Financial Times; Dec 20, 2001
By JANE CROFT and FRANCESCO GUERRERA

The European Commission is set to take action against the government over the regulation of Lloyd's of London in a move that could force changes at one of the world's largest insurance markets.

The Commission's decision to open formal proceedings - the first step towards taking legal action - could trigger a wave of multi-million-pound lawsuits against the government from some of the 20,000 individuals who incurred large losses at Lloyd's in the early 1990s. At the time a rash of asbestos-related claims brought the insurance market to the brink of collapse.

After an investigation of more than a year, the Brussels authorities are understood to believe that some of the rules that govern the 300-year-old insurance market could be in breach of European Union law.

Industry experts say Brussels' concerns over the regulation of Lloyd's have been compounded by fears that the events of September 11 could trigger a global crisis in the insurance industry. Lloyd's faces its largest ever single loss of £1.9bn net of reinsurance from the terrorist attacks. The Commission declined to comment but industry insiders say it is concerned that UK regulators do not monitor as often as required under EU law whether Lloyd's holds sufficient reserves to cover policy claims.

A requirement for more thorough monitoring would force Lloyd's to file details more frequently about its reserves and claims.

Under the 1973 European insurance directive, national regulators must periodically ensure that insurance companies and markets have enough reserves to cover potential liabilities.

The Commission fears the Treasury, which regulated Lloyd's until late 1998 when the day-to-day control passed to the Financial Services Authority, failed to do that.

The Commission is expected to send a formal letter to the government, outlining its concerns. The government will have two months to reply.

If the Commission is not satisfied with the reply, it can order the UK to change its practices and take it to the European Court of Justice if it refuses. The Commission's action could encourage some Names - individuals who invest in Lloyd's insurance syndicates on an unlimited liability basis - to sue the government for compensation. The Treasury said in a statement: "With regard to Lloyd's, the UK is confident that the relevant EC directive was and is being properly applied."

Lloyd's of London said: "We are not the subject of the Commission's letter and it would be inappropriate to comment on the matter."