THE OBSERVER: ASTONISHING claims that the Thatcher government connived with Lloyd's of London to hide the extent of the insurance market's Eighties financial crisis are to be made in the High Court.

The case will mark the first time that a judge has seen two crucial letters that support claims there were changes in the auditing of accounts of Lloyd's insurance syndicates.

A Lloyd's Name, John Pascoe, who has entered an affadavit alleging deceit, argues that the letters demonstrate a significant shift in who was responsible for calculating insurance syndicates' assets and liabilities from 1982 onwards. He also asserts that Lloyd's was in breach of the law governing insurance.

Lloyd's rejects all the allegations and says the Names' evidence has already been seen by the Serious Fraud Office, which decided not to pursue the matter.

The Treasury, which took over regulation of Lloyd's from the Department of Trade and Industry last year, also rejects allegations that the audit was watered down.

Pascoe claims that in 1982, Lloyd's shifted responsibility for calculating syndicates' assets and liabilities from independent auditors to managing agents. Pascoe hopes to show that the change could not have taken place without the DTI's knowledge.

A senior source involved in the clean-up of Lloyd's supports the Names'. He told the Observer: 'I believe the DTI did bend the rules to get Lloyd's through the solvency rules.'

And the Observer has obtained a letter from a Whitehall expert on Lloyd's, written 18 months ago, which shows the DTI was hugely relieved that none of the fraud allegations had come to anything. It says: 'The DTI has been surprised by the number of bad points that Names took in the many recent court cases, and has been pleasantly surprised at Lloyd's successes.'

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