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

Early in 1987, the Council authorised discussions to proceed with the Securities and Exchange Commission in the USA with the aim of establishing the criteria for the admission of US members. These discussions have not vet been finalised: it has been decided, however, that Lloyd's best interests would be served by applying the accredited investor status test for all US candidates. Consequently, agents have been advised that with immediate effect all US candidates must satisfy this test. (LeBoeuf)

GAF became a member of the Asbestos Claims Facility as a late joiner. GAF were regarded as a significant defendant in asbestos litigation and it was therefore reasonable to anticipate that settlement levels within the Facility would increase.

The Report by Sir Patrick Neill QC into Regulatory Arrangements at Lloyd's, published. The Neill Report, appendix 8, refers to the undertaking given to Parliament by the Committee of Lloyd's, by their counsel Mr Boydell, on 20 July 1981 that it would "take all (reasonable) (proper) steps to ensure that the recommendations in paragraph 9.15 and 23.22 of the Fisher Report as to the availability of information are implemented by the Council whether through the making of byelaws or otherwise, as soon as possible and in any event within two years of Royal Assent" (day 7 page 7). At the request of the Chairman of the Parliamentary Committee, Mr Michael Meacher, that undertaking was extended to the recommendations contained in paragraphs 10.29 to 10.31 of the Fisher Report (day 7 page 9). Paragraph 9.15 and 23.22 of the Fisher Report dealt respectively with the disclosure of information to prospective Names and with the formulation and promulgation of Rules in respect of the maintenance of syndicate accounting records, the content and standard of syndicate accounts and their audit.

(A letter from attorneys to the Environmental Claims Reinsurance Group (ECRG) enclosed an updated Priority List, identifying some 90 assureds in respect of pollution claims).

The letter encloses an updated Priority List identifying some 90 assureds.

I attach a copy of a letter from the managers of the above syndicate. They have made an arrangement with the Bellew Parry & Raven Group which manages Syndicate 691 whereby John Macmillan will in future employ the 69l underwriter as a deputy to accept Yacht class business for syndicates 80, 843 and 691 whilst Syndicate 80 underwriters will write general Marine business on behalf of all three syndicates. The management of Syndicate 691 will remain smith Bellew, Parry & Raven.

The 691 experience was poor in 1982 and 1983 but is now on an improving trend and Mr Macmillan feels this is an opportune time to move into the class with an experienced underwriter under his control. The volume of Yacht business is expected to be about 5% of the total syndicate 80 premium income and we recommend members to support the venture.

Ernst & Whinney meeting designed for all UK partners, managers and assignment leaders with insurance clients. Chairman, Nigel Holland. Agenda: "the market" (John Philpott); asbestosis and other latent diseases (Stephen Hill).

Clemtex, Inc. -v- Southeastern Fidelity Insurance Co., 807 F.2d 1271, 5th Circuit. Court applied exposure trigger to case involving silicosis arising under Texas law.

Letter from the Chairman of Lloyd's to syndicate partners, managers and assignment leaders. The Accounting and Auditing Standard Committee (AASC) has formulated the attached guidance on time and distance policies. Further consideration is being given to additional disclosures relating to the reinsurance to close in particular where the run-off of prior years of account of the syndicate has been reinsured. The guidance is attached.

Annual General Meeting of the Institute of London Underwriters: Statement by the Chairman, Mr. D D Lowen.

1986 was a most spectacular year in the history of the Institute of London Underwriters. The painstaking work carried out over a long period by chairmen, committees, Institute management and staff, together with planners builders and contractors, culminated in the successful opening of our new headquarters and marine trading market in Leadenhall in March on schedule. The official opening of the building at the end of April by Her Royal Highness The Princess Anne, Mrs Mark Phillips, set the seal on the determination of all ILU member companies to provide a pleasant and efficient market environment for the benefit of brokers. It is only too apparent that it has been a great success, and the Institute is now poised to expand steadily in world marine insurance affairs and to provide a service second to none.

Coupled with the new market environment a new sense of fraternity and discipline is emerging, with greater emphasis being placed on more efficient organisation within the individual underwriting units. Competent underwriters and their staffs are now highly valued and companies realise they are the key to future profits in what continues to be a difficult trading period.

As we are all to painfully aware, the marine insurance market suffered badly from the poor or mediocre years from 1979 to 1984. For a variety of reasons, however, and despite the continuing world-wide shipping slump, results from the years 1985 are encouraging. All responsible underwriters hope that these improved years will not provoke mindless expansion in the London marine market. Alas, already there are distinct signs of unwarranted rate cutting in other markets, accompanied by the frank admission of those local underwriters that they have to run for international expansion at any cost to survive the contraction in their own domestic business.

The cloud of gloom hanging over shipping poses the greatest challenge to insurers and no one can expect growth in pure marine direct business in the foreseeable future. The prolonged recession means that old tonnage is not being replaced by new, and the average age of fleets is rising steadily. As always happens when the shipping industry is depressed, standards are eroded. The "Flagging out" of major shipping nations into what are often inferior flags is being felt - resulting in the inevitable lowering of crewing and maintenance criteria. Thus, an even greater responsibility is placed on underwriters to help ensure that standards are maintained - for instance, in classification warranties.

One regrettable result of the contraction of direct marine business has been the movement towards extraneous or "grey area" non-marine writing by some marine underwriters, encouraged by many brokers who find their brokerage declining because of diminishing capacity for certain business in traditional non-marine markets. For some time the concept of package business, mainly of an offshore or energy related nature, has been accepted in the marine market but normally restricted to oil and gas exploration and production. There is nothing unusual in that: the London marine market has always offered the finest service and adequate capacity in this area. However, there are problems in the oil and gas industries, aggravated by the fall in world oil prices, and offshore insurance business is now showing a sharp downturn. In this climate, therefore, it is understandable that attempt are being made to include difficult non marine business in these packages as brokers find it increasingly frustrating to market their risks, especially in the USA.

A further development arising from this practice has been the reaction of the London excess loss market in opposition to his trend, and attempts have been made to draft exclusion clauses for excess loss contracts in the areas of land pollution and non-marine casualty liability business.

Many direct marine underwriters of what I might call the old school feel that too much power and resources are flowing into the London excess loss market. Certainly, I agree, too high a velocity of recycling of the market's premium, together with the market's absorption of its own catastrophe cover, is not healthy. Excess loss business utilised sensibly is an idea way to spread risk; but when underwriters rely on it to the event that it dictates their original direct underwriting, then obviously the effect could be serious for London as the major marine offshore market.

In view of the state of the shipping industry, the only viable solution available to the marine insurance market is to continue to improve its underwriting expertise and service. Technical ability and underwriting flair must be recognised and adequately rewarded. We are seeing the same qualities being handsomely rewarded in the City of London's financial services sector, and there is no reason why the insurance industry should lag behind. Every encouragement must be given to the people in our business to train for and achieve recognised qualifications so that underwriting, claims and back-up services are the best we can make them.

The work of the Institute in the year under review encompassed a wide range of subjects. We have continued to impress upon al sectors of the shipping, trading and commercial world the value of the security offered by the Institute policy. We have gone further in making our case to government and other regulatory bodies. The annual visit of an ILU delegation to attend meetings of the National Association of Insurance Commissioners in the United States has become a regular date in our calendar, and I fee! that great progress has been made in making them aware of the of the firm basis of the ILU and its member companies.

We have discussed matters of mutual interest with other market bodies and, in particular, with representatives of the broking houses. These discussions were all aimed at furthering the effective operation of the London insurance market, especially, of course, the marine and aviation sectors. In all these activities the executives and staff of the Institute have played an invaluable part, and I would like to place on record our appreciation and gratitude for the support we have received from them.

i ) the failure to regulate aspects of Agents' charges and to publish a register of such charges as agreed in Parliament during the passage of the 1982 Lloyd's Act;

ii ) defects in the method of dealing with parallel syndicates; and

iii) deficiencies within the standard Agency Agreement.

The identified shortcomings moreover fall within specific areas with which Neill otherwise expresses some satisfaction. On the subject of Agents' charges, Neill comments on the other measures which have been introduced by which the Names are "much better informed than hitherto", such as "greatly improved accounting and auditing arrangements" and "a central register of syndicate results."

In this matter, Lloyd's has proceeded step-by-step by a combination of rules on disclosure supported by auditors verification, prohibition of very small syndicates (under 50 members), and a code of practice to deal with possible abuses. (It should be remembered that it is not the trading of syndicates in parallel that is in itself an abuse, but the misuse of the situation so created to "prefer" one to another by allocation of risk, expenses or reinsurance). In its approach to this problem, the Council was particularly advised by its Rules Committee, chaired by the then Chief Executive and the Council very carefully examined the suggested cure before adopting it. The suggestion by Neill that the adopted method is not "sufficient as a regulatory control" and therefore not effective to cure the possible abuse of the situation created by parallel syndicates, must and will be taken very seriously by the Council. We must test again the claim that there is a commercial need for parallel syndicates.

In all, the Committee put forward some seventy recommendations for further action in the regulatory field at Lloyd's, to put Names who transact business at Lloyd's on a par with the protection which will (at a future date not yet certain) be available to City investors.

It seems to me however that we must not lose sight of one thing - trust. The relationship between a Name, his active underwriter and his underwriting agent must be based on complete trust, before it is even worth protecting by a legal framework.

Victor B Levitt, for the fifth time in recent years, delivers a paper entitled "Pollution, Clean Up Costs And Insurance Exposure" to the Under 30's Lloyd's Non-Marine Claims Committee.

Recognised auditors meeting held at Lloyds.

It was stated that environmental pollution will account for increases in some reserves. The market will end up paying a lot on pollution but policy wordings may give us better defences than on asbestos. It appears inevitable that we are likely to see a continued growth in the involvement of the London market as new losses are reported. There appears to be a trend developing in the court findings arising out of various EPA coverage litigation which demonstrates more respect for the intent of insurers - namely that the seepage and pollution exclusion means what it says and that the date of damage cannot reasonably pre-date the time of discovery).

(iii) Audit opinions regarding run-off accounts: There are noticeable differences of opinion within the profession as to the most appropriate method of report on run-off accounts. For example, two firms dealt with the uncertainty by emphasis of matter to the effect that names' net results as shown in the personal accounts were true and fair subject to any material adjustments which may be necessary if the amount retained is understated. One firm felt that the uncertainties necessitated a qualification and two firms gave no opinion on the personal accounts. All other firms reported in accordance with bye-law provisions. Lloyd's view remains that auditors should report in true and fair terms. In certain circumstances, an emphasis may be appropriate but should not be included as a matter of course.

Recognised auditors meeting held at Lloyds on 4 February.

4. Market issues:

The meeting was addressed by representatives of the four principal markets. Points to be watched include the following:...

Non-Marine:

The Johns-Manville facility is earning interest and payment is likely to be made when Johns-Manville is out of chapter 11 in 1987. However, if an early settlement is not reached, an extra call from syndicates may be necessary. A market letter advising the interest and appreciation figures will be circulated in good time. Reserves for Shell have increased and further pollution losses have been incurred. 1984 was likely to be a poor result but there is some hope that the open years will be better with the shortening of accounts and the move to claims made settlements. [The proposed time-table (page 336) reveals that the author of these words is R Jackson.] Main concern is still asbestos. It had been hoped that there would be a drop in claims in 1986 but this has not been evident, 900 new cases per month were reported in 1985, while 1,500 new cases were reported in November and December 1986....

The Asbestos Claims Facility settled claims at a higher rate than was expected. During the course of 1986, the London Market expended approximately $70,000,000 in Facility Billings and to some extent, this figure was affected by accelerated cash- flow. It must be emphasised that even though there can be acceleration on a temporary basis, reserves established in underwriters' books would always be well in excess of payments made no matter how accelerated they were. Expressed another way, the payment is easily contained with incurred reserves, even though there is a speed up in the cash going out beyond that which was originally foreseen.. Known claims will account for 25-30% increases in asbestos reserves at year end 31 December 1986. Much of this increase will come from reinsurance and retrocessional contracts....

Environmental pollution:

Environmental pollution will account for increases in some reserves.... In respect of Shell-Rocky Mountain, reserves will increase by $100 million. The Shell-Rocky Mountain case should come to trial in 1987. The market will end up paying a lot on pollution but policy wordings may give us better defences than on asbestos. It appears inevitable that we are likely to see a continued growth in the involvement of the London Market as new losses are reported. However , on a more encouraging note, it is worth observing that there appears to be a trend developing in the Count findings arising out of various E.P.A. coverage litigation which demonstrates more respect for the intent of insurers - namely that the seepage and pollution exclusion means what it says and that the date of damage cannot reasonably pre-date the time of discovery.

DES:

Ely Lilly obtained a "Keene" ruling which has been upheld. A settlement of $80 million plus for London's share, will be forthcoming soon.

Summary:

1984 account will show desultory results. For 1985, 1986 and 1987 accounts the tail of liability business is shortening ... it is therefore anticipated that these accounts will show significantly better results than earlier years.

The Environmental Claims Reinsurance Group (ECRG) held its first meeting. Mr. Ayliffe was a member.

(The letter stated the following. There had been a substantial increase in the number of new law suits which arise from asbestos related causes. During the course of the first half of 1986 new cases were arising at the rate of approximately 900 new cases per month but as the end of the year approached a significant increase in new filings became apparent reaching a level of approximately 1,500 new cases for both November and December. The average cost of settlement per claim being achieved by the ACF has yet to reduce to the level which was the basis of the claimant reserve used in the calculations for year end reserves. There are a number of reasons why indemnity levels have not been capable of being reduced, the most significant being the aggressive attitude adopted by the Courts in the Texas class action and the material effect this has had upon the overall average settlement costs. Once again it has not to date proved possible to reduce the substantial outlay in regard to costs which are being incurred through the liaison counsel acting on behalf of the ACF. There are a number of reasons that bear upon this issue, the most significant of which is the pressure being exerted by various courts to speed up the number of cases which are addressed during the coming months. With this increased activity it appears unlikely that we shall see any meaningful reduction of legal costs during the present year. The main area of concern is the substantial increase that has developed in new filings which are clearly arising as a result of an all out effort by the plaintiff Bar in conjunction with the unions to canvas claimants from industries with only a remote asbestos involvement. Mass screening is developing in the tyre industry where pulmonary problems are said to exist due to an exposure to talc which may contain minimal quantities of asbestos and which is used in the moulding process. Similar screening activities are now being reported from the steel industry. The letter quoted an extract from a recent Wall Street Journal article which summed up this new form of ambulance chasing. It is significant that claims that are generated in this fashion arise from individuals who have little or no disability and even assuming that liability was to fall upon asbestos producers - which is questionable - the measure of damages should be minimal. For some time it has been the perception of the Facility that the quality of more recent filings was less serious than formerly. The average indemnity levels which we are experiencing in the Facility reflect the severity of claims arising some 5 years ago and it would be reasonable to anticipate some reduction to develop as we start to address more recent cases. I emphasised this point at a recent meeting of Panel Auditors as a consideration that needs to be kept in mind in endeavouring to address future loss development. The problems arising out of asbestos related claims continue to become more serious with the passage of time. Indeed many producers are now being forced to recognise the present trends are such that they must now contemplate that there will be a future point in time at which they exhaust all insurance coverage. The majority of claims arise from asbestos exposure in an occupational environment and for employees in certain occupations such as shipyards and railroads they already have protection afforded for occupation disease under existing Federal legislation. In the event that a Bill were to be passed by the House supporting this objective it would greatly ease the burdens being imposed upon asbestos producers under the strict product liability theories).

I have advised you in earlier letters of the concern expressed by the Facility at the substantial increase in the number of new law suits which arise from Asbestos related causes. During the course of the first half of 1986 new cases were arising at the rate of approximately 900 new cases per month but as we approached the end of the year a significant increase in new filings became apparent reaching a level of approximately 1500 new cases for both November and December. The reserve projection contained in year end reports circulated to the Market were based upon the lower level of new losses then being experienced and assuming that the substantial increase which we are now seeing continues during the course of 1987 it will be apparent to you that this will have a material impact upon the reserves that will be reflected in the year end 1987 reports. Two other significant aspects which bear upon the potential for reserve increases are that the average cost of settlement per claim being achieved by the Facility has yet to reduce to the level which was the basis of the per claimant reserve used in the calculations for year end reserves. There are a number of reasons why indemnity levels have not been capable of being reduced, the most significant being the aggressive attitude adopted by the Courts in the Texas Class action and the material effect this has had upon the overall average settlement costs which we have achieved...

An additional consideration that enters into the reserving philosophy relates to the defence cost being incurred by the Facility. Once again it has not to date proved possible to reduce the substantial outlay in regard to costs which are being incurred through the Liaison Counsel acting on behalf of the Facility. There are a number of reasons that bear upon this issue, the most significant of which is the pressure being exerted by various Courts to speed up the number of cases which are addressed during the coming months. With this increased activity it appears unlikely that we shall see any meaningful reduction of legal costs during the present year. The Board have devoted considerable efforts in this area and a budgeting business plan has now been produced setting out revised control procedures which should contain further increases. The tentative goal for 1987 has been set at $89.75m although whether this proves to be attainable must depend upon future litigation activity. One favourable feature arising from the entry of GAF is that with our ability to provide a common defence for all producer members no increased costs will arise and those costs which are incurred will now be allocated over a larger base.

The experience achieved to date within the Facility and the pressures that are now developing will be a major consideration to be taken into account by the representatives of the Working Party when we come to address the basis upon which the 1987 year end reserve projections will be based. The main area of concern is the substantial increase that has developed in new filings which are clearly arising as a result of an all out effort by the plaintiff bar in conjunction with the Unions to canvass claimants from industries with only a remote asbestos involvement. Mass screening is developing in the tyre industry where pulmonary problems are said to exist due to exposure to talc which may contain minimal quantities of asbestos and which is used in the moulding process. Similar screening activities are now being reported from the Steel industry and the following extract from a recent Wall Street Journal article sums up this new form of ambulance chasing...

It is significant that claims that are generated in this fashion arise from individuals who have little or no disability and even assuming that liability was to fall upon asbestos producers - which is questionable - the measure of damages should be minimal. For some time it has been the perception of the Facility that the quality of more recent filings was less serious than formerly. The average indemnity levels which we are experiencing in the Facility reflect the severity of claims arising some five years ago and it would be reasonable to anticipate some reduction to develop as we start to address more recent cases. I emphasised this point at a recent meeting of Panel Auditors as a consideration that needs to be kept in mind in endeavouring to address future loss development...

The result of the re-evaluation of reserves will effectively reduce those reserves presently carried on post coverage block years based upon the current volume of outstanding claims. As the coverage limits in the Initial Coverall Block became depleted by future settlements GAF will add, on a sequential basis, subsequent years of coverage to expand the insurance available. When these future developments take place and assuming that there is no substantial reduction in the rate of new filings it must follow that there continues to be a potential IBNR exposure to all post Coverage Block years. From the above comments it will be apparent to you that the problems arising out of asbestos related claims continue to become more serious with the passage of time. Indeed many producers are now being forced to recognise the present trends are such that they must now contemplate that there will be a future point in time at which they exhaust all insurance coverage. This serious position has caused producers to renew their efforts in seeking to obtain Federal Government recognition of the dilemma which they face and more particularly to provide some relief to the liabilities which they are now required to address. There are presently pending before the Senate draft bills which provide that where a claimant has a right of action under a Federal statute this will be an exclusive remedy.

The majority of claims arise from asbestos exposure in an occupational environment and for employees in certain occupations such as Shipyards and Railroads they already have protection afforded for occupation disease under existing Federal legislation. In the event that a Bill were to be passed by the House supporting this objective it would greatly ease the burdens being imposed upon asbestos producers under the strict product liability theories...

The Neill recommendations (Nos. 42-45, 47-50) relating to this committee and its functions are contained in Chapter 9 of the Neill Report. An additional recommendation (No 40) on parallel syndicates is included in chapter 5 and this will be considered by
a sub-committee of the new UARC. The existing UARC will continue until 22 July 1987 to complete the present registration function as a committee of the Committee of Lloyd's

The new UARC's broad terms of reference are to propose to the Council of Lloyd's arrangements for implementation of Neill's proposals covering the registration and continuing approval of underwriting agents at Lloyd's and therefore to assume the powers of the UARC conferred by Underwriting Agents (Interim Provisions) Byelaw (No 8 of 1984, 8 October 1984).

The UAR Committee:-

The Sub-Committee's terms of reference cover Neill's recommendations (No 40 and 41) that the present Code of Practice on multiple syndicates should be replace by a more specific Byelaw covering the whole area of parallel syndicates.

The relevant recommendations (Nos. 2-7 and 39) are contained in Chapters 1 and 8 of the Neill report. The Working Group's terms of reference cover the provision of information to applicant an existing Names which enable them to evaluate the risks and merits of membership.

As recommended by Sir Patrick Neill's Committee of Inquiry, a new Names Interests Committee was established in March 1987, chaired by Sir Kenneth Berrill KCB. During the year, the Committee formulated the byelaws enacted by the Council in December setting up the office of the Lloyd's Members' Ombudsman and putting in place a modified arbitration procedure in relation to certain disputes between members and agents. The Committee also took over responsibility, in June, from the former Names' Advisory Committee for giving advice or assistance to individual members; over the year some 15 such requests were considered.

The recommendations Nos. 29-38 relating to this committee and its functions are contained in chapter 7. Its terms of reference cover arrangements for the effective investigation and resolution of complaints by Names against underwriting agents and the Corporation of Lloyd's.

The Council and Committee Byelaw (No. 1 of 1987, 4 March 1987).

Quorums and Appointments of Committees and Sub-Committees (Amendment) Byelaw (No. 2 of 1987, 4 March 1987).

Ordinary and Extraordinary General Meetings (Amendment) Byelaw (No. 3 of 1987, 4 March 1987).

The Membership (Amendment No. 2) Byelaw (No. 4 of 1987, 4 March 1987).

Likewise, the disclosure of any commission, remuneration or benefit given or received in connection with a candidate's membership of Lloyd's. The Rota interviews during 1987 required the prospective members to state whether any such payment has been given. The year also saw the implementation of the Neill Committee's recommendation that the agent should leave the Rota interview for a period to enable the candidate to be questioned alone.

The Underwriting Agency Agreements Working Group

1. the introduction of a direct contractual nexus between indirect Names and their managing agents;
2. the defining of the different functions and duties of a members agent and of a managing agent
3. the introduction of a fair and efficient deficit clause and a standard basis for calculating the agents' charges;
4. the tempering of the "pay now, sue later" clause.

Ernst & Whinney internal memo from Stephen Hill to syndicate audit executives and assignment leaders. Professional standards panel (PSP). The firm's rules relating to qualified or non-standard audit reports reply equally to syndicates as to any other clients. Any qualified or non-standard report relating to a syndicate for which an independent partner review is required would require the approval of the PSP.

Managing agents and underwriters reports: The auditors responsibility is to report on these documents on an exception basis only, that is, where he considers them to be inconsistent with the content of the syndicate annual reports. However, we owe a duty to our clients to review these reports for compliance with the bye-law and to advise accordingly....

Asbestosis: the treatment of interest on Johns- Manville payment into Court has been raised with insurance technical sections. It is apparent that a number of different treatments have been operated in the market. I draw your attention to my memo dated 12 April 1985 on this matter a copy of which can be obtained from my secretary. I stress the point made in that memorandum that the treatment set out is a preferred and not a prescribed basis. I am in possession of a letter from Toplis & Harding (Asbestosis Services) Limited dated 6th November 1986 regarding accelerated cash-flow payments on the asbestos claims facility. This does not add any new light on the matter, I have already disclosed to executives and staff but gives a general review of the subject together with some figures at 31 July 1986. If anyone would like a copy of this letter please let my secretary know.

Additional Underwriting Agencies (No. 3) Ltd (AUA (3)) was appointed by Lloyd s on 5 August 1985 to act as the managing agent of the PCW syndicates in place of Richard Beckett Underwriting Agencies Ltd (previously PCW (Underwriting Agencies) Ltd. The report and accounts made up to 31 December 1985 are dated 31 March 1987, a delay of only some 12 months. Spicer & Pegler state:

2. We have received full co-operation from Additional Underwriting Agencies (No. 3) Limited (A.U.A.3) but the scope of our audit has been limited by the following matters:

Apart from the limitations in the scope of our audit necessitated by the matters described in paragraph 2 above, there are various other material and inherent uncertainties which affect our audit opinion. These are referred to in note 1 to the aggregate balance sheet which note explains the basis of preparation.

Note 1. Basis Of Preparation:

The aggregate balance sheet at 31 December 1985 has been prepared to show the aggregate state of affairs of all the syndicates listed in note 7(i) and having regard to the matters explained below.

Since its appointment as substitute managing agent, A.U.A.3 has made extensive efforts to produce reliable accounts for the syndicates. In particular, it has re-assessed the basis on which the reserves for outstanding liabilities should be determined, and has examined in detail the accounting principles and assumptions to be adopted in the syndicate accounts.

A.U.A.3 have found that, to a great extent, the principal syndicates were managed by the previous managers as a group without always recognising the interests of individual syndicates. Many problems arose from this method of management, in particular relating to the transfer of business between syndicates, the use of group reinsurance programmes and the pooling of assets in cash groups. A.U.A.3's investigations indicate significant accounting irregularities under previous managers which call into question many of the accounting decisions made by them and the reliability of the accounting records inherited.

All of these problems have a material effect on the individual syndicates and as a result it has not proved possible to prepare syndicate accounts in accordance with the Lloyd's Syndicate Accounting Byelaw (No. 7 of 1984).

The open year of account balances for all open years less than three years old reflect underwriting transactions up to 31 December 1985 but do not include subsequent premiums and claims which may arise before the accounts reach the end of their third year and no provisions have been made for any additional underwriting losses which might arise.

(The accounts as at 31 December 1985 were signed off on 31 March 1987, and not in 1986.)

The Council agreed with the Government in April 1987 that they would aim to deal with the remaining 32 Neill recommendations within two years.

Offers were made by the Society of Lloyd's to the members of the syndicates managed by AUA3 (with the exception of eight names)v with a view to ending the involvement of those members in the PCW affair. The offers were declared unconditional on 19 June 1987 and were accepted by 98.4 per cent of the members to whom they were made. Under the terms of the ensuing settlement a reinsurance to close policy was effected with Lloyd's syndicate 9001 in respect of all members who assented to the offers thus terminating their involvement in the PCW syndicates. Syndicate 9001 was specially constituted for this purpose and has been 100 per cent reinsured by Lioncover Insurance Company Ltd, a UK authorised insurance company, which is a wholly owned subsidiary of Lloyd's. The reinsurance to close transactions arising from the settlement will be accounted for in the 1987 global accounts.

(a) Syndicate 9001 and Lioncover Insurance Company Limited

1. Contributions by other potential Defendants and the Errors and Omissions market

The Alexander & Alexander Group	Broker
Black Geoghegan and Till	Accountant
Josolyne, Layton-Bennett & Co.	Panel Auditor
The Minet Group	Broker
Needler Heath Ltd.	Broker
PCW / RBUA	Managing Agent
P.W. Kininmonth & Co. Ltd	Broker
The Sedgwick Group	Broker
Steel Burrill Jones plc	Broker
Waltons & Morse	Solicitor
W.M.D. Underwriting Agencies Ltd	Managing Agent
CONTRIBUTING MEMBERS' AGENTS
Bankside Members Agency Ltd.	Members' Agent
Bradley Gascoigne Underwriting Agencies Ltd.	Members' Agent
Bradstock & Barker (Underwriting Agencies) Ltd.	Members' Agent
Gordon Brighton (Underwriting Agencies) Ltd.	Members' Agent
CSB Underwriting Agencies Ltd. (incorporating Tennant Budd (Underwriting) Ltd.)	Members' Agent
Christand Underwriting Agencies Ltd.	Members' Agent
Cox Tudsbery & Wills Ltd.	Members' Agent
Craven Farmer Underwriting Agents Ltd.	Members' Agent
David Evers Ltd.	Members' Agent
G. P. Eliot & Co. Ltd.	Members' Agent
Fenchurch Underwriting Agencies Ltd.	Members' Agent
Glanville Enthoven & Co. (Underwriting) Ltd.	Members' Agent
Greenly Underwriting Agencies Ltd. (formerly Seascope Underwriting Agencies Ltd)	Members' Agent
Charles Howard Agencies Ltd	Members' Agent
Jardine Matheson Underwriting Agencies Ltd.	Members' Agent
John Townsend Underwriting Agencies Ltd.	Members' Agent
Laurence Philipps (Agencies) Ltd.	Members' Agent
London Wall Members Agency Limited (formerly Bain Dawes (Underwriting Agency) Ltd)	Members' Agent
Oakeley Vaughan (Underwriting) Ltd.	Members' Agent
H. L. Puckle (Underwriting ) Ltd.	Members' Agent
R. K. Harrison Underwriting Agencies Ltd.	Members' Agent
Stancomb & Kenington Agencies Ltd.	Members' Agent
Thos. R. Miller & Son (Underwriting Agencies) Ltd.	Members' Agent
Upton Underwriting Agencies Ltd.	Members' Agent
Duncan Wauchope & Co. Ltd.	Members' Agent
Wendover Underwriting Agency Ltd. (incorporating Hine & Butcher Ltd.)	Members' Agent

(b) Contribution from Lloyd's

6. Taxation

Since our appointment we have devoted substantial resources to formulating claims which might be brought on behalf of Names to recompense them for the wrongs they have suffered. We have prepared draft writs against more than 70 potential defendants including the former syndicate managers, their controlling shareholders, the sponsors of the offer made to Names in 1984, the brokers responsible for placing a number of the policies, the former syndicate auditors, Members' Agents, and Lloyd's itself. We have also prepared draft points of claim against the principal potential defendants and a copy of this (which exceeds 150 pages in length) is available to any Name or Members' Agent who requests it. The issues arising are complex.

A number of factors make it impossible, at this stage, to give advice as to the amount which may be recovered in these proceedings. Our prime difficulty is lack of evidence. Many of those who could provide us with evidence are potential defendants or unwilling for other reasons to provide us with the necessary information. The records of the syndicates are in many cases inadequate or missing altogether. Lloyd's has advised us that it is unwilling to make disclosure of the information in its possession because, it maintains, it would be unusual to disclose information which might count against it in the course of settling litigation which has not yet been commenced. Lloyd's is bound by its own byelaws and by undertakings of confidentiality, which have been given in investigations and disciplinary proceedings, not to disclose to anyone any evidence given in those investigations and proceedings. Such evidence might well have assisted us in assessing the value of your claims.

I must emphasise that you are giving up all your rights except rights to claim under personal stop loss policies. The rights you will give up will include any special rights which individual Names may have against, for example, their Members' Agents, or their personal professional advisers and attorneys and also any rights which you may have to sue AUA3 for anything it may have done or omitted while it has been your agent (and will include advice concerning the offer given by AUA3 or your other advisers). This is to achieve finality. Similarly, in the interests of finality, Lloyd's insist that you agree that you will make no claim against it for misrepresentation or non-disclosure in relation to the settlement. This is intended to ensure that if facts come to light which you ought to have been told in connection with the settlement, or if anything you have been told is wrong, you will have no legal claim.

Since our appointment we have made extensive efforts to produce reliable accounts for the syndicates. In particular, we have re-assessed the basis on which the reserves for outstanding liabilities should be determined, and examined in detail the accounting principles and assumptions to be adopted in the syndicate accounts. Both the syndicate auditors, Spicer and Pegler, and our consulting accountants, Price Waterhouse, have carried out a great deal of work to assist us in these investigations.

In spite of all these efforts, it has not proved possible to prepare normal syndicate accounts, but we have prepared pro forma statements. In doing so, we had to make a number of assumptions, notably in relation to the allocation of risks, reinsurance recoveries, assets and liabilities. Substantial credit has been taken in respect of reinsurance recoveries, some of which may be disputed. Spicer and Pegler have audited the books and records of the syndicates, but they have informed AUA3 that they are unable to give any opinion on these pro forma statements.

The pro forma statements have been prepared to enable the Names to make a rough and ready comparison of the required contribution with the estimated losses. Because of the unavoidable inaccuracies in the figures, which further work will not necessarily improve, such comparisons must be approximate. However, the global deficiency can be ascertained with reasonable certainty, and for all their uncertainty, the individual figures are the best that are available.

AUA 3 have found that, to a great extent, the principal syndicates were managed by the previous managers as a group without always recognising the interests of individual syndicates. Many problems arose from this method of management, in particular relating to the transfer of business between syndicates, the use of group reinsurance programmes and the pooling of assets in cash groups. AUA 3 s investigations indicate significant accounting irregularities under previous managers which call into question many of the accounting decisions made by them and the reliability of the accounting records inherited.

A letter from attorneys to the Environmental Claims Reinsurance Group (ECRG) stated the following.

We have proposed, and the ECG has approved, the creation of a Priority List of assureds with pollution claims. The Priority List will include assureds whose pollution claims pose an imminent potential exposure to underwriters, involve a declaratory judgement action against underwriters, or require an indemnity or expense reserve. Because of the significant potential exposure of the pollution claims included on the Priority List, it is imperative that the Market be kept fully informed. The London market faces an enormous problem with the presentation of pollution claims. There are already many more assureds concerned with pollution than were concerned with asbestos. The number of pollution coverage lawsuits involving underwriters already exceeds the number brought during the whole of the asbestos problem.

Seminar held in London entitled: Insurance and Reinsurance Insolvency.

In a report published in April 1987, the EPA are said to have examined 44,000 schools and established that they contained 213,000,000 square feet of asbestos containing material. There are 107,550 schools potentially affected which according to the EPA produces 510,203,786 square feet of asbestos containing material. The cost of ripping out asbestos tends to vary from a low of $4.50 per square foot in Texas to a high of $30 per square foot in New York. Overall, the EPA has estimated a cost of $12.50 per square foot for removal from public schools In August 1987, Mendes & Mount and Lord, Bissell & Brook advised that:-

"As the public schools represent 69% of suits filed to date, we can extrapolate these figures to produce a total of 739,425,777 square feet for all claims filed to date. Due to the great variance in removal cost, we have utilised the EPA projection of $12.50 per square foot, thereby calculating the gross removal costs of all known suits to be $9,242,822,210. The figures are provisional and it must be borne in mind that there are continuing reports of further filings, especially from the States Attorneys General and media articles indicating that there are as many as 735,000,000 public buildings in which asbestos may be deemed potentially hazardous".

Minutes of Merrett Holdings Plc Board Meeting. 421 Run-off contracts. .. It was agreed that the significant impact of the losses on the members of the syndicates justified regular audits of the reinsured's records and claims and reinsurance handling procedures. In addition, specific staffing requirements within the syndicate/agency to monitor progress were to be investigated.

British Insurance Law Association Journal: USA liability and Environmental Claims

"a great legal debate is raging over the extent that the Comprehensive General Liability Policy provides coverage to those insured who have sent waste to Superfund sites or who own and operate superfund sites. There are many issues concerning this debate and it is difficult to predict trends."

However, the ambivalence of court decisions did not rescue the insurance industry from its precarious situation. Apart from the ambivalence of legal decisions, insurance articles on the subject of pollution continue to point to the potentially crippling costs faced by the insurance industry, including enormous litigation costs. For example, Robert Faron outlined the extreme vulnerability of the insurance industry to litigation:- "Decisions in the product liability and workers' compensation area have accelerated the standards of care, have expanded upon the basis of liability, have imposed procedural and substantive devices to access liability for a new set of defendants.

Four years of litigation has left little defences available and has all but swept away common law barriers of causation and even proximate causation in the enormous costs of cleaning up sites."

The "deep pocket" mentality:- "The concern of not being able to attribute liability lead (sic) to a deep pocket mentality and the deepest of these pockets that has been discovered is the insurance companies who have provided comprehensive general liability cover to companies who are engaged in this exercise of environmental purification."

Collapse of Insurance Industry a possibility - and the consequence of this Faron argues, is the possible collapse of the insurance industry:- "Some say this expansion of liability will not only undermine the economic basis for many of its industries, as competitors in world wide competition, but also due to the stacking and imposition of enormous transaction costs on insurance policies, threatening the very basis of the US and indeed the world's insurance and reinsurance capacity."

The Syndicate Premium Income (Amendment) Byelaw (No. 3 of 1987, 6 May 1987).

Commencing with the 1988 account, the 30% franchise (50% for Life) for outward reinsurance will be formally consolidated with the premium limit and that allocated premium income will be monitored against the new gross premium underwriting limit (GPUL). This resulted in a Member's overall premium income limit being increased from 1 January 1988 by 25% to a new "gross" limit and it was the responsibility of Managing Agents to decide whether to invite Members to increase their share on individual syndicates by 25% to the new gross limit. Where a syndicate is not writing to its existing capacity the Managing Agent may decide that the gross limit for 1988 will be the same as the net limit for 1987 without enhancement. (Agency salaries likewise increased; With the introduction of minimum salaries (say £300), agency salaries may have increased in excess of 25%).

The Syndicate Premium Income (Amendment) Byelaw issued in May gave effect to the Neill Committee's recommendation that where a direction to restrict underwriting had been made a full explanation of the circumstances giving rise to the direction should be provided to the underwriting members and members' agents concerned.

In the case of the individual member, the Council decided (in 1987) that the calculation of premium income in checking compliance with premium income limits should be consistent with that used for syndicate monitoring purposes.

Corporation of Lloyd's Annual Report and Accounts as at 31 December 1986

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

On the regulatory front, Sir Patrick Neill's Inquiry sat effectively throughout the year. He and his colleagues subjected the Council of Lloyd's work since the 1982 Act to an exacting scrutiny. The detailed report they produced was very positive about the progress Lloyd's have made and it was encouraging to see how well Lloyd's systems for investor protection measured against those that will have to be installed elsewhere in the financial community under the Financial Services Act.

The major constitutional change recommended by the Neill Inquiry has already been implemented by the Council. It was possible to act this quickly because four of the working members of the Council selflessly volunteered their resignation so that four new nominated members could be appointed with effect from the middle of 1987.

The problems of the past in the shape of the PCW affair have accounted for a great deal of top management time and effort over 1986 and even more during the early months of 1987. It is the Council's hope that the offer now made will bring to an end the involvement of those Names caught up in this most unhappy affair.

The introduction of modern and effective self-regulatory machinery tailored to the needs of a vigorous and expanding market place - which contributes so significantly to the economic well being of the United Kingdom - requires efficient and capable administrative resources.

Postal ballots were held for six seats on the Council of Lloyd's for 1987 in respect of both working and external members - four working and two external members. The Electoral Reform Society conducted the ballot.

There were five candidates for the four working members' seats vacated by the retirement (by rotation) from the Council of Mr. David Coleridge, Mr. Norman Evennett, Mr. Colin Murray and the Hon Robin Warrender. Mr Frank Barber, Mr. Alan Jackson, Mr. Stephen Merrett and Mr. David Rowland were elected to fill the vacancies for four year terms.

Of the six candidates who contested the election of two external members of the Council, who had retired by rotation, Lord Kimball and Dr. Copisarow were re-elected to serve further four year terms.

Mr. Brandon Gough, one of the four nominated members of the Council, retired by rotation and Mr Alan Hardcastle was appointed for a three year term. His appointment was confirmed by the Governor of the Bank of England.

The Council elected Mr Peter Miller as Chairman of Lloyd's for 1987 and Mr Murray Lawrence and Mr Alan Parry as Deputy Chairmen of Lloyd's for the same period.

During the year there were three new appointments as Group Heads. Mr. J D Lee succeeded Mr. P M Hermon as Head of Systems and Communications in June. Mr. JA W Moir, Head of Finance resigned in September in order to take up an appointment in Canada and he was succeeded by Mr. J H F Gaynor. In December, Mr A A Duguid joined the Corporation as Head of Regulatory Services in succession to Mr. D M L McWilliam.

The number of members of the Society at the beginning of 1987 was 31,484 (1986 28,944): this represented an increase of 8. 77 per cent compared with a year earlier.

Almost 9,000 members (28 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 21 per cent.

The Names' Advisory Committee under the chairmanship of Lord Kimball dealt with 32 cases during !986 bringing to 74 the total number of cases referred to the committee since its establishment in 1985. A wide variety of issues have been considered by the committee, ranging from suggestions for improvements in Lloyd's rules or practices to requests for advice regarding the rights of Names. Under its terms of reference the committee was not, however, able to provide assistance where cases involved actual or imminent legal action.

The functions of the Names' Advisory Committee will be taken over during 1987 by the newly formed Names' Interest Committee, recommended by Sir Patrick Neill's Committee of Inquiry.

1986 saw the final stages of implementation of the Lloyd's syndicate accounting rules which were introduced in 1984 with the publication of the new list of recognised syndicate auditors, and the production of the 1983 syndicate annual reports to the mandatory true and fair view standard.

During 1986 the Committee of Lloyd's took formal action under the Syndicate Premium Income Byelaw (No 6 of 1984) for the first time. This action, intended to prevent or minimise overwriting of premium limits, took the form of directions to cease underwriting or to restrict the level of insurance business underwritten. A total of 15 directions were issued during the year and 13 voluntary undertakings to restrict underwriting were accepted from certain agents. The steps taken by the Committee of Lloyd's were intended to demonstrate its commitment to enforcing the provisions of the byelaw. To assist it in its work a sub-committee (the Premium Income Monitoring Committee) was established, chaired by the Senior Deputy Chairman.

The process of re-registering existing agents .and registering new agents, under Byelaw No 4 of 1984, which had begun in 1985 continued throughout the year. By year end 200 agents had been re-registered. and the bulk of the work on the remaining 40 agents re-registering under byelaw No 4 was complete. Under the old byelaw (No 87) 306 agents had been registered but under the rules of the new byelaw a number of small agencies, particularly members' agencies, have deregistered or intend to de-register. Various mergers, acquisitions and consolidations of agencies have also taken place.

The Related Parties Byelaw (No 2 of 1986) 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.

The Central Fund Agreement of 1927 was replaced by the Central Fund Byelaw (No 4 of 1986) 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.

The Review Powers Byelaw (No 5 of 1986) 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.

Towards the end of 1986, the regulation of Lloyd's brokers began to receive more concentrated attention than had been possible during the period of intense activity since the passing of the 1982 Act. Arrangements are in hand at the end of 1986 for the 1987 Council to consider the establishment of a Broker Regulation Committee. This committee was to be charged with making recommendations for future broker regulation, including the substance of the necessary byelaws, regulations, codes: and other requirements and their implementation.

A large amount of preparatory work had been in train since mid-1985 on the future rules for Lloyd's brokers. The intention was that these rules would encompass business aspects (such as financial strength, accounting disciplines, independence, competence), and the character and suitability of the people involved and operating standards (a code of practice). 1986 closed in the expectation that overall proposals would be embodied in a consultative document during the summer of 1987.

The new Premium Trust Fund Deed and the General Undertaking were signed by members together with the new Underwriting Agency Agreement. 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.

The detailed mechanics and procedures for implementing the Council's decisions on the move to gross premium underwriting limit and the bringing of all members into line with current requirements for means and deposits were formulated and notified to agents. It became clear that bringing this into effect will be a major operation, including considerable resources within underwriting agents and the Corporation departments.

A complete revision has been undertaken of the guide presented to prospective Names. Copies of this guide have now been sent to all existing Names. The Council agreed that a register of agents' charges to Names should be prepared and made publicly available. Work has proceeded by obtaining information from agents by the use of a comprehensive questionnaire. Analysis of the data provided is in progress with publication planned for spring 1987.

Work has been undertaken within the Regulatory departments with the assistance of the Systems & Communications Group to identify the new systems that are needed to enable regulation to function properly. As a result of the initial investigation work a systems strategy has been prepared and work has started on a number of business projects. It is planned that some of the data in these systems should, with the relevant security checks, be open to electronic enquiry by underwriting agents.

During 1986 six disciplinary cases involving ten defendants were concluded. Penalties imposed included two exclusions from membership of the Society, three periods of suspension, and, in one case, a fine of £175,000. Costs awarded in favour of the Society exceeded £250,000, all of which his been or is in the process of being recovered. Lloyd's Appeal Tribunal (composed of a President and Deputy President wholly independent of Lloyd's heard and dismissed three appeals against disciplinary penalties. The Appeal Tribunal also dealt for first time with three appeals on administrative rather than disciplinary matters. Again, in these appeals the Tribunal upheld the original decisions taken by Lloyd's.

EXTERNAL RELATIONS

The passage of the Financial Services Bill through Parliament focused attention upon the City. Introduced in November 1985, the Bill specifically exempted the Society and underwriting agents from the need to be authorised in respect of investment business carried on in connection with, or for the purpose of insurance business at Lloyd's.

After exhaustive Parliamentary discussion the Bill was finally enacted on 7 November 1986 and the Society remained exempt. Meanwhile, the Committee of Inquiry into Regulatory Arrangements at Lloyd's under the chairmanship of Sir Patrick Neill QC and established by the Secretary of State for Trade and Industry in January 1986 occupied a great deal of time and attention by the Council and Corporation departments.

The Committee of Inquiry was asked to consider whether the regulatory arrangements introduced under the Lloyd's Act 1982 provided protection for members of Lloyd's comparable to that proposed for general investors under the Financial Services legislation. Written submissions were made by the Society and oral evidence was given to the Committee by the Chairman, Mr. Murray Lawrence, Deputy Chairman, and Mr. W C Beckett, CB. Solicitor to the Corporation, on five days on behalf of the Council. Excluding members of the Council, a total of 274 individuals or organisations gave evidence to the Committee of Inquiry whose report was published on 22 January 1987.

The report described Lloyd's as "a prime example of self regulation in action" and congratulated the Council on the energy and determination shown in using its powers.

Nevertheless the Committee made a number of recommendations and the Council and staff of the Corporation will be heavily involved in undertaking the work necessary to implement the bulk of the recommendations by early 1988.

Press and media interest in Lloyd's continued at a high level throughout the year. The programme of revision of publications and the introduction of new titles designed to provide information to a wide spectrum of audiences world-wide on the history and development of Lloyd's was maintained. The monthly Lloyd's of London Newsletter launched in May 1985 continue to provide information on the activities of the Council and the Lloyd's market to members of the Society. The bi-monthly magazine, Lloyd's Log, was awarded prizes for its design in two national competitions.

Meanwhile, work was completed on the production of a new documentary film on Lloyd's which is designed to appeal to a world-wide audience. It will be released in the first half of 1987.

Meanwhile, refurbishment of the 1958 building has commenced. When the project has been completed it will be occupied largely by Corporation departments and catering services for the market, leaving the fourth and fifth floors available for market associations and external tenants.

A 20,000 sq. ft office block at Colchester was completed for occupation by Lloyd's of London Press Limited. It was formally opened by the Chairman of Lloyd's on 8 July 1986.

A system was introduced during 1986 whereby all slips with inception dates on or after 1 January 1987, are centrally registered with Lloyd's Policy Signing Office. This enables LPSO to issue listings of settlements due or overdue and is a significant step towards the introduction of centralised credit control.

A facility has been established in Zurich whereby policies for Swiss assureds may be prepared and issued in the appropriate language within a short time of risk inception. This pilot scheme is being introduced with the co-operation of Lloyd's brokers and Swiss brokers to address the problem of slow delivery of insurance documentation. If successful, it is expected that this initiative will be extended to other countries commencing in 1987.

The aviation intelligence section continued to produce publications relating to the intelligence service and to provide information and statistics to the market.

Business needs identified by MSD in full consultation with all markets are clarified and priorities established around the basis of four business directions. These are underwriting control of premium flow, faster claims agreement and payment, timely information flows and prompt documentation production.

Efforts have been concentrated on solving business issues by system solutions and differing problems of identifying market and Corporation systems requirements have been resolved.

This approach has led to the implementation of the outstanding marine claims advice system, slip registration and shortly to the introduction of flexible settlement.

In addition, major systems are now in development for funds management, Scheme Canada (to speed the payment of premiums and claims) and a substantial amendment of the main direct data entry system.

A major initiative was the development of two new areas of activity: Consultancy Services and the Technology Information Centre.

Hitherto, the Corporation has concentrated on the provision of all embracing systems for the good of the whole market. This approach left a gap in provision of service to individual firms which have been the exclusive domain of commercial computer bureaux. The consultancy services team will provide individual firms with objective advice and guidance on the implementation of new business technology. This initiative has been coupled with the establishment of the Technology Information Centre which is located on gallery 4 of the new building,

Without doubt the most important venture during the year has been the collaborative exercise with Lloyd's Insurance Brokers Committee, the Policy Signing and Accounting Centre and Institute of London Underwriters of electronic data networking. Two trials are progressing to plan and it is anticipated that 1987 will see the first electronic exchange of data between market business sectors. This new development will lead to enhanced business communications not only throughout the Lloyd's market but also will enable connection to European and North American concerns in the future. The development and implementation of the network will be determined by the market's business needs and will enable new trading relationships to be examined in the light of technology.

In 1986 the severe down-turn in the world-wide shipping market substantially affected income from subscriptions and advertisement revenue and pre-tax profit from the company's core products was £650,000 - a reduction of 24 per cent compared with 1985. Major cost savings were achieved and market share for the main publications was in fact increased.

During 1986 Toplis and Harding Inc. experienced trading difficulties reflecting an industry-wide reduction in available loss adjusting work. Turnover in 1986 was $16. 4 million compared to $16. 9 million in 1985. The reduction in new assignments, coupled with increased expenses arising from both a major re-organisation and the development of new services led to the loss for the year of $2. 4 million (£1. 8 million).

The consolidated revenue account for the Corporation of Lloyd's and its subsidiaries showed a surplus for the year of £12. 8 million.

Operating income rose by £19. 4 million. Subscription rates charged to members remained unchanged but income from this source rose by £12. 1 million or 28 per cent reflecting a further significant increase in market capacity. Direct charges to the market for specific services rose by £7. 1 million. Of this amount, £3. 9 million related to overseas operating expenses recoveries - largely reflecting increased premium taxes resulting from higher business volumes in Canada and France. The rates of entrance fees for new members were unchanged from the previous year; the reduction in income of £0. 8 million reflected a slight decrease in the number of new members elected to commence underwriting from 1 January 1987 compared to 1 January 1986.

Expenditure increased by £22. 9 million. Staff costs rose by £7. 5 million, reflecting the improved pay and benefits package introduced from 1 January 1986, a rise in staff numbers during the year, particularly in the regulatory services group and an increased emphasis on staff with professional skills. Premises costs rose by £5. 8 million, largely as a result of the move to Lloyd's new building.

The net cost of interest payable increased by £5. 4 million compared to 1985. This reflects both the full year cost of funding the settlement with the Inland Revenue in October 1985 and the additional investment of £37. 2 million in fixed assets during the year.

Capital expenditure continued at a high level, with the major part of the £37. 2 million cost incurred attributable to the final stages of the new building. This expenditure has been financed partly from current revenue and partly by increased borrowing. The source and application of funds statement (page 20) shows an increased funding requirement of £6. 9 million during the year, which was substantially below the increase during 1985. This is in line with the Council's long term financial strategy for the Corporation.

Business Insurance: New Avalanche of Asbestos Claims Hits.

"It causes me to think that this is going to go on forever... because the workers now suing have been in industries where they have been exposed to many products in addition to asbestos, insurers will have to conduct more investigations to determine whether there is an asbestos-related injury and whether it was caused by a policy-holder's product, notes Mr. Knowlton... As a result, legal and administrative costs could be very significant, he says. However, the indemnity payments in these cases may not be as large as for shipyard workers, Mr. Knowlton added".

Business Insurance: New Avalanche of Asbestos Claims Hits.

The number of new asbestos claims doubled in the last few months to 2,100 per month compared with 1,000 per month at the end of 1985. Knowlton "It causes me to think this is going to go on forever.".. Leonard Minches, vp claims for Gerling Global Reinsurance Co. said reinsurers are concerned about the increase but they don't yet know whether the increased claims are an acceleration of anticipated claims or were unexpected.... Tyre workers alone could eventually bring 20,000 claims; Mr. Gerry predicts. In addition to tyre workers sheet metal workers are also being screened as part of various medical studies...

No-one yet knows how much this new onslaught of claims will cost asbestos producers, insurers and reinsurers. Previously the cost of asbestos bodily injury claims has been estimated anywhere from $4 billion to $100 billion. The new wave of lawsuits not only names the major asbestos manufacturers but also many additional small and large manufacturers that used asbestos in their products.

... Even before this new wave ... more bankruptcies of asbestos producers had been expected, and the insurance industries ability to fund asbestos claims had been questioned.... William Bailey, former vp of Commercial Union says there is not enough insurance to cover all the asbestos claims that will be filed...

1. Trigger of coverage - Judge Brown ruled that all policies from first exposure to date of claim or death, whichever the earlier, are required to respond in full. This ruling in essence adds an additional trigger to that previously enunciated in Keene by extending past the manifestation date. What is also important is that while the Keene decision was based upon ambiguity in policy language, Judge Brown stated that the policy language considered in this case was clear and unambiguous. This ruling is quite obvious the broadest interpretation of insurance coverage for asbestos bodily injury claims to date and clearly extends beyond the coverage bands agreed within the Asbestos Claims Facility. Judge Brown in addition made it clear that where an insured was uninsured, or self-insured, during any period of the claimant's exposure, there was no obligation on the insured to contribute, and what is more allowed that the insured could select the year or years required to respond;

The PCW Syndicates (Exemptions and Miscellaneous Provisions) Byelaw (No. 6 of 1987, 3 June 1987). Not withdrawn.

Administrative Suspension Byelaw (No. 7 of 1987, 3 June 1987).

U.S.F. & G -v- Wilkin Insulation, No. 85-010, Kane City 3rd Circuit Court, 1987. Court held physical injury was required for plaintiff to prevail in an asbestos property damage case. While the case was reversed in December 1989, the lower court's holding was applicable from 1987-1989.

Anderson County Board of Education -v- National Gypsum Co., 821 F.2d 1230, 6th Circuit, 5 June 1987. Defendants prevailed before jury against Plaintiff claims of negligence, strict liability, misrepresentation and fraud in an asbestos property damage case. Appellate Court held statute of limitations also bars warranty claim - based on state law.

Business Insurance: Asbestos firms to gain $275,000,000 from ruling.

Three of the asbestos producers involved in landmark litigation stand to gain more than $275,000,000 in insurance coverage to pay asbestos claims following San Francis's Superior Court Judge Ira A. Brown's long awaited decision.... All attorneys generally agree that Judge Brown's decision gives the broadest insurance coverage possible to policy holders for bodily injury asbestos claims. Judge Brown ruled that producers are entitled to recover from all insurers that wrote liability insurance policies for them from the time they claim and was exposed to asbestos through the time of the victims files of claim on until the victims death. In many cases this has been more than 4 decades. Judge Brown also found that every policy figured by an asbestos related bodily injury claim must respond in full to the claim and that policy holders do not have to pay a proportionate share of defence and indemnity costs for periods when they were self-insured or uninsured. But, in a part of the decision that favours insurers, Judge Brown held that under pre 1966 policies insurers are not liable for defence costs after policy limits have been exhausted. Judge Brown also ruled insurers bear the burden that proving their policy holders acted intentionally or maliciously in order to deny coverage on the basis the policy only covers losses which are not expected or intended.

(produced late in the day, presumably after the closure of the 1984 year of account circa May 1987. The letter including for example the growing concern at the steadily increasing number of asbestos property damage claims and the following sentence:- "Quite apart from the liberal approach that can be anticipated when the Courts come to address the many substantial coverage issues that arise, the quantum in the underlying actions is very significant.")

(No doubt that you will be aware that on 29 May Judge Brown announced his tentative decision on the phase 3 issues in the California Co-ordinated action ... At this early stage our counsels are still assessing the impact of the decision but I can recall that there is substantial concern at the way Court has ruled upon trigger of coverage, particularly in view of their conclusion that the contracts under review were unambiguous. Although basically rejecting the Keene rationale the Court finds that injury commences from the date of first exposure and continues until either the death of the claimant or until a claim is notified to the assured. The injury process is considered to continue over the entire period and as there is no basis on which to measure the damage during each policy period the Court has determined that each policy is liable to respond in full ... We now have to cope with what can only be termed "Super Keene" in California.... It will be some time before counsel have completed their analysis of this ruling and its impact upon the many serious latency problems which confront the market. However, it is inevitable that we may expect to see California replacing Washington DC as the forum of choice....)

I have no doubt that you will be aware that on 29 May Judge Brown announced his tentative decision on the Phase III issues in-the Californian Co-ordinated Action. The issues relating to Phase III are of material concern to the Insurance Industry and specifically concern the trigger and scope of coverage, expected and intended defences and the obligations relating to defence. The decision is extremely detailed and lengthy and for that reason it is not my intention to distribute a copy with this letter but one will be available for review by any participating insurer at the above offices, or alternatively copies can be provided on request.

At this early stage our Counsels are still assessing the impact of the decision but I can record that there is substantial concern at the way the Court has ruled upon trigger of coverage, particularly in view of their conclusion that the contracts under review were unambiguous. Although basically rejecting the Keene rationale the Court finds that injury commences from the date of first exposure and continues until either the death of the claimant or until a claim is notified to the assured. The injury process is considered to continue over the entire period and as there is no basis on which to measure the damage during each policy period the Court has determined that each policy is liable to respond in full. Although the judgement does not specifically refer to an insureds ability to select the year from which to seek recovery, the joint and several nature of the finding effectively produces the same results. On the question of defence the Court indicated that it would be prepared to consider additional briefing on specific concerns but its general conclusion was that such obligations cease upon the exhaustion of indemnity limits.

Bearing in mind that in so far as bodily injury claims are concerned the London Market had concluded settlement with those insureds involved in the Co-ordinated Action, the decision has no direct impact on our Market. However, bearing in mind that this case is the most extensive coverage action ever to come before the U.S. Courts and already has consumed over two years for the Bench to reach this stage, the precedential nature of the ruling will be apparent to all. It was the concept of our industry that the significance of the issues involved justified the enormous investment of time, energy and legal costs to achieve a more rational interpretation of our contracts and in particular to contain the "free for all" effect of Keen. As matters presently stand we have to face on the one hand a developing reluctance of the Washington D.C. Courts to provide reaffirmation of Keene and on the other we now have to cope with what can only be termed "Super" Keene in California.

I must emphasise that Judge Brown's ruling is not at this stage a judgement, bearing in mind there are two further phases to be addressed by the Court Phase IV will deal with extraneous issues that arise from the earlier phases of the case and in particular the manner in which the latest decision will be implemented to avoid the uncertainties that arose out of the original Keene judgement. Thereafter the Court will move to Phase V to consider matters relating to Asbestos Property Damage. Only after all phases have been completed will judgement be entered on all aspects of the case and it is at that point that consideration of Appeal to the Upper Court will arise. However Counsel have cautioned that little substantial change is likely to occur from the tentative decision now handed down.

I would now like to move on to matters relating to the Asbestos Claim Facility. It is perhaps timely to remind the Market that but for the coverage resolution provided by the Facility, we would now be bound by Judge Brown's ruling. Although many critics of the Facility, and in particular certain Reinsurers, have maintained that the Facility Agreement was too generous, the latest decision clearly justifies our commitment; indeed the terms of the Facility Agreement are more restrictive in many respects than the latest pronouncement of the Court. The number of claims disposed of by the Facility continues at the rate of approximately 500 cases per month with total indemnity running in the area of US$30M. It is unlikely that we shall see any material increase in the number of settlements processed in the foreseeable future. With the dramatic upsurge in new cases being reported, we are now facing an ever increasing volume of outstanding claims as each month passes. There were in the region of 25,000 outstanding claims when the Facility started operating in September 1985; by the end of April 1987 we had disposed of 8,500 cases which represents nearly 35% of our original case load. Of much greater significance is the fact that the number of outstanding claims is now in excess of 50,000 cases.

It is perhaps indicative of the success of the Facility in providing fair and equitable compensation to meritorious claims that the Plaintiff Bar have now commenced an anti-trust conspiracy action against the Facility and its Members. In a wide ranging complaint filed in the Western District Court of Pennsylvania they assert that Facility members acting in concert is against the interests of claimants and that ethical concerns arise with one defence counsel representing all defendant producers. The objective of this outrageously self-serving suit by the Plaintiff Bar is the dissolution of the Facility and it is by no means coincidental that this case has been assigned to one of the few judges critical of the Facility. To date service has / not been effected on the London Market but the matter is being carefully monitored by Counsel.

As in previous years our U.S. Representatives will meet in July with certain members of the Direct and Reinsurance Claims Committees to develop the bases to be adopted for the coming year end reserves. The general deterioration gives cause for concern for it is now clear that the Market must prepare itself for significant reserve increases in year end reports. The Working Party are concerned that Companies and Managing Agents are mindful of these developments in making interim statements to Shareholders or Names.

The final issue I wish to raise relates to the problems that continue to exist on outward reinsurances. As a result of the efforts expended by the major London Reinsurance brokers we are now seeing an increasing response from the European Market and I am particularly pleased to record that Munich Re are now starting to respond to billings. I was recently advised that Gerling Global were now prepared to entertain pre Facility claims subject to existence of aggregate provisions in the original and reinsurance contracts. Bearing in mind that pre Facility expenditures go back to 1985 there is grave concern at the dilatory manner in which wholly justified reinsurance recoveries are being addressed. Of even greater concern is the negative attitude adopted by many reinsurers to original claims handled through the Facility. In the past reinsurers have argued that obligations under the terms of the Facility Agreement exceed contractual responsibilities. That argument and also the view that we were rewriting contracts has been rejected in the past and as a result of Judge Brown's ruling our commitment to the Facility has been totally vindicated.

The Annual General Meeting of the Asbestos Claim Facility took take place last week in Washington which attended as representing the interests of the London Market. I spent some time with William Wall, the Chief Executive Officer, to explain to him the unique manner in which our Market place operates and invited him to visit London as soon as his business pressures permit. I hope to provide you with a full report on the progress of the Facility later this month.

It was announced that a significant Producer, Owens Corning Fibreglass, gave the requisite 60 days of notice of withdrawal from the Facility in respect of new filings. Under the terms of the Facility Agreement, OCF will continue as an active participant in respect of all cases that are outstanding up to the time of withdrawal and, therefore, this development will only start to impact the Asbestos Working Party's operation as the Facility become actively involved in suits filed after the departure of OCF. On 26 August 1987, R A G Jackson advised the Insurers at Interest that "it appears that the fundamental problem facing OCF is that their generic share is becoming disproportionate to the changed source from which new cases are arising.

Financial Times: PCW affair moves nearer to settlement

THE PCW affair at Lloyd's of London moved nearer to a conclusion last night when Lloyd's declared unconditional its offer of a settlement to nearly 3,000 members of the former PCW syndicates.

The announcement came nine weeks after Lloyd's unveiled its settlement proposal and nearly five years after it began to emerge that members of the syndicates had been the victims of a massive fraud.

In April, Lloyd's asked a core group of 1,547 of its members (" names ") to contribute up to £34m to a cash fund to provide against net losses of an estimated £235m faced by the syndicates over the next two decades. In return, the names would be freed from all further liabilities.

Lloyd's refused to comment on the key question of how many of the 1,547 worst-effected PCW names had agreed to accept its terms.

Under the terms of the two part offer, Lloyd's could declare it unconditional only if at least 90 per cent of affected names accepted. However, this threshold could be lowered with the consent of Additional Underwriting Agencies Number Three, a caretaker body set up to manage the syndicates

AUA3 met Lloyd's officials yesterday but its directors were unavailable for comment last night. Mr Christopher Crosthwaite, a solicitor for 450 PCW names, said the body had refused to tell him the level of acceptances yesterday.

Mr Crosthwaite and the PCW 1985 Committee, which represents the 450 names, have criticised the Lloyd's settlement terms because they claim the losses directly arose from fraud by professional members of the Lloyd's market.

The share prices of two of the potential defendants Sedgwick Group and Minet Holdings, rose yesterday. Sedgwick gained 4p to close at 293p. Minet closed at 375p, up 3p.

The Times: Names support £134 million PCW package

One of the blackest periods in the history of Lloyd's drew to a close yesterday when the insurance market declared it had received enough backing from underwriting names enmeshed in the PCW scandal to proceed with the £134 million rescue package it unveiled in April to try to resolve the affair.

Mr Peter Miller, the chairman of Lloyd's, said: "It is now possible to close this shameful chapter."

"I am very pleased indeed that the proposals put forward by Lloyd's to end this most difficult problem have been accepted by an overwhelming number of damaged names. While the claims on the policies still have to be met, the names who have assented will not be involved in any further problems."

The acceptance of the package ends years of uncertainty generated by the PCW scandal, which blew up in 1982 when it was discovered that the two founders of the PCW syndicates, Mr Peter Cameron-Webb and Mr Peter Dixon, had misappropriated £40 million of investors' money over a period of years.

"I think it is very important that Lloyd's was able and had the strength to solve this problem," Mr Miller said.

"It is a problem which had to be solved by Lloyd's if it is to retain both its self-confidence and public confidence in it as an effective self-regulatory body."

The rescue formula devised by Lloyd's, which is pressing ahead with civil actions against Mr Cameron-Webb and Mr Dixon, asks names to contribute £34 million towards the cost of meeting outstanding claims against PCW syndicates.

Lloyd's itself will put in £48 million, with the balance coming from companies which Lloyd's deems may be under a legal or moral responsibility to syndicate members. They include Minet Group, which owned the PCW underwriting agency, and Alexander & Alexander, through whose companies PCW funds were siphoned abroad.

After nine months of negotiations, Lloyd's calculated the likely gross liabilities of the syndicates affected to be £680 million. Taking account of assets, including insurance recoveries, the net liability is reduced to £235 million. The £134 million needed now is to meet present and future liabilities of the PCW syndicates.

Lloyd's accepts that a caucus of the worst hit names, some of whom face bills of more than £240,000, will refuse. Some have already threatened to take their grievances to court.

But Mr Miller is offering no fresh sweeteners to win round dissenters and added that Lloyd's would defend any legal actions with vigour.

He said: "We have made an offer after intensive negotiations with those representing the names and we have no intention of mounting another."

Mr Christopher Crosthwaite, the solicitor who has been acting for the PCW 1985 Committee, which speaks for 450 of the hardest-hit victims of the non-marine syndicates, hailed yesterday as "the end of a long battle."

"The 1985 Committee has done its job. its job was to get an offer which although unpleasant for some people was good for others."

Mr Miller gave warning that the penalties of not accepting the Lloyd's offer were stiff. Names who assent will not be liable for any unforeseen deterioration in the claims against the PCW syndicates but, he said: "If you don't accept, you are a name against policies against which many people all over the world have claims."

It is understood that names who do not assent to the package run the risk of suspension from underwriting. They would also not be able to pass the solvency test required of names unless they put up assets that covered the whole of their losses from the stricken PCW syndicates. Some market sources suggest that even then it is doubtful whether such names would pass the solvency test.

Some aggrieved names say they are willing to pay their share, but are disputing what that share is. Mr Miller conceded that calculating the liabilities of the PCW syndicates had been a complex task.

He said: "The losses were underwriting losses. But you have fraud, and you have chaos which surrounds the fraud, which makes it impossible to apportion the losses correctly, 100 per cent, between the names involved."

1. At the last meeting of the Board, I outlined my concerns about the poor quality of the records and the weaknesses in our internal organisation for dealing with outstanding claims and reinsurance recoveries....

(i) The figures are now huge: ...

(ii) The outstanding claims go back many years and there have been numerous changes in personnel over the years.

(iii) The records are poor and in some cases non-existent.

(iv) The syndicates have grown to a size where individuals or groups have specialised and there is no-one Co-ordinating the problems or the syndicates as a whole.

(v) There have been massive problems in dealing with asbestos and environmental claims with the result that responsibility for monitoring outstanding claims on Syndicates 417 and 799 has been sadly neglected and the staff now assigned to maintain the records are far too junior and inexperienced.

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

Ladies and gentlemen, after the General Meeting last November, a senior member of the market commented to me that the Chairman's Statement on that occasion provided those attending with - I think his words were pretty thin gruel. In a sense, he was right; while we had the opening of the building by Her Majesty The Queen to look forward to, as to other matters, we were a bit like Godot, waiting for events which it seemed would never come about and therefore any comments would have been purely speculative. I can promise that same member richer fare today and with contents more wholesome than the "gruel thick as a slab" prepared by Shakespeare's witches in "that play." Indeed in view of the importance and complexity of the matters I must discuss with you, in advance I make no apology for a statement somewhat more lengthy than usual.

We received the Neill report in January; five months later it is perhaps becoming possible to put it into the overall context of the Lloyd's reforms of the last four and a half years. When we do this, we can get some idea of where we have got to with successful self- regulation at Lloyd's and where we should be going. It is the architecture of the new Lloyd's as conceived in the Lloyd's Act of 1982 which Neill sets out to improve, drawing upon the latest standards of investor protection being introduced elsewhere under the Financial Services Act. In the light of the Council's work since 1983, it is worth reminding the Society as well as the world at large of the praise which Neill felt able to accord to our efforts so far. Improvements in accounting standards, the reformed disciplinary procedures were particularly commended, and, as you know the Neill team said that they knew of:

That this is so, should not be any cause for complacency, Neill singled out some areas where it was felt that we had not yet got it right and further efforts were needed, but overall the recommendation made by Neill are clearly developments of and improvements to what was already in train.

At this point, may I pause to report to you the completion of a central requirement of the Lloyd's Act 1982? You will of course recall the requirement of the Act for divestment (of broker ownership of underwriting managing agencies and vice versa) by 23 July 1987. That has now been completed. But Lloyd's set itself a further goal, not precisely required by the Act, namely the re-approval by re-registration procedures of all underwriting agencies. This too will be completed by 23 July .and marks, to my mind the most significant of all the Lloyd's reforms. The application of the concept of "fit and proper" to overall composition and balance of boards and to the individuals serving thereon and the adequacy of the financial structure, is something Lloyd's developed in 1984 and has now put into practice. Combined with the vastly improved accounting procedures and requirements on disclosure we now have an underwriting agency system which is independent and therefore more responsive to the Names at Lloyd's; more competent and therefore more reliable.

To return to Neill and as you know, we have accepted in principle all the recommendations. We have already implemented eighteen of them and steady progress is being made on the others. I would make a plea for patience; practical effects need to be carefully worked out and we must have effective consultation with those concerned. For example, and as we have already said to Parliament, it may not be possible to bring in revised underwriting agreements before 1 January, 1990, if we are to get it right. Further it is wrong to castigate Lloyd's for delay in, for example, broker regulation. The Council and the Lloyd's broking community are equally keen to complete the considerable reforms already made in this particular area. Our necessary involvement with the work of the Neill Inquiry last year diverted resources from this task amongst others. These resources can now be devoted to their project. I am determined that we should be ready to start re-registering brokers under the new rules by the end of this year.

There really can be no doubting the will and determination of the Society and the Council in all these matters. In human terms, clearly the most difficult recommendation was the alteration in composition of the Council. Many expected that there would be lengthy transitional provisions, yet within days of publication of the report I was able to announce that this core constitutional change would come into effect on 1 July. I pay tribute to the selflessness of Mr Barber, Mr Bird, Mr Ballantyne and Mr Greig who were prepared to make way immediately for the four new nominated members. It is right to commend the services which they have contributed to the Society and to record, as an example of those services, that Mr Barber, in his ten years on the Committee and Council, served on sixty committees and chaired a further ten and served as both Junior and Senior Deputy Chairman. Mr Bird was the author of the Bird report on membership requirements and is virtually "Mr Property" and "Mr Captains' Room", while Messrs Ballantyne and Greig, though relative newcomers to Council are of an age (if they and their retiring colleagues will forgive me) which leads me to hope that re-election (for which they will be eligible for a term commencing in 1989 or any calendar year thereafter) may, one day again place their shrewdness at the disposal of the Council and the Society.

May I warmly welcome Mrs Elizabeth Freeman, Sir Maurice Hodgson, Sir Jeremy Morse and Mr Brian Pomeroy (a member of the Neill Inquiry) as the four new nominated members of Council. I am delighted that Lloyd's could attract people of such calibre. The new Council is now composed in such a way that each year in November, places for three working members and two external members will be subject to an election in accordance with Lloyd's Act - and voting is a topic to which I will return.

It has been said that the new composition represents a shift in the balance of power within the Council. This, I think, is to misunderstand the nature of the way the Council works and leads me to reflect specifically upon the nature of its task in the future and generally upon the future of self regulation at Lloyd's.

The Council never has, and I hope never will, either vote or find itself divided, upon what I would call constituency lines. The recommendation for a change in composition should be accepted as a reflection of the general changes outside Lloyd's in the concept of self-regulation, rather than any idea that the external and nominated members were in practice overwhelmed by the working members. I have heard it suggested, as a disadvantage to Lloyd's, that we shall be free of surveillance by the Securities and Investments Board or indeed by any other body. This seems an extraordinary suggestion, since we are now, as we have always been, subject to regulation by the Department of Trade and Industry. Further, we now have eight "surveyors", totally independent of the market, in the nominated members who have of course to be approved by the Governor of the Bank of England. One of these is the Chief Executive of the Corporation (and therefore as close as anybody to all that is going on) and another must be the Chairman or Deputy Chairman of the SIB itself.

May I pause to stress the difference between the duties facing the Council of Lloyd's and those for which some of the new self regulatory organisations have been called into existence, namely investor protection. In addition to our responsibilities to our Names we have further and equally important responsibilities to our policyholders world-wide. It is this dual responsibility which distinguishes us from the other self-regulatory bodies in the City.

This leads me to some comments which can shortly be made about the future of self-regulation at Lloyd's and the Council's role therein.

First, the Council at last has the chance to escape from the role to which circumstances have condemned it since 1983, namely crisis management. It must develop into the truly effective organ of policy decision within the Society in discharging its responsibilities. These responsibilities remain unchanged and deserve restating. They are, first to protect the solvency of the Lloyd's policy and thus the policyholders' interests; second to protect the interests of the Names by proper regulation of the market place; third to provide the market place with a proper working environment in the widest sense including the use of modern technology, and finally to represent when appropriate the interests of the Society as a whole to governments and regulators at home and abroad. While the Council's working relationship with an increasingly effective Corporation continues to improve (both of which developments I heartily welcome), the Council must perfect its policy-making initiatives by the proper use of the various Council committees. It is very important that these committees should work effectively and I look to increased participation thereon by members of the market, and the external Names alike - and to achieve the latter I welcome the increasing responsibility and interest of the Association of Lloyd's Members.

On the more general subject of regulation, there has been City criticism of the increasing cost. For Lloyd's, I do not share those particular worries (though in general terms we must always critically examine any increase in costs). Far more I fear the effect of regulation if it is perceived as a method of taking the risk out of what is essentially a risk-taking business. The man who is at the heart of our Society is the active underwriter with a pen in his hand. So far, I am satisfied that the new regulatory regime has not damaged his risk-taking ability - but clearly there is a danger that this could become so. He must not be put into the position where he is always looking over his shoulder, worried that the Names will sue him if he takes a risk. We must always remember that this is a risk-taking business and there is a high financial risk in being a member of Lloyd's; our chosen agent is carefully regulated perhaps, but he is the agent appointed by each individual Name and the consequences of his action are those of each individual Name and no one else.

Since I last spoke to you, the Society has put forward proposals to settle the PCW affair. A great deal has been written on this subject and I have already explained the reasons for the Council's action to all Names together with details of the proposals themselves to the PCW Names - and to any other name who required them. Ladies and gentlemen, the long nightmare is over; the offer made by Lloyd's has gone unconditional with more than 95 per cent of Names involved accepting. The PCW affair had characteristics and a dimension which render it unique. It involved not only large and genuine underwriting losses but also the theft of monies by the managing agents by improper use of certain reinsurances. The principal of these monies (though not the interest) was of course recovered and restored. But in addition we were left to cope with the results of the perhaps inevitable chaos which surrounds any fraud and certainly applied to the financial affairs of the PCW syndicates. It was this deadly combination which made it unavoidable that the Society's own monies - the monies of the other members of the Society that is to say - would become involved, in apparent conflict with the basic doctrine of each for his own part not one for another. Negotiations by Lloyd's succeeded in obtaining material contributions from the potential defendants to suits by PCW Names. Those Names were asked for payment of amounts which on average, relieved them of 75 per cent of their potential losses, thus replacing the uncertainty of years of litigation with the certainty of the immediate benefit of a fund of £100 million as well as the literally inestimable benefit of finality to their exposure in this dreadful affair. Lloyd's itself is financially involved, but it is the Council's carefully considered view that the unique circumstances set out above have not only rendered this inevitable if the matter is to be settled, but also that the continuance of the affair was becoming highly damaging to the wider interests of the Society. Those not yet accepting will be able to do so on almost identical terms to the present settlement up to 8 July. Thereafter non-assentors will, as every other Lloyd's member, have to pass the solvency test. I cannot, at this stage, see a way by which they could do so. We shall of course continue to pursue our declared policy of relief of hardship and pursue any sensible accommodation with those who wish to assent and finalise their affairs but who do not wish to continue underwriting at Lloyd's. Talking of pursuit we shall continue to pursue malefactors vigorously by civil suit. I hope that in the end the Director of Public Prosecutions can find a way to do so likewise in criminal procedures.

Ladies and gentlemen, there can be no dissent with the bald proposition that this must never be allowed to happen again. Of course no policyholder has suffered or has ever been likely to suffer. Our capital base, our Names, however, surely have the right to expect that in a well-regulated society, while they may be exposed to the hazard of insurance risk they should not be exposed to the hazard of theft of their own monies. I cannot promise that we will never again suffer from crooks and charlatans; I can, however, point to each particular of the Cameron-Webb theft and demonstrate how our modern system of regulation would, point by point, prevent recurrence.

The sadness to me of the 1970's was that not only that some people forget the law of agency but also that some forgot, perhaps under the twin strains of heavy taxation and cut-throat competition, the importance of ethics in business. It is easy to be cynical about this; when ethics in business are discussed the tendency is to reach out to see that the silver spoons are safely locked away. It is also easy to be guilty of talking down and to forget how much easier it is to be honest when one is older, richer and established than when one is young and properly hungry both for money and success. May I make a few practical suggestions? All but the sad handful of the truly amoral, know within themselves what is right and what is not. If you wish to carry on your business in mental as well as material comfort, adhere to the first and eschew the second. It is so desperately easy in the understandable anxiety to get or complete the order, to allow ambiguities to stand, to slide over or omit unpleasant truths, to fail to correct a misapprehension which stands to one's advantage. It is the particular duty of the older members of the market to take responsibility and enforce strict standards not only on those who work directly under them but also on those with whom they deal; for example nothing has so debilitating an effect upon standards as the sight of the broker being allowed to "get away with it" by weak or indolent underwriters. Know your law, particularly the law of agency - it is founded not on some abstract theory which can safely be ignored, but rather on a carefully constructed reflection of civilised society. Being part of the common law developed over centuries, to my mind it carries added moral weight; the development of this law within the Lloyd's Society by use of codes of practice is also of course extremely important. Finally (and I am indebted to Robert Heller for the initial thought), reflect on the Quakers; they treated their people honestly and decently, worked hard and honestly themselves, spent honestly and saved, honestly put back into the company more than they took out, honestly made good products, gave honest value for money and being honest told no lies - and look how well they did out of it!

To turn from the making of money to the spending of it, I must now deal with Lloyd's relations with the Inland Revenue and in particular with the recent proposals put forward in the Finance Bill concerning the taxation of the reinsurance to close. May I immediately state at least a personal sympathy with the theory of a system of lower taxes but an absence of "tax breaks" and reject firmly any suggestion that Lloyd's was enjoying some kind of tax break within the reinsurance to close. Our objection to the Revenue's approach to the problem, which was to seek to tax the reinsurance to close as though it were a "provision" made by an insurance company, was essentially because of its unreality in relation to what actually happens when the managing agent closes the syndicate's affairs.

An insurance company in making a reserve on account of a developing claims situation, is acting in a continuum. The "penalty" at that stage if a company cannot agree the prudential level of the reserve with the Revenue is of course payment of tax at 35 per cent. The managing agent closing a syndicate's affairs annually is transferring all risks and liabilities of that year from one set of Names (upon whom he is conferring finality in return for making a payment) to another set of Names (upon whose behalf he is accepting risks and liabilities in return for the receipt of a payment). It is pertinent that on average, fifty per cent of Lloyd's Names change their participation on every syndicate by 25 per cent or more each year (and liabilities are being transferred which may in extreme cases take up to forty years to settle). This means that unless amounts deductible for tax match the commercial payment of the reinsurance to close many Names will pay tax on money they have not received and others the reverse. At a time it is pertinent to remember that there is every temptation (but no justification) for the agent to cut down the reinsurance the reinsurance to close to maximise syndicate profits and his own commission while there is no reason (and likewise no justification) for a new set of Names being asked to accept liabilities from the past - often the far distant past - for a payment which contemplates anything less than adequate protection to cover the risk of loss which they are asked to assume.