jackson, Chairman of the Asbestos Working Party.

Observations on the recommendations of Mendes & Mount's basis for claims reserving.

1. The notional annual inflation factor of 10% may be in line with general inflation, but I wonder whether this adequately reflects asbestos claims inflation.

3. Mendes and Mount refer to a noticeable upsurge in new filings, therefore the book of outstanding losses will display a clear trend towards a greater proportion of immature losses with an inevitable effect on the average outstanding period. This throws the adequacy of the 20% inflation loading into further question.

0 Aug 86

Responsibilities at Lloyd's.

In his final article in the series, Lord Chelmsford considers the responsibilities of the various market sectors, and inter alia states:-

Now let us turn to the actual tasks of premium collection and policy preparation. Whose responsibility at law are they? And is it a matter of importance?

As to the first, the Marine Insurance Act represents the only UK statute. It makes the broker responsible for the payment of premium to the underwriter, gives him a lien on the policy against unpaid premiums, yet makes the underwriter directly liable for the payment of claims to the assured.

Not surprisingly, in 1906 there was no references to the problem inherent in handling wholesale and reinsurance business and the Act is couched in what today we would describe as ‘retail' terminology. Moreover there is no act for non-marine insurance. Its practitioners tell me that non-marine insurance is handled in accordance with ‘custom and usage', but when asked who has responsibility for collecting premium, they don't really wish to answer.

In certain states of the USA, insurance brokers are actually the agents of the insurer (by statute) for premium collection, even though they remain the agent of the assured for all else…

There are a number of different interests at Lloyd's, any one of which might well say "I have", and all of whom know that at the very least they have the right to block any new proposal, even if they cannot authorise it. These interests include the Council of Lloyd's, the Committee of Lloyd's, each of the Underwriting Associations and perhaps 100 of the most senior individual underwriters.

This is the extent of the task of any broker who wishes to make a reform at Lloyd's in the area that is now called Market Services. The problem arises from the fact that the responsibilities and accountability of each of these interest is undefined.

Changes at Lloyd's that concern market services take place by osmosis over very long time scales, and are either very modest because of the need to satisfy everyone, or far too late and take place because everyone has their backs to the wall, events clearly having overtaken them.

It is interesting to note that Sir Kenneth Berrill's report has recently restricted the work of the Committee of Lloyd's to that concerning market Services. The Council has accepted this, and in doing so it has to be hoped that it consulted the Underwriting Associations, and agreed with them where the responsibilities of the associations end, and those of the Committee begin. If this has not happened, then surely reform in market services at Lloyd's will be even more difficult than before.

The dilemma for underwriting interests at Lloyd's is one which is familiar to all successful growing enterprises. It comprises a recognition that success is due to the entrepreneurial power of individuals (in this case the underwriters), a determination not to so change the culture that these individuals become demotivated and lose their cutting edge and yet the need for discipline and a management ethic (in order to tidy up the service or the back end of the operation) which will be the opposite of all that such individuals stand for.

In the case of Lloyd's, this dilemma is made worse by the fact that the individuals who produce its wealth are not partners of a single enterprise, but rather the heads of many enterprises within a single market.

How then will this paradox be resolved for the greater good of all parties? Well, recognition that the problem exists would be quite a good beginning, because change will not come by the diktat of any one individual, but rather through the increasing concern of leaders generally.

However, there are key actions which could hasten those reforms in market services which are necessary to make us all more efficient, and therefore more productive in money movement and document distribution. There are also changes taking place now, which may well act as facilitators.

The first key action is one that is available to everyone both in industry and in commerce. I call it the ‘one in ten rule'. Every company or partnership has its young entry, or peer group, which is earmarked to be the future leadership of the concern. The group is being taught to be the best underwriters, brokers, engineers etc. The trick is to look for the one in ten of them, who, by the time of age of the group has reached the mid thirties, can be progressively moved into management, and out of underwriting, broking, engineering etc.

Unfortunately market conditions positively assist the avoidance of any resolution to any of the disputes between them. So it is hardly surprising that when a dispute is resolved, the answer is short term and one of the parties is victor, leaving the other side counting the days until it can get even.

Factors which contribute to this include the failure by underwriting interests to define responsibilities between Underwriter, Associations and Council, but also included the extremely brief periods in office of the market leaders. The former factor allows brokers to play off one part of the market against another, for short term advantage. the factor arises because the one of the two year chairmanship of a Market Association is just about long enough for its incumbent to learn his trade, but is hopelessly short should he wish to accomplish reform.

Therefore key action number two is for Lloyd's to define responsibility across the various interests in the market Services area, whilst key action number three is for reform within the committee organisations of the Underwriting Associations and of Lloyd's Insurance Brokers Committee (LIBC). Leadership of these key bodies needs to be much less part time than at present.

These three actions, which I have laboriously described in the context of the Lloyd's market place, actually reduce to the following requirement:-

Improve Management

Define Responsibilities

Reinforce Leadership

Put like that, it seems to me that few will quarrel with the concept. The real question is who will take action t o achieve it.

Earlier, I mentioned the existence of existing changes which could act as facilitators. I had two particular in mind. First, the growth of the new publicly quoted underwriting agents has already caused them to get significantly more involved in management skills. And to a lesser extent, those new managing agencies which were divested from brokers will follow suit, as the gap in management terms caused by the loss of the broker back and support becomes uncomfortable. It is therefore from within the agency that the underwriter will look, when he wishes to monitor broking performance, and not from within his broking box (anyone seeing an underwriter with a relieved smile can assume he has just read the last sentence).

Secondly, if like me, you believe that reform must reinforce the authority of Underwriting Associations to speak for their members on market service issues, and that this requires that those members who elected them conform to the edicts of their associations, then the problem still remains of reconciling the views of the different Marine, Aviation, and Non-Marine Associations, as they move toward improved servicing of assureds.

Surely this is the right terms of reference for the Committee of Lloyd's. It has been directed by the Council to concern itself with market service matters only, and it is the perfect body to decide whether the underwriting associations may properly go their own ways on any one particular issue or should be brought together for the common good. It can also act as an arbiter between LIBC and one or more underwriting associations, and it is to be hoped that it will encourage all of us to think cool and to think long.

So in the final analysis, we will only get a brave new support world if we are prepared to think about the long term, share common services where they will hold down market expense ratios, and act in concert (underwriters and brokers together) to move money as efficiently as competitive forces world-wide will allow.

Our abilities on a day to day basis as brokers and underwriters have never been in question. What is in question is our ability to develop an appropriate infrastructure behind those abilities. We all of us have a part to play in putting this right.

0 Aug 86

The report of the Davis Inquiry, commissioned by the Council of Lloyd's in June 1985, into the handling of syndicates managed by Richard Beckett Underwriting Agencies Ltd (formerly PCW Underwriting Agencies Ltd) between 6 December 1982 and June 1985 has been submitted to the Council of Lloyd's and a decision has been taken that the report should be published.

The most important finding of the inquiry is that there is no evidence of fraud or negligence by RBUA management or by any party involved with RBUA during the period covered by the inquiry.

Also, after detailed consideration, the Committee concluded that primary responsibility for the losses incurred by Names in respect of underwriting year 1982 lies with the former management of RBUA. It also conclude that, on the basis of the knowledge at his disposal at the time, Mr Beckett's decision to continue underwriting was reasonable and taken in the best interests of the Names.

Davis Report

The long-awaited Davis Report on Richard Beckett Underwriting Agencies (RBUA) has been published. It is available on request to Lloyd's Members, but we are reproducing most of the summary and conclusions.

‘We were asked by Lloyd's whether we had found any evidence of fraud or gross negligence by the management of the Agency or by any party involved with the Agency during the period of time covered by our Inquiry. We have found no such evidence.

‘Directors and senior management, under continuous heavy pressure and amid great uncertainty, gave unstintingly of their time and energies; many of them had only limited experience of the Agency and its business. It is against this background that we comment in the paragraphs that follow on a number of errors of judgement and of inadequacies in performance.

The decision to continue underwriting in December 1982

‘Mr J.R.K. Beckett joined the Agency on 6 December 1982 when steps were already well advanced to request permission from Lloyd's for RBUA and WMD to continue underwriting. We gained the impression that Mr Beckett had only been willing to take on his arduous role on condition that underwriting did continue.

‘Both agencies were then under pressure from Names and their agents to continue. The alternative of cessation would have had attractions in strengthening the Agency's negotiating position and in separating Names' future underwriting from the problems of the past. However, the evidence available to Mr Beckett suggested that the syndicates were profitable and that there was a competent team of underwriters waiting to continue. There was little evidence to indicate that dramatic losses might develop on some of the RBUA syndicates or that the reinsurance funds which he had already identified overseas would prove inadequate.

‘Despite the many uncertainties which remained, Mr Beckett decided that continued underwriting was in the best interests of the Names. We believe that, on the basis of the knowledge which he had at that time, his decision was reasonable.

Underwriting policy and reinsurance protection

‘We have considered the underwriting policy adopted and alterations made to the reinsurance protection programmes together in our report, since we believe the two are inextricably linked. Mr Beckett's period as principal underwriter from December 1982 to May 1983, however, did not involve any significant changes in either underwriting policy or reinsurance protection, which were to await the new principal underwriter. We consider that his approach was reasonable in view of the other pressures on his time.

‘The decision to appoint Mr R.M. Pateman as principal underwriter in May 1983 reflected the need for a new strong underwriter for the syndicates. Mr Pateman did not have all the desired experience, either of the non-marine liability business in which Mr Cameron-Webb had specialised, or of the unusual feature of a number of satellite boxes, but we are satisfied that proper steps were taken to recruit the most suitable person available.

‘Mr Pateman concentrated on the main marine syndicates, delegating responsibility for the aviation, non-marine and WMD syndicates to other active underwriters on the relevant boxes. Soon after he became principal underwriter he maze a number of changes to the group reinsurance protection programme, which had a particularly significant impact on the non-marine syndicates as a result of changes in the basis of allocation of recoveries under the Chiltern programme and certain open market aggregate reinsurances. We sympathise with his reasons for making these changes but we consider he should have ensured that the non-marine underwriter fully understood the effect of these changes. . .

Management of the Agency

‘Management of the Agency required careful consideration and choice of priorities, given the limited management resources in early 1983. Mr Beckett's first priorities were to keep the existing management team together and to recruit what he described to us as ‘reinforcements' to fill the posts of managing director and principal underwriter ....

‘Mr Beckett and his senior management team decided, rightly in our view, that recovering as much as possible of the identifiable premium outflow of some £38m from the RBUA syndicates was their next priority.

‘Thereafter, and throughout the period covered by our Inquiry the management of the Agency was continually having to divide its time between the investigation of the past and the running of the Agency, inevitably leading to certain matters being given inadequate attention ....

Recovery of the monies

‘The management of the Agency faced considerable difficulties in recovering monies from the overseas locations where it was quickly discovered. Their task in disentangling the past reinsurance arrangements, which had facilitated the misappropriation, was inevitably delayed by the protracted negotiations with Alexander & Alexander, Chiltern and Citadel. In the circumstances, we found that the pursuit of monies for Names was as thorough and as prompt as could reasonably be expected.

The offer to Names

‘The offer made to Names in June 1984 was a result of further protracted negotiation involving Minet, Alexander & Alexander, Chiltern and Citadel, as well as third parties with claims on the funds. Although it was not a complete solution to the problems faced by Names as a result of the misappropriations they had suffered, the offer did avoid protracted legal battles which would have delayed any return of premiums or payment of compensation to Names, to the disadvantage of Names in satisfying solvency requirements. It was based on the objective of returning to Names the premiums paid to offshore reinsurance companies under the arrangements which had facilitated the misappropriations. In seeking to restore Names to the position they would have been in had their affairs been properly managed, it was limited by the funds available.

‘The sums contributed by Minet and Alexander & Alexander to the offer were determined by their commercial judgement only after Mr White on behalf of the Agency, had argued strongly for a greater sum in total ., .

‘Inevitably there were the inequities of a comprise, an element of rough justice, but we are satisfied that the Agency's directors obtained, and where appropriate provided the Names, all the independent advice that could have been reasonably expected.

Disclosure to Names and the syndicate accounts

Disclosure to Names must be viewed in the context of what would be useful to them and what they expected. The standards of disclosure in the Lloyd's market were improving throughout the period covered by our Inquiry. In addition, increasing attention was being paid to comparative analysis of syndicate results and of statements of underwriting policy to assist Names in arranging their underwriting affairs. During this period, the standards of disclosure by RBUA and WMD also improved, though we consider that in a number of respects further improvements would have been appropriate.

‘Comment on the likely results of the 1980 underwriting year was given in the letters to Names in December 1982, reflecting Mr Beckett's genuine belief as to the financial position. He should, however, have made it abundantly clear that the information available to him was limited, and that there were material uncertainties.

‘The syndicate accounts were an important source of information to Names, but the accounts as at 31 December 1982 did not contain an adequate explanation of why it was necessary to leave the underwriting accounts open, nor did they draw Names' attention to the possibility of deterioration in the results or to the shortcomings of the information available to the underwriters determining the reserves.

‘The presentation of the 1983 and 1984 syndicate accounts represented a significant improvement on the 1982 accounts. However, the notes explaining the reversing methods did not make clear the changes in methods used and the changes in the basis of allocation of reinsurance recoveries, and the extent to which discounting had been used

Information provided to Names at the time of the offer did not remind them of their liability for any further losses on the non-marine syndicates although the principal underwriter himself had declined to close the accounts because of the remaining uncertainties. The 1983 syndicate accounts which did give some indication of the risk of further losses, were not signed until after the offer had been accepted by most Names. It would have been of assistance to the Names in considering the offer if RBUA had provided these accounts notwithstanding the additional qualifications which the auditors would have found it necessary to include in their reports


‘… We are satisfied that each underwriter approached his task conscientiously, given the limitations of information available. The calculation of reserves for Lloyd's syndicates is not an exact science and therefore we do not believe that one method, either the ‘loading' method or the ‘statistical projection' method, is necessarily the only appropriate course to follow. Our approach has therefore been to review the way in which each method has been applied and to comment on any shortcomings which we found.

‘Mr Beckett, in reserving as at 31 December 1982, and Mr Pateman, the two subsequent years used data f premium income, claims settled and outstanding claims net of reinsurance premiums and recoveries. We consider that this was inappropriate. The use of gross claims data by Mr Beckett would have revealed the inequity in the allocation of reinsurance recoveries between syndicates as at 31 December 1982; this allocation was to be changed subsequently by Mr Pateman with a significant impact on the non-marine syndicates.

‘In our opinion Mr Beckett and his team did not carry out sufficiently thorough review of the reinsurance security for the purposes of the reserving as at 31 December 1982. The thorough review of reinsurance security carried out for Mr Pateman as at 31 December 1983 was a significant improvement, and that used by Mr Bailey a year later was even better. We believe that for the syndicates for which Mr Pateman remained responsible, a further review of reinsurance security as at 31 December 1984 would have produced more accurate reserves.

‘We consider that the degree of subjectivity in the loadings used by Mr Beckett and Mr Pateman was not justified in view of the lack of underlying data which, if available, would have helped to compensate for the limited knowledge of accounts which they had not themselves written.

Where reserves were discounted, this was done on a logical basis, with the benefit of the fullest possible advice. Discounting of reserves at that time was not prohibited by Lloyd's. We do not criticise Mr Pateman and Mr Bailey for their approach, although in the circumstances it would have been more prudent not to have discounted any of their reserves.

‘We found if difficult to understand how RBUA could have accepted the use of significantly different reserving methods as at 31 December 1984 for the non-marine and incidental non-marine syndicates on which broadly similar risks had been written, without fuller Investigation.

‘The limited knowledge of the account available to Mr Beckett in calculating the reserves as at 31 December 1982 did not, in our view justify his decision to release £18.2 million to Names' personal accounts.

The role of the auditors

‘The auditors were seen in a predominantly statutory and regulatory role at RBUA during the period covered by our inquiry. Their advice was sought on a number of occasions by management as general advisers but to an extent which was surprisingly limited in view of the trails which RBUA faced.

‘In this statutory and regulatory role we consider that both firms carried out their work along the lines expected of them. We do, however comment upon:-

  1. the additional provisions against amounts due from, or to become due from, reinsurers in their audits of the syndicates as at 31 December 1982 which might have been judged necessary had further work been done.
  2. the representations from management in respect of anticipated reinsurance recoveries. They did not directly address the question of the allocation of recoveries due from Chiltern as at 31 December 1982 between individual syndicates, although Arthur Andersen had suggested in a management letter issued shortly after the accounts were signed that the allocation ought to be reconsidered;
  3. their acceptance of notes to the 1983 and 1984 accounts which did not make clear the changes in reserving methods, the change in the method of allocation of reinsurance recoveries between syndicates and the extent to which discounting had been used; and
  4. the absence of any comment in their report on internal controls and accounting records to Lloyd's, ‘AU3' in 1984 in respect of the year ended 31 December 1983, to draw Lloyd's attention to the weaknesses in the Agency's systems and records commented on in the auditors' 1983 management letters.

In these four respects, we consider that their statutory and regulatory role could have been fulfilled to greater effect.

‘In the provision of advice and support to management on matters which came to their attention during the audit, the performance of both firms of auditors was disappointing :-

  1. They should have done more to ensure that Mr Beckett was fully aware in his first few months as chairman, of the problems presented by the nature of his reinsurance protection programme and by the management issues in Farnborough.
  2. They should have done more to alert Mr Beckett, in his capacity as principal underwriter, to the dangers of reserving on a simplistic basis for long-tail liability business, of which he had little experience, they should have been able to do this from their general experience as auditors of insurance operations.
  3. They should have done more to ensure that Mr Beckett appreciated the risks of making a distribution to Names in May 1983
  4. Arthur Andersen in 1984 appear to have expressed only minor concern about the non-marine reserves. They used a statistical projection method to cross-check the underwriter's computation of reserves and this method might have been expected to indicate a need for higher reserves on the non-marine syndicates.
  5. They did not take steps to summarise and present to the board jointly their management letter points, particularly in 1984.

However some of the responsibility for the disappointing performance of the auditors as advisers rests on management for not seeking their advice.

The role of Lloyd's

Lloyd's was faced in 1982 with a series of problems which were virtually unprecedented for the market in terms of size and complexity starting with the discovery of misappropriation from syndicates managed by Alexander Howden Underwriting Limited and followed shortly by the discovery of misappropriations from the RBUA syndicates.

Lloyd's had a limited capacity at that time to manage such problems. Rather than being allowed to continue underwriting, the interests of the Agency's Names might have been better served by the immediate establishment of an Additional Underwriting Agency. We are, however, of the opinion that Lloyd's decision was a reasonable one on the basis of information available.

‘In 1983 and 1984 Lloyd's should have ensured that the Agency management properly appreciated the basis on which advice was provided by senior council members and corporation staff. The impression was gained that decisions had been approved when no such endorsement had been intended.

Lloyd's was involved in the discussions leading to the offer to Names in 1984 and in reviewing the content of the offer documents, but did not grant formal approval. Although this was clearly perceived within Lloyd's, the documents did not make the distinction clear to Names. Because at the time Lloyd's position was not made clear, it is now difficult for Lloyd's to disassociate itself completely from the offer.

The last paragraph of the Summary and Conclusions ends: ‘Primary responsibility for the losses incurred by the Names must rest with the former management of the Agency. Nothing in our report indicates otherwise.'

But the report certainly chronicles a shambles. The authors would have liked to use the phrase ‘with the benefit of hindsight' more often than it appears, but they soon learned to convey the meaning without repeating the words.

The shambles began with the first visit in December 1982 to Farnborough, the administrative headquarters of PCW, when it was found that many of the records had been shredded. The Report hardly mentions this unfortunate beginning except to note of the Minet hunt for the missing millions that: ‘This involved considerable searching of documents and computer records, limited by the extent to which the previous management of the Agency had destroyed many of the accounting records before they left.'

This destruction was aggravated by the depredation of the many investigations. ‘When Mr. Beckett arrived in December 1982, he found that many of the Agency's files had already been removed under instructions from the Department of Trade. Frequently, thereafter, we understand that the files necessary for the running of the Agency were unavailable because they were being used by investigation teams and, subsequently, were either lost or not returned promptly.'

Binder Hamlyn, now panel auditors, were the inspectors for the Department of Trade. Competing with them were Neville Russell, who were reporting to solicitors Clifford Turner, acting for Minets. Also milling around were Deloitte Haskins & Sells on behalf of Alexander & Alexander, and Ernst & Whinney, appointed by Lloyd's. Two late entrants were Spicer & Pegler, acting for a number of Names on the baby syndicates and Price Waterhouse, instructed by the PCW 1985 Committee.

These various investigators were not just treading on each other's toes; they were kicking each other's shins. According to the report: ‘Not only was there an overlap between the activities of Deloittes and Neville Russell, but there was a degree of conflict between the firms.'

The activities of the investigators were no more than an extension of the rivalry of their principals. Minet, stated in part of their submission to the commission: ‘Minet and Alexander & Alexander have been at loggerheads almost throughout the unravelling of the PCW affair. Alexander & Alexander's/Howden's adversarial attitude was a major factor in the cost and time spent by Minet.'

When the new management took over in December 1982, immediate actions were taken with regard to tracing the money and chasing the villains. This task was seen as being more important than securing the future of the agency, because at that time it was almost assumed, given the agency's previous history of success, that all was relatively well on the underwriting side.

Following that assumption, which led to the agency's continuing underwriting in 1983, it was an easy step to release £18.2m to the Names on the strength of the 1982 accounts. But those two actions, more than any other, would have encouraged Names to remain with the stricken agency. None of the parties concerned can disassociate themselves from the decision to continue and the decision to pay out £18.2m.

So confident were all parties in the inherent strength of the syndicates that qualifications of the reserving policy were that ‘further recoveries from reinsurance might be anticipated' (from the purloined funds), but that the reserves were otherwise adequate.'

It was not until the end of 1983 that the losses associated with the long-tail business of previous years became apparent. Even then, giving the state of the records, it could not be quantified. By then major damage had been inflicted on the reinsurance arrangements of the Non-marine syndicates.

Ron Pateman, the underwriter brought in for all syndicates, distrusted Farnborough and was suspicious of its competence, as he was of his own team of underwriters. The main, established reinsurance arrangements, some of which had been used to remove money from the syndicates were severely altered by him.

Worst affected were the Non-marine syndicates. (Pateman, like Beckett, was a Marine underwriter.) The changes took effect from May 1983, but M. D. Jackson, the Non-marine underwriter claimed ‘that even in October 1983, he was unaware that he had been writing lines since May 1st 1983 without the protection of the Intermediate and aggregate programmes.'

As if this were not bad enough, the inevitable consequences of writing large lines on American liability business (which continued in 1983) were coming home. Ralph Bailey, who had taken over as Non-marine underwriter in August 1984, gives an example: ‘On medical malpractice the Cameron-Webb incidental non-marine syndicate wrote the California Hospital Association. They had an average line over the years of about 6%. The reserves for outstanding claims went up during 1984 for all those back years from $28m to $56m.'

0 Aug 86

Eckersley Hicks

Eckersley Hicks (Underwriting Agencies) Ltd, the members' agency previously associated loosely with Janson Green, has been acquired by the Stewart & Hughman group. Senior executives of Eckersley & Hicks will be taking up important positions within the Stewart & Hughman group.

0 Aug 86

Merrett Motor

Merrett Holdings, through its subsidiary Creechurch Syndicate Managers, has acquired Warwick Insurance company with a premium income of about £8m. It is intended to convert the company into a motor syndicate as from January 1987.

The underwriter will be the company's present managing director, James Cassidy. Justifying the £1.85m payment for the company, group chairman Stephen Merrett said: "The move avoids the substantial set-up and marketing costs which would normally be associated with establishing a new syndicate."

0 Aug 86

The Council of Lloyd's has ratified a decision by the Committee of Lloyd's to appoint Additional Underwriting Agencies (No 3) Ltd (AUA3) as substitute managing agent for members of Lloyd's Marine Syndicate 970, previously managed by Gardner Mountain & Capel-Cure with P E J Cameron-Webb as underwriter.

AUA3 will assume the managing agency function for the syndicate - previously held by Gardner Mountain & Capel Cure Agencies Ltd - at a date to be agreed.

The Council of Lloyd's established AUA3 under the provisions of the Substitute Agents Byelaw on 6 June 1985. This followed the announcement by Minet Holdings Plc, the parent company of Richard Beckett Underwriting Agencies Ltd (RBUA), of its intention to close down RBUA by the end of 1985.

RBUA assumed the agency function of all syndicates previously managed by PCW Underwriting Agencies Ltd in December 1982. Today's extension of AUA3's responsibilities, in respect of the Gardner Mountain & Capel-Cure managed Marine Syndicate 970, reflects the close relationship which existed between the syndicate and those managed by PCW and RBUA.

5 Aug 86

Letter from Toplis & Harding (Asbestos Services) to members of the Asbestos Working Party.

Encloses a report by Malcolm Aickin circulating a report on his trip to Washington.


The Senate House Conference is now moving towards completion.... It has agreed to impose a strict timetable upon EPA. The EPA must complete preliminary assessment of 23,000 potential sites by 1st January 1988... These must be followed by site inspections at all sites by I January 1989. Following this the EPA must increase the number of priority sites to 1,600.... It is quite clear from my conversation that EPA does not even consider there to be an issue as to whether costs of remedial work are covered by liability insurance policies. Their view is that there is no question that such coverage exists under past liability policies.

14 Aug 86

Letter from Toplis & Harding to members of the Asbestos Working Party.

(A letter from Toplis & Harding to members of the AWP enclosed a draft report proposed to be submitted by attorneys. The draft report stated:

that the rate of new law suits filed showed a steady increase to an average filing rate of 900 new cases per month during the course of the current year. 40,000 outstanding claims were yet to be addressed, and although there is evidence to indicate that more current filings relate to cases of less serious disability, the continuing up-surge of claims continues to be of concern. This difficulty is further heightened by the recent amendment to the New York Statute of Limitations in respect of certain hazardous products including disability arising out of the use of asbestos. The amendment allows claimants who were formerly time barred a 12 month period in which to file an action. Whilst it is difficult to foresee how much activity may now develop out of New York State, some observers have reported that up to 5,000 new filings can be expected, mainly arising from the Brooklyn Shipyards.

that although there has been a steady increase in the number of property damage suits filed during the past year, there still exist many imponderables from a reserve stand-point).

[Encloses a draft report proposed to be submitted by Mendes and Mount]

(268) The one remaining area in the context of the year-end reserves relates to property damage. although there has been a steady increase in the number of suits filed during the past year, there still exist many imponderables from a reserve stand-point... No provision has been made in the calculations to provide for future deterioration. Considerations relating to IBNR are matters for the individual attention of each participating insurers.... The rate at which new law suits were filed has steadily increased to an average filing rate of 900 new cases per month during the course of the current year... 40,000 outstanding claims yet to be addressed, and although as already reported above there is evidence to indicate that more current filings relate to cases of less serious disability, the continuing up-surge of claims continues to be of concern. This difficulty is further heightened by the recent amendment to the New York statute of limitations in respect of certain hazardous products including disability arising out of the use of asbestos. The amendment allows claimants who were formerly time barred a 12 month period in which to file an action, and whilst it is difficult to foresee how much activity may now develop out of New York state, some observers have reported that up to 5,000 new filings can be expected, mainly arising from the Brooklyn shipyards.

15 Aug 86

Winchester Bowring letter to San Francisco Reinsurance Co re R W Sturge & Co "Run-Off Reinsurance" states inter alia:-

Regarding your request for current status of Syndicate reinsurance recoveries and in particular a breakdown of the amount of U.S.$7,775,145, stated in Jeremy Binns' letter dated 29 May 1986 as being the recoveries requested but not received at December 1985.

First let me stress that both Sturge and ourselves fully appreciate the benefit to you of effecting the reinsurance recoveries in a timely fashion. Having spent a considerable amount of time with Sturge yesterday on this subject, we can confirm that Sturge do have exhaustive systems in place, both to ensure collection requests are made promptly from their reinsurers and "that overdue amounts are monitored and chased regularly.

I'm sure you'll appreciate that the large majority of movement on this account relates to the Asbestos claims. You will already be aware of Mr H R Rokeby-Johnson's letter dated 21 December 1984. In this letter attention was drawn to the problems surrounding collection of Asbestos claims from Syndicate excess of loss reinsurers. Regretfully these problems are still not fully resolved, despite the sterling efforts of the London Market Asbestos Working Party. As you will be aware Keith Rayment, Sturge's Claims Director, has been actively involved as a leading member of the Asbestos Working Party, in answering reinsurers' questions and attempting to remove reinsurers' reluctance to settle Asbestos claims. This has entailed extensive travel to the four corners of the globe and has included a number of local Seminars in West Europe, India and Japan where representatives of the Asbestos Working Party in conjunction with the London Brokers addressed the reinsurers.

Despite these efforts certain reinsurers remain unwilling to settle these claims and are still asking many questions on each individual claim presented.

As a probably final attempt to obtain settlement from reticent reinsurers, prior to pursuing other means, the London Market at the request of the Asbestos Working Party, has adopted a standardised claim form which is intended to answer all reinsurers' relevant questions. The use of this form has just been agreed by the applicable London Market Associations and we await developments.

In summary, we wish to assure you that Sturge are pursuing, with great diligence, recoveries that are due to you. But it is not easily possible to demonstrate to you, by telex, letter or telephone the efforts that are being made on your behalf.

18 Aug 86

Mendes & Mount's report to underwriters at interest.

(An attorney's report stated that from a recent analysis conducted by the Facility, the rate at which new law suits were filed has steadily increased from about 500 per month, which had been the consistent level over 1984/5, to an average filing of 900 cases per month during the course of the current year. Although there is evidence to indicate that more current filings relate to cases of less serious disability, the continuing up-surge of claims continues to be of concern).

Finally we would like again to emphasise to the Market that the reserve projections are based on the most up to date loss information available, but no provision has been made in the calculations to provide for future deterioration. . .

We have been instructed by the Working Party that considerations relating to IBNR are matters for the individual attention of each participating insurer. In conclusion, we would like to make some observations in regard to the number of outstanding lawsuits, and more particularly the increased rate at which these have been filed over the past nine months. From a recent analysis conducted by the Facility, the rate at which new lawsuits were filed has steadily increased from about 500 per month, which had been the consistent level over 1984/5, to an average filing of 900 cases per month during the course of the current year.... although there is evidence to indicate that more current filings relate to cases of less serious disability, the continuing upsurge of claims continues to be of concern.. This difficulty is further heightened by the recent NY amendment allowing formerly time-barred claimants a 12 month period of extension. Difficult to foresee how much activity may now develop out of NY.

Aug 86

A letter from Toplis & Harding to members of the AWP states:-

that the Senate House Conference is now moving towards completion. It has agreed to impose a strict timetable upon EPA. The EPA must complete preliminary assessment of 23,000 potential sites by 1 January 1988. These must be followed by site inspections at all sites by 1 January 1989. Following this the EPA must increase the number of priority sites to 1,600. EPA does not even consider there to be an issue as to whether costs of remedial work are covered by liability insurance policies. Their view is that there is no question that such coverage exists under past liability policies.

28 Aug 86

London Wall Members Agency was created following a management buy-out from Bain Dawes on 28 August 1986.

Directors invested by way of subscription for £1 ordinary shares in an amount of £1.03m, and outside investors subscribed a further £1.15m. Names who were conducting their underwriting through London Wall on 1 January 1987 were each invited to subscribe to an issue of 686,000 £1 ordinary shares at par, and following closure of the offer on 9 January 1987, the shares traded on a matched bargain basis at 225p per share through Sheppards. In addition to the Members Agency, a Holding Company was formed which took over Gilliat Scotford & Hayworth Ltd, purchased a 40% shareholding in Warren Barber and then, established Derek Bryant as a dormant agency after transferring its Names to London Wall. Their latest acquisition is Alexander Howden and Beck Ltd, which will continue as an independent agency within the London Wall Group.


River Clyde Holdings Ltd

Under the name, River Clyde Holdings Ltd, a sale and placing of shares of the business of Stewart & Hughman group was made. The group manages five syndicates, with a net premium capacity approximately 1.4% of the Lloyd s market capacity. Names with the agency were offered 726,520 shares with 680,000 shares being placed with financial institutions. With the sale sponsored by Henderson Crosthwaite being successful, there were 5,825,085 shares in issue, and at the sale price of 200p, the historic earnings per share is 29.9p per share, giving a price/earnings ratio of 6.7%. The gross dividend was forecast at 11p.

The group attempted the same exercise in January 1987, but were stopped in their tracks when their two main syndicates, Marine 17 and Non-Marine 15, were rebuffed by the Outhwaite Marine 317 syndicate on claims on run-off policies. The prospectus had to be withdrawn and cheques returned.

When the 1984 underwriting year closed (mid 1987), the auditors allowed the syndicate to make 100% provision for the disputed run-off policies, but the year was left open for both syndicates. Only half the declared post-tax profit £2,443 for a £10,000 line on syndicate 17 was paid out, the other half being held in escrow pending the resolution of the picked up £1.7m in profit commission.

The agency was confident that the full amount due on the run-off policies would be paid, but in the event of any claims not being recovered, the appropriate amount of profit commission will be refunded.

The trading record showed that the company had now reached the important level of trading when income from underwriting salaries exceeded operating expenses.








£ 000

£ 000

£ 000

£ 000

£ 000

£ 000


210 (82)

256 (83)

394 (84)

827 (85)

1,117 (86)

1,284 (87)

Profit Commission

609 (79)

703 (80)

712 (81)

1,672 (82)

1,388 (83)

2,307 (84)







Operating expenses













Investment and other Income







Share of profit of related companies







Profit on ordinary activities before taxation














Profit after taxation and before extraordinary items







Earnings per share (P)







River Clyde Holdings Ltd was floated during 1987 to become River Clyde Holdings Plc. Non-Marine Syndicate 1117 was launched for the 1989 year of account, but has ceased underwriting.

2 Sep 86

Letter from RAG Jackson, Chairman of the Asbestos Working Party to CS Restal, Guardian Royal Exchange.

(Mr. Jackson, as Chairman of the AWP, wrote to the Guardian Royal Exchange stated that, as in the past, many imponderables continue to exist in projecting reserves for asbestos claims, the most significant being whether there is now developing a change in the severity levels in more recent filings. The letter also referred to the substantial volume of new filings).

The report which you have been receiving outlines the difficulties faced by our US representatives over a year ago quite independent of inflation factors, it was decided to adopt a $85,000 base reserve in the light of our general experience. It was perhaps coincidental that had one applied an annual inflation factor of 10% to the average cost reflected by the Rand Study in 1982, the present day figure would then be approximately $80,000. Nevertheless, it did afford us some additional support for the conclusion that we reached, particularly with the uncertainties that then existed. As is indicated in Mendes & Mount's report, it had formerly been the practice to assess reserves based upon the historical experience of each separate defendant insured, and in those times a loading of approximately 20% was factored into the calculation. Bearing in mind that with the development of the Facility, claims for some 34 asbestos producers were all handled by one entity, and that economies were anticipated, the loading was dropped as part of the consideration for year end 1985. .. as in the past many imponderables continue to exist in projecting reserves for claims of this nature, the most significant being whether there is now developing a change in the severity levels in more recent filings. There will shortly be available to the Market the latest Mendes & Mount report outlining the developments during the past year and the changes that are now indicated for forthcoming reserve projections in summary, indemnity per case reserves will be increased and defence cost-loading will come down, with the net result that little change is likely upon total per case reserves. However, due to the substantial volume of new filings, there will inevitably be some major reserve increases, recommended for this year end. The settling of asbestos reserves is certainly not an exact science, and whilst our attorneys endeavour to reassess the various considerations that arise at yearly intervals, the Working Party has always emphasised to the Market the need to give specific regard to IBNR loadings to reserve recommendations.

4 Sep 86

Lloyd's Global Report & Accounts at 31 December 1985: - the 1983 year of account

Statement by Mr Peter Miller, Chairman of Lloyd's

There are three major categories of persons with an interest in Lloyd's; first, those who provide the capital base, the Names; second, those who hold our policies and finally, the general public. Clearly, a report on trading results and trading prospects is particularly relevant to the first category, but I believe that there are other messages in this report which are equally of importance to the other two groups.

The 1983 Results

While 1983 is still within the trough of poor results to which I referred last year, it is nevertheless pleasing to be able to report at least an overall profit of £36 million or £179 million excluding the PCW syndicates. In the interests of presenting a fair picture of real trends we have set out the effects of the extraordinary position of the PCW syndicates by showing figures both with and without these results. Further details are set out in the notes to the accounts. Furthermore, the unusually volatile movement of our main trading currency, the US dollar, against the currency in which we account, the £ sterling, makes true interpretation the more difficult. For example, the apparent slight decline in the figure for the reinsurance to close, comparing 1983 with 1982, masks an increase at a constant rate of exchange of US$1. 45 = £1 of almost £500 million or 15 per cent; likewise, at the same constant rate of exchange, there is in fact a steady increase in premium between 1981 and 1983 of some 14 per cent."

The Notes to the Accounts disclose that:-

1. PCW

During 1985 Additional Underwriting Agencies (No. 3) Ltd (AUA 3) was established by Lloyd's to assume responsibility for the management of certain syndicates formerly managed by PCW (Underwriting Agencies) Ltd.

Due to the severity of the losses relating to the 1983 and 1982 years of account of syndicates managed by AUA (3) they are separately disclosed in the global accounts. The 1983 year of account and previously unclosed accounts for those syndicates have been left open as at 31 December 1985 in view of the uncertainties affecting the outcome.

In determining the underwriting liabilities relating to the syndicates now managed by AUA (3) as at 31 December 1984, discounting techniques were applied and the liabilities determined on this basis were reflected in the annual reports prepared for Names and in the global accounts as at 31 December 1984. Such techniques were not adopted by AUA (3) in determining liabilities as at 31 December 1985. While the effect of this change on the global accounts cannot be accurately determined, it is estimated that additional losses of approximately £60 million would have been reported for the 1982 year of account had the basis adopted by AUA (3) as at 31 December 1985 been applied as at 31 December 1984.

3. Reinsurance Paid to Close the Account - Run-Off Accounts

The reinsurance premiums paid to close the 1983 year of account £3,685.1 million (1982 year of account £3,779.7 million) include approximately £814.6 million (1982 year of account £647.8 million) representing amounts retained to meet known and unknown outstanding liabilities in respect of accounts which have not been closed. The total profit of £35.8 million (1982 year of account £57.0 million) is arrived at after providing for losses of £184.7 million (1982 year of account £129.4 million) in respect of these unclosed accounts.

The analysis of profit for all classes combined discloses:-

Year of Account


Year of Account




£ 179,135,000

Rest of market - profits

£ 130,226,000


PCW Syndicates - (losses)

£ ( 73,213,000)

£ 35,805,000


£ 57,013,000

The Statement of Accounting Policies discloses :-

B. Premiums

Premiums are gross premiums less commissions and brokerage, and are net of reinsurance premiums.

D. Reinsurance to Close

Where outstanding liabilities cannot be arrived at with sufficient certainty to close a year of account and hence determine the final profit or loss, that year of account is left open and is not reinsured into the subsequent year of account.

H. Profit Commission

Amounts charged by underwriting agents in respect of profit commission are not included in the global accounts.

The Notes of the Financial Facts on "Security - Financial Facts" as at 31 December 1985

1. The average deduction for brokerage and commission across all markets has been estimated at 18.5% per cent

The Global results as announced by Lloyd's to the General Public

Year of Account


Year of Account




£ 35,805,000

Declared post-tax profits

£ 57,013,000

The undisclosed additional expenses, being agents' profit commission

£ 57,600,000

Agents Profit Commission

£ 61,100,000


Received by Names

£ ( 4,087,000)


Discounting of PCW Losses

£ 60,000,000


True and Fair Result


£ ?

Central Fund Earmarking

£ ?

(This excludes additional earmarkings of members unencumbered ‘Funds at Lloyd's' for Solvency Purposes.)

  1. Central Fund position as at:-

31 December






Net assets of Central Fund after current taxation

Deferred taxation


( 22)


( 17)

Fund balance after taxation at 31 December 1985



During the above years sums were earmarked in respect of Names' underwriting deficiencies. The amount earmarked during 1986 in respect of the 1985 solvency test was £237m (during 1985, £65 million).

31 December




Year of Earmarking








Central Fund balance



Payable by Lloyd's under PCW settlement



Net assets after current taxation at date of earmarking








8 Sep 86

Maryland Casualty Co. -v- Armco, Inc., 643 F. Supp. 430 (District of Md., 8 September 1986. Court held "damages" do not include costs in compliance with equitable relief such as cleanup costs.

Sep 86

Letter from Attorneys to the Underwriters at Interest.

With further reference to our handling of the above matter, we submit our year-end 1986 reserve report on the above account. While we will in the future be submitting a detailed narrative report explaining the underlying assumptions on which these reserves are based, we submit the following summary for Underwriters' ready reference.

(I) Bodily Injury: Our recommended asbestos bodily injury reserves are set forth in the attached schedule. While there have been extensive negotiations within the past few months which would result in GAF applying for membership to the Asbestos Claims Facility, formal application has not been made, and it is unknown whether such an application will in fact be made. Accordingly, instead of reserving on a Facility basis, we are continuing to provide reserves on the exposure and manifestation concepts .

(ii) Property Damage: As will be fully detailed in our narrative report, there have been very few developments involving the assured GAF Corporation with regard to asbestos property damage claims. GAF, which did not manufacture any of the high hazard spray-on asbestos products, has not been found liable in any case and has not settled any property damage cased. GAF has been successful in obtaining dismissal in approximately 10 property damage cases during the past few years. We had previously been suggesting that Underwriters, if they so desired, should consider the establishment of a reserve of $200,000 per policed year, where said policies were not otherwise exhausted by bodily injury reserves. In view of the general overall increase in property damage litigation, and in view of the fact that certain of the target defendants have been found liable for substantial damages, we are now recommending that Underwriters establish a reserve of $200.000 per year where policies are not otherwise exhausted by bodily injury claims...

Sep 86

Letter from Attorneys to the Interested Insurers. Report No.... Assured: .

(An attorney's report referred to the general overall increase in property damage litigation and the fact that certain of the target defendants had been found liable for substantial damages).

We submit to the London Insurers our Report No ... providing our asbestos-related bodily injury and property damage reserve recommendations for year-end 1986. This Assured is a subscriber to the Asbestos Claims Facility and therefore our bodily injury reserve recommendations continue to be predicated upon all claims together with this Assured's generic share for indemnity and defence as determined by the Facility. The underlying considerations and bases for these reserve recommendations were agreed upon at a recent meeting of the Asbestos Working Party and its American counsel and are set forth in a Mendes & Mount letter to the Market dated 18 August 1986 [see above]. This Assured continues to be a principal defendant in the asbestos-related property damage litigation and rather than suggesting precautionary reserves we are now recommending substantial indemnity and costs of defence reserves for these claims. For the convenience of Underwriters we set forth below our gross ground-up bodily injury indemnity and expense reserve recommendations for this Assured in the 1949- 1961 and 1966- 1972 years. . .

16 Sep 86

Minutes of Merrett Underwriting Agency Management Board Meeting.

(141) Asbestos related claims:-

The number of new losses being reported to the claims facility is approximately 100% higher than anticipated but the potential deterioration is ameliorated by the following factors: The new claims tend to be for less serious physical injury; many assureds have now exhausted their insurance protection; it is anticipated that actual costs of settlement will fall particularly in view of the dramatic drop in defence costs from US$280 million to US$70 million. However, the scope for deterioration on retrocessions is still very difficult to assess.

17 Sep 86

United States -v- Conservation Chemical Corp., 653 F. Supp. 152, 200, Western District of Missouri, 17 September 1986. Court held the United States action against operator of chemical waste disposal facility was action within the claims-made policy period and required coverage by insurer for operator. Percolating groundwater under chemical waste disposal facility was not owned by operator, and, therefore, was not within the owned property exclusion of liability policies that excluded coverage under Missouri law for damage to property owned and controlled by insured. Other exclusions exerted by insurers were questions of fact precluding summary judgement. Owned property exclusion does not apply to damage to third parties.

Sep 86

From 1 January 1987, new audit codes were introduced in respect of Non-Marine All Other Business. These new codes relate to:-

Audit Code Description


Non-Marine all other business "Short" Long


Non-Marine all other business "Medium" Long


Non-Marine all other business "All Other" Long


Bankers Business

Although separate tables are prepared for business concerning each of these categories from 1 January 1987, the information for all of the above categories as described, is consolidated into the main Non-Marine All Other Business tables, for each appropriate currency.

Oct 86

The Cromer Report is made available to members of Lloyd's, almost seventeen years after its submission to the Committee of Lloyd's.

6 Oct 86

Ernst & Whinney management letter. Areas of audit significance:

I ) Reinsurance to Close. This is the most material and subjective figure in the underwriting account of the closed year. There are problem areas, in several of the syndicates, in respect of run-off accounts whereby the liabilities of other, non-Merrett, syndicates have been reinsured. Last year, for the first time, the Accounts Department at Merretts assumed responsibility for the preparation of the Reinsurance to Close Schedules and will do the same this year... We will audit the outstanding claims and the IBNR content using substantive testing and analytical review procedures as well as ensuring consistency of treatment with the previous years.

9 Oct 86

Financial Times: Sea changes at Lloyd's

AN AGE of accountancy dawned at Lloyd's of London on St Valentine's Day, 1983. Shaken by the scandals of Alexander Howden and PCW, unnerved by early signs of huge underwriting losses from US liability insurance, the world's foremost insurance market then suffered the unkindest cut of all. A chartered accountant, appointed on the initiative of the Bank of England, arrived as the market's first chief executive, charged with drawing up codes of conduct for the old Lime Street underwriting Room.

Now that accountant, Mr. Ian Hay Davison, is back with his old firm, Arthur Andersen. But he has his successors. Sir Ian Morrow, the man given the job of sorting out the four-year-old PCW mess, is " a tough accountant," according to Mr. Alan Lord, the market's chief executive since this spring.

Sir Ian was knighted for his role in the rescue of Rolls-Royce, which collapsed in 1970. He served as managing director in the early 1970s of Rolls-Royce (1971) Ltd., set up to continue the trading operations of the UK aero-engine company.

Elsewhere at Lloyd's, yet another accountant, Mr. Peter Rawlins, took over last year as managing director of R. W. Sturge, the 92-year-old underwriting agency. It controls the biggest single slice of the £8-5bn in premium income expected to flow through Lloyd's this year.

So a plague of accountants - who would have been unheard of in such positions ten, or even five year ago - has descended on Lloyd's. It symbolises what Mr. Hay Davison was apt to call "the quiet revolution" at Lloyd's - the modernisation of archaic inadequate standards of accounting and disclosure to underpin self-regulation.

Behind that quiet revolution lay the urgent need to ensure that scandals like PCW could never happen again. But, at the same time, the presence of men like Mr. Rawlins suggests that in some quarters the quiet revolution has had another driving force - the need to upgrade management, as opposed to purely underwriting skills, to turn the market's practitioners themselves into leaner, more competitive beasts.

The question now is whether this revolution has gone far enough to enable Lloyd's to survive unscathed the challenges now looming.

For Lloyd s, its 300 underwriting agencies, and the 28,944 underwriting members (or "names") who provide its capital, are now awaiting three events with varying degrees of anxiety. On November 18, the Queen will officially open the new Lloyd's HQ. In late autumn according to Whitehall, Sir Patrick Neill is due to report on his inquiry into the workings of the market's self-regulatory system, set up under the 1982 Lloyd's Act.

And, by the end of the year, Lloyd's hopes to have resolved the plight of the PCW names. More than 2,000 names on syndicates managed until 1982 by former PCW underwriting agencies are involved. Some 400 of them face the biggest chunk of a contingent liability for huge underwriting losses, estimated at a gross £380m.

The PCW Names 1985 Committee, which represents the 400, claims that those losses were incurred as a direct consequence of misappropriations of at least £40m by PCW's pre-1982 managers.

In fact, such losses are still a long way off. They represent a forecast of possible claims on US casualty insurance written by PCW syndicates in the late 1970s and early 1980s. Typically, such claims will not peak until five to 12 years from now, because they relate to so-called " long-tail " liability business. The nature of such business has bedevilled the PCW affair because claims on US liability policies - to cover, say, court awards in medical malpractice suits - may not be reported for years after the policy was written.

Additional Underwriting Agencies Number Three, formed by Lloyd's (and chaired by Sir Ian Morrow) to look after the PCW names' interests, may however be sitting on premium income of £100m (though it has not confirmed this figure) so it could be eight years or so before the PCW names are called on for extra cash.

Inquiries focusing on PCW, however, tend to evoke weary exasperation from leading figures in the market, who want a swift, clean, final solution to the affair. " The whole PCW affair is tortuous from "beginning to end," said Mr. Rawlins " There are issues that need to be raised at Lloyd's that far transcend PCW."

This is where the accountants and the actuaries come in. Mr. Hay Davison's lasting legacy at Lloyd's enshrined in bye-laws promulgated by its ruling Council, was the application of UK Companies Act standards of accounting and auditing to the 400 or so syndicates into which underwriting members are grouped.

That this was long overdue is freely admitted by men like Mr. Stephen Merrett, chairman of Merrett, the second biggest of the Lloyd's underwriting groups.

The kind of syndicate accounts that were shown to underwriting members ten years ago could be "very uninformative," he said.

But if the pressure for tighter management and accounting standards was partly regulatory, the quiet revolution has also been bound up with a complex of fiscal and commercial problems which have dictated changes at Lloyd's.

The Lloyd's global results for 1982 and 1983 - years when the world's insurance market was still in a downward cycle of falling premium rates - showed underwriting losses respectively of £188m and £114.7m.

Those losses were offset by investment income to yield an eventual profit, and Lloyd's is confident that future results show a big recovery reflecting the steep premium increases of the last two years or so.

The bottom line, however, was revealed in independent syndicate performance tables prepared by Chatset, an independent research company.

They show that nearly half the non-marine Lloyd's syndicates left their members with losses in 1983, the last closed accounting year.

Behind this lies the painful adjustment Lloyd's has faced - especially in non-marine insurance - to accommodate itself to harsher market conditions. That has been manifested, for instance, in the strategic need for many Lloyd's syndicates to expand their reserves against future underwriting losses deriving from the kind of US liability insurance claims that have hit PCW.

Anecdotes circulate, for instance, about a syndicate which took one risk at a single premium of £50,000 - and has already had claims of £10m, with more to come.

This, in turn, explains the gradual emergence of actuaries at Lloyd's to advise on reserving against such losses. Mr. John Ryan, a partner at Tillinghast the consulting actuaries, and a former insurance analyst with James Capel, the stockbroker, suspects for instance that in 1982 the majority of non-marine Lloyds' syndicates writing US long-tail casualty insurance were inadequately reserved

Extra reserving does two things, however: first, it cuts profit distribution to underwriting members, adding to pressure on agencies to streamline management expenses.

Second, extra reserves are attracting increased attention from the Inland Revenue, since they involve a reduced tax charge which the Revenue now wants to see properly justified.

But the tougher insurance market conditions of the last few years arguably have raised other questions.

Lloyd's underwriters tend to bridle at the suggestion that their world role will contract from the estimated 2 per cent share of the 1983 world non-life premium total of some $464bn - or from its 40 per cent share of the world's marine insurance market.

So, according to Mr. Merrett, the question about Lloyd's role in the world insurance scene is really two-fold.

Does Lloyd's want to be a big player? he said. "If it does how can one cope with the big syndicates that are required to maintain the flow of business at all points of the insurance cycle?"

This is not necessarily a problem of the market's overall capacity.

In spite of PCW and its other scandals, some 3,087 new names joined the market on January l 1986, taking the total to 28,944, and a further 3,627 (of whom about 3,000 will probably be accepted) have applied to join in 1987.

The problems to which Mr. Merrett is pointing - and about which there is scarcely a consensus - are more to do with management and the market's structure. On the one hand Lloyd's is a highly fragmented competitive community

Neither Sturge, nor the Merrett Group manages through its own syndicates more than 10 per cent of the market's total premium income. The biggest half-dozen underwriting agencies account for only about one-third, according to Mr. Rawlins. So the remaining two-thirds are split between syndicates managed by several hundred smaller agencies - some of which, arguably, must be too small to be efficient management units.

Structurally, however, the fragmentation allows Lloyd's to devolve commercial decision-making down to the individuals writing business for each syndicate in the market's four main sectors - aviation, marine, motor and non-marine.

So it by-passes the problems faced by the big general insurance companies in motivating individual underwriters - and fosters the innovation on which Lloyd's prides itself. "It may appear archaic, but it means we can do business very fast," in the words of one marine underwriter.

But at the same time, the need for fragmentation has to be offset by the presence of some big syndicates and underwriting groups which can act as the Lloyd's "market-makers," leading the market into new areas of risk.

That, in turn, creates more management strains, so that groups like R. W. Sturge, as big players, managing the affairs of thousands of names, are in a different league to most of the small agencies.

Eventually, questions like these cannot be divorced from the PCW affair - not because the PCW misappropriations are typical of the market, but because the forthcoming PCW settlement is bound to be very expensive for the participants and subject to fraught negotiations. As such it will be a critical test of just how far the " quiet revolution " has gone - and how far the market has the will to show that it has put its house in order.

Since last December, the PCW names have been threatening to sue at least 40 potential defendants in the market (including Lloyd's itself) for negligence or complicity in the affair.

Such litigation - which could be pursued in the US - would be " a nagging sore," said Mr. Lord, because of the drain on Lloyd's management's time, the airing again of the affair's more sordid features, and the uncertainty that would hang over the financial situation of the litigants. So Lloyd's effectively has to settle the matter now.

One hypothetical solution at the moment is a huge " stop-loss" insurance policy, written at Lloyd's, which would limit the PCW names' losses. But an adequate stop-loss policy could require a premium of more than £100m - a cost that would have to be shared, amid tough horse-trading, between the PCW names, their potential legal adversaries, or the market as a whole.

That leaves the shape of a settlement depending on some as-yet unanswered questions.

Will Sir Ian Morrow maintain the confidence of the PCW names - who have to he convinced that the solution is a just one? Can the PCW names' steering committee swing the 400 underwriting members behind a deal - when any one of them could take a case against Lloyd's to the US courts and finance legal fees out of the eventual damages? And will the underwriting magnates at Lloyd's feel able to go to their own names for money if the settlement requires a whip-round from the market?

In or out of the courts, PCW is likely to provide the best indication of how far Lloyd's is willing to purge past errors for good.

13 Oct 86

The Review Powers Byelaw (No. 5 of 1986, 13 October 1986).

This Byelaw empowers the Chief Executive of the Society to order a review into the affairs or any aspect of the affairs of a Lloyd's broker or underwriting agent. A review may range from a request for information to a more comprehensive review of the affairs of the business in question and will be carried out by the new General Review Department assisted as necessary by staff from other Corporation departments.

The general review department was fully established (during 1987) and began work on the review functions envisaged by the Review Powers Byelaw (No. 5 of 1986). Progress was made in developing the resources which, in due course, will enable the department to carry out regular on-site reviews of underwriting agents and brokers on average once every three years. The department will also be available to carry out other studies and, building on experience, is expected to become a valuable source of advice to both the market and the Corporation.

Oct 86

Asbestos Hazard Emergency Response Act (AHERA) (Public Law Order No. Of the USA) passed by Congress.

Congress mandated that the U.S. Environmental Protection Agency (EPA) establish a mandatory and comprehensive regulatory framework of inspection, management planning, operations, maintenance and abatement responses to control Asbestos-Containing Materials (ACM) in schools throughout the USA.

The AHERA Statute also extended the EPA mandate to require it:

  1. to conduct a study to determine the extent of danger to human health posed by asbestos in public and commercial buildings and the means to respond to such danger;
  2. to conduct a study to determine the dangers posed by asbestos in the 3.2 million public and commercial buildings in the USA. (The results of the EPA studies were released in February 1988). This began what is likely to become a long-term effort to remove hazardous asbestos from buildings and lessen the risk that people will be harmed by exposure to the fibres.

22 Oct 86

Merrett internal memo from K E Randall to the Merrett Underwriting Agency Management Board.

The report is heavily critical of our year end routines and accounts production. With regard to the accounts department itself the report illustrates the inevitable consequences of failing to plan ahead in terms of staff development and computer systems.

Members of the board will be aware of the increase over the last year in staff numbers in the accounts area. Members may not appreciate the archaic systems which we have been trying to replace. For example, until 1985 the group maintained hand-written general ledgers which must have made us almost unique as an organisation responsible for turnover running to hundreds of millions.

When I joined Merretts I was shocked that so little financial and management information was available. As a matter of urgency, computer applications were installed in a number of areas including (what was claimed to be) the widely used Sherwood bookkeeping system. As can be seen from the Ernst & Whinney report, that system contained a number of operational deficiencies which had not been resolved by year end. In other instances the control procedures have clearly been unacceptably weak...

I am satisfied that most of the deficiencies in our finance function are well on the way to resolution but it must be stressed it will take another two years before we can be fully confident that we have in-depth support and expertise and we have still a very long way to go in terms of producing adequate management information.

Aside from the accounts department itself, I remain very concerned that the syndicate staff do not appreciate the importance of the year end and the timetables; I have now witnessed two year ends when in some areas tasks are not given the priority they deserve. There are some syndicates where there is insufficient delegation and yet others where junior staff are asked to carry far too much responsibility. In the case of syndicate 417 we have yet to identify the person responsible for co-ordinating the year end work from an underwriting point of view.

28 Oct 86

Toplis & Harding (Asbestos Services) Ltd incorporated on 30 March 1983, changes its name to Toplis & Harding (Market Services) Ltd, registered on 11 November 1986.

30 Oct 86

Reserving commentary provided by Merretts to the Inland Revenue regarding reinsurance to close the 1983 year of account on Merrett Syndicate 417.


New forum selection undertaking required to be signed by all American Names that they agree to submit to UK jurisdiction on all matters, effective 1 January 1987.

4 Nov 86

Mraz -v- Canadian Universal Ins. Co., 804 F.2d 1325, 4th Circuit, 4 November 1986. Court held insurer had no duty to defend against cleanup because no "occurrence" which is judged by the time injury first manifest themselves — i.e. when discovered. Even without occurrence, no duty because government sought response cost but didn't allege "property damage".

5 Nov 86

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

Ladies and Gentlemen, there are two matters upon which I would immediately like to put your minds at rest. The first is, this being the 381st anniversary of Gunpowder Treason and Plot, that the cellars under this building have been thoroughly searched to see that no dissident broker or underwriter is lurking therein with fell intent. The second matter which should be of concern to all active underwriters at this busy time of year, is that this will be a short speech.

In a sense, since this building has not yet been officially opened, I suppose it could be said that the meeting is not taking place at all. Perhaps as with the Lady of the Bedchamber accompanying Her Majesty two weeks hence, it is a speech in waiting. In many. ways this is literally true. There are important matters which I would normally wish to discuss with the membership, but today I am not yet able to do so.

Fortunately, one of the healthiest changes over the last five years has been the improvement of communication between the Society and its members. I believe it is correct to say that before the Fisher Report in 1980 there had never been a communication directly mailed from the Chairman and Committee of Lloyd's to all the members. Today members are kept much more closely in touch through the monthly Lloyd's of London Newsletter, the Lloyd's Log and occasional Chairman's letters.

We have also updated our election procedures. Under the old Act and indeed until 1983, members had to attend in person if they were to vote and therefore a General Meeting in November was necessary. Our present byelaws provide for postal voting, but still require a General Meeting on election day. The Council believes that this second General Meeting is probably no longer necessary given the increased level of communication and the changes in election procedures to which I have referred. It is therefore our intention to change the byelaws so that we do not necessarily have to hold a meeting in November. The change will be that there will be no imperative to hold such a meeting, though clearly it is up to the Council of the day in any given year to decide whether they wish to call such a meeting or not. A General Meeting of course gives the membership an opportunity to put questions to the Council. I hasten to say that this is not an invitation to the membership at large to change the present practice whereby such questions are a rarity. But the Council must always be mindful of the consequences of a General Meeting in terms of market disruption. To close the market, even for a few hours, at the busiest time of year is something which we may well in future be able to avoid. We shall see.

There are two topics in particular that I would wish to discuss with you, but which I cannot. The first is the work of the Committee under the chairmanship of Sir Patrick Neill. This Enquiry was appointed, as you will recall, in January of this year to look into the workings of the new Lloyd's under the Act of 1982.1 do not now expect that the Enquiry's report will be available until next month and it would therefore be quite inappropriate for me to hazard a guess upon any of its conclusions. At this point I have however two things to say. The first is that we shall of course look with the greatest care at whatever proposals the Neill Committee puts forward for the better governance of the Society of Lloyd's. Your Council will endeavour to implement as soon as possible any suggestions which in the Council's judgement will benefit the Society as a whole. Second, I wish to draw to your attention the enormous amount of management time (and incidentally of course, of money) which the response to the Neill Committee has involved. It is clear that the Neill Committee has-and I welcome this-taken the duties placed upon it with the utmost seriousness. The enquiry into our affairs has been detailed as well as lengthy. This is all to the good in that no one who might be so minded will legitimately be able to accuse the Enquiry of any superficiality in their approach. Nor is the reference to the management time involved intended in any way as a reproach-but merely as a statement of fact. As .1 have said before, those of us involved with the reforms of Lloyd's over the last six years have welcomed the opportunity to explain our acts and attitudes to impartial outsiders: nor do we begrudge the time and effort which it takes to do so.

However, it must be realised that the time devoted to preparing and presenting our submissions to the Enquiry was time which would otherwise have been spent on other regulatory issues. At the beginning of this year we decided that the information we give to Names appeared to lack clarity and cohesion. A great deal of work has now been done in this area both by the Corporation staff and the underwriting agents. The Council should soon be in a position to approve new documentation. The related question of identifying the most helpful way in which to publish agents' charges has also been accorded a high priority. However, further examination of proper regulations for Lloyd's brokers, for example, has had to be postponed.

The second topic of great moment is clearly the question of a possible resolution of the affairs of the PCW syndicates. At present I must limit my remarks to repeating that I believe that a settlement of these issues is possible and that, if on the right terms, such a settlement will be to the very great benefit of the Society. The principles guiding the Council in their approach to this matter remain unchanged. In short, these are that there must be a just and significant contribution from the Names involved; there must be a just and significant contribution from those whose actions in any way impacted upon the seriousness of the position, and both of these matters must be resolved before there can be any question of contribution by Lloyd's as a whole. There are perhaps two other matters upon which I should briefly touch. The first is the opening ceremony on 18 November. To those of you here today who have been lucky enough to obtain a place through the ballot, I would say this: I hope that you will enjoy what we shall do our best to make a joyous occasion-an occasion for essentially a family party. We have deliberately restricted as far as possible the number of notable persons attending. While of course our builders and architects are represented, we took the view that the ‘topping out' ceremony was particularly the occasion when their great efforts were recognised. I trust that you will enjoy the occasion and feel able to stay for the champagne buffet which will be provided on all the galleries. Her Majesty The Queen and HRH The Duke of Edinburgh will arrive at 11.00 a.m. and, after a short ceremony, will tour the Room before lunching with the. Council and other guests. Her Majesty will tour the ground floor and the third gallery and His Royal Highness galleries one and two. Both will separately visit the exhibition area and, together, the Old Library. Each of you attending will receive very precise instructions which I know that you will be good enough strictly to adhere to. You are asked not to depart before the Royal party has had a chance to say farewell in the Room at about 12.30 and, as I have said, I hope that as many of you as wish to will stay to enjoy the buffet provided.

This must be an appropriate day to mention the ‘Big Bang'. The way in which this matter has been dealt with by the media clearly indicates that this is perceived as a revolution which will affect the whole City.

Indeed, I am therefore often asked what the effects are specifically for Lloyd's. I am tempted to answer that what is happening at the other end of the City is almost wholly irrelevant to Lloyd's. In a literal and narrow sense I think that this is true. Not only that, but the changes at the Stock Exchange are a direct reversal, as has often been noted, of what Parliament required Lloyd's to do. There, the separation of function between jobber and broker has been abolished. Here, the separation of function between underwriter and broker has become obligatory. Completely contrary courses may well be right in different circumstances. I am sure that Parliament got it right, even if arguably for the wrong reason, for Lloyd's.

I think that we should be encouraged by the regeneration of the underwriting agency system which will increasingly benefit from its new found independence. The task which we set ourselves (it was not imposed by Parliament, which only insisted that divestment must take place before July 1987), was to approve by re-registration every single underwriting agency at Lloyd's. I believe that this major and detailed reform which is now nearing completion, will result and to an extent has already resulted, in a reformed and much improved underwriting agency system.

It is as important to Lloyd's, as it is to the rest of the City, that self regulation should both work and be seen to work and we must all wish Sir Kenneth Berrill good fortune in his efforts at the Securities and Investments Board. I must say, speaking from my experience here, it is difficult enough in a harmonious market dealing essentially with only one product to establish the correct balance between strangulation of the market on the one hand and effective regulation on the other. How much more difficult will it be in the markets for which the SIB bears the ultimate responsibility with their multifarious and disparate activities?

But even if it is true in the narrow sense that ‘Big Bang' has nothing to do with Lloyd's, when we look at its underlying purpose as expressed by the chairman of the Stock Exchange there are more similarities than one might think. He recently and cogently put forward the view that the changes at the Stock Exchange were to enable it to take its rightful place on the international scene.

In a recent article he looked forward to the tough actions and hard commercial acumen which will be needed to keep the London Stock Exchange and its surrounding financial markets at the head of the international league. Herein lies the parallel of the City financial markets post the ‘Big Bang' to Lloyd's. Seventy-five to eighty per cent of our business comes from overseas and for years we have been struggling to maintain our leading position in the international market. It is a hard school indeed where ruthless competition prevails and we shall not keep our position unless we maintain at all costs our strengths. These are flexibility, by which I mean the ability to solve other people's insurance problems; capacity, by which I mean the ability to put together large amounts of coverage and above all, a strong policy, by which I mean the reputation and the ability always to pay any valid claim on a Lloyd's policy. We can look ahead with some confidence from our present position but in such an international business it is never possible to look far ahead and we must always be ready to react to circumstances as they are. We must continue to try to increase the number of countries where our underwriters may trade. All of us must be dismayed by the restrictions in so many countries, and in so many classes of business, which so often effectively prevent us trading except by way of reinsurance.

We hope for increasing ability to trade on a freedom of services basis and, in particular, we await with interest the result of Schleicher and other cases which we so fervently hope will be milestones on the road to free trade in Europe. Meanwhile, we take pride in the contribution of Lloyd's and our brokers to the UK balance of payments which amounted in 1985 to £1,872 million, an increase of 70% over the previous year. I promised you a short speech but I must refer to one sad event before I thank my colleagues for all that they have done. I refer of course to the death of Michael Barry, who was for many years our valued representative in South Africa. His death, just before his retirement from a post, which he had filled with such distinction for so many years, came as a great shock and sadness to all of us who knew him and valued him as a friend and colleague;

May I close by thanking all the members of the Council for their incredibly hard work and continual support and the staff of Lloyd's, led so ably by our Chief Executive, for the dedication of their efforts to build a better Society.

5 Nov 86

Council of Lloyd's elections

In the postal ballots held at Lloyd's on 5th November 1986 the following members were elected to the Council of Lloyd's:

Working Members


Frank Barber


Alan Francis Jackson


Stephen Roy Merrett


John David Rowland

External Members


Dr. Alcon Charles Copisarow, DSc.


The Lord Kimball

6 Nov 86

Toplis & Harding (Market Services) Ltd letter to Insurers at Interest, signed by R A G Jackson.

(Don't have).

7 Nov 86

The Financial Services Act of 1986 receives Royal Assent.

A new section introduced by the Financial Services Act 1986, Section 41 states that:

"Inspectors ...... may at any time in the course of their investigation, without the necessity of making an interim report, inform the Secretary of State of matters coming to their knowledge as a result of the investigation tending to show that an offence has been committed."

All intermediaries handling life, pensions and investment products are subject to the requirements of the Financial Services Act 1986.

11 Nov 86

Lloyd's publishes the Findings of Disciplinary Proceedings, case No. 8502/3, "Fidentia", involving B C Peers, Miss M M Brooks, J R Parry & F C Raven.

17 Nov 86

The Superfund Amendment Reauthorization Act (SARA) (Public Law Order No. of the USA) signed.

SARA imposed significantly more stringent remedial clean up standards and earmarked $8-5bn over five years for accelerated enforcement of its provisions. While CERCLA defined "clean up" generally in terms of removal of the hazardous substances, SARA calls explicitly for removal and remediation, which greatly increases the costs for clean up of any identified site.

Nov 86

Attorneys letter to Merretts. Re: Superfund Amendments and Reauthorization Act of 1986.

(The letter stated the following:-

The Act will significantly increase potential liability exposure of the insurance and reinsurance communities. The potential aggregate exposure is difficult to quantify at present. It is likely to depend on judicial interpretations. Congressional sources indicate that the ultimate cost of the various clean-up programmes will be between $20 billion and $100 billion. Further recoveries of a substantial portion may be sought from insurers. Assuming, for the purposes of discussion that 75% is recovered, the loss by industry might range from $15 billion to $75 billion. In time, further recoveries of a substantial portion of that sum may be sought from insurers, and , even if discounted by a factor of 50%, the net potential aggregate exposure of the insurance and reinsurance industry may range from $7.5 billion to $37.5 billion. While these figures cannot be predicted with accuracy at this time, it is clear that, given the potential exposure, vigorous cost containment activities and close monitoring of clean-up site expenses will be significant in reducing the aggregate exposure. Equally important will be protection of contract rights and defences).

The Act is likely to be viewed as a significant, pro-enforcement statute. Its effect will clearly be to increase the pace and level of clean-up activity against persons and companies with environmental exposure..


The Act will significantly increase the potential liability exposure of the insurance and reinsurance communities. The potential aggregate exposure is difficult to quantify at present. .. likely to depend on the judicial interpretations.... Congressional sources indicate that the ultimate cost of the various clean-up programmes will be between $20 billion and $100 billion.... further recoveries of a substantial portion .... may be sought from insurers. The amount of actual recoveries from American industry will be somewhat less due to enforcement difficulties, insolvencies, and other factors. However, assuming, for purposes of discussion, that 75% is recovered, the loss by industry might range from $15 billion to $75 billion. In time, further recoveries of a substantial portion of that sum may be sought from insurers, and, even if discounted by a factor of 50%, the net potential aggregate exposure of the insurance and reinsurance industry may range from $7.5 billion to $37.5 billion. While these figures cannot be predicted with accuracy at this time, it is clear that, given the potential exposure, vigorous cost containment activities and close monitoring of clean-up site expenses will be significant in reducing the aggregate exposure. Equally important will be protection of contract rights and defences.

Nov 86

The Council of Lloyd's has approved the transfer of the management of the 1983 year account business of WMD Underwriting Agencies Ltd to Additional Underwriting Agencies (No 3) Ltd (AUA3).

Under this arrangement, which is to take effect on a date to be agreed and will not affect the account business of subsequent years, AUA3 will also act for WMD's direct Names in the capacity of Member's Agent.

The move arises from the syndicates' involvement with syndicates formerly managed by PCW Underwriting Agency whose affairs have been managed by AUA3, under the Substitute Agents Byelaw since 1985.

Members' agent's functions of Upton Underwriting Agencies Ltd for 1985 and prior years of account have also, with the approval of the Council of Lloyd's, been taken over by AUA3. Upton Underwriting Agencies Ltd has not sought re-registration as a Lloyd's underwriting agent.

24 Nov 86

Additional Underwriting Agencies (No. 3) Ltd letter to PCW Names


When I wrote to you in May last, I mentioned that three important new documents will be introduced and signed by every Underwriting Member who participates in the 1987 Underwriting Account. These new documents are:-

  1. A Standard Form of Underwriting Agency Agreement
  2. A Revised Premiums Trust Deed and
  3. General Undertaking

Under byelaws passed by the Council of Lloyd's every Member who participates in the 1987 underwriting account is required by Lloyd's to execute these three new documents and agree with their provisions. In certain respects they are retroactive and could detract from your rights against potential defendants in the "PCW affair". Therefore, we advise Names who do not intend to underwrite for the 1987 account that they should not sign the new documents. Those Names who have decided to underwrite next year should be protected as far as possible and on their behalf, we have sought from Lloyd's, assurances that Names' existing rights will not be diminished by their signing the new documents . Lloyd's have stated that it was not their intention to deprive Names of any such rights in connection with the PCW affair and have therefore agreed to give an assurance on this point in the form of the letter enclosed.

This letter covers all of the aspects of our concern, except one matter which was raised by the advisors to the PCW 1985 Names Committee. This point concerns the provisions in the new documents which purport to give Lloyd's policyholders improved rights against Names' Premium Trust Fund monies; it affects only a relatively small proportion of those funds: the part held in sterling. Following representations made on this point, Lloyd's has not been prepared to vary these provisions, but the advisors to the PCW 1985 Names Committee and we consider that in view of the small proportion of total funds affected, Names should sign the new documents if they wish to underwrite next year.

Those Members who intend underwriting for 1987 will have received the three documents mentioned above from their Members Agent. When returning the signed copies to your agent, you should bring to the attention of your agent the letter from Lloyd's which is enclosed, in order that they may be fully aware of it and appreciate that the documents governing your underwriting for 1987 will be varied by virtue of this letter. Therefore, if you wish to underwrite next year please sign and return the documents to your Agent as soon as possible and in any event before 1st January, 1987. Also, we enclose an extract from a letter issued by Lloyd's which describes the main changes in the new Premiums Trust Deed.

If there are any aspects upon which you would like further advice before deciding whether to recommence underwriting and signing the new documents, please let us know. Alternatively, it is a matter to which you may wish to refer to your other professional advisers.

Lloyd's Premium Trust Deed - Introduced for 1987

Lloyd's have advised that the enclosed Deed which will be introduced for all Members participating in the 1987 account, includes the following changes:

  1. The Deeds now reflect current Market practice whereby it is common for Names to underwrite through Syndicates the Managing Agents of which are not the Names' Members' Agents. The Premiums Trust Fund will, in these circumstances, comprise a number of sub-trust funds operated at Managing Agent level;
  2. An Underwriting Agent may not itself hold the Premiums Trust Fund assets as a Trustee.
  3. The range of permissible investments may be limited by direction of the Council;
  4. The Deed reflects the terms in most, if not all, Agency Agreements, under which:-
  1. the Name entrusts his Agents with all investment powers relating to the Premiums Trust Fund; and
  2. interest and dividends are distributable at the same time as any underwriting profit for the year of account to which they are allocated.
  1. Personal Reserves may only be released where they are not required to meet known or estimated liabilities;
  2. The Lloyd's Deposit and Special Reserve Fund assets are specifically excluded (because they are held under separate Trust Deeds).
  3. In appropriate circumstances, the Council is able to appoint and remove Trustees.
  4. In appropriate circumstances, Trustees have the discretion to transfer surplus funds to the Trustees of any other Premiums Trust Fund of the Name;
  5. The Council is empowered, subject to the approval of the secretary of state, to continue, to set up and to vary the terms of overseas trust funds (e.g. LATF);
  6. Subject to the consent of the Secretary of State, the Council is empowered to vary or revoke the Premiums Trust Deed, without being requested to do so by the Underwriting Agent or the Name:
  7. The appointment of, or changes in, Trustees must be advised to the Council by the Members' Agent or Managing Agent concerned.
  8. For the purpose of winding up Names' underwriting affairs, the Premiums Trust Fund is capable of existing for the maximum period permitted by law.
  9. To ensure recognition of the purpose and effect of the Premiums Trust Deed, certain rights are given to policyholders in specially defined circumstances.

Nov 86

Mr Brandon Gough, retiring nominated member of the Council of Lloyd's has been awarded Lloyd's Silver Medal for his service to the Society.

Mr Gough has been a member of the Council since its inception in 1983. Mr Peter Miller, paying tribute to Mr Gough's work, recalled that the Fisher Working Party had envisaged that the nominated members of the Council would be truly independent and a stature to make a distinctive contribution to endeavours.

The vision had, Mr Miller said, been fully realised in the exemplary work and wise advice of Mr Gough during what was a critical period for Lloyd's. His work as Chairman of the Accounting and Auditing Standards Committee had been of fundamental importance to the reform of the underwriting agency system and many other areas.

The award ceremony was attended by the Deputy Governor of the Bank of England, Mr George Blunden.

Nov 86

At a recent press conference Chief Executive of Lloyd's, Mr Alan Lord -

reported on the current situation regarding the re-registration of underwriting agencies. Implicit in the Lloyd's Act 1982, is the severance of ownership and control links between Lloyd's brokers and managing agents. Under new procedures, all agents are required to register by July 1987 and will be the subject of strict scrutiny of each agency's arrangement for management control, day to day operations and financial standing.

Mr Lord reported that 200 agents had been registered by early December with another 20 having received approval subject to meeting certain conditions. Eleven applications are currently in progress. It is expected that by July next year there will be 242 registered agencies compared with 306 in 1984. Factors contributing to the fall in numbers include mergers, acquisitions and consolidation of underwriting agencies within existing group structures.

Figures suggest there has been little tendency towards the development of ‘mega agencies' predicted by the press with the capacity of the top ten managing agents remaining constant at 41 per cent. The capacity of the top ten members' agents has shown little fluctuation increasing to 33 per cent from 32.1 per cent in 1984. This stability in the larger agencies and the disappearance of many smaller agencies is seen as an indication of a healthy growth in the middle of the market.

0 Dec 86

The Committee of Lloyd's issued the 1988 Financial Requirements for Members.

Minimum means £100,000 up to £250,000 maximum;

deposit £50,000 up to $260,000 maximum;

overall premium limit £250,000 up to £1.3m maximum.

All Members resident and domiciled in the UK are required to provide a Lloyd's deposit of 20% of their overall premium limit and to show means of 40% of that limit. Members resident or domiciled outside the UK must show the same level of means as those in the UK but are required to provide a higher Lloyd's deposit equal to 28% of their overall premium limit. The deposit requirement is reduced from 25% to 20%, maximum premium limit increased from £1m to £1.3m.

0 Dec 86

Reactions: Who pays for pollution by Dr. Malcolm Aitken

Raised the question of whether:- "..environmental problems pose as big a problem as asbestos for the insurance industry…"

The article [by Aitken of Toplis and Harding (Market Services)] cites the OTA clean up costs estimate of over $100 billion and then goes on to discuss the likely increase that could result from the passing of SARA (the Superfund Amendment Reauthorisation Act 1986) which:-

".. could raise the average clean up costs per site from around $9M to between $35 - $50M; a recent EPA statement says new standards for ground water clean up could push average per site costs up to $300M - $600M."

Dr Aitken then commented:- "the insurance industry doesn't have that sort of money; if someone is intent on tapping the insurance industry for that sort of money, the insurance industry is going to go bankrupt."

And from this he deduced that liabilities cannot be quantified:- "until the law is changed, I don't think there is any chance that there will be a real environmental insurance programme in the US, because the liabilities are such that you can't really quantify them."

5 Dec 86

Fischer & Porter Co. v. Liberty Mutual Insurance Co., 656 F. Supp. 132, Eastern District of Pennsylvania, 5 December 1986. Court held failure to remove tank after its useful life was equivalent to accepting risk of leakage of toxic chemical. Burden of proving sudden accidental occurrence exception fell on the insured.

8 Dec 86

The Nominated Members of the Council (Remuneration) Byelaw (No. 6 of 1986, 8 December 1986).

Dec 86

Letter from Attorneys to the Environmental Claims Group. Re:

Summary of Developments in the Law Respecting Environmental Claims Coverage Issues. Introduction.

In 1984, we prepared a summary of case law respecting key coverage issues under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"). we are in the process of revising our 1984 summary. In the meantime, we report briefly on developments in the law respecting coverage for environmental claims under general liability policies.... We caution that even though a particular court decision may appear to be favourable, the federal system of the United States makes it difficult to determine whether a given court's decision applying the law of a state will be either binding precedent or even persuasive authority for courts of other states addressing the same issues. Also, many cases are litigated in federal court which apply particular state's law. While technically not binding on the state court in question, the federal court decisions usually, but not always, are followed by the state courts in question. The following is a summary of majority positions, minority opinions and perceivable trends in the courts respecting the foregoing coverage issues. We have attached a chart of significant recent decisions, keyed to the various jurisdictions which have addressed the issues and to the applicable state law chosen...

Dec 86

Report from Attorneys re: Shell litigation.

Brief summary: difficult to assess the eventual liability of Shell - one claim between $1,000,000,000 and $2,500,000,000.

10 Dec 86

Letter from the PCW 1985 Committee: To Members of Syndicates 918, 940 and 157 ("the Syndicates") managed by Richard Beckett Underwriting Agencies Limited - formerly PCW Underwriting Agencies Limited - for years of account

1979 onwards who have contributed to the funds of the PCW 1985 Committee.

I write to tell you about recent developments and in particular to tell you about certain steps we feel obliged to take to protect our supporting Names' interests in respect of U.S. claims

and to seek your support in connection with those steps.

1. Names who wish to continue to underwrite or to return to underwrite

You should by now have received AUA 3's letter of 24th November enclosing a copy of the undertaking from the Chairman of Lloyd's containing certain assurances intended to cover you against any prejudicial effect on your PCW claims which might otherwise have resulted from your entering into the new Agency Agreement General Undertaking and Premiums Trust Deed. Our solicitors were closely involved with AUA 3 in negotiating with Lloyd's these assurances. As AUA 3 point out one area of concern was not agreed between Lloyd's and the DTI namely relief from the increased exposure by reason of policy holders being put in a position under the new Premiums Trust Deed whereby they could have certain rights over premiums held thereunder. The issues are complex but having regard to AUA 3's assurance that the PCW premiums which they hold will not be subject to the new Premiums Trust Deed, to the fact that our solicitors have told Lloyd's that certain pooling provisions of the new Premiums Trust Deed will not by reason of the letter from the Chairman of Lloyd's become effective, and to the fact that the new Premiums Trust Deeds only affect sterling premiums, our solicitors agreed with AUA 3 that this was not a material point which should deter Names who wish to continue to underwrite or to return from doing so. We do stress however that the decision of any Names to continue to underwrite or to return to underwrite is their own. Names should not rely on there being a solution of the PCW Affair without active litigation.

2. Settlement discussion

AUA 3 and their advisors have been in serious discussion with Lloyd's on the mechanism of any settlement including the tax implications thereof. There has not, we are told, been any discussion as to the amount of any settlement proposal. The Steering Committee's without prejudice position, of which Lloyd's are fully aware, remains that Names are seeking a full indemnity for their alleged losses, as well as for their fees and expenses incurred in protecting themselves and formulating and pursuing their claims; and of course there are the U.S. claims referred to below.

There is talk of Lloyd's announcing a proposal before the end of the year. We have an understanding with AUA 3 that no serious proposal would be considered by them which was not fully discussed with the Steering Committee and its advisors and we have always formally reserved on behalf of all our supporters their rights to challenge any step towards settlement AUA 3 might try to take on its own.

3 . U . K Claims

We continue through our solicitors to work closely with AUA 3, their advisors and Price Waterhouse on amendments to the U.K. draft statement of claim. We apologise if this seems a boring refrain which we have been repeating throughout the year. We are informed by our solicitors that further research into the affairs of the PCW Syndicates continues to produce further damaging and undisclosed evidence of fraud and accounting manipulation.

4. U. S. Claims - Background

In May we wrote to you about work being done through the backing of a group of our supporters ("the U.S. action group") in connection with U.S. claims not available to you in the U.K. That initial work was funded by the U.S. action group.

Since then our solicitors have been working closely with AUA 3 and their solicitors and two U.S. law firms on the preparation of a U.S. complaint. There have been several visits to New York and considerable progress has been made. AUA 3 have been paying the fees of the U.S. lawyers. However the understanding with AUA 3 has always been that if they did not wish to adopt the U.S. claims on behalf of all Names then the U.S. action group and the Steering Committee on behalf of its supporters should receive the benefit of the U..S. work.

The nature of the U.S. claims

With a view to ensuring that these remain the subject of solicitor and client privilege in contemplation of litigation these are briefly summarised in the accompanying letter from Ashurst Morris Crisp.

The limitation questions

The letter from Ashurst Morris also touches on certain limitation issues. In the light of that advice Ashurst Morris have approached AUA 3 to ask them to obtain a "standstill" for limitation purposes from all the potential defendants to U.S. proceedings. This is now in hand and we understand that AUA 3 are hopeful that such standstills will be obtained within a few days. However as we write neither AUA 3 nor ourselves can be sure that all such standstill agreements will be obtained. In that event the only practicable way of Names protecting their U.S. rights would be for them to issue proceedings in the U.S. Obviously we have asked AUA 3 to do this for you. But we cannot be sure that they will do so before the end of the year and it is our solicitors advice that it would be only prudent to do so by then with a view to protecting the U.S. Claims. Accordingly we are endeavouring to make arrangements for the U.S. Complaint to be ready for filing by the end of the year. If by Monday next, 15th December we have not heard from AUA 3 that satisfactory U.S. standstills have been agreed or that AUA 3 will issue proceedings on behalf of all Names by the end of the year we shall write to you enclosing a short form for immediate signature and return to us by those of you who wish to be party to the proceedings in the United States and seeking contributions of at least £500 per Name for that purpose. If any of you intend to be away please write or telephone beforehand.

5. Effect on the U.K. Standstills

The bringing of the U.S. proceedings will necessitate the bringing of the U.K. proceedings against all potential defendants. We would expect that AUA 3 would do this on behalf of all our supporters. Were this not to be the case and were there to be any danger of you losing the benefit of the UK standstill arrangements then we would commence the U.K. proceedings on behalf of all our supporters and write to you as soon as we had done so.

10 Dec 86

Ashurst Morris Crisp letter to the PCW 1985 Steering Committee and its contributing Names

You have asked us as your solicitors to describe briefly the nature of the principal claims not available in the United Kingdom that we understand may be brought by PCW Names in the United States.

We are not U.S lawyers nor competent to advise on U.S law. This letter is based on the advice given by the U.S law firms who have been consulted. It is necessarily simplistic. The underlying law and facts are complex.

  1. We understand that the U.S claims are open to all PCW Names not merely those who are U.S resident.
  2. We understand that the potential defendants including Richard Beckett Underwriting Agencies Limited formerly PCW Underwriting Agencies Limited ("PCW"), Lloyd's, the Sedgwick Brokers, Minet, Alexander & Alexander Services Inc. and the Howden Brokers, Needler Heath Limited, P.W. Kininmonth & Co. Limited, Steel Burrill Jones Limited and Arthur Young are thought to have or to have had sufficient U.S business connections for U.S jurisdiction to apply.
  3. The first claim would be against various of the Defendants under the Racketeer Influenced and Corrupt Organisations Act (Rico) for treble such amounts as would compensate Names for their alleged proportion of their alleged losses of at least the equivalent of £135 million as well as for exemplary damages.
  4. The question of joining Lloyd's as a Rico defendant would be particularly the subject of further discussion with U.S lawyers. Lloyd's would be joined if this was felt to be correct in law on the evidence thus far available. If not, Lloyd's would be potential Rico defendants pending further discovery and the obtaining of depositions from past and present officers and Committee Members of Lloyd's.
  5. The second claim to which Citibank N.A. as trustee of Lloyd's American Trust Fund would also be party would be for a declaration that certain of the Rico defendants and not Names are liable on U.S policies written by PCW and for a declaration that those Rico defendants are so liable and that there be released to PCW Names out of Lloyd's American Trust Fund the deposits accumulated premiums and interest in connection with such policies.
  6. The third claim (which would not necessarily be embraced in the main Complaint) would be that certain of the Rico defendants be the subject of an order prohibiting them from engaging in any insurance business involving United States commerce in certain U.S. States.

You have also asked us briefly to indicate our views on U.S limitations questions. These have been the subject of extensive privileged and confidential correspondence and discussion with the U.S lawyers. We believe that the most pessimistic view should be taken on any limitation question. Accordingly it is our advice (based on the U.S advice and such factual research as we have been able to make) that certain of the U.S. claims may imminently become statute-barred. Accordingly our advice is that the prudent way of protecting this position is to obtain U.S. limitation standstills to the satisfaction of the Steering Committee, or to commence proceedings as soon as possible and in any event not later than the end of the year. At your request we have so informed AUA 3.

Lastly we would remind you that under the Protection of Trading Interests Act any multiple damages judgment would not be enforceable in the United Kingdom and that any of the defendants who are U.K. corporations or firms may seek to claw back such amount of any multiple damages award as was in excess of the amount of compensation for loss included in any damages.

17 Dec 86

Financial Times: Unease at Lloyd's self-regulatory system

There was a note of irritation in the words of one member of the ruling Council of Lloyd's of London, "There'll be no cover-up at Lloyd's," he said.

His tone of voice carried a thinly-veiled hint that the Neill inquiry - set up by the Government last January to scrutinise self-regulation at Lloyd's - has concentrated minds wonderfully.

Born out of Parliamentary controversy over the scandals that have surfaced at Lloyd's since 1982, the inquiry is not now expected to report publicly at least until the second half of next month. The timetable for publication has partly been dictated by Mr Paul Channon, Trade and Industry Secretary, who is unwilling to see it appear when the Commons is in recess.

The imminence of the report is only one explanation for a sense of unease now felt by some members of the Council of Lloyd's. The unease manifests itself most clearly when outsiders challenge them about the apparently slow pace at which the market's regulatory procedures work.

It will hardly have been reduced by the inconsistent but widespread public speculation this week over the precise fate of an informal review into the connections between Sir Peter Green, the market's former chairman, and a Cayman Islands insurance company.

The review began at least two years ago but as a matter of general policy Lloyd's still refuses to comment on whether disciplinary proceedings have resulted.

The unease felt by some council members has two components. First, there is a general sense of exasperation at the difficulty Lloyd's has had in convincing the outside world that it means business in clearing away a legacy of alleged market misconduct.

Lloyd's has for instance, made a root-and-branch reform of its standards for reporting syndicate accounts. According to Professor Richard Macve, an academic authority on Lloyd's accounting: "Openness and disclosure are now the order of the day instead of exclusiveness and secrecy."

Central spending on self-regulation has also increased from £3.5m in 1981 to £12m this year. However, Lloyd's remains shadowed by outsiders' suspicions that it has not removed the root causes of pre-1982 scandals such as the PCW affair.

PCW involved the misappropriation of at least £40m belonging to underwriting members of the market - but it developed out of practices apparently not uncommon in the market before the Lloyd's Act reforms of 1982.

It cannot finally be laid to rest until Lloyd's completes negotiations aimed at finding a formula for meeting the £380m gross underwriting losses facing the 400 worst-affected PCW names.

That will involve an agreement with the names - whom Lloyd's wants to contribute to the settlement - and with up to 40 insurance interests, including leading brokers, which the names have threatened to sue. So far, the smart money at Lloyd's is saying that while Lloyd's may have a "conceptual" or "skeletal" framework for doing that by Christmas, detailed talks could last well into next year.

The second cause for unease among some council members is more fundamental and could outlive PCW. Behind it is the fear that the disciplinary proceedings which Lloyd's has so far completed and made public have revealed some basic flaws in the principles underlying the market's law enforcement mechanism.

On the face of it, the mechanism is logically simple, if arduous in practice. It has also been successful, for instance in the final resolution last month of the "Fidentia" affair, in which syndicate funds had been improperly channelled into an offshore insurance company.

Between January 1983 and this November Lloyd's disciplinary committees completed 16 cases all arising from alleged misdeeds dating from before 1982, and sometimes as far back as the late 1960s and involving 34 defendants. They resulted in 10 expulsions from the market, one total exclusion, one life-time exclusion from doing business at Lloyd's, 15 suspensions - two of them for life - 10 reprimands and three fines.

In turn, the machinery seems clear - at first sight. Under the 1982 Act, Lloyd's set up an investigations steering committee, made up of council members.

Its task is to scrutinise allegations of misconduct and pass its findings to the council - which then, if necessary, hands them to a disciplinary committee chaired by Mr Edward Walker-Arnott, a leading City lawyer and council member. A three-person subcommittee headed by a barrister then conducts actual proceedings which can lead to penalties on Lloyd's members or brokers.

However, problems surfaced in some of the cases completed up to November. One prominent figure at Lloyd's said yesterday: "You can sum up the difficulty in two words: natural justice. If you have ever studied philosophy you know that it doesn't exist."

Quite simply, the central weapon in the Lloyd's armoury is the December 1983 Misconduct, Penalties and Sanctions By-law and arguably, it has an ‘Archilles' heel. It allows Lloyd's to prosecute offenders retroactively for pre-1983 offences - uphold this twice in the High Court - but it sets criminal law although Lloyd's has had to standards of proof and insists on satisfying "natural justice." Both provisions arose from determination by Lloyd's to place its findings beyond challenge.

There have been two results. First, the process can be protracted by the ability of wealthy defendants from within Lloyd's to fund a lengthy legal battle against disciplinary proceedings.

But, second, one fear is that at present the disciplinary proceedings leaves too much scope for plea bargaining by defendants.

Meanwhile some figures at Lloyd's are quietly thankful that Mr Brian Sedgemore, Labour MP for Hackney South and Shoreditch, has not repeated last year's political campaign against it. One said: "Parliament has other things to worry about. Thank heaven for Nimrod and the Awacs."

31 Dec 86

The Alexander Howden M J Harris Non-Marine Syndicate 947 - Run-off .

Year End

Paid Loss

Outstanding Loss

Incurred Loss

Paid in Year






31 Dec 86

Toplis & Harding (Market Services) Ltd. letter to "Insurers at Interest" from R A G Jackson, Chairman of the Asbestos Working Party.

With the approach of the year end I would like to provide you with an update on the developments that have been taking place in the Asbestos Claims Facility and other significant areas as they impact upon the Markets interest.

As I reported in my last letter dated 6 November 1986 there was a need to change the title of the Service Company to more adequately reflect the nature of the business which it is processing on behalf of the Market. As you will observe the necessary changes have been made and the Service Company will now be known as Toplis & Harding (Market Services) Limited.

As you may have observed from recent press reports Wade Coleman, President and Chief Executive Officer of the Facility, recently tendered his resignation to enable him to pursue other interests. The Board have set up a search Committee who are presently engaged in interviewing prospective candidates and I hope shortly to be in a position to provide you with details of the individual who has been selected to succeed Mr Coleman. In order to ensure that the Facility operations continue in an orderly manner, members of the Board are, on a temporary basis, meeting at two weekly intervals to ensure that business decisions are addressed in a timely manner. Larry Fitzpatrick, General Counsel - Law, has been appointed as the co-ordinator between the Board and various sections of the Facility to further ensure smooth operation pending appointment of a new Chief Executive Officer.

In an earlier letter I reported to you that the London representatives on the Board of the Facility were reasonably confident that it would be possible for the Facility to effect a reduction in the surcharge which has been running at 10% of amounts expended in respect of indemnity and defence costs. I am pleased to advise you that at the December Board meeting the Treasurer proposed to the Board that the surcharge be reduced to 8% with effect from 1 January 1987 and this proposal received the Boards approval. You will have observed from year end reports now circulating in the Market that our Attorneys had been requested to make their projections based upon an 8% surcharge and I am pleased to confirm that our assumptions have now been confirmed.

May I now turn to the status of year end reports. Something in excess of 250 year end reports relating to direct and reinsurance involvements have been received by Toplis & Harding (Market Services) Ltd. Broadly speaking our U.S. Representatives have adhered to the time table which has been set but inevitably a considerable number of reports were received in the early part of this month. The majority of the reports have now been circulated to the Market and I am advised by Ann Seavers that the final reports will be released within the next week.

In my last letter I advised you of the developments that were then taking place in the United States to address problems raised by a group of U.S. Reinsurers. Since that time there have been further discussions between certain companies and Guy Carpenter and I am pleased to report that at long last there appears to be slight progress in obtaining support to the views advocated by the London Market. At the present time Guy Carp[enter are involved in discussions with Reinsurance Corporation of New York who are also representing the interests of certain other reinsurers including the following:

Excess Casualty Reinsurance Association

Philadelphia Re


Gerling Global

Pan Atlantic

Universal Re

Directly I receive advice upon the outcome of the present discussions I shall report to you accordingly. Meantime arising out of the extraordinary efforts made by Winchester Bowring in the European Market, I am pleased to report that there are now an increasing number of European reinsurers accepting claims presented by London Market interests. Although it may be early days to form a conclusion, I am encouraged by the increasing acceptance by the European Market that the "anyone insured any one year" approach by way of the Aggregate Extension Cause is the only practical manner in which to deal with reinsurance presentations. Although a short time ago the Gerling Global had indicated their agreement to consider claims presented under the Aggregate Extension Clause, my latest information is that they have withdrawn their support and proposed to consider each presentation on its own merits. I find their change of course somewhat surprising but quite clearly there will now be a need for participants under Gerling Global's own reinsurance programme to consider whether it is equitable for this Market to continue to respond to claims presented on an aggregate basis.

You may recall that at the commencement of the Asbestos Claims Facility I advised you that the Weavers Underwriting Agency found themselves unable at that time to become subscribers to the Facility. During the past several months those views have changed and that Agency has now obtained the approval of all producer subscribers to their applying for admission as a late entrant. This matter has been considered by the Board and I am pleased to advise that the Board have now admitted the Weavers Agency to membership. As a consequence of this development consideration will shortly be given to inviting that organisation to renew their participation in the Asbestos Working Party.

The present year has seen many significant developments in connection with asbestos related claims, not the least of which was the approval by the Bankruptcy Court of the Johns Manville insurance settlement and Plan of Reorganisation. Although it is inevitable that an Appeal will now be taken, the Courts approval is a further step towards resolving one of the many problems which confront this Market. With the continuing increase in the number of new suits which are being filed it is apparent that we will continue to see an increase in the problems affecting the Market and the Asbestos Working Party.

Finally, on your behalf, I would like to record the Working Party's appreciation to the staff of the Service Company for all the time and effort which they have expended in their endeavours to get to you with the minimum of delay reports from our U.S. Representatives.

31 Dec 86

1986 Year End Reserving

May I now turn to the status of year end reports. Something in excess of 250 year end reports relating to direct and reinsurance involvements have been received by Toplis & Harding (Market Services) Ltd.

31 Dec 86

The Sedgwick Group Annual report 1986 discloses:

  1. Sedgwick at the heart of progress, the rate of innovation and progress in the world highlights the interdependence of insurance and industry. Successful insurance cover is an essential ingredient of innovation and the new Lloyd's Building in London demonstrates the insurance market's confidence in its ability to provide this ingredient and to cater for the future. Lloyd's is the largest international insurance and reinsurance market in the world and Sedgwicks is the largest Lloyd's broker. The success of the market at Lloyd's is dependent on the co-operation between the underwriter and the brokers, responding to the needs of their clients by providing cover. It is this cover that enable constant progress to take place. On the reinsurance side E W Payne Companies Ltd, the largest United Kingdom reinsurance broker is heavily involved in providing reinsurance programmes for underwriters at Lloyd's and in placing business with them. Insurance is, indeed, at the heart of progress and Sedgwicks is at the heart of insurance.
  2. Sedgwick Ltd: Price Forbes ended the year with increased revenue and its formidable marketing capability enabled it to increase its volume of business in London from its North American clients. The acquisition of the Crump Armistead and Owen Companies met specific criteria. All these companies fit well into the overall strategy of the James Group. They strengthen the Group's geographic spread, they enhance key skills, they provide major additional accounts, they give the Group the added dimension of a strong United States wholesale broker, they provide an opening in facultative reinsurance broking and they contribute to ....
  3. Reinsurance: E W Payne Group, the Sullivan Payne Company, is the second largest reinsurance intermediary on the North American continent. .... In the united Kingdom, E W Payne reinforced its position as the pre-eminent reinsurance broker within the London market .... E W Payne companies Ltd is well positioned for future growth with 12 offices and more than 1,500 staff world-wide.
  4. Shareholders: Trans-America Corporation holds 39% of the company and is entitled to 29% of the voting rights at General Meetings.
  5. Sedgwick Lloyd's Underwriting Agents Ltd: 1986 was the first full year's trading for Sedgwick Lloyd's Underwriting Agents Ltd as a Members' Agency following the divestment of the Sedgwick Group's Managing Agencies at Lloyd's .... One of the company's principal objectives during 1986 was to ensure that the three constituent agencies, Sedgwick Forbes, Bland Welch and Wigham Richardson & Bevingtons were consolidated into one agency without any loss of personal service and attention to Names. .... A Members' Agency of this size requires a well organised efficient team to ensure that Names continue to receive personal attention together with sound and well informed advice. The Agency is now organised into 8 teams, each of which looks after the underwriting affairs of a group of Names. They, in turn, are supported by a separate team continually liasing with, monitoring and assessing syndicates in order to provide the best intelligence available for the benefit of their Names. With its enhanced size, specialist taxation computer and investment teams, extensive market connections and first class technical resources, Sedgwick Lloyd's Underwriting Agents is well placed to provide the best possible service to its Names and to contribute to the future success of Lloyd's.
  6. Company Underwriting: Mendip Insurance & Reinsurance Company Ltd, Bermuda.
  7. Contingent Liabilities: Claims have been notified against certain subsidiaries of the Group, together with a number of other potential defendants, on behalf of Names on Lloyd's syndicates formerly managed by PCW Underwriting Agencies Ltd. These claims take the form of a draft Statement of Claim which have been sent to the potential defendants and also a generally endorsed Writ which has been issued, but not formerly served upon any subsidiaries of the Group. The draft Statements of Claim are complex and widely drawn. The claims have yet to be separately quantified but, if they were to succeed at trial, the result could be a substantial liability for the Group. The Group intends to resist such claims strenuously. The Directors understand that the Corporation of Lloyd's is currently negotiating to achieve an overall settlement of this dispute.

Return to main Fraud page
Home | Q & A | Regulation | Litigation | News | Fraud
Contact Truth About Lloyd's