Lloyd's List: Compulsory reading - Letter from Alan Smallbone

SIR Mr. Hiscox's plea (Dec 6) for those with shares in agencies to be allowed to sell them - and with such sales the futures of the next generation of underwriters - to the highest bidder should be compulsory reading for all names; so should be a summary of the principal dangers to them from this attitude of mind.

Lloyd's underwriters used to be able to turn away underpaid business, as their company competitors could not, but we have been busy abandoning that high ground

Costs are rising at a frightening rate. Between 1981 - 85 net premiums were up by 135% syndicate expenses by 165%, agents' take by 216%, Lloyds sub etc. costs by 237%.

Agencies attract buyers at high prices - Hogg's paid £1.07 million for £25 000 assets and pre-tax profits last year of £460,000 from Bain's - but that was a members' agency

Those operating managing agencies could be tempted to "fatten" them for sale.

The Cameron-Webb method was to write too much high-level excess long tail business buy an inadequate (i.e. cheap) RI programme, grossly underestimate IBINR reserves (how the Inland Revenue would approve!) and sell to a complacent buyer before things went wrong. Masterly timing. He could have ignitators.

Agencies run by the scheming or the stupid may show eventual losses for seemingly the same reasons, the root cause being a matter of reference only.

Eliminating the temptation to gamble in the hope of selling soon enough would be a protection for names.

Mr. Hiscox's belief that incorporation promises stronger management is fantasy. The "necessarily high accounting standards of a public company" are an illusion; Lloyd's can impose what requirements they wish on all agencies.

The huge protection to names from partnerships is a matter of law. Partners are responsible for other partners' defalcations.

Directors on the other hand all too often have no more authority or security of tenure than a kindergarten pencil-monitor. They can be the creatures of a simple 100% shareholder ordered by their employers to sit on boards of directors.

That is not in names' interests is it? So would Mr. Hiscox abandon Lloyd's fidentia motto, substituting "Apres moi le deluge?"

European Storms.

On 24 January 1990, the four year old trial in the California consolidated proceedings came to a close when Judge Ira Brown issued a final judgment on Phase VI, nearly nine months following the completion of Phase VI of the trial. Key decisions arising out of this proceeding include the Phase II ruling wherein Judge Brown construed the "asbestosis" exclusion to apply to all asbestos-related diseases and the Phase III ruling wherein Judge Brown ruled that all policies in effect from the date of first exposure until date of death or date of claim are triggered by an asbestos-related bodily injury claim. On 3 April 1990, Judge Brown denied the motion of various defendant insurers for a new trial. Certain defendants have filed a Notice of Appeal of the trial court ruling.

Insurance Institute of London: Lloyd's and insurance in the 1990's, an address delivered by W N M Lawrence

Syndicate Accounting (Amendment No. 2) Byelaw (No. 1 of 1990, 7 February 1990).

Under this amendment, it was a mandatory requirement for managing agents to produce summary annual reports with effect from 31 December 1990 in addition to making available full annual reports to Names on request. The Syndicate Accounting (Amendment No. 4) Byelaw No. 2 of 9 January 1991 reversed the above requirement in that the production of summary annual reports is no longer a mandatory requirement.

Failed Promises: Insurance Company Insolvencies. A Report by the Subcommittee on Oversight and Investigations of the Committee on Energy and Commerce U.S. House of Representatives, Washington, DC. Letter of Transmittal

"To Members of the Committee and Commerce: It is my pleasure to transmit to you a report by the subcommittee on Oversight and Investigations entitled "Failed Promises: Insurance Company Insolvencies". This report sets forth the Subcommittee's findings from its extensive investigation into the causes of insurance company failures in the United States. The report was adopted by unanimous vote of the Subcommittee.

The Subcommittee found that the present system for regulating the solvency of insurance companies is serious deficient. Consequently, the number of insolvent companies has increased dramatically, and the resulting costs to the public have skyrocketed due to the changing nature of the insurance industry. With an accelerating international market and the leverage provided by excessive reinsurance, the costs of liquidating failed companies is starting to reach billions of dollars and take many years to resolve. The parallels between the present situation in the insurance industry and the early stages of the Savings and Loan debacle are both obvious and deeply disturbing. They encompass scandalous mismanagement and rascality by certain persons entrusted with operating insurance companies, along with an appalling lack of regulatory controls to detect, prevent, and punish such activities. Because the ill effects of fraud and gross incompetence may be hidden for 10 years or more after a policy is written, the problems observed by the Subcommittee could quickly escalate into a real threat to the solvency of the insurance industry if reforms are not implemented very soon.

The regulatory system must anticipate and deal effectively with the activities of the pirates and dolts who inevitably will plague an attractive industry such as insurance, where customers hand over large sums of cash in return for a promise of future benefits. The Subcommittee will continue its enquiry with an open mind regarding the types of actions that will correct the problems described in this report. The public rightfully expects that responsible industry participants and officials of Federal and State governments will move to address abuses and deficiencies in the present solvency regulatory system.

European Storms, estimated cost U.S. $11 bn.

Lloyd's Market Bulletin explaining that a settlement had been reached with the U.S. Internal Revenue Service (IRS) to resolve the dispute on the deductibility of provisions made for outstanding liabilities for syndicates in run-off. The Closing Agreement comes into effect on 1 January 1991 and makes specific provision for the deductibility of reserves for syndicates in run-off. It does not cover the PCW run-off syndicates. A Market Bulletin will be issued shortly to explain the position for non-US Names. The settlement provides for the 1990 return to include the reversal of the exclusions in the years 1982-88 and 1989 (i.e. what was disallowed in 1982-1989 will be allowed in 1990).

Agency Agreements (Amendment) Byelaw (No. 2 of 1990, 7 March 1990).

Syndicate premium Income (Amendment No. 2) Byelaw (No. 3 of 1990, 7 March 1990).

Lloyd's List: Conflicts of interest is an acute problem - Letter from Alan Smallbone

SIR Mr. Kauntze (Insurance File Jan 30) is quite right to draw attention to the conflicts of interest between names and shareholders in underwriting agencies and to emphasis how acute this becomes when an agency is quoted on the stock market.

Lord Cromer criticised this anomaly " names may be regarded as supplying funds to enable others to share in the profits of the syndicate," he wrote in Paragraph 228, concluding Chapter 8 of his report 20 years ago " if the recommendations are carried out the financial attraction of these companies would become much less …"

Unhappily for Lloyd's, names were not allowed to know about those recommendations. According to Mr. Hay Davison that was because the agents did not want names to know. The rest is history.

Unfortunately, Mr. Kauntze then gets things wrong. Of the 158 agencies only a handful have some sort of listing; indeed, but those who do account for 30% of Lloyd's capacity and the blight is spreading every month.

He is mistaken too in supposing that partnerships provide no greater protection for names than incorporated agencies. Because partners are responsible for other partners' defalcations people will not dare to join those, w ho behind a facade of entrepreneurial vigour are actually gambling with their names; and if they find the pace too hot and the people too slippery should they be ill-advised enough to join in ignorance of the true character of those controlling the agency, they will very quickly resign.

Yet what director in the entire PCW/Minet empire, to take but one example, did anything that mattered to warn names in time? Who can doubt that, had they been partners they would have got out long before? Not because they knew for certain but because partners dare not want to be certain; they resign as soon as they cannot get really clear assurances that all is well.

In view of the cash shortfall, the Trust withdrew all settlement offers more than 30 days old and issued a new payment plan on April 1, 1990. The plan provides that the Trust will make its earliest payments in March, 1991 to claimants who filed in 1982 and these claimants will not receive their final payment until 1996. Claimants filing in 1990 will not receive their first payment until the year 2015 and their final payment in the year 2020.

Underwriting Agents (Amendment No. 6) Byelaw (No. 4 of 1990, 4 April 1990).

Press Release: issued by the Council of Lloyd's - Asbestosis Liabilities: Run-Off Contracts

The Council of Lloyd's decided at its meeting yesterday (4 April ), that no grounds have been established for conducting an inquiry into the circumstances surrounding the placing of certain run-off contracts in the period 1980-1982, in particular by syndicates with asbestos-related liabilities.

A call .for an independent inquiry was made last year by Mr. John Donner, chairman of Donner Underwriting Agencies Limited, in the interests of some of his Names affected by the losses of the 1982 Outhwaite syndicate. In correspondence and discussion with Lloyd's, Mr. Donner made no specific allegations but posed a number of questions, from which the possibility of misconduct could be inferred. When initially considering the matter last year, the Council of Lloyd's concluded that the issues raised by Mr. Donner's questions warranted an inquiry only if there were some prima facie evidence.

The opportunity was therefore given to Mr. Donner to provide any material which he considered to be prima facie evidence of matters that might warrant an inquiry and of any matters that would amount to misconduct within Lloyd's disciplinary powers. In taking this step the Council of Lloyd's was conscious of the difficulties of attempting to disprove vague suggestions of impropriety without specific allegations, especially when recollections of events which occurred in the past are easily influenced by hindsight.

Contrary to suggestions that there was a high coincidence between members of the AWP and those placing run-off contracts, in fact only two Lloyd's members of the AWP (which had a total membership of 10 or more at various times) arranged run-off policies for their syndicates. No evidence has been provided which supports the suggestion that in placing their contracts the underwriters took advantage of information which was available to the AWP but was not made available to the market. Of the other parties referred to by Mr. Donner in this context, one placed a run-off contract some six years before the formation of the AWP and the others were at no time members of the AWP.

A second aspect concerned the handling of representations made to Lloyd's by syndicate auditors about the difficulties for syndicates of reserving at the end of 1981. The concern expressed by auditors was well understood by Lloyd's and resulted in guidance issued by Lloyd's to the market (including syndicate auditors) early in 1982.

No evidence has been found to indicate that Lloyd's failed to do all that it reasonably could to encourage syndicates and their auditors to adopt a duly diligent attitude in setting their reserves as at 31 December 1981.

A third area concerned comments made by Mr. Donner about the role of the broker in placing run-off contracts in the Lloyd's market. It is relevant that the market for unlimited run-off policies developed mainly in the period from 1990 to 1992 (with policies offered by three Lloyd's underwriters); it vas natural and proper for brokers to advise their clients on what was available and no evidence has been produced or found that suggests that there vas any misconduct on the part of any broker in the placing of such policies.

Underlying all of these issues is the implication that some syndicates failed to disclose material information when placing their run-off contracts. The four nominated members, and the council of Lloyd's. have been conscious that non-disclosure has been alleged in a number of disputes concerning run-off contracts which have been (and in some instances still are) the subject of litigation. arbitration or negotiation between the parties. In the absence of evidence of concerted action or conspiracy, whose existence or relevance might not come to light in individual cases in the courts or arbitration, there is no case for Lloyd's to interfere in such cases.

No such evidence has been produced to the four nominated members nor has prima facie evidence been established of misconduct on the part of particular members of the Lloyd's community in placing their run-off contracts. Accordingly the council has concluded that there are no grounds for establishing an inquiry of the kind suggested by Mr. Donner nor for

disciplinary investigation by Lloyd's.

In reaching these conclusions. the council of Lloyd's recognised that some of the issues referred to above may be addressed in further detail in specific disputes which are still the subject of litigation or arbitration between syndicates or in the litigation commenced by some Names against their agents. The decisions of the council of Lloyd's are not intended in any sense to prejudge or pre-empt the outcome of these actions. (page 4 missing)

Press Release: issued by the Board of R H M Outhwaite (Underwriting Agencies) Ltd

The announcement made today by the Council of Lloyd's that they do not intend to take any further action or, to hold any enquiry into the issues raised by Mr. Donner in relation to the placing of certain run-off contracts, many of which were written by syndicates 317/661 under our management during the period 1980 - 1982, comes as a considerable surprise to us. We are aware of the correspondence which has passed between Mr. Donner and Lloyd's, certain documents produced to Lloyd's by Mr. Donner and oral evidence given to the nominated Members of the Council of Lloyd's by others. On the basis of the information known to us we believe that Mr. Donner has raised issues of significant importance to the Market, particularly in relation to the way in which the 1979 Account was reserved at 31 December 1981 for asbestos liabilities. Under the circumstances we find it surprising that the Council of Lloyd's, acting on the recommendations of the Nominated |members, have concluded that no further action is required.

We agree with the Council that the legal and re-negotiation processes remain the proper means by which to resolve disputes relating to specific individual contracts.

There have been no significant declaratory judgement coverage decisions at the appellate level in the past year involving asbestos-related bodily injury claims. However, there have been certain noteworthy trial court decisions. Trial courts in New Jersey and Pennsylvania handed down two adverse decisions restricting the "asbestosis" exclusion and affirming the continuous trigger theory. In California, Judge Brown issued a final judgement in the four year long trial of the co-ordinated proceedings and denied the motion of certain defendant insurers for a new trial. The general developments in the bodily injury coverage litigation are discussed below.

One of the year's most troublesome asbestos-related bodily injury coverage decision was announced April 6, 1990 by the Chancery Division of the Superior Court of New Jersey, Middlesex County, in Owens Illinois. Inc. v. United Insurance et al. This claim involved a coverage dispute between an insured and its primary and excess insurers and certain reinsurers concerning coverage issued after 1977 for asbestos-related bodily injury and property damage claims. The London Insurers were not a defendant in this action. The trial court was asked in part to rule upon the insured's Motion for Summary Judgement seeking continuous coverage for its asbestos bodily injury and property damage claims and a declaration that the "asbestosis" exclusion does not preclude coverage for all asbestos related diseases. The defendant insurers in turn sought policy reformation on grounds that the insured fraudulently concealed its asbestos involvement from the insurers.

The New Jersey trial court relied extensively upon the reasoning set forth in Lac D'Amiante Du Quebec v. American Home Assurance Co., decided in 1985 by a federal court sitting in New Jersey, and ruled that the continuous trigger theory should apply to the insured's asbestos bodily injury claims. The chancery court stated that the triple trigger coverage approach maximises the insured's coverage and is consistent with medical evidence that injury arises from exposure to asbestos and continues through to manifestation.

The New Jersey trial court was also asked to determine whether an "asbestosis" exclusion applies generically to bar coverage for all asbestos-related diseases or only the single disease of asbestosis. The court reasoned that the insurance contract should be construed liberally to provide the maximum amount of indemnity to the insured and ruled that the "asbestosis" exclusion should be strictly interpreted as barring coverage only for those claims involving the singular asbestosis disease. This New Jersey State court ruling conflicts with the 1989 decision by the U.S. District Court for the District of Columbia in Carey Canada. Inc. v. California Union Insurance Co., et al. and with Judge Brown's decision in the California co-ordinated proceedings, both of which construed the "asbestosis" exclusion as barring coverage for all asbestos-related diseases.

We must in addition note that the New Jersey Chancery Court applied the triple trigger theory to the insured's asbestos-related property damage claims. This development will be discussed in detail in the separate asbestos property damage Market Report.

Corporation of Lloyd's Annual Report and Accounts 1989:

Statement by Murray Lawrence

The Corporation aims to assist underwriters in their business by providing them with cost-effective central services. These must impose the minimum of restrictions commensurate with being of value to the market as a whole.

Regulation is a service to the market which, in recent years, has taken a great deal of the Council's time. Last year the remaining recommendations made by the Neill Committee in its report were implemented. Our progress was recognised by the Parliamentary Under Secretary of State for Corporate Affairs in July, who said:

Underwriters have ‘travelled light' because Lloyd's brokers have proved such splendid partners, acting as a dynamic and enthusiastic marketing arm for Lloyd's. The Council considers that this partnership will continue to be in the best interests of the Society and last year several initiatives were taken to make the Lloyd's market more attractive to both assureds and Lloyd's brokers. Work is now well advanced on the establishment of a single claims system to simplify and speed up the settlement of claims. The Council has also decided that, to facilitate the placing of business and the proper use of capacity, the current market divisions will be abolished. I am encouraged by the speed and determination with which these changes are being put in place and the progress that is being made in relation to the London Insurance Market Network.

Considerable work has also been done to increase the market's ability to accept business from the European Community and progress has been made on two fronts. First, we have established and we are developing a Lloyd's presence in other member countries to enable the market to increase the business it does on an establishment basis. Second, from 1 July 1990, we shall accomplish this by way of freedom of services. Negotiations on the outstanding directives continue and the market has welcomed the proposal made by Sir Leon Brittan, vice-president of the European Commission, for business to be done throughout the community from one base on a ‘single passport'

The single market presents challenges as well as opportunities and the UK insurance industry as a whole is well aware of this. At Lloyd's our concern is focused particularly on the issue of solvency: whether the more prudential regime of some continental countries enables their insurers to reserve on better terms than Lloyd's underwriters and thus provide them with a more secure base from which to undertake both new and existing business.

The problems surrounding the creation and carrying forward of proper reserves for long tail American liability business continued to occupy much of the Council's time. These are at their most acute in the case of the syndicates which have had to leave old years open. Last year the Council appointed Mark Littman, QC to act as a conciliator for the market disputes surrounding the Outhwaite syndicates. His efforts have borne considerable success and it is encouraging to note that more than 60 per cent, by value, of the disputed contracts have been resolved either by arbitration or conciliation.

Naturally the Council is concerned to ensure that those Names affected are afforded all proper advice and assistance. To this end, in addition to appointing a conciliator; the Council has formed a new committee to liaise with those Names who are experiencing serious financial problems.

In these circumstances it has been particularly encouraging to record the support and confidence of the majority of the membership which is reflected in the record capacity for 1990 of £11. 07 billion.

During the year our concern to maintain close relations with both our own and foreign governments was reflected in the number of visitors we welcomed to Lloyd's. These included the ambassadors of China, the Federal Republic of Germany, France, Greece, the Republic of South Africa and the United States of America. Delegations from the United Arab Emirates and the Arabian Establishment fore Trade and Shipping Ltd. were also received.

I undertook two visits to the United States of America and I also visited both Amsterdam and Paris. During the year it was my pleasure to open new Lloyd's representative offices in Milan and Frankfurt.

Further new byelaws originating from the recommendations of the Neill Committee of Inquiry have been enacted in 1989, the main ones concerning the financial requirements that managing and members' agents are required to meet and the provisions governing the new Lloyd's members' compensation scheme designed to give help to members with claims of certain kinds against agents who have become insolvent. These effectively completed Lloyd's implementation of Neill's recommendations at this stage leaving only matters for future consideration still in progress.

The Neill Committee of Inquiry recommended that Names should each year receive a report on the progress of regulation and the Council of Lloyd's readily accepted this view and will continue to supply reports of this kind. Regulation is not of course an end in itself and the overriding objective is effective regulation to contribute to the progress of the business as a whole. The Council therefore will be keeping a continuing eye on the state of regulation, understanding as it does the role that a reliable and trusted regulatory framework can play in achieving an expansion in the Lloyd's business.

The Council accordingly commend the work described elsewhere in this report designed to streamline the existing regulatory framework and at the same time to reassess its scale and appropriateness.

My role as the Lloyd's Members' Ombudsman is to investigate complaints by members of the Society, or former members with open years of account, who believe that they have suffered injustice in consequence of maladministration in relation to action taken by or on behalf of the Society. My powers do not extend to complaints that Names may have against underwriting agent

During 1989 I completed my investigation of the case which was still in progress at the end of 1988. This concerned the Corporation's responsibilities for checking the allocation of results to particular years of account in members solvency test reports. I rejected the allegation of maladministration.

During the year I received ten new complaints. Three of these were resolved without investigation and three were rejected (two because, they fell outside my jurisdiction and one because by reason of its subject matter, I considered that was more appropriate for any determination of the complaint to be performed by a court of competent jurisdiction). Two complaints have not (so far) been pursued further by the complainants. The remaining two have been the subject of full investigations. My report on the first was sent to the complainant: investigation of the second was still in train at the end of the year

The allegation in the 1989 case which was completed was that Lloyd's had embarked on a policy of non-Cupertino, was in collusion with an underwriting agent and had been less than candid in its responses to the complainant, each of these in relation to six different matters about which Lloyd's had been in correspondence with the complainant. In relation to one of the six matters, being the date on which the complainant's membership of the Society ceased, I found that the allegation that Lloyd's had been less than candid was sustained. In consequence I appended to my findings a recommendation that Lloyd's should apologise to the complainant. I also suggested that Lloyd's should ensure that its procedures for the termination of membership of the Society are carried out correctly; and that, if errors are made, it should admit these to the parties affected by them. I was unable, however, to sustain the complainant's allegation that Lloyd's had been less than candid in relation to the other five matters on which correspondence had taken place and I was also unable to sustain the allegations either that Lloyd's had embarked on a policy of non-Cupertino or that it had colluded with the agency.

The expenses incurred by my office for the year amounted to £55,000 which related, in large part, to accommodation costs and other overheads.

There were three main areas of achievement during the year. First, the task of implementing the regulatory recommendations of the Neill Committee was completed on time. This set the seal on seven years of work to put into place an appropriate regulatory system at Lloyd's together with arrangements, including suitably qualified staff to ensure compliance with it. The task now is to review the regulatory system so that, without any reduction in its standards, it is simpler and more "user-friendly" for members and more cost-effective for the market. In the latter half of 1989 the Council established the Byelaw Review Committee for precisely this purpose. The Committee is chaired by Mr. David Walker, a nominated member of the Council and Chairman of the Securities and Investments Board.

Second, with the regulatory framework in place, the Council, and therefore the Corporation, focused attention on facilitating the development of the business of Lloyd's. This change had been anticipated in the Corporation by the creation of a separate Market Services Group in 1988. The work of this Group, as of the Systems and Communications Group with which it operates closely, will become increasingly important in future, both in providing support services for the market and in making sure that the achievements of Lloyd's and developments within the Lloyd's community are effectively communicated both to members of the Society, whether working or external, to our policyholders and to opinion-formers.

Third, the administration of the Corporation was strengthened considerably during the year. The improvement in financial controls and the detailed analysis of the Corporation's costs both helped to hold the Corporation's expenditure, before recoveries, to virtually the same amount in money terms in 1989 as in 1988 despite inflation. Indeed, but for the delay in refurbishing the 1998 Building, expenditure in 1989 would have been below that in 1988 notwithstanding a considerable increase in work volume, particularly in the Claims and Policy Signing Offices. The significant reduction in jobs during the year was achieved primarily by a tight control of recruitment, involving only a few redundancies almost all of which were voluntary. At the same time, improved career development programmes were developed; this is consistent with the objective of having a Corporation which is smaller in overall numbers but with each individual being highly skilled and motivated.

Market Services Group

The first full year of the Group's existence in its new form was dominated by three themes increased demand for its services; keen interest in developing the business; and continued efforts to reform some of Lloyd's procedures in order to be more attractive to clients and Lloyd's brokers.

The largest increases in demand stemmed from the very high level of claims, particularly in reinsurance, resulting from Piper Alpha and several other major casualties. The total volume of transactions processed by Lloyd's Policy Signing Office (LPSO) increased by 11. 4 per cent. There was an especially heavy demand for the services of the Lloyd's Aviation Department with 18 per cent more surveys conducted.

Soft market conditions, increased competitive activity and growing awareness of changes in Europe combined to make the market especially conscious of the importance of developing new sources of business. For the insurance industry, the imminence of implementation of the Freedom of Services directive provides Lloyd's with a major opportunity to extend its portfolio of business throughout Europe. Meanwhile, Lloyd's has also increased its ability to write business by acquiring a licence to operate in the Federal Republic of Germany.

Last year also saw a greatly increased emphasis on the need for Lloyd's to improve its public image and to become more active in proclaiming the advantages it has to offer to clients and brokers. In September Lloyd's placed its first public advertisements, coinciding with the publication of the global results. Plans were laid for increasing the level of promotional activity by Lloyd's centrally. it was also recognised that individual firms within the market must be allowed a greater degree of freedom to promote themselves and their insurance products under the umbrella of the Lloyd's name.

Continuing efforts were made to improve procedures and to reduce costs, notably in the area of the claims agreement process. Although Lloyd's has an excellent reputation for paying very large claims extremely quickly, procedures for paying certain kinds of smaller to medium size claims are sometimes criticised as too slow or too cumbersome. The Committee of Lloyd's put forward proposals to deal with this situation.

Improvements were not confined to claims; the LPSO worked with market representatives to improve the timeliness of documentation and weekly settlement was extended to all markets. A major reorganisation of the LPSO structure was carried out to streamline management and standardise working practices, as a necessary preparatory step for the ending of market barriers.

Throughout the year the group has tried to reach a closer understanding with its customers in the marketplace about the pattern and standard of services required. The group has enjoyed an increasingly constructive relationship with the Market Associations and looks forward to building on this during the years ahead.

During the year the direction of information technology in the market underwent significant change. The considerable investment in networking infrastructure in 1988 had a strong effect on the forward planning of firms in the market. Previously, direction had been very much technical rather than business led. The widening of the membership of the Network Steering Group, which is now a formal committee of the Committee of Lloyd's, was an important step. In future, technical development will be totally business led, the direction and priorities being established and controlled by market practitioners. The Committee had decided earlier that advice cards will no longer be provided by the Corporation after the end of 1990; a similar decision has also been taken on the distribution of claims information. The Society is now on course for total electronic output from the LPSO and the Claims Offices by the end of 1990.

The main thrust of systems developments is to support the Society with current information systems, to reduce overheads and to facilitate the flow of business. Major systems have been developed and implemented to prepare for the replacement of the old and cumbersome direct data entry system which is the key entry-point for all LPSO transactions. Funds and membership information systems were installed in the Regulatory Services Group to improve control of funds and enable direct updating of membership details from members' agents by way of the network in the future.

At the beginning of the year the Council approved an increase of 30 per cent in the Corporation's investment in information technology. Use of personal computers and office terminals increased by 19 per cent over the year and the rate of growth in market telecommunications dropped back a little to 90 per cent compared with 70 per cent in the previous year. Mainframe processing and storage capacity increased by 30 per cent in line with existing plans. The extra capacity will support market changes related to new business opportunities. There is no doubt that 1990 will be a year of considerable change and challenge as network applications multiply. The Corporation is evaluating a Room Support System which will enable syndicate reinsurance and business placing support applications to be processed rapidly. The system will use the existing underwriting box terminals and the Lloyd's building fibre optics cabling and provide Lloyd's brokers easy electronic access through the network directly into the Room. This system should provide a competitive advantage for Lloyd's underwriters by simplifying the placing of business.

Regulatory Services Group

Following almost a decade of review and reform 1989 saw the completion of the final major elements of Lloyd's regulatory frame-work.

After a period of consultation on its proposals, the Council of Lloyd's set financial requirements for managing and members' agents. In addition to meeting new minimum fixed capital requirements, every agent must maintain substantial solvency margins for both net assets and net current assets, to meet both their short and longer term financial obligations. These requirements are being phased in from June 1990.

A further Byelaw established a compensation scheme which will be available to meet certain claims which Names might have against their agents, but which the agent could not otherwise meet because of insolvency. The scheme provides for a maximum of £90,000 per claimant subject to an overall limit for the scheme of £90 million in any year. The first one-third of each year's costs would be met by agents and the remainder by Names.

Protecting the interests of members was also the purpose of the Multiple Syndicates Byelaw which provides that an underwriter may not write for more than one syndicate without consent from the Council of Lloyd's. This consent is given only in circumstances where there are adequate safeguards against conflicts of interest.

The year of consolidation for the group was also a year of considerable change for Names. All members had to complete new underwriting agency agreements to come into effect from 1 January 1990, as well as preparing for the introduction of the new membership requirements effective from 1990. This involved Names and their agents in handling a great deal of complex documentation.

In May 1989 the Solicitor's Group was reorganised and a new general manager was appointed primarily to oversee the drafting of byelaws and regulations and the general advisory functions of the Group. By the end of 1989 effectively all the Neill Committee's recommendations had been implemented. Indeed, more byelaws and regulations were passed by the Council and the Committee than in any year since 1983. All these were drafted by lawyers in the group. A new Lloyd's internal arbitration scheme was drafted and is now the subject of consultation.

The group is called upon to advise on an increasingly wide range of Lloyd's functions. Extensive work was done on the preparation of new Lloyd's deposit trust deeds and forms of security, in the context of the introduction of new agency agreements and to facilitate electronic data interchange in the market.

Members of the group will be largely responsible for the technical work which will be commissioned by the Byelaw Review Committee in its examination of Lloyd's regulatory arrangements. Work began in the autumn of 1989 and this will be a major task for some considerable time.

During the year the workload of the Disciplinary Committees and the Administrative Suspension Committee was relatively light. No cases were concluded before the Appeal Tribunal. The opportunity was taken of reducing the staff complement in the secretariat to these bodies.

The 1988 Report described the new financial planning control and reporting systems introduced during that year by the Corporation. In particular it described the detailed review undertaken to ensure that the future needs of the market and the membership for services are met in the most efficient manner. The result was a budget which aimed to hold the Corporation's expenditure level in 1989 compared with 1988, despite inflation, and implied a reduction of 213 in the numbers of staff which otherwise would have been needed to meet the volumes of work in 1989. Both objectives were substantially met; for the first time in the last nine years average employee numbers declined by over 9 per cent despite an increasing workload. Further savings both in manpower and other resources are projected for 1990.

The market financial services department has continued to seek new ways to improve its range of services to the market. During 1989, the weekly settlement system was extended to cover the marine and aviation markets. Work was undertaken on new procedures to encourage the early flow of premium to underwriters.

The prime focus in the taxation area was on securing new and appropriate arrangements for the taxation of Lloyd's Names in the United States of America. The need for new arrangements sprang directly from a requirement enacted by the United States Congress at the end of 1987 that the US Treasury should study the relative tax treatment of Lloyd's Names in the USA with that of certain investors in "Lloyd's plan" insurers there. The subsequent negotiations have been difficult and protracted but, in the view of the Council, have resulted in a new tax closing agreement which provides a fair and equitable US tax regime for all Lloyd's members. A new agreement governing the US tax affairs of all Names was signed on 6 April 1990 and will have effect from 1 January 1991.

A full range of tuition material was prepared for the Lloyd's Market Certificate (LMC), which is a professional qualification administered by the Chartered Insurance Institute. During the year 160 students from both the Corporation and the market were registered for the first LMC examination and were given assistance with their studies. Initial work was undertaken to prepare a vocational language training programme. With the help of Training Agency funding a project was begun for the Lloyd's market, which will provide a computer-based training package on business culture, etiquette and practice across five EC countries.

The visitors' viewing gallery and Lloyd's exhibition was moved from the fourth gallery to the fifth gallery to enable further expansion of the underwriting Room. It was opened by HRH The Princess Royal in November and has proved extremely popular with thousands of visitors.

The refurbishment of the 1998 Building has proceeded slowly, mainly because of contractual difficulties and other factors. The contractor's programme for completing the works will prevent the complete occupation of the building until the last quarter of 1990.

The consolidated surplus for the year after taxation was £32. 3 million, £10. 9 million higher than for 1988 which included an extraordinary loss of £4. 5 million on the sale of Toplis and Harding Inc.

Operating income at £164. 2 million increased by £10. 5 million or 7 per cent. Subscription income rose by 3 per cent to £86. 1 million contributing £2.3 million to the increase. Direct market recoveries added £8. 7 million of which £3.3 million related to higher Room rents and £2. 3 million related to overseas operating expenses. A decline in the number of new members elected to commence underwriting from the following 1 January, from 951 in 1988 to 312 in 1989, resulted in a fall in entrance fees of £1. 6 million to £0. 8 million.

The rise in operating expenditure was contained at 4 per cent reflecting the benefits of the new planning review and financial reporting systems introduced in 1988. Expenditure rose £5. 0 million to £128. 9 million. Average employee numbers fell by 121 people, a reduction of over 5 per cent which enabled the rise in employment costs to be held at £3. 8 million. Premises costs rose by £2. 3 million to £24. 5 million due largely to an increase in rental charges arising from a rent review on London House. These increases were offset by a reduction in other expenses of £3. 4 million to £32. 5 million.

The Corporation's operating surplus before taxation was £6. 9 million higher at £31. 7 million. Capital expenditure during 1989 amounted to £14. 7 million of which £9. 9 million related to refurbishment costs on the 1958 Building. Substantial further investments were made in computer and communications equipment.

As the world's major maritime publisher, the company again registered increases in market share. However, with 40 per cent of sales coming from exports it was not possible to export UK inflation in costs. Nevertheless, net cash flow improved by £0. 4 million during the year. The core business pre-tax profit of £0. 7 million was reduced by start-up losses on LLP Video Limited to a net pre-tax profit of £0. 3 million. During the first quarter of 1990 these losses have been eliminated and the company is set to achieve its planned profit.

[Stephen Merrett was, in fact, "the [active] underwriter at the time" but the Syndicate 421 Loss review Committee presumes that the reference was intended to be read as referring to his deputy, John Emney. In response to a question from the Syndicate 421 Loss review Committee as to how he determined the premium required for the Run-Off Contracts, John Emney replied:]

The Centre for Claims Resolution commenced operations in October of 1988 with 66,254 claims pending against its 22 producer members. We can expect that between October 1988 and 27 May 1990, an additional 42,487 claims had been filed against CCR members for a total claim count of 108,741. The average number of new claims filed in the Centre's current fiscal year (1 October 1989 to 27 May 1990) has been 2,031 claims per month. We are not yet seeing a decline from prior years in the number of new asbestos claims which are being filed.

The Centre has been able to close 35,852 claims since its inception through 27 May 1990. A key to the Centre's success in resolving a large number of claims has been its ability to negotiate block settlements with major plaintiffs' counsel. We note that the Centre has settled 10,875 individual claims for an average indemnity payment per claim of $18,800 and has additionally entered into group settlements of 22,380 claims for an average payment per claim of $8,500. Settlements are reached only with claimants who are able to demonstrate that they have sustained an asbestos-related injury. The average indemnity payment by the Centre for both individual and group settlements combined therefore equals $11,100 per claim.

For Owens Corning Fiberglas, the gross amount of its indemnity and defence payments has been even greater. It is reported that as of May 31, 1990, indemnity payments of S177 million have been paid on behalf of Owens Corning to close more than 10,000 claims. Defence costs of 5152 million have also been paid.

During the same October 1, 1988 to May 31, 1990 period, another major asbestos manufacturer, Pittsburgh Corning Corporation, disposed of a total of 7,954 cases for a total indemnity payment of $41.9 million or a per claim average of $5,400. Defence costs for this period were approximately $54 million.

Other asbestos manufacturers who had formerly been subscribers to the Facility have been successful in keeping indemnity payments low; however, these manufacturers have

been required to incur significant defence costs. For example, Flintkote Corporation has reportedly disposed of 8,886 claims since leaving the Facility through the end of May, 1990. Total indemnity payments are roughly S4.8 million for a per claim average of S538. Its total defence costs, however, are in excess of S18 million or 377% of indemnity. Similarly, AC & S's average payment per closed claims is less than $500; however, its defence costs are roughly 340% of indemnity.

The Trust's inability to pay claimants in a timely matter has drawn criticism from both the Claimants and the judiciary. The Trust was ordered to provide a detailed account of its assets. According to a June 1, 1990 opinion issued by Judge Jack B. Weinstein of the U.S. District Court, the accounting revealed that the total cash required by the Trust to meet its obligations will be at least $7.5 billion. The Trust is estimated to be now worth $1.5 billion. Thus, there is no doubt that the Trust's assets as currently limited will not be sufficient to fully compensate bodily injury claimants, much less satisfy any of the contribution claims which other asbestos manufacturers have filed against Manville.

Council and Committee (Amendment No. 3) Byelaw ( No. 5 of 1990, 6 June 1990).

Lloyd's Brokers (Amendment No. 3) Byelaw (No. 6 of 1990, 6 June 1990).

Umbrella Arrangements (Amendments) Byelaw (No. 7 of 1990, 6 June 1990).

Lloyd's Global Report and Accounts at 31 December 1989 - 1987 Year of Account - signed by Ernst & Young, Chartered Accountants.

Keene Corporation resigned its CCR membership as of 22 June 1990 and will now independently handle the asbestos claims filed against it. It appears that all available product liability coverage issued by Wellington Subscribers to Keene is exhausted. Keene Corporation had been one of the three largest players in the Centre. We anticipate that the per claim indemnity payments made by the Centre on behalf of its members will be reduced in the future because it is no longer paying for Keene's share; however, the Centre's per claim costs of defence will remain relatively constant. Therefore, the ratio of defence costs as compared to indemnity payments may increase in the future for the remaining producer members and their insurers.

Secondly, we note that Keene Corporation was the only Center-named defendant in 2,156 pending claims. Therefore, Keene's departure from the Center reduces the Center's universe of claims by this number.

Annual General Meeting of Members of Lloyd's: Statement by Mr. Murray Lawrence, Chairman - A Quest for Quality

May I begin by welcoming you to this Annual General Meeting of the Society of Lloyd's of London. When I addressed you last year I said that as heirs to a famous name we faced the challenge of working effectively together in such a way that we could take the fullest advantage of that name. The progress we have made and the work still to be done will be the main theme of what I have to say to you today.

First, let me draw your attention to a major change in the material that is available to you this year. You may be aware that we have brought forward the publication of the global results by some three months. Copies of the report will be available to you as you leave this meeting and it will be sent to members together with the text of this speech. When you see the new global report, you will note first that it is much smaller than before. We have identified the key figures and printed only these. Thus, the results of the marine, non-marine, aviation and motor business are still shown separately but the breakdown of the results into the seven separate categories of business in accordance with our statutory reporting requirements is no longer included.

We believe that this change will make the report clearer and more useful to our Names. In the past, our Report and Accounts has been the only substantial document before you and, in a strict sense, that is still true today because the adoption of the Report and Accounts is the formal business of this meeting. We believe that it is an improvement also to make available at this meeting the results for the year that was closed at 31 December 1989.

The results for the market as a whole are, as you will see, encouraging. At £509 million the profit is down on the 1986 account profit of £650 million. It is, nevertheless, more than two and a half times the comparable figure for the 1985 account and represents an outcome which is better than many predicted at this time last year.

As is usually the case, the results of the separate classes of business differ. Aviation produced a very impressive profit and the motor market too has every reason to be pleased with its results. The consistency of the marine results continues this year with a profit only slightly down on 1986. Although non-marine business has shown an overall profit, very little of that is underwriting profit. You may find that when you look at your own syndicates' results this is not typical as once again it is the one class of business - liability - which has largely cancelled out the underwriting profits produced in other areas. I should remind you that while this class of business is also written by syndicates trading in other markets, it is all reported under the non-marine heading.

Both 1988 and 1989 have been years in which the incidence of major catastrophes has been unusually high. The marine market will be adversely affected by the Piper Alpha oil production platform loss in 1988 and all markets suffered from the many well-publicised disasters of 1989. We must expect deteriorating results since in addition the premium rates were depressed in those years. The first few months of 1990 have done little to cheer underwriters, but there are now signs that parts of the market are responding to recent events with a hardening of rates, although many areas and classes of business are still experiencing disappointingly weak rating levels.

There is one other favourable development which I should draw to your attention. We are all acutely aware of the anxiety and concern which is caused to the generality of members of our Society by years which are left open after the third year. The Council shares this concern and sees the problem of open years as being of vital importance. At last year's meeting I outlined the two stage plan decided on by the Council to tackle this problem. The first element of this plan was the introduction of a byelaw which laid down new measures to apply where an agent did not feel able to close a year of account. That has been implemented and it is very encouraging to see how the market has responded. As a result of the efforts that agents have made, after the small reduction that we saw in the number of open years last year, the number left open at the end of 1989 has fallen more sharply from 115 to 92. More of these are expected to close next year and in the two years after that.

But discussions with agents have confirmed that among the 92 there are a number of syndicates which will continue to face difficulties in closing: some because of particular uncertainty as to the eventual level of liabilities especially in relation to asbestos, property damage and pollution; and others because they have no current year of account and where the task of arranging a reinsurance to close in the market remains extremely difficult.

For these, as the second element in the plan, the Council continues to explore possible alternative solutions. These include, should a market solution prove impossible, the establishment of some vehicle to act as a reinsurer of last resort, which would write the reinsurances on arm's length terms. I am only too aware that progress in this area must appear to have been slow but I can assure you that it has received considerable attention during the last year and progress has been made.

The first steps were to explore the feasibility of such an arrangement from a regulatory standpoint and to assess the fiscal implications both in the UK and in the United States. This latter aspect was complicated by the negotiations that were taking place at the same time on the US Closing Agreement. We are now at a stage of assessing the viability of such a vehicle and the extent to which it might in practice help to provide a satisfactory solution for those problem syndicates to which I referred earlier. However, it would be foolish for anyone to pretend that the way forward is not still fraught with difficulty and uncertainty.

Work on this agreement started in October 1987 when legislation was introduced into the Congress of the United States of America that would have had the effect of terminating the Closing Agreement which governs the taxation of Lloyd's in that country. The legislation was subsequently withdrawn but only on condition that the American Treasury should study the taxation of Lloyd's and its Names in the United States and should, thereafter, negotiate a new Closing Agreement which would be fair as between Lloyd's and other insurance organisations in the United States which purport to do business in the Lloyd's fashion. The US Treasury report was published in February 1989 and recognised that the proper taxable entity in the United States was the individual Name rather than the syndicate or, indeed, Lloyd's collectively.

Nevertheless, the effect of the proposals which the American Treasury put forward, based on their report, would have been extremely adverse for our American Names and therefore, by extension, for our wider business connections in that country. After intensive negotiations I am glad to record that a satisfactory new Closing Agreement was negotiated and will take effect for the 1991 year of account. Given the very unpromising position from which the negotiations began, it is a great credit to the many people both from the market and Corporation who were involved, together with our advisers in the US, that we finally reached such a satisfactory outcome.

Before I return to the subject of the business of the market, since it has received so much publicity, I should refer to two aspects of the problems which have arisen in relation to the Outhwaite syndicates. The Council initiative that I announced last year in appointing Mr. Mark Littman, QC as an independent conciliator in the disputes between the 1982 Outhwaite syndicate and other syndicates in the market is proving successful. A number of the contracts in respect of which these disputes had arisen have been settled by negotiated agreements or arbitrations and of the 32 contracts written into the 1982 year of account only six remain in arbitration, litigation or otherwise unresolved. The result is to introduce a much greater degree of certainty into the affairs of the Outhwaite Names and also to reduce the incidence of public litigation. Litigation between trading bodies at Lloyd's or between Names and agents is thoroughly unhelpful to our perceived public reputation and, it may well be argued, to our trading prospects as well. The more we can resolve these matters fairly, rapidly and by our own procedures within the Society itself, the better it will be.

Secondly, at the general meeting last year, a number of questions were asked about the circumstances in which run-off contracts were placed with the Outhwaite agency in 1981 and 1982 and an independent inquiry into them was demanded. Last autumn the Council asked the four nominated members who had been assisting in the Littman conciliation process, Sir Maurice Hodgson, Mr. David Walker, Mr. Matthew Patient and Mr. Alan Lord, to look into the question of whether there were prima facie grounds for ordering an inquiry into these matters.

After a painstaking review, the nominated members concluded that no prima facie evidence of misconduct on the part of anyone in the Lloyd's market had been presented to them nor had any other matters that warranted an independent inquiry. That was the recommendation which they made to the Council and which the Council accepted. A full statement of the reasons for the decision was made at the time.

In addition, a fuller note about Lloyd's position on the Outhwaite affair will be circulated to all Names together with the text of my statement today. Since I was one of the individuals against whom the questions were apparently directed I would like to make it clear that I have taken no part in the handling of this matter and was not present when the conclusions reached by the nominated members were discussed and endorsed by the Council in April.

I would like now to turn from the problems of the past to the opportunities of the future. Many of the members of Lloyd's whom I meet, at home and abroad, want to know whether the unique insurance marketplace that has evolved here in London will continue to be a success story in the decades to come.

The Council of Lloyd's began its work this year in January by trying to stand back and look towards the future. We looked particularly at the ways in which insurance business comes to Lloyd's, the kind of business it is - and might become - and the places from which it might originate.

One thing is very clear. Lloyd's strengths over the years as an underwriting market have been built upon a partnership with Lloyd's brokers.

Our future ability to attract good business may rest on many things, but above all it rests on a close, continuous and successful relationship between underwriters and brokers. I don't mean a cosy relationship; daily life in a commercial marketplace consists of tough bargaining. But we must all look below the surface to the underlying truth that our two sets of skills - broking and underwriting - are complementary. Together they serve the insurance customer well. And that is the foundation of every successful insurance business.

It follows that the key to Lloyd's future success is to consolidate and build on this vital relationship. Our discussions at Council have confirmed us in the view that Lloyd's brokers will remain the exclusive channel through whom underwriters will expect to write their commercial business.

Throughout the developed world, Lloyd's brokers and their associates have offices in every major city. Beyond that, they have established relationships with correspondent brokers throughout each country. This distribution network represents an enormous strength which any business in any industry would be extremely proud to possess. The best interests of our underwriters - and therefore our members - demand that we make the fullest possible use of this asset.

Our commitment to Lloyd's brokers is clear. Occasionally, I know that confusion is caused by the adaptations that have evolved in certain specialised parts of our market. For example, in the motor market, there are long-established arrangements that have enabled Lloyd's to make significant inroads into retail insurance which cannot be economically serviced through the conventional broker route. This has led us to the position where we provide cover for one out of every five privately-owned cars in the United Kingdom. These arrangements have been worked out in co-operation with Lloyd's brokers, as have proposals for the one exceptional area where the Council has decided not to require the involvement of a broker. I am referring here to the Council's decision to allow syndicate service companies to accept personal business direct from private individuals.

During the past year, we have taken a number of steps to intensify the dialogue between underwriters and brokers. The Committee of Lloyd's has invited teams from each of the major broking firms to discuss how they see the future and to raise any problems with us. These meetings have been very frank and extremely helpful. The Council has also set up a new Business Development Committee, which is unlike some of our traditional committees. Its function is to act as a catalyst for the development of new business initiatives and relationships involving both underwriters and brokers - either for particular classes of business or particular territories.

The first territory that we have chosen for special attention is our own backyard: the United Kingdom itself. We have always been so international in our outlook, that we may have paid too little attention to the opportunities throughout the regions of Britain. Lloyd's brokers are heavily represented up and down the country, and we are now setting up with them a series of visits to regional centres for the Chairman of Lloyd's and underwriters to make closer contact with the local broking community. This initiative is still at an early stage but the broker response has been most encouraging. We and they are determined to make it much easier for the regional offices of Lloyd's brokers to place their business in the market. The development of information technology and the London Insurance Market Network have an important part to play in this, as will visits by underwriters, who will in some cases decide to establish a local presence.

We have also been concentrating on the new opportunities in Europe. By now, everyone will be aware of the exciting prospect of a Single European Market, known by the slogan "1992". For insurance, one of the big steps towards this goal takes place in a few days' time. From 1 July, sophisticated commercial buyers of insurance, throughout a large part of the European Community, will be able to buy their insurance needs from anywhere else within the Community. Lloyd's has been at the forefront in pressing for this development. We want to see it go further, and there is every sign that it will.

We believe that we will be able to offer some buyers in continental Europe types of insurance cover that have never really been available to them before. We shall also be able to meet comprehensively the needs of businesses whose interests and activities span several different European countries.

The presence of Lloyd's brokers, their associates and their correspondents in Europe will be a great source of strength to us in rising to the challenge presented by these changes. But we have also made it clear that we are happy to extend the status of Lloyd's broker to any European - or indeed other overseas broker - who can meet our regulatory standards. If our rules need to be adapted to accommodate overseas brokers, we will be willing to look at them, provided always that we maintain our high standard of regulation and that there is only one set of rules for Lloyd's brokers, wherever they come from.

Over the last year, every one of us has become aware of the transformation in Eastern Europe. This too spells opportunities, as insurance is an essential feature of any modern economy based on the principles of enterprise, risk-taking and private property. It will be a long time before some of the societies of Eastern Europe become as reliant on insurance as those in the West, but it is important to be in at the beginning of this exciting process. I had the privilege of leading a party from Lloyd's to Moscow last month, where we were able to reinforce the excellent relationships we have with those facing the mammoth task of managing a transition to free market principles. Many Lloyd's brokers are active in other Eastern European countries; we must applaud their initiative, and work closely with them to support their efforts.

The Council of Lloyd's has also become increasingly convinced of the need to help Lloyd's brokers to sell our policies. Lloyd's centrally cannot do the selling; but we can support the broker by marketing Lloyd's itself much more actively than we have in the past. We must help customers to understand the special attractions of our marketplace, not least the unique security behind our policies, compared with what our competitors have to offer. That is why we have recently been looking closely at our marketing strategy, with the help of external consultants.

Tomorrow you will see in your newspapers that we have again thought it right to advertise our global results and the contribution that Lloyd's makes to our national economy. We have done this on a few carefully chosen occasions in the last year and the results have been well received. In order to symbolise the close identity between brokers and the Lloyd's market, we have worked with the Lloyd's Insurance Brokers' Committee to develop a special logo for use by Lloyd's brokers, and we will be publicising this too. These steps represent a part of a much wider exercise to encourage greater use of Lloyd's name in promoting the development of profitable business for the market, and therefore for our members.

As we strengthen our relationships with Lloyd's brokers we must follow that through by improving access to the Room for those key people who place business here but are not members of Lloyd's. At present we levy an annual charge on broking firms for each employee who is allowed to enter the Room.

The Council has decided, therefore, that from the beginning of 1991 the present charges for substitutes will be abolished; there will merely be a small charge for the direct cost of issuing the passes which are needed as a normal part of our security arrangements. This change will reduce the income of the Corporation by approximately £3 million in 1991, but with the tighter financial controls for its other expenditure which the Corporation now has in place, together with the considerable progress which has already been made in reducing the Society's outstanding borrowing, we shall be able to accommodate this loss of revenue without any significant impact on our overall financial planning or on the other objectives which we shall be seeking to achieve.

On the subject of costs, I must again emphasise the point which I made last year, the Corporation of Lloyd's has once again kept a firm control over its budget. If we are to succeed in the highly competitive conditions of the 90s, it is essential that all sections of the market maintain a tight grip on their expenses.

One of the reasons why our Society has been so successful over the centuries has been our willingness to embrace change. Lloyd's underwriters are known throughout the world for innovation and flexibility. Our unique structure, by which we trade as over 400 separate syndicates, allows a degree of variety and flexibility that could not exist in a single organisation of equivalent size.

Our concern to reinforce this freedom led the Council last year to decide to bring to an end the rules that supported the rigid division of our marketplace into four traditional markets. It is well known that these distinctions had already become blurred at the edges, as they struggled to adapt to changing commercial circumstances. The Council decided that the time had come to acknowledge that these barriers were no longer relevant or necessary.

Some brokers and some underwriters found them an inhibition on Lloyd's ability to provide insurance coverage of the kind being sought by some clients - notably those wanting a single policy to cover all their risks. The customer is king and if we do not provide that single policy quickly and easily, they will seek it elsewhere.

This change will require three conditions to be met. First, any syndicate which decides to operate in new fields must be equipped in terms of underwriting experience: it is the managing agent's job to ensure this. Second, we need a common system for categorising risks which is applicable throughout the market; this has now been agreed, and will come into force at the end of the year. Third, Names must have an opportunity to decide whether they wish to join, or to stay with, a syndicate which plans to extend the range of its activities. Therefore, syndicates proposing to do so will have to explain their intentions to members' agents so that they can offer the necessary advice to Names. That is another reason why it was not possible for us to introduce this before the beginning of 1991.

I know that this change gave rise to considerable anxieties in the market. But my judgment, after many discussions with senior market representatives, is that most of the concerns were about the transitional problems. I do not underestimate them but I believe that they are manageable and that they can be accomplished without compromising the vital importance of expertise on which our strength as an underwriting market rests.

The development of syndicates writing more broadly across markets will, in my view, be an evolutionary rather than a sudden change, but the Council has no doubt that in the long term it will be to the benefit of the market to be allowed to develop in this way. Equally though, I believe that many underwriters and their members will prefer to continue with their traditional pattern of business largely unchanged.

Another important area where changes are taking place is in our claims servicing. At the end of the day, insurers are selling a promise to pay a valid claim when it arises, and the peace of mind that goes with that promise.

Lloyd's ability to deal quickly and fairly with large and exceptional claims is one of the foundations on which our world-wide reputation has been built. I have received many compliments on the speed with which we have settled claims in respect of major catastrophes in recent years: aviation disasters; the Piper Alpha platform and those arising out of hurricane Hugo.

But there is scope for improvement in the level of our service in relation to more routine claims if we are to be fully competitive. Because it is our collective reputation that is at stake here, the Committee of Lloyd's has taken a close interest in our standards of performance. It is also an area in which some of our procedures have in the past been a source of excessive cost and frustration to some of our brokers. With the full Cupertino of market representatives, the Committee has stimulated work to improve our claims procedures and to back them up with more effective use of information technology to spread vital information quickly. A new scheme to streamline the agreement process in relation to claims arising out of insurance written up to and including 1990 came into play at the beginning of this month. Further improvements to the scheme will apply to business underwritten next year and onwards. These schemes involve changes which will inevitably limit the ability of following underwriters to approve claims on policies on which their syndicates have a line. I recognise that to some in the market this can seem like an erosion of sovereignty or, indeed, of their duty to their Names, but the Committee is quite clear that it is a change we must make if we are to maintain our reputation for top-quality service.

The new unified claims system is but one of the potential benefits of information technology to the Lloyd's market. Over the years to come the London Insurance Market Network has the potential to speed up the procedures and reduce the costs of many other aspects of the transaction of insurance business. We are especially fortunate in the enthusiasm and dedication of those working on the various project teams investigating the ways in which technology can be harnessed to make us still more competitive.

As you now all know I have expressed my intention not to continue as Chairman after the end of this year. It has been a great privilege to serve the Society in this way and one that I have thoroughly enjoyed.

Recently, I have been looking back over the eight years I have spent as either your Deputy Chairman or Chairman. We have come a very long way since 1983, when the new Council of Lloyd's met for the first time and it is important that we never forget this. Preoccupied as we inevitably are by the concerns of the day there is a danger that we can lose our sense of perspective and overlook the vast amount of work that has been done in the intervening years to protect the interests of Names and promote the business of the market.

Names can now be assured that we have a regulatory system of the highest quality which establishes standards, both individual and corporate, for those working in the business and then actively monitors them. Nevertheless, despite this, there is still today all too often a temptation for Names to jump to the conclusion that underwriting losses are indicative of a breakdown in regulation. I must reiterate once again that no regulatory system can guarantee that underwriting losses will not occur. We are in a risk business.

Our system of regulation operates in three areas. First, it provides safeguards for the solvency of the Lloyd's policy, which is crucial to our business. Second, as I have mentioned, it sets fit and proper standards, for both individuals and organisations, and also strict accounting standards. Finally, it monitors those requirements and also ensures that full information is available to Names thus enabling them, in conjunction with their member's agent, to decide on their participations on particular syndicates. Expectations beyond this are unrealistic and impractical.

Recent market and regulatory developments have combined to ensure the quality of our capital base - the membership. One of Lloyd's greatest strengths is the loyalty and commitment which, over the years, our membership has shown. Many more Names now are writing larger limits, and this is likely to be the trend for the future.

For the 1990 account, nearly 5,000 Names increased by an average of £160,000 each. Interestingly, with an average commitment today of £385,000, we are still very significantly below the average commitment of a Name in the 1950s who then wrote the equivalent of £750,000 - £800,000 in today's money. Although a move towards larger participations is welcome, it also must be in everyone's interest that membership should continue to be an attractive proposition, particularly to younger working Names.

An efficient and professional underwriting agency system must be at the heart of a successful Lloyd's. There has been a number of recent rationalisations and I think it inevitable that the current contraction in numbers will continue. Market forces and regulatory requirements designed to protect Names are resulting in agencies combining to ensure that they have a unit able to provide Names with the service that they both expect and deserve.

Lastly, we must never forget that our business is first and foremost a people business. Personal relationships underlie the entire way business at Lloyd's is transacted. A Name needs to feel satisfied that he and his agent, and indeed those underwriting on his behalf, have a similar approach and business objectives.

Underwriters and brokers in the Room transact business on the basis of the relationships of trust built up over the years. Clients too value the long-term relationships they build not only with their first point of contact, the broker, but also with the underwriter who carries the risk. Finally, the market only works because of the support provided by the many people in the Corporation whose skills, and relationships with those who work in the market, could not easily be replaced.

Indeed Lloyd's has always been fortunate in its ability to draw upon the skills of individuals of all ages prepared to work voluntarily for the good of the entire Society but, conversely, we must be aware that we have a structure which tends to make any disagreement very visible to the outside world. Our way of working often means that we deal with problems in the glare of publicity. Meanwhile, our competitors in the composite sector have the security of company discipline and confidentiality which allows them to solve their problems in private. The Lloyd's market can and will thrive on healthy debate, but I believe that there are times when we should pause before publicly exhibiting our differences, which can do so much harm to us all in the eyes of our competitors, our producers and most importantly our customers.

Global Report and Accounts 1989 - 1987 Year of Account -

Chairman's statement: Statement by Murray Lawrence

This new shorter form report and accounts is designed to ensure that the important general information about the performance of the market is immediately and easily available to the membership and Lloyd's clients. The new format and timing reflect the substantial changes currently taking place throughout the Lloyd's market. Working together with Lloyd's brokers, we are determined to ensure that in the 1990s Lloyd's retains its unique position in the world insurance market by developing the new products and services that its customers will require.

The results for 1987 show a reasonable overall profit before personal expenses. However, as always, there is some variance between the markets.

The aviation and motor markets have produced impressive profits and the marine market a consistent level of return. The underwriting result for the non-marine market is disappointing. This is almost entirely due to the continuing need to increase reserves for old years on the liability account.

For the market as a whole, the outlook for the following two open years is less satisfactory. The 1988 year appears as though it will be profitable. It will reflect, however, the impact of the over-capacity throughout the industry which became evident that year and the results are likely to vary dramatically from syndicate to syndicate. In 1989 there were an unusual number of major claims. This was particularly damaging since the disasters occurred at a time of keenly competitive premium rates. This is likely to result in an overall loss for the market.

1990 has not made a promising start but prospects for the future are more encouraging. There has been some strengthening of premium rates and the tighter reinsurance market should result in a further improvement, as underwriters recognise the importance of writing business at rates which enable them to make a profit, while retaining a substantial part of the risk themselves.

The reduction in the number of years left open from 115 to 92 is encouraging. It demonstrates the market's determined response to the measures introduced by the Council last year to tackle this problem. We continue to be dogged by the long tail of US liability business, which is causing major difficulties to a minority of syndicates and has required a substantial increase in the size of the reinsurance to close. This is an issue which affects insurers world-wide involved in this class of business.

These problems highlight the importance of solvency and a prudent approach to reserving which are issues of crucial importance to the whole insurance industry. Currently, in the UK, we are handicapped in our ability to compete fully with our European competitors because the ‘playing fields' in this area are not level.

Finally, I believe that the Lloyd's market is in good shape to provide an excellent service to assureds in the 1990s. Recent work on the Unified Claims System, LIMNET and the removal of market barriers from I January 1991 will make the market more attractive for brokers and clients alike. Equally, I am confident that Lloyd's underwriters and our brokers, with their customary skills, will exploit the new opportunities available as a result both of developments in Europe and in technology, to provide their customers with the security of policy and quality of service which they seek.