Members of Lloyd's who are now locked into the 584 insolvent syndicates which cannot close their accounts are there because of a long history of massive, probably deliberate, and even possibly fraudulent under-reserving by Lloyd's of US Long Tail Liabilities. This under-reserving dates back to 1967 and no doubt earlier, and it continued up to and including the 1985 syndicate year.

This conclusion is based on a study of the "Ultimate Loss Ratios" (ULR's) contained in Lloyd's official 1994 publication Annual Settlement Statistics.

Had Lloyd's set more realistic Minimum Reserve Requirements for syndicates to apply to their major US Long Tail Accounts from the mid or 1970's, when the under-reserving had become clearly apparent, the worst afflicted syndicates would have been forced into run-off at that time. Many others would have shown losses or reduced profits and would not have had the reserves to allow them to continue writing US Liability business. Lloyd's own Annual Global Accounts would have shown a very much worse picture. Few Names then would have joined Lloyd's, few would have increased their lines, and thousands would have escaped their present suffering.

Ultimate Loss Ratios are calculated by dividing the Net Premium Income for a policy year by the sum of the net claims paid out to policyholders plus the Minimum Reserve Requirements. Claims paid are factual. Minimum Reserve Requirements are set annually by Lloyd's and are used to determine the Re-insurance to Close Premiums for syndicates winding up their affairs. They are therefore an essential element in the annual statutory assessment of Lloyd's "solvency" by the Department of Trade and Industry. The setting and approval of Minimum Reserve Requirements are thus, perhaps, the single most important financial and regulatory tasks undertaken annually by the Society of Lloyd's and the DTI.

The most important Long Tail insurance category, and the one which has sown the seeds for the present destruction of Lloyd's, is "Non-Marine All Other US$." This category includes the critical US asbestos and pollution clean-up policies. Its Ultimate Loss Rations, as shown in the attached Appendix, indicate clearly and unequivocally that the Minimum Reserve Requirements set by Lloyd's for every single syndicate year from 1967 to 1989 were grossly low and unrealistic. By contrast, as the Appendix also shows, the three other major Long Tail business categories suffered variable over and under-reserving, as one might expect. The reserving requirements for all the remaining sixteen Short Tail and Minor Long Tail business categories also show an expected, variable pattern. The "Non-Marine All Other US$" category stands out uniquely.

The massive and consistent under-reserving of "Non-Marine All Other US$" liabilities is evidenced by a comparison of its Ultimate Loss Ratios at the end of year three, when syndicates close their accounts, and the equivalent ULR's at the ends of years five and ten. Every policy year without exception from 1967 to 1989 shows a massive deterioration in its ULR during years four and five, that is during the two years immediately after syndicate closures; and in every completed instance this deterioration continued for the following five years. The average Ultimate Loss Ratio for policies issued between 1967 and 1989 was 110% at the end of year three. Two years later, that average had increased to 155%. By year ten it had increased to an astounding 221%. And it keeps on rising.

But money, not percentages, affects Names. The premium income for 1984 policies totaled $368.5 million. When the syndicates of that year closed their accounts at the end of 1986, Lloyd's set official Minimum Reserve Requirements which indicated that the ultimate underwriting pay-outs for those 1984 year policies would total 430.3 million. Only two years later, in 1988, Lloyd's official Reserve Requirements for those same policies indicated that ultimate payouts would increase to $671.5 million. By the of year ten, 1993, their official Reserve Requirements reflected their belief that total pay-outs would rise to $1,075.8 million. Stair-stepping of reserves with a vengeance.

By the mid 1970's leading insurance companies internationally, including Lloyd's, had started to monitor the problem of asbestos related liabilities. Several firms of US Attorneys were engaged to track its development and they have since sent thousands of pages of official reports to Lloyd's. Most of those Attorneys' Reports are now being studied by lawyers for the Names Defence Association. It is already evident that year by year those US Attorneys spelled out in horrific detail the financial and legal implications for major insurers and Lloyd's underwriters. In addition, other major studies were commissioned by Governments, Lloyd's and leading insurance companies. These studies included the definitive 1982 Report by Dr. Selikoff, the world's foremost epidemiologist in asbestos related disease. Lloyd's had copies of them all.

It is inconceivable that, at least by the late 1970's, the actuarial and statistical staff at Lloyd's and the DTI would not have noticed the consistent, continuing and massive under-reserving by Lloyd's of US Long Tail Liabilities. And it is inconceivable that they would not have drawn the attention of their senior officials to it. Their data was, after all, an essential ingredient for Lloyd's annual "solvency tests" which the DTI is statutorily obliged to conduct. Actuaries and skilled statisticians do not overlook such significant data and such significant trends.

Three questions must be asked. Firstly, was the continuing massive under-reserving of Long Tail US$ liabilities from the late 1970's onwards a deliberate act by Lloyd's in order to conceal the true state of the market from Names and potential Names? Secondly, why were Lloyd's officials so anxious to get the infamous immunity from suit Clause 14 inserted into the 1982 Lloyd's Act? And thirdly, why did the Department of Trade and Industry, the supposed guardian of policyholders' interests, not require Lloyd's to adopt a more realistic and truthful approach to its minimum reserving?

Did the consistent and massive under-reserving result from simple negligence? Or from gross negligence? Or from reckless negligence? Or was it deliberate?

Negligence, bad faith, or conspiracy to defraud?

The Appendix lists the four major Lloyd's categories of Long Tail business. Less important Long Tail categories and all Short Tail categories are not detailed. Suffice it to say that nineteen of the twenty Lloyd's categories all show a record of variable accuracy in the setting of Minimum Reserve Requirements. That is exactly what one would expect. The Non-Marine All Other US$ stands out.

Non-Marine All Other US$ includes all the asbestos related and pollution cleanup liabilities. Some people express surprise that the under-reserving, although serious, is not much worse. The answer is this category contains very many other types of insurance risk. The effect of asbestos and pollution is thus spread over a much broader field. Consequently the resulting figures are therefore only averages in which asbestos and pollution might almost be said to be ‘lost'. There is no doubt that if asbestos and pollution liabilities had comprised a separate category, made up only of them, the resulting figures would show cataclysmic shortfalls for each and every year.

The first key figures to concentrate on are the figures for the year three. That is when the syndicates closed down and closed their accounts. That is when Agencies took their profit commissions. That is the first year when Reinsurance to Close premiums are set for a syndicate and the first year when the RITC's take into account the new business actually taken on by the syndicates. That is when Accounts were issued to Names and prospective Names. The figures shown for the positions at the ends of years five and ten might just as easily been as at the ends of years four and twelve, or six and fifteen. All of these would simply highlight the fact that Lloyd's set Minimum Reserving Requirements for US Long Tail Liabilities which were absurd. And which their professional staff must have known, as far back as the late 1970's, were absurd.

One criticism you may hear is that the Report and Appendix discuss "Minimum" reserves and that syndicates should themselves have set their reserves at much higher levels when they deemed it prudent to do so. Of course they should. That criticism is not tenable because, if it was, all the other nineteen Business Categories would show a similar record of being grossly under-reserved. None of them do. The only Business Category which has been consistently and massively under-reserved is the one which contains the asbestos related and pollution cleanup liabilities.

Some honest and ethical Managing Agents may well have set syndicate reserves at far higher levels than the minimums laid down by Lloyd's. There cannot have been many. There are now 584 insolvent syndicates in run-off. It now seems probable that in practice the Minimum levels set by Lloyd's became, in general, the maximum levels used by Agents. They had their profit commissions to consider. They had to present their own record and underwriting competence in as favorable a light as possible in order to attract ever more Names and ever more new capital to their syndicates for subsequent years. An ever rising level of personal remuneration for themselves had to be sought. Low reserves resulted in low RITC premiums and high profits. No wonder Managing Agents under-reserved. Lloyd's, after all, gave them the excuse and the figures to do so.