Reinsurance to close It may not be immediately clear how current members of current Lloyd’s syndicates, which accept business one year at a time, could be liable to
pay historical claims.
The Names (few in number for such large losses) took legal action and ultimately paid only £6.25m of c. £15m of Den-Har claims under the 1976 year, leaving the Corporation
of Lloyd’s to pay the remainder.
A member joining a syndicate with a long history of such transactions could – and often did – pick up liability for losses on policies written decades previously.
Around that time, it was unusual for a Lloyd’s syndicate to have more than five or six backers; this lack of underwriting capacity meant Lloyd’s was losing many of the larger
risks to rival insurance companies.
Third, new specialised policies had arisen which had the effect of concentrating risk: these included “run-off” policies, under which the liability of previous underwriting
years would be transferred to the current year, and “time and distance” policies, whereby reserves would be used to buy a guarantee of future income.
 Having survived multiple scandals and significant challenges through the second half of the 20th century, most notably the asbestosis affair, Lloyd’s today promotes its
strong financial “chain of security” available to promptly pay all valid claims.
While some insurance companies were denying claims for fire damage under their earthquake policies or vice versa, one of Lloyd’s leading underwriters, Cuthbert Heath, famously
instructed his San Francisco agent to “pay all of our policy-holders in full, irrespective of the terms of their policies”.
Third, during the decade a number of scandals had come to light, including the collapse of F. H. “Tim” Sasse’s non-marine syndicate 762, which had highlighted both the lack
of regulation and the lack of legal powers of the Committee of Lloyd’s (as it was then) to manage the Society.
Another asbestosis-hit operation, Pulbrook syndicates 90/334, had taken out reinsurance in 1981 on its general liability business with Merrett syndicate 418; however, in 1990
Stephen Merrett (who by now controlled Pulbrook) won an arbitration ruling to void that arrangement due to non-disclosure of the extent of asbestos exposure, leaving the Pulbrook Names without cover for their losses of £100,000 each on average.
Because Lloyd’s was a tax shelter as well as an insurance market, the second issue affecting it was an increase in its external membership: by the end of the 1970s, the number
of passive investors dwarfed the number of underwriters working in the market.
Lloyd’s was later forced to make a settlement with the roughly 3,000 Names on the various PCW syndicates involved and to reinsure their liabilities into a new syndicate, number
9001, in turn reinsured by a unique vehicle named Lioncover, which was set up as a Lloyd’s subsidiary insurance company.
Once the three-year Lloyd’s accounting period passed, the 110 Names on syndicate 762 were told they faced substantial losses, from mostly fraudulent claims.
Liabilities for all pre-1993 business (other than life assurance) were to be compulsorily transferred (by RITC) into a special vehicle named Equitas (which would require the
approval of the UK’s Department of Trade and Industry) at a cost of around $21bn.
In this manner, liability for past losses could be transferred year after year until it reached the current syndicate.
Centrewrite still exists today but has not written any EPPs since 2011 and conducts little other business; its most recent transaction was in 2013 when it assumed the 2001
liabilities of the life syndicate 1171.
Lloyd’s then instituted some major structural changes: corporate members with limited liability were permitted to join and underwrite insurance; no new unlimited-liability
Names were allowed to join (although a few hundred existing ones remained); financial requirements for underwriting were changed, to prevent excess underwriting that was not backed by liquid assets; and market oversight significantly increased.
Traditionally business is transacted at each syndicate’s “box” in the underwriting “Room” within this building, with the policy document being known as a “slip”, but in
more recent years it has become increasingly common for business to be conducted outside of the Lloyd’s building itself, including remotely.
 Problems also developed out of the Oakley Vaughan agency run by brothers Edward and Charles St George, which had written far more business than its capacity allowed in
order to invest premium to take advantage of high interest rates.
As a result, a great many Names whose syndicates wrote long-tail liability at Lloyd’s faced significant financial loss or ruin by the late 1980s to mid-1990s.
 Sasse had also been one of 57 underwriters on other syndicates that wrote loss-making “computer leasing” policies in the late 1970s.
 Arising simultaneously with these developments were wider issues: first, in the US, an ever-widening interpretation by the courts of insurance coverage in relation to
workers’ compensation for asbestosis-related claims, which created a huge hole in Lloyd’s loss-payment reserves, which was initially not recognised and then not acknowledged.
Syndicate funds were also moved offshore (which later created problems through fraud and self-dealing).
Money was raised in many ways, including the sale and leaseback of the Lloyd’s building, and a tax on future business.
Lloyd’s losses from the earthquake and fires were substantial, even though the writing of insurance business overseas was viewed with some wariness at the time.
Late 1970s: Sasse scandal and other issues The collapse of the Sasse syndicate came after it wrote a “binding authority” in 1975 that delegated underwriting authority
to Florida-based expatriate Dennis Harrison to write property and fire risks through his Den-Har Underwriters agency, even though Den-Har was not an approved Lloyd’s coverholder (a fact noticed neither by Sasse nor Lloyd’s Non-Marine Association).
This came about as a result of the Lloyd’s accounting practice known as reinsurance to close (RITC).
In 1885, he wrote the first fire reinsurance contract, reinsuring the Hand in Hand Insurance Company and marking the start of Heath’s push to diversify the market into “non-marine”
 Many Names faced large bills, but the plan also provided for a settlement of their disputes, a tax on recent profits, and the write-off of nearly $5bn owed in the form
of “debt credits”, skewed towards those with the worst losses.
Unlike most of its competitors in the industry, it is not an insurance company; rather, Lloyd’s is a corporate body governed by the Lloyd’s Act 1871 and subsequent Acts of
Late 1980s: Piper Alpha and the LMX spiral It has long been normal for one Lloyd’s syndicate to reinsure another, but when Piper Alpha, a North Sea oil rig, exploded
on 6 July 1988 causing an initial $1.4bn loss, the practice had become so widespread that the underwriters in Lime Street initially had no idea how extensive their exposure was: the loss was passed around in what became known as the London
market excess of loss (LMX) “spiral” and claim values escalated out of control.
When the huge extent of asbestosis losses came to light in the early 1990s, for the first time in Lloyd’s history large numbers of members either were unable to pay the claims
or refused, many alleging that they were the victims of fraud, misrepresentation, and/or negligence.
The practice at Lloyd’s was to wait three years (that is, 36 months from the beginning of the year in which the business was written) before “closing” the year for accounting
purposes and declaring a result.
As long as the reserves had been accurately estimated, and the appropriate RITC premium paid every year, then all would have been well, but in many cases this had not been
possible: no-one could have predicted the surge in APH losses.
This contract developed so poorly that Fireman’s Fund later sought its own stop-loss cover for the losses assumed from Sturge.
The business underwritten at Lloyd’s is predominantly general insurance and reinsurance, although a small number of syndicates write term life insurance.
Within a year he was underwriting for himself on a three-man syndicate; in 1883 he also opened a brokerage business.
Lloyd’s income counted as earned income, even for Names who did not work at Lloyd’s, and this heavily influenced the direction of underwriting: in short, it was desirable
for syndicates to make a (small) underwriting loss but a (larger) investment gain.
 Structure Lloyd’s is not an insurance company; it is a market of members.
He also wrote Lloyd’s first burglary insurance policy, its first “all risks” jewellery policy and invented “jewellers’ block” cover.
Since claims can take time to be reported and then paid, the profit or loss for each syndicate took time to realise.
Fisher, working with Richard Southwell QC, drafted the Lloyd’s Act of 1982 which further redefined the structure of the business and was designed to give external Names, introduced
in response to the Cromer report, a say in the running of the business through a new governing Council.
In 1986, the year Lloyd’s moved into a new building at 1 Lime Street (where it remains today), the British government commissioned Sir Patrick Neill to report on the standard
of investor protection available at Lloyd’s.
Dilution of liabilities and the consequences It was alleged that in the early 1980s some Lloyd’s officials began a recruitment programme to enroll new Names to help
capitalise Lloyd’s prior to the expected onslaught of APH claims.
This report advocated the widening of membership to non-market participants, including non-British subjects and then women, and the reduction of the onerous capitalisation
requirements (thus creating a minor investor known as a “mini-Name”).
The reserve for future claims liabilities was set aside in an unusual way.
By writing swathes of business regardless of whether the premiums were adequate, the St Georges left their Names with serious losses.
The employer would report a claim to the insurance company that wrote the policy in the 1960s.
In the case of Lloyd’s, this resulted in the bankruptcy of thousands of individual investors who indemnified general liability policies written from the 1940s to the mid-1970s
for companies with exposure to asbestosis claims.
Warrilow syndicate and Centrewrite Lloyd’s also faced action from Names on C. J. Warrilow’s syndicate 553, which had chronically exceeded its underwriting capacity in the
early 1980s and failed to adequately reinsure the huge quantity of risks it was taking on.
This entity was named Centrewrite Ltd and in 1993 it assumed Warrilow’s 1985 and prior years’ liabilities, separately also offering “estate protection plans” (EPPs) for resigned
Lloyd’s rebounded and started to thrive again after the catastrophic losses arising out of the World Trade Center attack, but it faced increased competition from newly-created
companies in Bermuda and other markets.
A marine underwriter named Frederick Marten is credited for first identifying this issue and creating the first “large syndicate”, initially of 12 capacity providers.
The prompt and full payment of all claims helped to cement Lloyd’s reputation for reliable claim payments and as an important trading partner for US brokers and policyholders.
 It was soon realised that the membership of the Society, which had been largely made up of market participants, was too small in relation to the market’s capitalisation
and the risks that it was taking on.
A greater debacle arose when Peter Cameron-Webb and Peter Dixon, of PCW Underwriting Agencies, allegedly defrauded their business of some $60m through rigged reinsurance transactions
and fled to the United States, never to return.
As the oldest continuously active insurance marketplace in the world, Lloyd’s has retained some unusual structures and practices that differ from all other insurance providers
His report was produced in 1987 and made a large number of recommendations, but was never implemented in full.
To calculate the profit or loss, reserves were set aside for future claims payments, for claims that had already been notified but not yet paid, as well as estimated amounts
for claims that had been incurred but not reported (IBNR).
This arrangement carried on until 1773, long after the death of Edward Lloyd in 1713, when the participating members of the insurance arrangement formed a committee and underwriter
John Julius Angerstein acquired two rooms at the Royal Exchange in Cornhill for “The Society of Lloyd’s”.
The syndicate bought a RITC policy to pay any future claims; the premium was equal to the amount of the reserve.
However, usually the syndicate re-formed for the next calendar year with the same identifying number and more or less the same membership.
This chain consists of £55.2 billion of syndicate-level assets, £31bn of members’ “funds at Lloyd’s” and £4.9bn in a third mutual link which includes the “Central Fund” and
which is under the control of the Council of Lloyd’s.
Therefore, the amounts of money transferred from earlier years by successive RITC premiums to cover these losses were grossly insufficient, and the current members had to
pay the shortfall.
Even earlier, in 1974, the underwriter of R. W. Sturge syndicate 210, Ralph Rokeby-Johnson, who specialised in American industrial risks, bought “stop-loss” reinsurance from
Fireman’s Fund and Kemper Insurance in the US on Sturge’s pre-1969 exposures that were accumulating into the present.
Historian Eric Williams noted that “Lloyd’s, like other insurance companies, insured slaves and slave ships, and was vitally interested in legal decisions as to what constituted
‘natural death’ and ‘perils of the sea’.
The catastrophe halted the capital that hitherto had been pouring into Lloyd’s, and twice as many members left between 1965 and 1968 as had left over the prior eight years.
 The transfer (in two phases between 2007 and 2009) represented “finality” under English law for all affected Names, who now faced “no further liability whatsoever” to
the pre-1993 losses.
Some of the leading LMX reinsurers at the time that suffered serious spiral losses included the numerous syndicates managed by the Gooda Walker agency, Devonshire syndicate
216, Rose Thomson Young 255, R. J. Bromley 475, and Patrick Fagan’s already challenged Feltrim syndicates 540 and 542.
Unexpectedly large legal awards in US courts for punitive damages led to substantial claims on asbestos, pollution and health hazard (APH) policies, some dating as far back
as the 1940s.
Second, by the end of the decade, almost all of the market agreements, such as the Joint Hull Agreement, which were effectively cartels mandating minimum terms, had been abandoned
under pressure of competition.
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Photo credit: https://www.flickr.com/photos/cycletours_holidays/6325571510/’]