I, lan Hay Davison of ____________________, will say as follows:

INTRODUCTION

I trained as a Chartered Accountant in the 1950s and by 1966 had become Managing Partner of Arthur Andersen & Co's London Office and from 1973-82 I was Managing Partner of the UK practice. During the period we expanded Arthur Andersen from 180 employees in 1966 to about 2000 by 1982.

I was appointed a DTI Inspector, with Michael Sherrard QC, in 1974, to investigate the ramifications of the disappearance of John Stonehouse MP and the complex web of fraudulent arrangements surrounding the British Bangladesh Trust, a secondary bank later to [*3] be called London Capital Group. In March 1978,1 was asked by the Treasury to investigate a fraud at Grays Building society in which £8m, half the balance sheet, had been extracted by the secretary over a period of forty years and spent on women and racing. As a member of the Price Commission from 1977 to 1979. I was involved in reviews of the banking, unit trust and estate agency businesses.

I was a long-standing member of the Council of the Institute of Chartered Accountants in England and Wales and from 1981 was Chairman of the Accounting Standards Committee, a body sponsored by the six accounting institutes and charged with the task of developing accounting standards for the UK.

On the 22 December 1982,1 was asked to call on the Governor of the Bank of England, who asked if I would consider taking on the job of Chief Executive of Lloyd's. He made it very clear he wanted me to go to Lloyd's for three to five years. I undertook to do the job for a limited period in order to clean up the market and to alter the structure of power to prevent a recurrence of the iniquities of the late 1970s.

I have, since leaving Lloyd's, reformed the Hong Kong Stock Market (1987-88), done work for the Bank of England (1992-2000), and helped to set up the Dubai Financial Services Authority. I was Chairman of the Independent Newspaper until (1993-94), and served on several other Commercial Boards (Midland Bank, Morgan Grenfell Asset Management, Storehouse, Credit Lyonnais Capital Markets, Cadbury Schweppes and Chloride) and Voluntary Organisations (eg Royal Opera House, Victoria and Albert Museum and Sadler's Wells). My most important contribution at Lloyd's was to establish better disclosure of financial information. As I said at the time "Sunshine drives away the mists". [*4]

When I first came to Lloyd's it was an amazingly secret place. Despite the recommendations of Cromer there was still no regulatory requirement that agents should send syndicate accounts to their Names. Many did so, but an important minority did not, and in the overwhelming majority of cases the figures were not audited. Despite bearing unlimited liability Names were far less well served in the matter of information than shareholders in limited liability companies incorporated under the Companies Act. My belief in the disinfectant value of disclosure has been vindicated by the disappearance of market practices that would have taken years to eradicate if the problem had been tackled solely by charging the individuals concerned one by one before the Disciplinary Committee. Soon after I came to Lloyd's I observed that the Room was loud with the susurration of collapsing arrangements ' collapsing because their perpetrators were ashamed to expose them to the gaze of their principals. It is now clear that the measures introduced failed to force the full disclosure of all liabilities until several years after they were introduced in 1986, although they had some immediate effect as was seen in the tussle between the auditors and Outhwaite over the closing of syndicate 317's 1982 year at the end of 1984. As I deal with in more detail below, we did not tighten up the rules on reserving in the RITC in the first wave of reform. I must emphasise the distinction, not understood by Names, between the solvency test, erroneously described as an audit aimed at protecting policyholders, and the accounts to Names. I believe that we did ask searching questions to ensure solvency was adequate to ensure all policyholders were paid. Accounting to Names was a different story.

I formally took office on Feb 15 1983 as Chief Executive and Deputy Chairman of Lloyd's. I remained in office until February 1986. [*5]

REASONS FOR NOT GIVING EVIDENCE PREVIOUSLY

I have been approached to give evidence by Names at various times since 1987. I felt I had nothing to add to what I had written in my book and said I stood by it. I did not appreciate that nothing I had written would be taken account by the Court without a witness statement from me or that accounting would be a key issue about which I was knowledgeable. I had understood that the key issues would be asbestos about which I knew nothing. Now largely retired, I have been asked to comment on matters I know a bit about.

ASBESTOS

For the purposes of this statement I have been shown a number of attorney reports and other documents. I have not seen these before.

My memory is that asbestos was not discussed in Council and rarely in Committee (even more rarely was any discussion minuted). We were told in Committee that it could not be discussed/minuted for fear of US attorneys' subpoenas to obtain the minutes for the complex litigation underway in the USA. I had no idea that asbestos was as serious a problem as computer leasing in my time at Lloyd's. I never saw the attorney reports giving figures for the number of claims made or expected or the current value of claims. I have no memory of having "triple trigger" explained to us. I was unaware that syndicates would have been unable to tell where the liability for claims would fall or how much they might be as well as how many there might be. It is quite clear that there was a huge and unquantifiable liability for asbestos and that Lloyd's underwriters were being told that they had a major exposure to it. Underwriters, and members of the Committee and Council who received the reports must have understood that. Rokeby-Johnson, Nelson, Lawrence, Green, Merrett, Skey, Barber, amongst others, must have known that the problem was a major one for Lloyd's. When [*6] writing my book I was unaware of the extent of the asbestos losses that were hitting Lloyd's at the time and of the warnings that Lloyd's had been receiving since the seventies about the scale of future losses. Subsequently I have seen attorney reports and information that was being received by Sir Peter Green, Murray Lawrence and others, that was not disclosed to me at the Lloyd's Committee or to any of the Members of the Lloyd's Council in their capacity as Council Members. I do not know how many others of the Lloyd's Committee were privy to the detail of the attorneys' reports but it is clear that a number of them were leading underwriters (I believe thirteen out of sixteen members of the Committee were underwriters) and that many of them would have been seeing the attorney reports, or could have seen them, on a regular basis.

With hindsight it is clear that asbestos was a problem that was serious enough to merit a great deal of attention from the Council and Committee. I recall no discussion about the need to collect information, to analyse it and to publish the information and intelligence thereby gained for the benefit of Names. The result of the information being concealed from external and nominated members of Council, is clear in the Appeal Court finding that the liability was not properly reserved for. Those who knew about the problem were clearly choosing not to share that knowledge with me and others.

NEVILLE RUSSELL LETTER AND MURRAY LAWRENCE LETTER

These two letters were written before I joined Lloyd's. I did not see these letters at the time of joining or subsequently. I believe the first time they were brought to my attention was in the late 1990s. I am unaware of them ever having been mentioned in Committee or Council meetings during my time in office. [*7]

I have looked at the Neville Russell letter and am quite clear, as an accountant and former auditor, that when such a letter is written by panel auditors it should have been take extremely seriously. It was not unusual for the Solvency Committee to receive such requests for guidance on how to deal with a particularly difficult piece of business, though the serious warning about the impossibility of quantification is unusual. In my opinion when the auditors say it is impossible to quantify the liability, they must mean what they say and from an audit perspective it would be inappropriate to close the years of account involved. The ramifications for Lloyd's as a whole would have been extremely serious. However, I think this letter was not about the audit of the syndicate accounts or the re-insurance to close, it was about the solvency test. & #151; what were the liabilities of Lloyd's on a calendar date, what were the assets of Lloyd's on a calendar date, were the assets of Lloyd's in excess of liabilities? I did not understand the ramifications for Lloyd's at the time since I had no idea of the scale of the problem. Given the level of asbestosis claims known about at the time, it would clearly not have been possible to meet the requirements of the solvency test as set out in the Insurance Company's Act 1974 (amended in 1982).

I have looked at the suggestions in the Murray Lawrence letter as to the way in which information should be collected and analysed by syndicates. These are detailed and care was obviously given to the compilation of the letter. We received no reports that the Lloyd's Committee could have seen as a consolidation of syndicate information such as was requested to be maintained in that letter. However, my assumption was that the Solvency department was collecting comprehensive returns and was better at calculating or forming a view as to the adequacy of reserves than the individual underwriters were.

The Insurance Company's Act laid the responsibility for calculating the adequacy of the [*8] assets to meet the liabilities on the auditors, in accordance with guidance laid down by the Secretary of State, a task which was delegated to Lloyd's and the underwriters who formed the Audit Committee. The Murray Lawrence and Randall letters taken together were clearly interpreted by the auditors as giving them sufficient instruction to allow them to do what was suggested, namely to rely on reserves calculated by the underwriters. It was the practice at Lloyd's to give guidance to the auditors each year as to how to handle the Solvency Test and in particular how to address difficult classes of business. Given the warnings contained in the Neville Russell letter and the fact that the information mentioned in the letter derived from Lloyd's, it must have been clear to those who received and considered the letter that whatever the ability of individual underwriters to estimate a particular liability for reserving purposes, it was incumbent on Lloyd's to ensure that the assumptions being made by underwriters were consistent as between syndicates and that the overall picture represented the total exposure of the market. The role of the independent auditor was to check the calculations and ensure that the necessary reserving to ultimate required for solvency purposes, has taken place. He was not concerned with equity between Names because he did not audit the Reinsurance to close or the syndicate accounts.

To allow the finalisation of Global Accounts for Lloyd's, therefore, the Committee should have required a detailed compilation of all policies whereby Lloyd's might acquire an exposure to asbestosis problems, an analysis of which syndicates had liabilities in which years of account under exposure, manifestation, or triple trigger assumptions, an analysis of which syndicates were reinsuring other syndicates, which syndicates had reinsurance exposures not yet notified at all, and what reserving assumptions had been made by all syndicates that had already set up asbestos reserves. These needed to be examined to ensure that they were consistent in relation to claims where all syndicates, or a selection of them, [*9] were on a slip facing the same problem, and consistent in their assumptions about future liabilities.

It seems to me that all those who were on the Committee that received and saw the Neville Russell letter and were aware of the asbestosis exposure must have been put on notice that the global accounts could not be compiled on an accurate basis. They must have known that making an accurate estimate of future liabilities was impossible, particularly in relation to unknown and unnoted claims. It must follow that they knew that the accounts being shown to DTI for the market as a whole were inaccurate whether or not any particular syndicate accounts were inaccurate. They ought to have realised that a great many syndicate accounts would inevitably be very inaccurate.

The Neville Russell letter was primarily addressed to the solvency test rather than to accounts for Names. Although I attended some meetings setting Minimum Reserving Percentages, I did not have the information about asbestos to understand how inadequate they were. So far as I know the DTI never checked.

In sum, my recollection is that although I knew asbestos was a problem, I did not think it was as big a problem as computer leasing, or the rollers, or the problems with the Revenue — all of which were in a pretty strong position to damage Lloyd's. Now with hindsight I was clearly wrong and it is clearly the case that I was not being shown all the relevant papers on which to form my impression.

Quality of Lloyd's Auditors and Lloyd's accounting systems

Serious reservations have been expressed about the quality of Lloyd's accounting in the late [*10] 70's. Both Cromer and Fisher had had some reservations about the audit. However, they probably were totally unaware of some of the abuses that were going on within the Lloyd's accounting systems. The use of rollers by certain agents and the way in which panel auditors attempted to get round the prohibition of the Institute of Chartered Accountants on keeping the books of clients they audited, are both examples of the failures of the accounting and auditing systems at Lloyd's. When I started to get involved, the number of firms on the Lloyd's audit panel was very small. None of the leading members of the accountants' panel were household Names in accounting terms. Until 1985, any newcomer to the panel was required to serve a period of probation as a joint auditor with an existing panel member. The result of this situation was that the small panel firms became increasingly bound up with Lloyd's and in isolated cases had partners who were not only members of Lloyd's but members of the syndicates they audited. Because of their significant involvement in Lloyd's work some of the panel firms drew a substantial proportion, and in a few cases the majority, of their total fee income from such work. Many firms also acted as auditor to the agent and auditor to the syndicate for whom the agent acted. It was a clear conflict of interest.

The fundamental problem was that the Lloyd's audit was not an audit at all. Lord Cromer described the duty of the "panel auditors": "the main function of the auditor is to provide a certificate to the Committee of Lloyd's that the Name has sufficient funds at Lloyd's to meet his obligations". Agents, Underwriters, Names and the Committee were all under the misapprehension that the work done by the panel auditors was an audit in the commonly accepted sense of that word: an independent opinion on the veracity of a set of accounts. It was not a point which the panel auditors had occasionally drawn attention to. The accounts of an underwriting syndicate, and the determination of its profits, depend on how much reserve is necessary to close the accounts. The minimum such reserve required by the [*11] solvency test was supposed to be calculated by the auditors on a basis approved by the Secretary of State, who in practice delegated this role to Lloyd's, who, in turn, delegated it to the Member's Solvency Committee which used to be called the Audit Committee. (ICA 1982 Section 83 (5)). The figure was in fact provided by the underwriter in the form of the reinsurance to close. Panel auditors of the day were still living in the days which I recall from my apprenticeship as an accountant thirty years previously when auditors accepted a certificate of stock "a director's valuation". The Lloyd's panel auditors did not consider it part of their duty to audit the reinsurance to close, yet the result of the syndicate for the year of account was wholly dependant on this one figure.

Names can be forgiven for not knowing that the Lloyd's "audit" was not in fact an audit because they were never told.

I have been asked to comment on the individuals on the Committee in my time. When I went to Lloyd's I commented that it was not just a matter of a few rotten apples but that the whole barrel was tainted. This included members of the Committee many of whom were involved in rollers which involved questionable tax practices, and many were members of baby syndicates. My main focus was on the frauds on the Names — PCW, Brooks & Dooley, Minets, Posgate & Denby et al.. In all these scandals a common thread emerged. Lloyd's agents had breached the duty of trust that every agent owes to his Names under the law of agency. Any agent faced with a conflict between his own interests and those of his principals, the Names, has a clear legal duty to avoid that conflict if he possibly can. If he cannot avoid it, he must declare to his principal that there is a conflict, seek his principal's [*12] express informed permission to continue to act, and if this is granted he must then, at all times, put the interests of his principal before his own interests. In each of the scandal cases, agents had breached the rules of the law of agency: principally concerning conflicts of interest, the rule against secret profits, and the duty to account. In each case the arrangements had also secured dubious tax advantages. When serving as regulators it is necessary for working Names, already facing conflicts of interest, to take special care not to create further conflicts of interest and to act in accordance with their duties to all the Names in the market not just their own Names, or own interests. This was a novel concept. I was asked where the laws of agency could be found, was it in the Companies Act? There was negligible understanding of how deeply compromised most were. We made it our practice to publish the reports of Disciplinary cases so that the market — and the Committee — would know what was and what was not allowed.

Members of the Committee of Lloyd's should all have been well aware of how deeply unsatisfactory the accounting systems at Lloyd's were. The defective systems were still in place in 1982, and criticised by Fisher who suggested that syndicate accounts should be produced and audited (para 23,22). Despite their title, the panel auditors were not in fact charged with carrying out an audit at all. As I have said their duty was described by Lord Cromer: "the main functions of the auditor is to provide a certificate to the Committee of Lloyd's that the Name has sufficient funds to meet his obligations ". It was not an audit, in the commonly accepted sense of that word: an independent opinion on the veracity of a set of accounts. All of the Committee would have known that the accounting system and auditing system would have to change and they all accepted it. Fisher had highlighted the fact in his report (pages 136-140) and the Committee had given a Parliamentary undertaking to lay down rules as to the minimum information to be disclosed in syndicate accounts, and the accounting standards and principles which shall apply. The first draft of an accounting [*13] manual for the guidance of syndicate agents and auditors was ready in December 1982. In November 1982 I was appointed to chair a working party to consider amongst other things, disclosure of interests by underwriting agents. After I became Deputy Chairman and Chief Executive, lan Plaistowe became Chairman of the group which released a consultative report in August 1983.1 deal with this in more detail below.

The solvency test may have been conducted rigorously but Committee members knew there was no system of producing audited accounts for Names that showed how reserves were being created for outstanding liabilities.

Professor MacVe analysed the Lloyd's syndicate accounts in detail in his book and all Members of the Committee should have seen his report in 1985. Despite the introduction of the true and fair requirement, there were still valuation questions for discussion in connection with the reinsurance to close. A set of explanatory notes was issued in December 1985 to provide further guidance on the application of the syndicate accounting byelaw. These notes considered whether the reinsurance to close should take account of the future costs of claims settlement, of future inflation in the size of claims, and of the effect of discounting claims by the time value of money when they are unlikely to be settled for many years ahead. This was not allowed other than by Time and Distance insurance. On pages 106 - 108 of my book I reviewed the progress made in improving accounts and the areas I knew were still requiring attention. All my comments were made in ignorance at the scale of the asbestos problem. Committee Members who knew the criticisms being made of the accounting system and who knew that the asbestos liabilities were unquantifiable and enormous and not reserved to ultimate in their own accounts and therefore probably in others, can have had no honest belief in the rigour of the accounting system and its ability to make reasonable estimates of [*14] outstanding liabilities. My view is that there was no rigorous syndicate audit. I think that the brochure representation is probably referring to the solvency test. The solvency test was in its way a rigorous test but it only went as far as was necessary to ensure there were enough assets to meet Lloyd's liabilities It did not concern itself with the truth and fairness of syndicate accounts or equity between Names. There was no independent audit of the accounts for Names and the underwriters on the Committee would have known that.

Peter Green

I knew Peter Green from 1982 and worked with him closely until he retired as Chairman in 1983. I have no doubt that Peter Green knew Lloyd's inside out. He had worked in it man and boy for a great many years and had a deep affection for the place. He had been a leading underwriter of Syndicate 932 and shareholder and Chairman of the Janson Green Agency. He was a dominant, controlling figure, who was widely respected in the market. There can be no doubt that he dominated the Council in its early days. In the discussions in the Lloyd's Committee that we both attended, when asbestos was mentioned, he understood the implications and detail of what was being discussed. My impression was that this was an area of business that he had not been involved with professionally as a marine underwriter. I have already dealt with the general impression that the Committee Members ought to have drawn from the Neville Russell and Murray Lawrence letters. Peter Green was an agent and therefore subject to all the conflicts of interest that any other agent experienced. Peter Green also created conflicts of interest for himself. There can be no doubt that he entered into arrangements with the Cayman Island companies that he and his families owned and controlled (Imperial Insurance) that were a total breach of agency law and of his fiduciary obligations to his Names. For that he had to resign as Chairman. Later, after disciplinary proceedings he was censured for behaving "discreditably". [*15]

I don't recall registering any surprise that Sir Peter did not mention asbestos in the "Globals" AGMs or other public occasions. We were always told that the matter had to be handled confidentially in order to preserve privilege and avoid any escalation of claims from US attorneys.

Sir Peter Green recognised that Lloyd's had to change, whereas some others were hoping that by removing me they could revert to their old ways. He recognised the extent to which agency law was key and had been ignored. In his speech at the AGM in 1983 he said: "Our real problems have been due to a dichotomy. Whilst on the one hand the Society has scrupulously protected the interests of Lloyd's policyholders, we have failed to ensure that all those who make up the market fully comprehend the commercial and legal realities of the 1980s, especially in the area of accountability between agent and principal. The issues are almost all internal in the sense that members of the public are not involved. The main issues are conflicts of interest, to which Fisher drew attention, secret profits and failure to disclose...The relationship between Name and agent is founded on mutual trust and we must ensure that nothing is done or not done which can undermine that trust. "

Murray Lawrence

Murray Lawrence was the next candidate in line to become chairman when Green resigned. He told me that he could not take the job because of the doubts that were being expressed over the way he had purchased protection by way of Time and Distance and Run-off insurance for his syndicate in the light of the knowledge he had gained about asbestos while in the job of Deputy Chairman. He had seen the way that Green had been forced out and felt that he would face similar treatment if he became Chairman. [*16]

Stephen Merrett

Stephen Merrett was a classic example of the attitudes of Agents serving on the Committee. He made no secret of the fact that he was on the Committee in order to get information of use to him in his business - "to find out what was going on ".

Peter Miller

Miller became Chairman because he was the only Committee candidate not being charged with fraud by the Inland Revenue. The Inland Revenue were accusing all the agents on the Committee of offences in connection with roll-overs and tax evasion. As a broker and not an underwriter he had escaped the charge. However, I had reservations about him in the light of the developing PCW scandal. He had been a reinsurance broker and had been involved in the placing of some of the reinsurances that had been used by Cameron-Webb and Dixon to defraud their Names. Although Thomas Miller & Co were well known for their involvement with PI Clubs, Miller himself was principally a reinsurance broker. He did not carry the clout in the market that Green had had. In a Panorama interview in 1985 he tried to suppress revelations about his involvement with baby syndicates. Baby syndicates did not really get stopped until Neill identified them as being totally unacceptable, after my resignation.

Ted Nelson

Nelson was chairing the Membership Committee in 1983 and was a Committee member. He was a former chairman of the asbestosis working party. He had to resign following the Bellew, Parry and Raven enquiry.

Passage of the Lloyd's Act

The passing of the Lloyd's Act of 1982 was enormously important to Lloyd's. I deal with it [*17] in my book (Pages 59 and 184-187). I was not at Lloyd's at the relevant period and therefore have no intimate knowledge of the discussions that went on and that prompted the undertakings given to Parliament by Lloyd's QC, Peter Boydell, or the Council Member representing Lloyd's, Peter Miller. As I state in my book, I have no doubt whatsoever that if Members of Parliament had been made aware of all the information that was in the possession of Lloyd's at the time, they would not have passed the Lloyd's Act. At the time that I made my comments in the book I was referring to the knowledge of the leaders of Lloyd's of the various scandals associated with rollers, reinsurances with Imperial, Howdens and Minet scandals (PCW) and the awareness that grew in 1982/3 that the real problem at Lloyd's had less to do with divestment than "divorce". In pressing for divestment, in the name of avoiding conflicts of interest among brokers between their duties to their customers, the insureds, and the Names for whom they also acted as underwriting agents. Sir Henry Fisher had overlooked the much more serious abuses of conflicts of interest involved where agents put their own interests improperly ahead of their duties to their Names. Those conflicts of interest were clearly to be seen once Parliament had granted new powers to the Lloyd's Council and some of the Members of it had been found to have cheated and even plundered the members of Lloyd's for whom they acted. Green, Posgate, Grob and Wallrock had been important witnesses before the Select Committee on the Bill. If Parliament had known of the Howden, PCW and Brooks and Dooley affairs before July 1982, the new Lloyd's Act would not have been passed and Lloyd's self-regulatory status would have been in grave doubt.

The revelations of Autumn 1982 disclosed how dishonest agents had milked their Names and that there were major conflicts of interest between Names and their agents which were a much more serious problem than those between brokers and broker-owned agents. As I have [*18] mentioned, some of the leading witnesses before the Select Committee had themselves been involved in major improprieties (eg Grob, Wallrock, Green, Posgate). Later there were further revelations about the size of the PCW losses and the prevalence of baby syndicates. There is no doubt that Parliament was misled. Had the matters that became a matter of public knowledge in 1982 been known in 1980 and 1981, Parliament would undoubtedly have taken a different view. My own appointment as Chief Executive and Deputy Chairman was in part due to the fact that the authorities recognised the need for an independent Chief Executive from outside and that Lloyd's could not be counted on to implement the new Act fully and fairly without outside intervention.

Since the Committee Members had knowledge of the Neville Russell and Murray Lawrence letters, the attorney reports would have carried meaning for them in a way that I or others who had not seen those letters would not have appreciated. I have no doubt that the failure of Lloyd's to reveal the content of the Neville Russell and Murray Lawrence letters to Parliament, or to mention the subject of asbestos to Parliament (I am told there is no reference in Hansard to asbestos problems in relation to the Lloyd's debate) is indicative of the culture of secrecy that prevailed at Lloyd's at the time.

I was well aware of this culture of secrecy from the work I had done in chairing a working party immediately prior to becoming Chief Executive. Its report was finished under the Chairmanship of my former partner lan Plaistowe. His report was released as a consultative document in August 1983. It proposed that Lloyd's agents and those connected with them should disclose any interests in insurance companies or in companies which provided services to their syndicates. The need for the report arose directly out of the Imperial scandal involving Sir Peter Green. The report proposed that Lloyd's Agents and those connected [*19] with them should disclose any interests in insurance companies when companies had provided services to syndicates. The disclosures should be of ownership interests and of transactions. A two-part register was proposed. It was a complicated document covering eighty pages and was not well received. However, it led directly to proposals to make Lloyd's syndicate accounts available to Names. This was partly in response to external pressures from Names who were increasingly of the view that they were entitled to see syndicate accounts and to be able to compare them to see the performance of syndicates one against another.

The Brochure

Although I was Chief Executive and Deputy Chairman, many detailed matters did not come to my attention. As in any large organisation a Chief Executive has to reserve his time for matters of reform and policy and tends not to get involved in the detail of publicity material. Perhaps incorrectly I did not see the brochure produced for prospective members of Lloyd's as being an important document that required much of my time and attention. I have no recollection of its content or of any discussion of its content. If I had read it properly at the time I would certainly not have allowed it to say that there was a rigorous system of auditing in place because I knew that that was an incorrect statement. I believe Members of the Committee who were aware of the deficiencies in the accounting systems, as highlighted by Fisher, internal working parties, my own reports, and later DTI inspector reports, etc. and who were also on the Membership Committee which approved that brochure, must have been aware that the statement as fundamentally untrue. They knew perfectly well that they needed a new auditing system and that would be done in the future but wearing their recruiting hats they continued to say, "we have a rigorous auditing system." They had been saying that for years and it did not enter their heads to change it. They should have known [*20] that it wasn't tme. However, none of them took their public regulatory duties very heavily, and some of them neglected their duty to their Names

Reserving at Lloyd's

The accurate estimate of this figure (the Reinsurance to Close) is vital to determining syndicate profit. It is essentially a matter of forecasting, in which the underwriter must form a view both as to the likely outcome of claims of which he has been notified and as to the expected development of claims of which he has not yet been advised & #151; the IBNR or 'incurred but not reported' claims. This judgement is more likely to be fair if it is arrived at in a disciplined manner following a regular routine under with all the available evidence about the trend of claims is carefully sifted. From an accounting point of view the problem is no different from that which faces a building contractor estimating the cost of completing a building or an automobile manufacturer assessing future car warranty claims: in both these cases an accurate estimate is critical to the determination of annual profit. If the method is thoroughly and meticulously documented the auditor should be able to put his name to the result: not in the sense of warranting the accuracy of the estimate; but, as with the stock of a manufacturing company, in the sense that the figure for reinsurance to close is a fair estimate which a reasonable man might be expected to draw from the evidence before him, and that all the available evidence was considered.

As a result of the introduction of the true and fair requirement, and of pressure from the Revenue, improvements began to be made in accounting for the reinsurance to close, a matter in which the Revenue continues to take a close interest. The old secrecy with which the matter had been surrounded gave way to a regime of disclosure which no longer gave so much room for nudge and fudge. And the bias towards prudence which had always been [*21] present was increasingly overtaken by the concept of equity between Names. Although the practice of providing more than the circumstances required was admirable from the point of view of Lloyd's solvency and hence the policy holder, it favoured tomorrow's Names at the expense of today's and provided the underwriter with hidden reserves with which to smooth over any future hiccups in his underwriting results.

In 1985 a set of explanatory notes about the reinsurance to close were issued. These were intended to provide further guidance on the application of the Syndicate Accounting Byelaw. These notes deal with whether the reinsurance to close should take into account the future costs of claims settlement, of future inflation on the size of claims, and of the effect of discounting claims by the time value of money when they are unlikely to be settled for many years ahead. Discounting was not allowed but the practice of discounting was effectively achieved by underwriters purchasing a Time and & Distance Reinsurance Policy. That these were essential to the survival of Lloyd's was clearly understood by Peter Miller (see memo from Barber 19 Jan 1984 (H19 1984 0056-9) though I think it is fair to say that I had no appreciation at the time of the extent of the need for them, not understanding the importance of the asbestos issue. The problem of reserving for claims when delays were being experienced at the Lloyd's Policy Signing Office was not deal with. This created problems in achieving equity between Names from one year to another. The problem was particularly acute where brokers delayed the entry of risks in order to delay handing over premiums to the underwriter perhaps because the underwriter had exceeded his premium income limit for the year and wished to defer income to conceal that fact. This issue was only dealt with when inception date accounting was introduced post R&R. Up until then it would not have been possible to audit the LPSO and give syndicate auditors any comfort that the LPSO figures, on [*22] which the syndicate depends for important elements of its accounting input, were themselves true and fair.

There were four areas of disclosure that proved to be contentious at the time. Historically, syndicates had prepared accounts with premiums shown net of reinsurance so that the overall volume of the syndicate's business was not disclosed. Such a disclosure of the overall volume is important because premium income limits are set before reinsurance and under Lloyd's Rules, security must cover the gross business underwritten. No credit is given for reinsurance so that if the reinsurer fails to pay, the policyholder does not suffer: the loss is a purely commercial one to be borne by the Names who should have sufficient means to meet it. There was considerable resistance at Lloyd's to disclosing gross figures and the figures for outward reinsurance because it made it more difficult for the underwriter to conceal overwriting by quota share reinsurance which had been , in the case of PCW for example, associated with irregularities.

Syndicates also resisted making public details of the syndicate reinsurance programme as is required in insurance companies. That remained a commercial secret. This was particularly critical in relation to Lloyd's since Lloyd's Rules & Byelaws encouraged syndicates to reinsure within the market. The argument was that only another Lloyd's syndicate could provide security commensurate with that of a Lloyd's syndicate. This must clearly be debateable given the size and substance of many continental and American reinsurers, many of which are substantially bigger than Lloyd's as a whole. However, the practice poses particular problems for Lloyd's since if the solvency of Lloyd's is to be assessed "as a whole" then arguably such internal reinsurances between syndicates are not reinsurance at all but are simply a form of self-insurance. The emphasis on internal re-insurance within the market [*23] would have to be regulated. I was concerned about it and I thought it should have been forbidden. I raised questions about it that in the main were ignored.

The Lloyd's Global Accounts, which are an aggregation not a consolidation, conceal this problem. In certain circumstances, this became clear in the subsequent development of the LMX and PA Spirals, where the practice gave rise to serious distortions and to concentrating risks within the market instead of dispersing them. At times of loss there was also the risk of significant double counting as happened in Lloyd's in the early and mid 90s. So far as I am aware syndicates still do not publish details of their reinsurance programme as is required of insurance companies. I have recently been made aware of the European Directive 73/239 and I find it difficult to see how Articles 8 & 9 of that Directive can be complied with if the information about the reinsurance programme and the reinsurers is not made available to the competent authorities, and arguably to the capital providers.

The third problem area I deal with in my book (Pagel07) is in relation to the disclosure of pure year results. If Names, and the competent authorities, were to obtain a full picture of the performance of the syndicates from year to year, it was necessary to see to which year developing claims related. If conventional accounting rules were to be applied all that had to be shown was the total figure for the reinsurance to close covering all claims for all prior closed years. As the old claims come in they are charged to the account which has received the reinsurance to close premium regardless of the year to which the claim relates. There is a strong argument that suggests that the pattern of claims development should also be disclosed. Doing so would have aided understanding of the kind of margin or error within which estimates have to be made. The competent authorities, be it Lloyd's or the DTI, should have been collecting and analysing the pattern of claims in relation to particular past [*24] years with great care: information was fundamental to the setting of minimum reserving percentages.

The last problem I identified in my book was the disclosure of provisions on open years. Open year accounts were nothing more than a record of premiums received and claims paid to date. Not until the end of the third year of account was an attempt made to quantify notified claims and the IBNR and hence to form a view of the profit. For solvency purposes the open year liabilities must be estimated following the Lloyd's minimum percentages for reserving purposes, but the results of the solvency valuation do not appear in the syndicate accounts. MacVe (A Survey of Lloyd's Syndicate Accounts) and Neill (Para 5.13 on Page 24, and 5.8 page 23) were of a view that a way forward towards some more current accounting used by insurance companies would be to include a note in accounts of the estimated deficiency on the open years and an explanation of the extent to which risks have been accepted but are not yet reflected in the accounts.

The fourth area of argument was the Underwriters' Report. The Accounting Manual had proposed that the report would include a description of the business written including reinsurance arrangements in force. Schedule 8 of the Byelaw reflects the market's concern at the liberality of these proposals. It was finally decided the comments would be more general; no details of the reinsurance in force were called for nor was analysis of the business required. The Report therefore did not assist in any understanding of the risks and returns of the syndicate's business. There was a distinct lack of useful statistics to provide performance indicators and guides to likely prospects. Only in cases where losses were anticipated were there quantified forecasts in the reports in the mid-80's. In my book Pagesl06-108 I have set out more on this subject drawing on the work ofMacVe who was supported by Neill. There [*25] is no doubt that in the mid 80's substantial progress was made in improving the presentation of the accounts. Prior to then they could not properly have been described as rigorous nor could a statement that they made reasonable estimates of outstanding liabilities have been properly justified. After the mid-80's a non-accountant, such as a Name, unaware of all the history, and unaware of the asbestos problem, could reasonably have believed that Lloyd's did have an accounting system that was as good as the one applicable to insurance companies. That view could not have been shared by anybody who was privy to the information about the developing asbestos crisis. However, as I have said, that information was not shared with Members of the Lloyd's Council in their capacity as Council Members.

There were also structural problems in the accounting at Lloyd's. I have mentioned the problems of internal reinsurances but similar issues arise with personal stop-loss and errors and omissions insurance. The three taken together produced substantial double counting of losses in the early nineties. Both these categories were usually placed within the Lloyd's market. This results in a security weakness, because stop-loss insurances are using the asset backing behind a Lloyd's policy twice. The Lloyd's security chain has been pledged once to back the claims of direct external policyholders. It is then pledged a second time to cover the risks of stop-loss policies. Although there are rules to prevent a Name participating on a syndicate which writes his own stop-loss policy there is a clear element of double counting. There are also regulatory weaknesses because underwriters of agents' errors and omissions insurance are not excluded from the regulatory activities of the committee and Council where deliberations as to an agent's behaviour can affect a claim against him by his Names. A complete solution would be provided by a rule that personal stop-loss policies, and agents' errors and omissions insurance, must be placed outside the Lloyd's market. [*26]

Accounting Changes

When I joined Lloyd's at the beginning of 1983 measures to reform the accounts were well under way. In March 1983 a Consultative Committee of Accountancy Bodies' reported to the Chairman of Lloyd's on Fisher Task Group 4's proposals. "We believe that Names should be given the fullest possible information about abnormal elements of uncertainty and that in the interests of equity between Names it may be appropriate in exceptional cases to leave the account open." I subscribed to that view. It is clear now that neither Fisher nor I fully understood the significance of the issue since I had not seen the lawyers' reports on the asbestosis problem. We attempted to introduce replication of company accounting rules, disclosures of related party transactions (principally reinsurance) with agency-related companies, and the removal of baby syndicates. A provisional accounting manual for syndicates had been released for consultation in December 1982. The final version, containing a number of changes, was issued in November 1983 with a letter from the Chairman which said that although the document was still provisional pending a byelaw on the matter, it should be followed by agents as a guide to best practice in the market. Six items formed the accounts proper and were in future to be subject to audit.

1. An Underwriting account for the year just closed

2. Underwriting accounts for the open years, normally two

3. A Balance Sheet

4. Notes to the Accounts

5. Disclosure of Interests of Agents in syndicate's transactions

6. A personal account for each member, showing his interest in the syndicate result and any charges made to him personally. [*27]

Separately, not subject to audit, there would also be published a Managing Agent's report, an Underwriter's report, a seven year summary of syndicate results and an audit report.

This took legislative form in byelaws in 1984 when a February byelaw gave immediate effect to the accounting manual that required agents to provide annual reports for syndicates comprising the first eight of the elements I have just listed. In April there was the passage of the Disclosure of Interests byelaw which implemented the Plaistowe Report and which required every annual report in respect of a syndicate to include a fair presentation of all transactions entered into by the managing agent for the account of the syndicate in which the agent had, directly or indirectly, a material interest. If there were no such transactions or arrangements the annual report should state that fact. This was one of the principle steps taken to avoid a repetition of the insider dealing associated with the scandals of 1982.

These brief changes held the line until the main byelaw came into effect with the Syndicate Accounting Byelaw of 1984. This is a large document and one of the four principal foundation stones of the reform of Lloyd's. The Syndicate Accounting Byelaw requires the agent to keep proper accounting records; it establishes the three-year accounts rule; it calls for syndicate reports containing the three elements described above; and it requires the accounts to be approved, signed and audited. The accounts have to be circulated to participating Names and filed at Lloyd's. The schedules cover details about accounting records, accounting policies, the format and contents of accounts, including disclosures of interests, the contents of the Managing Agents report, which is seen as corresponding to the Directors' Report in a set of Company Accounts, and the contents of the Underwriter's Report, which is to be a discussion of the business of the syndicate for the year. The whole document is [*28] redolent of the corresponding sections of the Company's Act. The regime took immediate effect with the first new style accounts prepared under the February Byelaw and sent out to Names in the Summer of 1984. A central file of syndicate accounts was opened to the Public in August 1984. Not until 1986 was the additional requirement that accounts should show a "true and fair view" introduced. This was to give auditors and agents time to prepare syndicate accounts able to match the standards of the company world in showing a true and fair view of the profit for the closed year. All these changes to the way in which accounts were being produced were intended to produce transparency and therefore to cut down on the major abuses that had hit Lloyd's in the late 70's and early 80's. There is nothing in the Byelaws which goes to the question of the calculation of the RITC, the valuation of outstanding liabilities, including IBNR. The RITC is fundamental to determining the profitability of syndicates and in my time at Lloyd's, we failed to grapple with the question and we gave no guidance or instructions on how this exercise should be done. It is essentially a matter of forecasting, in which the underwriter must form a view both as to the likely outcome of claims of which he has been notified and as to the expected development of claims of which he has not yet been advised - the IBNR or 'incurred but not reported' claims. It is akin to the process of valuing stock and must be meticulously documented if the auditor is to put his name to the result. A set of explanatory notes on this was issued in December 1985 to provide further guidance on the application of the syndicate accounting byelaw. Given the extent of the reforms that took place 1984-1986, which were the product of work I was doing or initiated in my time from 1983 to 1986, it is impossible to see how Members of the Committee could honestly have believed that there was in place at Lloyd's a rigorous accounting system that made reasonable estimates of outstanding liabilities including IBNR They knew the accounting system was deficient, hence the need for reform. They had been told in the Neville Russell letter that the calculation of liabilities was an "impossibility". [*29]

They knew that they were not following through on the Murray Lawrence letter and were not assembling, collating and checking information about the asbestos problem which a great many of them were seeing as an increasing problem.

The Audit Panel

I have made detailed comments about the auditors in my book Pages 109-115 and in a lecture that I gave in 1985 to the National Association of Accountants Conference in Paris on 19 April 1985. In both places it can be seen clearly that I was very critical of the Lloyd's audit regime. I believe that the views that I held at that time about the audit regime were ones that I made clear during my time at Lloyd's from 1983-1986. Anybody on the Committee of Lloyd's in the 1980's should have been aware that Fisher, I and other independent observers strongly believed that the audit regime at Lloyd's was inadequate and widely misunderstood. Any Name recruited on the basis of believing that there was a rigorous system of auditing which was independent and objective and made reasonable estimates of outstanding liabilities would have been acting under a misapprehension. Committee Members who made such claims could not have made them honestly.

During the 1970's a series of mergers between medium sized accountants reduced the number of accounting firms. Baker Sutton linked with Ernst & Whinney, Angus Campbell with Josolyne Leighton Bennett and then with Arthur Young. Ernst & Whinney and Arthur Young were two of the top eight international accounting firms. When the 1982 scandals emerged Arthur Young took steps to apply their high standards to Lloyd's clients who had joined their list as a result of the Josolyne Leighton Bennett takeover. Ernst & Whinney who had not been responsible for any of the troubled syndicates were heavily involved with their partner Nigel Holland in investigating wrongdoings. The style of professional work at [*30] Lloyd's therefore began to change before the 1984 reforms. However, all the auditors suffered under the misapprehension, on the part of the market, that they were responsible for auditing the syndicates. This was an incorrect view even if widely held by agents and Names. "Auditors" merely signed annual solvency certificates confirming that each Name possessed the means to meet his obligations. The quantum of the obligations was fixed by the Lloyd's minimum reserving rules plus such extra sums as the underwriter and the agent thought prudent. The means were measured by the Premiums Trust Funds deposits and Personal Reserves. In the usual case the Premiums Trust Fund itself was large enough and once the auditor saw that the obligations were covered he stopped counting. The market called this an audit and allowed itself to believe that the fairness and equity of the annual syndicate results had been blessed by the auditors. This was not correct.

The first step to correct the misapprehension was taken in 1983 when the name of the Committee responsible for supervising the annual solvency test was changed from the "Audit Committee" to the "Members Solvency and Security Committee".

Fisher had called for the new syndicate accounts to be audited and this was provided for in the Syndicate Accounting Byelaw in 1984. The question of who should do audits was discussed in a consultative paper issued by the Council in July 1984. Lloyd's, under my guidance, was quite clear that it did not wish to take upon itself the task of saying how syndicate audits were to be conducted. The accountancy profession had that duty and Lloyd's wanted to make sure that the responsibility for saying how audits should be conducted lay with the accountancy profession not Lloyd's. The way of achieving this was done by means of the "True and Fair test" which came into force at Lloyd's in 1986. The Companies Act lays down the duties of auditors who must report if the accounts show a true [*31] and fair view. The scope and nature of the audit work necessary to support the opinion is prescribed by the corpus of professional guidance issued under the aegis of the accountancy profession's Auditing Practices Committee. Lloyd's itself laid down special rules in relation to certain matters. The first was as to the qualification of auditors where the requirement for past Lloyd's knowledge and experience was removed on the grounds that the independent objectivity of the auditor was more important than any technical knowledge he might previously have acquired. However in view of the fact that the Insurance Company's Act provides that the accounts of every underwriter shall be "audited" by an accountant approved by the Committee of Lloyd's, (the audit referred to is in fact the solvency test), it was necessary for Lloyd's to continue to licence a panel of auditors for solvency purposes. Some firms with past experience were therefore removed from the panel. Lloyd's wanted well rounded auditors who could stand up to the agents. Prior to then (1986) too many of them had been "poodles".

The lack of audit independence and the undue cosiness which existed between agents and panel auditors had been a critical source of weakness in the old arrangements. In future it was going to be impossible for auditors to be directors or shareholders or to keep the books. They should not earn more than 15% of their fee income from any one client. The rules were applied to Lloyd's by requiring that the auditor could not be a director or shareholder of the agent or member of any syndicate managed by the agent. Auditors were prohibited from keeping the books of syndicates they were auditing. Auditors were also prohibited from auditing the agency and the managed syndicates.

Because of the peculiar composition of syndicates, it was not possible for the Names to be responsible for appointing the auditors. The Council was also unwilling to accept that [*32] responsibility. It was therefore left that agents would appoint the auditors but it was clearly stated that the auditors' responsibility was "to report to Names". This arrangement was criticised by Neill but he made no recommendation.

The matter of the relationship between Lloyd's and the panel auditors was a tricky one. Panel auditors are not subject to Lloyd's jurisdiction and cannot be sanctioned by its byelaws but as a regulatory authority Lloyd's needed a relationship with each firm. Panel Auditors were therefore asked to provide a written undertaking to the Council of Lloyd's as a means of defining the relationship between syndicate auditors and the Council. This allowed the Council of Lloyd's to appoint and remove auditors from the panel and ensure that the auditors would comply with Lloyd's Syndicate Accounting Rules. The arrangements potentially breached the confidentiality that an auditor owed to the Names and the problem was only solved by the introduction of a new general undertaking in 1987 under which all members of Lloyd's waived in favour of the Society of Lloyd's any duty of confidentiality owed by a syndicate auditor to its Names.

Although the arrangements increased the size of the panel it had little effect in practice. 80% of the audits continued to be carried out by four firms. Again this matter was criticised by Neill. He recommended that if it remained the case by 1991 then Lloyd's should implement Fisher's proposal and limit the number of syndicates handled by any one audit firm. So far as I am aware this proposal remains unimplemented. Within the overall picture there were important underlying changes resulting from the separation of agency auditors and syndicate auditors, mergers with larger firms meaning that two thirds of the syndicates were being audited by firms known outside the Lloyd's community, and the requirement of registration including monitoring and recruiting and training having an effect on raising the standards of [*33] audits substantially. However, the fundamental position remains that the Lloyd's "audit" is not an audit and I am told this is now specifically noted in relation to the Lloyd's Global Accounts

I have been asked what consideration was given to the implications of the particular requirement in the Insurance Companies Acts that require actuaries to "calculate" the liabilities and adequacy of assets where long-tail liabilities were concerned. Being totally unaware of the extent to which old years were being re-activated by asbestos claims, I am afraid I never realised the significance of this section. I cannot recall there ever being any discussion of its implications. I can only assume that this is because the auditors were satisfied that the responsibility had effectively been passed from them to the Underwriting Agents on whose calculations they had been told they could rely. I do not recall any instances of actuaries being called in.

Lloyd's as a public regulatory authority

I think it is clear from the letter that Sir Peter Green wrote to Sir Kenneth Ben-ill in August 1983 that we had a very limited view of our role as regulators and that did not encompass all the ramifications of the European Directive 73/239 which I have recently been shown. As I set out in my book (Pages 1-7) I was asked to take the job by the Governor of the Bank of England and was very much "parachuted in " from outside Lloyd's. I had some able people helping me. Ken Randall was already there. Peter Rawlins I recruited as my assistant from Arthur Andersen. A third adviser was Philip Brown. Philip was a deputy secretary at the DTI, who had acquired experience of insurance regulation and whose initial brief was advise on the investigatory and external relations areas. I remember him saying of Lloyd's "this is a very corrupt place". [*34]

I remained an outsider throughout my time there ("the chap the Governor found"). The minutes of Committee meetings show that even though I held the posts of Chief Executive and Deputy Chairman and therefore could attend the Committee, I was described as being "In attendance". This is because I was not a working Name and therefore not formally a member of the Committee. In any event I did not attend every Committee meeting eg Jan 1984, or Nov 1983 since they often took place on Wednesdays when I had other commitments at the Accounting Standards Committee. Partly my "distance" was a question of choice. I felt it was important that whilst I might be on friendly working terms with colleagues, I must be, and must be seen to be, independent and objective if I was to achieve the changes that we all agreed were necessary. I was not a Mason and did not attend any of the Masonic Lodge meetings. I was not aware that there were any Masonic lodges at Lloyd's. I was not part of the "club" that reflects part of the culture, traditions and history of the Lloyd's market and of the old "chib" rules and standards which had historically been important in making the market work.

In the early eighties the responsibility for investor protection and the reputation of the City rested with the Governor of the Bank of England. Having been appointed, as I saw it, by the Governor of the Bank of England, I had no doubt that my primary duty at Lloyd's was, as in any other public regulatory function, to ensure that Lloyd's was properly regulated to the high standards that I believed were appropriate. I believed this was in the interests of members of the "Society " of Lloyd's of which the overwhelming number were Names. I did not see myself as being answerable to agents. I kept in close touch with the Bank of England and also with the DTI. The fact that Lloyd's was a self-regulating institution became an increasing matter of concern as the corrupt practices within the market and the inadequate [*35] handling of conflicts of interest among the working members of the Committee became apparent.. Looking at the position, with the benefit of hindsight, and informed by the provisions of the European Directive, it now looks extremely odd for a regulated body, supposedly regulated by the competent authorities of the Member State Government, to have self-regulatory powers. I am also very sceptical about the process of self-regulation (I describe the process and what is required for it to work in pages 33-35 of my book). It is essential, if the public interest is to be properly secured by a self-regulatory regime, to be punctilious in excluding anyone with a vested interest from applying the rules in the market place. This was to prove extraordinarily difficult at Lloyd's with its small number of market professionals from which the amateur market regulators were to be drawn, and with the extensive cross-membership of syndicates. Furthermore there was an unwillingness to concede that there was a point at issue. To many at Lloyd's self-regulation meant, then and for many years thereafter, self-government, in which the legislative, executive and judicial branches are all in the control of the market professionals. This meant that repeatedly a blind eye was turned to conflicts of interest and matters that might properly have been considered together were compartmentalised. I have been asked whether I felt any particular duty to report to Names in view of the objects set out in the Lloyd's Act 1911. Whilst I was clear that I was acting in what I perceived as being the best interests of the institution my particular focus was on the interests of the Names. The DTI took care of the policy holders, the Committee took care of the agents, I felt that I stood, with the external members of the Council, for the Names. As the regulators of the institution we were undoubtedly performing a function that would have otherwise have had to be done by the DTI or some other public body (the FSA does it today). I felt I had been appointed by the Governor of the Bank of England and I certainly saw my role as one of performing a public office. [*36]

Whilst I have little doubt that I, and the Council, saw ourselves as having an important public function as a regulatory body, I am also clear that we did not see ourselves as having any particular responsibility to apply any articles of European Directives.

European Directives

My book makes no mention of European Directives. The reason is very simple. We were not concerned about their regulation of us. All we were concerned about were our rights to practice in Europe. The thought of them regulating us never entered our heads.

I have no memory of ever having referred to a European Directive for guidance as to what we should do at Lloyd's. I have been shown the provisions contained in Directive 73/239. I am unaware that it informed any regulatory activity that we were involved in, though certain arrangements in the Statutory Instrument 1983 may have been intended to be implementation of some articles.

I have briefly considered whether or not I can recognise any of the requirements in any statutory provision that I was involved with. I do not recognise any of the articles in any of the provisions of the Insurance Company's Act or of the Lloyd's Act that were dealing with. Specifically:

Articles 8.1 & 9

So far as I am aware neither Lloyd's nor the DTI required syndicates or Lloyd's to produce any scheme of operations. We did not assemble the information nor pass on information as to the nature of risks which syndicates were proposing to cover. We did not specifically lay down any guiding principles as to reinsurance and I do not believe we received any from the [*37] DTI. I am not sure what items could be said to constitute the minimum guarantee fund other than the Lloyd's Central Fund.

The Central Fund, although established as a policyholder protection fund is useable by the Council of Lloyd's to cover the liabilities to policyholders of defective Names, and latterly for other purposes eg the tax settlement. It was formally reconstituted in accordance with the Central Fund Byelaw of 1983. Its existence is used by external regulators in the monitoring of Lloyd's solvency, even though it has no external statutory basis. I do not believe Lloyd's or the DTI ever issued any formal guidance on what items could constitute the minimum guarantee fund of any syndicate but this is possibly because the view was taken somewhere that this was unnecessary on the grounds that the Central Fund effectively provided, through earmarking etc., an equivalent protection to a minimum guarantee fund for each syndicate. During my time at Lloyd's we were not overly concerned about the adequacy of the Central Fund although this must clearly have become a matter of some concern later. I do not believe that we or the DTI asked syndicates to provide estimates of the costs of setting up administrative services or of securing business. There were no requirements for training and qualifications prior to the introduction of the Lloyd's Introductory Test for working Names at the end of 1985.

There was no requirement to take Chartered Insurance Institute exams or other professional qualifications. Neill rightly points to these defects, commenting on the absence of any adequate system of examinations. He refers to the Lloyd's Introductory Test but does not consider that this goes far enough. Neill says: "We for our part are in favour of mandatory examinations. We find the arguments against them unconvincing. Active underwriters at Lloyd's assume considerable responsibilities in conducting insurance business on behalf of Names. Furthermore, Lloyd's have taken great trouble to introduce a substantial volume of legislation covering many aspects of the market. It is imperative that [*38] those who work in the market should be thoroughly familiar with the body of law, and as we have said elsewhere, a knowledge of the law of agency is essential to the proper conduct of the business "(Neill, para 9.25, page 57). The weight of this argument is borne out by the findings of the PCW investigators that many members of the Lloyd's community in senior positions were not even vaguely aware of their legal obligations as agents".

Article 13.2

Financial supervision shall include verification As far as I am aware, Lloyd's itself never took any steps to verify syndicate accounts, the adequacy of reserving, the state of solvency either for individual syndicates or from the market as a whole. The view we took was that it was the responsibility of the auditors to check on the accuracy of the figures for the solvency test and that our obligation was to licence auditors who were competent to do so. We believed the solvency test was tough even though we knew the audit system was inadequate when reporting to Names. For those Committee Members, who had seen the Neville Russell letter, and who knew that the reserving in their syndicates was not to ultimate and would only cover anticipated claims for a short period ahead, there was clearly knowledge that the nature of the verification process was totally inadequate both in relation to their own syndicates and therefore in relation to the market as a whole. I am not aware that there was ever any discussion of the requirements of Article 13.2. Any thinking we had about solvency in relation to legislation would have been in relation to the Insurance Company's Acts requirements. I do not believe the DTI ever took any specific steps of its own to check on the accuracy of any syndicate accounts or of the Lloyd's accounts. It did not organise any specific verification process.

Article 13.3

As far as I am aware the DTI never took any steps to check on the administrative and [*39] accounting procedures or on internal control mechanisms. As far as Lloyd's was concerned in my time, we were well aware of inadequacies in the administrative and accounting procedures and were taking steps to rectify them which, as I have explained previously, took effect from 1986. Prior to then the procedures were certainly inadequate and known to be so. Nothing we did in 1986 looked particularly at the question of internal control mechanisms. I do not know if anything has been done about that in recent years but certainly during the 80s I do not believe the matter was given serious consideration either by Lloyd's or the DTI.

Article 15

I am not sure what is meant by "adequate technical provisions^. The DTI delegated its responsibilities under the Insurance Companies Act in this respect to Lloyd's but these were the absolute minimum requirement for syndicates to use when calculating their reserves. I emphasise minimum since they were clearly a totally inadequate basis in relation to a problem like asbestosis where the level of anticipated claims vastly exceeded a level of notified claims and of premium income.

Article 19.1

I think the syndicate accounts as produced after 1986 do comply with the requirements for an annual account setting out financial situation, solvency etc. They were clearly wrong and had been for a number of years in as much as fundamental liabilities of the reserving process had not been properly audited. That was made possible by the confusion about the nature of the audit and the responsibility for the independence of the auditors. I am aware that the European Commission has suggested in its letters of Formal Notice to the British Government that it considers the auditors cannot be viewed as independent when they take any instructions from the Council of Lloyd's. [*40]

I am unaware of the DTI taking any steps to directly supervise the syndicates or Lloyd's. Their policy was to leave the regulation of the market to Lloyd's. There were certainly, in my time, never any detailed inquiries regarding Lloyd's as a whole or particular syndicates or any attempts to gather information or require submission of documents other than the global solvency returns, there was no procedure for carrying out on the spot investigations by the DTI.

I have dealt with the whole question of divestment and re-registration in my book Pages 116-124. I do not think there is anything I can usefully add to that at this stage.

I note that Article 19.3 requires competent authorities to take measures to ensure that an undertaking's business complies with the laws, regulations and administrative provisions applicable. I am unaware of any intervention by the DTI aimed at ensuring that. When I took steps to bring specific matters to the attention of the authorities in the hopes that they would prosecute and bring criminal proceedings (I refer specifically to the tax avoidance arrangements set up with rollers etc) no steps were taken. I continue to regard that as being a major strategic mistake taken at the highest level of Government. It allowed Lloyd's to believe that it could operate effectively above and beyond the law. Such a cultural belief, whether true or not, can only lead to arrogance and a disregard of legal requirements. In my opinion that is precisely what has happened at Lloyd's since 1986. When evidence of irregularities came to light it was our practise to inform the Director of Public Prosecutions. Initially, we were concerned that the process of Lloyd's investigations and the subsequent hearing of disciplinary charges would be interrupted by criminal proceedings. Had such proceedings been brought we would then have had to wait years for these proceedings to be [*41] completed before taking action. However, the decision was taken to press on hoping that, in the most serious cases where criminality was alleged, the DPP would follow closely on our heels. Had this been the case the authorities would have been seen to be actively supporting the actions of Lloyd's in punishing wrongdoers. It would have put the official stamp of approval on our new disciplinary powers. However, as time passed the inaction by the DPP became an increasing source of embarrassment top Lloyd's. While I have no doubt that the DPP's delays were caused by serious procedural reasons, there must be something wrong with a system of criminal justice in which a shoplifter goes to jail for petty theft and a City fraudster, who may have stolen millions, gets away scot free.

I am interested to see that there is a Directive requirement to prevent or remedy irregularities prejudicial to the interests of insured persons. So far as I am aware the Central Fund can be used to protect policyholders and Names. It has been so used on many occasions. So far as I know policyholders have always been protected and paid. But it is self evident that Names suffered huge losses in the 1990s as a result of massive incompetence and major irregularities at Lloyd's. These were not simply the actions of agents. There were clearly major regulatory failures on the part of Lloyd's which both had the responsibility of ensuring that the reserving was adequate and the accounting systems were adequate A Directive requires proper enforcement measures to ensure compliance with laws, regulations and administrative provisions, where appropriate through judicial channels. In my time we did set up a number of disciplinary investigations and I believe these had a major effect on raising standards amongst working Names in the Lloyd's market. However, maintaining standards is an ongoing process. We were laggardly in introducing a scheme that would require people working in the market to have proper qualifications and professional experience or to be "fit and proper". These were reforms which in part were introduced in the mid-1990s though I [*42] am unaware of measures requiring professional qualifications and experience through to the present day.

I was very saddened at the time at the failure of other public authorities to take action in relation to matters that appeared to me to be criminal. I said then that I felt the government and Director of Public Prosecutions had let Lloyd's down. The failure to press charges was an inexcusable lapse by the authorities which did great damage to the City and great damage to Lloyd's where it clearly induced a culture where the importance of complying with the letter of the law was not accepted. Neil picked up on this in 1985 when he quoted the PCW inspectors' conclusion saying "Many members of the Lloyd's community in senior positions were not even vaguely aware of the legal obligations as agents to act at all times in the best interests of their principals and not to make secret profits at the their principals ' expense and to disclose fully all matters affecting their relationship with their principals" I have no doubt that in other situations Sir Peter Green's conduct in relation to Imperial would have been prosecutable. Quite clearly there was major fraud in relation to PCW and it is extraordinary to me that more vigorous efforts were not made to bring to book Peter Cameron Webb, Peter Dixon and possibly others involved in that fraud. The inspectors we appointed to enquire into the PCW frauds told Lloyd's by letter (20 Jan 1984) that it was apparent to them that many members of Lloyd's in senior positions had only the sketchiest notion of their legal obligation to act at all times in the interests of their Names, and not to make secret profits at their expense. I concur with their view. Most members of the Committee understood that their duty was to Names and that they had a duty to regulate, and enforce regulation, that might conflict with their own financial interests. But they discharged this duty inadequately and in some cases incompetently. [*43]

A number of agents were involved with rollers and in baby syndicates. Those were clearly a breach of their agency duties. The whole business of rollers and avoidance of tax was a matter that I discussed with the Revenue (as mentioned above).The DTI Inspectors had identified that 99 out of 360 syndicates had fewer than 50 members and more than half had syndicates being operated in parallel. Many leading figures in the market were involved. Sometimes these arrangements were hugely profitable I note that when David Coleridge, a later Chairman of Lloyd's, was asked about the enquiry into Bellew and Raven underwriting agencies where syndicate 973 was a baby syndicate with 5 members, one of whom was Coleridge, he said: "/ don't think that underwriters ever understood the law of agency. Not because they were stupid but because it never came across their desks ". The fact that nearly all members of the Committee (Posgate said 11 out of 16 in his time on the Committee) were under investigation for their involvement with offshore funds meant that no agent was suitable as a candidate to succeed Peter Green as chairman in 1983. Peter Miller, a broker, therefore took over.

In that connection my attention has been drawn to the findings of the inspectors published in 1990 into the Howden and Minet affairs with their criticisms of the audit system.

PCW and the new general undertaking

I dealt with the PCW affair in my book Pages 174-183. So far as I knew in my time at Lloyd's and when writing the book, the PCW affair was a straightforward fraud by crooked agents (Cameron Webb and Dixon) which was complicated to unravel because of the way in which it had operated a group reinsurance programme covering syndicates with different constitutions. This arrangement was probably designed to assist the non-marine syndicates which were probably facing the major asbestos problems. However, we knew nothing about [*44] that at the time since we did not know the extent to which the PCW syndicates had brought asbestos problems in to the market. Although the position was bubbling throughout my time at Lloyd's since the problem at PCW became clearly evident in December 1982 and the Davis Report was published in July 1986, we found the necessary evidence of fraud to allow Lloyd's prosecutions but Dixon and Cameron Webb managed to escape Lloyd's disciplinary procedures by resigning in 1982. Some recoveries were made from Gibraltar augmented by contributions from the brokers involved in the original reinsurance arrangements, Howdens and Minets.

£40 million was obtained in that way. The Names were pressed to accept an offer and remain liable for future deterioration. However, by the Autumn of 1985 a large number of Names were refusing to pay losses that by then were five times the premium income they had written on the syndicates. Minets decided to pull out of the agency business and we reformed the company, AUA3 (Additional Underwriting Agencies Number 3) chaired by Sir lan Morrow. During 1985, the losses climbed even higher .

The Council of Lloyd's was adamant that they must be paid by Names, however they might have arisen. However, at the time I left pressures were mounting for some sort of settlement to avoid years of litigation between the Names and agents. I have recently been shown two letters from Sir Peter Miller, one to the Names on the PCW syndicates and one to the Names in general. It seems to me to be clear that the first letter acknowledges that the PCW Names had the ability to bring the legal action in the United States and that they were doing so. The second letter says that the proposed general undertaking will have no negative effects on a Name's rights. It does, however, contain a forum selection clause the effect of which would be to prevent any future action by Names in general in the United States. They are mutually inconsistent.

I draw attention to the lessons that I believe could be leamt from the PCW affair on Pages 180 & 181 including the need to have better accounting and auditing with proper reserving, [*45] Names when agents get into difficulties and the importance of the role of an independent Deputy Chairman and Chief Executive in achieving that.

Rollers and the Revenue Settlement of 1985

I have dealt with this in my book (pages 49-52) and in a speech that I gave to the Revenue Law Conference in July 1986. In summary the practice was that payments described as reinsurances were in fact general reserves. Tax deductions were obtained. The underwriter had under his hand an additional secret fund which could be called on to meet later losses and hence to smooth profits Repatriation of funds in the eighties was often at lower tax rate. Such arrangements breached two fundamental rules of Lloyd's: the rule of equity between Names was broken because Names in an earlier syndicate would be paying for reserves for which they got no value, while Names in a later syndicate would benefit without paying for the value of the fund through their share of the premium for the reinsurance to close; the law of agency was broken because agents failed to account properly to their Names for the funds and in some cases made secret profits out of them.

The Revenue alleged fraud, wilful default or neglect. A majority of agent members of the 1982 and 1983 Committees were amongst those accused. In the course of educating the Revenue about the need for reserves a number of statements were made by those responsible eg Merrett (who gave evidence for the Revenue), Barber, and Miller. Having set them in train I was excluded from the negotiations. In those statements there are a number of statements to the effect that Lloyd's was under-reserved for long-tail liabilities. In part, this was a stratagem to persuade the Revenue of the need for reserves. However, there was a [*46] fundamental truth that can be seen from the steadily increasing reserves for such business which made it loss making.

My own view was that the potential losses in the United States were sufficiently serious that Lloyd's should consider withdrawing from the American market. I did not know how serious the asbestos problem was but I was aware that long-tail liability losses from a range of causes were very serious. I was aware that Lloyd's Non-marine dollar business accounted for about 10% of our premium income but a very large share of Lloyd's losses. It would have been sensible to have demanded that claimants in the United States pursue us through the English courts, as the policy wordings largely required, where more reasonable settlements could have been obtained. This might well have led to Lloyd's withdrawal from the US market which would in the long run have been better for the Society

Lloyd's problem was that the calculation of the RITC was, in most cases not properly evidenced by actuarial, statistical, or accounting data nor was it supported by an audit opinion. Consequently, individual cases of over-providing had occurred. The Revenue alleged fraud, willful default or neglect. Lloyd's case was based on commercial necessity of the arrangements made its pursuit of miscreants, and the complexity of reopening assessments for up to 35,000 names, many of whom had died or resigned. The Revenue's case was complicated by two facts. First, the agents who were alleged to have misled the tax authorities were not themselves the tax payers, but the agents of the taxpayers; the Names, in whose alleged interest the arrangements had been made were largely ignorant of the arrangements. Second, the funds if repatriated would flow into the Premium Trust Funds which by law could not properly be used for the payment of tax liabilities. [*47] Clearly several parties at Lloyd's bore some responsibility as did the Revenue who for many years had either failed to ask the questions that they should have, or, having asked them, failed to understand the answers. The figures on which on which the computations were based were unaudited until 1985.

In the event the Central Fund was used to settle the agents' tax liabilities. I felt this was quite improper. I raised it but met the argument that if we don't, Lloyd's would go bust.

Rota Process

I had little to do with the recruitment or vetting of prospective Names. I understood there was a rota process and I attended one or two rota committees. I have looked at the Rota Brief again and it is clear to me, on reflection, that the process was flawed. It is impossible to ascertain what an individual understood about the process of joining Lloyd's and the adequacy of his briefing by the agents from the 5/10 minute formal sessions with Council members following the briefs I have seen (H 24 313-4). Lloyd's accepted a responsibility to check that the new members were aware of what unlimited liability meant; too glibly it was laughed off as being liable to your last waistcoat button or cuff-link. Lloyd's had a duty to do the task effectively and to check what individuals understood not just ask whether they had been told certain information. Quite clearly that process could not be conducted effectively in groups.

Lloyd's rules prohibited the use of a person's house as part of his show of wealth for underwriting. This was circumvented by the use of bank guarantees. Unquestionably we should have stopped this practice. Using a bank guarantee was quite clearly against the rules. [*48]

Duty and Obligations

It seems to me that the first duty of the Chairman and Chief Executive should be to Names and that if disputes arise between Names and Agents then Lloyd's should be seeing to it that the Names are provided with legal and accounting advice, at the Corporation's expense, and that the Names are facilitated to organise themselves to take whatever action is deemed necessary against the agent or the regulatory authorities if appropriate. The Neill Report elaborates on this in its chapter on Complaints and Disputes. Neill envisages an investigatory service for Names with a complaint against their agent.

Since Lloyd's has immunity from suit for damages it is vitally important that it complies with the objects of the Society which are the raison d'etre for that immunity. The objects of Lloyd's are first and foremost to protect the trading interests of the Members. To that end they must collect, publish and diffuse intelligence and information. In support of those objects it has a duty to regulate the market. It does not owe its first duty to policyholders, that role is handled by the DTI. It seems to me that Members of the Committee and Council of Lloyd's have a clear obligation to act in pursuit of the objects of the Society and no authority to act contrary to them or in a way that prefers the interests of agents or brokers or a nebulous "market as a whole'' to the interests of Names. Confusion about this is bound to lead to a situation where there are potentially duplicate regulators of the market (DTI & Lloyd's or Treasury & Lloyd's) both with ill-defined responsibilities to policyholders and a failure to recognise other interests in the market. If there was any justification for the Lloyd's self-regulatory structure it was a division of responsibility between the DTI and Lloyd's, the DTI being responsible for the protection of policyholders and Lloyd's the protection of Names. In recent years it seems to me that Lloyd's has lost sight of its primary objects. I see no distinction between an obligation to achieve the objects and the duty to achieve the [*49] objects. There is clearly a statutory obligation to that end and that must bring with it fiduciary statutory duty.

I drafted a letter, with input from others, for Sir Peter Miller to send to Members on the 25 May 1984 (H20 1984 0581). That letter says: "Lloyd's Acts 1871 to 1982 impose upon the Council of Lloyd's the task of managing and superintending the affairs of the Society and of regulating and directing the business of insurance at Lloyd's. In other words, the Council has a general duty to the membership at large to manage the Society and a specific duty to maintain an orderly market.

It is the role of the Council to ensure that there is a sound and well regulated framework within which individual underwriters can work and Names can subscribe to syndicates. From time to time syndicates and the Names on them can, and do, suffer from the results of poor underwriting judgements. In very exceptional cases, such losses may have been exacerbated by negligence or, in a rare case, by improper conduct on the part of the underwriting agents concerned: in such cases, the Council will act vigorously in the interest Names through full and expeditious use of its investigatory and disciplinary powers " It clearly sets out what the Council viewed as duties and obligations to Names in 1985. I see no reason to think that position should have changed though I am told the courts no longer accept it. I have, therefore, been asked to comment on whether or not the Lloyd's Committee and Council owed any duty to Names. It seems to me that the objects of Lloyd's are clearly spelt out in the Lloyd's Act 1911 (section 4). There can be no doubt that the primary duties are to the Names. The duty to manage and supervise, to which from 1983 must be added the duty to regulate the market, are vested in the Council and Committee for the purposes and [*50] solely for the purposes, of protecting and promoting the interests of Names. The DTI has wider roles in regulating the whole insurance industry to protect policyholders. Lloyd's, as a matter of good business, is obviously keen to ensure that all valid claims are paid but its duties and obligations are to Names. Any actions not aimed at promoting the interests of Names and ensuring they are properly informed is potentially ultra vires. It is this fact that made the concept of self-regulation at Lloyd's so difficult. All the Committee were working Names whose primary financial interests were centred on the development of their agencies or brokerage. There was minimal understanding of agency law or the contractual and fiduciary duties they owed to their principals. When translated from being agents (or brokers who are agents for policyholders), to acting as regulators of the Lloyd's market they found it very difficult to disregard their own interests and to put the interests of Names first. It was for this reason that I devoted so much time and gave such priority to creating transparency (See my exchange with PAR Brown & #151; H 19 1984 0071-3 and 0076). I believed that if the Names had the information, as I set out above, then they could take independent decisions and, if need be, take action against rogue or incompetent agents. I have no doubt that it was correct to create greater transparency, as I set out above, but we underestimated the extent to which conflicts of interest were entrenched and the lengths some agents would go to protect their positions regardless of the consequences upon Names. I have no doubt that Names ought to have known more about asbestos problems. By letter, rota, reports, and accounts, the intractability and scale of the problem should have been explained. Clearly the consequences for Lloyd's could have been dire. Thousands of Names would probably never have joined. Some form of agreement, like R&R, would have had to be instituted. Many of the reforms of the last decade would have been forced on the market sooner. The concealment of the problem was, in my opinion, a breach of the duties and obligations owed by the Committee and Council to the Names. To the extent that those of us who were [*51] external or nominated members of Council were ourselves unaware of the problems, it seems to me to be clear that the working Names on the Committee, or some of them, must have been deliberately concealing information (or at the very least, turning a blind eye to the fact that we were unaware of the scale of the problem) in breach of their duties and obligations to all Names

My Book

In connection with preparing this statement I have reviewed my book "A View of the Room: Lloyd's, Change and Disclosure" which I wrote in 1987. At that time all the details of my time at Lloyd's from 1983 to 1986 were very fresh in my mind. Although I have looked at some papers in connection with the preparation of this statement, I believe that the most accurate summary of my views about the time is set out in my book and I confirm that I believe that what I wrote at that time was true to the best of my knowledge and belief. I must emphasise that knowledge of the asbestos problem, which is not mentioned, was not shared with me or other Council members or Committee members not directly involved.

I understand that copies of the book are being attached to this statement and I confirm that I am in agreement with that.

Also attached to this statement is the text of a speech I gave in Paris in 1985. Again I stand by the truth of that to the best of my knowledge and belief.

Conclusion

Although there was some discussion of asbestos at Committee meetings I attended, it was minimal. We were told that the matter was handled by a special working party in view of the [*52] need to preserve privilege in relation to the American courts. Nothing said in Council or Committee in my presence ever led me to believe this was an enormous problem that could swamp Lloyd's and with which the Lloyd's accounting system was quite unable to cope. I left Lloyd's in 1986 totally unaware of the seriousness of the asbestos problem and the extent to which Lloyd's syndicates had not reserved for it. I entirely agree with the conclusion of the Court of Appeal that the accounting system at the time was not working and was not making reasonable estimates of outstanding liabilities including IBNR. In my view it was known at the time that it was not making such reasonable estimates and it was not possible for Committee Members who had received the Neville Russell letter, been party to approving the Murray Lawrence letter, and were seeing attorney reports, to make a statement that Lloyd's operated a rigorous auditing system with any honesty.

It seems to me that it was well known and understood at the time by Committee Members who had any involvement with asbestos syndicates that those syndicates were not reserving to ultimate. It follows that they must have known and understood that their accounts and hence the Lloyd's Global Accounts were not accurate and did not contain reasonable estimates of outstanding liabilities. They must have known and understood that at the time and therefore those figures and reserves were fraudulently calculated. I do not believe that this can be attributed to mere negligence. I am quite certain there has been a great deal of negligence at Lloyd's but the build-up of knowledge on the asbestos problem during the 1980s was clearly inexorable and in the wake of the Neville Russell and Murray Lawrence and Randall letters, which required a detailed and comprehensive regulatory response from Lloyd's that did not happen, I can only conclude that there was a deliberate agreement amongst certain key members of Lloyd's, including in particular Sir Peter Green and Murray Lawrence, to conceal from me and others the seriousness of the asbestos problem. If it was [*53] not a deliberate decision to exclude nominated and external members of council from full knowledge of the problem, there was certainly the turning of a blind eye to what we were not being made aware of and the inconsistencies between what was known about the defective/inadequate/non-existent audit system and the claims in the brochures sent to Names. The consequence was that the figures shown to joining and renewing Names from 1983 onwards were basically a fraudulent misrepresentation of the financial position of the syndicates and of Lloyd's. The dust jacket of my book says "when I joined Lloyd's I had announced my decision to pick out the rotten apples....but it was not as simple as that...the barrel itself appeared to many observers to be infected". That was my view m 1987, formed principally from my observations in relation to baby syndicates, rollers, and the appalling lack of understanding of agency obligations. Today I am certain that it was rotten to the core and that the losses that the Names suffered in the 1990s, whether from the cumulative build up of under reserving for asbestos, or through the participation in the Spiral Syndicates which so focussed Lloyd's losses, were the product of regulatory failure at Lloyd's as well as of the negligence and incompetence of particular agents. I believe much of that regulatory failure was due to deliberate concealment of known facts and information by, among others, Peter Green, Murray Lawrence, David Coleridge and others.

Statement of Truth

I believe the facts stated in this statement are true to the best of my knowledge and belief.

lan Hay Davison

Dated: 4 March 2005

IN THE HIGH COURT OF JUSTICE

1996 Folio No. 2032

QUEEN'S BENCH DIVISION COMMERCIAL COURT

BETWEEN

THE SOCIETY OF LLOYD'S

Claimant and Defendant to Counterclaim

-and-

JOHN TREVOR HOWARD HENDERSON

Defendant and Counterclaimant

WITNESS STATEMENT OF IAN HAY DAVISON

Grower Freeman

Solicitors

________________