Legal Relationships Between Names and Agents

There are three types of agents, a members agent, a managing agent and a combined agent, which performs both the roles of members' agent and of managing agent. From the early 1970's insurance in the Lloyd's market could only be effected through an agent if that agent was listed in the Register of Approved Lloyd's Underwriting Agents (Byelaw No. 87 (18 November 1970)). In 1984 the Register was divided to record separately those agents approved as managing and members' agents (Byelaw 4 of 1984). In deciding whether the agent was "fit and proper" to be registered, the Committee would take into account the suitability of its directors, partners or staff, the suitability of the active underwriter(s) (in the case of a managing agent) and its ability to supervise and service all of its activities and responsibilities (Byelaw 4 of 1984, paragraph 8). It was agents who decided whether they wished to be managing agents, members' agents or combined agents and to seek registration accordingly.

Until the introduction of the standard agency agreement, there was no mandatory standard form of agency agreement. On 11 March 1985 the Agency Agreements Byelaw No. 1 of 1985 was passed which stipulated that from 1 January 1987 insurance business could not be underwritten in the Lloyd's market unless the Name had entered into a Standard Agency Agreement. The Standard Agency Agreement governed the relationship between the Name and his/her members' agent (or a combined agent acting as members' agent). Where that members' agent or combined agent delegated some or all of the underwriting to a managing agent a Standard Sub-Agency Agreement contained the terms of that delegation.

There was no direct contractual relationship between a Name and his/her managing agent, unless the members' agent also acted as managing agent. (The position changed in 1990 with the implementation of the Agency Agreements Byelaw (No. 8 of 1988) which prescribed standard form agency agreements and introduced a direct contractual relationship between the Name and his/her managing agent). However, the House of Lords in Henderson v Merrett Syndicates Ltd [1994] 3 WLR 761, upheld the decision of the Court of Appeal that the delegation of the conduct of underwriting business did not remove the implicit promise by the members' agent that the work of the managing agent would be carried out with reasonable care and skill. In addition, the managing agents were under a similar, non-contractual duty to Names to exercise reasonable care and skill.

The Role and Duties of a Members' Agent

A members' agent is an agent to whom members delegate complete control of their Lloyd's affairs and who enter into sub-agency agreements with managing agents to place Names on their syndicates. A members' agent does not underwrite any risks. Although many Names remain with the same members' agent throughout their membership of Lloyd's, it is possible to transfer to another members' agency. The new members' agent may not be able to secure a Name's participation in syndicates on which that Name had previously underwritten, and accordingly a transfer of members' agent may involve a change in the Name's syndicates.

The primary role of a members' agent is to manage a Name's Lloyd's affairs other than the actual management of the underwriting. The main duties of a members' agent were summarised by:

Other duties fulfilled by members' agents are:

In practice, policies vary between agents as to the minimum and maximum percentage of OPL which Names should have on syndicates. The final decision as to whether to join a recommended syndicate and for what line rests with the Name. During the Relevant Period, many existing Names increased the lines that they wrote.

The Role and Duties of a Managing Agent

The principal role of a managing agent is to determine the underwriting policy of and to make arrangements for the transaction of insurance business by the syndicates it manages. Managing agents must appoint and supervise one or more individuals to be the active underwriters for each of their syndicates, pricing and accepting risks on behalf of the syndicate members, and placing reinsurance. The underwriter is a key figure in a syndicate.

The role of a managing agent includes the approval and supervision of arrangements for:

NAMES' ASSETS

Deposits

The Lloyd's deposit is held in trust by Lloyd's (governed by the Lloyd's Deposit Trust Deed or Lloyd's Security and Trust Deed). A separate deposit, known as the Lloyd's life deposit, is required if a Name underwrites life business.

Maintenance and Re-Confirmation of Deposits

The Corporation of Lloyd's carries out an annual check as at 31 December to see whether the value of a Name's Lloyd's deposit has been maintained. A Name will be required to make any shortfall good by the following 31 October. Names failing to comply are required to reduce their level of underwriting to an amount commensurate with the value of their deposit. Names must provide the requisite additional deposits if they wish to regain their former levels of underwriting.

Acceptable Assets for Deposit

A Name's deposit may be provided by means of certain specified assets including: bank guarantees or letters of credit, building society guarantees, cash, life assurance company guarantees and policies and certain other approved securities.

Special Deposits/Premium Limit Excess Deposit

Any Name exceeding his/her premium income limit in a particular year may be required to establish an additional Special Deposit in the form of a bank guarantee/letter of credit or cash. This will be held under an appropriate Deed but kept separate from the securities forming the Name's normal Lloyd's Deposit.

Personal Reserve Fund

This fund is a reserve of cash or certain specified investments, held under the terms of the Name's Premiums Trust Deed, which may be retained by a members' agent (at the agent's discretion) as a reserve against future liabilities and expenses from the Name's underwriting business carried on through the agent. This reserve may be built up by the members' agent retaining a proportion of the Name's profits.

The Special Reserve Fund

The SRF enabled Names, within limits, to accumulate reserves from their underwriting profits, which, when transferred into the SRF would then be taxed only at the basic rate (rather than the higher rates) of income tax. Such reserves were to be used to meet underwriting losses. Payments into the SRF had to be approved by the Inland Revenue. Payments out of the SRF were required to be made to cover losses certified by the Inland Revenue, although payments could, within limits, be made on a provisional basis in respect of estimated losses. The SRF was required to be held on trust, with one trustee being the Corporation of Lloyd's, and the other being the Name's members' agent. (The SRF arrangements were changed with effect from the 1992 underwriting year).

Premiums Trust Fund

Every member of Lloyd's is required to hold all premiums received by him/her or on his/her behalf in respect of any insurance business in a trust fund in accordance with the provisions of a trust deed approved by the Secretary of State for Trade and Industry. This requirement is imposed by section 83(2) of the ICA 1982.

Premiums trust fund monies can be used to pay any underwriting liabilities and any expenses incurred in connection with or arising out of underwriting. For these purposes liabilities include losses, claims, returns of premiums and reinsurance premiums, while expenses include any annual fee, commission and other remuneration of a member's underwriting agents, any tax liabilities arising in respect of the premiums trust fund or its income, and subscriptions and Central Fund contributions or levies imposed by the Council.

The premiums trust deed provided for separate treatment of overseas underwriting business, for which the Lloyd's American Trust Fund and Lloyd's Canadian Trust Funds have been established. Those trust funds received the premiums on US dollar or Canadian dollar denominated policies issued in any country by Lloyd's members and paid any losses, expenses, claims, returns of premiums, reinsurance premiums and other outgoings in connection with the member's American or Canadian dollar business respectively.

The way in which the assets described above are used as part of Lloyd's overall chain of security is described below.

Lloyd's Chain Of Security

The purpose of security is to protect policyholders.

The First Link

The first link in the chain of security is the premiums trust funds. To protect the interest of policyholders all premiums are initially paid into premiums trust funds managed by the managing agent of the syndicate. Payments from these funds may be made to meet claims, reinsurance premiums or underwriting expenses: profit may not be distributed to Names unless and until the underwriting account for the year has closed, and therefore at or after the end of three years. In practice, the majority of claims are met from the premium trust funds.

The Second Link

The second link is Name's funds at Lloyd's which must be provided by the Name as security for his/her underwriting, as described above. Funds at Lloyd's comprise the three trust funds in which Name's assets may be held: the Lloyd's deposit, the Special Reserve Fund and the Personal Reserve Fund held under the terms of the premiums trust deed (see above).

The Third Link

The third link is the personal wealth of individual Names. Each individual Name is required to show a minimum level of personal wealth, but Names are further liable to the full extent of their wealth to meet any claims arising from their underwriting business.

The Fourth Link

The fourth link is the Central Fund of the Society. The Fund is available to the Council of Lloyd's to meet Names' liabilities in connection with their underwriting at Lloyd's in the event of their default. The Fund is not for the protection of the Name, who remains responsible for his/her liabilities to the full extent of his/her wealth.

Other Assets

The other assets of the Society of Lloyd's are also available to meet underwriting liabilities in the last resort.

The following account of the Regulatory Background for the Auditing and Accounting Regime at Lloyd's is drawn from a statement of agreed facts. Where I have decided a matter in dispute between the parties this is shown in square brackets.

A. INTRODUCTION

I set out below the regulatory background for the auditing and accounting regime at Lloyd's. I also describe the procedures culminating in the production by Lloyd's of the statutory statements of business and the Globals.

The sections below take as their starting point, where applicable, the regime for the preparation of syndicate accounts and solvency audit as at 31 December 1977, which encompasses the closure by reinsurance to close of the 1975 year of account into the 1976 year of account. The sections below conclude by describing the regime for the year ended 31 December 1987, which encompasses the closure of the 1985 year of account into the 1986 year of account. The description of the procedures for the production of the statutory statements of business and globals covers the same period.

B. BACKGROUND TO THE AUDIT/ACCOUNTING PROCESS

Lloyd's Three Year Accounting System

Lloyd's operated a three year accounting system, under which the results of underwriting by a syndicate in any one year were normally not determined until a further two years had elapsed. As a general rule, distribution to Names of their proportions of the syndicate's profit could only be made after the end of the third year and then generally only when the relevant year of account had been reinsured to close. The composition of each syndicate was likely to vary year by year, and each year's trading was a separate venture. The accounts of each syndicate were, as a result of the three-year accounting system operated at Lloyd's, necessarily left open for the first and second year. A syndicate specialising in Personal Stop Loss operated a four year accounting system.

Reinsurance to Close

The closure of a year of account was effected by the payment of a premium (the RITC premium) in respect of the members' underwriting liabilities allocated to that year to reinsure these liabilities into the following year of account. If a decision was taken not to close the relevant year of account, the account was described as having gone into "run-off" and no RITC premium was payable. The subsequent two years of account over the three year accounting period that were not being (or entitled to be) closed were known as "open years". Thus the first two years of the three-year accounting cycle were "open years." If a syndicate year was not closed by RITC, that year was "left open".

As reported in the Chairman's statement in the 1987 Globals, at the end of December 1987 there were 76 syndicates with a total of 120 years of account left open. Problems associated with asbestos and pollution risks, together with other US liability business, appear to account for the vast majority of the run-off years.

In the 1980s, there was a growing number of syndicates which did not close their accounts at the end of their third year.

Against the payment of a RITC premium, all syndicate members' undischarged liabilities in respect of risks allocated to the relevant year of account (including liabilities in respect of RITC of any preceding year of account) were reinsured without limit in time or amount into a succeeding year of account of the same syndicate; they could also, on occasion, be reinsured to close into a later year of account or by another syndicate. When RITC was underwritten by the same syndicate, the premium was set by the managing agent of both syndicates, in conjunction with the underwriter, acting for the Names on both years of account.

The amount charged by way of premium was required to be equitable between Names on the reinsured and reinsuring syndicates, having regard to the nature and amount of the liabilities being reinsured. RITC into a subsequent year of the same syndicate was not treated as premium income for the purposes of premium income monitoring. The Syndicate Premium Income Byelaw (No 6 of 1984) dealt with circumstances in which RITC by a different syndicate would form part of premium income for premium income monitoring purposes.

Syndicate Accounts

The managing agent of each syndicate was required to prepare syndicate financial statements as at 31 December each year for the closing year of account and for the two subsequent open years and to arrange for them to be audited. The managing agent was required to send the financial statements, together with certain other specified information, to the Names on his syndicate, either direct or through the Names' members' agents. The requirements for the preparation and publication of syndicate accounts changed over the period 1978 to 1988.

The Solvency Test

Each Name at Lloyd's was required, under the provisions of the ICA 1982, to meet an annual solvency test (the Name level test). (The requirements for the years ended 31 December 1981 (and prior years) were contained in ss73-74 of the ICA 1974). In addition, all members of Lloyd's taken together had to satisfy a global annual solvency test (the global test). The requirements for the solvency test were sent out in the annual Instructions for the Guidance of Lloyd's Auditors (Audit Instructions) and Covering Letter to the Instructions for the Guidance of Lloyd's Auditors (Solvency Letter) prepared by Lloyd's, which included the basis on which the Names' liabilities were calculated, as approved by the Secretary of State DTI (Board of Trade in earlier years) pursuant to Section 83(5)(b) of the ICA 1982.

The paragraph in the earlier brochures (e.g. the 1979 and 1980 brochures) headed "Lloyd's Audit", which referred to a "rigorous audit conducted by a member of a panel of chartered accountants approved by the Committee of Lloyd's", referred to the annual solvency test. The phraseology in the brochure was changed in 1983.

The Name Level Test

Under the provisions of Section 83 of the ICA 1982, each Name was required to provide annually to the Committee/Council of Lloyd's and to the DTI a certificate of solvency in a prescribed statutory form, signed by an approved auditor. (The forms of certificate are set out in:

The certificate stated (inter alia) whether the value of the assets available to meet the Name's known and estimated future underwriting liabilities in respect of his/her insurance business at the previous year end was correctly shown in the Name's accounts, both assets and liabilities being calculated in accordance with the Audit Instructions. The Name would generally not be personally involved in carrying out the procedures for the Name level test, but might be required to provide further assets in the event of a solvency shortfall.

The solvency requirements in relation to insurance companies are set out in Section 32 of the ICA 1982, which implemented article 16 of the First Council Directive on Non-Life Insurance. Thus, the section provides that insurance companies shall maintain a margin of solvency of such amount as may be prescribed in accordance with regulations made for the purposes of that section. Section 32 is applicable to the "members of Lloyd's taken together": see Section 84(1) of the ICA 1982. Accordingly, all members of Lloyd's taken together had to satisfy a "global test"; i.e. the solvency margin requirements under the ICA 1982. For this purpose, the assets and liabilities of all the members of Lloyd's were aggregated. Assets included each Name's funds at Lloyd's, the assets in his/her premium trust funds, and certain other assets. Account was also taken of the assets and liabilities of Lloyd's in addition to the assets and liabilities of the Names: see Regulation 3(2) of The Insurance (Lloyd's) Regulations 1983. Such assets included, for example, the Central Fund. Liabilities were, in aggregate, those for the most recent closed year of account, the two subsequent open years and any run-off years of account.

The forms submitted annually to the DTI as part of the statutory statement of business included information as to the assets and liabilities of all members of Lloyd's taken together. In particular, from the SSOB for the year ended 31 December 1982, Form 9 required a consolidated statement of assets and liabilities of underwriting members of Lloyd's. Accordingly, in effect, the members of Lloyd's taken together had to pass a global annual solvency test. (Prior to 31 December 1982, Lloyd's was required under Section 74(1) of the ICA 1974 to deposit annually with the DTI a statement summarising the extent and character of the insurance business done by the members of Lloyd's. The form of statement was set out in The Assurance Companies Rules 1950 and required Lloyd's to confirm that it had received an audit certificate in respect of each Name).

For some years before the SSOB form required for the year ended 31 December 1982 became mandatory, Lloyd's had submitted voluntary returns to the DTI, in a form similar to the SSOB presented pursuant to The Insurance (Lloyd's) Regulations 1983, in addition to the statutory returns prescribed by The Assurance Companies Rules 1950.

The purpose of insurance company supervision, as enshrined in the ICA 1982, is (inter alia) to ensure that margins of solvency are complied with.

Lloyd's was required under Section 86(1) of the ICA 1982 (for the year ended 31 December 1981 and prior years, Section 74 ICA 1974) to lodge a statutory statement of business with the DTI every year, in the form prescribed by The Insurance (Lloyd's) Regulations 1983 (for the year ended 31 December 1981 and prior years, The Assurance Companies Rules 1950 (SI 1950/533)). The SSOB summarised the extent and character of the insurance business done by all members of Lloyd's in the twelve months to which the statement related. The SSOB certified solvency for the purposes of the global test described above and could not be filed unless unqualified audit certificates had been received in respect of each Name, taking account, if necessary, of any Central Fund earmarking which had occurred.

The information required in order to complete the SSOB was provided principally by syndicate auditors in certain specified returns.

The auditors made returns in the form in which Lloyd's from time to time required these to be made. In general the returns were a collation of the results shown in those syndicate accounts for which any particular firm of auditors was responsible.

Lloyd's reported annually to the market on the underwriting results for the third year of account.

Under Section 73(4) of the ICA 1974, and Section 83 of the ICA 1982, the accountants who audited the Names' results for the purposes of the annual solvency test had to be approved by the Committee/Council of Lloyd's. Lloyd's had accordingly established a panel of auditors from which managing agents and members' agents selected their auditors. In practice, the panel auditors were also those who audited the syndicate accounts.

[ The role of a syndicate auditor was consistently regarded as requiring special skill and experience. In some cases syndicates engaged two firms as joint auditors. The responsibility for selecting an auditor from Lloyd's panel – subsequently the approved list – lay with the managing agent, not the members' agent. The practicability of syndicate Names appointing the auditors was considered by Lloyd's but not adopted. Following changes in the system, members' agents appointed the auditors to issue Members' Solvency Reports.]

On 10 December 1984, the Council passed The Syndicate Audit Arrangements Byelaw (No. 10 of 1984) which set out arrangements for a new list of registered auditors, containing all persons entitled to act as syndicate auditors. The byelaw replaced the panel auditor arrangements, and included the criteria for admission to and removal from the list. In a letter to underwriting agents, active underwriters, market associations and panel auditors dated 11 December 1984, Lloyd's stated that the Council had resolved that in future approval of auditors for the purpose of the annual solvency test would be determined by reference to the inclusion of a firm's name on the list of recognised auditors.

The panel or registered auditors had an annual meeting with Lloyd's. Further meetings occurred from time to time on an ad hoc basis (for example on 15 January 1982, 24 February 1983 and 8 February 1984). In addition, the panel auditors used to meet informally to discuss Lloyd's accounting rules and other issues arising out of the audit of syndicate accounts and solvency audit. Representatives of panel audit firms also sat on the Accounting and Auditing Standards Committee.

C. SUMMARY OF DEVELOPMENTS IN THE LLOYD'S REGULATORY ENVIRONMENT

Prior to the passage of the Lloyd's Act 1982, Lloyd's statutory duties in relation to the solvency audit and the preparation of the SSOB were exercised by the Committee of Lloyd's. The Underwriting Agents and Audit Department (or Audit Department) was the department within Lloyd's responsible for day-to-day matters affecting the solvency audit and the preparation by Lloyd's of the SSOB. It supported the Audit Committee which in turn reported to the Committee of Lloyd's.

The Committee was the governing body of Lloyd's until January 1983, after which it was subordinated to the Council.

Lloyd's also produced a Manual for Underwriting Agents, which set out the obligations of managing agents in relation to syndicate accounts and the solvency audit.

The regulatory structure within Lloyd's changed as a consequence of the Fisher Report, which was published in May 1980. The Fisher Report made certain recommendations as to the accounting regime and recognition of auditors as follows:

The Fisher Report had appended to it a draft bill to amend the Lloyd's Acts 1871-1951. The draft bill, which received royal assent on 23 July 1982, provided for the establishment of a Council to manage and superintend the affairs of the Society, in place of the Committee, and proposed that the Council should have the power to make byelaws, including a byelaw:

The Lloyd's Bill was a much debated private measure and the enactment procedures took a considerable time. In November 1980 members, by a large majority, approved the promotion of a Bill. The Chairman wrote to members on several occasions thereafter reporting progress and soliciting continuing support.

As a consequence of the recommendations in the Fisher Report on the accounting regime and certain other comments made in the Fisher Report on the solvency audit, Lloyd's established two task groups, Task Group 4 and Task Group 15, in September 1980. Task Group 4's terms of reference were directed towards considering the provision of information to existing Names, with particular reference to syndicate accounts and accounting standards. Task Group 15's terms of reference included the consideration of procedures in relation to syndicate accounts, Lloyd's solvency test and global results, and all aspects of the "licensing" of panel auditors. It was recognised that the work of the two Task Groups was closely interrelated insofar as Task Group 15 was concerned with the audit of syndicate accounts.

Lloyd's established 21 Task Groups to consider the Fisher recommendations and their implementation. Lloyd's gave an undertaking to Parliament through counsel relating to (inter alia) paragraph 23.22 of the Fisher Report.

[The work of Task Groups 4 and 15 set up in September 1980 became part of the review in respect of which Lloyd's gave an undertaking to Parliament through counsel relating to the Fisher Report.]

In November 1982, Lloyd's set up, with the approval of the Bank of England and the DTI, a working party under the chairmanship of Mr. Ian Hay Davison, the managing partner of Arthur Andersen and Chairman of the Institute of Chartered Accountants. The overall aim of the working party was to review the requirements of the Lloyd's solvency audit with particular attention to both the information which should be sought by auditors and to the information which underwriting agents and underwriters should provide to their syndicate auditors; and to consider disclosure of interests by underwriting agents. In addition, the working party was required to review the annual Audit Instructions for the solvency audit. It was intended that the working party should consider urgently what changes should be implemented for the solvency audit as at 31 December 1982. It was announced that the working party hoped to provide some input for the 1982 audit while expecting to complete its study during 1983. It was noted in the terms of reference that it was essential to demonstrate that self-regulation was effective.

Task Group 4 issued its consultative document "The Annual Financial Report for Underwriting Members of Lloyd's" in December 1982, and attached to it a draft accounting manual, including proposed Statements of Lloyd's Accounting Practice. A letter from Lloyd's dated 21 December 1982 requesting comments on the document and summarising the points of difference between Task Group 4 and the Committee of Lloyd's was also circulated.

Mr Ian Plaistowe, a senior partner of Arthur Andersen, replaced Mr Hay Davison as chairman of the working party (renamed the Plaistowe working party) in February 1983 on Mr Hay Davison's appointment as Deputy Chairman and Chief Executive of Lloyd's. The work of the Plaistowe working party was built upon by the AASC.

Task Group 15 issued its consultative document "Lloyd's Auditing Manual" in 1983. The Task Group had taken as its starting point the draft accounting manual produced by Task Group 4 and had incorporated that into an overall accounting and audit manual. It also made recommendations as to the "licensing" of panel auditors.

In late 1983 the departmental responsibilities within Lloyd's changed. The Audit Committee and Audit Department were respectively replaced by the Members' Solvency and Security Committee and Members' Solvency and Security Department, and a new department and committee were established in October 1983: the Accounting and Auditing Standards Committee and, supporting it, the Accounting and Auditing Review Department. The terms of reference of the MSSC and AASC are set out in the minutes of the meeting of the Council of Lloyd's on 3 October 1983.

This reorganisation was one of a number of administrative and department changes which took place during the Relevant Period.

Under its terms of reference, the MSSC was responsible for making recommendations to the Committee of Lloyd's on all aspects relating to the annual solvency test and the protection of Lloyd's policyholders.

The AASC reported to the Council of Lloyd's. It effectively took over the work of Fisher Task Groups 4 and 15. Under its terms of reference, it was, in general terms, required to define the accounting and related auditing requirements applicable to Lloyd's brokers, underwriting agents and syndicates, the reporting of information to Names and the introduction of manuals to reflect the Council's requirements as to accounting and audit. It was also required to establish criteria for the approval or otherwise of panel auditors.

Although the AASC's terms of reference included the production of the annual Audit Instructions and their agreement with the DTI, in practice this responsibility remained with the MSSC. The MSSC liaised with the AASC in relation to accounting and audit considerations relevant to the conduct of the annual solvency test.

Both the MSSC and the AASC met about once a month to discuss matters falling within their terms of reference.

On 2 December 1983, Lloyd's published a Provisional Accounting Manual. The Manual relied heavily on the Draft Accounting Manual produced in December 1982 by Fisher Task Group 4 and the work done by the Plaistowe working party in relation to the Manual.

The Plaistowe working party was wound up in January 1984 and handed over much of its outstanding work to the AASC or MSSC.

A series of byelaws were issued by the Council of Lloyd's during 1984 and 1985 which established the revised accounting and auditing regime for syndicates as follows:

While the new accounting byelaw regime was under discussion, Lloyd's approached the Auditing Practices Committee of the Consultative Committee of Accounting Bodies to propose that an audit brief be produced by the APC addressing the audit of Lloyd's syndicates. A working party of the APC was set up in 1984 to develop the audit brief, under the chairmanship of Mr Frank Attwood, a senior partner of Robson Rhodes, comprising members of the accounting profession and Mrs. Cathy Shorthouse, manager of the AARD in Lloyd's.

A draft brief was produced in about April 1985. Following discussions with the AASC, the draft audit brief was published in the autumn of 1985. The final audit brief was issued in April 1986. The Audit Brief stated that its purpose was to give "guidance on the special factors to be considered in the application of Auditing Standards to the audit of the financial statements of Lloyd's syndicates". Its status was as an informative publication, intended to assist auditors in the discharge of their duties. While it did not have the same authority as Auditing Standards or Auditing Guidelines, the Audit Brief was treated as the standard, in the absence of Auditing Standards or Guidelines dealing with any particular issue.

Statements of Lloyd's Accounting Practice featured in, for example, the 1983 Provisional Accounting Manual, but did not feature in the byelaw regime that was subsequently introduced.

In January 1986, a committee was formed under the chairmanship of Sir Patrick Neill to consider whether the regulatory arrangements being established under the Lloyd's Act 1982 provided protection for the interests of Names comparable to that proposed for investors under the Financial Services Bill. The Neill Committee was a Committee of Inquiry set up by the Secretary of State for Trade and Industry. The Neill Report "Regulatory Arrangements at Lloyd's" was published in December 1986.

[The Neill Report made certain recommendations relating to syndicate accounting. The AASC was primarily responsible for reviewing the recommendations. The majority of the recommendations were implemented by The Syndicate Accounting Byelaw (No. 11 of 1987) which became effective on 1 January 1988 and first applied to syndicate accounts prepared for the year ended 31 December 1987. Further recommendations were implemented for subsequent years of accounts.]

Fisher Task Groups 4 and 15 each had two members representing the auditing profession. Mr NF Holland and, from October 1980, Mr JA Philpott of Ernst & Whinney were members of Task Group 4. Mr M Wildig of Arthur Anderson & Co and Mr AM Blake of Neville Russell & Co were members of Task Group 15. In addition, Mr JA Philpott and Mrs C Shorthouse of Ernst & Whinney produced initial drafts of the report for the Task Group's consideration. Mrs Shorthouse subsequently joined Lloyd's permanent staff, and became manager of the AARD.

(According to Lloyd's the CCAB was invited to nominate a representative to join Task Group 15. Mr TD Marks of Deloitte Haskins & Sells was nominated and attended two meetings, with Mr GC Wintle, the CCAB's under-secretary for Parliamentary and Law affairs. However, following the formation by the CCAB of a Lloyd's sub-committee, and to avoid possible duplication of effort, it was agreed that it was sensible for the CCAB representation on the Task Group to cease.)

The Hay Davison/Plaistowe working party was chaired initially by Mr Hay Davison, senior partner of Arthur Anderson & Co and subsequently by Mr I Plaistowe, also of Arthur Anderson & Co. In addition Mr C North Smith of Peat Marwick Mitchell & Co was a member of the working party.

The initial membership of the AASC included Mr C Brandon Gough of Coopers & Lybrand, as chairman, Mr I Plaistowe of Arthur Anderson & Co and Mr NF Holland of Ernst & Whinney. Mr Brandon Gough remained Chairman until 1986, when he was replaced by Mr A Hardcastle of Peat Marwick McLintock. Mr Plaistowe remained a member until 1986. Other members of the AASC included members of panel auditors. Mr Hardcastle became chairman of Lloyd's Regulatory Board when it was established.

The membership of the MSSC included two members drawn from the nominated or external members of the Council. From 1983 to 1985, Mr REM Elborne, of Elborne & Mitchell, solicitors, was one of these members.

This section summarises the chronological process for the preparation of syndicate accounts, the solvency audit, the SSOB and the Globals for any particular year. The process broadly followed the same pattern throughout the period 1978 to 1988, and commenced in the summer of the year to which the solvency test was to apply (e.g. the summer of 1980 for the audit of syndicate accounts and the solvency test for the year ended 31 December 1980).

The following should be noted:

There were two separate (although related) aspects of the annual audit work carried out by the panel or registered auditors:

The first major function performed by syndicate auditors was the audit of the syndicate annual financial statements.

The Manual for Underwriting Agents, first published in 1971, required managing agents to send to Names underwriting accounts and a balance sheet and stipulated that syndicate auditors should be required to certify:

The Manual went on to say:

The requirement to report in "true and fair" terms was introduced by The Syndicate Accounting Byelaw (No.7 of 1984). This requirement applied to all accounts for the year ended 31 December 1985, although some auditors reported in "true and fair" terms on the accounts for the year ended 31 December 1984. The "true and fair view" report was required in respect of the profit or loss on the closed year of account. No such report was required in relation to the two open years of account, on which the auditors also reported, but in different terms.

The Syndicate Accounting Byelaw (No.11 of 1987) revised the Lloyd's syndicate accounting rules which governed syndicate accounting and reporting to Names. In accordance with this byelaw the managing agent was required to prepare adequate documentation supporting the basis on which the RITC had been determined. The auditors' duties in respect of this were as follows:

The annual solvency audit of underwriting members of Lloyd's was a statutory requirement. This was, until 28 January 1983, provided for under Section 73(4) of the ICA 1974 which provided that:

This section was replaced by Section 83(4) of the ICA 1982 which was in substantially similar terms.

The content of the audit certificate was addressed by Section 73(5) of the ICA 1974 which provided:

The mandatory form of wording of the certificate to be issued in respect of each underwriting member of Lloyd's was set out in The Lloyd's (Audit Certificate) Regulations 1982 (1982 No.136), (Prior to the 1981 solvency test, the Assurance Companies Rules 1950 (1950 No. 533)). This had been made by the Secretary of State in the exercise of his powers under Sections 73(4) and 85(1) of the ICA 1974. With effect from 22 March 1983 the 1982 Regulations were replaced by The Insurance (Lloyd's) Regulations 1983 (1983 No.224) which (so far as is material) were in substantially similar terms to the 1982 regulations. The wording of the certificate (the Members' Solvency Report) in the 1982 regulations was as follows:

With effect from the 1981 solvency test, the solvency certificate was issued not by the syndicate auditors but by auditors appointed by the members' agents in respect of those Names underwriting through that members' agency. The members' agents' auditors were not required to audit further the affairs of all the syndicates on which the members' agents had placed Names. The wording of the audit report expressly permitted them to rely on certificates issued by the syndicate auditors. The certificate issued by the syndicate auditors for these purposes (the Syndicate Solvency Report) was in the following terms:

With effect from the 1981 solvency test:

Panel and registered auditors were subject to broader professional standards, being certain relevant auditing standards and guidelines that applied to the profession.

The following conclusions can be drawn from the Merrett Judgment as to the duties of the auditors in relation to syndicate accounting and the solvency audit:

Prior to the passage of the Lloyd's Act 1982 and subsequent byelaws, the obligations of agents with regard to syndicate accounting were set out in the Manual for Underwriting Agents. The Manual was first published in 1971, and reprinted in 1980, incorporating all the amendments that were then current. Further amendments were made thereafter. Among the main duties of agents set out in the Manual in this respect were:

The duties of the managing agent with regard to the syndicate accounts and, in particular, the basic accounting procedures to be followed were set out in Section A10 of the Manual (Section A9 of the 1971 Manual for Underwriting Agents).

The agent also had certain obligations as to syndicate accounts in the Underwriting Agency Agreement (Paragraph 9(A) and (B) of Underwriting Agency Agreement). The agent was obliged to keep "such usual and proper underwriting books accounts and memoranda as are kept by Underwriting Agents at Lloyd's" and to send to the Name a copy of the accounts as soon as practicable after the end of each calendar year.

There was no requirement in the Manual for underwriting agents to send copies of syndicate accounts to Lloyd's.

The managing agent selected the auditor appointed to audit the syndicate accounts from the panel of auditors. A syndicate auditor auditing the syndicate's accounts also undertook the audit required under the Audit Instructions for the purposes of the solvency audit.

The managing agent was also responsible for maintaining the syndicate's books and records. Occasionally, some managing agents appointed a firm of accountants to maintain their books. An accounting firm maintaining the books and records of a syndicate was not permitted to audit its accounts or conduct the solvency audit. This restriction was set out in the Solvency Letter circulated with the annual Audit Instructions. Such an accountant was, however, permitted to act jointly with another firm, in which case both firms were required to sign the Audit Certificate or, for the 1981 solvency test and thereafter, the Syndicate Solvency Report required by the Audit Instructions.

In December 1983, Lloyd's circulated the Provisional Accounting Manual to active underwriters, underwriting agents, market associations and panel auditors. In his covering letter dated 2 December 1983, Sir Peter Green stated that it had been decided not to make the Manual mandatory in respect of the accounts to 31 December 1983, in view of the short time available to the end of the year and the practical problems that might be faced in seeking to comply with the requirements for the first time. However, the provisions of the Manual were considered to be best practice. Mr. Peter Miller then wrote to panel auditors on 1 February 1984 enclosing a form of audit report and expressing the hope that auditors would encourage their clients to comply with the spirit of the Manual in preparing the 1983 syndicate reports. He also expressed the hope that auditors would at a minimum be able to report in the terms of the draft audit report. The notes to the syndicate annual report were to include a statement of the extent to which the annual report complied with the Provisional Accounting Manual.

The Provisional Accounting Manual required managing agents to prepare syndicate accounts comprising:

On 13 February 1984, the Council passed The 1983 Annual Reports of Syndicates Byelaw (No. 2 of 1984). The byelaw imposed an obligation (enforceable by disciplinary measures) on managing agents to prepare audited syndicate accounts for the year ended 31 December 1983. The byelaw specified the contents of the accounts, which were the same as those required under the Provisional Accounting Manual, with the exception of the seven-year summary, and the timing for their completion and circulation to Names (direct or through members' agents) and to Lloyd's. Lloyd's itself was required to maintain a central file of syndicate annual reports, which were to be available to public inspection. The byelaw was a transitional byelaw and, in light of the provisional nature of the Manual, did not prescribe a standard form for audit reports, nor specify matters to be dealt with therein. A letter introducing the byelaw was sent by the Chairman to active underwriters, underwriting agents, market associations and panel auditors on 14 February 1984. The Chairman expressed the view that the requirement of the byelaw for the preparation of descriptive reports commenting on business transacted, future prospects etc., merely codified existing "best practice".

In addition, on 9 April 1984, the Council passed The Disclosure of Interests Byelaw (No. 3 of 1984) which required managing agents to disclose in the annual report details of agents' interests in syndicate transactions. The audit report on the syndicate accounts was also required to cover the disclosure of interests statement. This byelaw was applicable to syndicate accounts for the year ended 31 December 1983 onwards.

On 8 October 1984, The Syndicate Accounting Byelaw (No. 7 of 1984) was passed by the Council. This byelaw set out the requirements for the preparation and audit of syndicate accounts for the year ended 31 December 1984 onwards and for the preparation and audit of individual Names' personal accounts. It contained full details as to the contents, timing, publication and circulation of syndicate accounts, and provisions relating to the accounting records to be maintained by syndicates, the accounting policies to be employed and the contents of managing agents' and underwriters' reports.

Byelaw No. 7 of 1984 introduced the requirement that syndicate auditors should report whether the syndicate accounts and members' personal accounts gave a true and fair view respectively of the profit and loss of any year of account closed at the relevant accounting date and the net result of the Name. The true and fair view requirement was only mandatory for the accounts prepared as from the year ended 31 December 1985, although some auditing firms did report in true and fair terms for the accounts for the 1982 year which closed as at the year ended 31 December 1984. This approach was encouraged by the Council of Lloyd's (See letter from Lloyd's dated 10 January 1985). Specific provisions relating to the audit of the accounts are set out in paragraph 11 of the byelaw.

The byelaw set out in schedule 3, paragraph 4, the requirement for equitable treatment as between syndicate members where items affected more than one year of account. Specifically, it made explicit the requirement that the RITC premium was to be equitable between reinsured and reinsuring Names on the same syndicate.

The byelaw provided for the Council to prescribe dates by which syndicate annual reports and accompanying documents were to be dispatched. As from the accounts for the year ended 31 December 1984, the dates prescribed were: 15 June for despatch by managing agents to members' agents, direct Names and Lloyd's; and 15 July for despatch by members' agents to Names. These were also the dates required by Byelaw No. 2 of 1984 in respect of the accounts for the year ended 31 December 1983.

Explanatory notes to Byelaw No. 7 of 1984 were issued with the byelaw and provided further details and explanation on the requirements of the byelaw. The explanatory notes commented on the true and fair view requirement and the requirement for equitable treatment between Names participating in more than one year of account, in paragraphs 11 and 51, respectively.

On 9 December 1985, Lloyd's published Further Explanatory Notes to Byelaw No. 7 of 1984. These notes were intended as a practical guide to managing agents and underwriters as to the procedures and documentary standards they should adopt in computing the RITC. They emphasised the factors to be addressed in determining the RITC but not the manner in which the underwriter should exercise his professional judgment in relation to his particular syndicate.

[The AARD instituted an annual review of the syndicate accounts submitted to Lloyd's commencing with the 31 December 1983 accounts to check that the formal requirements of Byelaws No. 2 of 1984 (for 1983) and No. 7 of 1984 (for 1984 and following) had been complied with and that key terms in the syndicate accounts reconciled with the equivalent items in the SSOB and Global accounts.]

Further changes to the regime were effected by The Syndicate Accounting Byelaw (No. 11 of 1987), which applied to syndicate accounts for the year ended 31 December 1987 and thereafter.

The Further Explanatory Notes stated in paragraph 5:

When, as was typically the case, the RITC for any particular year of account was underwritten by the same syndicate, the premium was set by the managing agent of both syndicates, in conjunction with the underwriter, acting for the Names on both years of account. The overall responsibility for setting the RITC rested with the managing agent who derived his authority to do so from the terms of the Underwriting Agency Agreement and, from 1 January 1987, from the agency agreements made pursuant to The Agency Agreements Byelaw (No. 1 of 1985).

[The managing agent/underwriter were concerned to determine the premium for RITC by reference to the syndicate's total estimated outstanding liabilities (including reserves for IBNR) in respect of risks allocated to the closing year of account, including undischarged reserves from previous years which had been closed by RITC into that year of account. The underwriter exercised his professional judgment in setting the RITC, taking into account the particular circumstances of the individual syndicate and years of account.]

The amount charged by way of premium was required to be equitable between the Names on the reinsured and reinsuring syndicates, having regard to the nature and amount of the liabilities being reinsured. Although this requirement was first made explicit in Byelaw No. 7 of 1984, it was a requirement for RITC for prior years.

[The Further Explanatory Notes, to which I refer, set out procedures relevant to compliance with the provisions of the Lloyd's accounting rules relating to the reinsurance to close and, in particular, those dealing with accounting records. They also set out the factors relevant in determining the reinsurance to close, including known outstanding claims and IBNR. The Further Explanatory Notes emphasised the exercise of the underwriter's judgment in determining the IBNR element, identifying the nature of the business written by the syndicate as one of the main factors affecting the size and relative importance of the IBNR element, the syndicate's loss experience and its reinsurance protection as matters which might fall to be taken into account.]

The Further Explanatory Notes set out the records that should be kept by the syndicate in order that the RITC calculation was supported by records in sufficient detail to "show and explain" the nature of the RITC. Overall, the underwriter was to have regard to the particular circumstances of his syndicate in carrying out the exercise, while it was noted that the syndicate auditors would review the documentation of the RITC as part of their audit of the accounts.

The Inland Revenue also took an interest in the calculation of the RITC. It was emphasised in annual letters accompanying the scales of MPRs recommended by the Committee for the purposes of the solvency test, that the Inland Revenue might, as in the past, require to be satisfied for purposes of taxation that the RITC premium was not excessive. In a letter to underwriting agents dated 17 December 1984, Mr Frank Barber, as Deputy Chairman, stated the following:

The letter continued by describing the types of evidence that should be kept.

The agent also had power not to close the year of account by RITC at all, but to leave it in run-off (Clause 9(F) of Underwriting Agency Agreement and The Agency Agreements Byelaw (No. 1 of 1985)). This would happen where the managing agent was unable to fix a premium which was equitable as between the reinsured and the reinsuring Names. In these circumstances, closure of the year of account might take a number of years. The managing agent had a duty to leave a syndicate year open where an equitable RITC could not be fixed.

The Manual for Underwriting Agents imposed an obligation on agents to comply with the Audit and other regulations (A3, para 1(i)(e)). The obligation was also set out in the typical Underwriting Agency Agreement at paragraph 9(A). The procedures to be followed by managing and members' agents for the audit of Names' accounts for the purpose of the solvency test were set out in Section F of the Manual and in the Audit Instructions and Solvency Letter. The Audit Instructions and Solvency Letter were updated every year and, following approval by the Committee of Lloyd's and the DTI, circulated to active underwriters, underwriting agents and panel or registered auditors.

The Audit Instructions included rules relating to the calculation of the estimated cost of winding up the underwriting accounts for the year to which the solvency test applied and previous years (the audit reserves). These rules were approved annually by the DTI for the purposes of Section 83(5) of the ICA 1982 (previously s73(5) of the ICA 1974). Although Section 83(5) of the ICA 1982, and, previously, Section 73(5) of the ICA 1974, were expressed in terms which required the auditor to calculate the syndicate's liabilities, it was, essentially, the role of the managing agent, the role of the auditors being to review the calculation as part of their work on the solvency test. The Audit Instructions were clarified over the years to reflect this distinction in roles.

The tests for the audit reserves in relation to each category of business were set out in clause 6 of the Audit Instructions. For the year then in its third year of account at 36 months of development and any years of account in run-off, including, in each case, all years reinsured into it, the audit reserves were required (for most categories of business, including non-marine "All Other" business) to be the greater of the following:

It is to be noted that:

Although, for the two open years then at the 12 and 24 month stages of development, the test was based on the MPRs, managing agents, when certifying the adequacy of the audit reserves, were required to "examine the Audit Reserves in the light of past run-off statistics and other relevant facts available to them" (Manual for Underwriting Agents (Section F, 1.8(ii)). In addition, the fact that the MPR scales represented the minimum requirement was emphasised in the Audit Instructions for the 1984 solvency test. From November 1980 onwards, underwriters at interest had available to them the information of the AWP in the form of (inter alia) attorneys reports; market letters from the AWP; (from late 1981) computer print-outs produced from the database created in the United States; and other information contained at (initially) the offices of Elborne Mitchell, and subsequently the offices taken by the AWP and then Toplis and Harding (Asbestos Services) Ltd.

In order to establish the MPRs, which were prepared on the basis of market averages, the Audit Department/MSSD obtained from underwriters in the summer of the year for which the solvency audit was being done (e.g. the summer of 1980 for the year ended 31 December 1980) details of net premiums received, and net settlements paid, by each syndicate during the preceding calendar year on a year of account basis. The net premium income and settlement figures on each year of account excluded any RITC premium received by the account from a previous closed year and premiums and claims relating to any previous closed year that might have been reinsured therein. The data were combined into the "Annual Review of Audit Reserves - Settlement Statistics" which set out, by class of business a market wide statistical analysis (in percentage terms) of net settlements which had arisen in previous years against net premiums received. The Audit Department/MSSD used the statistical analysis for the purpose of its recommendations as to the appropriate levels of MPRs for the relevant year's solvency test across all years of account in respect of which the Names' liabilities were to be calculated. Subject to the DTI, the final decision was taken by the Committee after reviewing the Settlement Statistics Packages.

As to the MPRs for the years 1970 to 1987 for non-marine "All Other" US$ business, the non-marine "All Other" category of business contained the widest range of types of risk, and was defined by exclusion as being non-marine risks which did not fall within the classes of non-marine "short tail" business, a list of which was set out in the notes to Clause 6 of the Audit Instructions. Which of the tests set out above was applied for the calculation of audit reserves for the purposes of the solvency test depended upon the circumstances of the individual syndicate and the categories of business it underwrote.

The Audit Department/MSSD provided copies of the Settlement Statistics to the DTI and the market associations for consideration. The DTI in turn provided copies to GAD which analysed the statistics on an actuarial basis against historical information and the statistics it had available from the insurance companies under the DTI's supervision.

The Audit Department/MSSD then put its recommendations to the Audit Committee/MSSC, with details of the comments received from the DTI and the market associations. After the Audit Committee/MSSC had approved the recommendations (with amendments if required) they were put to the Committee of Lloyd's for approval.

The Audit Department/MSSD also reviewed the rest of the Audit Instructions and Solvency Letter to determine whether any other changes should be recommended. These recommendations were also put to the Audit Committee/MSSC for consideration and then to the Committee for approval.

A meeting of the panel auditors was held towards the end of the process attended by representatives of the Audit Committee/MSSC and Audit Department/MSSD. This was a regular annual meeting at which the panel auditors were informed of any material changes to the Audit Instructions and any other material developments in the audit/accounting process. At the Panel Auditors meeting in November 1981, asbestosis was discussed under the heading "Any Other Business." It was agreed at that meeting to hold a further meeting in the new year in order to discuss the subject again, and the meeting took place on 15 January 1982.

Final approval by the Committee of the Audit Instructions took place thereafter on the basis of the recommendations put forward by the Audit Committee/MSSC. The Committee approved, inter alia, the dates for completion of the annual solvency test, changes to the Audit Instructions and Solvency Letter and the scales of MPRs.

The MPR scales approved by the Committee were then sent to the DTI, following which discussions between Lloyd's and the DTI/GAD as to the final levels could take several weeks. Once the Audit Instructions had been formally approved by the DTI they were printed and issued to active underwriters, underwriting agents and panel or recognised auditors.

It was usual practice to advise underwriting agents, active underwriters and panel auditors by letter of the year end requirements as soon as they had been approved by the Committee on the basis that they had not yet received the approval of the DTI, and were therefore subject to possible amendment.

Role of Auditors

Prior to the solvency test for the year ended 31 December 1981, the syndicate auditor was responsible for the production of the Audit Certificate for each Name required under s 73 of the ICA 1974. In some cases (where an individual members' agent managed its proportion of the syndicate premium trust fund) the Audit Certificate was produced by the auditor appointed by that agent, not by the syndicate auditor.

Prior to the introduction of a centralised computer system (the Central Solvency System) in 1981, Lloyd's itself had no direct involvement in the conduct of the annual solvency test of Names, other than in the case of funds held centrally by Lloyd's (i.e. Lloyd's Deposits and Central Fund) the availability of which for earmarking would be confirmed to the auditor by the Audit Department. The Audit Department did, however, supply all necessary forms and, before the solvency test for 1978, acted as a 'postbox' for the statements of estimated outstanding liabilities supplied by active underwriters for onward transmission to syndicate auditors.

Some syndicates comprise a very large number of Names, and many of those Names would participate in several syndicates audited by different firms of panel auditors making their own reports on solvency. There was, therefore, an exchange of information and correspondence between the firms of panel auditors, as auditors endeavoured to establish the existence and availability of audit surpluses, profits and other assets to cover Names' solvency deficiencies and losses.

In order to simplify the system, Lloyd's established the Central Solvency System to operate as a 'clearing house' for the information which was then passing between auditors, agents and Lloyd's, and which would meet the requirements for Names' solvency contained in the ICA 1982 and the relevant statutory instruments. The system commenced operation with effect from the solvency test as at 31st December, 1981.

The syndicate auditor's role in relation to the solvency audit changed from the practice for prior years, with effect from the year ended 31 December 1981. As from the 31 December 1981 audit, the syndicate auditor prepared a Syndicate Solvency Report on the solvency of the syndicate, and on the allocation of the syndicate's profit or loss and surplus or deficiency for the relevant years to individual Names on the syndicate, but did not report on the overall solvency of individual Names.

As from 31 December 1981, the Members' Solvency Reports were prepared by auditors appointed by the members' agent for the Names concerned. Under these regulations, the members' agents' auditor was entitled to rely on the Syndicate Solvency Reports furnished by the auditors for the various syndicates on which the Names underwrote. Each Member's Solvency Report produced by the members' agents' auditor reported on the solvency of the individual Name across all the syndicates on which he underwrote. The Reports were addressed to the Society of Lloyd's and to the DTI.

The Audit Instructions set out in detail the tasks required of the syndicate auditor and members' agents' auditor for the purposes of the solvency test.

The form of Audit Certificate required for the purposes of the ICA 1974 required the syndicate auditor to report inter alia whether:

Similarly, the Syndicate Solvency Report obliged the syndicate auditor to report, having examined the syndicate's accounting records, that in his opinion:

The syndicate auditor's duty required him to satisfy himself as to the adequacy of the RITC. Lloyd's did not know in the case of any particular syndicate, precisely what work the syndicate auditor had carried out as part of his audit.

The Chairman of Lloyd's could only sign the SSOB for the purposes of the annual global test once unqualified Audit Certificates/Members' Solvency Reports for all Names had been received.

If there were any factors which affected or might affect the adequacy of the reserves, the syndicate auditor was required, under Clause 3 of the Audit Instructions, to report to the Committee and obtain their instructions before issuing the Audit Certificate/Syndicate Solvency Report. The letter from Neville Russell dated 24 February 1982 was written pursuant to Clause 3.

The syndicate auditor (and, for the 1981 solvency audit and thereafter, the members' agents' auditor) and the managing agent were required to produce a number of reports to Lloyd's arising out of the solvency audit. The forms used for the 1980 and prior solvency audits, originally called AU forms, were changed after the Central Solvency System to reflect the different information that was required. By 1986, the forms, with the exception of the AU38 form, had been replaced by CS forms. The system and the information provided did not change significantly over the intervening years.

Amongst the forms was Form AU38 (or AU38a) - "Matters to be reported by syndicate auditor". This form was completed by the auditors in relation to each syndicate audited by them. In particular it required the auditors to report in accordance with Clause 3 of the Audit Instructions and the Solvency Letter on the following:

The form AU38 was changed for the 1984 solvency audit to refer to apparent inadequacies in reserves rather than RITC in order to maintain the distinction between the RITC and the solvency test (see MSSC minutes of February 1985). In the years prior to the 1983 year-end, the Global Revenue Accounts produced by syndicate auditors were consolidated returns for all the syndicates which they were responsible for auditing. They contained details of (inter alia) the RITC premiums received and paid, if any, including reserves on accounts running-off. Individual syndicate returns were first required and obtained in respect of the 1983 year end.

[The AU38 form identified the extent of any apparent inadequacies in the particular syndicate's reserves for the year of account that had closed (or was running off) at the previous year end (i.e. for the year prior to the year of account then being closed). An apparent inadequacy with respect to the prior year's reserves had no bearing on the adequacy of the syndicate's audit reserves for the year of account closing at the date of the solvency test. The underwriting agent and active underwriter were also required to provide a certificate to the syndicate auditor and the Committee of Lloyd's certifying to the best of their knowledge and belief, the adequacy of the audit reserves being created for the current year's solvency test, including those for the year then closing (See form AU17). Those audit reserves should therefore have included an amount in respect of any apparent inadequacy identified for the prior year. Furthermore, the syndicate auditor was under a duty not to sign the Audit Certificate/Syndicate Solvency Certificate for the current year's solvency test if he was not satisfied with the calculation of the audit reserves for that test. From the introduction of the AU38(a) form as at 31 December 1982 the auditors were required to give an explanation for the inadequacy of the prior year RITC. There was a change in reporting requirements as at 31 December 1984 to report inadequacy in reserves for prior years as opposed to RITC.]

The Audit Department/MSSD conducted a review of the AU38s for each year and reported the results to the Committee of Lloyd's or, later, the MSSC. As from the review of the AU38s for the year ended 31 December 1984, where a syndicate's reserves for the year prior to the year of account being closed were found to have an apparent inadequacy greater than 15% of the reserves, and where no satisfactory explanation had been given, Lloyd's requested the managing agent to explain the reasons for the apparent inadequacy and the steps being taken to prevent a recurrence. Where the apparent inadequacy was greater than 30% of the reserve, the active underwriter and a director of the managing agent were called in for an interview with the MSSC Chairman or Deputy Chairman. Discussions in relation to apparent inadequacies are found in the following documents:

The changes in the scales of MPRs referred to below are only those for non-marine "All Other" business, and, for the 1981 solvency test and thereafter, the non-marine "All Other" US$ business. The changes to the Audit Instructions and Solvency Letter are those that are relevant to the issues in these proceedings.

As to MPRs - non-marine "All Other" business, increases were made in the percentages for years 2 to 8, and new reserves were applied to years 9 and 10 (with an alternative outstandings test for year 10).

As to Audit Instructions and Solvency Letter, this was the first year in respect of which syndicate results were required to be provided to Lloyd's by 30 April.

No changes to MPRs - non-marine "All Other" business, were made.

There were no material changes to Audit Instructions and Solvency Letter.

As to MPRs - non-marine "All Other" business, increases in the percentages were made for all years, and new reserves were introduced at the end of years 11 and 12 (with an alternative outstandings test for year 12). The Committee agreed that statistical information up to year 20 of each account should be requested, inter alia, in respect of non-marine "All Other" accounts. The Committee also agreed that certain matters should be considered during 1980, including the sub-division of the non-marine "All Other" account, the separate application of an alternative outstanding liabilities test for the third and subsequent years and the replacement of the existing system of relating reserves to premium income.

There were no material changes to Audit Instructions and Solvency Letter.

As to MPRs - non-marine "All Other" business, the MPR percentages were increased for years 2-12, and a new reserve of 3% (or outstandings) required for year 13.

There were no material changes to the Audit Instructions or Solvency Letter. The letter of 2 February 1981 enclosing the Audit Instructions and Solvency Letter drew auditors' attention to the effect on reserves of very long-tail business such as products liability and excess casualty reinsurance business.

The scales of MPRs-non-marine "All Other" business were split to provide a separate, higher, scale for US$ business and a separate, lower, scale for non-US$ business. This split was a consequence of continuing efforts on the part of Lloyd's to provide a separation, for the purposes of the MPRs, of the diverse categories of business which were included within the non-marine "All Other" business category. Some of the categories within non-marine "All Other" business were shorter tail, and therefore warranted lower MPRs than other categories. Accordingly, efforts were directed, in consultation with the relevant market associations, and in particular LUNMA, towards refining the categories of business within that class with a view to refinement of the MPRs. Segregation was not, however, a straightforward matter, as revealed by the Committee minutes and other documents summarised below:

[Efforts to obtain a more refined segregation continued thereafter, and ultimately culminated in the introduction of new audit codes with effect from 1 January 1987.]

At the same time as efforts were made to obtain a more refined segregation for the purposes of the MPRs, Lloyd's also investigated and explored the possibility of developing a formula for reserving which was not based on percentages of premium income. Preliminary work carried out within Lloyd's was discussed at the Audit Committee meeting held on 5 May 1981, and referred to at the panel auditors meeting on 10 November 1981. An actuary, Mr. Sidney Benjamin, a senior partner of Bacon & Woodrow, subsequently began working on this question, and his work is referred to and discussed in various documents and minutes. Comparative tests of the "Benjamin method" against the traditional audit reserve calculations were undertaken during the mid 1980's, and the information generated was made available to the market and to registered auditors. In April 1983, a working group was formed to undertake limited testing of the Benjamin method. Their report was published in December 1983. Development of the Benjamin method was delayed after 1985 until a means could be found of obtaining gross settlement statistics, which were felt to be necessary if the system was to be effective.

[As to other changes to Audit Instructions and Solvency Letter, clauses 1 and 2 of the Audit Instructions set out the form of Syndicate Solvency Certificate to be completed by syndicate auditors, which was required as a consequence of the introduction of the Central Solvency System. The Audit Instructions also set out the duties of the syndicate auditors with respect to the review of syndicate books and records.]

The Solvency Letter, in the notes on Clause 3, was amended to require underwriters and underwriting agents to draw to the attention of syndicate auditors any factors that affected or might affect the adequacy of the reserves as at 31 December 1981. The equivalent provision in previous Solvency Letters had required the auditors to ask this question of the underwriting agent and had drawn particular factors to the attention of the auditors. The Solvency Letter was in future to be addressed specifically to underwriting agents and active underwriters as well as to panel auditors to reflect the change in emphasis of this aspect of Clause 3. The non-exclusive list of factors in the notes to Clause 3 included "risks which included liability for latent diseases and product liability".

A letter was sent to Lloyd's by Neville Russell on 24 February 1982 pursuant to Clause 3 of the Audit Instructions in relation to reserves for asbestos-related liability. Lloyd's (by Mr. Randall) responded to panel auditors by letter dated 18 March 1982, enclosing a copy of the Murray Lawrence letter of the same date to underwriting agents and auditors (see chapter 19 below).

Increases to MPRs - non-marine were made in the "All Other" US$ scale in each of years 1 to 11 and 14. In a letter dated 3 February 1983 Lloyd's advised managing agents and active underwriters that for the purpose of the statement of outstanding losses for the solvency test as at 31 December 1982, Lloyd's would require both gross and net outstanding losses for the 1980 and prior years of account to be shown.

As to amendments to Audit Instructions and Solvency Letter, clause 2 was amended to impose additional requirements on the syndicate auditor to examine and satisfy himself as to the adequacy of the accounting systems and to undertake alternative procedures where the systems were inadequate. Further the auditor had to satisfy himself that all necessary information had been supplied. Clause 6 was amended to clarify that it was the responsibility of the managing agent to establish the audit reserves and the auditor's responsibility to audit that calculation. The syndicate auditor was required to ensure that the agent had discharged his responsibility in this regard in a reasonable manner consistent with available information on outstanding losses, statistics on underwriting performance, market experience and any relevant information and explanations.

The scales of MPRs - non-marine "All Other" US$ business were unchanged from 1982.

The Audit Instructions were changed to require the syndicate auditor, where he believed the syndicate's accounting systems were not adequate, to make recommendations to the managing agent as to improvements for systems and controls and to require that certain reports be made on the systems. The syndicate auditor was also required to undertake "such other procedures as he considered necessary" to enable him to complete and sign the Syndicate Solvency Report.

As to MPRs - non-marine "All Other" US$ business, the scales of reserves were increased from year 5 to year 13 and new reserves were added for years 15 and 16. In addition, years 10 to 15 were made subject to an alternative outstanding liabilities test (year 16 was in any case subject to an alternative liabilities test in accordance with usual practice).

As to Audit Instructions and Solvency Letter, consideration had been given in the discussions on the MPR scales to a higher scale than eventually agreed. The higher scale was rejected but Lloyd's took the opportunity in the Audit Instructions to re-emphasise that the syndicate auditor must have regard to the fact that the MPR scales represented the "absolute minimum requirement" for any syndicate and had been compiled on that basis. Where professional judgment and statistical evidence suggested, provision had to be made over and above the MPRs to take account of the particular circumstances of individual syndicates. This was also re-emphasised in a letter to managing agents, active underwriters and panel auditors dated 12 November 1984 advising them of the MPR scales for the 1984 solvency audit. The letter reminded the addressees that any syndicate reserving at or near minimum percentage levels would have to demonstrate to its auditors that this represented an adequate provision.

In previous years, if a syndicate had wanted to set an RITC premium at less than the audit reserves calculated by reference to the MPRs, it was required to obtain the Committee's approval. Under Byelaw No.7 of 1984, auditors were now required to report in true and fair terms on the results of closed years. Therefore it was considered no longer appropriate for the Committee to approve the setting of RITC by a syndicate at less than MPR levels. Reflecting this change, syndicate auditors were now merely required to report to Lloyd's if the 1982 and previous years' accounts of each syndicate were closed by reinsurance at a lesser sum than the MPRs and if so to confirm that the audit reserve for the open year of account had been adjusted to reflect the difference between the RITC premium and the audit reserves calculated in accordance with the MPRs.

The Audit Instructions and Solvency Letter were accompanied by a letter from the MSSD dated 10 January 1985 alerting managing agents and registered auditors, inter alia, to:

As to MPRs - non-marine "All Other" US$ business, the scales remained the same, subject to the removal of the alternative outstanding liabilities test for years 10 to 15. The proposed scales of MPRs were circulated under cover of a letter dated 19 November 1985. A further letter was sent on 31 January 1986.

As to Audit Instructions and Solvency Letter, clause 6(i)(d) of the Solvency Letter, which required any syndicates reserving at or near the minimum percentage to demonstrate to its auditor that this represented an adequate provision, was removed, because all syndicates needed to demonstrate to their auditors that their reserves were adequate regardless of whether they were at or near the MPR levels. It was misleading to state that this was only necessary where syndicates reserved at or near MPRs. Clause 3 of the Solvency Letter was changed to require auditors to report inadequacies in reserves created at 31 December 1982 (the prior closed year), rather than RITC. The reason was to distinguish between the syndicate accounts (RITC) and the solvency test (closing reserves). Clause 3(iii) of the Solvency Letter (managing agents to bring to auditors' attention factors which affect or may affect the adequacy of the reserves) was amended, inter alia, so that "any factors" was in bold, the words "but in no way limited to" were added to the introduction and sub-paragraph (a) read "risks which include liability for latent diseases "and/or" products liability".

As to MPRs - non-marine "All Other" US$ business, the scales of MPRs were reduced for years 1, 2 and 16, and increased for years 11 to 15. A new reserve was added for year 17.

As to Audit Instructions and Solvency Letter, the Audit Instructions and Solvency Letter were combined into one document. This change was of form rather than substance, as explained in a letter to managing agents, active underwriters and recognised auditors dated 19 December 1986. In particular, the Audit Instructions now identified the principal responsibilities of the managing agent, syndicate auditor, members' agents and members' agents auditors in separate parts. The provisions as to the valuation of assets and the valuation of liabilities were in two further parts. It was stressed in Clause 6.1 (valuation of liabilities) of the Audit Instructions that the Instructions were applicable solely to the annual solvency test and were not determinative of the accounting standards applicable to the annual report prepared in respect of a syndicate.

As to MPRs - non-marine "All Other" US$ business, the MPRs were decreased in respect of years 3 and 17 and increased in respect of years 5 to 16. A new reserve of 5% (or outstanding liabilities) was added in respect of year 18.

New audit codes had been introduced with effect from 1 January 1987 but separate minimum reserve levels could not be established immediately for these codes until sufficient data had been collected:

non-marine long-long-tail Code A1

non-marine medium long-tail Code A2

non-marine short-long-tail Code A3

bankers' business Code BB

The introduction of the new audit codes was a further consequence of the efforts made to refine the categories within the non-marine "All Other" business class following the division in 1981 between US$ and non-US$ business. The further discussions and efforts concerning segregation are revealed in the documents identified below:

The new audit codes were referred to in a letter dated 4 December 1987, enclosing the Solvency Test Instructions for the year ended 31 December 1987. The letter stated:

There were no material changes to Audit Instructions - now called Solvency Test Instructions.

H. REGIME FOR STATUTORY STATEMENT OF BUSINESS AND GLOBALS

Introduction

The process of collating material for the SSOB, Aggregate Results and Global Accounts was, in the relevant contemporaneous documents, called "the Global Process" and the end result "the Globals", notwithstanding the distinctions between the various documents.

To summarise the production of the SSOB and Globals:

Prior to the year ended 31 December 1982

For the year ended 31 December 1982 and subsequent years

The administrative departments responsible for producing the SSOB, Aggregate Results and Global Accounts over the Relevant Period were as follows:

DEVELOPMENT OF THE STATUTORY REGIME

(a) SSOB as at 31 December 1981 and Prior Years

Lloyd's has been required to lodge statements on Lloyd's business with the Board of Trade (or the DTI) since 1948. For the year ended 31 December 1981 and prior years, this requirement was set out in Section 74 of the ICA 1974. The Assurance Companies Rules 1950 (SI 1950/533) set out the prescribed form of SSOB at Rule 19 (then called the "Annual Statement"). The SSOB were required to be signed by the Chairman of Lloyd's, the Chairman of the Audit Sub-Committee and the Clerk to the Audit Sub-Committee.

There were four categories of business in respect of which statements were required:

Each form certified that all the liabilities attaching to such business had been calculated by an auditor (or an actuary in respect of life assurance business) and that an Audit Certificate had been furnished by each underwriter to the Board of Trade and to the Committee of Lloyd's. Each form also set out the income and expenditure for each open year and the closed year of account as at the year end to which the Annual Statement related.

(b) SSOB as at 31 December 1982 and Subsequent Years

Following the enactment of the ICA 1982, a new form of SSOB was required to be furnished to the Secretary of State for Trade and Industry. The SSOB was prescribed in Regulation 5 and Schedule 3 of the Insurance (Lloyd's) Regulations 1983, and applied to the audit as at 31 December 1982.

The SSOB was in the form of a general certificate to be furnished by Lloyd's and a number of supporting Forms. The general certificate stated that the SSOB had been completed in accordance with the ICA 1982 and that an Audit Certificate had been provided in respect of every underwriting member. The general certificate was signed by the Chairman, Deputy Chairman and Secretary-General of Lloyd's. The supporting Forms to be completed pursuant to paragraph 5 of the Regulations and Schedule 3 covered revenue accounts, premium analysis returns, solvency margin calculations and a consolidated statement of assets and liabilities of Names.

Form 1 required "Three Year Revenue Accounts" for each of the open years and the closed year as at the year end to which the SSOB related. Regulation 5(2) and (3) specified that Form 1 returns were required for the following:

Form 1 compared income and expenditure as in the earlier SSOB but in greater detail. One principal difference was that the reinsurance premiums received and paid, if any, were separately stated from the net premiums and net claims. These values included amounts placed to reserve in respect of estimated liabilities from previous accounts (i.e. reserves established on years of account in run-off).

The Production of the SSOB, Aggregate Results and the Global Accounts, the Development of Globals and the Process for the approval of SSOB and Globals are described in Appendix 4.

12. THE RULES AND PROCEDURES GOVERNING THE ADMISSION TO UNDERWRITING MEMBERSHIP OF LLOYD'S AND RELATED MATTERS

The following account of the Rules and Procedures Governing the Admission to Underwriting Membership of Lloyd's and Related Matters is drawn from a statement of agreed facts. Where I have added to the statement this is shown in square brackets.

A. THE REGULATORY FRAMEWORK APPLICABLE TO ADMISSION TO UNDERWRITING MEMBERSHIP OF LLOYD'S AND RELATED MATTERS

Byelaw No. 87 (18 November 1970)

Under this byelaw, insurance business could be effected with Names through an underwriting agent only if that agent was at the time listed in the Register of Approved Lloyd's Underwriting Agents to be kept by the Committee of Lloyd's.

Manual for Underwriting Agents (1971 Version)

The procedure applicable to admission to underwriting membership of Lloyd's was set out in the Manual for Underwriting Agents which was first published in 1971. The Manual also set out the duties owed by underwriting agents (both members' and managing agents) to prospective and existing Names. These duties included (at Section A, paragraph 3.1(ii) of the Manual):

The Manual also set out the obligations on a managing agent to "keep the [members'] Agent fully advised of the progress of the underwriting account ... by periodical advice at least on a quarterly basis ... [and] by making available any such further information as may be requested ..." (at Section A, paragraph 9.2(iv) of the Manual).

The Manual was subsequently updated by means of replacement pages which were regularly issued in the form of sequentially numbered "Amendment Lists".

A brochure entitled "Notes for Applicants for Underwriting Membership" was prepared by the Membership Department of Lloyd's in 1971 and appended to the Manual. Various amendments were subsequently made to this brochure between 1971 and 1979 prior to its replacement by a separate brochure, the "Brochure for Applicants for Underwriting Membership" in 1979.

On 22 December 1977, the Committee of Lloyd's issued a letter to all underwriting agents setting out detailed requirements as to information to be provided by agents to US citizens and residents applying for membership of Lloyd's. The letter also gave instructions as to documentation to be used by agents in connection with such applications, including a separate brochure for US applicants (appended at Part A to Exhibit D to the letter) and a "verification form" which was to be signed by US applicants at or immediately following his or her Rota Committee interview as part of the procedure for admission to underwriting membership of Lloyd's.

On 23 January 1979, the Committee of Lloyd's issued a further letter to all underwriting agents recommending that the same information that was to be disclosed to US applicants should be disclosed to all new Names who became Names through their agency. The letter also recommended that disclosure should be made to an existing Name at the time of his/her increasing his/her line on a syndicate, joining a new syndicate or employing a new agent. Finally, the letter advised that if a brochure was prepared by an agent for the purpose of disclosing information to new Names, the agent should notify its existing Names of the existence and availability of that brochure.

Again in January 1979, the brochure for non-US applicants entitled "Notes for Applicants for Underwriting Membership" was replaced by the "Brochure for Applicants for Underwriting Membership".

On 5 March 1980, a letter was sent by the Manager of the Membership Department to agents indicating that all prospective Names or existing Names joining an agency or syndicate, irrespective of nationality, should be provided with the same information which was previously required to be disclosed specifically to US Names as set out at Section A, paragraph 16.5 of the then current version of the Manual. The letter also asked agents "to draw to the attention of new Names factors which may have affected past results or may affect future results, and to keep all Names informed of factors which might materially affect the results of the Syndicate".

Manual for Underwriting Agents (January 1980 Version and Amendments)

The Manual was reprinted in full in January 1980. Replacement pages continued to be produced throughout the Relevant Period up to and including 1988.

The amendments to the Manual made by Amendment List No. 49 on 2 May 1980 made reference to the following:

The requirements set out in Amendment List No. 49 that agents should explain the concept of unlimited liability to prospective Names and should show them the results of at least the last seven closed underwriting years (where applicable) for each proposed syndicate, had both previously been set out in the relevant Rota briefs and verification forms for both 1979 and 1980 joiners.

The Report of the Fisher Working Party into Self-Regulation at Lloyd's - May 1980

The Fisher Report made a large number of recommendations, including that under the anticipated new Lloyd's Act (which subsequently received Royal Assent on 23 July 1982), the Council and Committee of Lloyd's should be given extensive powers:

The Fisher Report gave rise to the establishment of a number of "Task Groups". These included the following:

The work of these Task Groups in turn led to the passing of a number of byelaws, as set out below.

1983 Annual Reports of Syndicates Byelaw (No. 2 of 1984)

This byelaw imposed an obligation (enforceable by disciplinary measures) on managing agents to prepare audited syndicate accounts for the year ended 31 December 1983. The byelaw specified the contents of the accounts and the timing for their completion and circulation to Names (direct or through members' agents) and to Lloyd's. The timing was as follows:

Disclosure of Interests Byelaw (No. 3 of 1984)

This byelaw required that members' and managing agents must disclose to Names, through annual statements and syndicate annual reports respectively, all transactions and arrangements concerning the Name in which the agent had a material interest.

Underwriting Agents Byelaw (No. 4 of 1984)

Through this byelaw, the Committee of Lloyd's established a register of all underwriting agents, divided into members' agents and managing agents (paragraph 3 of the byelaw). An agent was not permitted to operate in the Lloyd's market unless it was registered under this byelaw (or was already registered under Byelaw No. 87 in which case the need to register under the 1984 byelaw was postponed until 22 July 1987) (paragraph 4 of the byelaw). The factors which the Committee would take into account in deciding whether the agency was "fit and proper" to be registered included the suitability of its directors or partners and its staff; the suitability of the active underwriter(s) (in the case of a managing agent); and its ability to supervise and service all of its activities and responsibilities (paragraph 8 of the byelaw).

Syndicate Accounting Byelaw (No. 7 of 1984)

This byelaw set out the requirements for the preparation and audit of syndicate accounts for the year ended 31 December 1984 and onwards and for the preparation and audit of individual Names' personal accounts. It contained full details as to the contents, timing, publication and circulation of syndicate accounts, as well as provisions relating to the contents of managing agents' and underwriters' reports. The timetable for the circulation of syndicate accounts and accompanying documents was the same as that set out in the 1983 Annual Reports of Syndicates Byelaw.

Membership Byelaw (No. 9 of 1984)

This byelaw was supported by detailed secondary rules set out in the Manual for Members. The Manual for Members, which was prepared by the Membership Department, consolidated all of the existing rules relating to admission and was distributed to members' agents.

As well as dealing with the requirements for admission (paragraphs 4-8 of the byelaw), the byelaw gave the Council and Committee of Lloyd's the power to require Names to provide proof of means and required Names to notify the Committee in writing if their level of means fell below the qualifying level (paragraphs 3(b)(ii) and 14(c)-(d) of the byelaw).

Agency Agreements Byelaw (No. 1 of 1985)

As a result of this byelaw, insurance business could not be underwritten at Lloyd's after 31 December 1986 except in pursuance of a Standard Agency Agreement (set out in Schedule 1 to the byelaw) or a Standard Sub-Agency Agreement (set out in Schedule 2 to the byelaw).

1986 Brochures

In February 1986, both the US and non-US versions of the Brochure for Applicants for Underwriting Membership were replaced by the "Applicants' Guide for Underwriting Membership" which was introduced in respect of all applicants regardless of nationality. This in turn was replaced in December 1986 by a brochure entitled "Membership: The Issues", again in respect of all applicants.

The Report of the Committee of Inquiry Chaired by Sir Patrick Neill into Regulatory Arrangements at Lloyd's - January 1987

Among the conclusions of the Neill Report was the finding that "the formal [admission] process does contain many of the safeguards associated with modern investor protection legislation, for example, specific rules about the financial circumstances of the prospective Name and the information he/she is to be given, and a lengthy introductory procedure culminating in a Rota interview" (paragraph 4.8 of the Neill Report).

The Neill Report also noted that the members' agent "has a critical role to play in explaining in detail the financial requirements for Names laid down by Lloyd's, the financial consequences of membership, the services which the agent himself provides and the syndicates he can make available. A competent agent will be at pains to advise the applicant whether membership of Lloyd's is appropriate to his circumstances. It is then for the agent to guide the Name through the admission process" (paragraph 4.5 of the Neill Report).

It further noted that members' agents had to understand that they were "responsible for giving Names comprehensive and objective advice on the consequences of membership in the light of a thorough understanding of the Names' individual circumstances" (paragraph 4.33 of the Neill Report).

The Neill Report in turn gave rise to further byelaws and codes of practice, as summarised below.

Syndicate Accounting Byelaw (No. 11 of 1987)

This byelaw set out revised requirements relating to the preparation and audit of syndicate accounts and to the preparation and audit of individual Names' personal accounts. Like the Syndicate Accounting Byelaw (No. 7 of 1984), it contained full details as to the contents, timing, publication and circulation of syndicate accounts, as well as provisions relating to the contents of managing agents' and underwriters' reports. As stated in a letter dated 11 December 1987 from the Council of Lloyd's to underwriting agents, market associations and recognised auditors, the revised timetable for the circulation of syndicate accounts and accompanying documents was as follows:

The revised timetable applied in respect of syndicate accounts and accompanying documentation for the year ended 31 December 1988 and onwards.

Members' Agents (Information) Byelaw (No. 7 of 1988)

Under this byelaw, which came into force on 1 January 1989, all members' agents had to compile annually a members' agent's information report containing "such information as would materially assist a reasonable applicant to make an informed assessment of the members' agent (and its business)" (paragraph 2 of the byelaw). The MAIR had to include, among other matters (listed in Schedule 2 of the byelaw):

Members' agents were also required to compile annually a table of syndicate relationships (i.e. numbers of Names and the aggregate capacity of those Names for the past seven years of account, going back no further than the 1984 year of account) (paragraph 3 of the byelaw).

A members' agent could only issue a brochure if the brochure either (i) attached the current MAIR and any supplemental report prepared by the agent; or (ii) was a "qualifying brochure" (i.e. contained the information found in the MAIR and any supplemental report) (paragraph 4 of the byelaw).

Paragraph 5 of the byelaw provided that the Council of Lloyd's would set up and maintain a file of MAIRs and tables of syndicate relationships, containing a separate section in respect of each members' agent.

No members' agent could agree to act for an applicant without first giving that applicant either (i) a copy of the current MAIR; or (ii) a qualifying brochure; and in either case a copy of any supplemental report (paragraph 6 of the byelaw).

Agency Agreements Byelaw (No. 8 of 1988)

This byelaw provided that, in respect of the 1990 and subsequent years of account, no members' agent could act as members' agent of a Name, and no Name could appoint a members' agent or agree that the members' agent would continue to act in that capacity, otherwise than in pursuance of a written agreement in the form and terms of the standard members' agent's agreement set out in Schedule 1 of the byelaw (paragraph 2 of the byelaw).

Clause 4(a) of the standard members' agent's agreement required that the members' agent should "advise the Name as to the syndicates in which he should participate and as to the amounts of his overall premium limit which should from time to time be allocated to each such syndicate".

Clause 6.2(m) of the standard members' agent's agreement required that the members' agent should "disclose to the Name in good time any information in its possession relating to any of the Contracted Syndicates, or to any syndicate which the Agent has advised the Name to join or which the Name and the Agent have agreed that the Name should join, which could reasonably be expected to influence the Name in deciding whether to become or remain a member of, or to increase or reduce his participation in, any such syndicate, and use its reasonable endeavours to obtain any such information".

Similarly, in respect of the 1990 and subsequent years of account, no managing agent could, and no Name could authorise or continue to authorise a managing agent to, underwrite insurance business on behalf of a Name or provide any other services as a managing agent to a Name, otherwise than in pursuance of an agreement in the terms of a standard managing agent's agreement set out in Schedule 3 of the byelaw and, except where the managing agent is acting as the Name's members' agent, the standard agent's agreement set out in Schedule 2 of the byelaw (paragraph 3 of the byelaw).

Neither agents nor Names could vary the terms of any of these standard agreements without the written consent of the Council of Lloyd's (subject to limited exceptions) (paragraph 5 of the byelaw).

Code of Practice: "Know Your Principal" Guidelines for Members' Agents at Lloyd's (7 September 1988)

This code of practice stated that members' agents should promote and maintain, on a continuing basis, a flow of information from their principals (i.e. their Names) regarding the latter's personal and financial circumstances (paragraph A of the code of practice).

Members' agents had to satisfy themselves that (as set out in paragraph B of the code of practice):

Members' agents had to seek confirmation from each principal that the implications of membership were compatible with the principal's financial objectives (paragraph B(vii) of the code of practice).

Members' agents also had to keep up to date records of each principal. These records had to demonstrate the suitability of the advice given by the members' agent in connection with membership (paragraph C of the code of practice).

B. 1978 ADMISSION PROCEDURE FOR PROSPECTIVE NAME SEEKING TO COMMENCE UNDERWRITING ON 1 JANUARY 1979 (1979 JOINER)

Categories of Membership

The requirements for admission differed in a number of respects, as detailed below, depending on the classification of the particular applicant. The principal categories of Name at Lloyd's were as follows:

Application Process

An application to become a Name and to commence underwriting on 1 January 1979 would be made during the course of 1978. Such an application could only be made through a registered members' agent, who would provide the prospective member with the necessary forms and would guide him/her through the application procedure. The members' agent's responsibilities would also include:

The main duties of a members' agent were summarised in passages set out in chapter 10 above by:

Having decided to apply for admission to underwriting membership, the prospective Name also had to obtain sponsorship by an existing Name, who would send a sponsor's letter to the Membership Department of Lloyd's. In addition, in the case of US applicants, a further sponsor form, known as a "US Sponsor Declaration", was required to confirm that the prospective Name had sufficient financial and business experience to be able to evaluate the risks of membership/was able to bear the economic risks of membership.

The closing date for receipt of the sponsor's letter was, in the case of prospective Lloyd's Names and prospective Connected and Associated Names, the end of May 1978, and, in the case of prospective non-Lloyd's Name applicants, the end of June 1978.

On receipt of a sponsor's letter (and, in the case of US applicants, a US Sponsor Declaration, a US Names Questionnaire and, if appropriate, an Adviser Questionnaire), the Membership Department would provide personal details of the prospective Name to the Committee of Lloyd's.

Eligibility

In order to be eligible to commence underwriting on 1 January 1979, a prospective Name had to be at least 21 years old and be of suitable character and financial standing.

Relevant considerations as to suitability of character included any involvement in litigious or criminal proceedings, any bankruptcy or insolvency, any conflicts of interests or any commitments or interests likely to prejudice the applicant's ability to meet his/her underwriting liabilities at Lloyd's.

The checks on age and financial standing were carried out by the Membership Department, by reference to the information submitted by applicants in the sponsor's letter. The Membership Department also co-ordinated the checks on character, which were carried out in two ways. Firstly, they circulated the information contained in the sponsor's letter to various departments within Lloyd's such as the Advisory Department and to overseas representatives where applicable. Secondly, a list of prospective applicants was posted on the board in the Underwriting Room. Any objections to the eligibility of a particular applicant and the reasons for these would be reported to the Membership Department which would then either reject the application, if it had not progressed past the Rota Committee interview stage or, if it had, notify the Committee of Lloyd's.

If, following these checks, the application was allowed to proceed, a folder, containing all the necessary forms to be completed by the applicant (except for the deeds), would be sent by the Membership Department to the prospective Name's nominated members' agent. Special folders were issued to US applicants.

Forms and Deeds

Certain of these forms had to be completed immediately. The members' agent, having assisted the prospective Name in completing these initial forms, would then send these to the Membership Department. The deadline for receipt of these forms was the end of July 1978 for prospective Lloyd's Names and prospective Connected and Associated Names and the end of August 1978 for prospective non-Lloyd's Names. The forms included a Nomination Form, a Statement of Means form and the General Undertaking.

Once any queries relating to these forms and any supporting documentation had been resolved, the applicant's name and Nomination form were posted on a board in the Underwriting Room.

If no objection was made to the Membership Department within one week, the Membership Department would prepare a request for the Lloyd's deposit to be provided, together with the relevant deeds, and would forward them to the members' agent for signing by the prospective Name. The request and deeds would be sent out by the end of November 1978.

Means Requirements

The means requirements which an applicant was required to meet differed depending upon the nationality and place of residence and domicile of the particular applicant. In order to determine financial standing, a UK citizen applying in 1978 to join Lloyd's as a non-Lloyd's Name (i.e. a 1979 joiner) who was both a UK resident and domiciled in the UK would need to show a minimum level of means of £37,500 (permitting a maximum underwriting premium limit of £75,000 and requiring a minimum deposit of £20,000). A US national in 1978, wherever resident and domiciled, would need to show a minimum level of means of £100,000, permitting a maximum underwriting premium limit of £150,000 and requiring a minimum deposit of £35,000. Satisfaction of the means requirement had to be shown in the form of a Statement of Means signed by an independent professional.

Information Available to Applicants

The members' agent was required to provide certain information to the prospective Name, including, among other matters, figures for at least seven closed years of account for the syndicates which the Name was proposing to join, together with a copy of the Underwriting Agency Agreement and details of how expenses and commission were calculated and charged. In the case of US applicants, the members' agent also had to provide percentage settlement figures in respect of open underwriting years of account. This additional requirement was extended to all prospective Names from 1979, i.e. the time of 1980 joiners. At the Rota Committee interview, the Rota Committee chairman would check that the prospective Name had indeed seen this information.

Rota Committee Interview

At the same time as sending out the request for the Lloyd's deposit, and the deeds for signature, the Membership Department would arrange for the applicant to attend a Rota Committee interview, to be held by the end of November 1978. The Manual stated that it was the Committee of Lloyd's wish that the applicant should have met the active underwriters on his/her proposed syndicates prior to attending this interview.

The interview would be held at Lloyd's offices in London. It would generally last between ten and fifteen minutes and would be led by a Rota Committee chairman who would be recruited by the Membership Department from among members and former members of the Committee of Lloyd's. In addition to the Rota chairman, the others present would be the applicant/group of applicants, a director of the members' agency, an interpreter if appropriate, a representative from the Membership Department and possibly a "trainee" Rota Committee chairman and "trainee" Membership Department representative.

Given the number of applicants, interviews would sometimes be conducted with groups of applicants rather than on an individual basis. However, this would only be done for UK applicants (i.e. not for overseas applicants) and only with their consent. The group would also only consist of applicants all put forward by the same members' agency.

The interview was conducted by the Rota chairman using a form known as a "Rota brief". The brief was designed to enable the Rota chairman to fulfil the purpose of the Rota Committee interview, which was to confirm that the specific matters set out in the Rota brief had been drawn to the attention of the applicant by his/her members' agent and had been understood by the applicant. The Membership Department representative would be responsible for ensuring that the chairman had covered all the points in the brief. That representative would also have a complete file on the applicant (up to date as at that point) to help brief the chairman.

The Membership Department would also, prior to the interview, prepare a draft Rota report. The Membership Department would include any conditions yet to be satisfied prior to election, e.g. that the deposit still had to be provided. The chairman would then sign the report which would be kept by the Membership Department with the other forms.

The Rota report, which now included a note of the date and time of the interview and the name of the Rota Committee chairman, was then submitted to the Committee of Lloyd's.

Verification Form

At or immediately after (i.e. on the same day as) the Rota Committee interview, UK and US applicants were required to sign and return to the Membership Department a "verification form" confirming that the specific matters included in the form had been explained to him/her by his/her members' agent and that he/she understood those matters. Both the US and non-US verification forms also required the applicant to confirm that he/she had been shown the results of at least the last seven closed underwriting years (where applicable) in respect of each syndicate which he/she was proposing to join.

Entrance Fees

Entrance fees also had to be paid by the end of November 1978. These were:

Lloyd's Names: £500
Spouses (wishing to continue after the death of a member): £750
Connected or Associated Names: £1,000
UK residents with means of £50,000-£100,000: £1,500
UK residents with means of more than £100,000 and foreign nationals: £1,900

Election

Following receipt of all the remaining forms, the Membership Department would then include the applicant's name on a ballot list which it submitted to the Committee of Lloyd's seeking formal approval for the applications to proceed to final election by the Committee of Lloyd's.

The deadline for such election was the end of December 1978, in order to allow the newly elected Name to commence underwriting on 1 January 1979.

The applicant could withdraw his/her application at any time during the year in which the application was made. This would be done by giving notice to his/her members' agent who would then give written notice to the Membership Department, to include if possible reasons given by the applicant for withdrawal.

Immediately following election, the Membership Department sent out a membership certificate and membership card to the new Name.

C. SUMMARY OF CHANGES TO THE ADMISSION PROCEDURE AFTER 1978 UP TO AND INCLUDING 1988 (I.E. FOR 1980 JOINERS TO 1989 JOINERS)

Membership requirements and procedures were reviewed annually as a matter of course by the Membership Department. Changes might also arise out of queries and recommendations made to the Membership Department by existing Names or underwriting agents. Proposal papers were from time to time submitted to the Membership Committee which, having debated them, would make its own recommendations to the Committee of Lloyd's.

Means Requirements

In 1979 (i.e. in respect of 1980 joiners), the minimum means requirement for a UK citizen applying to join Lloyd's as a non-Lloyd's Name and who was also both a UK resident and domiciled in the UK was increased from £37,500 to £50,000. In 1983 (i.e. in respect of 1984 joiners), this requirement was increased again to £100,000. It remained at this level for the remainder of the Relevant Period.

The list of qualifying assets which could be used by an applicant to show that he/she satisfied the minimum means test requirements referred to above was amended in 1982 (i.e. in respect of 1983 and subsequent joiners). Prior to this time (i.e. for 1979 to 1982 joiners), it was necessary for an applicant to show that at least 60% of the assets being used to satisfy the means test were in a particular form. These included "Bank Guarantees or Letters of Credit on any of an applicant's assets other than their own home". There was also a separate requirement prior to 1982 that the value of an applicant's own home (which was to be calculated at certified market value less any outstanding mortgage or loan and less £25,000 - increased to £50,000 in respect of 1981 and 1982 joiners) could not exceed 40% of the assets being used for the means test. These requirements changed in 1982, from which time (and throughout the remainder of the Relevant Period) the applicant's own home was no longer excluded from the list of assets upon which a bank guarantee or letter of credit was acceptable to meet the 60% requirement referred to above. As a result of this, the use of an applicant's principal residence towards the 40% means test requirement referred to above was no longer permitted.

[In his witness statement Mr. Pollard explained that the Means/Deposits Working Party made various recommendations on means requirements and deposits (principally that the minimum means should be increased from £50,000 to £100,000) which were introduced in respect of 1984 and subsequent joiners. In respect of use of the applicant's home as part of the assets used to satisfy the means test, Mr. Pollard explained that in 1982 Lloyd's decided that applicants should no longer be allowed to use their home directly to satisfy the means requirement. Instead, an applicant could offer the home, if he/she wished to do so, as collateral against a bank guarantee.]

Application Process

An internal review of the admission procedure was conducted by the Membership Committee in 1984. This review resulted in a number of administrative changes to the procedure.

Forms and Deeds

In 1986 (i.e. for 1987 joiners onwards), the Standard Agency Agreement was introduced. This standardised the agreement which the Name signed with his/her members' agent in respect of all the syndicates on which he/she was writing business.

Also in 1986 (i.e. for 1987 joiners onwards), a new form of General Undertaking was introduced under which a prospective Name agreed to comply with the provisions of the Lloyd's Acts, subordinate legislation and other requirements of the Council of Lloyd's and to have any dispute relating to his/her membership of or underwriting at Lloyd's resolved in the English courts and subject to English law.

Rota Committee Interview

From 1987 (i.e. from the time of 1988 joiners onwards), the Rota brief was amended to provide that members' agents should be asked to leave the interview room part way through the Rota Committee interview, after which applicants should be asked about the information they had received from their members' agents and be reminded of the very important financial step they were intending to take and of their right to withdraw their application at any time during that year. The requirement that members' agents be asked to leave the room was made in response to a recommendation in the Neill Report arising out of an "anxiety that a Name may be inhibited by the presence of his agent from raising queries or giving candid answers to questions" (see paragraphs 4.38 and 4.39 of the Neill Report). The Neill Report did not, however, require any alteration to the nature of the questions asked by the Rota Committee chairman.

Verification Form

With effect from 1979 (i.e. for 1980 joiners onwards), a revised verification form was introduced for all non-US applicants. The wording of the verification form which had been used for UK applicants in 1978 (i.e. for 1979 joiners) was supplemented in the revised form by the following additional wording:

The above wording was already present in the verification form for US applicants in 1978 (i.e. for 1979 joiners) save that the wording referred to "risk business". The reference to "high risk business" was likewise introduced into the verification form for US applicants in 1979.

With effect from 1985 (i.e. for 1986 joiners), paragraph 2(a) of the verification forms for both US and non-US applicants was further amended to read: "The Underwriting of insurance is a high risk business and losses can be made as well as profits".

With effect from 1988 (i.e. for 1989 joiners), the following wording was added to paragraph 2 of the verification forms for US and non-US applicants: "My own experience and knowledge and the guidance I have received have enabled me to appreciate the risks as well as the benefits of membership of Lloyd's".

13. RITC - SOME GENERAL PRINCIPLES - THE ROLE OF THE MANAGING AGENTS/UNDERWRITER

Reinsurance To Close

The closure of a year of account was effected by the payment of a premium (the RITC premium) in respect of the members' underwriting liabilities allocated to that year to reinsure these liabilities into the following year of account. If a decision was taken not to close the relevant year of account, the account was described as having gone into "run-off" and no RITC premium was payable. The subsequent two years of account over the three year accounting period that were not being (or entitled to be) closed were known as "open years". Thus the first two years of the three-year accounting cycle were "open years." If a syndicate year was not closed by RITC, that year was "left open".

As reported in the Chairman's statement in the 1987 Globals, at the end of December 1987 there were 76 syndicates with a total of 120 years of account left open. Problems associated with asbestos and pollution risks, together with other US liability business, appear to account for the vast majority of the run-off years.

In the 1980s, there was a growing number of syndicates which did not close their accounts at the end of their third year.

Against the payment of a RITC premium, all syndicate members' undischarged liabilities in respect of risks allocated to the relevant year of account (including liabilities in respect of RITC of any preceding year of account) were reinsured without limit in time or amount into a succeeding year of account of the same syndicate; they could also, on occasion, be reinsured to close into a later year of account or by another syndicate. When RITC was underwritten by the same syndicate, the premium was set by the managing agent of both syndicates, in conjunction with the underwriter, acting for the Names on both years of account.

The amount charged by way of premium was required to be equitable between Names on the reinsured and reinsuring syndicates, having regard to the nature and amount of the liabilities being reinsured. RITC into a subsequent year of the same syndicate was not treated as premium income for the purposes of premium income monitoring. The Syndicate Premium Income Byelaw (No 6 of 1984) dealt with circumstances in which RITC by a different syndicate would form part of premium income for premium income monitoring purposes.

In the Merrett Judgment [1997] LRLR 265 at 313, I set out Some General Principles as to RITC.

As to the role of the managing agents/underwriter I said:-

14. RITC - THE ROLE OF THE AUDITORS

In the Merrett judgment [1997] LRLR 265 at 314, I set out the following propositions as to the role of the auditors in relation to RITC:-

This passage from the Merrett judgment was accepted by the parties in the statement of agreed facts as to the Regulatory Background for the Auditing and Accounting Regime at Lloyd's (see chapter 11 above).