THE RHA REVIEW
Volume 1, No. 4, Third Quarter 1995

By Michael D. Jackson

In the first news from the London Line, Forebodings and a Funeral, I expressed concerns felt by many in the London market. Not surprisingly, though, many will not express those concerns openly. Little has changed in the last few months to alter the views of most pundits in London, or in the world, for that matter.

Lloyd’s is attempting to change things, the members of the insurance market (names) are attempting to change things, the legal fraternity is attempting to change things, people who know nothing about the market are attempting to change things — but the biggest problem of all is the simple fact that nobody can agree upon what "things" need changing. Even if the above groups were able to come up with the right solutions, would they be able to implement change in a reasonable time span? If changes are to be made, they need to be addressed sooner rather than later. Lloyd’s can be equated with a body that needs to be treated with radical modern surgery techniques, not by the current antiquated methods which are equivalent to using leeches for blood-letting.

During the last few months, much has been reported in the press about Lloyd’s and what has taken place in the London market. In fact, it seems that more has appeared about Lloyd’s and its problems than at any other time, including the scandals of the 1980s. I mention below a few of the recent events recorded in the press concerning Lloyd’s.

James Barclay, the chairman of Cater Allen, said recently that his 1993 prediction of a return to profit by 1995 had not been realized. Therefore, Cater Allen was pulling out of running some Lloyd’s syndicates.

Sir Adam Ridley, a director of Hambros Bank and a name at Lloyd’s, is to chair a working party that is responsible for finding an acceptable method of distribution of Lloyd’s’ £2.8 billion settlement. This settlement, negotiated in May, was intended to secure Lloyd’s’ future. It is calculated to be an offer of debt write-off and compensation to loss-making and litigating names.

Equitas (formerly known as Newco) is a limited liability company into which all the old year claims prior to 1986 would be funneled together with all syndicate reserves. This should mean that syndicates which continue to trade would be protected from all old year claims in policy years prior to 1986. If Equitas is to succeed, the amount of losses must be quantifiable, an immense problem. However, the creation of Equitas still continues to puzzle and amaze people. Some are getting the impression that Equitas will totally relieve the market of asbestos and other pollution-type claims. These claims will still exist. Can Equitas, however funded, pay all of the claims? Some believe that it may go "bust" first. These fears were expressed by names at their recent annual meeting. Heidi Hutter, the project director of Equitas, is leaving to head the North American operations of Swiss Re. Hutter says she will stay to see Equitas implemented. Lloyd’s had hoped she would stay as its chief executive officer.

Plans by Lloyd’s to change its accounting system from three years to one year have been delayed, another small setback.

Lloyd’s is to press ahead with plans for a system of "risk-based capital" under which the limits on the volume that can be underwritten by the names will be set according to the risks involved. However, despite Lloyd’s’ announcement of a timetable for the scheme, there are considerable fears about its practicability and its impact on profits.

Persuading names to pay up is becoming increasingly difficult. Some names owe more than £3 billion collectively. However, only 232 of the 15,000 or so defaulters have submitted to negotiations with the collectors, who have become known as "Rottweilers." Letters were being prepared in July in an attempt to recover monies owed. How many will pay? How many will not pay? How many cannot pay?

Lloyd’s has decided to stop admitting new American and Canadian names who reside in the U.S. This has been forced on Lloyd’s by the United States Securities and Exchange Commission after a dispute over the way the membership of Lloyd’s should be regulated in North America. This move brings to the fore the upheaval in the Lime Street marketplace, a marketplace that has lost more than £8 billion in recent years and is being viewed very carefully by U.S. regulators. At its peak in 1988, there were nearly 3,000 U.S. names, now there are about 750. Is Lloyd’s afraid of the U.S. legal system and the action that could be brought against it?

On a lighter side, some names have set up a company called Lloyd’s of London Limited, so that in the future any incorporated form of the insurance market could not use the title without some form of financial payment to its owners.

Lloyd’s is now predicted to have its total capacity reduced by nearly 16 percent for 1996, a reduction from £10.2 billion to £8.6 billion.

As an added disappointment to us all, there is now news that the government has angered a cross party committee of Members of Parliament by postponing for at least two years any reform of the way Lloyd’s is regulated. The Department of Trade and Industry is understood to have agreed to review Lloyd’s’ systems, but it has said the inquiry should not begin until the future shape of the market is clear. This is really a chicken-and-egg situation. Sadly, in this case, while everyone is talking about the riddle, the egg has cracked and the chicken has died of old age.

I remember an old expression that might be pertinent to the current situation: "It’s a bit like giving the keys of the asylum to the inmates." I leave it up to you to decide if these words can be applied to this situation. We have only to wait two years for the answers; then we will see who was right or wrong.