ON THE BRINK

Also by Andrew Duguid

CASE STUDIES IN EXPORT ORGANISATION (with Elliott Jaques)

ON THE BRINKHOW A CRISIS TRANSFORMED

LLOYD’S OF LONDON

ANDREW DUGUID

Text © Andrew Duguid 2014Archive Material © Th e Society of Lloyd’s 2014

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First published 2014 byPALGRAVE MACMILLAN

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ISBN 978-1-349-45266-8 ISBN 978-1-137-29930-7 (eBook)DOI 10.1057/9781137299307 Th is book is printed on paper suitable for recycling and made from fullymanaged and sustained forest sources. Logging, pulping and manufacturingprocesses are expected to conform to the environmental regulations of thecountry of origin.

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For my wife Janet, our children, Bruce, Leo and Jessamy, and their children

It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change

Charles Darwin

CONTENTS

List of Figures viii

List of Pictures ix

Preface x

List of Abbreviations xiii

1 Inside Out 1 2 Hidden Trains 31 3 Alarm Bells 67 4 Fresh Start 107 5 The Chasm 149 6 Last Chance 179 7 Struggling 211 8 Tightrope 241 9 Aftermath 27810 Reflections 315

Appendix 1: Businesses at Lloyd’s 330Appendix 2: Names’ Minimum Wealth and Deposit Requirements

1969–2002 333Appendix 3: The Evolution of Lloyd’s Governance 335Appendix 4: Lloyd’s Global Results for the 1980–97 Years of Account 340Appendix 5: Alternative Analyses 342Appendix 6: The Changing Capital Structure at Lloyd’s 1994–2013 346

Key Characters, Firms and Institutions 347

Chronology of Key Events 352

Glossary of Terms 355

Notes 359

Bibliography 366

Index 367

LIST OF F IGURES

1.1 Structure of the Lloyd’s market in 1986 51.2 Number of Names, 1953–95 112.1 Overall capacity and premiums at Lloyd’s, 1980–97 435.1 Overall results at Lloyd’s after personal expenses, 1980–96 1696.1 Propensity to litigate 2097.1 The NC’s final proposals for the allocation of debt credits 2378.1 ‘Members likely to support the plan’ 2699.1 Individual and corporate market capacity 2929.2 Overall results after personal expenses, 1997–2013 3049.3 The Equitas solvency ratio, 1996–2006 313

LIST OF PICTURES

1 The trading floor at Lloyd’s, known as the Room 4 2 Intended to impress: the Adam Room at Lloyd’s 13 3 The all-male 1985 Council of Lloyd’s in confident mood 24 4 Cartoon by Dave Gaskill 29 5 The 1988 Piper Alpha disaster 39 6 The 1991 Lloyd’s Task Force 79 7 Names’ Leaders 89 8 The Rt Hon Michael Heseltine PC MP and the

Houses of Parliament 160 9 The Law Courts, London and Sir Thomas Bingham,

Master of the Rolls 17710 David Rowland introducing the reconstruction plan to the

Lloyd’s market 19911 David Rowland explaining the reconstruction plan to

Lloyd’s members 20012 Cartoon by Richard Cole 21813 The 1995 Lloyd’s Council that adopted the reconstruction

plan 22214 Three phases of leadership 22815 David Rowland and his seven Deputy Chairmen 23216 Equitas: key people 28017 Recognition 28918 The Queen’s visit to mark the 325th anniversary of Lloyd’s 314 19 Reflections of the Lloyd’s building 31520 Women who helped change Lloyd’s 324

PREFACE

This is the story of how huge losses very nearly destroyed the world’s oldest and largest insurance market. Thousands of members were trapped, often facing unaffordable bills of a million pounds or more. This led to agony, outrage and self-help. New leaders emerged, formed action groups and sought justice from the courts. A complacent institution was forced to think again, repair some of the damage and reinvent itself. To confront its biggest crisis ever, Lloyd’s found inspirational leaders, hidden talents among its members and hired formidable experts. At times, the financial chasm looked too wide, the breakdown of trust too deep to be crossed.

How could this happen after ten years of reform? What were the causes of these huge losses? Was the disaster the result of fraud, incompetence or just bad luck? Could a way be found to meet the debts, renew the capital, restore enough trust to strike a deal and rescue the hardest hit? Could this be done within the constraints of the strict law governing insurance, in Britain and the US, and a highly competitive international marketplace? The response had to win over the members while retaining the confidence of regulators and customers. It also had to attract investors and retain market professionals, many of whom had tempting opportunities elsewhere. It was a Rubik’s Cube with little scope for trial and error.

In this book we uncover the sources and uneven impact of the losses. We see insiders’ reactions turn slowly from collective denial to desperation. We trace efforts to understand what had gone wrong, to design and put in place solutions. We see the power of joint action, the value of fresh thinking, over-turning centuries of tradition and self-serving conventional wisdom. We see a cultural transformation and discover new ways of running a market and over-coming conflicts of interest. We find members embraced in the search for fair treatment combined with practicality, and exhaustive examination of the stark alternatives. We see regulators wrestling to avoid a shipwreck. We join members in deciding whether to accept rough justice. We follow a new approach to the discharge of accumulated debt. Slowly, we see attitudes change and the common interest prevail.

xiPREFACE

Readers may query the relevance of a story that occurred nearly 20 years ago. Today, confidence in capitalism, government and financial institutions is at a low ebb. In my view, this story is relevant to many contemporary issues that remain unresolved in other markets. They have a very familiar ring: lev-els of professional competence, negligence, greed, perverse incentives and re-sponsibilities owed by insider managers to outside investors. Excessive rewards contrast sharply with disastrous results. They extend to the responsibility of governing institutions, the right degree of self-regulation and the role of gov-ernment. They illuminate the limits of tolerance, the power and limitations of anger, factionalism among rebels, the impact of the legal system, fairness versus commercial expediency, compromise, maintaining confidence, building trust and the critical role of leadership. In short, the issues illustrated by this story are reflected daily in the pages of today’s news and analysis in Britain, the US and most Western countries.

All of us approach a topic like this with a mixture of incomplete knowledge and partial opinion. Like the miners’ strike that occurred in Britain in 1984–5, the Lloyd’s crisis still raises strong emotions among those involved. My aim is to report the facts, expose a range of viewpoints and explain what happened. You will draw your own conclusions about this crisis: its causes, its impact, its handling and the lessons it holds. You will judge the response of groups and individuals. If your views change, even a little, then it will have been worth writing this account.

The historian Ben Macintyre tells us that Germans have a tongue-twisting word for coming to terms with the past: Vergangenheitsbewältigung. He says that it has been voted the most beautiful word in the language. It implies na-tional catharsis as opposed to nationalist pride, deliberate collective self-exam-ination, confronting causes rather than allocating blame. It is in this spirit that this book has been written.

It cannot be over-emphasised that the experience of each person who lived through this saga was different. For many, it meant a profound change of for-tunes, leaving a permanent scar on their lives; for others, it opened up new op-portunities. A few members have told me they were propelled towards new and rewarding careers as a result. Others re-evaluated their priorities, changing their whole outlook on life. Some relationships were destroyed; others were strength-ened. I am very conscious that the perspectives of many people on this story are very different from mine. I would be interested to hear from anyone who wishes to express their views or recount their experience of the Lloyd’s crisis.

Since readers will have different levels of interest in aspects of the story, an accompanying website, www.onthebrink.uk.com, contains extra material for

xii PREFACE

those who wish to read more. I hope to add something about the perspectives of others in due course.

I gratefully acknowledge the help of many individuals, the Association of Lloyd’s Members, and Lloyd’s in enabling me to write this account. Particular thanks are due to Dr Peter Martland, a Cambridge economic historian, who has helped me stay as independent as possible, and Dr Adrian Leonard, another Cambridge academic, who has helped me with research. I am also grateful to Thomasin Summerford for her illustrations.

AADLondon, 2014

LIST OF ABBREVIATIONS

ABI Association of British InsurersAIG American International GroupALM Association of Lloyd’s MembersANA American Names AssociationAPH asbestos, pollution and healthARC Assistance and Recovery CommitteeASL Additional Securities LimitedBAT British American TobaccoBH Berkshire HathawayBiC Business in the CommunityBIC Business Issues CommitteeCEA California Earthquake AuthorityCERCLA Comprehensive Environmental Response, Compensation and

Liability ActCFUS central fund in the USCSG Chairman’s Strategy GroupCSU Central Services UnitDAM Debt Allocation MatrixDoC Department of CorporationsDRs Document RequirementsDTI Department of Trade and IndustryE&O errors and omissionsEATF Equitas American Trust FundECG environmental claims groupEGM Extraordinary General MeetingEIL Equitas Insurance LtdEPP Estate Protection PlanFAIR Fairness in Asbestos Resolution BillFAL Funds at Lloyd’sFBI Federal Bureau of InvestigationFRC Financial Recovery CommitteeFRD Financial Recovery Department

xiv L IST OF ABBREV IAT IONS

FSA Financial Services AuthorityFT Financial TimesGAD Government Actuary’s DepartmentGB governing bodyGWAG Gooda Walker Action GroupHLSL High-Level Stop Loss FundHPG High Premium GroupICA Individual Capital AssessmentILV integrated Lloyd’s vehicleIRS Internal Revenue ServiceLATF Lloyd’s American Trust FundLCCA Lloyd’s Corporate Capital AssociationLIBC Lloyd’s Insurance Brokers’ CommitteeLLP Lloyd’s of London PressLMA Lloyd’s Market AssociationLMB Lloyd’s Market BoardLMC Lloyd’s Market CertificateLMCS London Market Claims ServiceLMX London Market Excess of LossLNA Lloyd’s Names AssociationLNAWP Lloyd’s Names Association Working PartyLNC Litigating Names CommitteeLRB Lloyd’s Regulatory BoardLUA Lloyd’s Underwriters AssociationLUAA Lloyd’s Underwriting Agents AssociationLUNMA (or NMA) Lloyd’s Underwriters Non-Marine AssociationMAM Mercury Asset ManagementMAP modified arbitration procedureMAPA Members Agent Pooling ArrangementMORI Market Opinion Research InternationalNACDE Names Action for Compensation and Defence in EuropeNAIC National Association of Insurance CommissionersNASAA North American Securities Administrators AssociationNC Names’ CommitteeNICO National Indemnity CompanyNMA Non-Marine Association of UnderwritersNYID New York Insurance DepartmentOFT Office of Fair TradingOGM Ordinary General Meeting

xvL IST OF ABBREV IAT IONS

OLS One Lime StreetOPL overall premium limitOPW other personal wealthPCW Peter Cameron WebbPIL premium income limitPNAG Paying Names Action GroupPRPs potentially responsible partiesPSL personal stop lossPTD Premium Trust DeedR&R Reconstruction and RenewalRAA Reinsurance Association of AmericaRBC risk-based capitalRICO Racketeers Influenced and Corrupt Organizations ActRITC reinsurance to closeSAFE Struggle Against Financial ExploitationSCU Specialist Claims UnitSEC Securities and Exchange CommissionSFO Serious Fraud OfficeSIB Securities and Investment BoardSID Settlement Information DocumentSOD Settlement Offer DocumentSoN Society of NamesSRO self-regulatory organisationTRO Temporary Restraining OrderVSG Validation Steering GroupWRG Writs Response GroupXL Excess of Loss

It was the best of times, it was the worst of times ... it was the spring of hope, it was the winter of despair, we had everything before us...

Charles Dickens, A Tale of Two Cities

1

INS IDE OUT

ON THE BRINK2

At an Extraordinary Meeting of Lloyd’s members held in London’s Royal Albert Hall in May 1993, a retired Englishman moved towards the micro-

phone. After commending the efforts of the new Chairman and Chief Executive, he said: ‘A man’s word is his bond, but it no longer is at Lloyd’s. There are 30 Names who have taken their own lives. Sir, with your permission, I want to have one minute’s silence.’

There were good grounds for disputing the number and the cause of these suicides. The Chairman simply added: ‘We should include in that minute all those who are facing problems with which they feel they cannot deal.’ Several thousand members bowed their heads.

***

Seven years earlier, all seemed well as Queen Elizabeth II opened Lloyd’s gleam-ing new stainless steel building in the heart of the City of London’s financial district. There had been scandals, but they were being dealt with. The new, multi-storey trading floor was a hive of activity. A huge expansion in member-ship was still underway. A new Council was busy making new rules, empowered by its own Act of Parliament. The Chairman, Peter Miller, was articulate, ener-getic and very bullish.

Coping with disasters is what an insurance marketplace is for: fires, earth-quakes, hurricanes, plane crashes and acts of terrorism. For decades, most of the several hundred syndicates at Lloyd’s were insuring these and other risks and declaring profits to their members. But soon after moving to futuristic premises, problems from the past began to emerge. These were much more gradual and insidious than an earthquake. Some were quicker than others to notice these trends. By 1991, nearly everyone was getting worried, angry or both.

Members of Lloyd’s were known as Names because their names were origi-nally listed at the bottom of the insurance policies they supported – ‘under-writ-ten’. In the early 1990s, many Names found that instead of receiving a cheque, they were asked to write one. Demands for cheques increased. Disappointment soon turned to anger. The men who ran Lloyd’s were at first unable to grasp or solve the crisis. New leadership was badly needed.

Outwardly, Lloyd’s seemed a respectable, settled institution, fixed in its ways, with a long history and shared values. But inside, on the trading floor – known as ‘the Room’ – it was a hothouse of changing fortunes. Its market players included real experts, weaker elements, a few rebels, the odd crook, con-formists, contrarians, innovation and opportunity. Individualism1 was a creed.

By contrast, its outside Names had little in common and almost no idea of what went on within. Under pressure of big losses, they turned out to contain a

INS IDE OUT 3

range of talents. Normally passive, Names found new ways of working together to protect their interests: all kinds of self-help groups sprang to life. Their story is as compelling as the changes in how Lloyd’s was run, and the character of their leaders every bit as critical.

Before the story can be told, the institution and its people must be intro-duced. The rest of this chapter describes Lloyd’s to those not acquainted with it. Most Names had no detailed understanding of the insurance business, nor is this required of the reader. Technical language is kept to a minimum.

THE TRADERSTrust – confident belief in or reliance on the character of somebodyHonour – a fine sense of and strict allegiance to what is due or right

The market began in Edward Lloyd’s coffee house, frequented by sea captains, ship-owners and merchants. Marine insurance was first transacted there around 1688: some merchants would offer to reimburse ship-owners for the loss of their ships and cargoes on a particular voyage, in return for a premium. Over the next 100 years, Lloyd’s, and London too, became pre-eminent in the shipping world. The market branched out to insure against fire, theft and many other hazards. Representing all sorts of worldwide clients, Lloyd’s brokers shopped around, buying tailor-made insurance policies from many specialist underwriters.

Originally, these underwriters took on risks exclusively for themselves. Later they formed syndicates that included others – family and close associ-ates at first – who put their wealth at risk in the hope of earning a profit. These Names played no active part in underwriting. Normally, they were quiescent silent partners.

Over more than three centuries of trading, Lloyd’s has seen good times and bad. The market gained a reputation for innovation and solid security, espe-cially in America after a dramatic response to the San Francisco earthquake in 1906: ‘Pay all claims in full, irrespective of the terms of their policies’, said the telegram from legendary Lloyd’s underwriter Cuthbert Heath, in many ways the father of Lloyd’s in the twentieth century, to his local agent.

As it grew, the Lloyd’s market moved eight times. Its latest home is striking. An innovative architect, Richard Rogers, won the competition to design it with a flexible concept, not a drawing. Often described as inside-out, it is like a glass and concrete cathedral on the inside, with trading floors stacked vertically, linked by conspicuous escalators. Outside are all the services – pipes, staircases and glass elevators. To celebrate the official opening, an entire vintage of Veuve Clicquot champagne was acquired.

ON THE BRINK4

Every day, thousands of brokers poured onto the new trading floors to strike deals with underwriters at their boxes, as their desks were known. The noise and bustle rose to a crescendo by late morning. At the rostrum in the centre of the room, with the glass atrium rising 12 floors above it, a waiter (so-called due to Lloyd’s coffee-house origins) announced a stream of messages. The brokers car-ried heavy leather slipcases with information about the ‘risk’ their clients wanted to insure – a factory, an oil rig or a group of doctors’ liabilities. Each risk was summarised on a paper ‘slip’. With a speed reflecting the level of trust between the parties, contracts were often quickly agreed after a brief, sometimes jaunty, exchange of words.

Much store was – and still is – set by the face-to-face encounter between broker and underwriter. They meet each other often – socially as well as in the Underwriting Room. The broker’s job is to get the best terms for his cli-ent; the underwriter tries to strike a deal that will make a profit for his syn-dicate. The two parties can often agree on contracts that serve both interests. That is the essence of any market.

Buying and selling insurance is unlike trading goods or everyday shop-ping. For a modest premium of a few hundred pounds, an insurer may be required to pay out millions of pounds in compensation to an accident victim. An underwriter takes on many contracts, expecting to pay large claims rarely. Normally he, in turn, insures his syndicate against unusual losses; this is called

Picture 1 The trading floor at Lloyd’s, known as the Room. Reproduced by per-mission of Lloyd’s

INS IDE OUT 5

reinsurance. If his claims are bigger than expected, he will be reimbursed by his reinsurer to the extent agreed in their contract.2 London – including both Lloyd’s and nearby insurance companies – is a world centre for buying and selling insurance and reinsurance. Relationships among insurers are complex: they may compete with each other for business; they may share in big risks; and they may reinsure one another. At Lloyd’s, all these transactions are done through brokers.

Figure 1.1 below shows the flow of business from clients on the left, through the broker, to Lloyd’s syndicates trading in the Underwriting Room. On the right is the control, ownership and the supply of capital to the syndicates.

InsuranceBuyers

CommercialClients

ReinsuranceBuyers

PrivateCustomers

IntermediariesCorrespondents

andCoverholders

worldwide

258Lloyd’sBrokers

371Syndicates

CentralServices

176Managing

Agents

234Members’

Agents

28,984Members

The Room

Flow of Business Supply of Capital

Figure 1.1 Structure of the Lloyd’s market in 19863

In 1986, the total amount of premium received at Lloyd’s from clients, via brokers, was a little over £5 billion, with a little under £4 billion paid out in claims. The full picture is far more complicated because of the many partici-pants and myriad contracts among them. Each of the main types of participant4 is described briefly below.

SYNDICATESIn 1986, 371 syndicates traded at Lloyd’s, ranging from small start-ups to the largest with a ‘capacity’ to accept £220 million of insurance premiums. Each was run by an ‘active underwriter’ and a small support team, operating from a box in the Room. A typical syndicate had a capacity of, say, £30 million and around 1,000 members. With a £30,000 share, or ‘line’, a Name would receive

ON THE BRINK6

one-thousandth of this syndicate’s profits or losses. Some had bigger or smaller shares. The underwriter was always a member of his own syndicate.

In the Room, each risk is first offered to a ‘leading’ underwriter, who may agree a price and take a share of the risk. Other syndicates are then invited to take further shares as ‘followers’.5 The ‘leader’ negotiates with the broker over the price, terms and conditions of the policy, and plays the main role in settling any claims. There is kudos in being a successful leader. Followers watch the results of leaders very closely. Dealing is brisk, as there are thousands of brokers, with plenty of slips, and hundreds of underwriters. News, rumours, gossip and jokes travel around the Room with astonishing speed. At lunchtime, the Room empties completely and all the nearby pubs and restaurants are crowded with these traders and their teams.

An insurance buyer normally knows more about his risks than the seller. For example, a car owner knows more about its state and his own family’s driv-ing habits than his insurer. In the same way, a direct insurer knows more about what he has covered than his reinsurer can possibly know. That is why, under insurance law, a buyer and his broker are required to tell the underwriter, in good faith,6 what they know about the risk for which they seek cover, otherwise the transaction would be unreasonably one-sided. If the broker misleads the underwriter, the contract is void, but if he deals regularly with him, the under-writer will rely on him for truthful information. The broker, in turn, will be fairly confident that when his client’s claims arise, they will be paid promptly, without too many quibbles. Relationships are built up over many years of trad-ing in the Room.

Brokers and underwriters were often introduced through a family connec-tion, and came from a variety of social backgrounds: public schools,7 grammar schools and those with less cultivated accents who had left school at 16. Colin Murray, who joined as a broker after a spell in the Army, saw variety as a source of strength: ‘It was a complete mix of men of every background. In the market I couldn’t give a damn if a chap was at grammar school, a bog-standard compre-hensive, or Eton, it made no difference to me. People were aware that some had large estates and others lived in the East End, but in the market it didn’t mat-ter.’ Murray spent ten years as a broker, ten as a deputy underwriter, ten as the ‘active’ underwriter of ‘Syndicate 510’ and finally ten years as the Chairman of his managing agency, Kiln. Like many agencies, it bears the name of its founder, in this case, Murray’s mentor, Robert Kiln.

Learning was by doing. In the 1980s, few underwriters had undergone for-mal professional training. Not many were university graduates. Most had started out young, often in a clerical role – either at the box or with a broking firm. Some had family connections. A few aspiring underwriters took Chartered Insurance

INS IDE OUT 7

Institute courses and examinations in their spare time to become Associates (ACII) or Fellows (FCII). Introduced to the Lloyd’s market by his brother, Bryan Kellett first worked for a broker. A grammar-school product without a univer-sity degree, he looked for an edge over his contemporaries. He heard about ACII qualifications, studied, took the Part 1 exams, and won the Institute prize. On the strength of this, he was offered his first job on a Lloyd’s underwriting box. Soon he became a leading underwriter. Eventually, he secured broker support for set-ting up his own syndicate. Later he became President of the Chartered Insurance Institute, Chairman of the Lloyd’s Underwriters Non-Marine Association (LUNMA or NMA) and was elected to the governing Council of Lloyd’s.

Most underwriters specialised in certain kinds of business. Although what they knew had been learned on the job, rather than through studies, the accu-mulated expertise of the best was formidable. Some leaders built worldwide reputations for their in-depth knowledge, sometimes of esoteric subjects. Hugh Jago was said to know more about Chicago’s drains than the city authority itself, having insured them for 20 years. Tony Medniuk knew the safety records, cul-tures and procedures of the world’s leading airlines. At the other end of the spectrum, some underwriters were completely out of their depth, entering fields for which they were unqualified by intellect or experience.

Knowledge was one route to success. Another was flexibility. It was a matter of pride that practically any risk could be underwritten at Lloyd’s, including the legs of an actress or a wine-taster’s nose, or pioneering on the frontier of tech-nology through oil exploration rigs, satellites or nuclear energy. Underwriters were open to persuasion to look at something new or in a new way, often citing the old maxim: ‘There’s no such thing as a bad risk, only a bad rate.’ In this spirit, new kinds of insurance contract were invented. Varying in size and char-acter, Lloyd’s syndicates were generally small enough for one man to exercise tight control over the business. Some were collegiate, holding a team meeting to review each day’s trading, sharing information and instilling a collective sense of responsibility for performance. Others were run more secretively: one under-writer would not allow his deputy to see the claims record of the business he wrote. Some did not allow the use of first names. In 1986, very few employed women.

MANAGING AGENTSUnderwriters are employed by firms called managing agents. Like lawyers, under-writers are notoriously hard to manage; those who have tried it often liken it to herd-ing cats. The job requires an independence of mind that resists interference. Some were dominant personalities within their own firm. Robert Kiln was chairman

ON THE BRINK8

of the managing agency he founded, and its chief underwriter until 1974, when he handed that role to Colin Murray. When he stepped down, the Kiln agency ran seven syndicates. Stephen Merrett doubled as the agency chairman and chief underwriter for the Merrett group, in which he was also the largest shareholder.

When Robert Hiscox took over his father’s managing agency, Hiscox, it was small and precarious. It had suffered while his father, Ralph, had given prior-ity to his other role as Chairman of Lloyd’s. Robert says: ‘We had lost money for five years running. We had only 17 Names, and were frightened of every handwritten letter we received, in case it was a resignation.’ He built a team in which each member focused on particular areas and encouraged brokers to join his syndicate. He found that: ‘If I said “no” to a broker a lot, he backed me. That strengthened my resolve to underwrite sensibly.’ His Syndicate 33 gained in reputation; with good results and low fees, it built a following among working Names. When he retired in 2013, Hiscox Ltd had an annual turnover exceeding £1.6 billion and an enviable reputation.

Another large managing agency, Sturge, had been acquired from its found-ing family. It was built up by David Coleridge and Ralph Rokeby-Johnson and floated as a public company. Merrett planned to float too, but a few years later it sank. At one stage there was concern in the market about the growing domi-nance of these two agencies. Ten years later, both were gone. From 1986 to 1996, the fortunes of the top agents and syndicates8 were transformed. Others took the place of the biggest. Historically, many agents had been owned or control-led by brokers. But in 1982, concern about conflicts of interest led the British Parliament9 to require brokers to sell their stakes in managing agencies. This was called compulsory divestment.10

LLOYD’S BROKERSOnly accredited Lloyd’s brokers can enter the Room. Most did not trade exclu-sively with Lloyd’s syndicates, but also with insurance companies – some domestic, many foreign-owned – operating in the nearby district. The bigger brokers brought around 40 per cent of their business to Lloyd’s. A large brok-ing firm contained many specialist divisions: reinsurance and direct business; North American and other continents; marine and non-marine; liability and property and so on. Smaller brokers specialised in fewer fields. Most risks origi-nated overseas and were first handled by a local broker based near the original client. The client paid a commission to its local broker and to the London broker with access to Lloyd’s.

The US was the biggest overseas market for Lloyd’s, providing around one-third of its business. The larger American brokers disliked sharing

INS IDE OUT 9

commission. In the 1970s and 1980s, they wanted to own brokers in London. At first rebuffed, eventually their offers were too much to resist. After a long courtship and a failed hostile takeover, Marsh & McLennan bought C.T. Bowring, the second-largest London broker, in 1980. Several Bowring brokers left to set up their own businesses. Alexander & Alexander’s acqui-sition of Alexander Howden uncovered a scandal, which is discussed later. Willis Faber – the largest marine broker in London – eventually merged with another US company to form Willis Corroon. Sedgwick grew to be the largest British-owned broker.11

The leading figures among the brokers were all members of Lloyd’s and were well-known there. A few became involved in running it: Peter Miller, Chairman of T.R. Miller, was Chairman of Lloyd’s for four years from 1984. David Rowland, Chairman of Stewart Wrightson, later Sedgwick, was first elected to the Council of Lloyd’s for 1987–90. Other brokers became deputy chairmen. Philip Wroughton, Chairman of Marsh UK, was elected to the Council in 1991. The Lloyd’s Insurance Brokers’ Committee (LIBC), a powerful trade association, concerted brokers’ views, making sure Lloyd’s knew them. Lloyd’s rules required all transactions to involve a broker, paid by commission or fee, even when one syndicate was reinsuring another. These arrangements were vigorously defended through the LIBC, whose members preferred Lloyd’s as their regulator. Lloyd’s was – and still is – seen as the quintessential brokers’ market.

Traders in the Room are very observant. Some brokers are seen as the big beasts of the jungle, looking out for prey. Others are smaller and less colour-ful; some are thought sneaky. The slightest signal is noticed: a lowered tone of voice, unusual body language. When they engage with an underwriter, there are outward rituals to be observed. Negotiation is something of a contest, framed within well-understood conventions. The broker often begins by addressing the underwriter as ‘Sir’, sometimes a little theatrically. Information is exchanged and evaluated. Decisions are often reached quickly. Once made, they are always adhered to. The story is told of a broker who queued late one afternoon to see a well-known underwriter, who had to leave just before a deal could be negoti-ated. That night the vessel sank. The next morning, the broker explained his dilemma. The underwriter looked him in the eye and asked for a categorical assurance that he had been in the queue. On receiving this, he said he would write it, back-dating it to the time at which he would have written it the night before. The ship was covered and the claim was paid. This was described to the author as ‘Old Lloyd’s at its best’.

***

ON THE BRINK10

Underwriters need to concentrate hard. A day in the Room can be exhausting. A single unwise decision on a big risk can have massive consequences. Some people had enviable reputations: their stock could rise and fall, usually built up over many years of consistent trading, patiently developing in-depth knowledge and making steady profits. Some people had reputations as weaker elements; a few were known to display less judgement after a good lunch. A few underwrit-ers made excellent mentors. Andrew Beazley and Bryan Kellett were trained by Charles Skey, widely regarded as one of the market’s best. But in the absence of proper qualifications, dodgy or indifferent underwriters also tended to replicate themselves. One was nicknamed the ‘Nodding Donkey’ because he always said yes. The result was inevitable.

Dealings between brokers and underwriters were not just a matter of knowl-edge or technique. One senior figure says he had to choose between two talented underwriters. He selected the taller, on the grounds that when an important broker came to the box, it was necessary to stand up and not be dominated. Another describes the engagement as a bit like a game of rugby or contesting barristers in the adversarial system – ‘very British’.

Underwriters and brokers each employ specialists, like claims-handlers, who work closely with outside lawyers and loss adjusters based in Britain, the US and elsewhere. The pugnacious Jim Teff, for example, Head of Claims for Janson Green, trained as a lawyer and became a recognised market expert on US liabilities. Chris Ventiroso, Claims Director at Murray Lawrence and Partners, trained as a reinsurance specialist. Efficient claims adjustment and payment forms an important part of the market’s reputation. Because many syndicates share in each risk, co-ordination across the market is usually needed.

Claims issues can sometimes be contentious. Where a conflict may exist, a claims broker acts as the agent of the insured client. His dealings with leading claims-handlers are a bit like those between a broker and an underwriter: a con-test between professionals, framed by conventions. A claims man (or woman) who flouts the norms will quickly acquire a bad reputation. Other professionals play key roles at Lloyd’s: accountants, lawyers, IT specialists and so on. Many non-professional support roles outside the room – secretarial and clerical – brought employment in the Lloyd’s market to around 30,000 in the 1980s.

THE NAMESWho were the people that joined as Lloyd’s members, usually as silent partners? The terms ‘members’ and ‘Names’ are interchangeable. Those who worked in the market, called working Names, comprised around 15 per cent of all mem-bers in 1986. Generalisations about Names are dangerous: no two person’s

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circumstances are the same. Until the Second World War, many of the 2,000 Names had close ties with someone working at Lloyd’s. Numbers grew, but after losses caused by Hurricane Betsy in 1965, they began to level off at around 6,000. They included a high proportion of ‘old money’. Lloyd’s appointed Lord Cromer, a former Barings banker, Ambassador to the US and ex-Governor of the Bank of England, to chair a working party to recommend ways to resume growth. It was made easier to join Lloyd’s: minimum wealth requirements12 were reduced and overseas members13 and women were introduced.

By the mid-1970s, all kinds of financial advisers were encouraging middle-class clients to consider joining Lloyd’s. Many lawyers, accountants and other professionals became members. Adam Ridley, for example, wanted to supple-ment his limited income when working in the Conservative Party Research Department. He owned some farming assets and was advised that he could make a return on them at Lloyd’s. Michael Deeny thought he could add a more reliable income to the fluctuating successes and failures of the rock concerts he promoted, as impresario for Bruce Springsteen, U2, Nirvana and others. Most new members had limited interest in insurance; they just wanted a use-ful return on their money. Richard Spooner’s interest was unusual: ‘I was just starting a new business. I’d always been interested in insurance, but I had very little knowledge of how it worked.’14 Encouraged by his brother-in-law, he joined for the 1985 year of account, along with three more brothers-in-law, and his mother-in-law. Membership peaked in 1988 at 33,500. After that the resigna-tions greatly exceeded the trickle of new entrants.

0

5,000

10,000

15,000

20,000

25,000

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35,000

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

Figure 1.2 Number of Names, 1953–9515

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MEMBERS’ AGENTSEach member was looked after by his members’ agent, a little like having a per-sonal stockbroker, on whom he would rely heavily for guidance in the arcane ways of Lloyd’s. Some were flamboyant characters. John Donner, for example, toured Australia and New Zealand in a Rolls Royce, a signal that one could do well out of Lloyd’s. He recruited John Stace, an enthusiastic New Zealander, who eventually moved to Britain, fell out with Donner and established his own members’ agency, Stace Barr. Robin Kingsley ran the Lime Street members’ agency. The son of a stock-broker, he first worked as a junior on a marine underwriting box, then became a broker before his role as an agent. He had strong connections with the world of ten-nis, first approaching some tennis stars, it was said, in the changing-room baths.

In the 1980s, John Gordon ran one of the largest members’ agencies, Sedgwick, owned by one of the big brokers. Respected as thoughtful, ethical and considerate, Gordon did charity work at weekends in his native Dublin. He wore a small cross on his lapel, giving him a slightly priestly quality. Nigel Hanbury was a serving soldier when his father said he should become a member of Lloyd’s and gave him the money to do it. He joined at 21, the minimum age. Profits began to flow and he thought: ‘I’m getting cheques bigger than my salary, I’d bet-ter become a broker myself.’16 A few years later, after working for two large bro-kers, he joined Sturge and ‘learned the ropes about how to be a members’ agent’. He made many six-week business trips to the US, where he ‘travelled to various cities seeing a great many people. I did the mid to west coast, we would go out to our various stations where introducers would line up suitable people. You’d talk them through it. If they wanted to take it further, they would have to fly over here [to London] and do their verification meeting, and have it all explained. The introducers were generally highly respected people in their communities’.

Before 1960, managing agents dealt with their own Names, who were allowed only one agent for each main class of business. The role and number of specialist members’ agents grew in the 1970s in line with the growth of the membership. Some were independent, while others were owned by managing agents or by brokers. By 1982, there were 270 members’ agents.17 They began to consolidate: ten years later, there were 83 and by 2013, there were only three.

Some members’ agents came clean about the risks; others were much less forthright. Some were later accused of being downright misleading. When one Name asked about the impact of a catastrophe, he was told it was ‘only a gin and tonic’. By contrast, Peter Green, for emphasis, used to ask a prospective member to get out his cheque book, sign a cheque, made out to him, leaving the amount and date blank. He tucked it in his shirt pocket and said that was what member-ship of Lloyd’s amounted to. This was highly unusual.

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JOINING UPOutside Lloyd’s, Names were often inaccurately described as investors. Each was a ‘sole trader’, carrying on the business of insurance. All sole traders have unlimited liability; it was not unique to Lloyd’s. It is the historic form of trading, still used today by barristers and by many other professionals then. The combi-nation of insurance, with its potential for big claims, and unlimited liability was to prove disastrous for many Names.

From 1978 onwards, each new member was required to sign a ‘verification’ form,18 confirming that he had understood the key features of membership, including unlimited liability and a warning that losses could be made. This was first introduced on the advice of Lloyd’s perceptive US General Counsel, who believed it would ‘reduce the risk of disgruntled US members bringing private lawsuits against their underwriting agents under the US Securities Act of 1933’. The influence of US laws and customs on Lloyd’s is a recurring theme in this story. Names’ agency agreements with their agents provided for disputes to be subject to English law in English courts or London arbitration. From 1986, it became a condition of underwriting for all Names to sign an agreement with Lloyd’s, the General Undertaking, whereby they agreed that any dispute in con-nection with their membership or underwriting at Lloyd’s should be decided in the English courts subject to English law. Years later, some US Names fought repeatedly for a US court hearing, arguing that their rights as US citizens had been violated.

Picture 2 Intended to impress: the Adam Room at Lloyd’s. Reproduced by per-mission of Lloyd’s

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The admission process led to a ‘Rota’ interview with a Lloyd’s elder states-man. Each new member dressed smartly for this important occasion, held in the Adam Room, an elaborate eighteenth-century masterpiece. Intended to impress, it had been transplanted from an historic English country house into Lloyd’s modern buildings. The interview acted as a check that the individual had been properly informed about Lloyd’s and the risks and responsibilities he was about to take on. Lloyd’s set much store by this safeguard; even overseas members were required to attend in person. Only a tiny handful of exceptions were made for those physically unable to make the trip. Toby Jessell was a busy MP who nearly became a member in 1988. He had signed all the papers when invited to his Rota interview. He felt it unnecessary and could not spare the time. When Lloyd’s insisted, he suggested a Deputy Chairmen should visit him in the House of Commons instead. Lloyd’s would not depart from procedure. Jessell considers himself to have had a lucky escape.

In December 1986, after much delay, Lloyd’s published Membership: The Issues,19 setting out the risks very explicitly. By then, the great boom in membership was nearly over. Years afterwards, insiders recalled the warnings given at Rota interviews as clear, solemn and unmistakable. Some Names recalled the interview very differ-ently, saying their agent had winked at them, plied them with wine beforehand and generally made light of the procedure. Some claimed it had been hard to take seri-ously the ‘old buffoon’ who conducted it: he was just ‘going through the motions’.

Diana Wallace was one of a dozen20 at her Rota interview in 1984. Later, in a letter, she recalled the moment when the ‘Very Important kind of Beak Person’ from the Lloyd’s hierarchy explained matters and invited questions. She had the temerity to ask if membership ‘could involve forfeiture of all one’s earthly treasures – pic-tures, books, furniture, bits and bobs generally, and just about everything one holds dear?’ ‘Who is this lady?’, came the response. Her agent spoke up. The elder states-man said: ‘I think, Mrs Wallace, your interests will be well attended.’ No more was said. Afterwards she received a ‘wounded and rather indignant telephone call’ from her agent, who told her that it was ‘unheard of’ for a Name to question the VIP and that it had not been a very clever thing to do. ‘Silly me’ she wrote, eight years later, facing huge losses, ‘at least I made some attempt to fly the flag of sporting challenge over the unnerving scene of my decimation.’ She wrote to suggest that ‘this form of mesmeric intimidation’ might in future be ‘less of an admonitory lecture and more of a helpful exchange’. She said the pomp and mystique ‘made even the agents quite jumpy, as though it was Prize-Giving Day’ and totally overcame its purpose of con-veying a clear understanding of the commercial venture involved. Another member who joined eight years later said it felt a bit like going to church: ‘We might as well have been at Buckingham Palace, I could not have felt more reassured.’

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At the final stage of ‘election’ to membership, the list of prospective Names went to the Committee of Lloyd’s for approval. A mahogany box was carried around the table by a waiter. Each Committee member voted by solemnly plac-ing a white marble through a hole in the box, where it fell with a loud clatter. Very occasionally, a new member was turned down – or blackballed – because some previous dealings had cast doubt on his reliability. Almost invariably, though, the balls were dropped into the slot marked ‘yes’, meaning that another batch of Names were formally admitted and on the hook, for better or worse.

The Rota interview also checked that the prospective Name had understood how past liabilities were dealt with at Lloyd’s.21 Intense debate surrounded this later: many Names claimed never to have understood it. You could inherit lia-bilities written long before you joined. They could follow you to the grave and beyond. Few Lloyd’s members – even insiders – understood just how unending and lethal these could be. Unlike a shareholder in a conventional company, the new member’s liability was unlimited: everything he or she owned was now at risk.

People were encouraged to think of Lloyd’s membership as a long-term commitment, the very opposite of making a quick gain. New members had to be patient. Historically, Lloyd’s insurance of ships and cargoes involved long sea journeys; as a result, it could take time before the extent of any losses was known. Lloyd’s operated a unique accounting system: each syndicate’s year of account remained ‘open’ until three years had elapsed. Only then was the profit or loss determined. As Lloyd’s business broadened, this accounting system was also used for other insurance categories, like fire, property and theft. But where liabilities22 are insured, it can take much longer than three years for the true value of claims to emerge.

Liabilities reflect the duties that people and firms owe each other. All driv-ers are required to have liability insurance, so that an accident victim can be adequately compensated, no matter how impecunious the driver who hits them. In a complex society, insuring liabilities is big business. Compensation levels are often established by court judgments or compromised on the courtroom steps, and can take many years to be sorted out. The 25,000 Names who joined Lloyd’s during two decades of growth did not realise that a time-bomb of ‘latent’ liabilities was quietly ticking in the US.

SYNDICATE SELECTIONIt was often said that a Name’s most important decision was his23 choice of mem-bers’ agent. A few Names met several and chose carefully, but many met only

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one, often through a relative or a personal adviser. They did not realise that com-mission was often paid for these referrals. For many people, inexperienced in the ways of the City or Lloyd’s, it would have been awkward to ask to meet other agents. They were grateful to have met one at all; he seemed personable and helpful. Many felt flattered or lucky to have been approached. They were driven on by very high tax rates on income earned elsewhere and the prospects of good returns at Lloyd’s, encouraged by their new best friend.

Names depended on their members’ agent to find their syndicates. This would determine their fate: like the game of Snakes and Ladders, you could mount a financial ladder and do well, or climb on the back of a long slippery snake, from which it could become impossible to escape. Each members’ agency had its own approach. If part of a ‘combined’ agency,24 like Sturge, the new Name’s portfolio would start with the ‘in-house’ syndicates, operated by the group. An independent or broker-owned members’ agent would have estab-lished relationships, providing Names to syndicates they knew well. There were many complaints from new Names about access to the more profitable syndicates. A balanced portfolio would include lower-risk syndicates to offset the riskier ones. But some Names, including those joining through Kingsley’s Lime Street Agency, found themselves with a ruinous concentration of high-risk business.

Some agents took care to introduce the new member to his prospective underwriters. New members tried to assess their characters on the basis of these brief encounters. Occasionally they backed off quickly, but most of the time they felt reassured. When Donald Cameron joined through Sturge in 1991, he recalls meeting ‘smooth well-spoken gentlemen in very well-cut suits’. By then, losses were apparent elsewhere. They mentioned ‘bad publicity’, but assured him ‘with us you are absolutely safe, we have reinsured against all this, you have nothing to worry about’. They believed it and so did he. They were wrong.

THE ASSOCIATION OF LLOYD’S MEMBERSIn the late 1970s, Lloyd’s attracted publicity through scandals and high-profile members. The British press is especially interested in writing about the royal family, aristocrats, descendants of national heroes, wealthy foreigners, pop stars, tennis stars and so on. All of these categories were well represented among Lloyd’s Names, together with 60 members of the House of Commons and 230 members of the House of Lords. However, the vast majority of those who joined during the big expansion were not celebrities; they were middle-class people who wanted to earn an extra return on their relatively limited capital. Frequently their main asset was their home. Although this was not admissible, a bank

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guarantee, secured on the home, was fine. The minimum required wealth for external British members to ‘show’ was only £50,000 from 1970 to 1984, when it was increased to £100,000. In 1988,25 the overall premium limit (OPL) for a Name showing this amount was £250,000; the deposit required was £50,000 or 20 per cent of OPL for British residents and 28 per cent for residents elsewhere. The changing requirements are shown in Appendix 2.

The high-profile element of Lloyd’s membership meant that when problems occurred, they could be guaranteed plenty of public attention. Apologists might say that a rapidly expanding market was likely to produce the occasional exam-ple of excessive greed or dishonesty. Lloyd’s authorities had to deter, detect and punish these breaches. Some offences were isolated; others appeared to reveal more widespread flaws in the structure, culture or levels of competence and honesty.

As membership grew, scandals occurred and attitudes changed, members felt the need to band together. One group formed around the Sasse26 affair and another around the new Lloyd’s Act and the creation of the first published set of ‘Lloyd’s League Tables’. Until their publication, members knew only the results of the few syndicates which they had joined. This new analysis was led by John Rew and Charles Sturge for the 1977 and 1978 results, published in 1981 under the name Chatset. John Moore, then a Financial Times (FT) jour-nalist, described it as a move which ‘has left the Lloyd’s establishment purple with rage’. The figures showed Ian ‘Goldfinger’ Posgate topping the charts. His members would receive a cheque for £2,000 for each £10,000 line. Posgate had underwritten a larger amount of premium than the rules allowed, but there was a clamour to join his syndicate.

After some initial rivalry, the two groups merged to form the Association of Lloyd’s Members (ALM). In 1983 a Conservative MP, Tom Benyon, became its first Chairman, with nearly 1,000 Lloyd’s members. An early newsletter defined its aims as being to improve the understanding of Lloyd’s among members, to represent their collective views, to help select external members standing as can-didates for the new Council and to provide a link to them. In 1985, Benyon was succeeded by Anthony Haynes, who was determined to make the ALM a still more effective voice. He thought Lloyd’s did not always give enough care to the providers of its capital: ‘But if we are to play a more active part as Names, our role must be constructive and positive – working with, and not against, the sys-tem.’ In 1987, he clashed with the same journalist, John Moore, who accused the ALM of becoming too cosy with Lloyd’s. Haynes disagreed: working behind the scenes, they had achieved nearly everything they sought. As the crisis unfolded, conflict developed between groups of Names and Lloyd’s. By contrast, the ALM was consistently moderate in its approach. Its influence steadily increased.

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THE CORPORATIONIn the original coffee house, waiters served traders. Gradually their duties extended. When the new building was opened, 90 waiters, still wearing tradi-tional uniform, looked after security, took messages and performed other duties. They were nearly all men, with a tradition of long service and a strong sense of comradeship. The few remaining are still conspicuous. Only a small num-ber of other staff, working under a secretary, were employed by Lloyd’s in the nineteenth century. When the Society of Lloyd’s was incorporated by the 1871 Lloyd’s Act, the central body and its staff became known as the Corporation. In the twentieth century, its role expanded.

By 1986, the Corporation employed around 2,000 people. Several senior officers had been recruited from outside Lloyd’s, from both the private and pub-lic27 sectors. Among its middle and junior ranks, staff turnover was low. Many people had worked there all their life. Newer recruits included accountants, spe-cialists in IT systems, lawyers and other professionals.

The Corporation provided services to the market and supported its self-regulatory machinery. Departments checked and issued Lloyd’s policies,28 set-tled claims in the marine market,29 registered each agent, collected syndicate data, produced ‘global’ reports showing overall financial results for the market, managed the premises, operated the central accounting system enabling the flow of money between brokers and syndicates, and provided computer sys-tems. Lloyd’s representatives in various overseas markets stood ready to accept service of suit on behalf of syndicates. They also helped to ensure that Lloyd’s complied with local rules. Their supervision was made difficult – sometimes comically so – by Lloyd’s tribal habits.

To a complete outsider, these various groups – underwriters, brokers, man-aging agents, members’ agents, claims specialists, accountants, waiters, support staff and the Corporation employees – were all part of the ‘Lloyd’s Community’, a phrase that was often used when the speaker wanted to emphasise its unity of purpose. To a Name, who in his main life was far removed from the market, all of these people were loosely seen as ‘insiders’. But whether being extolled or crit-icised, the notion of a single community of insiders was an over-simplification. Lloyd’s in the 1980s was seriously tribal.

TRIBALISMWithin the underwriting market were well-defined tribes: marine, non-marine, motor and aviation markets, each with their customs and their separate market associations, provoking strong loyalties. They argued over matters like space in

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the underwriting room. Tradition had it that the marine market, as the ‘senior’ market, enjoyed the ground floor. In the new building, this was a big trading advantage – resented by others, not least because the distinction between marine and other syndicates was increasingly blurred. In the previous building it was just about possible to see everyone at once: the non-marine market was on a gal-lery surrounding the others on the ground floor. In the new building, each floor was a separate world. To reach the upper galleries, a broker had to take a lift or ride slowly up several escalators. The architect called the glass lifts and escala-tors a ‘celebration of movement’. Busy brokers found them painfully slow.

The traditional marine world was in decline: shipping volumes fell steeply in the 1970s and 1980s. Marine underwriters looked elsewhere for expansion. Encroachment became an issue. Non-marine specialists thought marine under-writers lacked the expertise to rate ‘their’ risks properly. Non-mariners also thought the bigger ‘lines’ taken by large marine syndicates symptomatic of a less collegiate approach. The main walkway between boxes that led from the front door was known as ‘alphabet alley’ because it contained underwriters Agnew, Brockbank and Charman. It was also known as ‘ego alley’.

Attitudes towards members’ agents illustrate another tribal distinction. The members’ agent who understood the trends at work in different market sec-tors, building relationships with a range of underwriters, could serve his Names’ interests well. Some approached this in a professional manner, developing an in-house capability for analysis. Stace Barr, for example, grew rapidly from a start-up with a second-hand desk to one of the largest in ten years. But the gen-eral view of members’ agents among underwriters was not respectful: some did not conceal their contempt for this ‘lesser breed’, especially if asked what they saw as cheeky questions about their performance or aggregate exposure to risk. When new syndicates were formed, underwriters were keen to secure support from members’ agents. Loyalties and resentments were built up. Years later, John Charman, a successful underwriter, recalled his supporters fondly, refusing to deal with some who had been unhelpful in his early days.

On the trading floor, the sharpest tribal distinction was between under-writers and brokers. As the source of all business, some underwriters felt the need to cultivate brokers, but to stay on their guard. They were seen as the sales-men, the smooth talkers, making light of difficulties. Many underwriters had started life as brokers. They understood attempts to talk them into taking a risk at too low a price or on too generous terms. Some brokers were seen as always looking for weakness; sadly they often found it on another box. They called you ‘Sir’ by convention, but not necessarily out of respect.

In the 1980s, most senior and middle-ranking brokers were themselves underwriting Names. Their juniors aspired to be Names. Many broking firms

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encouraged this, often providing interest-free loans. Any broker who was a Name wanted his syndicates to be profitable. To insiders, this shared member-ship was part of the glue that held the whole system together.

To brokers, some of the underwriters seemed arrogant and vain. A few were seen as lazy. It was necessary to show them a little deference. Added flattery often paid off. If one wouldn’t take on a dubious risk, another often would. Particularly in the late 1980s, with burgeoning capacity, someone, somewhere in the Lloyd’s mar-ket would take on most risks. Danger lay where underwriters accepted hospitality from brokers; most were careful to avoid anything excessive, but a few were not.

There were many cross-currents: ownership issues, membership issues, rivalries, close bonds and cold shoulders. The concept of reciprocity is central. Favours tend to be returned with a favour. Thus, a broking firm that brings val-ued business may be offered a chance to place important reinsurance contracts on behalf of the underwriter, thereby earning commission. Underwriters’ atti-tudes towards brokers were a little schizophrenic: the source of business but also the source of much that was wrong. Brokers had plenty of complaints about the market too: old-fashioned, cumbersome claims procedures, too many small syn-dicates wanting small shares and heavy transaction costs. A big complaint from both sides was the flow of money: it moved like glue on its way from client to underwriter, while the broker earned the interest. Claims payments to clients were said to suffer the same fate. Brokers countered with complaints about delays in authorising payments. If one talked to a group of underwriters on almost any subject, within minutes they would start on the iniquities of the brokers and vice versa. All markets generate attitudes like this until they face a common threat.

There was one thing upon which the more extreme among these warring tribes could all agree: a belief that the Corporation was a bloated bureaucracy. To many, it was beneath contempt. It had grown unjustifiably. Staff were seen as uncommercial, some were seen as self-aggrandising. Their job titles were a bit of a joke, from ‘Chief Executive’ downwards. The ‘regulation’ of the market they attempted to provide was ineffective and misplaced, and was often aimed at the wrong targets. They lacked respect for trading skills. Corporation staff were spoken of collectively, and a little contemptuously, as the ‘civil service’. To many, it was the ‘f***ing Corporation’, its requests resented as a burden on the free operation of the market. This might sound like an over-sensitive caricature, but tribal instincts and stereotypes were at work.

Many underwriters felt as much loyalty to their tribe as to Lloyd’s itself. Claims specialists felt under-regarded by underwriters; everyone poured scorn on lawyers. Non-marine underwriters saw themselves as the true insurance pro-fessionals; to them, the mariners represented the past, still clinging to residual privileges. Mariners resented them as jumped-up Johnny-come-latelies. Aviators had their own sense of distinctiveness and self-importance, as did motor

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underwriters. Many of the underwriting associations’ staff had occupied their positions for a long time. Defenders of the rights and privileges of their sectional interests, they imbibed and shared the market view of the Corporation, some-times echoing their masters with extra stridency.

Many of the Corporation staff reciprocated. Often suspicious of the entre-preneurial market culture, they thought differently and ate in a separate, sub-sidised canteen. Long-serving staff were used to this. Newer recruits found the attitudes they encountered much harder to take. Among the hundreds of syndi-cates were odd exceptions. One aviation underwriter, John Tilling, had started out as a corporation employee. He was always approachable. Less rare was the migration of qualified Corporation staff to better-paid jobs in the market. A few individuals built bridges across the cultural divides. Lloyd’s first Chief Executive, Ian Hay Davison, battled hard to break down what he referred to as the ‘green baize door’ separating the market and the Corporation, with some success at the senior levels, but much of the time, a ‘them and us’ attitude pre-vailed on both sides. This gulf contributed to Lloyd’s inability to see and act on the problems that lay hidden below the surface.

New agents often lacked the arrogance of long-standing colleagues. For example, Andrew Beazley and Nick Furlonge set up shop in 1986 with a rented room and second-hand furniture. They were too busy creating a business to worry about old tribes. They were glad of any support, cultivating contacts wherever they could. They were part of a newer breed that helped Lloyd’s to shed its skin. Over the next two decades, Beazley became the third-largest man-aging agency at Lloyd’s with a turnover exceeding £1 billion. Stephen Catlin, John Charman and Mark Brockbank were among those who started businesses that began on a very small scale and rapidly established strong positions in the market. They preferred making money to tribal warfare.

Humour plays a big part in life at Lloyd’s. A cynical underwriter, Ralph Rokeby-Johnson, came up with unflattering nicknames for every well-known personal-ity in the marketplace. He described the Chief Executive as having undergone a ‘Charisma Bypass’. His demeaning nicknames included the compliant ‘Nodding Donkey’. ‘Time Bomb Terry’ described someone (correctly) thought to take exces-sive risk, while ‘Judas’ was used for someone who once switched allegiance. Others included the ‘Sewer Rat’, ‘Fly Button’, ‘Mission Impossible’, ‘Liberace’, the ‘Flower Arranger’, the ‘Tailor’s Dummy’ and ‘Half-Pratt’. One powerful broker was known as ‘God’. The originator of these colourful phrases was known as ‘Satan’.

INSTITUTIONAL VALUESAny institution develops its own conventions, traditions, myths and values. Although prizing individualism, Lloyd’s required conformity in some matters

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and resisted change. For all its tribalism and rivalry, the Lloyd’s market engen-dered a very real sense of belonging, especially among the more senior ranks of underwriters and brokers whose interests the system served well. They might regard the Corporation, the accountants and the support staff as hangers-on, but they also believed that Lloyd’s was very special. They were very defensive of the institution when it came under attack from the press, Parliament or com-petitors. With only rare exception, they were susceptible to the authority of the Chairman and the Committee of Lloyd’s.

Few institutions were more conscious of their uniqueness than Lloyd’s: its myths were strongly believed. It was said that unlimited liability made Lloyd’s uniquely strong, conjuring up an image of unlimited resources. Lloyd’s under-writers were thought to be uniquely creative because they operated flexibly as small units, while backed by the whole institution. This was the catechism, eagerly taught to the newcomer, who was keen to learn and repeat it. Interference from government or elsewhere was anathema. The world outside Lloyd’s was not quite its equal. Those who worked in the nearby ‘company market’ were only too well aware of this irritating sense of superiority.

This self-belief was uplifting for those concerned, but it tended to reinforce a stifling orthodoxy, notably in the strength and virtue of unlimited liability and blind faith in market mechanisms. Amid growing concern about the impact of losses, the Council told members in 1990 that it had once again reviewed unlim-ited liability and concluded that it should remain as the basis for underwriting. The ideology of Lloyd’s explains the initial attitudes towards big losses when they began to emerge: Lloyd’s was all about risk, each member was responsible for his losses and his duty was to pay up without argument. Names even con-templating legal action were regarded as traitors. For insurance disputes, there was a long-standing preference for arbitration over resorting to the courts.

This brief introduction can only scratch the surface of the inter-dependent network of relationships and loyalties that together make a functioning mar-ketplace. It would be seriously deficient if it emphasised loyalty to tribes at the expense of the intense loyalty also often felt towards individual firms. Among the managing and members’ agents, and the brokers, there were many firms whose culture had been shaped by a strong personality. At any one time, some of these firms were starting up, others were growing, sometimes quickly, while others had reached maturity or were in decline. Some had a well-defined hous-estyle, quickly adopted by those who joined the firm.

Some had rigorous disciplines of their own, usually owing much to the strong character of one particular underwriter. Robert Kiln was an extreme case. He started work in Lloyd’s in 1937. During the Second World War, he lost a leg and suffered partial deafness. Returning to Lloyd’s in 1945, he became an

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innovative non-marine underwriter, forming his agency in 1962. He played an active role in Lloyd’s affairs, with nine years as a member of the Committee of Lloyd’s. He became well-known for his forthright views and active as a speaker and writer. He also wrote a textbook on reinsurance which became a classic.

Kiln was intensely proud of the best aspects of Lloyd’s. In a 1978 lecture, he attributed its success to the ability of those in Lloyd’s to rely on each other’s word. He said: ‘We come to Lloyd’s to work and for profit, and working for profit is worthwhile ... if we in Lloyd’s ever lose our integrity or do things which we know to be dishonourable, then that will be the beginning of the end ... con-fidence will evaporate and the whole edifice will collapse.’

Kiln’s syndicate had well-defined procedures for assessing risk. He took a very dim view of sloppy practice in others. In many respects, his firm was a beacon of rectitude. By contrast, there were also agents and syndicates with few inherited disciplines. If their biggest asset was the charm or pliability of their underwriter, they were likely to be in big trouble. To handle the increasing complexity of modern business required sophisticated techniques: exhaustive record-keeping systems, analysis, projections and so on. For some syndicates, the deep water of liabilities and complicated reinsurance contracts went over their heads; they drowned, taking many Names with them. Nevertheless, the independence of each underwriter was the prevailing ethic. Only when the scale of damage was nearly fatal to the whole institution did this notion change.

While the expertise was variable, the tribal instincts strong, and the quality of firms and individuals mixed, the values and loyalties of those at the core of the market were widely shared and deeply ingrained. As the story of the mid-1990s crisis unfolded, tradition had to be sacrificed on a big scale. Change was forced by the need to prove solvency to regulators, respond to a large-scale rebellion by Names and attract fresh capital. Self-interest and the survival instinct were important drivers in the search for a workable solution. But loyalty to an institu-tion under threat was another powerful force.

***

External Names were much less intimately involved with Lloyd’s than those who spent their working lives in Lime Street. Most had allegiances outside Lloyd’s, but as the losses mounted, groups of Lloyd’s Names found a common cause. New groups were formed – people united by their anger and determination to lessen the impact of big losses on their lives. They discovered leaders within their ranks, they hired lawyers and went to the courts seeking recompense. Some went further and attacked the institution and everything it seemed to them to stand for: greed, amateurism, deception, dishonesty and downright fraud.

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GUARDIANSQuis Custodiet ipsos custodes? (Who will guard the guards themselves?)

Juvenal

Lloyd’s governance evolved in stages over three centuries. By 1987, a re-vamped 28-strong tripartite Council comprising working, external and independent or ‘nominated’ members had sweeping powers to run Lloyd’s. The 1982 Lloyd’s Act also conferred immunity from suit by its members on the Council and Corporation, provided they acted in good faith. The evolution of the governance of the Society of Lloyd’s is briefly summarised at Appendix 3. Two important milestones were the Fisher Working Party,30 reporting in 1980, and the Neill Committee,31 reporting in late 1986.

Exercising authority at Lloyd’s had become increasingly difficult, thanks to the growing size and complexity of the market, and a growing sense of com-petition at home and abroad. By the 1980s, it had become difficult for anyone in Britain to exercise authority in a way that might have been taken for granted in earlier decades – ask any teacher or headmaster. Deference was going out of fashion. In banking, the ability of the Governor of the Bank of England to get his way merely by raising his eyebrows was nearly over. At Lloyd’s, the

Picture 3 The all-male 1985 Council of Lloyd’s in confident mood. Reproduced by permission of Lord Snowdon

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various scandals of the 1970s had tested the authority of the Committee and the Chairman, exposing their powers as inadequate to run a complex interna-tional marketplace. The constitution and its cumbersome procedures needed updating: the Fisher Working Party was asked to make proposals. The chal-lenge to authority came in several forms. Christopher Moran was expelled from the market; Ian Posgate was suspended32 from underwriting for a time. Other scandals stretched the Committee’s ability to deal with miscreants and rebels.

In late 1982, soon after Parliament passed the new Lloyd’s Act, fresh scandals emerged. Against this background, the Governor of the Bank of England, Gordon Richardson, persuaded a reluctant Lloyd’s to accept an out-side figure of stature in a new role as Chief Executive. Until then the most senior role in the Corporation had been the Secretary-General, whose role was too deferential to be source of authority. An independent Chief Executive was seen as essential to counter the suspicions now surrounding the market. The new man, Ian Hay Davison, was also made a member of the Council and a Deputy Chairman of Lloyd’s to give him added authority. He was a crusader. Many elements in the market, including the next Chairman, Peter Miller, found it hard to accept the new pattern in the spirit intended by the Governor. As such, much of the body politic tried to reject this transplanted organ.

Following an uncomfortable tenure from 1983 to 1985, Davison left, say-ing the rotten apples had begun to infect the barrel. His book, A View of the Room, which appeared two years later, was dedicated ‘to the external members of Lloyd’s on whose behalf the mission was carried out’. It did not foresee the problems to come. His successor was Alan Lord, a very able ex-Treasury civil servant who had been tempted into the private sector to become Chief Executive of the British manufacturer Dunlop. His gruff Lancashire manner and apparent intellectual arrogance did not win him many friends in the mar-ket; he did not court popularity. An intensely private person, those who knew him respected his intelligence, total integrity and his dry sense of humour. Miller, the Chairman, only served champagne. At one of his many receptions, Lord, a whisky-drinker by preference, picked up a glass, muttering: ‘We prac-tically wash our socks in this stuff here.’ When he eventually stood down, a perceptive tribute by the editor of Lloyd’s List recognised his many virtues, crediting him for the steadiness of his hand. But the ship was lurching towards the rocks.

From 1983 to 1993, the Council delegated supervision of the market to the Committee of Lloyd’s, comprising its elected working members. The Council met monthly, but the Committee met each week. Matters affecting the market

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were brought to the full Council if they required a byelaw. New byelaws required the support of a majority of both the working members and the external and nominated members taken together.

The Committee, a descendant of earlier arrangements, still operated in a somewhat ritualistic way. Members spoke in order of their seniority. First up was the longest-serving member, referred to by the Chairman as ‘Mr Senior’. The pro-cedure could be quite frustrating for a new boy (there were no new women), who was often reduced to expressing agreement with an earlier speaker. Meetings ended with a solemn reading of recent deaths among members, at which point heads were reverently bowed. It had the air of church service. At the end of each meeting, there was an informal session, for which senior Corporation staff were required to leave, which went unrecorded. This was followed by a lunch that gave a chance for more informal discussion, to which a handful of senior staff were invited by rotation. Excellent wines were supplied from the Lloyd’s cellar. The lunch habit dies hard: at the time of writing, the members of the last Committee of Lloyd’s, replaced by a new Market Board in 1993, still lunch together every December.

Authority over Lloyd’s did not stop at the Council. The law in most coun-tries recognises the special character of insurance. Protecting individuals and businesses from the effects of disaster, a modern economy could not function without it. To play this role, it must be reliable. Because an insurance failure can be so damaging, insurers are tightly controlled in most countries. It would be too easy for unscrupulous people to sell insurance – which is simply a promise to pay – and then fail to pay up. In Britain there have been few insurance fail-ures; there have been hundreds in America, where the regulation of insurance is performed at the state, not the federal, level. Every insurer’s ability to pay when needed – its solvency – is closely watched by government regulators. In Britain this was done by the Board of Trade, which became part of the Department of Trade and Industry (DTI) in 1970.

Insurance law in Britain exempted Lloyd’s members from registration as insurers, but required that an annual solvency certificate was provided to the DTI on behalf of every Name. In the rare event that an individual could not show assets sufficient to cover his liabilities, Lloyd’s own central assets were ‘earmarked’ to cover the deficiency. As the losses mounted, this rarity became frequent and eventually almost overwhelming. Lloyd’s also had to demonstrate its collective solvency to the DTI and to various overseas authorities. Foreign regulators tended to treat Lloyd’s as a single entity. In the US, Lloyd’s holds licences to conduct business in Illinois, Kentucky and the US Virgin Islands – in the jargon it is an ‘admitted’ insurer in those states, able to underwrite all kinds of insurance. (Kentucky is the centre for horse

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racing and breeding; Lloyd’s is big in ‘equine’ or ‘bloodstock’ insurance.) In all other US states, Lloyd’s syndicates are eligible to write reinsurance – much less closely regulated – and commercial business unavailable locally, known as ‘surplus lines’.

State insurance regulators are co-ordinated by the National Association of Insurance Commissioners (NAIC). As a group, they normally defer to the New York Insurance Department (NYID) as the ‘lead regulator’ for Lloyd’s in the US. Relations with the NYID are as important as with the DTI. On a day-to-day basis in the 1980s, they were handled by Lloyd’s US General Counsel, the law firm LeBoeuf.33 The senior partner responsible for the Lloyd’s account was Don Greene. In a long career, he was an authoritative adviser on US matters to suc-cessive Lloyd’s chairmen. As the crisis grew, Lloyd’s future hung in the balance at dramatic face-to-face top-level meetings with the New York Superintendent of Insurance, Ed Muhl.

The Bank of England had informal oversight of the whole City of London, also representing City interests to the British government. Its influence over Lloyd’s affairs was subtle but important. Another external guardian of a kind was the British press. As the crisis developed, successive chairmen and chief executives were increasingly sensitive to press comment, devoting much energy to explaining events, policies and specific decisions. As the battle for the hearts and minds of Names reached its climax, Lloyd’s tried hard to reach for the moral high ground, hiring a succession of experts to help. Reporting by an increas-ingly well-informed cadre of journalists could affect the outcome.

TAX MATTERSFrom today’s vantage point, the reader may wonder why Lloyd’s and its mem-bers were quite so driven by tax. It was a big factor and its effect was corrosive. Younger readers may find it hard to believe that until 1979, the top rate of income tax in Britain was 83 per cent (in the two preceding decades, it was 90 per cent, down from the wartime peak of 99 per cent). To this was added, for investment income, an ‘unearned’ income surcharge of 15 per cent, bringing the marginal rate to 98 per cent. These rates of tax drove many to seek professional advice on how to minimise their impact. In Britain, almost anyone so advised had the tax advantages of Lloyd’s membership put to them. Advisers were sometimes paid by members’ agents for referrals.

A well-established syndicate with a large ‘reserve’ – money set aside to meet future claims – was highly valued by many Names in the 1980s. This was because the money tied up in the syndicate reserves produced investment income and capital gains. They could outweigh a small ‘underwriting loss’

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that would result if claims exceeded premiums in any one year. The return on investment was often steadier than the underwriting profit, especially during periods of intense competition among insurers, when premium rates were forced down. In 1980 Lloyd’s overall profit was £264 million. But profit attributable to underwriting – the difference between premiums and claims – accounted for only £22 million, or eight per cent of this. If syndicate expenses were taken into account, underwriting made a loss in 1980 of £61 million and a loss in every year bar one (1986) for more than a decade thereafter. Appendix 4 provides the global results.

The tax treatment of regular income, capital gains and investment income differed significantly. Perverse incentives prevailed: some syndicates routinely expected to make an underwriting loss – which Names could offset against prof-its made elsewhere – but made a profit through investment income and capital appreciation. Overseas names in some jurisdictions liked this; they did not pay capital gains tax at all. In Britain, capital gains were taxed at much lower rates than income. Further tax advantages were achieved for Names by allocating ‘Special Reserve Funds’ and offsetting losses in one syndicate against profits in another, and against previous and future years. Investment and accounting prac-tices, including ‘bond-washing’34 and ‘rollovers’,35 could be employed to further avoid taxes. The Inland Revenue watched closely.

Opinions differ on whether high marginal tax rates generally act as a spur or as a disincentive. But the fact that losses could be largely recovered through tax rebates must have made Names and their members’ agents less vigilant than otherwise. This must in turn have affected the single-mindedness with which underwriters pursued profitable underwriting. Too often, instead, the focus was on writing for volume, regardless of the underlying profitability, as there were volume-related commission payments to collect. This sapped the underwriting disciplines of the market. In his AGM speech in 1988, Murray Lawrence recog-nised the distortive effect of taxation and called for a return to underwriting basics. However, by then, much damage was already done.

STAINLESS STEELLloyd’s inside-out building became a symbol of the institution during the cri-sis years. Some people love it; others hate it. Its creation was against the odds, reflecting the supreme self-confidence of the Society at the time it was com-missioned. It still impresses clients and capital providers who visit it daily from all parts of the world. It awed some new Names; later it became the focus of much wrath. How did this conservative institution end up with the ultimate expression of modernism? A fuller note on this is available.36 The key concept

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was a high degree of flexibility to respond to future needs. In June 1979, Lloyd’s redevelopment committee, chaired by Peter Green, enthusiastically endorsed Richard Rogers’ outline proposals.

Friction developed during the later stages of construction. Although the architects and the redevelopment committee wanted to impose standard boxes, underwriters insisted on variety. Rogers’ interior designer, Eva Jirinca, proposed very modern offices for the top floors. Peter Miller did not share his predeces-sor’s enthusiasm for modernism. A Paris decorator, Jacques Grange, fitted out the executive floors in a semi-traditional manner with marble. The architec-tural correspondent, Kenneth Powell, stated that: ‘The effect of these two floors is like a bad dream – it seems out of place and incongruous.’37 Fake hollow pil-lars, which did not quite reach the ceiling, were an offence to good taste and an insult to the spirit of functionalism.

As it began to collect the first of a long series of design awards, there were growing complaints that it was the wrong building at the wrong price. In the nine years following Lloyd’s decision to commission a new building, the climate of opinion in Britain had changed. There was a counter-attack on innovative

Picture 4 Cartoon by Dave Gaskill. When it opened in 1986, the novelty of the Lloyd’s building featured in many light-hearted cartoons. The author’s favourite is reproduced by kind permission of Dave Gaskill

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design in the City. Few occupants would agree with Powell, a huge fan, who likened it to a medieval cathedral.

Many underwriters saw the building as dysfunctional. The isolation of the leadership – now known as ‘the twelfth floor’ – from the day-to-day market was reinforced. Before long, the underwriting associations asked if they could all return to the previous building. Studies were undertaken to improve matters. Meanwhile, much more serious issues were festering beneath the surface.

The building played an important role in the story of this book. It proved remarkably resilient when bombs exploded nearby. At one stage it was a key asset that allowed Lloyd’s to pass the vital solvency test. Later it was sold to help pay for a settlement offer and convince Names that Lloyd’s had dug deep: Lloyd’s became a tenant when it was acquired by a German property company. In 2013 it was sold to the Ping An insurance company of China. In 2011, 25 years after its completion, it received Grade I listing, the youngest building ever to achieve this status in Britain.

Un train peut en cacher un autre (One train can hide another)Common sign at French level crossings

2

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It is easy to be pre-occupied by what confronts you. In 1982, a big train was in full view. Scandals showed the difficulty of running the increasingly large

and complex Lloyd’s market. Until recently, traders were kept honest by a sense of honour and fear of disapproval in a tight community with shared values. This formula still worked for most. But when greed got the better of a few, the system proved inadequate to control them. To protect its growing membership and the market’s reputation from those who would not play by the rules, Lloyd’s needed a modern constitution, giving full authority to set and enforce standards. Under the old rules, it was exceedingly cumbersome to expel someone and had hap-pened only once.

This was the train everyone saw. Lloyd’s petitioned Parliament to pass a new Lloyd’s Act, establishing a Council with sweeping powers and immunity from suit. For the next seven years, the Chairman and the Council were pre-occupied with reform and discipline. Many byelaws were passed and the capac-ity to enforce them was built up. Even a former chairman was investigated and censured. Lloyd’s wrestled with the effects of the PCW1 scandal, which first broke late in 1982, involving the theft of syndicate money and disastrous under-writing that produced big losses. Meanwhile, divestment2 – the price required by Parliament for the new Act – distracted and weakened the management of many Lloyd’s businesses by removing their much stronger parents.

These pre-occupations hid from view not one train, but three. Dangerous as they were, they were not fully apparent until the 1990s. The first two had much in common: they were claims arising in the US, first on asbestos and then environmental pollution. This became known as the ‘long-tail’ problem: the liabilities stretched back into the normally innocuous ‘tail’ of a diminishing curve of claims. The third train was home-grown: the so-called ‘LMX spiral’ had the effect of concentrating losses from big catastrophes – hurricanes, explo-sions, earthquakes, etc. – onto a handful of syndicates. Together, these three hidden trains produced huge losses and their impact on some Lloyd’s members was seen as profoundly unfair.

THE STING IN THE TAILAsbestos-related illnesses are known as latent diseases: symptoms appeared decades after the asbestos fibres were inhaled. When manifest, it was hard to say when the fatal damage had been done and therefore who was responsible. Much has been written about the long struggle of asbestos victims to secure compensation in America. Paul Brodeur’s Outrageous Misconduct3 evokes immense sympathy for the victims in the face of the mendacious efforts of asbestos manufacturers to deny knowledge and responsibility. Sympathetic

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juries, elected judges and persuasive lawyers meant that to British eyes, US courts seemed more swayed by emotion than in Britain. The size of awards was commonly decided by the jury, not the judge. The first claims were under the Workers’ Compensation Act insurance that all employers were obliged to provide. Lawyers grew ambitious for bigger amounts: they began to target the ‘general liability’ policies taken out by the firms that exposed workers to asbes-tos. To some Lloyd’s underwriters, the massive expansion of coverage involved in this was ‘monstrous’.

A full description of how asbestos came to be the subject of so many claims in the US is set out in Adam Raphael’s excellent book Ultimate Risk.4 A torrent of litigation was unleashed, leading to punitive jury awards. Leading American asbestos manufacturers became bankrupt. Raphael says: ‘Lloyd’s and other insurers were left to pick up the bill as the greatest explosion of toxic tort litiga-tion in the history of jurisprudence jammed US courts for a generation.’

In 1980, the London market set up the Asbestos Working Party to co-ordinate information. Many of the relevant policies were not originally writ-ten at Lloyd’s, but by American insurance companies and then reinsured by Lloyd’s syndicates. They were usually written on an ‘occurrence’ basis under an ‘umbrella’ form. This was interpreted by the US courts as meaning that claims could be made on policies issued decades earlier at any time they occurred. In 1981, a US Appeal Court endorsed the ‘triple trigger’ approach, which meant that all periods of insurance cover were liable, from first inhalation to the out-break of the disease, often 30 years later. There were no aggregate policy limits, which meant there was no limit to the number of claims that could be made or their value. US courts looked for ways to extend insurance coverage. Raphael5 cites a US Appeal Court judgment: ‘insurance policies must be strictly con-strued in favour of the injured and to promote coverage’. Insurers tried to per-suade the US Supreme Court that it was unreasonable for a one-year policy to be held liable for decades of damage, but the Court refused to hear the matter. In 1985, Lloyd’s underwriters restricted the scope of the cover for general liability policies, replacing the ‘occurrence’ wording with a ‘claims made’ form. This required the claim to be made during the period of the policy, thereby reducing the length of the tail, but this wording could only apply to new policies. In 1992, a Yale University study predicted the eventual cost of all asbestos-related claims to be $50 billion.

***

The second hidden train, environmental pollution claims, was a similar story. American society’s latest problem was to be paid for by the private sector and

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its insurers. In this case, mounting public concern about polluted sites led leg-islators to make corporate polluters responsible. In 1980, Congress passed the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), widely known as ‘Superfund’, the name of its funding provision. This law permits the government to carry out reclamation work and recover the cost from potentially responsible parties (PRPs) or to issue orders that corpo-rate polluters should clean up damaged sites themselves. There are virtually no defences against these powers and stringent fines for those that do not comply. Unusually, the liabilities apply retrospectively. Feelings were running high that polluters should not be allowed to get away with their crimes against society.

The new pollution laws produced an explosion of lawsuits. A very large proportion of the costs incurred over the 15 years that followed the legislation were legal expenses. A 1990 study by the actuarial firm Tillinghast showed a wide range of estimates for future costs. The middle scenario was $215 billion – twice the total assets of all US property casualty insurance companies. Could these claims be resisted? What would be their eventual cost? Opinions differed widely, but provisions had to be made.

It was becoming obvious that the Lloyd’s syndicate structure – evolved for small groups of people writing relatively straightforward marine insurance – was unsuited to the uncertainties of long-term liabilities written on an ‘occur-rence’ form, as interpreted by the US legal system. For this kind of business, the underwriter was faced with a dilemma. When he drew a line under a year’s trading – after waiting three years for claims to clarify – he had to decide how much the closing syndicate should pay the new syndicate, for the following year, to take on existing liabilities. In Lloyd’s jargon, this is known as the ‘reinsurance to close’ (RITC). It required the judgment of Solomon. The active underwriter had to conduct what amounted to a transaction with himself on behalf of all his members. Should he be pessimistic about the rising tide of claims or optimistic that the problem would level off or get solved somehow? It seemed unlikely that Congress would persist with laws that would bankrupt the whole US insurance industry twice over.

Most experienced underwriters are naturally conservative. They look for opportunities to build up a reserve against the possibility of a bad trading year, a sudden unexpected event or an unwelcome trend. The structure of Lloyd’s inhibited this. The RITC had to be fair to those Names who might be leav-ing the syndicate, as well as to those who would be participating in the future. Members’ agents and Names could choose which syndicates to support each year; what they liked best was regular profits. Any wish to squirrel away exces-sive reserves was balanced by the need to release a regular profit, if possible, thereby retaining the support of Names and agents. As already noted, there was

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also very strong pressure from the Inland Revenue to keep reserves down to what could be strictly justified. An auditor’s opinion on the accounts was also required.

The result was that most syndicates were under-reserved for the old liabili-ties. As more and more claims on old policies were notified, each year under-writers had to reassess the amount likely to be needed to pay them. They made bigger and bigger provisions, describing this process as ‘strengthening reserves’. This translated into losses for Names on the syndicates concerned. The scale of this increased provision is shown in Appendix 4. As the 1980s progressed, it became staggering. Over £5 billion extra had to be found to pay for past under-writing – done before most members had even thought of joining Lloyd’s.

PASS THE PARCELSome Lloyd’s syndicates with inherited US liabilities looked for a way to mini-mise their impact. Hady Wakefield, a reinsurance broker at C.T. Bowring, devised a policy whereby a syndicate could pay a premium to pass its old liabili-ties to another one to discharge, or ‘run off ’. Many non-marine underwriters were worried by the growth of claims and were keen to rid their syndicates of the problem. Wakefield adjusted the terms until an underwriter found them acceptable. In 1982, in what proved later to be a massive misjudgment, a hith-erto successful and respected marine underwriter, Richard ‘Dick’ Outhwaite, agreed to take on the ‘run off ’ of 32 other Lloyd’s syndicates’ past liabilities in return for amounts that he thought would be enough, when invested, to more than meet all the eventual claims. He had already taken on 19 such contracts. As the evidence of rising claims and faster payments grew, many began to doubt his wisdom.

In 1985, Outhwaite tried to close his 1982 account for Syndicates 317/661 in the normal way. But he was immediately warned that many members’ agents would remove their Names from the ongoing syndicate if he did so. They believed that claims for asbestos and pollution would grow beyond his current estimates. If the 1982 account was closed by an inadequate RITC, the syndicates’ new and recent joiners would be hit by the increasing cost of these claims. So he left the 1982 account ‘open’, at first with a reassuring message to his Names that he still believed it would eventually prove profitable. Two years later, now confronted with fresh information about the rising cost of claims, he made a ‘cash call’ on his members for the 1982 year of account. He needed £10 million, shortly fol-lowed by another £20 million. A loss of 75 per cent of capacity meant a cash call of £7,500 for each Name with a £10,000 ‘line’ on his Syndicates 317/661. Many Names had much larger lines and worse was to come.

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As the rising cost of US liabilities hit other syndicates, this pattern was repeated. Merrett’s syndicate had also taken on the ‘run off ’ of 11 other syndi-cates. By 1988, he too was under pressure not to close his 1985 account. Many other underwriters felt unable to say how much these claims would cost; they too left their accounts open, always reluctantly. It meant no profit for the Names on that syndicate and uncertainty about the size of the eventual loss. In the meantime, they were trapped, awaiting their fate. Each month brought fresh evidence that these ‘open years’ might one day cost them a lot. Members’ agents became more influential: the mere threat of removing Names was a powerful weapon. If capacity appeared likely to shrink significantly, auditors would be unwilling to approve an account being closed – it would be unfair to burden the ongoing Names who remained with the syndicates’ old liabilities.

This growing problem of open years began to overshadow the whole mar-ketplace. By 1988, 97 syndicate years of account had been left open. In 1989, an article in ALM News6 said: ‘The seriousness of this state of affairs cannot be over-emphasised ... Resignation from Lloyd’s offers no solution. Death merely passes the problem to the executors of the deceased member’s estate ... Unless the number of syndicates with open years can be rapidly reduced, disenchant-ment will spread among Names, with the gravest consequences for the Society.’

Several years earlier, Robert Kiln had said:

the very long tail liability business has virtually become an un-writable class of business with a three year accounting period ... With changes in social attitudes, the environmental lobby and retrospective changes and awards, the insurance industry has been saddled with paying indexed pensions to injured people, plus indexed medical and other unaccept-able social charges. This will ruin many limited liability insurers and reinsurers, and the pressure on the so-called unlimited liability of Lloyd’s members will become intense.7

Kiln had called for prompt action by the Council. It was not obvious what it could do. The business had already been written and the liabilities incurred. Many people thought that the US courts had behaved unreasonably in the allo-cation of responsibility for asbestos claims, and the US Congress even more unreasonably over pollution. But these legal and political developments could not be ignored. Insurers are bound to pay claims ordered by a court. They are also required by regulators to make reserves for future claims and to show that they are solvent – that their assets can cover their liabilities.

In 1989, the Council announced steps to ensure that leaving a year of account open would not be an ‘easy option’. The managing agent would be required to

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obtain a report from the syndicate auditor, an independent quote for the RITC, an actuarial report, board approval for leaving the year open, to hold a meeting of members’ agents and to provide full disclosure to Names. This new raft of consequences did little to stem the rising tide of open years. They reflected the uncertainty surrounding the eventual cost of the policies written over decades in the US. By 1992, open years rose to over 300. Most Names were now affected.8 Outhwaite, originally a marine underwriter and seeing a business opportunity, had taken on the old liabilities of 51 mostly non-marine syndicates. As their poisonous nature became increasingly clear, he began to question the honesty of those who had unloaded their liabilities so cheaply. Had they disclosed all they knew, as required by the principle of utmost good faith? His claims direc-tor began to get tough: she refused to reimburse reinsured syndicates where they had paid losses for which she thought they were not strictly liable. In other cases, she argued that the reinsured syndicate’s managers had not disclosed all they knew. At first, arbitration was used to try to resolve these differences. A group of members’ agents organised an enquiry by Freshfields, a City law firm, and Coopers & Lybrand, a company of international accountants. The outcome was awaited anxiously.

THE SPIRALEven if a Name had been lucky enough to avoid the two deadly trains of asbestos and environmental pollution, there was a third one hidden from view. The LMX spiral began to materialise in 1989.

Lloyd’s underwriters normally protected their syndicates against unusual losses by buying reinsurance and insurance companies did the same. This was a key duty, but not an easy one. Imagine being an underwriter: spend too much on reinsurance and the syndicate’s profit is impaired by its cost; too little and regret will follow if a big loss arrives. There are several forms of reinsurance protection. Prudent insurers – whether Lloyd’s syndicates or insurance companies – normally buy some ‘excess of loss’ reinsurance. Their own syndicate will pay losses up to a defined amount; above that, unusually large losses will be met by their reinsurer. The excess of the loss reinsurer’s business is more volatile: he makes good profits in years when there are no big catastrophes. He in turn wants to lay off part of the risk against the day when many of his reinsured clients make claims at the same time. So he buys reinsurance from someone known in insurance circles by an awkward word, a ‘retrocessionaire’ – a reinsurer of reinsurers. The retrocessionaire’s losses will be less frequent still and his results even more volatile. In good years he will make very large profits.

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First invented at Lloyd’s, excess of loss reinsurance worked well for 70 years. A few syndicates specialised in it. With careful attention to the syndicate’s aggregate exposure, it was usually a profitable line of business. Others saw this and entered the market, but didn’t understand that the large profits were made as a result of substantial potential exposure. To attract business, they dropped their prices. It didn’t stop there. Because reinsurance was cheap, more was bought. In turn, the reinsurers bought more retrocession and passed on more of the liabilities. So some syndicates ended up with most of the liabilities, but not the premiums.

The spiral occurred when retrocessional syndicates bought more protec-tion from others like themselves, who, in turn, bought from them. When the big catastrophes struck, the inherent problems emerged: every time the retroces-sionaire made a claim on his excess of loss cover, he triggered another claim on himself. Every outward claim resulted, often by complex routes, in an inward claim. The claim went around the circle until one syndicate, which hadn’t bought enough protection and couldn’t pass it on, was left with the liability and therefore had to pay the claim.

The market for this kind of reinsurance – London Market Excess of Loss (LMX) – was specialised and complex. The brokers who were expert at buy-ing and selling it were some of the best paid in London, notably Bill Brown of Walsham Brothers. They earned fees or commissions on each transaction. With a small specialist broking firm, Brown, who had started out as the tea boy, earned in excess of £8 million in one year. The pattern of contracts was complex: the phrase ‘slicing and dicing’ of risk was commonplace then; 20 years later, this same phrase was used to describe the handling of US ‘subprime’ mortgages. LMX reinsurance grew rapidly in London during the 1980s. There were few claims until 1987 because there were few catastrophic events. As a result, syn-dicates taking on a lot of LMX business appeared very profitable. Some Names clamoured to join them; other Names were placed on them by their members’ agents without realising just how inherently risky they were. Experienced mem-bers agents were careful to give their Names only small shares of such syndi-cates. But some Names acquired a bucketful.

CATASTROPHES STRIKESpecialists in reinsurance against catastrophes expect them to happen from time to time. For example, Lloyd’s underwriters keep a close watch on the hurricane season in the Caribbean and south-eastern US – the peak period is August to October each year. Hurricane Betsy in 1965 was etched into the collective mem-ory. It caused the first annual trading loss at Lloyd’s since the Second World War, stopped growth in its tracks and led to much soul-searching.

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Windstorms in Europe are much rarer and less predictable. The Great Storm of 19879 occurred on the night of 15 October. It was the worst storm to hit Britain since 1703 and killed 22 people. The damage caused was put at £1.4 billion. It was described as the sort of rare event that was expected to happen only once every several hundred years. However, the Burn’s Day storm in January 1990, less than three years later, was equally intense.

The 1987 storm caused huge damage over much of England, felling 15 million trees, including six of the seven famous oak trees in Sevenoaks. The lighthouse six miles from Eastbourne on England’s south coast recorded wind speeds literally off the scale of its instruments. Coincidentally, stock markets crashed around the world a few days later.

This was followed by several more big catastrophes. In July 1988, there was a massive explosion on the Piper Alpha drilling platform, then producing ten per cent of North Sea oil and gas. Killing 176 men, it was the worst offshore oil disaster ever in terms of lives lost and industry impact. The survivors found it hard to get work on a rig again: seaman considered them ‘Jonahs’ who would bring bad luck.

Picture 5 The 1988 Piper Alpha disaster. Reinsurance claims revealed the extent of the spiral. Reproduced by permission of the Press Association

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In 1989, the Exxon Valdez tanker ran aground in Prince William Sound, Alaska, spilling hundreds of thousands of barrels of crude oil. The unresolved claims associated with this loss loomed very large in the affairs of Lloyd’s for the next seven years. Amid allegations of a drunken captain, it emerged that the radar was not switched on and had been faulty for over a year. In 1996, a jury awarded $287 million, plus $5 billion in punitive damages. After many twists and turns, and a US Supreme Court hearing, the damages were capped at $507 million in 2008, Exxon’s actions being deemed ‘worse than negligent, but less than malicious’. Later in 1989, Hurricane Hugo struck Puerto Rico and South Carolina. It left nearly 100,000 homeless, resulting in $10 billion of damage, the costliest storm to impact the US at the time.

These events triggered many claims by syndicates on their LMX reinsur-ance, which reverberated around the system. When the music stopped, some syndicates were shocked to find that they had failed to watch their total expo-sure to all the reinsurance risks that they had taken on. The net effect was the reverse of what insurance is supposed to do: instead of spreading losses, the LMX spiral had concentrated a high proportion of losses on a few Lloyd’s syn-dicates (and some reinsurance companies outside Lloyd’s).

Speaking in 1988, Murray Lawrence, Chairman of Lloyd’s, said: ‘we must get back to the highest standards in our original underwriting. In the past some underwriters have become too involved in cash-flow underwriting, particularly where there has been the ability to shovel out of the back door – by way of rein-surance – what one has underwritten and in this way make a satisfactory return, but only at reinsurers’ expense’. He said that Lloyd’s needed to concentrate on the attraction of new business to the market ‘rather than being happy endlessly to recycle that which is already there’. He made these remarks about the dangers of recycling less than two weeks before the Piper Alpha explosion.

It was later believed that the unchecked expansion of the market had led some syndicates to chase extra LMX business in order to fill their capacity. Charges of mismanagement were hurled at both Lloyd’s for lack of supervi-sion, the syndicates involved for recklessness and those members’ agents that had placed Names on several of these LMX syndicates at once – often without explaining, or sometimes even understanding, the risks involved.

The rapid growth in membership had been seen as a badge of success, but the extra capacity this brought with it came to be seen very differently. There was too much capacity chasing too little original business: this fuelled price-cut-ting and recycling of business. There were powerful incentives driving growth: agents earned fees and profit commissions for each member. In the market, very few saw it differently: ‘Profit is sanity; size is vanity’ muttered Michael Cockell, an underwriter of a determinedly small syndicate who likened himself to a

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small bird that emerged from the hedge to peck only very selectively. The bigger battalions dismissed him as lacking vision.

The popularity of LMX syndicates among external members was fuelled by Chatset’s league tables10 showing which syndicates produced the best results. Many market practitioners frowned on league tables, because without careful interpretation, they could lead people to make unbalanced choices among syn-dicates. Chatset and the ALM saw the dissemination of facts about syndicate performance as a crusade for openness, while underwriters saw it as danger-ous. Many Names had never even heard of the term ‘LMX’, but it became infa-mous later, just like the novel term ‘subprime’ mortgages two decades later in the 2008 banking crisis. Ironically, the man whose syndicate was hit hard by the first train was among the first to spot this one. A speech by Richard Outhwaite warned about the dangers of LMX11 before they materialised.

John Stace recalls a telephone call from Christopher Thomas-Everard, a Name who lived near him in Somerset. In 1988, he had heard about Stace’s new members’ agency and said that he would like to transfer to him. When he enthusiastically described his syndicate portfolio, which contained several risky LMX syndicates, Stace told him that he would be unable to manage such a col-lection. The portfolio would need to be radically reorganised if he was to take on his affairs. Thomas-Everard went on to became a loud and persistent critic of Lloyd’s, with formidable powers of analysis, with whom Stace clashed several times.

It took time for the full extent of the spiral losses to emerge. Chatset’s analy-sis12 of the 1991 closed year of account, which included estimates for 1992 and 1993, showed a total spiral loss of £2,254 million incurred by 29 syndicates run by eight managing agencies. Twelve syndicates had losses of over 300 per cent. The largest was Gooda Walker’s Syndicate 298 1989 year of account, with a loss of £287 million, a 647 per cent loss on capacity. The second largest was Feltrim’s Syndicate 540 1989 year of account: it lost £226 million, a 549 per cent loss on capacity. In the three years 1988–90, this syndicate lost a staggering total of £1,058 million.

Most underwriters were too busy taking advantage of cheap reinsurance to stop and think about the wider systemic effects. Richard Keeling said later:13 ‘The LMX underwriters didn’t know what they were doing. There was a really unpleasant culture in Lloyd’s of just making money on the arbitrage. By and large we [Syndicate 362] made money for our reinsurers, but there are lots of people out there who just took reinsurers for as much as they could, and it’s not, to be honest, that difficult ... It was a brutal culture.’ Others were pre-occupied with dealing with the difficult trading conditions, partly caused by over-capacity and cheap reinsurance. The Council and Committee were still busy implementing

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the Neill reforms – desirable reforms in themselves, but largely irrelevant to this unseen concentration of risk on a handful of apparently profitable LMX syn-dicates. Meanwhile, some Names had been pleased to gain access to these very syndicates. Foresight and action were sadly lacking.

TOO MUCH GROWTHLloyd’s was not unusual in seeing growth as a measure of success, a yardstick widely applied throughout business. Headlong expansion is often wrongly seen as an unqualified good, its side-effects ignored. Managing and members’ agents stood to make money from growth and did not want restraint. Later it was argued strongly that the central authorities should have known better. Chairmen Green and Miller both spoke proudly, as did others, about the increasing popularity of Lloyd’s membership.

At the AGM in 1984, there was a call from a member of the ALM Committee, Raymond Nottage, to limit the unchecked expansion of the market. Noting that the Lloyd’s Global Report stressed the difficulties posed by over-capacity, he cited the dreadful results of the rival ‘composite’ insurance companies and the deterioration in the results at Lloyd’s. He thought it would be wise to check the growth in membership. He argued that expansion did not comply with com-mercial logic or good business practice, saying ‘the capacity of the market is too important a factor to be left merely to chance’. When increases were needed, he argued they should first be sought from existing members. Peter Miller replied that sterling’s depreciation versus the US dollar meant that there could be a capacity shortage. He had a point: the pound sterling was worth $2.40 in 1980, but only $1.50 in 1984, a fall of 37.5 per cent. ‘With a capital base expressed in sterling, and 70 per cent of our business income in US dollars, clearly we have a capacity problem at the very time when market rates are turning.’

Why were Miller and the Council so resistant to control? The answer lies partly in vested interests, but also in the prevailing mindset. There was an extreme concern to avoid intervention in the operation of the market. Practitioners did not wish to restrict the freedom of agents or underwriters; this was bedrock philosophy. They attributed the past problems to fraud and believed it would not recur. Miller stressed the philosophy of non-intervention: ‘The market in this, as in so many things, should be left to deal with the matter itself, and it does so with remarkable efficiency.’ A dogged member said the fourfold increase in members had not been matched by a fourfold increase in business. He called for restraint in recruitment to give existing members a bigger share of the gravy. Miller told him that the ‘increase in premium income recently had been of staggering proportions’ and that there were ‘great opportunities in the market

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today, a shortage of worldwide capacity from which Lloyd’s could profit greatly’. In truth, much of the increase was mere recycling of business.

There was pride and self-interest in expansion. Non-intervention was a clear principle. Most of the Council’s external and nominated members were imbued with the same philosophy. The climate was against restraint. This was Thatcher’s Britain: it was not intellectually fashionable to think that interference with a market was a good idea. The priorities were to build a new disciplinary framework that would minimise the risk of fraud recurring, punish miscreants and improve disclosure. But running Lloyd’s was not, as some thought, like try-ing to run the British economy: determined capacity management might have helped avert a disaster. To recognise this and put it right required a degree of confidence in the wisdom of market supervisors that was very much against the spirit of the time.

INFECTION SPREADSThe problems of inexorably growing asbestos and pollution claims directly affected many syndicates at Lloyd’s. Outhwaite and Merrett Names bore the heaviest burden because they had taken on the ‘run off ’ of many others. LMX concentrated the worst consequences of catastrophes on about 30 syndicates, but these problems reached out to involve the membership as a whole in several ways. One was the central fund, to which all members contributed, available to support policyholders if anyone was unable to meet his full obligations. It was a much-vaunted feature of the strength of the Lloyd’s market, underpinning the security of all Lloyd’s policies. It guarded against defaults by individuals, but it also roped everyone together through contributions. If defaults were to become

1980

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Capacity (bn)

Premiums (£ bn,gross)

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£11

Figure 2.1 Overall capacity and premiums of Lloyd’s, 1980–9714

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large or widespread, the central fund would have to be topped-up by everyone. As events unfolded, this was done several times.

About half of Lloyd’s Names had bought Personal Stop Loss (PSL) insur-ance. Despite its reassuring title, it did not stop all losses. It paid a Name’s losses above a certain level (known as the excess) up to a defined limit. A typical policy would be for personal stop loss to pay a loss of over £100,000, up to a limit of £500,000. There were also cumulative limits on claiming in successive years. When heavy claims came to be made years later, Names encountered all kinds of restrictions and problems with securing repayment quickly. After exhaust-ing their stop-loss cover, Names were once again on their own. Most PSL poli-cies were underwritten at Lloyd’s. Some were widely spread through a market ‘line-slip’ – to which many syndicates subscribed – but some were insured by syndicates specialising in PSL. As the claims began to accumulate, their results were ruinous. Once again, the market had concentrated rather than spread losses, just as some had predicted. One stop-loss syndicate had losses of over 1,000 per cent. Another scheme – the Estate Protection Plan (EPP) – paid out on any outstanding Lloyd’s losses in the event of death of the member. As the losses grew, this scheme became engulfed with claims far bigger than expected. Underwriters stopped offering it.

PSL and EPP had been invented and popularised by a creative, energetic young broker named Michael Wade, who had a strong interest in national and Lloyd’s internal politics. Late in 1987, during a lunch for the Committee of Lloyd’s, a waiter handed a piece of paper to the Chairman. It contained the results of the recent elections. Miller’s face fell as he read out its contents. Wade, the upstart young broker, had been elected to the Council of Lloyd’s at the age of 33. Contrary to tradition, Wade had done some campaigning, although it was frowned upon. He was keen to explain his reasons for standing for the Council. He was convinced that the structure of Lloyd’s needed reform. He routinely parked near a broker named David Rowland, already a Council member, and stuck a cheeky notice on his windscreen, saying: ‘Vote for me please, or I’ll let your tyres down!’

Soon after this election, the Lloyd’s Council spent a weekend away, attempt-ing to take a more wide-ranging view of the future. They mostly failed to spot the nature and scale of the crises about to hit the market. At times the weekend was almost comical. Most of the insiders wanted to protect the market from interference. Most of the outsiders present were either insufficiently aware of market practice or were too keen not to rock the boat to challenge the collec-tive Lloyd’s mindset. With supreme irony, this weekend was held in Brocket Hall, the comfortable home of an English aristocrat who was later convicted of attempted insurance fraud. As a newly elected member, Wade was invited to

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attend the conference, but he was expected to stay in a nearby hotel, as the Hall did not have enough rooms for everyone. Miller was not amused to find that Wade knew the host, Lord Brocket, sufficiently well to be invited to stay as his guest in the private rooms.

The session agreed that the amount of PSL underwritten by members should be controlled. It also supported increased security requirements. An exercise was already underway to bring all members into line with the rules, thus ending the widespread practice of ‘overwriting’ – exceeding a syndicate’s premium-income limit. The Council agreed to toughen these rules. The minimum deposits were to be increased and gearing – the underwriting limit expressed as a multiple of funds held at Lloyd’s – was to be reduced. These measures would go some way towards reversing the effects of the post-Cromer laxity. An underwriting limit of five times the amount on deposit was asking for trouble: it put policyholders and Names at risk. In the early 1970s, Names could underwrite ten times their deposit. The changing ratios at Lloyd’s, later buttressed by risk-based capital requirements, are given in Appendix 2.

THE SHADOW OF THE PASTThere was intense debate later about who had known and said what in the 1980s. In 1982, syndicate auditors sought guidance on how these claims should be reserved. Writing15 on behalf of all six approved audit firms, one of them, Neville Russell, referred to the ‘impossibility of determining the liability in respect of asbestosis’. In his capacity as Deputy Chairman, Murray Lawrence issued a bulletin16 to all Lloyd’s managing and Members’ agents, and all under-writers and auditors, saying that the responsibility for the creation of adequate reserves rested with managing agents liaising closely with their auditors. He urged all agents to seek out information from various sources, to reserve at the higher level required by the alternative legal approaches then being used by the US courts, and to add a substantial loading to reflect cases so far unreported and incomplete information. It was argued later that the letter was not widely heeded or enforced. It was even suggested that it was ‘written for the record’ and was not actually despatched. Around this time, Murray Lawrence himself, like many others, placed a run-off contract with Outhwaite.

Chairmen are more inclined to focus on achievements than on problems in their addresses to Names. In June 1982, Sir Peter Green was basking in the warm gratitude of his market and members. The Lloyd’s Bill was now at its Committee stage in the House of Lords; the finishing post was within sight. Green said the Bill’s provisions for proper self-regulation would save Lloyd’s from the ‘dead hand of bureaucracy’. The Queen’s Birthday Honours had brought him a

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knighthood, which seemed to put an official seal of approval on the response of Lloyd’s to previous scandals. The new building was starting to take shape. But within days of the Lloyd’s Act receiving the Royal Assent, the Howden, PCW and WMD scandals17 were uncovered. Somewhat chastened, Sir Peter told mem-bers at the November meeting that it would be hard to steer a course ‘between over-regulation and the freedom which permits the Lloyd’s underwriter and broker to exercise their imagination, ingenuity and judgment ... to protect our assureds’. He made no mention of the problem of growing US liabilities.

Although successive chairmen downplayed the insidious growth of US claims in their speeches, Lloyd’s global accounts were published each year and were sent to all members. They gave the results for Lloyd’s as a whole (all syndi-cates) and also the aggregate result for each of the four main traditional markets – marine, non-marine, aviation and motor – with a commentary by the chair-man of each market association. Michael Cockell, Chairman of the Non-Marine Association of Underwriters (NMA), wrote: ‘I look at 1980 as the worst non-marine underwriting result since the mid-1960s, brought about by the gradual decline since those days in commercial sanity, bolstered by the insidious buffer of historically high interest rates.’

Miller’s commentary in the Global Report for 1981, published in 1984, men-tioned ‘the need for still greater funds to be set aside to meet future claims’. But he concluded that ‘it is easy to be pessimistic in today’s insurance world. I remain an unrepentant optimist ... I believe ... Lloyd’s will emerge having avoided the worst of the losses now being reported by so many of its competitors, par-ticularly in the US market’. He did not state the basis for this belief. The com-mentary by NMA Chairman Ralph Rokeby-Johnson contained no figures, but sat in stark contrast to Miller’s optimism: ‘it is rapidly becoming apparent that the potential claims arising from asbestos will dwarf any claim in the history of our industry’. Too much money had ended ‘in the capacious coffers of the more rapacious lawyers’. Reassuringly, he also believed that ‘we are on the threshold of a time of opportunity for sensible underwriting: the ignorant or innocent capacity has been taught its lesson again’.

Rokeby-Johnson had been more prudent than most: he reinsured his Syndicate 210’s old liabilities with two American companies several years ear-lier. However, these reinsurers sought to reinsure all their old liabilities, includ-ing those from Syndicate 210, with other syndicates at Lloyd’s. This contract was placed 50/50 with Outhwaite and Merrett in 1982. In the summer of 1985, Miller told the Lloyd’s AGM that ‘the international insurance market is going through a very severe crisis indeed ... we face a storm rising to a whirlwind which has destroyed, particularly in America, more than a few insurance institutions and which threatens to destroy, or certainly to cripple many more’. US insurers

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had lost $4 billion in 1984, British composites had lost money on US reinsur-ance business and so had the European giant Munich Re. Swiss Re had pulled out of US casualty business.

Miller seemed to believe that Lloyd’s could escape this fate. At the 1985 AGM, he acknowledged that a ‘handful’ of its 431 trading syndicates had reported ‘heavy losses, and some very severe indeed’. Eleven syndicates had produced losses of over 40 per cent, mostly through increased reserves. Andrew Drysdale was sacked for his loss, although he saw it as honest and prudent. He was proved right.

The global results did not highlight a trend that was already apparent to a few: claims on old years of account for US liability business were mounting steeply. If the figures had been more sceptically analysed, they would have shown a pattern of deterioration. But the Council’s attention was directed elsewhere.

Global figures published by Lloyd’s did not at first distinguish the top-ping-up of reserves for old liabilities from other underwriting results. From 1983 onwards, extra provisions were shown for ‘open’ years only. From 1987, a fuller picture was revealed: the amount by which closed years of account were topped-up to pay for past liabilities was also shown. Only from then onwards is it possible to get a full picture of the growing scale of old year liabilities. This is shown in Appendix 4. In 1987, an extra provision of £425 million was needed. This brought the overall underwriting result, after expenses, to a loss of £287 million. But in a boom year, investment income and capital appreciation meant that a near-record profit of £509 million was declared. After that, Lloyd’s declared big losses for five years running, the past inheritance making a big contribution to the mounting claims.

The self-image at Lloyd’s was of an underwriting market, where the key skills were those of an underwriter in selecting and pricing risks. Some syndi-cates were consistently doing well through underwriting, especially new ones that had no ‘tail’. But, overall, Lloyd’s owed most of its profits throughout the 1980s to investment income and appreciation. The job of getting the best return on investments was handled by managing agents who frequently sub-contracted it to external fund managers. When the 1987 account was closed in 1990, the global profits still looked good. The moment of truth had not yet arrived.

RAISING THE BARWhile the hidden losses grew, the Council was pre-occupied with creating a whole new system of rules in the wake of scandals and ineffective control of a rapidly changing market. In 1983, the new Council was provided with a paper discussing its fundamental approach. It was so impressed with the lucidity of

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this document that it decided to publish it in full in Lloyd’s Log, a glossy quar-terly sent to all members. Speaking approvingly of the self-regulating approach, the Fisher Report18 said that such institutions ‘must use their freedom wisely and fairly in the public interest and must be able to demonstrate by their actions that they are doing so’.

Devising and operating a system with these high ideals proved a challenge, which was heightened by further scandals. The Council agreed on a framework of byelaws, regulations, directions and codes of conduct. After three years, the Neill Report19 said it had acted with energy and determination in using its pow-ers: ‘They have transformed self-regulation at Lloyd’s. The many byelaws and associated regulations and codes of practice introduced are eloquent testimony to the reforming zeal of the Council.’

In 1984, the new Chairman, Peter Miller, placed much weight upon the central role of agents and the Council’s role of ensuring their competence and proper discharge of their duties. In 1985, he described enthusiastically the main components of the ‘modern and efficient system of regulation in which Names may readily put their trust’. However, despite all this effort, weak agents per-sisted and caused huge problems. Insufficiently high standards were imposed. Why? The sub-group responsible for registering agents was composed almost entirely of working members.

Miller described the many steps taken to improve the regulation of the mar-ket and asked whether a new member could trust the improved system or, as he said, ‘to put it more bluntly, could it happen to me?’ His answer was to say there would always be the possibility of financial disaster from losses, but that we should look at ‘probabilities, rather than the risk of possibilities ... Everyday life is not so different’. He illustrated his point with the ‘most improbable’ chance of a fatal accident on a cross-channel ferry. Such ferries crossed the channel every day. Within two years the provocatively named ferry The Herald of Free Enterprise capsized with the loss of 193 lives.

The name of the ship was no less an expression of 1980s free market exu-berance than Miller’s various pronouncements about reliance on market forces to solve all problems. This was the time of a move to deregulate US banks and to accommodate US investment banking practices in the City with a series of moves known as the ‘Big Bang’. This phrase was widely used at the time to describe a package of simultaneous measures seen as reforms. In essence, they deregulated the market for securities, ending the mandatory separation of ‘broking’ and ‘jobbing’ to allow American-style securities houses to oper-ate, thereby promoting competition. In debates about whether to introduce several measures sequentially or simultaneously, a proponent of the latter

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used the ‘Big Bang’ expression. It is taken from a then-novel theory about the universe originating at one spectacular moment of change. Miller noted that the changes at the Stock Exchange were a direct reversal of what Parliament required Lloyd’s to do: ‘There the separation of function between jobber and broker has been abolished. Here, the separation of function between under-writer and broker has become obligatory.’ Yet more parallels existed than first met the eye: changes at the Stock Exchange were driven by the need to be internationally competitive. Lloyd’s too was ‘struggling to maintain a lead-ing position in the international market’. Ruthless competition required it to maintain its strengths of f lexibility, capacity, reputation and ability to pay any valid claim.

In 1987, Miller described the re-registration of agents as the most signifi-cant of all the reforms, as it involved applying a ‘fit and proper’ test to the agency boards and the individuals who served on them. Subsequent events showed Miller’s confidence in this process to be misplaced. Some of the boards of agen-cies were shown to be woefully ill-equipped to run syndicates, but were still reg-istered. In his capacity as an errors and omissions underwriter, Stephen Merrett turned down cover for the board of the Feltrim agency, saying prophetically that he lacked confidence in them. But they bought cover from someone else and were registered along with other weak agents.

In 1988, it was the turn of Murray Lawrence, the new Chairman of Lloyd’s, to address the members at the AGM. He announced record profits. He did men-tion the ‘overhang of asbestosis and pollution claims’ and the likely effect of the Inland Revenue’s new rules on accurate reserving. The natural pessimism of the underwriter had replaced the exuberance of his predecessor, the broker. He said that the market ‘was currently experiencing difficult trading conditions. The improving rates and results of the past few years have encouraged an increase in capacity, not only in Lloyd’s, but worldwide, and this has led to pressure on premiums and hence reduced capacity utilization’. He was describing the begin-ning of the down-cycle, while announcing profits from three years earlier.

He had spotted the hidden trains: ‘present market conditions, uncomfort-able as they may be, are overshadowed by the need to provide for the develop-ment of past year claims, some as yet unknown and unquantifiable, springing mainly from long tail liability business in the United States’. He said that these claims had reduced the anticipated profit for the 1985 account. They were also responsible for the two current major problem areas in the market, namely the Outhwaite Syndicate 317 and the Warrilow Syndicate 553. In the case of Outhwaite, he welcomed the initiative taken by members’ agents to commission an inquiry by lawyers and accountants.

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Lawrence went on to distinguish between what the Council could and should do and what it could not do in problems like this. He repeated the line Miller had used before, saying that its primary role was to satisfy itself that there was a competent agent managing the affairs of the syndicate on behalf of the Names. In addition, the Council could do its best to facilitate the early resolu-tion of outstanding problems: ‘What it must not do is enter the marketplace and seek to dictate to those with the responsibility to their own Names how nor-mal business claims should be settled. This is particularly the case when those claims are the subject of litigation or arbitration.’

He blamed the wider society for driving Lloyd’s off-course – ‘The economic distortions of the last 40 years, deliberately imposed by successive governments’ had obscured the need for a single-minded approach to underwriting profit. ‘Grossly excessive rates of personal taxation’ had obscured the impact of under-writing losses. High levels of inflation and interest rates had provided impressive rates of return on investments, much of it in the form of capital appreciation, taxed on a favourable basis. The situation had changed; since the last budget,20 one could say with certainty that ‘those days have gone’.

***

The year 1988 began with a Lloyd’s Gold Medal for Peter Miller, followed by a knighthood. Lloyd’s celebrated its tercentenary with a charitable foundation and the Queen Mother throwing a switch to illuminate the building. One evening, the underwriting room became the setting for a specially commissioned pag-eant of its long history. Invited guests marvelled at the production from the galleries. Few realised what the next Act would bring.

UNLIMITED LIABILITYWhen individuals lost large amounts of money, they began to realise the con-sequences of trading with unlimited liability. Others who heard about losses became nervous. The subject surfaced for debate several times during the 1980s. The Council reviewed unlimited liability on four occasions during its first dec-ade. Each time it concluded that such liability should stay. Arguments in its favour included the sharp sense of responsibility it imposed on underwriters. Its biggest attraction was the tax treatment that went with it. It was seen as a fundamental feature of the structure of Lloyd’s.

The unsuitability of underwriting with unlimited liability was accurately described by Robert Kiln in a note to the Council for the discussion at Brocket Hall in 1987. He also described the problems of underwriting on the basis of

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capital that was not fully within the control of Lloyd’s. He pointed out that twice before21 when losses had seemed egregious, Names had refused to pay. Instead, they resorted to litigation. Kiln said that this would happen again. He was right.

The Inland Revenue’s withdrawal of some tax privileges helped to stimu-late a further debate about the future of unlimited liability. Michael Wade took every opportunity to stress the need to build up reserves at the syndicate level. In 1988, an article appeared in ALM News by Robert Hiscox, saying there was now very little advantage in being taxed as individuals. He argued ‘we could get rid of unlimited liability and, if necessary negotiate a different tax struc-ture’. He challenged the conventional view: ‘Security of the Lloyd’s policy is often advanced as an advantage resulting from the unlimited liability obliga-tion imposed on Names. Unlimited liability gives an impression of unlimited means behind the Lloyd’s policy which is totally fallacious.’ Behind the means shown by the Names and Lloyd’s known reserves, there were ‘far from unlimited means and, in reality, very little extra to pay for a very large loss’. He had spoken to many senior brokers and had yet to find one who used unlimited liability as a selling point: ‘Should a massive loss hit the insurance industry, resulting in mas-sive losses to Names, Lloyd’s will be far harder hit than insurance companies. There will be a chaos of failure to pay losses by Names through unwillingness or inability and because of probable litigation against Lloyd’s and agents.’ Whereas companies would be able to go to the capital market to replenish their reserves, Lloyd’s was not equipped to raise major new capital swiftly.

Hiscox found the argument that with limited liability, underwriters would be less cautious ‘derogatory’. He thought that capital could be raised from institutions and companies. He understood that the Council had debated the issue of unlimited liability twice in the last four years and was firmly committed to its continuation: ‘To which my reply is that the Council of Lloyd’s have a track record second to none for lack of foresight, which has been well illustrated by the recent debacles in Lloyd’s.’ He said the system should be changed now, without waiting until after the massive loss, when it would be too late.

Despite institutional inertia and complacency, most of the ideas that even-tually saved Lloyd’s were already lurking among the more thoughtful profes-sionals and Names. What was needed was a political process by which they could rise to the surface and overwhelm the suffocating weight of tradition. Success over three centuries made this hard to do. The anachronistic structure of Lloyd’s had been perpetuated by the tax structure. Its appetite for capital and its relatively lax rules had extended its appeal beyond the rich, attracting large numbers of essentially middle-class members who could not withstand the full impact of unlimited liability when the unexpected happened.

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GOING TO COURTIf God’s will be that the said ship shall not well proceed, we promise to remit it to honest merchants, and not to go to the law.

Sixteenth-century insurance policy

Litigation is the most expensive means of settling a dispute, short of warfare.

Stephen Merrett

At what point does a person decide to sue? Custom and inertia inhibit most Britons in most circumstances. Until the 1970s, this was especially true among the more traditional Names at Lloyd’s. Many were tied to their underwriters or agents by links of family or friendship. There was also a sense of inferior knowl-edge of the insurance world: they were passive amateurs; the underwriters were professionals. It was simply not done.

The values that prevailed in the City generally, and at Lloyd’s in particular, included what people called a sense of honour: one paid one’s debts, however uncomfortable one might feel about it. In the past, most members had enjoyed the experience of steady profits. When losses arrived, one had to take the rough with the smooth. This way of looking at the world was strongly encouraged at Lloyd’s. It helped the system to work; it fitted a culture that saw risk as the business of Lloyd’s. Lord Kimball, a member of the loss-making Warrilow syn-dicate, put it like this: ‘It’s swings and roundabouts. Sometimes you win, some-times you lose. You always pay your bookmaker. Underwriting is the same. You pay up and shut up.’

But a code of honour is inherently reciprocal. An extreme case can pro-voke a sense of injustice. Some losses are so egregious that they trigger a call of ‘foul’ as predictably as when a hand is seen reaching out to touch a football. When their sense of fair play is offended, people will question whether honour still restrains them. When they have had no uplifting experience of steady prof-its, or indeed any profits, their threshold of tolerance is lower. When the losses incurred are literally unaffordable, the individual is likely to see himself as a victim. At Lloyd’s there had already been exceptions to the principle that each Name alone was responsible for his losses. These cases are known by the names of the underwriters concerned: Harrison, Wilcox, Sasse and Peter Cameron Webb (PCW). The last three all involved fraud – the reason for breaking normal principles. In each case they generated pressure to litigate.

In the late 1980s, leaders at Lloyd’s were concerned about its reputation in the eyes of the press, brokers and clients. There was deep concern at the prospect of Names suing either Lloyd’s itself or their agents. The leadership was anxious

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to avoid the unseemly spectacle of court battles between Names and their under-writers. This aversion had a long history. Over centuries, British merchants and insurers typically avoided formal courts where possible, preferring in camera arbitration, which was cheaper, quicker and preserved their trade secrets. On three occasions, the hand of Lloyd’s was forced as a result of fear of the damage that a court battle would do to its reputation.22

The most recent case was PCW. The bill for its run off had been taken on centrally. The structure chosen was novel. A specially created syndicate was reinsured into a new company called Lioncover. This enabled the liabilities to be discounted to reflect their current value. Responsibility for further deteriora-tion of PCW losses proved very expensive to the Society. As the old year prob-lems mounted, the leadership and parts of the Corporation had at least some sense of what it was like to watch the claims for cash rise inexorably, albeit with bills for the central fund rather than for themselves.

The Warrilow losses, about which Lord Kimball had been stoical, were regarded differently by Tom Benyon, the ALM’s former Chairman. He hoped to sue the managing agent for negligent underwriting, seeking compensation from the agent’s errors and omissions insurance cover. First, he needed to get in touch with other Warrilow Names; this he found difficult. Neither Lloyd’s nor the members’ agents were very co-operative. He found a retired schoolmaster who used a list of Names known as the Lloyd’s ‘Blue Book’, which does not con-tain addresses. He was able to cross-reference many of the Names in the book with other publications, such as Who’s Who, and thereby built up a database of Names and addresses. This meant that he was able to get in touch with many other people on the syndicate.

A members’ agent, John Donner, thought that Outhwaite’s losses rep-resented yet another exceptional occasion on which Lloyd’s should step in to compensate the losers. A long-awaited report by Freshfields23 concluded that Outhwaite was open to criticism. Although they said a case could be made for a breach of duty, they also said it would be unlikely to succeed.

GROWING CONCERNIn the late 1980s, the world around Lloyd’s was changing. The investment returns which had disguised poor underwriting returns were falling. The tax regime which had driven its expansion had now altered fundamentally. New members stopped arriving. The insurance cycle24 was entering a phase of falling prices. Its invincible reputation began to be questioned.

The Business Issues Committee (BIC) was established in 1988 as a forum for discussion of the major business issues of the day by representatives of all

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the constituent parts of the market. It brought together the chairmen of all six Lloyd’s market associations and a senior representative of the Corporation (the present author). It marked a partial truce in tribal warfare, implicitly reflecting a view that the common external threats were more important.

The Council was in the habit of receiving presentations from each of the various market associations. Once a year it was the turn of the Lloyd’s brokers to say their piece. In 1989, broker representatives indicated a series of concerns, some genuine, others perhaps exaggerated. They were very unhappy with the attitude of underwriters towards brokers. They disliked waiting at boxes, the costs involved in seeing many different parties, the painfully slow progress of electronic communication and standardised business processing, and the con-stant threat that brokers might be cut out of the chain of business. They also said that many brokers were in financial difficulties.

Concern was also expressed about over-capacity in the market. In the last down-cycle, the most ‘irresponsible’ competition had been outside Lloyd’s, in the company market. This time it was likely to be within the Lloyd’s market. Various possible steps were discussed, such as enhanced quality criteria for agents, syndicates or underwriters, or the introduction of quantity controls by restrictions upon the growth of membership and capacity. Merrett reported at the Council25 that there were large classes of business where the rating levels bore no resemblance to the past – for example, major oil platform risks were now being placed at around one-tenth of the rate prevailing a few years ear-lier, while major US construction risks were being insured at around one-third of their former rate. These huge rate reductions were cited as evidence of ‘real irresponsibility’. When the losses for 1989 were reported three years later, they were partly blamed on low rates, as well as the catastrophes that occurred. The insurance cycle was entering the trough.

New sources of insurance business were not being tapped. Even without new members, there was over-capacity. This was helping to drive down prices and profitability. Admission of new members slowed down in 1988, and the fol-lowing year was for the first time exceeded by resignations.26

While market conditions were deteriorating, the Council continued to mend some leaks in the collective roof. For example, in order to deal with the concentration of risks involved in PSL underwriting, the Council restricted it27 to five per cent of the syndicate’s capacity, otherwise it would be deemed a spe-cialist syndicate. Names would be restricted to a total participation of 2.5 per cent of their OPL on all such specialist syndicates, thereby limiting their expo-sure to others’ losses through PSL underwriting. This measure came too late for many members who had been on specialist stop-loss syndicates with massive losses.

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The Council also continued doggedly with the implementation of Neill’s entire shopping list of reforms, including a standard agency agreement, with a compulsory deficit clause. Foot-dragging on this was a case study in the dangers of self-regulation.28

The government-appointed Neill Committee29 had received some com-plaints about one feature of the standard underwriting agreement. This required the Name to supply funds to cover an insurance claim, even if he believed that he had grounds to seek recovery of the money from the agent: ‘in other words, he must pay now and sue later’. He could not seek an injunction over funds already in the control of the agent or seek to have any dispute dealt with by arbitration. Neill found the underlying objective of these provisions ‘laudable: valid claims of policyholders should be met promptly’. But he thought the effect should be tempered to deal with possible cases of abuse, suggesting, for example, that doubtful demands by agents might be put through the filter of an ‘independent arbiter who would be likely to be a much more formidable inquisitor than the Name on his own’. Much debate and legal action subsequently surrounded the operation of the ‘pay now, sue later’ clause.

Another Neill recommendation had been that Lloyd’s should review intro-ductory commissions. Neill had been inclined to outlaw them, but lacked detailed evidence about the implications. From a members’ agent’s point of view, it was becoming more difficult to recruit new Names and such incentives were useful. It was therefore decided that payment of introductory commis-sions should not be prohibited. Instead, there should be a byelaw obligation to disclose any commission or other benefit at the first meeting between an agent and a prospective Name. This byelaw was passed in June 1989, long after the boom in membership.

In October 1989, the Wall Street Journal headlined Peter Nutting’s remark that ‘Lloyd’s is on the ropes’. The article spoke of the shrinking pool of Names and widespread unease, citing the notorious case of Betty Atkins, a secretary who had been given Lloyd’s membership by her employer as a leaving present. She was quoted as saying ‘I have wished I could die and be out of it. That’s how bad it is’. A former broker described the market as ‘so ludicrously unprofessional it drives you mad’. The reporter, Craig Forman, mocked the market’s traditions. He said that Lloyd’s was being shaken to its very foundations, battered by enor-mous claims, besieged by disgruntled investors and hamstrung by inefficient time-honoured ways of conducting business.

Lloyd’s was shocked by this depiction. The BIC Chairman, Michael Williams, wrote to the editor to say that he was ‘frankly astonished at your ill-informed and biased article’, making a number of corrections. He strongly challenged the image of ‘genteel decline’ used in the article, describing the high-tech building

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as an international symbol of modernity, dismissing resignations as a loss of small fry and citing greatly increased membership financial requirements for the next year. The Chairman of Johnson & Higgins, a prestigious US broker with close connections to Lloyd’s, wrote a blow-by-blow rebuttal of each point in the article. Angus West, a prominent US Name, wrote that nothing could be further from the truth than the impression that Lloyd’s was on the ropes.

Concern about public perception was felt throughout the market. A Lloyd’s Underwriting Agents Association (LUAA) delegation comprising John Gordon, Paul Archard and Robin Gilkes told the Council that many perceptions of Lloyd’s held internally and externally needed to be improved. They were con-cerned about the way in which the market was run and led, and proposed that the elected chairs should be concerned with only the market’s technical insur-ance problems and its relations with its customers. Regulatory and service mat-ters should be dealt with by the Corporation.

Gordon’s main theme was business volume. He had come to Lloyd’s from the shipping industry, which like Lloyd’s had been steeped in tradition and old ways, and was not at all market-orientated. It had been forced to change. The world of insurance business had also changed and Lloyd’s had to adapt. The underwriter was no longer king. The LUAA supported efforts to develop the brand name and marketing of Lloyd’s. A Council paper reviewing the budget for the Corporation was based upon some ‘explosive’ assumptions about the future: the number of Names was likely at best to hold steady. The Committee of Lloyd’s – the working members – thought a budgetary response to a worst-case scenario should be developed.

COPING WITH LOSSESThe losses suffered by some Names began to raise issues at the Council level. When a Name was unable to pay a cash call, money was taken from the central fund to make up the deficiency. Until now, this had been rare. In 1985, there had been only one single such withdrawal. By October 1988, £1.7 million had been withdrawn to make up the amounts owed by 24 Names. It was normal to seek to recover this from the Names.

As required by the DTI, an annual solvency test was applied to each mem-ber in order to demonstrate that his assets could cover his liabilities. If there was a shortfall, the central fund was notionally ‘earmarked’ to the extent necessary to cover the gap. The ever-vigilant Solvency and Security Committee wanted to recover this growing amount – which seemed large at the time – from the members concerned. A new byelaw passed in 1988 gave Lloyd’s the power to recover money from Names at this earlier ‘earmarking’ stage. Some misgivings

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were expressed about using the power of a byelaw to recover money at this early stage, on the basis of an estimate.

A sub-group was asked to think through how these powers should be used. Chaired by a Corporation executive, Graeme King, it reported to the Council in September 1989. The latest solvency test, for end-1988, had required the cen-tral fund to be earmarked on behalf of 284 members. To date, it had been the policy to recover money actually withdrawn from the central fund by all pos-sible means ‘short of driving the member into abject poverty or bankruptcy’. Now it was felt necessary to establish a civil debt at the earlier earmarking stage. This would prevent those who were able, but unwilling, to pay from rearrang-ing their financial affairs. It was proposed that Lloyd’s inform the member of his shortfall and issue a writ at that point. However, if a member advised Lloyd’s that he was willing but unable to pay his losses, or that to do so would cause financial hardship, then the enforcement of the writ could be postponed.

Such a member would be asked to prove his financial status, to acknowledge his debt and to cease underwriting. A formal agreement should be made with each ‘hardship case’, to include a repayment schedule based on the members’ ability to pay. When central fund withdrawals were made, interest normally accrued at the rate for a judgment debt – 15 per cent at the time. Much lower rates were suggested for hardship cases. Income falling below that of the aver-age male manual wage of £8,500, or 1.5 times this for a couple, would exempt a member who acknowledged his debt from repayment. For higher incomes, periodic repayments would be expected for five years. After that, the outstand-ing amount could be written off. Unencumbered assets would need to be sold, but there would be no need to sell the house if it was ‘modest or average for the size of family’. Lloyd’s would not seek to claim it before the death of the Name and his spouse.

Some Council members were unhappy about what they saw as lenient treat-ment for hardship cases. Persuasive among those who spoke up for a humane response to the plight of some Names was Dr Mary Archer, who had been a member of the sub-group. It was agreed that the hardship status of Lloyd’s mem-bers should not become known through posting names in the Room. Archer agreed to serve as Chairman of the members’ Hardship Committees – each selected from a panel. An announcement was made that members could apply for help on hardship grounds and that legal action would be postponed while the case was considered. The Chairman of Lloyd’s, Murray Lawrence, stated that: ‘Lloyd’s does not wish to bankrupt a member who is unable to meet his underwriting losses [and] co-operates with the Society over the arrangements for the settlement of the debt.’

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THE OUTHWAITE PROBLEMOuthwaite’s syndicate was a persistent issue throughout 1989 for two reasons: it was causing Names big losses and it was generating many disputes with syn-dicates that had bought a run-off policy from him in 1982 or earlier. As men-tioned above, Outhwaite resisted some of their claims – some on the grounds of material non-disclosure when the run-off contract was placed and others on the basis that the syndicates had paid claims well beyond their legal obligations. The Chairman, Murray Lawrence, was in a difficult position, as he had bought a policy from Outhwaite himself. He tried hard to promote an accommoda-tion between the disputing syndicates. Mark Littman QC was appointed as an independent conciliator. He had some success: many of the run-off contracts were renegotiated. But the limited relief this brought was not enough to remove the strong sense of injustice at the still-mounting losses felt by many Outhwaite Names.

Outhwaite’s Chief Executive, Edward Bloxham, wrote to Murray Lawrence in April 1989 following a resolution of one dispute by Lord Wilberforce, Chairman of the Lloyd’s Appeal Tribunal, of the disputes with Syndicates 347 and 570, underwritten by Michael Cockell. He argued that the Wilberforce prin-ciples were applicable to other run-off contracts and would bring some relief to the troubled syndicate. He recognised that this would ‘cause considerable dif-ficulties for the market as a whole’ and had therefore devised proposals for a centrally organised cap on Outhwaite’s liabilities, known as the Havers plan (Sir Nigel Havers, a former Attorney General and Lord Chancellor, chaired the Outhwaite agency).

Bloxham said that Names had already suffered losses of 227 per cent of their line, a total of £94 million. Legal action by Names would bring bad public-ity for Lloyd’s. He proposed that a further cash call of 150 per cent be made on Outhwaite Names; Lloyd’s should then set up a company to reinsure any further deterioration. Lawrence told the Council in June 1989 that he could not recom-mend this: it would mean ‘mutualising the risk of further deterioration on the account’. Lawrence reaffirmed the Council’s commitment to doing all that it could to encourage the speedy resolution of outstanding disputes.

At the June 1989 AGM, John Donner, a member’s agent, asked for an imme-diate and wholly independent enquiry into all the circumstances surrounding the placing of the run-off contracts with Outhwaite, in particular the level of disclosure. He also wanted an urgent in-depth investigation into the account-ing procedures at Lloyd’s, pointing out that the system could not cope with immense and uncertain potential liabilities from the past. He thought the uncertainty of open accounts was unfair on the Names affected: ‘They find that

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the cash demands are causing enormous distress and financial hardship. Names are required to fund now the future liabilities, which is both unnecessary and destructive to Lloyd’s reputation.’ The system, he said, had broken down.

Donner was given an opportunity to report to four nominated members of the Council – Sir Maurice Hodgson, Matthew Patient, David Walker and Alan Lord. This group found that there were no grounds for the allegation that the asbestos working party had concealed information from the market about the seriousness of asbestos liabilities. Nor had Lloyd’s failed to do all it reasonably could to encourage syndicates and the auditors to adopt a duly diligent attitude in setting their reserves at the end of 1981. There were, in short, no prima facie grounds for an inquiry. The Council endorsed their view. This proved hard to explain to journalists, some of whom preferred the conspiracy allegation.

Although the Council set its face against an inquiry into Outhwaite, the Names involved were in no mood to accept their fate. Determined people hit by losses had won concessions before in the Sasse and PCW debacles. Peter Nutting emerged to lead the Outhwaite Names. After leaving Eton, he had done his National Service as an Irish Guardsman. He signed up for another year, instead of going, as planned, to Trinity Hall, Cambridge: ‘I didn’t want to go back to school’, he explained.30 Later, he joined a banking group, Grindlays – ‘Where I earned squillions’ – which bought a controlling interest in Sturge, a Lloyd’s managing agency. He was encouraged to become a member of Lloyd’s for 1972, although none of his family had been a member. After a poor start, it was ‘won-derful all the way through until the mid-1980s. It helps one to live beyond one’s means, educate one’s children and do all those sorts of things because of the tax-free capital appreciation. I had a big line on Posgate’.

He received a phone call from a friend, David Lentaigne, a Marine broker, asking whether he was a member of the Outhwaite syndicate. He said yes, it was one of his better syndicates, making good profits. Lentaigne replied: ‘You’ve got one hell of a problem. It’s done the most incredible things and it’s going to cost his Names an absolute fortune.’ When the Freshfields report, commissioned by members’ agents, concluded that legal action would probably not succeed, Lentaigne and five other brokers commissioned a firm of solicitors, Richards Butler, to take a closer look. Nutting did not attend the first meeting of members at the Baltic Exchange because it was Ascot week. He says: ‘The upshot was that they formed a small committee of these six Lloyd’s brokers and me because I was considered to know something about insurance. I was asked to chair the initial meeting because I was the only non-working name.’

All sorts of well-known Names were considered to lead this exercise, as the syndicate included Robert Maxwell, Lord Weidenfeld, Edward Heath and Adnan Khashoggi, reputed to be one of the world’s richest men. Nutting agreed

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to be the acting chairman for the time being. The committee asked members to subscribe £100 as they were now starting to incur legal costs. Nutting recalls that:

We had incredible difficulty in getting to the members of the syndi-cate. We would write a letter, and copy it to the members’ agents and write the Names of the individuals, taken from the Blue Book, on the envelopes and asked the members’ agents to send it out. Some of them refused, but Lloyd’s were marginally co-operative and said that they ought to, on the basis that the law of agency meant they should not deprive their principal of something that might be of interest to him.

Nutting employed a young man who was out of a job: ‘He sat in Richards Butler’s office and sorted out the cheques. We probably got 100 people sending £100 each. Around that time I was looking about for my next project.’ By 1989, Nutting was elected to the board of the ALM: ‘They didn’t entirely welcome me with open arms.’ Later, he was invited to be a guest speaker at a regional meeting: ‘The local organiser was told to un-invite me, that I was not accept-able as an ALM speaker, although I was on the board.’ The ALM Chairman argued that the ALM had only just been accepted as a force by Lloyd’s; it did not want to do anything to damage that relationship: ‘To blow the trumpet of the Outhwaite action group might be against the interests of people who were not on the Outhwaite syndicate. I said I was not an idiot, and spoke at an unofficial meeting anyway.’

The Action Group went to Anthony Boswood QC, who knew Lloyd’s well. He thought there was a case for Outhwaite to answer and said that he would like to argue it. He stated that it would all hinge on expert evidence. The com-mittee and its advisers alleged negligence by Outhwaite and the 80 members’ agents who had put Names on his syndicate. They were aiming at the members’ agents’ errors and omissions (E&O) insurance cover. The agents themselves, says Nutting, ‘weren’t worth tuppence. We weighed up very, very carefully, before we issued a writ at all, that there was a pot of gold there available to us. In fact we estimated it might have been as much as a billion pounds’. He goes on to say:

We put in a claim and they put in a counterclaim and there was a huge amount of aggression, with me appearing on breakfast television programmes with Alan Lord. I came out and said how disgracefully we were being treated and all the rest of it. I hired a PR consultant.

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He found out the names of reporters who covered Lloyd’s and I met them, gave them lunch and generally chatted them up and got them onside. It wasn’t difficult because Lloyd’s had a pretty poor reputa-tion at the time. John Moore of The Independent was a ready ear. Lisa Buckingham at The Guardian was supportive, as were other journal-ists. We had a series of public meetings. The first was at the Methodist Central Hall in Westminster with over 1,000 people. I spoke and so did Anthony Boswood ... While all this was going on, enormous pres-sure started to be put on me as we were preparing to issue writs ... I was summoned to a meeting with Murray Lawrence, the Chairman. David Coleridge was there and all the grandees of Lloyd’s. We were told that really we should shut up and pay up and all the rest of it and we said we wouldn’t shut up.

Nutting was asked to go to the Bank of England, but declined: ‘Murray Lawrence wrote a letter to all the litigants just before we issued writs. I should think about 30 of what I call City people pulled out. It didn’t affect the critical mass but it was a very nervous moment!’ Nutting says he had ‘two really good guys on the committee: John Tomlinson, who had been a senior partner in a big City law firm; my real coup was persuading Sir John Grenside to come on board, who had been the senior partner of Peat’s. He was a formidable City character’.

The litigation had by now become Nutting’s main project: ‘It had become part of my life. I was happily tied up in this. I mean, I was organising it single-handedly. I had moved the whole thing into my office at home.’ He composed the letters, checked them by fax with his lawyer and posted them out: ‘My wife and our housekeeper used to come up and help stick stamps on.’ He raised £4 million in cash:

We called for a similar amount in undated cheques for the trial. We could have cashed those cheques had we lost and had to pay the mem-bers’ agents costs. So we had a kitty of about £8 million ...

We were told the whole case hinged on expert witnesses and we found this extraordinary man called Ulrich Von Eichen.31 For some reason or other he didn’t like Lloyd’s and had an appallingly low opinion of Lloyd’s underwriters. We had some concern that he was an unguided missile. He worried some of us. We thought he would either sink us out of sight at the start of the trial or he would be a really winning card.

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Christopher Stockwell was a member of Nutting’s committee, having become a Name in 1979 through the Outhwaite agency. A former corporate planner and management consultant, he worked with a United Nations body to develop the activities of Third World charities, learning a lot about action groups and co-ordinating efforts ‘to influence organisations otherwise immune from shareholder or community pressures’.32 He also ran a group of companies. He underwrote £2 million at Lloyd’s backed by a Norwich Union guarantee secured on his house. His wife, Philadelphia, underwrote another £1 million, backed by a portfolio of shares and a small guarantee.

STILL IN DENIALAs the crisis unfolded, starkly contrasting attitudes surfaced at the big events like Lloyd’s AGMs. They provided a chance for Names to air their concerns and they became a stage for Lloyd’s’ own theatre. At first, these were still held on Lloyd’s premises. Later they were held in places normally used for theatrical performances: the Royal Albert Hall, the Royal Festival Hall and the Queen Elizabeth Hall.

At the 1989 AGM, a Name queried the Chairman’s recently expressed view about the Council’s concentration on internal issues such as old disciplinary cases and new regulatory arrangements. Lawrence had declared that ‘this period in our history is over’. The member argued that there were still scandals not yet fully aired, saying that time would tell. He did not consider this period was over; he thought it was just beginning. Earl Alexander of Tunis rose to move a vote of no confidence in the Council of Lloyd’s. He was ruled out of order, but a fairly public note of rebellion had been sounded.

As the new decade began, the full significance of the oncoming trains was still not widely understood. In January 1990, Alan Lord took the opportunity to look at the Council’s likely priorities for the 1990s. He saw the main regula-tory task for the coming decade as simplification without reducing quality. Like others, he foresaw an increasing central role in supporting the businesses. In a glancing reference to Outhwaite, he said there would always be problems and there would be vigorous work to resolve them. There was no hint of recognition of the scale and depth of the crisis about to confront Lloyd’s. In this, he was not alone.

In an effort to reduce the irritation caused by too much paper, the Council decided to reduce the volume of information received by Names. Abbreviated annual reports would become mandatory, with full reports available on request. In the same vein, the last year’s Global Report and Accounts had only been sent to members who asked for them – which had been less than 20 per cent

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of Names. This is the same report in which Rokeby-Johnson33 had described the possible scale of the asbestos problem in 1984. The pendulum was swing-ing away from the more and more detailed disclosures of the previous decade. Somewhat incredibly, most people, even in 1990, did not want to know.

In April 1990, the Newsletter described a consultative document about a scheme for the arbitration and conciliation of disputes between syndicates, and between Names and their agents. The question as to whether mediation proce-dures should be set up within Lloyd’s stemmed from the increasing popularity of conciliation to settle commercial disputes, especially in the US. Conciliation had also been extensively used at Lloyd’s, most recently to help in the resolution of reinsurance disputes involving Outhwaite. In June, Alan Lord reviewed the involvement of Lloyd’s in the Outhwaite affair.34 He set out the ways in which Lloyd’s sought to help Names with big losses, saying ‘the Council is sympathetic to those Names and is doing everything possible to help them, short of transfer-ring the liabilities to the membership as a whole’.

Lawrence’s third and last AGM speech in 1990 sounded even more like busi-ness as usual than the year before. He was encouraged to note that the number of open years of account had fallen from 115 to 92. He expected this number to fall even further.35 He was able to announce an overall profit of £509 million for 1987 – only a little down on the record profit of the year before. He said that the class of ‘business liability’ had largely cancelled out the underwriting profits produced in other classes.36 The outlook for 1988 and 1989 was ‘less sat-isfactory’. It appeared as though 1988 would be profitable, whereas 1989 had an unusual number of major claims and it was ‘possible’ that the market would make an overall loss that year. The 1990 year had not made a promising start, but prospects for the future were more encouraging. Still there was no recogni-tion of the scale of the problems to come.

Lawrence spoke with some relief about the conclusion of negotiations with the US Internal Revenue Service (IRS) over taxation. He reported on the success of the independent conciliator, Mark Littman QC, in the disputes between the Outhwaite syndicate and others in the market. Of the 32 contracts written into the 1982 year of account, only six remained in arbitration, litigation or were otherwise unresolved. In this context, he said that ‘litigation between trading bodies at Lloyd’s or between Names and agents is thoroughly unhelpful to our perceived public reputation and, it may well be argued, to our trading prospects as well. The more we can resolve these matters fairly, rapidly and by our own procedures within the Society itself, the better it will be’.

Lawrence then turned to the issues of the future, including relations with brokers, and ended with a pronouncement that the regulatory system was of the highest quality, deprecating the temptation for Names to jump to the

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conclusion that underwriting losses were indicative of a breakdown in regu-lation. Donner said ominously that he might be unable to advise his Names on the 1982 Outhwaite open account to meet any further cash calls. He was described by another member as ‘a fifth column ... feeding selected information to television presenters ... I, for one, ask Mr Donner to cease his insidious attacks on the Lloyd’s Council, particularly when seeking to discredit the nominated members’.

One member expressed the hope that some Names would still be around to enjoy the future. He saw the open year problems as the result of poor-quality underwriting of liability risks 40 years earlier. It was like a disease which had lain dormant in the body corporate and was now exploited by a section of the US legal profession. This sickness was now activated and spreading. He asked if the Council had decided to sacrifice a limb in order to delay the effect of the disease on the whole body. Mr Littman’s negotiations had merely passed the problem back to another set of Names. He argued that it should be shared – or mutualised – in order to cure it. The time had come to show ‘that we are a united body with a sense of community ... that cares for its casualties and succours its wounded’.

Lawrence disagreed, saying that past underwriting was entirely responsible at the time; it had only turned out to be unsuccessful by ‘40 years development of outrageous legal progression in the tort system in the US’. He rejected calls for mutualisation, saying that they ‘went against the whole way in which we trade’. Chris Rome, the BIC Chairman, declared that AGMs were too much dominated by the problems of the past: ‘many of us have lost money ourselves, but are more concerned now in looking forward’. Lawrence concurred: ‘We have tried to move on to market issues.’ The leadership was still in denial about the scale of the problems that were building up. Below the surface, the temperature was ris-ing to fuel an eruption of volcanic proportions.

In October 1990, Colin Murray, Chairman of the Solvency and Security Committee, persuaded the Council that the central fund should be increased. One reason was the growing calls on it made by mounting estimates of the eventual cost of Lioncover – the reinsurance company formed to take over the PCW liabilities. But Murray was also concerned that the outturn for the 1989 and 1990 years of account could make fresh demands on the central fund. It was desirable to start raising the contribution now rather than wait until the Council’s hand was forced. Alan Lord came to his aid, proposing that savings in Corporation costs could offset a modest increase of 0.125 per cent. After a long discussion, the Council went further and increased central fund contri-butions to 0.6 per cent, with half of this increase financed by a cut in mem-bership subscriptions to reflect Corporation savings. The Chairman resisted a

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suggestion that some kind of cap should be placed on future contributions. Lord repeated the recently expressed view that the major task of self-regulation was now ‘behind us’; the main concern of the Council in future was to facilitate the development of business.

In October 1990, the Council was told that a meeting of the ‘Outhwaite 1982 Names Association’ had recently taken place. As an Outhwaite Name, Michael Wade had been there. He said the meeting was well conducted. It had been largely concerned with the question of when to sue rather than whether to sue. Anthony Boswood QC had reviewed the points contained in the Chairman’s letter to the Names; he had urged them to express no interest in a further exten-sion of the standstill agreement. The possible introduction of the reinsurance vehicle had been regarded as an ‘interesting sop’, but was of no relevance to the question of liability of the Names. The lawyers present had agreed that an independent inquiry into the placing of the contracts would achieve little and would distract from the resolution of the outstanding disputes. Action Group Chairman Nutting was said to have advised Names that if they did not join the litigation now, they might be unable to share in any recovery subsequently. Wade told the Council that the meeting had been very dismissive of the concili-ation initiative.

The following month, the Council considered whether E&O insurance should continue to be compulsory. The agents saw the requirements as an unacceptable burden. They also said it was another example of reinsurance by Lloyd’s syndicates of Lloyd’s syndicates. They felt that E&O should be seen in the context of other financial requirements and the new compensation fund. The Council decided to drop mandatory members’ agents E&O insurance cover for 1991, retaining it for managing agents.

Nutting was elected to the Council for 1991. He recalls Mark Farrar, already a Council member, taking him to lunch at Brooks’ before his first meeting, tell-ing him ‘you need to, sort of, not be loud. Frankly most of them think you’ve got horns and a forked tail’. Nutting said it was hardly in his nature to be strident: ‘So he marked my card. At the first big party up on the top floor there was a sort of string orchestra. The chap I made real friends with over the evening was Stephen Merrett and actually we retained a rapport on an ongoing basis.’

SEVEN SINSAccording to tradition, there are seven deadly sins: greed, sloth, pride, lust, gluttony, envy and wrath. All seven were there. There was greed aplenty and it increased in the 1980s. It was the time to get rich quick. Certain underwrit-ers openly spoke of it being human nature to be greedy; some Names looked

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greedily for the syndicates with the highest returns, forgetting that they were the riskiest. Some brokers excelled themselves with the highest salaries in the land. There was sloth: some underwriters failed to track their exposures; some members’ agents failed to watch the syndicates; and some Names failed to look for danger or to heed it. At the Council, the Committee and the Corporation too, there was a failure to spot problems that were growing out of control. There was no shortage of pride all around. They all thought Lloyd’s was the crème de la crème, that it was the centre of the insurance world and that it knew best. There was lust – both the usual kind and also the lust for power, dominance and control. There was gluttony; the City restaurants were full with expense account entertainment and fine dining. Many Names mistook a good lunch with their agent for proper stewardship. There was no shortage of envy by some of others’ greater returns and position.

And then came wrath. All six sins could ride together while the profits rolled in. When the big losses arrived, there was much wrath.

It is not spite that drives some Names into the hands of lawyers; it is outrage and despair. Without justice there can be no peace, and possibly no Lloyd’s.

Lloyd’s Name

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By late 1990, some of the more thoughtful characters in the market and among Lloyd’s Names began to question the market’s future. Some were

most concerned about where the future business would come from and whether Lloyd’s would be able to compete for it. Market capacity had fallen in 1989 for the first time in 20 years. Others questioned whether the fabric of the market could withstand the pressures generated by growing losses, open years and liti-gation. Some were convinced the structure was outdated. The leadership and the Council seemed unsure how to navigate a way through this minefield.

RETHINKING LLOYD’SIn late 1990, an increasingly confused leadership agreed to the formation of a Lloyd’s task force to study all these problems and find a way forward. Pressure for action came from two main quarters: the ALM and a handful of the more far-seeing elements in the market.

The ALM was very troubled by the number of syndicates left open. Following headlong growth, the engine of Lloyd’s now seemed to be going into reverse. Capacity was falling in real terms; over 2,000 members had resigned in 1989 and another 2,000 had done so in 1990. The number of new joiners in 1990 was down to a tenth of those joining three years earlier.1 Although an overall profit of £509 million had been announced, some Names were hit by losses and cash calls. Hundreds of people faced sudden demands for tens or hundreds of thousands of pounds. Many Names were not especially wealthy: too often, those who had joined recently in large numbers had no liquid funds with which to pay losses. Their main asset was the recently inflated value of their home. The capital base of the market was revealed to be much more fragile than was widely thought.

Confidence was ebbing in the market too. The Chairman of the ALM, Anthony Haynes, a businessman, was an effective networker and lobbyist within Lloyd’s. He was convinced that Lloyd’s needed to hire outside consult-ants to take a fresh look at its growing problems. He approached McKinsey, who suggested he get support from agents. He approached Robert Hiscox first and between them they formed a group of contributors. When the Chairman and his successor were persuaded, chiefly by Michael Wade and John Gordon, that a study was needed, they asked David Rowland, an outgoing Council member, to lead a Lloyd’s task force.2 He took over the McKinsey initiative.

ANOTHER CHAIRMANDavid Coleridge became Chairman for 1991. The hope that Lloyd’s could leave behind the problems of the past was soon crushed by the weight of events.

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A crisis was taking shape at Lloyd’s at the same time as the UK economy entered a period of deep recession. Insurance rates were still at a low point in the cycle. The full horrors of the losses already embedded in the system were yet to emerge. Inconvenient truths and strong opinions surfaced at each big meetings of Names. In Coleridge, the voice of Lloyd’s was at times rash and defiant, and at times humble, weary, sad and apologetic. By the end of his time as Chairman, he was like a wounded boxer, staggering a little, having endured a long fight. He had held the fort and passed the mantle on to a team with fresh energy and better credentials.

Business Week heralded the arrival of Coleridge with the title ‘The New Broom at Lloyd’s of London’, saying he had ‘always been known as a go-getter’. He had taken on a sleepy underwriting agency and had turned it into Lloyd’s largest business, quadrupling its profits and earning him stock worth $32 mil-lion after it went public. Now the ‘Bombay-born son of a wealthy cotton broker and a descendant of the poet Samuel Taylor Coleridge is assuming the biggest challenge of his career. His mission: pulling the 303 year old exchange into prof-itability and keeping it number one in the world of high risk insurance’. It billed Coleridge as a reformer who wanted to see a wave of mergers in order to create bigger syndicates better able to withstand global competition. It described him as a lifelong insurance man who picked a brokerage house over college after leaving Eton. It said: ‘if Coleridge’s reforms click, Lloyd’s could end up well posi-tioned for the rest of the 1990s and beyond. In fact, despite the gloomy news now, Coleridge, an avid collector of volumes by his literary forebear, is any-thing but downbeat. Like the storm-tossed seaman in The Rime of the Ancient Mariner Lloyd’s is also facing rough seas.’

In a profile in The Times (8 June 1991), Coleridge was characteristically frank about the ease with which he had sailed through life to date. With his Eton education, it had not been hard to succeed at Lloyd’s or to become Chairman. He had not needed to be ruthless: ‘the world has always been a per-fectly nice place. I have never lacked anything I wanted. I am aware that there are a lot of people who have a miserable time and I’m jolly sorry for them. I’m not talking about losses at Lloyd’s; I’m talking about real tragedy. The truth is I’ve never experienced it’. The article cited one friend describing him as an enormously hard worker and as straight as a die, intelligent, very approach-able and very frank. Ralph Rokeby-Johnson, his business partner and a friend from school, said ‘he conceals his ability behind a tired teddy bear outlook. He is a very competent businessman and a very patient person. He is extremely well liked and trusted’.

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The year 1991 saw the arrival of a second woman on the Council. Lady Rona Delves Broughton was encouraged by several friends to stand for election as an external member. She half-suspects that some of them were hoping to split the female vote. She found that Names who said they did not want a woman on the Council soon became her strongest supporters. She recalls that her presence made some uncomfortable. When she said she was unable, from her position at the far end of the table, to hear the chairman clearly, someone said: ‘You’re new. You’re not supposed to hear!’ Soon afterwards, microphones were introduced.

In February 1991, the first Gulf War became a brief pre-occupation, just as the Falklands conflict had done nine years earlier. The media were fascinated by the role that Lloyd’s played in leading the war risks class of business. For the first time ever, the market opened on Saturday. Business was brisk and it was said later that a young Lloyd’s underwriter, John Charman, made the basis of his fortune during these few weeks.

MIXED MESSAGESThose who felt that their losses were unfair appealed to the court of public opin-ion. They thought that exposure of their plight would produce sympathetic news coverage. This would embarrass Lloyd’s and help build up pressure to find some kind of support or rescue. It might also help to build political pressure on Lloyd’s to find a solution. Some believed it could generate pressure on the gov-ernment to intervene or mount a rescue itself.

Lloyd’s preferred to avoid publicity. Just as government interference was anathema, so was intrusive press interest. In the late 1970s, the Sasse affair and other matters had brought much unwelcome public attention, fuelled by the prominence of some of the affected members. The passage of the 1982 Lloyd’s Act brought a double hit of parliamentary and press scrutiny from which it longed for relief. The PCW scandal that broke very soon afterwards put paid to that hope.

The PCW names pressed their case for relief from their losses and found their cause taken up by several journalists, notably John Moore, an FT journal-ist who moved to The Independent. He became a thorn in the side of Lloyd’s over many other issues. Often well-informed, he put the most cynical inter-pretation on developments at Lloyd’s. Until the PCW settlement in 1987, when Peter Miller said the long nightmare was over, it provided a more or less constant basis for adverse press comment. There were other issues too: the long-running argument with the Inland Revenue about reserving and tax avoidance, and the outcomes from a new impartial and transparent disciplinary system, including a finding of discreditable conduct by the former Chairman, Sir Peter Green.

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These criticisms resulted in pressure from the British press and Parliament for Lloyd’s to be brought within the Financial Services Bill. When Neill con-cluded otherwise, his report was swiftly denounced in some quarters as a white-wash. No sooner had Neill and the PCW scandal been dealt with, the Outhwaite losses and attendant cash calls arose as the source of regular comment. Other syndicates with large losses included Warrilow, leading Tom Benyon to start an Action Group. Peter Nutting, the leader of the Outhwaite Action Group, hired lawyers and a PR company. These groups were soon joined by others that stimu-lated press interest.

Starting in 1991, Chatset made a succession of gloomier and, as it turned out, more accurate predictions than Lloyd’s about future losses. As the scale of the losses and the number of Action Groups grew, Lloyd’s became increasingly concerned that publicity could affect client and broker confidence.

Lloyd’s communications department was headed by Peter Hill. An ex-jour-nalist, Hill, a dour, heavy-smoking Yorkshireman, had enormous commitment and staying power. He inspired much loyalty from a small team of long-serving individuals who maintained good relations at a personal level with most of the press. As the pressures mounted, inevitably some in the Lloyd’s market blamed the poor coverage on the supposed inadequacies of the department. If only they could show more imagination, they said, the critics of Lloyd’s could be silenced. Although there was scope for professional help, this was never feasible. The Lloyd’s story offered juicy material that no journalist could ignore: losing money on a record scale; conflict between Lloyd’s and its members; litigation alleging fraud and incompetence; and possible failure and collapse.

Lloyd’s took external advice from a succession of PR consultants and media-savvy individuals. Melvyn Bragg, a Name himself, was invited to offer his views to Coleridge. First Valin Pollen, a PR firm, then Citigate were hired, primarily to support marketing efforts. Brian Nicholson, formerly Managing Director of The Guardian and The Observer, was also hired. John Maples MP and Tim Bell, who was associated with coaching Margaret Thatcher, were also consulted.

FRONTBENCH SUPPORT AND BACKBENCH ATTACKAs the losses affecting some members rose, Lloyd’s began to attract more atten-tion from Parliament and the British government. It was reported that the Serious Fraud Office (SFO) was conducting an inquiry at Lloyd’s. Chief Executive Alan Lord said it was merely considering an investigation. At issue were the questions raised by John Donner, which had already been considered by the four nominated members of Council. The reports were sparked by responses made in the House of Commons by John Redwood, then Minister of State for Corporate Affairs.

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Moral support from the government was strong, but sporadic assaults and awkward questions came from backbenchers. Early Day Motions by Labour MPs Brian Sedgemore and Dennis Skinner called for inquiries. Mrs Thatcher paid tribute to the Lloyd’s community during a private visit to the market in March 1991. She thanked the market for the income it brought to the government, the lustre it brought to the world of insurance and also because it stood for the ‘very best business ethics and the very highest of standards. Lloyd’s is still a byword the world over’. Referring to her loss of office, she said: ‘Fate plays strange tricks with life.’ She knew of the difficulties: ‘because events have flouted the laws of prob-ability and chance. You have had more disasters in three years than one could ever have expected. If the law of averages does work out, it means there are a good three years ahead’. She was right, but there was more agony before these three good years arrived. As Secretary of State for the Environment, Michael Heseltine visited and spoke on inner-city regeneration and the vital contribution played by private firms and groups. He commended the active involvement of Lloyd’s in helping the local community, in which Michael Wade played a prominent role.

In November 1991, opening the new city headquarters of Lloyd’s broker CE Heath plc, Prime Minister John Major went over the top: ‘we do have in this coun-try one priceless advantage over European competitors ... which we should never spurn or lose ... the international fame and standing of Lloyd’s of London. It is at the heart of the London insurance market. It holds a worldwide reputation for innovation and for the security that unlimited liability brings.’ The recent under-writing losses, he said, while serious for some, needed to be seen in perspective.

The DTI gave the go-ahead to create Centrewrite, Lloyd’s new reinsurance company to offer run-off cover to syndicates unable to close their books after the usual three years. Lord warned members that it was a solution of last resort, not a rapid panacea. He did not expect Centrewrite to look at more than a hand-ful of syndicates each year. The board included underwriters Robin Jackson, its Chairman, Charles Skey, David Mann and Robert Hiscox – a formidable col-lection of underwriting talent. Uniquely, managing agents were allowed to deal directly with Centrewrite without involving a broker.

The tax authorities became unusually helpful. Lloyd’s taxation depart-ment’s negotiations with the British Inland Revenue secured the return of over £100 million of tax relief a year in advance. This came hard on the heels of the early recovery of $53 million of US tax from the IRS. In the weeks before the June 1991 AGM, there was much speculation about an extra tax break to help Lloyd’s members. Headlines proclaimed an imminent partial bailout. The March budget allowed small businesses to offset losses against the tax they had paid on profits during the previous three years. Lloyd’s lobbied hard for the same arrangement for its members. On 17 June 1991, a furious Commons row erupted

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over cross-party plans to help members of Lloyd’s who had suffered huge losses. Labour’s front bench, fearful for the London insurance market, had indicated support for tax relief covering a limited period, from 1988. Paul Boateng MP, the Opposition Treasury spokesman, lectured the government: ‘Lloyd’s is more than just a place where seriously rich dabble in the insurance market. It is a major international institution that is widely respected and it needs support and encouragement at this time.’ Francis Maude, then Financial Secretary to the Treasury, jeered that he had not realised that Labour’s efforts to get closer to business – its ‘prawn cocktail offensive’ – had penetrated so far into the heart of the City. But Labour backbenchers disagreed with Boateng: ‘they should be cast adrift to look after themselves. The Government has bailed no one else out in the last twelve months’, said Harry Cohen,3 a member of Labour’s backbench economic committee. ‘These people take enormous profits out of the insurance industry in the good times and as soon as profits drop below the Plimsoll line, they cry.’ Another left winger, Bob Cryer,4 joined the assault on his own front bench, saying: ‘Labour should make it clear this is a failure of market forces and we are not going to prop them up.’

Some Conservative backbenchers took the same view. Former stockbroker Anthony Beaumont-Dark5 said the government ‘would be out of its tiny mind’ if it gave Lloyd’s members preferential treatment: ‘These Names know what they are going into. They stand to make unlimited profits and they know they can make unlimited losses. That’s what capitalism is all about. If the government bails them out then the cost to the country could be billions, not millions.’

The next day Ian Taylor, Conservative MP for Esher, pressed for finance bill amendments giving retrospective tax relief to Lloyd’s Names, but received a non-committal response. A rescue was also attempted under another clause, extend-ing to individuals and partnerships provisions that applied only to companies for offsetting trading losses against capital gains. The following day, Maude signalled a climbdown. He said the tax relief plan would give Lloyd’s an unfair advantage: ‘the problems of Lloyd’s have not been caused by taxation and will not be solved by taxation’. Both attempts to extend tax relief were dropped and described as unworkable. Labour MP Diane Abbott, a member of the finance bill committee, said there was agreement on the need for a long-term solution: ‘the consensus is that there is a problem, and that Lloyd’s must put its own house in order’.

The Guardian6 reported that ‘the solution is likely to involve changes to Lloyd’s funding and capital base, which are currently under consideration by a task force. Both Lloyd’s and the Association of British Insurers have long been lobbying for taxation for reserves in line with other European composites. They argue that if they could build up reserves on a tax-free basis, they could cope with excessive claims’.

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In June 1991, the Sunday Times7 reported that Treasury Ministers had been happy to let the kite of a possible tax break fly for a few days in order to gauge reaction: ‘It was swift in coming. Tory backbenchers had deluged the whips’ office with protests; Tory central office received a similar response from the party in the country. Newspapers, including the most loyally Tory, railed against the idea in editorials. The combined message was loud and unmistak-able: wealthy Lloyd’s Names, no matter how grievously exposed to heavy per-sonal loss, were not a politically acceptable outlet for government largesse. ‘It was overwhelming’, said one minister: ‘there was no way we could get away with bailing out fat cats even if we wanted to. We have spent the whole of this reces-sion watching businesses going to the wall as we fight to get inflation down. We cannot now turn around and throw money at someone with £½m in the bank who stands to lose £50,000. It’s not on.’

In the same edition, journalist Ivan Fallon said Sir Nicholas Bonsor, a Conservative MP and a Lloyd’s Council member, had warned of the real danger that, without special help, the 26,000 Names would decide to quit, saying: ‘That would mean no Lloyd’s, quite literally.’ Fallon pointed out that many Names were not, ‘as people like to think, rich, privileged and greedy’. The suffering Names were ‘more innocent than greedy, tempted into the market for totally the wrong reasons’. Fallon described Lloyd’s as seeking ‘essentially retrospective legislation’. The state, he said, could not be in the business of rescuing risk tak-ers who get into trouble. There were many more deserving cases than Lloyd’s. He predicted that the pressures would generate big changes. Lloyd’s was ‘inef-ficient, incestuous and racked by fraud and dishonesty’. Coleridge was ‘deter-mined to tackle it, as none of his predecessors ever were’. An agency managing director had said there were no longer any sacred cows. The disappointment felt by many at Lloyd’s added to the background to the forthcoming AGM. Overt financial help was now politically impossible.

THE MARATHONAs Coleridge prepared to announce the first overall losses at Lloyd’s for over 20 years, there was increasing anxiety on the twelfth floor. Several measures were taken that helped shape the future course of events.

In May 1991, the Council agreed on a package of measures in response to large losses and action groups. To help resolve disputes, a conciliation scheme was to be set up using professionals from outside the market. A two-tier arbi-tration scheme, administered by Lloyd’s, would also be provided as a second stage. (The former modified arbitration procedure (MAP) introduced in 1987 to deal with disputes over sums less than £100,000 had been dogged by delays.

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Its financial limit was far too low to deal with the latest outbreak of large losses.) Lord expressed the hope that the new arrangements would enable disputes to be kept ‘within the family’, saying ‘going to law is expensive, public and time-consuming. If we can resolve disputes by any of these means, that seems wholly good for Lloyd’s, its public reputation and the welfare of its Names’.

As part of this package, Lloyd’s adopted a policy of commissioning an inde-pendent loss review when syndicate losses were large. Initially, the threshold was to be a loss of over 150 per cent of capacity in any one year. But this would leave many egregious losses untouched. After a Council debate, including a some-what unworldly discussion of whether to publish these inevitably unflattering reports – which were bound to leak – it was decided to commission reviews whenever a syndicate’s cumulative losses exceeded 100 per cent of capacity. This marked a big turning point in the attitude of Lloyd’s to large losses. Instead of telling Names not to sue their agents, Lloyd’s was now helping to produce the evidence they might use to seek redress, albeit with strong encouragement to use conciliation and arbitration rather than full-scale litigation. The press were told that, unlike a disciplinary investigation, the reviews were designed to estab-lish the facts, not to point the finger at anyone.

The first four reviews, announced later in August, were for syndicates man-aged by Feltrim, Gooda Walker, Rose Thompson Young and Cuthbert Heath. Each was headed by an external accountant or lawyer, who was supported by market experts. Sir Patrick Neill headed the review of Feltrim; Kieran Poynter, a partner in Price Waterhouse, headed Gooda Walker. Eventually, some 40 loss reviews were conducted.8

Other steps were taken by an increasingly worried leadership. The Council received a progress report on McKinsey’s work for the task force, readily agree-ing to extend its scope and cost as it dug deeper into aspects of the competi-tiveness of Lloyd’s. The marine underwriters association reported that prices for marine risks had been driven down to absurd levels by intense competi-tion. With applications from new members reduced to a trickle, the maximum amount of underwriting – OPL – for any one member was increased from £2 million to £3 million for 1992. Shamed by reports of huge payments to failed underwriters, the Council also adopted Rona Delves Broughton’s proposal to require syndicate annual reports to disclose underwriters’ remuneration with-out delay. If reports had already been prepared, then an addendum slip could be added. The amount to be disclosed had to include everything: salary, fees, employer’s pension contribution, and profit-related pay and compensation for loss of office if charged to syndicate expenses in the calendar year.

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In a profile in The Times two weeks before his first AGM, Coleridge was reported as saying about Names that ‘many of them will have lost money and make a lot of fuss. The insurance industry worldwide is having a very tough time. Most of the people who are bitching and whingeing are doing it because they don’t like losing. I understand that. It’s human nature to only want to win. No one has been swindled and it has nothing to do with unlimited liability. It is simply pure losses’. He expressed both sympathy and exasperation to his interviewer. The words ‘bitching and whingeing’ caused much offence; Coleridge said he had been misquoted.

The 1991 AGM9 was a piece of theatre, held in the Room at Lloyd’s. Coleridge announced the loss. The tone of many ensuing questions was fairly hostile. He repeated the assurance that Lloyd’s would not drive members into bankruptcy. He denounced the US courts. He earned respect for his endurance and patience in handling questions. He was challenged on the ‘duty of care’ owed by the Council.

In August 1991, Chatset, by now regarded as a thoroughly irritating thorn in the side of Lloyd’s, estimated the 1989 losses, not officially due until the fol-lowing summer, to be over £1 billion. It also said that 23 per cent of Names had a 1988 loss exceeding £50,000, in contrast with the claims by Lloyd’s that only two per cent were so affected. Coleridge denounced the Chatset figures as ‘unneces-sarily pessimistic and alarmist’, saying they ‘served only to unsettle Names’ at a difficult time. Lloyd’s forecasts, although based on returns from agents, proved very wide of the mark, time and time again, leading to furious disappointment and denunciation by Names.

Two years after stepping down as ALM Chairman, Tom Benyon discovered that the Warrilow syndicate ‘was an extraordinary mess, overwritten, under reserved and badly managed too, so even I could notice it’. He set up the Warrilow action group, travelling around Britain, the US and Canada to drum up support. He warned people that the incompetence of Warrilow was probably not unique and that many more problems would soon emerge. He encountered a lot of indifference at that stage, reminding him of Ibsen’s phrase: ‘the majority is always wrong’.

Benyon says that his early action group made many mistakes, from which others were able to learn: the committee was not united; they chose the wrong lawyers; and they did not collect all the subscriptions at an early stage. Eventually they settled out of court for a fairly modest amount. Benyon started the Gooda Walker Action Group in the library at Lloyd’s, chaired at first by Alfred Doll-Steinberg. Disagreeing with the ALM’s approach, Benyon set up the more mili-tant Society of Names in July 1991, publishing his own newsletter, The SoN, which later became The Insider. This played an important role in the propa-ganda war over the next four years.

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OFF-SITE DEBATEThroughout 1991, the ground was rapidly moving beneath the feet of both Lloyd’s and the task force. It became necessary to adapt this group to help solve a crisis that was now staring Lloyd’s in the face. It would not wait for five to seven years. At the current rate of resignation and shrinkage of capacity, not to mention the problems of litigation, it was obvious that there would be little left of Lloyd’s in far less time than that. As the task force report put it: ‘The cur-rent pressures on the Society led us to broaden our outlook.’ They included key short-term changes to strengthen the capital base, improve competitiveness and develop a new structure for governance of the market.

The task force tried to stand back from the daily problems in semi-aca-demic mode, meeting mostly over weekends in a country hotel next to the River Thames, not far from London. On Thursday evenings, they dined and discussed topics informally over a few drinks and sometimes a game of snooker. Some important discussions, when individual views shifted, took place informally. The next morning, casually dressed and in a frame of mind less dominated by their jobs, the group would assemble, typically considering material from McKinsey and other reports. Rowland and the presence of outsiders created an atmosphere of objective inquiry: instead of fighting their corner in the usual tribal manner, traders pooled their experience. Sub-groups were established, bringing their ideas back to the main group. The long-standing issues – capital structure, old and open years, distribution and trading costs – were all exam-ined afresh in an objective manner and were subjected to the cool analysis of a capable McKinsey team (Charles Roxburgh and Bronek Masojada), who were undergoing a crash course in the oddities of the Lloyd’s market. They prepared papers showing the pros and cons of alternatives, including comparisons with the world beyond Lloyd’s. Outsiders brought their professional insights to the table.

Although convinced of the need for corporate members, the task force was wrongly advised that this would require fresh legislation. After their report was published, others argued otherwise. Bryan Kellett, a Council member, insisted that a leading QC’s opinion be taken. Richard Southwell QC, who had repre-sented Lloyd’s during the long battle with Parliament, also wrote, suggesting that membership was not restricted to natural persons. Both were instrumental in Lloyd’s seeking the opinion of Jonathan Sumption QC. His view was clear: there was no reason in law why Lloyd’s should not proceed with admitting corporate members. Task force members regretted their earlier reliance on Corporation advice. Kellett still fumes at what he sees as a deliberate attempt to subvert the course of the history of Lloyd’s.

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The report was more accommodating towards existing members than it might have been. It stressed the primacy of Names’ interests and proposed meas-ures to temper the effects of unlimited liability. The report was well received by most Names. A bolder commitment to an all-corporate Lloyd’s – which many task force members would have liked – might have provoked more resentment and less support. The next five years saw a gradual and successful transition from the traditional form of capital to predominantly new corporate forms. The Names alienated in the process were too few to stop it, although some market players believe a heavy price was paid in terms of friction and complexity.

As the scale of the losses mounted, Rowland fostered an urgent common purpose: saving Lloyd’s. This drove the group to recommend a whole series of urgent changes, as well as the longer-term changes in capital structure. These included adopting a strategy for growth and for managing capacity; reforms to give Names more rights and to improve standards; a chance for Names to realise the value of their syndicate participations; a move to centralise the management of the old and open years problems; and measures to reduce costs and improve competitiveness. There were some anxious and gloomy moments during the task force deliberations. They were overcome by an infectious sense, encour-aged by Rowland, that the potential of Lloyd’s was too good to be allowed to fail. Most task force members had a big stake in its future. They could make their fortune if they got it right; they stood to lose plenty if they got it wrong. While at times the atmosphere was almost like an academic seminar, the conclusions were driven by a fierce determination to succeed. The few task force members who were more detached were caught up in this spirit.

One of the more dramatic moments was a discussion about the unending nature of Lloyd’s membership. When a member resigned, his liabilities were passed on to the successor syndicate by RITC. Until recently, this had been routine: it was accomplished by the end of the year. Now it was becoming increasingly diffi-cult. Sometimes underwriters felt unable to put a fair price on the liabilities, while other times the syndicate had no successor. The upshot was a growing number of ‘open’ years. Legal advice was sought on the nature of RITC. It was explained that it was only a reinsurance: if it failed for any reason, the liability remained with the original insurer, the Name. Seasoned Lloyd’s members, including Rowland, gulped. The failure of RITC had never been contemplated. As sole traders, Names had acquired liabilities that they could never completely wipe out. Someone said ‘it’s like a financial version of AIDS; you can never make it go away’.

More gloomy moments were provided by the unfolding news of the scale of the losses. Over and over again, the loss estimates collected from syndicates were revised upwards. Official estimates were much lower than Chatset, the unofficial source. Wade was in the business of handling PSL insurance. His firm had built a

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model as its many clients began to incur losses and make claims. One evening, the normally bouncy Wade reported the model’s latest predictions in a solemn tone of voice: total losses would exceed £6.5 billion, assuming the 1991 year to break even. The atmosphere changed. Everyone knew that there must be a level of loss that would prove fatal; no one knew what this was. For the first time, there was tangible evidence that the likely limit of tolerance could be breached. The complex rescue operation that the group was debating began to look like an overweight aircraft. It might not be able to get off the ground, overwhelmed by its cargo of accumulated losses, which proved even worse10 than Wade’s model predicted.

The next morning, these estimates seemed a little less daunting. They could be wrong, as others had been. Whether they could be managed depended on where they fell; more analysis was needed. The financial problems of much of the existing membership made the search for new capital all the more urgent. The task force returned to thinking about the future. Its proceedings were con-fidential; these wild estimates were not broadcast. People returned to work on Monday doing their best to look confident. But many, including the present author, felt heavily burdened by a dark secret. Wade and Patient were also mem-bers of the ruling Council. They agreed they had a duty to share their fears with someone else. Wade decided to speak to fellow Council member Sir David Walker, a non-executive director of the Bank of England. He felt relieved when Walker later told the Council that a serious situation was developing.

Picture 6 The 1991 Lloyd’s Task Force. Reproduced by permission of Lloyd’s

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AMERICAN REBELLIONSince their admission in 1970, US members had grown to a peak of 3,000. Several Lloyd’s underwriters flatly refused to have any Americans on their syndicate, believing them to be too litigious. They turned out to have some avenues of pro-tection11 of which Lloyd’s was completely unaware when they were eagerly made members. During 1991, some became increasingly restless. In one of many such cases, the US Court of Appeals, sitting in New Orleans, held in May 1991 that an underwriting member who wished to sue the Society in Texas must do so in England. The case was brought by J. Hirsch, a member of the Oakeley Vaughan syndicates.

Some US Names alleged that Lloyd’s had breached the 1933 Securities Act by offering investments to American individuals without properly registering with the Securities and Exchange Commission (SEC). The SEC launched an informal investigation into whether Lloyd’s should have been entitled to an exemption from regulations governing the issue of securities. Lord said that he was aston-ished. Every member had signed an agreement that all disputes were subject to the jurisdiction of the English courts. Lloyd’s had always worked closely with the SEC on US membership of Lloyd’s. Lord pointed out that Lloyd’s already had the backing of the US courts. Lloyd’s started proceedings to secure pay-ment against Dale Jenkins of New York and Ronald Riley of Colorado. Riley’s plea before the federal District Court in Denver was denied by the judge on the grounds that he had no jurisdiction in the dispute.

In October 1991, a group of 64 American Names brought a suit ‘charging violations of the registration and antifraud provisions of the federal securities laws’. The action was brought by a US law firm12 in the Southern District of New York against Lloyd’s, its Council and Committee, 266 syndicates, 16 members’ agents, 42 managing agents and 59 of the principals. The suit charged that invest-ments for each year in Lloyd’s syndicates were ‘securities’ under the Securities Act of 1933 that require registration with the SEC. It also alleged that ‘Lloyd’s, the members’ agents who had actively recruited American investors and other defendants had actively downplayed the practical import of Names’ unlimited liability, while misrepresenting or failing to disclose serious risks in plaintiffs’ syndicate investments’. Under their ‘RICO’13 claims, the plaintiffs sought treble damages and attorneys’ fees.

In London, Lord again expressed astonishment. He was also surprised that an inquiry was being conducted by the Senate permanent subcommittee on investigations, chaired by the prominent Senator Sam Nunn, into the way Lloyd’s ‘solicited’ members in the US. The FBI was working in tandem with the Senate subcommittee. They were said to be antagonised by attempts by

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Lloyd’s to prevent a former FBI agent, called Roby, from pursuing his case. Dale Schreiber, the attorney acting for the American members, was described as a rough and tough lawyer with a record of success in Wall Street legal bat-tles against large American companies. Lloyd’s lawyers in New York City, LeBoeuf, were dismissive of the Proskaur (a US law firm) writ. Meanwhile, in California, members were consulting lawyers and making their own investigations. In Ontario, Canada, where there was a heavy concentration of Names recruited by Kingsley’s Lime Street agency, many of whom were dentists, members were trying to prevent their banks calling in their letters of credit.

The long tail problems of Outhwaite were also shared by Pulbrook Syndicate 334 and Merrett Syndicate 418. Merrett’s syndicate had written 11 run-off poli-cies in 1982. Those who joined it afterwards thought he should not have closed the year, thereby passing the liabilities on to them. With the help of the ALM, Ken Lavery, a Canadian accountant, organised a meeting of the Merrett 418 Association at the Chelsea Old Town Hall in London. There they agreed to elect a committee and to take legal advice.

Faced with legal action in the US, Coleridge fought back. In a speech in Los Angeles, he outlined the importance of the US to Lloyd’s – and vice versa. He reminded his audience that 35 per cent of the business of Lloyd’s was derived from the US, which provided 10 per cent of the capital base. Lloyd’s held nearly $8 billion in the Lloyd’s American Trust Fund (LATF) in US government secu-rities and invested in the US economy. He asked where things had gone wrong: ‘Industrialisation has brought many blessings, but the thoughtless and often reckless way in which it has been pursued has left a fearful legacy of contami-nation.’ Society was looking to insurance to clear up the mess. What was not acceptable was: ‘The way in which policy wordings, agreed by both parties, are being misinterpreted by the courts under the guise of public policy, on occasion even countermanding clear and deliberate exclusions. It is surely a negation of justice if contracts of insurance are to be rewritten by the judiciary to meet a social need, albeit worthwhile.’

Coleridge argued that polluters should not be indemnified for such deliberate activity. He supported the proposal by Hank Greenberg, Chairman of American Insurance Group (AIG), to establish an environmental trust fund to handle the past history of pollution, leaving Superfund14 to deal with future cases. The fund could be financed by a levy on all commercial and industrial premiums. He told the North American casualty conference at Greenbrier, Virginia that the industry could not afford the current state of affairs to continue. He warned that Europe contained some of the world’s largest most secure and best-reserved insurance companies, who were hungry for acquisition and expansion. They were strong

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because of their governments’ attitudes to insurance and their fiscal and taxa-tion treatment of their reserving policies. Otherwise, he said, to paraphrase the Spanish poet Ortega, ‘all that will be left of US insurance will be the dust that hangs in the air’.

In November 1992, Bill Clinton swept to victory in the US presidential elec-tions. As a result, the US political climate became much less favourable towards tort reform.

SECURITY ALERTRating agencies play a big role in the way in which most insurers are seen by brokers and clients. In October 1991, for the first time, at a press conference launching reports on individual Lloyd’s syndicates, Standard & Poor’s ventured a negative opinion about the security of Lloyd’s, querying the adequacy of the central fund. Its spokesman said: ‘Lloyd’s’ aura of invincibility no longer exists.’ Coleridge spoke out in response, saying the Standard & Poor’s syndicate reports gave a misleading impression. Lloyd’s produced fresh material on its security, distributing thousands of copies to reassure any clients who were worried by reports of the losses and their impact. Two of the world’s largest insurance bro-kers, Marsh & McLennan and Willis Corroon, pledged their continuing support of Lloyd’s as a secure and innovative marketplace. The market was only a little rattled by these unsolicited comments from Standard & Poor’s. The reputation of Lloyd’s for paying claims remained good.

Lloyd’s came out strongly against the continued concerns raised by Standard & Poor’s. They were based on the possibility that the courts might rule that Names’ deposits should not be drawn down on to satisfy cash calls, despite the declared resources of Lloyd’s standing at almost £18 billion. Standard & Poor’s contrasted realisable assets, held in premium trust funds, with the total figures for projected liabilities arriving at a ‘negative balance’ of £1.2 billion. Lloyd’s said that it was wrong to compare total liabilities, stretching many years into the future, with the cash immediately available. In March 1992, Coleridge issued a statement deploring the misleading and potentially damaging claims made by Standard & Poor’s.

***

Meanwhile, in November 1991, elections took place for Council vacancies. Among working Names, Coleridge was re-elected. Philip Wroughton, Chief Executive of Marsh UK, whose US parent was the largest broker in the world,

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and Dick Hazell, a non-marine underwriter, were elected for 1992. Valerie Robinson – who had been running an ALM helpline for worried members (see below) – topped the poll among external members with 3,204 votes. Her support was one indicator of growing concern among members. Sir Peter Viggers received 2,811 votes. At the Council level, there was still an air of ‘business as usual’: the scale of the losses to come was not yet apparent, the Outhwaite trial had not yet reached a conclusion and the report of the task force was awaited.

A ROUTE FORWARDAs the January 1992 publication date approached, media speculation about the task force report began. Reuters referred to it as ‘the great white hope of a loss-hit institution fighting for its life’. The report, Lloyd’s: A Route Forward, re-asserted some of the traditional strengths and potential of Lloyd’s at a time when self-confidence was shaky. Heavily influenced by McKinsey, it contained numerical analyses and projections, diagrams, extracts of the pros and cons analysis, and generally inspired confidence as a business report– in stark contrast to earlier reports by Cromer, Fisher and Neill, which were all prose, much of it written by lawyers. At Rowland’s insistence, the report also set new standards of disclo-sure. Each task force member’s material interests in Lloyd’s, including their per-sonal syndicate participations, were shown. Later, there were calls for Council members to do the same.

The task force was convinced that Lloyd’s had a chance to tackle its prob-lems and find a way forward. But could it buy enough time to make these changes, discharge its accumulated liabilities, keep its customers, retain its talents and still be allowed to trade throughout the world while all this was happening? Realistically, the chances of bringing this off were slim. The old laissez-faire, market-knows-best approach would not work. Nor was there room for ‘them and us’ leadership. A new way of involving market partici-pants in the transformation was going to be needed. The task force decided to include proposals for a new set of institutions to run Lloyd’s as an essen-tial part of their package of reform. It proposed a new Market Board to take Lloyd’s forward, with a more separate and independent regulatory role for the Council. This aspect of the report was a closely guarded secret until the day it was circulated. The Chairman, the Chief Executive and the whole Council were taken by surprise.

The report was sent to Council members in advance of a special meeting on Saturday 11 January 1992. Before Rowland was asked to join, the author

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was grilled. He had been leading a double life: as a senior insider and a mem-ber of the task force. The Chairman and the Chief Executive were incensed by the governance proposals. Had he, the task force and Rowland taken leave of their senses? At a time of great challenge, the existing institutions should surely be supported, not undermined. Changes would only slow down the work that the task force saw as urgent. The Council swiftly agreed to endorse all the other proposals in principle, while saying they needed further, detailed examination. But Coleridge and Lord persuaded the Council that the changes to governance should be firmly rejected. This decision soon blew up in their faces.

Coleridge duly announced that the Council had immediately accepted many of the recommendations, but rejected the re-vamp of governance as a distraction. The ALM welcomed the primacy of Names’ interests, but expressed concern as to whether the report would be implemented. It urged the Council to rethink its rejection of governance reform. A leading article in the FT described Lloyd’s as an organisation built on business structures that ‘pre-date the Industrial Revolution’. The report offered an escape into the modern world, but it might be too late. It told a story with admirable clar-ity and force: ‘In short, Lloyd’s is in crisis. In response, the task force offers a curious mixture of short-term conservatism and long-term radicalism.’ The FT thought the longer-term vision had much to recommend it. Unlike many blueprints for reform, it offered a way to get from here to there with minimal disruption. But it warned that events might yet conspire against its successful achievement. In the midst of a serious recession, much would depend on a swift return to profit.

Coleridge and Lord added to the controversy about the future governance of Lloyd’s by holding a private briefing for a few journalists. Coleridge said the report was ‘full of incredibly sensible, well-thought-out things’, but that the thinking on governance was ‘codswallop’. As one incredulous journalist left the Chairman’s briefing, he asked Peter Hill what ‘codswallop’ meant.

An FT editorial – headed ‘Codswallop at Lloyd’s’ – took the side of the task force. It said the report had been right to propose a change in the leadership of Lloyd’s in order to give it more business emphasis. It said Rowland believed this reorganisation was essential to bring about the wider changes he had recom-mended. It said that the Council’s response had been seen as the ‘protective reaction of the Lloyd’s establishment, and a poor omen for the prospects for the rest of the report. The Council must think again’. The next day, Reuters reported that ‘Lloyd’s of London backtracks on governance reform’. Coleridge had announced that the recommendations on this issue would be reviewed in

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the same way as others. A special working group headed by Sir Jeremy Morse would be created and Rowland would be asked to join it. The ALM Chief Executive welcomed this move; Lloyd’s List called it a dramatic U-turn. Stacey Shapiro reported in Business Insurance that mounting criticism had forced the Council to back down. Rowland was said to be delighted that Lloyd’s had got back on course.

Alan Lord’s intention to retire in June 1992 was reported in February. As an interim measure, his role as Chief Executive would become the responsibility of a team of three corporation group heads. Those few with a classical educa-tion saw the executive team as inspired by the triumvirate that ruled Rome in the first century BC. They took up this designation, but not very seriously. The author was one of them.

THE NADIRDuring 1992, the prospects of Lloyd’s reached rock-bottom. At the higher levels of the Council and management, complacency gave way to concern, border-ing at times on despair. The task force report gave some hope that there was a way forward. Despite its generally favourable reception at first – marred by the row about governance – trouble with Parliament and militant Names brought a swift descent back into strident press criticism. Members’ views began to be polarised into two broad camps: those who believed that the problems could be solved and those who saw litigation as their best hope. To a large extent, this reflected whether their losses were manageable or posed a threat to their whole lifestyle. The litigants in turn contained ‘moderates’, who saw compensation as their due, and a more extreme group who were convinced that their best inter-ests lay in pulling down the Lloyd’s temple.

According to Jonathan Mantle: ‘Tom Benyon, Alfred Doll Steinberg and Christopher Thomas-Everard were the men responsible for the outburst of indig-nation on the part of the 60 Conservative MPs who were also Lloyd’s members.’15 They sent difficult questions for MPs to ask at a meeting of the Conservative backbench finance committee on 11 February 1992. Mantle says those present saw Coleridge begin to shake as he read the questions. Some of them stimulated Labour MPs’ Commons motions. This in turn led to newspaper headlines. An article written by Mantle in the Evening Standard stated: ‘Lloyd’s tried to pretend that it was still a gentleman’s club long after its morals have fallen below those of the Lebanese casino. How and why did it all go so wrong?’

The next day, Lloyd’s issued a press statement saying that Coleridge had read the article ‘with fury and dismay: it was impossible to list all the errors

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it contained. The article was a “disgraceful, unholy, baseless attack upon the integrity and solvency of the leading city institution. Accordingly Lloyd’s will take all appropriate steps to seek redress, including, if necessary, the bringing of legal proceedings” ’. In response, Mantle published more information about Lloyd’s and liaised with action groups. He testified to Senator Nunn’s Senate subcommittee on investigations. Soon afterwards, the Sunday Times suggested that Coleridge should resign. Other destabilising press reports appeared, say-ing that Lloyd’s was seeking aid from the Bank of England and that Ian Hay Davison, the former Chief Executive, had predicted that it would not survive the end of the century.

Lloyd’s vigorously denied a charge that insiders had profited at the expense of outsiders. In February 1992, Coleridge asked Sir David Walker, outgoing Chairman of the Securities and Investment Board (SIB)16 and a member of the Lloyd’s Council, to head an inquiry into the allegations. He was also asked to investigate the LMX spiral. Coleridge said he needed a man so white he made Snow White seem dirty.

THE OUTHWAITE TRIALAs Lloyd’s was taking a battering in the press, the Outhwaite trial was approach-ing its end. The case opened in October 1991 and lasted 49 days. Although Lloyd’s had tried hard to avert it, a debate about the duties of an underwriter to his Names – hitherto a very grey area – became extremely public. Much evi-dence was aired about the standards of professionalism among Lloyd’s under-writers. Outhwaite said he was not alone: others had underwritten the old year liabilities of other syndicates. But the evidence of several experts showed he had not known much about the nature of the risks he had taken on. He hadn’t read the relevant reports; he had relied on disclosure by the original under-writers. It looked increasingly likely that he was going to lose. To add insult to injury, much of the damning evidence came from the very professional-sound-ing German underwriter, Heinz Ulrich Von Eichen. The unguided missile had hit home. When Von Eichen had finished and the evidence of the Lloyd’s Deputy Chairman, Dick Hazell, was demolished, the judge, Mr Justice Saville, adjourned the case.

Nutting17 says his defence counsel, Anthony Boswood QC, ‘tore Dick Hazell to shreds! That really pleased me because I had been a Name through his firm, the Cater Allen agency. There had been quite a big row, because he refused to allow the members’ agency to continue to act for me as a member of Lloyd’s, because I was suing the agency. I had to find a new one’. James Sinclair, who ran

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the Willis members’ agency, was a supporter of the action and was very happy to act for Nutting.

Nutting states:

After the Hazell evidence was a complete disaster, I got a phone call from David Coleridge to say would I come and see him. He had Stephen Merrett sitting with him. Coleridge said ‘we need to settle this case’. I said: ‘Yes, I imagine you probably do because you’re going to lose and we are going to win.’ It was really the Hazell testimony that absolutely sank the ship because he gave all the wrong answers. I said I thought I could carry my committee, but would also have to carry the litigating Names. Stephen and I got into a huddle and eventually came up with the figure of £116 million.

This represented around 80 per cent of the estimated losses or about 500 per cent of each litigating Name’s line on Outhwaite.

It looked like a big win for the Names. It also revealed the unfairness of the position of those who had not sued. Many of them were working Names who had heeded the request of the previous Lloyd’s Chairman, Murray Lawrence, not to litigate. When they tried belatedly to seek similar compensation, they found it was too late – they were time-barred. This seemed a poor reward for their loyalty to the old ways.

The period of celebration was cut short by the next move. Payments were held up by Lloyd’s going to the High Court to argue that any funds paid to Names should be counted as part of the Premium Trust Fund, governed by the Premium Trust Deeds (PTDs). This would mean they would have first to be used to meet any insurance losses owed by the members concerned. The PTDs were designed to protect policyholders. Lawyers acting for Lloyd’s advised a reluctant leadership that they had a duty to policyholders, as trustees, to ensure the money did not ‘leak’ from the system. Names saw it differently: many had other priorities for their winnings, like repaying money they might have bor-rowed from friends, relatives or banks to stay afloat.

Nutting recalls his reaction: ‘It was a bombshell. I went up in smoke.’ The case was swiftly heard and decided in the Names’ favour by Mr Justice Saville. ‘We gave Lloyd’s a serious bloody nose’ said Peter Nutting ‘and we were awarded indemnity costs.’ However, Names were required to repay any money received from their PSL insurers in respect of the Outhwaite losses. This mattered less; Nutting still sees the victory as a ‘tremendous life-saver’ to many Names.

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NEW MILITANCYAfter the Outhwaite case, the atmosphere changed. It was now clear that litiga-tion was worthwhile. Underwriters’ judgement could be challenged. As more large losses emerged, the idea of forming an action group of similarly affected Names spread. This acquired a new urgency as Names and their advisers began to realise two critical facts: first, the opportunity for making claims was time-limited, as the Outhwaite Names who had not sued found to their cost. Under the statute of limitations, a case could not be brought before an English court after six years had elapsed. (A standstill agreement could extend this and was sometimes offered – as it had been to the original Outhwaite litigants – in the hope that a solution might be negotiated.) Second, money available for compen-sation was strictly limited: the agents had very few assets, and sometimes none. The E&O cover for a managing agent was also limited. Suing a large number of members’ agents, as Outhwaite Names had done, was more fruitful. But their E&O cover was also finite. Those who won their case first could scoop the pool; latecomers would find the cupboard bare.

Under these pressures – and growing cash calls – there was a scram-ble to get moving. Tom Benyon first suggested forming the Lloyd’s Names Association Working Party (LNAWP) to co-ordinate action groups. Nutting, its first Chairman, was by now also a Council member. The group commis-sioned a report by John Rew of Chatset and Alan Porter, an accountant. It was presented to Lloyd’s Council members in April 1992, saying ‘the scene is set fair for five to ten years of litigation which will involve members’ agents, managing agents, directors of agencies, individual underwriters, auditors, brokers, errors and omissions underwriters and the Corporation of Lloyd’s itself ’.

Nutting soon became fed up. In his book Ultimate Risk, Adam Raphael says the more militant chairmen saw Nutting as too much a part of the Lloyd’s establishment; a meeting in May 1992 turned into a shouting match. Nutting had infuriated others by declining to disclose Council proposals to settle the litigation. Alfred Doll-Steinberg, the ‘mercurial’ Chairman of the Gooda Walker Action Group, walked out. Nutting18 likened the behaviour of some members as ‘like the child19 who said she would scream and scream or make herself sick until she got what she wanted’. They were pursuing a campaign of vilification and were wrong to expect to be relieved of all their losses. Later, the new LNAWP Chairman, Christopher Stockwell, crossed swords with Claud Gurney, whose idea of tactics, according to Raphael, was to threaten to ‘smash Lloyd’s’. Sir David Berriman, an action group leader and member of the ALM Committee, was also involved in creating the LNAWP. The ALM was active in helping new action groups to get started.

Picture 7 Names’ Leaders

Tom Benyon, first chairman of Association of Lloyd's Members (ALM), led the Warrilow action group. After helping establish the LNAWP, he formed the Society of Names, editing its Newsletter, The SoN.

Michael Deeny led the Gooda Walker Action Group to a court victory. Later, he played a lead-ing role in negotiations for a global settlement with Lloyd’s. Elected to Council for 1996, he also served as ALM Chairman for 11 years.

Sir David Berriman led the Rose Thompson Young action group, later becoming ALM Chairman and Chairman of the Validation Steering Group, described later.

Christopher Stockwell, a member of the Outhwaite Action Group, later became Chairman of the LNAWP, the Old Years panel, and later Chairman of the Lloyd’s Names Association.

Neil Shaw, as new ALM Chairman in 1992, proposed talks with Lloyd’s, which led to several joint study panels and to the first settlement offer.

Peter Nutting led the Outhwaite Action Group. Elected to Council for 1992, he became the first LNAWP Chairman. Acting Chairman of the Lloyd’s Regulatory Board for several months, he later led the Names’ Rights group.

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Many members were facing cash calls far exceeding the costs of litigation. So long as the debt collectors could be held at bay, Names could try to con-tinue their lifestyle, albeit clouded with anxiety. According to Mantle,20 ‘many distressed Names faced with huge losses and the choice of bankruptcy or the Hardship Committee began to make clandestine arrangements’ to salvage their remaining assets. ‘They liquidated everything they could and hid it in cash behind other people’s names, or transported it physically out of the country.’

Names were embarrassed and kept quiet about their losses at first; it was not easy to get them to share their experience with others or even, in many cases, their spouses. A frequent reaction to adversity was to blame someone. Often, husbands felt ashamed; often, they were blamed by their wives and chil-dren. Some had pressed their spouse to become a member in order to restrict their own exposure. In many cases, problems caused by losses led to divorce. Benyon says ‘suddenly these men who try to give the impression that they’re all-knowing, all-seeing and frightfully clever, had to admit to their wives they’d completely screwed up and were facing bankruptcy, and the only way they could muddle through was if their wife could help them out with the gas bill. And so actually it either shattered marriages or brought them together; often it brought them together in a big way’. Many examples of the anguish experienced by members are reported by Mantle, Raphael and others.

Belief in the wickedness of some underwriters and agents became intense among some Names. There was often a strong sense of betrayal: Names had been encouraged to believe in the professionalism and expertise of the Lloyd’s market. They had entrusted others to commit them to contracts that were sup-posed to earn them a profit. The atmosphere, the building, the Adam Room, the interview, the documents, the suits, the language, the history and, for some, the trip to London (and for Commonwealth and US members, the trip to Britain): all contributed to a sense of respect and trust in the institution. When the losses exploded, the reaction was one of disbelief and fury. Many overseas Names felt especially badly let down by Britain as well as Lloyd’s, sensing they had been exploited by their distance from London. The sense of broken trust was fertile ground for conspiracy theorists. In the eyes of many Names, their members’ agent – their former friend and guide – had turned overnight into a debt collec-tor. Attitudes polarised. Some members’ agents saw it very differently: the good guys paid up, while others looked for excuses. Some thought that recent joiners had only themselves to blame: they were not rich enough to become members and were ‘just greedy’.

‘Did you hear how to make a small fortune?’ went a joke that did the rounds in the City. ‘Start with a large one and join Lloyd’s!’ Many working there, on the underwriting boxes of fortunate syndicates, in the Corporation generally and in

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the back offices, were not directly affected by these losses. The ‘reserve strength-ening’ that they represented appeared as mere numbers. This was inconvenient but necessary, as Coleridge said, ‘to make the market stronger’. From top to bottom, they applied the basic principles of Lloyd’s culture: Names are respon-sible for their losses; liability is unlimited; policyholders must be protected; all this was explained to Names before they joined, etc. But to the Names affected, these concepts seemed irrelevant and harsh. They felt cheated. They had joined expecting a profit; they had listened to some warnings and understood that profits were not guaranteed. Never in their wildest dreams had they imagined the full horror of huge demands for cash calls, engulfing their home and other illiquid assets. There had been no overall losses for many years; most Names had a spread of syndicates; many had PSL policies. Cash calls came as a bad dream.

Even by the standards of Lloyd’s, the Oakeley Vaughan (OV) case was bizarre in the extreme, involving race horses, the Caribbean and all sorts of doubtful characters. Following a court order to see its records in 1992, they went up in smoke in a convenient fire in Essex. Meanwhile, the legal case brought by OV Names against Lloyd’s raised an important legal question: had the Council a ‘duty of care’ towards the Names? The House of Lords ruled this should be heard as a preliminary issue. Later, in the High Court, before Mr Justice Gatehouse, Lloyd’s accepted a duty to act in good faith, but the Judge held that, unlike agents, it did not owe a legal duty of care to Names in the terms contended.

Most action groups were focused either on a syndicate with LMX losses or a syndicate with heavy ‘long tail’ losses inherited from the past. The underwriter of Aragorn Syndicate 384, Graham Potter, admitted writing a 30 per cent line instead of 2.7 per cent by mistake; this was settled in November 1993 on the courtroom steps. Another case that fell out of the main pattern was the Lime Street Action Group, led by Marie Louise Burrows, which focused on a sin-gle members’ agency. Its members had an extraordinary concentration of LMX syndicates in their portfolios. Burrows was a member of the LNAWP, a very active campaigner and was later elected to the Council.

HELP!Some of the letters received by Names in the early 1990s came like a bolt from the blue. They were asked to pay amounts they had never thought possible. Often, their first reaction was to call their members’ agent in disbelief, who might offer some sympathy and explanation, but no comfort. The bad news was not always delivered by post. Some agents had the practice of inviting groups of half-a-dozen members to lunch. Nigel Hanbury recalls how his boss ‘enjoyed

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the lunches with Names where he was accustomed over many years to handing out the cheques in person. They would come up with their wives for a big happy lunch expecting to depart with their cheque’. He recalls an awkward moment when his chairman handed out envelopes to five expectant members, saying ‘Here’s yours, here’s yours, here’s yours, here’s yours’, then he paused when he noticed the brackets around the next Name’s result: ‘Oh, sorry, look, can you see me afterwards?’ As things went from bad to worse, the group lunches stopped and the news was generally delivered by letter with follow-up meetings to discuss the ramifications. The members’ agents based their figures on those provided by the managing agents; these tended to get worse each quarter. This made planning very difficult for Names.

For those who worked in members’ agencies, life became very uncomfort-able. Their Names were blaming them, but most of them were in the same fix: they too were members of the syndicates. Many had a horrible sensation of guilt: they felt partly responsible for the plight of others, some of whom were their friends and relatives. They hated sending out the bad news; they hated receiv-ing the anxious and incredulous replies, the questions and the desperate phone calls. They were horrified to have to convey the news of heavy losses. Some became as distraught as their members. Martin Gascoigne, whose father, like many at Lloyd’s, had been a soldier during the Second World War and then a respected members’ agent, told the author that the anguish of it all hastened his father’s death. Although he was retired when the big losses arrived, he still felt a heavy responsibility towards his neighbours, cousins and friends.

In January 1992, Robin Kingsley of the Lime Street members’ agency was interviewed by Jonathan Mantle.21 He insisted that he had observed the rules about informing new members in foreign jurisdictions: ‘We were wor-ried about the UK tax climate and it seemed common sense to attract members from countries without those problems like America, Canada and Australia and New Zealand.’ He said the current problems were devastating: ‘People who had become very good friends over the years were desperately affected. And one’s own family. Relationships are strained. Staff work harder and harder. You lose your clients. You lose your business. These are very harrowing times.’

Lady Rona Delves Broughton encouraged Names with financial problems to call her. She soon needed more help. The ALM reacted constructively. From June 1991, Valerie Robinson, an external member, ran a helpline, encourag-ing members to telephone and discuss their problems. She handled hundreds of enquiries and did her best to soothe many an anxious Name. She grew to know more about the problems faced by many members than almost anyone else. In 1991, she decided to stand for the Council as a representative of external members. She was supported by the ALM and was duly elected, bringing useful

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knowledge from the front line to the Council’s deliberations. It was no longer possible for her to run the helpline.

The ALM suggested that Lloyd’s itself should provide this service. Gill Wilson, a members’ agent, was appointed in April 1992. The ALM continued to publicise the helpline. Like Robinson, Wilson was a Name herself. Although she worked from an office in the old Lloyd’s building, this was not made obvi-ous. Names were always assured of full confidentiality, even anonymity if they wanted it. She recalls that many nervous people were concerned to know whether calls were being recorded (they were not) and whether they needed to give their name or leave a number.

Wilson took on the job for a limited period on a part-time basis. Some 20,000 phone calls later, she had run the helpline for a gruelling six years. She was widely praised for the way in which she did this work. She came to under-stand and sympathise with many of her callers. With hindsight, she points out that there could have been a much more sensitive word than hardship for the support available. It sounded almost like the workhouse. In many people’s minds, it was the final insult. What made matters worse, she says, was all the stationery and envelopes emblazoned on the front with ‘Lloyd’s’. As the post-man came up the drive, the whole village knew that you were a Lloyd’s Name. Local chat and home life became difficult. Donald Cameron22 recalls how he felt sick each time he approached his home from an overseas business trip for fear of what lay on his doormat.

Wilson says that once a Name understood that their conversation was not being recorded, they would start to talk openly. She had a lot of regulars. Rather than giving a huge amount of practical assistance, much of it was what she calls active listening: ‘People just needed to talk and talk.’ Sometimes it was the wives: usually the husband was the member and often he was not commu-nicating. There were cases of a ‘For Sale’ sign appearing without any warning to the wife. Wilson recalls that those calling the helpline ranged from those who would have done anything to avoid paying a penny – they got short shrift – to traditional members of the old school who did not want to join an action group. She felt sorry for those people ‘who paid and paid until they had noth-ing’. Some of the callers were relatives of Names, complaining at the loss of their inheritance.

Barbara Mills started to run ‘HELP: Helpful Encouragement for Lloyd’s People’. She was the wife of a Lloyd’s Name with heavy losses. Wilson says ‘she was a very empathetic, very helpful lady who spoke to an awful lot of Names and spouses. David Durant, a distressed Name himself, channelled much of his energy and time into helping and supporting others’. Wilson gave their names to many of her callers. Durant defiantly renamed his house ‘Dunlosin’.

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THE COURTS DECIDEIn the US, some court cases went in favour of Lloyd’s, upholding the ‘forum selection clause’ whereby, on joining, US Names agreed to settle any disputes under English law in English courts. In Chicago, Judge Norgle overruled a mag-istrate’s injunction that prevented Lloyd’s from drawing on a Name’s letter of credit. In Denver, a federal judge found that the US courts had no jurisdiction in view of that clause. In New York, Judge Lasker dismissed the argument in Roby v Lloyd’s that such clauses illegally deprived US Names of the protection of US security laws and RICO. Soon afterwards, the Court of Appeal for Ontario dismissed an appeal by Canadian Names.

In London, Lloyd’s joined as a party with eight members’ agents who were defendants in proceedings issued by the solicitor Michael Freeman on behalf of eight Names. This action was to prevent the agents from drawing down mem-bers’ deposits to meet cash calls on LMX syndicates. Coleridge urged managing agents not to delay in making cash calls if they were necessary. He said that members’ agents should continue with draw-down proceedings where neces-sary. Lloyd’s was determined the action would not compromise its ability to meet all valid claims on its policies.

Coleridge spoke on BBC’s Radio 4 Today programme to explain the posi-tion of Lloyd’s. Although a standstill had been temporarily agreed in the case of the eight Names concerned, Lloyd’s was applying to transfer the proceedings to the Commercial division of the High Court and was confident of eventual vic-tory. He said: ‘I understand, it is human nature, that if people have large losses to pay they will try and find some other way perhaps to delay it or to avoid it.’ In this case, he said, ‘there is absolutely no justification’.

Mr Justice Saville ruled in favour of Lloyd’s, saying ‘those joining Lloyd’s as Names must appreciate that the system can only work if the business of under-writing is conducted by professionals who must be left to judge, among other things and, of course, in good faith, what funds are required from time to time for the underwriting business’. Otherwise, he said, ‘claims could not be settled promptly. In short, Lloyd’s could not exist as an insurance market’.

***

As the author left the office on the evening of Friday 10 April 1992, an IRA white van was circling the area. Unable to park outside Lloyd’s, it was placed outside the nearby Baltic Exchange. Half an hour later, its fertiliser bomb was detonated, with the loss of three lives and terminal damage to the Exchange. Hundreds of windows in the Commercial Union building across the square

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from Lloyd’s – where several Lloyd’s agents offices were located – were smashed. Over the next week, Lloyd’s occupants watched papers floating out of the win-dows, adding to a sense of unreality and gloom. The Exchange was temporarily rehoused on the fourth gallery at Lloyd’s.

FALSE HOPEIn the spring of 1992, preparations were made to enact the task force proposal to limit the impact of any future big losses with a compulsory High-Level Stop Loss (HLSL) scheme. Those who had already incurred severe losses pressed hard for this to apply retrospectively. Intense efforts were made to devise a way of doing this. The Council confirmed that it was trying to do it. More work was needed before a scheme could be announced; a successful outcome could not be guaranteed. Deputy Chairman Dick Hazell led these efforts, culminating in several long debates at special Council meetings. Many difficult issues emerged: should help be concentrated on members of certain ‘rogue syndicates’ – those with huge losses – or should it focus on the aggregate level of loss incurred by each member? Should it focus on recent extreme losses or look back over three, four or even seven years? How much would other members be willing to con-tribute? Would it need a referendum for legitimacy? Would it be open to legal challenge? Could it stop the litigation?

All these issues were debated against an uncertain background about the scale of the problem. New managers of troubled syndicates were struggling to understand the scale of their losses. Fresh, mostly worsening, estimates were arriving daily. Press speculation mounted; some form of relief was confidently expected. But as the losses mounted, another priority emerged. The Solvency and Security Committee was keeping a close eye on the ability of Lloyd’s to meet claims and pass the annual solvency test. Each depended on an adequate central fund. On 3 June, the Council decided there was an immediate need to impose a levy on all members to raise £500 million for the central fund. Although the press still expected some help for the biggest losers, two weeks later the Council finally concluded that it could not impose a worthwhile scheme on top of the central fund levy without stimulating a rebellion; nor was it able to borrow on a sufficient scale. Furthermore, neither the ALM nor the LUAA still supported a relief scheme. Instead, the Council would continue to help the worst-affected members through the hardship scheme. The Council also agreed to set up a sub-account of the central fund in the US (CFUS) in dollars and to create a joint asset within the LATF to alleviate NYID concerns about ‘negative balances’.23

The June 1992 Newsletter reported the decision to adopt the HLSL scheme to prevent large losses from engulfing members in future. It also explained

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that, after all, the Council had ruled out a rescue scheme for loss-hit Names. Nevertheless, it said there were people at Lloyd’s who were prepared to listen and, where possible, help. Sadly, it said, for those faced with the prospect of financial hardship and domestic upheaval, there could be no quick fixes. The same edi-tion reported the decision to double the size of the central fund from £500 mil-lion to £1 billion through a special levy on Names. For Names with losses, this would add to them. The levy was at a rate of 1.66 per cent of each member’s allo-cated capacity for each of the 1990, 1991 and 1992 years of account. It would be payable on 15 July. Coleridge called it ‘a prudent response to especially difficult trading circumstances throughout the industry’. Val Powell, Chief Executive of the ALM, said the levy was ‘uncomfortable but inevitable’ and ‘an essential pre-requisite to get us through the next two years’. Claud Gurney felt differently: he thought a levy on those who had already lost so much was grotesque. He decided to call an Extraordinary General Meeting (EGM), seeking to rescind it.

A study commissioned from Hoare Govett investment research by the ana-lyst Christopher Hitchens compared the performance of Lloyd’s with insurance companies in Britain and the US. He concluded that on average and over time, Lloyd’s syndicates had been more profitable than insurance companies. Their technical reserve ratios were higher than either the British or American com-panies. Lloyd’s maintained significantly stronger solvency margins. Its ratios ‘probably represented genuinely stronger reserves’. Many thousands of copies of this report were reprinted for distribution to brokers and clients. It was a wel-come antidote to the concerns of Standard & Poor’s. But it was of small comfort to Names.

ANOTHER MARATHONBy 1992, anger among Names had reached boiling point. The June AGM was a chance to express it. The losses far exceeded levels predicted by Lloyd’s. Expectations of relief had been raised then dashed. Instead, the levy to boost the central fund was yet another cost. Coleridge had to deliver the news of the losses and explain the failure of efforts to find a new form of relief. Amid the anger and disappointment, two new speakers – Michael Deeny and Richard Spooner – emerged. Both would later prove critical, as would some of the ideas they and others put forward.

Coleridge described the loss of £2 billion as appalling. He explained that it had escalated in the last two weeks, as new managers got to grips with the worst syndicates, making a fresh rescue plan unaffordable. Members could not be asked to pay more, nor was it right to take a loan. The Council could not see a better way to solve the fairness problem than means-tested help for those in

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genuine hardship – an approach he defended. His tone was conciliatory and apologetic. He dealt robustly but patiently with questioners, describing the problems of most members as manageable.24

Shortly afterwards, the Chairman of the Association of British Insurers (ABI) reported that 1991 saw record claims on insurance companies, plunging the company market into record deficit. Their worldwide trading loss was £3.3 billion.

THE MORSE AND WALKER REPORTSThe howls of protest greeting the Council’s early rejection of task force ideas on governance led Coleridge to perform a hasty volte-face: Sir Jeremy Morse was asked to review the proposals. The barrage of complaints from the House of Commons and the press in early 1992 also led Coleridge to turn to Sir David Walker to conduct an inquiry into the allegations of preferential treatment for insiders and the operation of the LMX spiral. In both cases, only the indepen-dent ‘nominated’ members of Council had the external credibility to undertake such sensitive assignments.

July 1992 saw the simultaneous publication of the Morse and Walker reports. Morse broadly endorsed the task force governance reforms, arguably improving their acceptability. His solution reminded some of the Council of Nicaea some 17 centuries earlier, which hammered out a compromise known as the Trinity. He proposed a Council, a Market Board and a Regulatory Board, instead of giving the regulatory role to Council as the task force had proposed. Under Morse, the Council would be halved, bringing it down to 14 members from 28 and delegating most of its work to the two new boards. When discussed by the Council in August, a timetable was agreed for the new Boards to start in 1993. The Council made a few minor changes to the Morse proposals, adding the Chief Executive and the Head of Regulation as nominated members of the Council.25 It also altered the terms of office for working members from four to three years in order to make membership less onerous.

Sir David Walker’s conclusions were greeted with relief: LMX was not fraud. The report described the growth of LMX business through the 1980s as ‘wholly explicable in terms of commercial factors and judgments’. It stressed that London companies were as involved as Lloyd’s syndicates. It did not find the LMX spiral ‘to have been improper or to have been distorted by conspir-acy or misfeasance’. On the sensitive question of preference, the report said insiders had tended overall to fare better than external Names ‘though not, in general and in most years, on an immodest scale given the inevitably superior market knowledge available to many working in the market’. The proportion

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of new capacity allocated to external Names in the ten worst LMX syndicates was described as ‘slightly higher’ than that for the allocation of new external capacity to all syndicates. This was later contested. Walker also noted that some Names had been enthusiastic to join LMX syndicates.

The report said that a radically different approach to the regulation of the Lloyd’s market was needed: it should be proactive and more vigorous. It called for more information to be held centrally and for a new system that would relate capital requirements to levels of risk. It called for much greater supervision of underwriters by their agents, including peer review. It warned against the view that underwriters ‘cannot operate effectively unless their discretion is largely unfettered’. This had a big influence on the way in which regulation developed under the guidance of the new and more independent Lloyd’s Regulatory Board that took over in 1993.

Both reports were widely welcomed in the press as thorough and radical. The FT26 said the good news for Lloyd’s was Walker’s finding there was no fraud or conspiracy; the bad news was the list of unedifying practices, some of which ‘make one’s hair stand on end’. The Corporate Affairs Minister, Neil Hamilton, welcomed the report, telling the House of Commons: ‘It does not help them when members, such as the honourable member for Neath [Peter Hain MP] make irresponsible and unwarranted claims on the basis of half truths. Last week the gentleman denounced the Walker report as a whitewash before it was even published; he then had to retract after he read it.’

Lloyd’s List editor David Gilbertson reviewed Chief Executive Alan Lord’s role and contribution on the day of his departure. He said that in a market where many reputations had taken a battering, Lord emerged from Lloyd’s with his fully intact. To his sternest critics, Lord had remained an outsider who never became fully involved in the real business of the market. Paul Archard, Chairman of the LUAA, said ‘he is misjudged by the market because they think he should have done things he never had the brief to do. As a market we do tend to judge people on the flimsiest of evidence’.

Lord did not believe that regulation could prevent losses: underwriters should be controlled by their boards. Gilbertson said Lord took a special pride in the Lloyd’s disciplinary procedures. An ex-Treasury official, he was also proud of the big improvement he made in the finances of the Corporation – eliminating the debt he found on arrival – and the greatly improved quality of staff at all levels, including a graduate intake system. Gilbertson described Lord as ‘a man of searing intellect, not easily impressed by others. As several found to their cost, he was a dangerous enemy to have. He can chill the room with a sud-den change of tone as he recalls an individual for whom he has no time’. Despite this, and a personal shyness, Gilbertson said that he was very loyal to those who

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won his respect and believed he had built a much stronger team than he had inherited. Those who knew him enjoyed his dry sense of humour.

GURNEY STRIKESA few days before the July 1992 EGM, Coleridge announced his intention to step down as Chairman at the end of the year. He said that, subject to his election to the Council, David Rowland had been asked to succeed him and would have his full support. The meeting took place on 27 July and was called by a group led by Claud Gurney. The group put three resolutions to the membership,27 say-ing they were intended more as a strong nudge than a vote of no confidence in the Council. They wanted the Council to rescind the central fund levy, to fully disclose Council members’ interests and to give all Names’ representatives all the help they sought. Gurney tried to state that his group were not revolutionaries.

The new ALM Chairman, Neil Shaw, had been invited to put forward a more positive resolution and to speak to it. He had obliged with a resolution that expressed confidence in the Council while urging action on various fronts. As with the other big meetings, some of the ideas put forward by speakers from the floor were eventually adopted.

The meeting finished in time to permit the Room to resume as a place of business for the afternoon. A postal ballot, supervised by the Electoral Reform Society, resulted in support for the first resolution put forward by the ALM by just over 80 per cent of those voting, numbering 23,000 (72 per cent of the mem-bership). This was seen as a clear-cut vote of confidence in the Council and its policies. Gurney’s three resolutions were defeated, attracting minority support of between 35 per cent to 44 per cent of those voting. This was the last big debate to take place in the Underwriting Room.

***

In August 1992, Hurricane Andrew caused huge damage in the Bahamas and to oil platforms in the Gulf of Mexico, before hitting the US coast, where it spawned 28 tornadoes throughout Alabama, Georgia and Mississippi. Overall, it caused 65 fatalities and $26 billion in damage, making it the most destructive hurricane in US history at the time – by 2013, it was still the third most destruc-tive. Despite this, its impact on Lloyd’s was expected to be much less than that of Hurricane Hugo: US insurers had bought far less catastrophe reinsurance, which was now much more expensive.

Chatset’s downbeat forecasts were routinely denounced as alarmist – ‘grossly misleading’, ‘irresponsible’ ‘entirely specious’ and ‘dotty’. Optimistic

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forecasts were a feature of the period. In September 1992, LUAA Chairman Paul Archard rashly predicted that the 1991 and 1992 results would see a return to overall profit. In the event, the 1991 losses exceeded £2 billion. Losses of over £1 billion for 1992 were not helped by a fall of nearly £200 million in the value of the reserves. Archard was right about an improving trend, but profits did not return until the 1993 year.28

When Coleridge had dashed false hopes of a rescue, he said that efforts would concentrate on hardship. In October 1992, members were told that the new approach would bring finality to hardship members. After three years, they would be discharged from future indebtedness to Lloyd’s. Payments from income would cease. Lloyd’s would retain a charge over the principal resi-dence; any Lloyd’s-related litigation recoveries would still need to be assigned to Lloyd’s. If a deposit trust fund had been set up to provide income, the capital would be retained by Lloyd’s.

It was announced that the support fund, using contributions from bro-kers and underwriting agents, would be structured as a sub-fund of the Lloyd’s Charities Trust, subject to the approval of the Charity Commissioners. This fund would be used in a number of approved ways, including: payment of school fees at critical stages of a child’s school career; payments to a spouse and/or dependants where a special need was identified; payment of nursing fees in retirement home; and others. All payments would be discretionary for those whom the Hardship Committee accepted as suffering severe financial hard-ship. If a member had no assets, the support fund could be used to provide income for both the member and their spouse. Charity status was later rejected by the Commissioners. Other measures were taken later to achieve some of these aims. Members were also told that Lloyd’s had issued writs to recover the amount withdrawn from or earmarked against the central fund to meet Names’ losses. Names who applied to the Hardship Committee would secure a stay of execution.

In September 1992, Sir Patrick Neill’s loss review on Feltrim was published. Its criticisms shed more light on bad practice and contributed to the whole atmosphere of gloom. Eventually, the leadership felt oppressed by these reviews with their evidence of failings, grimacing with each fresh publication, wonder-ing whether this policy had been a good idea. But it was not possible to turn off the tap, as a commitment to them had been made in 1991. Like many govern-ment inquiries, they seemed a necessary response at the time to the plight of the Names, but came to be inconvenient. Most reports were deeply unflattering about standards of conduct. A total of 40 loss reviews were conducted.

In mid-September 1992, the pound fell heavily and the government was obliged to suspend Britain’s membership of the Exchange Rate Mechanism.

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Soon afterwards, the Chancellor Norman Lamont, who had been willing to consider an extra tax break to help the Lloyd’s market a few months earlier, resigned. Lloyd’s confirmed that a weaker pound would put a further squeeze on its diminished capacity to accept premiums in stronger currencies, including the all-important US dollar.

FINDING FUTURE LEADERSAs 1992 unfolded, it was widely believed at Lloyd’s that there was only one per-son who could lead it across the chasm that had now opened up. But there were serious obstacles to persuading David Rowland to take on this task. The chair-manship had always been unpaid. As Chairman of Sedgwick, Rowland was well paid and he needed his income, not least to pay his Lloyd’s losses. Michael Wade was aware of Rowland’s family circumstances and knew this remuneration issue had to be addressed. He wrote to Sir David Walker, who was a member of the Council’s appointments committee. Wade said it was essential that this nettle be grasped. He was relieved when he received a terse reply from Walker, saying ‘nettle grasped’.

From the time he was first elected to the Council, Wade had always been irreverent. The Lloyd’s establishment tended to regard him as bumptious, cheeky and misguided. At the Sturge agency, he had the nickname ‘CLS’, mean-ing clever little sod. He would not take no for an answer. Without his and Robert Hiscox’s efforts, it is impossible to say how long it might have taken for Lloyd’s to find two of the pillars on which its reconstruction rested: Rowland’s leader-ship and corporate membership.

One reason Coleridge had taken up the role of Chairman was his strong sense of duty. He had taken a lot of flak, but he believed it was just possible that he was now over the worst. He would have been less than human if some part of him had not resented the prospect of handing over to someone else – someone who had not had to stand there and take the battering he had, someone who was now going to be paid handsomely to do the job that he and his predecessors for 200 years had done for nothing, as a service. He told members that he had ushered in more change than any previous chairman, but he also knew that new leadership might stand a better chance and that he was exhausted.

In July 1992, while he prepared to face down the so-called EGM initiative, Coleridge received advice from many quarters. One was a call from Hiscox, who told him the game was up. Hiscox says:

I worked hard to get David Rowland. We knew in his heart he wanted to be Chairman, but he wanted to be persuaded. We got the Bank of

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England onside and we worked on Sedgwick to release him. In the end, a momentous moment in my eyes, Anthony [Haynes] rang me on Saturday morning at home. I can remember him saying, ‘they are choos-ing a new Chief Executive, we have got to get Coleridge to step down’. I rang up Coleridge in his Chelsea kitchen, and I could hear the clat-tering of dishes behind, and I said ‘you have got to ask David Rowland to be Chairman of Lloyd’s next year. If you go on you will be the man who turned the lights out. If you hand over to David Rowland you will be seen as the man who set up a task force, put in a reforming crew and you will be a hero’. He said, ‘well David doesn’t want to be chairman of Lloyd’s’ and I told him he did; he was the perfect Chairman.

As a result, Hiscox persuaded Coleridge to approach Rowland.Hiscox says he, as Deputy Chairman, and Rowland had ‘an uneasy alliance

as we are very different, but we were an effective team. We arrived together at the beginning of January 1993. I admired the way David changed things’. He was astonished that Coleridge advised continuing the tradition of a bottle of champagne delivered by a waiter on a silver salver at 5 pm every afternoon: ‘I remember the first words Rowland said to me: “Why haven’t they changed things around here?” ’

At each of the several stages of the Lloyd’s drama, the leadership of the ALM played a critical role. Anthony Haynes, described by Hiscox as ‘utterly brilliant as a politician and organiser’, played a key role in getting the task force established and armed with top-flight consultants. Haynes served on the task force, at which he was a consistent voice of reason. Mark Farrar took over the ALM chairmanship from Haynes in 1991, followed a year later by Neil Shaw. In July 1992, Shaw played an important role in questioning Coleridge at the ALM’s own general meeting and then helped to express the voice of moderation among Names at the EGM. Shaw stressed that his support was not a vote of confidence in the Council of the past, but was strictly conditional on a programme of radi-cal reform.

In an interview with Lloyd’s List in August 1992, Shaw was described as having the rare knack of saying the most radical things in the most reasonable way. The reporter Edward Ion said this new head of the ALM was wrongly seen by some dissident Names as being too close to the Lloyd’s hierarchy and there-fore as part of the market’s problems. Shaw revealed himself to be a reformer, possessed of a quiet determination to see that change came soon. As a Canadian and a highly successful chairman of a multinational company, Tate & Lyle plc, he had a healthy disregard for the sheer quirkiness of Lloyd’s. He once told his fellow ALM committee member Sir Adam Ridley that Lloyd’s was like a very

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corrupt cottage industry, unable to recognise a conflict of interest. He thought the market had suffered from a level of incompetence that would not have been allowed in other areas of business life.

Shaw moved to London to become Chairman and CEO of Tate & Lyle in 1986. He transformed the group into the world’s leading sweetener company, becoming known as ‘Mr Cube’. He was Chairman of Business in the Community (BiC), one of the Prince of Wales’ associations, spearheading industry’s drive to revive inner-city development. In this capacity, he had already met Rowland, who was also active in BiC. Shaw’s strength was said to be understanding the political realities of different regions. In some countries, legislation promoted cane sugar, while in others, it promoted liquid sweeteners, made from corn. The company had to be ready to adapt. He wanted Lloyd’s to do the same.

Shaw said that every few years, there have been a ‘litany of hucksters’ who had been allowed to charm their way into the Lloyd’s system and nearly destroy it. He had sat on the Morse committee and was a strong advocate of a professional management structure at the top. He had every confidence that Rowland would succeed. He also thought the ALM should take a big role in advising members on whom to elect to the Council, choosing people with business experience. He endorsed the candidacy of David James for the vacant seat on the Council representing external Names. In the 1992 election, James defeated Alfred Doll-Steinberg, the hot-headed leader of the largest action group at Lloyd’s.

At the time that Coleridge’s decision to step down was rumoured, there was even some speculation that Shaw might be invited to become Chairman of Lloyd’s. Saying that he was already busy, he endorsed Rowland. But he did say that in future anyone should be capable of being hired from inside or outside Lloyd’s: ‘Don’t give us this rubbish that you can’t control these people, you can. Someone has got to start running the place. That is all that is missing at Lloyd’s.’

***

Chief Executive Alan Lord had left in July, temporarily succeeded by the trium-virate. A Council appointments committee chose a successor. As Chairman-designate, Rowland’s approval was sought for the preferred candidate: he was convinced that Peter Middleton was a good choice. He met the stipulation of the task force and the Morse report: the Chief Executive Officer of the Lloyd’s Market Board (LMB) should be a businessman. He was head of the Thomas Cook travel business. The first rumour of his appointment in The Observer29 also reported concern that he would be leaving Thomas Cook at a delicate time. Its purchase by a German bank, impressed by the strength of the company’s management team, was not yet complete.

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Middleton says he was under considerable pressure to take the Lloyd’s job. He received many phone calls, including one from the Chancellor of the Exchequer and another from the Governor of the Bank of England. People in government asked other leading British businessmen, including Colin Marshall of British Airways and Sir John Harvey-Jones of ICI, to talk to him too. He was at first reluctant because he had only recently assured the Chairman of Westdeutsche Landesbank – truthfully at the time – that he was planning to stay in place at Thomas Cook. However, he had a strong hand-picked successor in Christopher Rodrigues.

Middleton’s appointment was announced in September 1992. It was very well choreographed, with imposing photographs, interviews and a press confer-ence. He was well received by the press. In a profile in The Times, Jon Ashworth30 said it was hard to imagine someone further from the traditional oak-panelled image of Lloyd’s. Crucially for the now seriously alienated section of Names, Middleton had no previous form as a Lloyd’s insider. Action group leaders were quick to make their position clear to him and he showed himself ready to listen. Interviewed by Lloyd’s List on 6 October, he said he was adopting a different style from his predecessor. He had dispensed with some of the stately furniture in the Chief Executive’s office, bringing in more workmanlike replacements. He said of the twelfth-floor environment: ‘I have never been in a more remote place. I could hardly be further from the market and from bumping into people.’ In contrast to his predecessor, he had spent time observing on underwriting boxes.

Shortly after Middleton’s appointment, The Times31 reported Coleridge as telling his fellow Council members he had received an approach from Shaw on behalf of Names to start talking. One meeting between action group representa-tives, the ALM and the market had already taken place, and a schedule had been drawn up for further meetings to concentrate on specific issues. Paul Archard, Chairman of the LUAA, had attended the first meeting and said it had been a sensible first step in bridge-building.

Coleridge and Middleton responded positively to Shaw’s initiative. Four separate groups were set up, comprising six to eight members each, including the LUAA, representatives from Names’ action groups and the ALM. Three groups would examine key aspects of Names’ hardship such as open years and would report to a fourth committee chaired by Dick Hazell. Supported by con-sultants, these groups did important groundwork and were the forerunners of major policy initiatives. The groups established a pattern of discussion with Names’ representatives – relevant people with something to contribute – which Shaw advocated. Eventually, the four study groups coalesced into two: one gaug-ing the size and scale of the open years problem, and the other discovering the

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amount of E&O insurance available to contribute to a settlement. Christopher Stockwell chaired the first of these groups, the Old Years Panel, supported by Fields Wicker of Mercer Consultants.

***

Rowland had been working behind the scenes to find the right person to chair the new Regulatory Board, which would start the following year. He wanted someone tough and independent. Brian Garraway was named in October 1992. He was due to retire as Deputy Chairman of British American Tobacco (BAT). He would hold the title of Lloyd’s Deputy Chairman, one of six nominated members who would sit on the reconstituted Council. Educated at the King Edward School and the Institute of Chartered Accountancy, he had spent his whole career with BAT, including oversight of the Group’s diversification into the insurance field during the 1980s. His appointment at Lloyd’s was welcomed by the financial press as symbolising its new outward-looking regulatory phi-losophy. He was described as a heavyweight: a man who had achieved a lot at BAT and had immense experience in the insurance market. Hay Davison had said there was a risk of the new regulator being hijacked by a Lloyd’s Chairman determined to capture the regulatory ground. The Times32 commented that Garraway was ‘the most un-hijackable of men’.

The September edition of the Newsletter carried Lady Delves Broughton’s first ‘Viewpoint’ page. An elected Council member with a flair for communica-tion, her column covered topics from a Name’s point of view and became influ-ential. She began by saying: ‘This is to be our page – yours and mine – and I hope that this medium will enable us to exchange ideas. I have long been unhappy with the lack of satisfactory liaison between Lloyd’s and Names.’ She thought that better explanation could have avoided much irritation and discontent, hop-ing her column could help to bridge the gap. She would: ‘Write in my capacity as an external member but with the benefit of the extra knowledge gained from being on the Council, which I’m anxious to pass on to you.’ She called for 1993 to be seen as a fresh start, with much better market conditions. She wrote the maximum amount of premium income and her two daughters were members. She was on 14 open years, including Gooda Walker and had neither any EPP nor PSL, as the prices she had been offered were ‘totally unacceptable’. She had seri-ous losses, ‘sufficiently high to cause considerable discomfort’. Fortunately, she was able to trade on. She reviewed the cost of the recent EGM and hoped that such an event would not be repeated.

In November, members were told of a series of initiatives. This included a six-month moratorium on issuing further writs for recovery of money owed or

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earmarked to the central fund. Middleton said it would have virtually no effect on the security of Lloyd’s, but would help some Names through the next period. The action had been taken after listening to the views of a wide range of Names and was intended to help those who were suffering from a temporary liquidity problem. Costs were also being examined closely.

The Economist33 reported that Middleton seemed more sympathetic than his predecessor, citing the temporary halt to writs. It was doubtful about the success of the initiatives to deal with open years or quantify E&O, pointing out that Centrewrite had so far quoted prices so high for closing open years that it had not yet found a customer. The E&O market was an even tougher problem; the odds were that the negligence suits would go to court and would hang over Lloyd’s for three or four years. Colin Hook, leader of the Feltrim Action Group, had said that in assembling a £6 million fund for what might be the biggest case in English legal history, Names were building ‘an atomic bomb that they were ready to use’. It could blow up even the optimistic Mr Middleton, said The Economist.

The overwhelming will of the leadership, the market, the brokers, the customers and even many competitors was that Lloyd’s should survive. This extended to the regulators in Britain, the US and just about everywhere that Lloyd’s traded. A collapse would be messy and would create all kinds of unwel-come clear-up work. A continuing Lloyd’s was a useful part of the world’s insur-ance fabric. The will to survive embraced the ALM leadership and warriors like Deeny, who later became the most influential action group leader. They wanted a stream of future profits to help pay for the losses. But the Names who had lost too much to continue did not share this interest. Some of them seemed to hope that the whole edifice of Lloyd’s could, like themselves, be brought crashing to the ground.

By the close of 1992, Lloyd’s had appointed a new Chairman, a new Chief Executive and a new Chairman of the Lloyd’s Regulatory Board that was about to take shape. In Shaw, the ALM had a new leader, an international business executive who had already taken a decisive initiative: he had opened talks and Middleton had responded with enthusiasm. A moratorium on trying to force Names to pay their losses had improved the atmosphere. Despite the huge losses already announced and the further losses known to be in the pipeline, there was a mood of optimism that a new team could solve the problems of Lloyd’s.

Would you please, please, give peace a chance.Peter Middleton, Royal Albert Hall, May 1993

4

FRESH START

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It was a classic double act: as Chairman, the urbane David Rowland, who had been around Lloyd’s all his working life, and, as Chief Executive, Peter

Middleton, the gaunt Northerner with the gravelly accent whose slightly exotic past had been 100 miles away from Lloyd’s. It looked good to a wide range of audiences. Most of the time, it worked almost as well as it looked. Both appoint-ments owed much to the crisis. In more normal circumstances, Middleton’s complete unfamiliarity with Lloyd’s or insurance would have been considered a drawback, but now it was a positive factor, while Rowland’s need of a salary might have ruled him out for a role that had hitherto been unpaid.

By late 1992, a cool analysis of the facts might have concluded that the odds were against Lloyd’s surviving. The tidal waves of litigation, loss of capacity and looming insolvency looked likely to engulf it. But that was not the prevailing view: institutional self-confidence defied gravity.

HONEYMOONRowland told Post Magazine, a trade journal, that he was: ‘Excited, apprehensive and optimistic. I feel passionate about the London market and about Lloyd’s.’ He believed in its importance to the country. He once told the author it would be difficult to live with yourself if you overheard someone on the golf course saying: ‘See that chap over there, he’s the one that turned down the chance to save Lloyd’s.’

What other people think is important to Rowland. He has many skills, including a polished presentational style. But his key skill is that he is a politi-cian through and through. Instinctively, he assesses the reaction of interested parties to any proposition, thinking how to persuade them to accept it. Lloyd’s faced a huge political problem: how to reconcile the many interest groups, rang-ing from angry loss-making Names, through to successful agents, brokers and clients who were not all dependent on Lloyd’s for the future. He is also very adept at getting the best out of others, making each interlocutor feel important, even intimate. Chairing the task force, he had everyone contributing, encour-aged to express their views and ready to change them. In running Lloyd’s, he was able to delegate good and bad jobs to others, who took them up enthusiasti-cally. People seemed to want his approval; he gave just enough of it to keep them trying to earn more.

In her Daily Telegraph profile in early May 1993, Patience Wheatcroft said: ‘The emollient powers of Mr Rowland were to the fore this week, as he spelt out his business plans for Lloyd’s. He had many qualifications to fit him for the chairmanship, but his prowess at public relations must have featured well up the list.’ She also perceived ‘something of the closet revolutionary encased in the

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immaculate pinstripes.’ He confided: ‘I have always wanted to be sufficiently on the inside to change things.’

Those who have worked with Rowland have noticed his enthusiasm for uncovering and confronting the real issues. If the time is not right for their immediate resolution, he will park them for later. A favourite phrase is ‘we need to pause and reflect’. He has a sure sense of timing, knowing what is urgent as well as what will benefit from the passage of time and the unfolding of related events. There was enough strength in the reputation of Lloyd’s, aided by the curious delays of three-year accounting, for a plan to reconstruct Lloyd’s to be achieved over a period of four years. Although impatient, Rowland understood that time was needed to put the jigsaw together. He devoted a large but neces-sary amount of his time to reassuring brokers, clients and regulators, exuding confidence without complacency.

St Paul’s School in London, where Rowland was educated, has the high standards of Britain’s best private schools without the social insularity of a boarding school. One of his early role models there was Field Marshal Bernard Montgomery, an alumnus with a capacity for inspiring great loyalty among his troops. ‘Monty’ taught him the importance of facing the facts and telling it straight. Rowland was a governor at St Pauls for 16 years until 2007. A graduate of Trinity College, Cambridge, he has shown a keen interest in management education. His part in the development of management studies at the University of Oxford and his seven years as President of Templeton College were recognised when the University conferred on him an honorary degree of Master of Arts.

In his early career at the brokers Matthews Wrightson, Rowland was once made to apologise to every member of staff for a simple error. He recalls feeling the humiliation deeply, but he became better-known as a result, establishing a new level of sympathetic rapport with his colleagues. He never looked back. He now regards this incident as one of the best things that happened to him in his early career. Within three years, aged just 29, he was a director, hence his advice to all aspiring highfliers to ‘always admit when you are wrong’.

Middleton cut a very unusual figure at Lloyd’s. He had the distinctive accent of a Geordie.1 It was widely rumoured that his former diplomatic work had involved intelligence. He then made a rapid transition to business leader with a ready use of the latest management concepts and jargon. There was something deeply unconventional about him. He rode to work on a large motorcycle, chain-smoked and carried a black rucksack instead of a briefcase. When he spoke to a large audience, he commanded total attention. During his careful pauses, you could hear a pin drop. He was strikingly relaxed and deft with the media.

Middleton’s short business career had begun in 1985 when he left the diplo-matic service to head the international banking operations of Midland Bank. It

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culminated in the turnaround and sale of Thomas Cook, Midland Bank’s travel agent subsidiary, for £200 million. He said his lack of experience in the insur-ance world would be: ‘No more a handicap than my total ignorance of travel when I took over at Thomas Cook.’ After reading philosophy at the University of Paris, he took a degree in social studies at Hull before joining the diplomatic service, rising to become counsellor at the British Embassy in Paris. While at Hull, he was expected to represent Britain in the 400 m and 800 m races at the Mexico Olympic Games before an ankle injury intervened.

Middleton struck reporters as remarkably down to earth. He told them that he only needed four hours’ sleep a night, loved music and enjoyed long walks on his own. Of his five early years as a monk,2 he said that, as well as giving him sore knees, it had been instructive: ‘You learn things about human nature. The great thing about being silent and being still is you’ve nowhere to hide, no activity to cover up your shortcomings. You learn a lot about observing other people. They also had a superb library and I just read and read and read.’ The inside of the cupboard door in his outer office was covered in a large poster of him astride a motorcycle, placed there by his admiring staff. Over the next few years, rumours abounded about his past and alleged liaisons.

Throughout his tenure, Middleton made a point of meeting Names each week in order to keep their perspective at the forefront of his mind. He found many of their stories harrowing. Later he said3 that the job contained a combi-nation of emotional strain and management challenge that was rare in corpo-rate life: a job like it could only be done once in a lifetime.

Crucially, Middleton established some hope and even some trust on the part of loss-making Names. Evidence of this kept surfacing. In July 1993, Claud Gurney, a dissident Name, expressed his complete confidence in Middleton, while calling for the resignation of Rowland and Stephen Merrett. Middleton said he was a bit concerned by the suggestion that he was to be left alone. His working relationship with Rowland was easily the best he’d ever had: ‘The respect I have for David Rowland is the greatest respect for anybody for whom I have ever worked, anywhere.’ There was far more work to be done than he could conceivably manage alone. Rowland stressed the importance of teamwork, acknowledging his dependence on others around him: ‘You hire people who are brighter than yourself, pinch their ideas and remember to say thank you.’

NEW STRUCTURESRowland and Middleton were each essential to the subsequent course of events, but it would be wrong to put all the focus on them. The new boards were much better equipped to approach Lloyd’s problems, enabling other key staff and

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volunteers to become involved in finding solutions. The market and member-ship turned out to be nearly as resilient as the building: when an IRA bomb destroyed the nearby Baltic Exchange, Lloyd’s suffered only a bent coat-stand.

The new Lloyd’s Market Board (LMB) was a very different institution from its predecessor, the old Committee of Lloyd’s, with its frustrating ritualistic ways. Opening its first meeting in January 1993, Rowland said that the Board would be the engine to drive Lloyd’s forward. Instead of being timed to finish with a long lunch, it began at 8.30 am. Instead of speaking by turn, anyone could catch the Chairman’s eye. The whole atmosphere was far more businesslike. The use of management consultants McKinsey by the task force, and Middleton’s ready use of other consultants, led to a complete change in atmosphere about the value of outside advice. This marked a sharp contrast with past scepticism about consultants, once dismissed as ‘borrowing your watch to tell you the time’. The first meeting of the LMB had before it a fresh analysis of costs by Booz Allen. A report from Mercer was anticipated.

The new regulatory board (the new Lloyd’s Regulatory Board (LRB)) also had a fresh sense of mission. Its Chairman, Brian Garraway, had the reputa-tion of being sharp and tough. Its spirit was quite different from that of the old Committee of Lloyd’s, which was culturally – almost ideologically – opposed to market intervention. In January 1993, a new publication, One Lime Street (OLS), replaced the monthly Newsletter and quarterly Lloyd’s Log. OLS was edited by Nicola Major, who came from the Financial Times and World Insurance Report, supported by Sarah Goddard, the Assistant Editor of the Log and the Newsletter. The aim was to combine the best of both the old titles: a high news content with balanced in-depth insurance-related features. OLS’ letter columns were a debat-ing forum and it played a key role in the battle for Names’ hearts and minds.

The first edition of the new publication featured an article by Rowland which began with the words: ‘Poisoned chalice? Rubbish! To be elected to the leadership of the Society offers one of the most fascinating and challenging jobs in this country.’ Middleton had sought from his first day to create an atmos-phere of co-operation rather than confrontation; this was his attitude too. An editorial said that OLS would concentrate on what was important to the whole membership, but would retain a sense of humour. A letter from an Australian member hoped it would display a sense of realism about what mattered to the membership at large.4 To date, he said, Lloyd’s had meant nothing but misery. In future, the membership, including those ‘on the other side of the world’, would be watching Lloyd’s like hawks and would expect fair and open reporting on all important developments.

The Chairman of the ALM, Neil Shaw, told OLS readers he had no doubt that Lloyd’s would survive and flourish, warning: ‘Once we are through the

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current crisis, we must not fall back into the routine of slapping ourselves on the back and letting things slide back into the old ways.’ He thought that unlimited liability ‘must inevitably go’. He hoped that OLS would concentrate on serious issues rather than the ‘social gossip that affects very few beyond the bounds of Lime Street’. In a New Year message to his 9,000 ALM members, he said there could be an improvement on the anger, litigation and recrimination of 1992. Welcoming the more enlightened and even-handed manner in which loss-mak-ing Names were being treated, he promised to be alert for any signs of backslid-ing: the ALM would ensure reforms were carried through.

Lady Delves Broughton continued her ‘Viewpoint’ in OLS. She included a tribute to Coleridge, saying that he ‘had steered us safely through probably the two worst years in Lloyd’s history. A lesser man neither could nor would have done it. His integrity, dignity and charm carried him through ... many conten-tious meetings of angry members. Despite many personal attacks, he kept his patience and sympathy and was always available to members. It was no easy feat to appease both angry external and working Names and keep the market on course’.

Middleton’s review of costs bore fruit. Cuts were announced, bringing Corporation numbers down from 2,202 to 1,600. Although radical, before long the cost of external advisers would start to mount. The priority was to hire the best available expertise to find solutions to lethal problems; the stakes were too high to worry about their costs. The need to strengthen the levels of profession-alism and competence throughout Lloyd’s was one of the key points of the task force’s report. It was proposed that the Lloyd’s Market Certificate (LMC) should be required for all agency directors, with requirements to be further upgraded later.

The 1993 Budget brought new reserving arrangements for members of Lloyd’s, as had been recommended by Lord Cromer some 24 years earlier. Up to 50 per cent of Names’ profits could be transferred free of tax into the new reserve, provided that the value of the fund did not exceed 50 per cent of the Names’ overall premium limit. Withdrawals had to be made to meet losses and would be treated as underwriting income and chargeable to income tax. Gains on assets representing invested premiums would cease to be taxed under the capital gains tax rules from 1 January 1994, after which any capital appreciation or depreciation would be included in the trading result.

Some help for Names with short-term liquidity difficulties was announced. They would be allowed to use anticipated income tax recoveries, due as a result of past underwriting losses, as ‘funds at Lloyd’s’ (FAL) to back up their contin-ued underwriting. A US tax rebate of around $125 million was divided among 20,000 Names. Policy was altered to make it easier for action groups to get in

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touch with members. Members’ agents had not always co-operated in terms of forwarding letters. Middleton now decided that the Corporation could forward material directly to Names. Meanwhile, seven more syndicates breached the 100 per cent loss threshold, triggering more loss reviews.

Rowland announced an end to ceremonial dinners until the crisis was solved. The wine cellar was to be sold and the Adam Room would be available for use by Lloyd’s firms – brokers, agents and underwriters – for the develop-ment or production of Lloyd’s business.

BUSINESS PLANRowland and Middleton wanted the mission of the LMB expressed in a business plan for Lloyd’s. As an evolving market of competing syndicates, Lloyd’s had never before had anything remotely like this. Charles Roxburgh, the McKinsey consultant who had played a large role in supporting the work of the task force, was asked to help construct it. Drawing heavily on task force thinking, a draft plan was brought before the LMB in February 1993. The Board contained four members of the task force, whose report had formed a manifesto for Rowland.

Planning for Profit was published in late April 1993. It re-stated the oppor-tunity for profit at Lloyd’s, despite all the well-known problems. It called for a new management approach to running Lloyd’s, saying that ‘to date, agencies and syndicates have had almost complete freedom to operate as independent competing units. Decision-making has been based on consensus, developed through extensive committee work’. It concluded: ‘The current state of the Society clearly demonstrates the inadequacies of this style of leadership. We cannot drive through the degree of change required without adopting a more directive approach.’ The main planks of the business plan were to centralise, separate and manage the problem of old liabilities, using a vehicle described as Newco; to raise fresh corporate capital; to reduce costs; and to develop new sources of business.

Another fundamental change of approach was the plan’s commitment to playing an active role in seeking negotiated settlements to the big legal disputes between Names and their agents. Opening the door to a ‘modest’ central con-tribution towards a settlement, the plan also encouraged syndicates not to call more cash than was actually needed to pay claims. While this was very wel-come news to many Names, it had an important unintended consequence: US asbestos and pollution reserves were the prime example of money that was not required immediately. A US dollar solvency deficit began to build up.

The plan was well received by the market, the ALM and, for the most part, the press. The FT’s insurance correspondent Richard Lapper said that it was

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nothing less than a survival formula and carried revolutionary implications for the running of the market. Lloyd’s List headed its coverage ‘Revolution unveiled at Lloyd’s’, saying it would lead to the most fundamental changes in its 300-year history. The Guardian’s Pauline Springett said that Lloyd’s action groups gave it their approval, despite its failure to bail out those facing huge personal losses, while market insiders were surprised by the support shown by dissidents. In The Times, Sarah Bagnall said the document was a blueprint for radical reform and that the balance was, on the whole, right. The Independent, a constant critic of Lloyd’s, said ‘much of the contents make sense ... [it] also sets forth a way of isolating the financial problems that occurred before 1985’. The Sunday Times called it: ‘A bold radical plan to bring the Society back from the brink. For the first time since it hit its problems five years ago, talk is being replaced by action.’ Tabloid coverage was less favourable and very confused.

Shaw said: ‘The plan addresses all of the issues worrying members. It is not the solution to the very serious problems at Lloyd’s. But it is a well thought-out strategy. That is a mammoth feat and should be recognised.’ He also called for more effort to be put into resolving the litigation. Brokers, agents and under-writers were also supportive.

NEW RECRUITSRowland and Middleton were not satisfied with the headhunter’s London mar-ket candidates to lead the Newco project. One of Rowland’s former Sedgwick colleagues, Tony Keys, asked Jay Novik, a senior executive at Swiss Re’s New York office, whether his firm could help out. This led to the appointment of Heidi Hutter, a young and talented actuary from Novik’s team. She had at least a chance of establishing credibility with both the Lloyd’s market and the DTI, who would need to approve any new reinsurance vehicle.

Middleton believed that large savings were possible through centralising the administration of Names’ affairs. Members’ agents were highly suspicious of this. But he saw that if Lloyd’s was to make an offer to settle the disputes, it would have to be tailored to each Name. Lloyd’s centrally knew very little at this level, which was normally the province of members’ agents. In October 1993, Nicholas Pawson, the LMB member designated to chair the new Central Services Unit (CSU), chose Joe Bradley to create and run it. Bradley had been the direc-tor responsible for the development of IT at Eagle Star Insurance Company. He brought the skills and tenacity required to make sense of the vast muddle of uncertain losses and assets, building a database that defined the problems of Lloyd’s numerically. His almost obsessive approach to this task irritated some and amused others. He was critical of the lack of record-keeping and systems he

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encountered. Two years later, a group led by Sir Adam Ridley had to consider the Rubik’s Cube of an offer that affected every Name differently. Ridley said that without Bradley’s data and modelling capacity, the task would have been impossible.

The advent of LMB brought with it a new way of involving key market figures in taking Lloyd’s forward. Rowland, a broker, appointed two Deputy Chairmen, Stephen Merrett and Robert Hiscox, both underwriters and bosses of their own agencies (one from the marine market and one with a non-marine background). Both had distinguished Lloyd’s parentage, but each had built up his business well beyond his inheritance. Both had played a large part in the task force and were completely committed to the survival and success of Lloyd’s. Each was Chairman of a major market association.

CORPORATE CAPITALInsurance prices in 1993 were far more realistic than they had been for sev-eral years, partly because cheap reinsurance was no longer available. Losses had now helped turn the insurance cycle into an upswing. Furthermore, the global economy was now growing rapidly. But the number of new members had been reduced to a trickle. Lloyd’s took several steps to allow existing members to make the most of opportunities. It also developed new ways in which members could participate by spreading their interests among a wide number of syndi-cates, along the lines of a unit trust approach. This was known as a Members Agent Pooling Arrangement (MAPA). But, as the task force had foreseen, new sources of capital were also needed if Lloyd’s was to resume a growth path. The business plan committed the LMB to active capacity management, avoiding a repetition of the over-expansion that had taken place in the 1980s. It also set out an intention to set a target, gauge the level of members’ interest, and invite corporate members to fill the gap, paying an entrance fee.

Robert Hiscox, who was well-known as an advocate of corporate mem-bership, recalls that Rowland asked him to work on plans for the future and Merrett to lead the plans to resolve the past. The business plan set out the broad approach to admitting corporate capital; progress to date had been slow.

Hiscox led the work to admit the first corporate members, aiming for January 1994. He knew nothing about capital structures or how to create corpo-rate membership, so he asked for the best professional support. This led to the appointment of Barry O’Brien, a senior corporate lawyer at Freshfields, whom Hiscox describes as a ‘brilliant can-do character’ and who was creative in devis-ing a legal framework. The design of the structure came mostly from Richard Johnston of JP Morgan, who was familiar with the market. His colleague,

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William Christopherson, had an office in Lloyd’s, as did O’Brien, who recalls the Corporation’s habit of working behind closed doors. Life changed when he brought in a doorstop, which was soon followed by a stream of visitors through his open door.

A Corporate Membership Unit was established to help progress and administer the rules. Its head was Ewen Gilmour, a Cambridge graduate who had gained his qualifications with KPMG and then spent 12 years at the corpo-rate finance department of Charterhouse Bank. Years later, he was to become Deputy Chairman of Lloyd’s.

The business plan set out the main ways in which fairness between new-style members and existing Names would be achieved. Corporate members would be required to pay a higher annual central fund contribution of 1.5 per cent of their OPL, compared with 0.6 per cent for individual Names. Corporate members would also be required to maintain deposits at 50 per cent of their OPL, while individuals could deposit 30 per cent and MAPA members 25 per cent. Corporate members would also be required to diversify their underwriting across several syndicates, like Names did. Other issues were still being thrashed out when the next big discussion took place with the membership.

To those who worked in the financial heart of the City – the Stock Exchange and the merchant banks – Lloyd’s was another planet. Seven years earlier, the impact of the package of measures known as the Big Bang on their world had been dramatic. They imagined that success at Lloyd’s depended on personal con-tacts and networks of favours. During 1992, Sir Laurie Magnus, a young invest-ment banker with Samuel Montagu, was impressed by John Charman, a rising underwriter at Lloyd’s. Magnus discussed the possibilities for corporate capital with Alan Nichols, a prominent insurance analyst at HSBC’s James Capel sub-sidiary, and Michael Carpenter, an HSBC colleague who was also a Name. The three began to make contact with those developing the rules. Magnus believed it would be important for a new vehicle to be completely independent from the ‘old boys’ network’ of Lloyd’s members’ agents, equipped to make its own selec-tion of syndicates, using the analytical and research techniques of an invest-ment bank. His preference was accommodated. Corporate members would be required to retain a licensed Lloyd’s adviser; if they had sufficient resources, they could form their own in-house adviser. This would be substantially cheaper than paying commission to a members’ agent, most of whom would be unable to offer an analytical service better than the one which HSBC could create.

When Gilmour was appointed to run the new unit at Lloyd’s, Magnus already knew him. He and his team approached a variety of managing agents, based on knowledge of their performance and potential. In most cases, they were desperate for support from new capital to take advantage of the opportunities

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to underwrite more profitable insurance. The HSBC team decided to call their vehicle ‘LIMIT’, which stood for the London Insurance Market Investment Trust. To attract his investors, Magnus needed a stock exchange listing. The only way this could be achieved without a three-year track record was to struc-ture his vehicle as an investment trust. Over 90 per cent of the new corporate capital raised for 1994 took this form. As momentum developed, Hiscox decided to create a ‘dedicated’ corporate vehicle that would back only its own syndicates. In a reference to his own prominence in developing the rules, Hiscox said with a grin that he felt he should be eating his own cooking.

Meanwhile, others were also active in developing proposals for new cor-porate members. Michael Wade, who had been pressing for this form of mem-bership on the task force and elsewhere, took it on his own initiative to create a vehicle open to any shareholder. Advised by Barclays, he wanted to call it ‘Corporate Lloyd’s Membership’, but this sounded rather too generic to be fair on others and he was persuaded to alter the title to ‘CLM’. John Stace, whose members’ agency, Stace Barr, was growing rapidly, decided that his firm should create a new corporate member, Angerstein. His firm was advised by Charlie Philipps of County NatWest.

Magnus and others had found strong demand for corporate capital among many Lloyd’s managing agents, and a recognition by the leadership team that this was essential to maintain and develop the capacity of Lloyd’s. The early indications were that City institutions would be interested in participating. However, it was still necessary to convince the existing Names that the move would be in their interests too. Many were sceptical, fearing second-class status for themselves. Some were also worried that by trading with unlimited liability, they could somehow be left holding the baby if corporate members’ funds were exhausted by losses.

At an early stage, the prospect of corporate membership interested George Soros. Less than a year earlier, he had played an infamous role in the speculation that had brought down the pound sterling. He had a reputation for shrewdness; his imprimatur would be an obvious boost to confidence. His team was received for a high-level briefing and was treated with unusual deference. The author began a slide presentation with evidence of improved market conditions; he was immediately cut short by Soros, who said that they knew all this – that was why they were present. The presentation was fast-forwarded to the new rules for entry, which were not yet final. Afterwards, Soros told Rowland that he was contemplating a very big investment of around £1 billion, but he wanted an exclusive position as a corporate investor.

Middleton found this to be one of the hardest business decisions he had ever faced. Lloyd’s was desperate for new capital in a rising market and was keen to

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make an early success of the much-discussed concept of corporate membership. But an exclusive role for Soros was completely contrary to the spirit and practice of Lloyd’s. The plan was to open a new route for capital from diverse sources, which would eventually become the pattern for the future. It was swiftly con-cluded that exclusivity was too high a price to pay. In the event, the first wave of corporate membership raised over £800 million, boosting the 1994 capacity of Lloyd’s by a much-needed £1.6 billion.

NAMES’ ATTITUDESThe range of attitudes among Names reflected their differing circumstances. As Chairmen, both Coleridge and Rowland were assiduous in meeting many Names and replying to hundreds of letters. The helpline received around 100 calls a week over several years. Many callers were put in touch with support groups that had sprung up locally. Marie Louise Burrows, David Durant and David Rennison, themselves hard-pressed, made enormous efforts to put people in touch with other nearby members, organising moral support and counselling wherever they could. Burrows also made frequent representations to Lloyd’s, eventually stand-ing for Council. When she stood a second time, she was elected for 1996.

Where members’ agents were blamed, relations became very strained or were broken off completely. But in many cases, Names did not see their agent as the main architect of their financial problems. Relationships often remained cordial, if no longer jovial. During 1993, many Names felt a little better about the stance of the leadership. Middleton’s disapproval of much that had gone before was convincing. His whole style was so different from that of the typical Lloyd’s insider – the accent, the motorcycle, etc. – that Names recognised the new broom. He began to establish a surprising degree of trust. Mrs Jessie Munn had spoken with passion at previous AGMs, condemning many aspects of Lloyd’s. She wrote to OLS applauding Middleton’s recent meeting in an Oxfordshire vil-lage hall: ‘A group of impoverished Names who have suffered the double mis-fortune of having Gooda Walker as their members’ agent as well as being on a range of disastrously loss-making Gooda Walker syndicates.’ Names who had come from Spain, Aberdeen, Liverpool and the West Country had his undi-vided attention for two-and-a-half hours. ‘He talked, but above all he listened. He comes to Lloyd’s with clean hands, and the impression he gave was one of empathy and great integrity. Names left the meeting saying they felt fortified in hope and in spirit, not because they expect him to wave a magic wand but in the belief that he will act honourably and fairly.’

Rowland associated himself strongly with Middleton, conveying a sense of shame about what had happened and identifying himself with reform and

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fairness. This did not convince everyone. A minority were beyond any form of reconciliation with the institution that had wreaked such havoc upon their personal lives. Both of the new leaders of Lloyd’s were keen to speak directly to Names, not just through the ALM or the action group leaders. The Royal Albert Hall was chosen as the biggest space anyone could think of. As the date approached, Rowland began to wonder if it had been wise to assemble thou-sands of angry Names, thinking: ‘If we couldn’t control it, what would we do?’

The meeting went ahead in May 1993. The aims were to explain the busi-ness plan, announce initiatives to try working towards a settlement and take questions. Rowland was determined to conduct the meeting differently from his predecessors: the venue would not interfere with underwriting business and the platform would be shared with others. As Chairman, he spoke first, show-ing that he was genuinely ashamed of the past performance of Lloyd’s. He said he would serve the interests of all members – past, present and future; he, too, was frightened and trapped with open years. He was also convinced that Lloyd’s could be restored to health. He described measures to help members to trade on. He asked to be judged on actions, not just words.

David James, the recently elected external Council member – with a repu-tation as a company doctor – spoke next. He too identified himself with the audience, saying he had learned to write cheques and had many open years. To applause, he said that members had been disgracefully treated. He argued that capacity had to be maintained to buy time and to keep the place of Lloyd’s in the world and make profits; this could only be achieved by accepting corporate cap-ital. The audience were noisily divided when he asked rhetorically if the lights should be turned out in Lime Street. He said ‘no’, but many thought otherwise.

He was followed by Middleton, who called for accountability, saying it was not possible to manage in a mist. If the business plan was not implemented by the end of 1995, he should be fired. He spoke about an approach to a settlement, referring to the work of the E&O panel and the complex issues it had revealed. As first steps towards a settlement of disputes, he described plans to create two new panels: a litigation panel, chaired by a retired judge, Sir Michael Kerr QC, which would try to assess the strength of the cases advanced by various action groups; and a financial panel, chaired by Sir Jeremy Morse, which would try to gauge the amount available for a deal. Morse was a nominated member of the Council and a former Chairman of Lloyds Bank. (The bank and the Lloyd’s insurance market are unconnected, distinguished by an apostrophe.) Neil Shaw had been invited to take part, as had Christopher Stockwell, whom he described as the ‘organiser and the centrepiece’ of the LNAWP.

Middleton ended by saying that only the Society itself could solve its prob-lems. He had spent a lot of time listening to people whose lives had been seriously

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damaged by their membership of Lloyd’s and it was impossible not to be moved: ‘We are not made of stone’ he said, ‘but we are not made of money either. It is your choice.’ He finished to loud applause with a plea borrowed from John Lennon of the Beatles: ‘Would you please, please give peace a chance.’

Tom Benyon drew attention to the slender government majority of 18 in the House of Commons at that time. He believed there were 64 Conservative MPs who were Names, including five Cabinet ministers and seven junior ministers. If they declined hardship assistance, he asked whether Lloyd’s would force them into bankruptcy. He was assured that ministers and MPs would be treated no differently from other Names.

Despite the good intentions, detailed preparations and better stage manage-ment, the occasion was used very effectively by several speakers from the floor to draw attention to their plight and the strength of their feelings. This book begins with the poignant call for a minute’s silence to mark the many suicides that had already taken place. It was also the second time that the distinctive voice of Michael Deeny was heard by a large Lloyd’s audience. He said Gooda Walker was one of the worst examples of the failure of Lloyd’s to regulate and was being investigated by the Serious Fraud Office. He feared that non-litigating members – ‘those who had not lifted a finger to help us in our struggle’ – might also benefit from a settlement. When Middleton expressed concern about those who could not afford to join action groups, Deeny replied that they had sought legal aid for those who could not afford subscriptions. He contrasted this with the demands of the Lloyd’s Hardship Committee, inviting the audience to conclude who was more concerned to help ruined Names. He was loudly supported.

Another voice that was to become familiar was that of Sally Noel, a former model, who said she had never spoken in public before. She stated that she ‘stood here today to represent another innocent, ignorant female’. She had been nearly destroyed by Lloyd’s: ‘We have been totally manipulated like lambs to the slaughter. Innocent people who have never gambled, like myself, were per-suaded to put their trust in the reputation of Lloyd’s and were given half-truths, false reassurances and incompetent advice.’ She did not think that members should be ‘taken to the cleaners’ while they awaited justice in the courts.

Rowland felt afterwards that the meeting had served a useful purpose. It gave him the confidence to know that such an event could be managed. In June 1993, World Insurance Report, a trade journal, said the meeting held at the Royal Albert Hall had demonstrated the depth of disillusionment among the market’s membership in the wake of the losses; emotions among the 2,800 Names ran high. The platform was heckled and speeches calling for the Society’s liquida-tion were cheered. It said that Lloyd’s must take seriously the threats made by dissidents.

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In June 1993, The Times reported that five extra High Court judges were being called in to deal with an avalanche of litigation from the heavy losses at Lloyd’s. It said that those facing big bills included 11 judges and at least 54 QCs. Several senior ministers were also Names, including the Lords leader, Lord Wakeham, and the former Lord Chancellor, Lord Hailsham.

ANOTHER EGMThe spring honeymoon was over. At the June AGM, held at the Royal Festival Hall, it became Rowland’s task to announce a new record market loss of nearly £3 billion (roughly £6 billion at 2013 prices) for the 1990 year of account. The large gap between this and earlier forecasts led him to say that he had ‘nothing but contempt’ for the current standards of forecasting. He also announced the failure of the initiative to raise money from agents and brokers: it had not proved possible to reach an accommodation with the Charity Commission. Lengthy negotiations preceded Gurney’s call for a second EGM: Lloyd’s tried to avoid another divisive meeting, fearing its effects on customers and new corporate capital, while Gurney tried to extract concessions in return for calling it off. It went ahead.5 The hostile resolutions were defeated. The ALM’s supportive reso-lution was backed by 77 per cent of the voters on a 60 per cent turnout. Rowland said that this support gave Lloyd’s a clear mandate to implement the business plan and return Lloyd’s to profit.

TRADING THROUGHAlthough the losses for 1990 were huge, there were consistent reports of good current trading conditions. Those able to carry on underwriting were encour-aged to believe that profits were now at last being earned. Potential newcom-ers heard this too; some were keen to get a stake in the upswing, provided they could avoid being dragged into meeting the old liabilities of Lloyd’s. Even underwriting catastrophe risks was now said to be attractive. A leading Lloyd’s underwriter, Colin Spreckley, said he intended to take full advantage of the greatly improved conditions that now applied. Catastrophe business could be very profitable; properly controlled and managed, now was the time to get into it. The retrocessional market had to all intents disappeared. A lead-ing catastrophe underwriter summed up the position: ‘if there is any lesson to be learned, it is that capacity should, wherever possible, be entrusted to the specialists’.

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There were other fragments of good news from time to time. Two major US environmental pollution clean-up cases had been settled in favour of insur-ers. Leading underwriters, representing several hundred Lloyd’s syndicates and London market companies in the Shell-Rocky Mountain Arsenal pollution case, welcomed the decision. The London market’s legal costs for this single case had so far exceeded £10 million over the course of a decade. The stakes were high, the legal precedent far-reaching. In another big US case, Lloyd’s underwriters and around 100 insurers filed a lawsuit against US oil company Exxon over the validity of insurance claims arising from the Exxon Valdez spillage of some 11 million gallons of crude oil into Prince William Sound in Alaska.6

Morale on the top floors at Lloyd’s received another boost. The US Seventh Circuit Court of Appeals upheld the decision of the lower court that a group of American members should have their case against Lloyd’s and their underwrit-ing agents heard in an English court under English law. The court concluded that although different, English legal remedies – both civil and criminal – were sufficient to protect the plaintiffs’ rights.

The market’s profitable business opportunities were now constrained by its shrinking capacity.7 Names were assured that there was no intention to abandon them in favour of corporate investment. Two new classes had been introduced: high liquidity Names and those writing through a MAPA. More steps were taken to help ongoing Names underwriting in 1993 who faced cashflow dif-ficulties. Syndicates were permitted to make cash transfers to Names’ personal reserves up to a maximum of five per cent of each syndicate’s 1993 allocated capacity, so long as managing agents felt it was prudent. To help sustain capac-ity in 1994, a five per cent credit from 1993 underwriting was given to Names. Other rules were relaxed significantly. Instead of being required to hold funds at Lloyd’s to cover ‘uncalled losses’, these could now be covered by assets held outside Lloyd’s.

Sir David Berriman succeeded Neil Shaw as Chairman of the ALM in July 1993. Eight years after a predecessor had told the Neill inquiry that self-regulation should be maintained, Berriman said that the membership would undoubtedly prefer external regulation in future: Lloyd’s’ own regulation was seen by members as cumbersome, costly and very slow. He welcomed the move towards centralising reserving and claims-handling systems. He also hoped to reach a settlement on the litigation. The ALM hoped that the High Court would find for the Gooda Walker Names and would lay down criteria for determin-ing the quantum of damage and for determining underwriters’ negligence. It might then be possible to achieve a settlement for those litigating Names with strong cases. Hardship and debt remained worrying factors; the low level of Names applying to the member’s Hardship Committee suggested that it wasn’t

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working properly. Berriman said experience had shown that the best results were achieved by quiet negotiation rather than public denunciation, but, where these efforts failed, the ALM would make sure that its views were very clear to both Lloyd’s and the outside world.

SHOWDOWNUp to now, all voting within Lloyd’s had taken place on the basis of one man, one vote. The forthcoming arrival of large corporate members raised a chal-lenge: for how much should their voice count? A working party was set up in June to look at the representation of corporate members at Council and board levels, the election of working and external Names to the Council, and voting and other procedures. It was chaired by Mark Sheldon, a joint senior partner of Linklaters & Paines, City solicitors, and a former President of the Law Society. The consultative document, A Guide to Corporate Membership, was issued ahead of schedule in September 1993, outlining the entry conditions. Rowland declared that the new capital providers would bring new disciplines to the mar-ket that would benefit everyone. Extra capital would enhance the capacity of Lloyd’s, enabling everyone to benefit from the much improved conditions in the international insurance industry and the rapidly growing economy. He was pleased that the business plan – which included proposals for corporate mem-bership – had received the support of existing members at the EGM on 5 July. He also pledged further efforts to drive down costs, reinforce professional stan-dards and ensure an effective regulatory regime.

The main requirements were that each new incorporated member should have a minimum net worth of £1.5 million. Those with a net worth of over £5 million could deposit funds made up entirely of letters of credit or a wider range of investments. Incorporated members would need a sponsor and a licensed Lloyd’s adviser. Their initial annual subscription was set at 0.5 per cent and their central fund contribution at 1.5 per cent for the next three years. A firm pledge was made that in future all members – individual and corporate – would be advised of the maximum charges, contributions and levies in advance for the year ahead. If any more special levies were judged necessary, they would have to be approved by a majority of the membership first. These assurances were needed to convince outside investors to take the risk of Lloyd’s involvement, but also benefited existing members: no such pledge had been contemplated before. The relationship of Lloyd’s to capital was changing.

The byelaws to provide these assurances to incorporated members were vul-nerable to procedures for overturning them. Rowland was advised that, although ultimately unlikely to succeed, the risk of such procedures being invoked would

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make it impossible to raise corporate capital in time for the following year. To eliminate the risk, the leadership decided to call a pre-emptive EGM of their own. This third piece of Lloyd’s theatre in the year was set for 20 October. Action group leaders combined forces to try to extract concessions from Lloyd’s in return for their support. Rowland and Middleton raised the stakes by threat-ening to resign if it did not go through. This was a showdown they were fairly confident of winning. A total of 95 per cent of members who voted supported a resolution welcoming the admission of corporate members and six other resolu-tions dealing with the necessary byelaw amendments. Middleton described the result as ‘the first bad day our competitors have had in the past two years’.

Mark Sheldon’s proposals to give voting rights to corporate members were accepted by the Council. The main recommendation involved a move from one vote for each member to a system of weighted voting, based on members’ overall underwriting capacity. It was to be a banded system, with transitional arrange-ments, taking account of the need to ensure fair representation for all sections of the membership. Sheldon also recommended that the Council should comprise six working, six external and six nominated members from 1 January 1995. The LRB should include at least six Council members and the LMB at least four. The Council should give a specific public assurance to members that it would con-sult on all proposals likely to have a major impact on their interests.

The capital-raising exercise was a success. Magnus thought it was a great example of the financing power of the British stock market and a vindication for those, like him, who ‘stuck our necks out to promote Lloyd’s as an invest-ment opportunity’. The vote of confidence by professional investors helped restore confidence among others; many Names increased their own capacity in response. LIMIT was the largest investment trust; it was heavily over-sub-scribed. Supporters were mostly City institutions, including Fidelity’s highly regarded Anthony Bolton. Jonathan Agnew, a recent Chief Executive of a City firm, Kleinwort Benson, became its Chairman. He was reassuringly familiar to institutional investors; soon he became a well-known figure at Lloyd’s. When arrangements were made to elect the first representative of corporate capital, the seat went to him without a contest. LIMIT’s executive team was drawn from the HSBC group. LIMIT took a stake in around 100 of Lloyd’s growing businesses. A dozen quoted investment trusts plus a similar number of smaller vehicles pro-vided £1.6 billion of extra capacity to the Lloyd’s market.8

RISE AND FALLFew people at Lloyd’s have had a rollercoaster ride like Stephen Merrett. A rising star at an early stage, he became a dominant figure, contributing greatly to the

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running of the Corporation. He was a leading spokesman for the Lloyd’s market as a thoughtful, experienced underwriter. He was an innovator on many fronts, once financing the rescue of a satellite – a venture that paid off, saving money for his syndicate and Names.9 He bought back his father’s business and built it up to be one of the largest agencies at Lloyd’s, employing some very able people. His main Syndicate 418 became the largest at Lloyd’s.

He became the leading ambassador of Lloyd’s to the US Congress, where he espoused the cause of sensible reform in the US approach to pollution liability. Years later, this paid dividends, as pollution clean-up costs were reduced in ways proposed by the industry. He had many allies in America as well as opponents. After the 1991 AGM marathon, it was Merrett who proposed the vote of thanks to Coleridge. He also made a point of thanking for their hard work the staff of the Corporation, where he was widely respected. Coleridge thanked him for his dedication to transatlantic flying on behalf of the market.

Merrett was Chairman of the Lloyd’s Underwriters Association (LUA) for 1991 and 1992. Despite his status, the choice of Merrett as Deputy Chairman was controversial in some quarters, not least with his fellow deputy Hiscox, who scented trouble. Merrett had lost money for his Names. Like Outhwaite, he faced a large share of the problem of growing US liabilities. His frequent stric-tures and his power had also generated resentment in the market.

The settlement of the Outhwaite case led to fresh confidence on the part of Names that it was possible to establish negligence by an underwriter and sue successfully for compensation for their losses. Within days, it was reported that Merrett had come under attack from some of his own Names, who had formed an action group led by Clive Francis, a former RAF pilot turned property tycoon. A vote by the Syndicate 418 Names in favour of proceeding with litigation was announced in December 1992, just as Merrett was preparing to take up his new position as Deputy Chairman of Lloyd’s. By then his Names had made losses of 77 per cent and a further substantial deterioration was expected.

On 9 September 1993, The Independent reported that ‘a new crisis hit Lloyd’s yesterday as Stephen Merrett, Deputy Chairman of the troubled insurance mar-ket, resigned from his post and stepped down from the ruling Council. It is the first time in recent memory a top figure on Lloyd’s ruling body has resigned from it midway during a term of office’. A bad year got worse for Merrett as he struggled to secure capital. Able executives and underwriters took up offers in greener pastures. The better syndicates were sold to several agents, while the old flagship Syndicate 418 went into run off. The year 1993 had begun with Merrett freshly elected and made Deputy Chairman. It ended with his loss of office and the collapse of his business. Worse was to come when the Names had their day in court.

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IT’S ONLY MONEYRemember, it’s only money. Don’t let it ruin your life.

Tom Benyon

In July 1993, John Rew took issue with a member who had said that the Society of Names’ newsletter, The Son, was ‘manifestly written by very embittered peo-ple’. He said that the average member of Lloyd’s had already lost half his assets – £100,000 – over the last three years. He would have lost the rest by the time the following year’s result was declared. These members were certainly disil-lusioned and would never again trust Lloyd’s to behave properly in the matter of self-discipline. Rew’s co-author, Tom Benyon, who had big losses of his own, regularly told audiences of Names: ‘Remember, it’s only money. Don’t let it ruin your life.’

Benyon was extremely resilient. He had been both philosophical and ener-getic – writing newsletters and organising and attending meetings – ever since he uncovered rank incompetence in the management of the Warrilow Syndicate. He thought that the ALM was too tame, but he did not agree either with what he saw as the destructive tendency of Stockwell and other hotheads. Nor did he approve of greedy, campaigning lawyers climbing onto the Lloyd’s bandwagon. He thought highly of Deeny, Middleton and Rowland, and had a sneaking affec-tion for Coleridge, despite taking a libel action against him when Coleridge said Benyon was only in it for the money. It was settled out of court in Benyon’s favour.

More friction developed among Names. One wrote to OLS to say that many Names felt a growing frustration and irritation with a small minority of their fellows. Some of them seemed to want to bring down the rest ‘out of pure selfishness and spite. Many of us fear that by destroying Lloyd’s, they will tip the balance for us too, and we shall end up broke’. This produced a sharp response from another member: ‘It is not spite that drives some Names into the hands of lawyers; it is outrage and despair. Without justice there can be no peace, and possibly no Lloyd’s.’ He argued that heavy losses were caused by the incompetence, negligence and possibly worse of the profession-als and regulators of Lloyd’s, not as was widely believed because ‘some Names were greedy’. The editorial in Chatset for 1993 was pessimistic and bitter, say-ing: ‘So the future of Lloyd’s is bleak. A lingering demise, going down with a whimper rather than a bang as Names are crushed because those who work in Lloyd’s are determined to keep it as it always was (jobs for the boys). Mr Middleton appears to be an excellent person, hired to put an honest mask on a corrupt face.’

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HARDSHIPAttitudes to hardship assistance were as diverse as those towards social security in Britain’s wider society. Those receiving state support often see it as an entitle-ment and regard the rules surrounding it as stingy. Those who pay towards it are inclined to see it as too generous and too readily available. Those who administer it are blamed by both sides. By 1993, the hardship secretariat had grown to 20. A big overhaul of the rules in November 1992 brought ‘hardship’ more into line with bankruptcy arrangements, but without the member having to lose his home and without the social stigma that surrounded bankruptcy. Many cases had to be re-evaluated in the light of these changes. Assistance was supervised by the Hardship Committee, chaired by Dr Mary Archer since it began work in 1989.

Gill Wilson, who ran the helpline, joined the Hardship Committee in 1993. She recalls10 how Mary Archer became a focus for a lot of Names’ ‘outrage and venom’ because she was seen as sitting in judgment over people, but says: ‘She ran that committee extremely well. She dealt with these problems with a scien-tific mind: there is a problem here, how can we find a solution?’ Wilson says the Corporation staff ‘were professional, competent and they were empathetic as far as they could be. They had to be pretty resilient because they did get ranting and upset Names on the phone; they had to see through that and try and formulate a proposal with them’.

The plight of several Names was floodlit by a long and extremely well-writ-ten piece by one of England’s best contemporary writers, Julian Barnes. This article11 appeared in the New Yorker and made almost anyone who worked at Lloyd’s squirm with embarrassment. The present author put off reading it for days, then made sure no one was watching. Fernanda Harford, who had joined Lloyd’s in 1977, told Barnes: ‘I sort of slid into it.’ She knew a Lloyd’s agent named Anthony Gooda. With her connections and the new ability for women to join, it seemed like a good move and, as she put it, ‘a very English thing to do’. Cheques rolled in annually; she increased her premium limit several times. Late in June 1991, she received a letter from Anthony Gooda saying that she had an overall loss for 1988 of £220,000 and asking for a cheque by 12 July. Advised that the worst was over, she suppressed her first instinct to resign. In 1992, she was asked for £527,000 for the 1989 year. In 1993, the bill was £319,000. Her cumulative total of losses gave Barnes the title for his article: ‘The Deficit Millionaires’.

Barnes likened Lloyd’s to another famous institution, the Bank of England. In the light of the ‘bank’s inept failure’ to regulate the Bank of Credit and Commerce International (BCCI)12 in the period before its collapse, he suggested the old saying that Lloyd’s was ‘as safe as the Bank of England’ should now read

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‘as sleepy as the Bank of England’. He listed many famous people who were members, including 47 Conservative MPs. This, he said, ‘briefly raised a merry scenario of political destabilisation’ because a bankrupt MP is automatically disqualified from sitting in the House of Commons, which could lead to John Major’s parliamentary majority being wiped out.

Barnes said that Names received very little public sympathy. Explaining this attitude, he said that ‘partly, and mainly, it is a question of class, envy, prim-lipped glee, and wise virgin huzzahing. There is always a sound case for social gloating and below-stairs schadenfreude when the Master is forced to hock his christening mug’. He observed that there might well be some ‘social, even moral justice’ in money passing from comfortable upper middle-class golfing Englishmen to elderly American seamen suffering from terminal asbestosis. But, he said, it was not so simple. He explained the sources of the losses. He attributed the LMX spiral to the excess capacity that was the result of aggressive over-recruitment, a diagnosis that was widely shared.

Barnes visited a Cornish widow who, faced with a bill for £350,000, approached what he called ‘The Hardship’. She was ready to think the worst of the process and, like many other Names, focused her resentment on the Hardship Committee’s Chairman, Mary Archer. She showed Barnes a widely circulated photograph of Archer modelling a cocktail dress by a French fashion designer, which he described as a flouncy, black, above-the-knee number, with diaphanous sleeves and shoulder bits, topped off by a provoking head-dress of ostrich feath-ers. The widow thought it probably cost more than she was going to be allowed to live on for a year. Barnes later mentioned the picture’s satirical circulation among burnt Names to Archer, who said she didn’t blame them. Archer also told him that most Names were very straight about their finances and just wanted finality.

The Barnes piece was full of insights about the social appeal of Lloyd’s. Clive Francis, a former Royal Air Force squadron leader, told him he had been hooked by flattery and greed. He was facing a bill for £2 million. Buster Mottram, a former tennis player, had described himself as mesmerised by the Lloyd’s myth. Another Name, the daughter of a trade unionist, had said that, having grown up on a council estate, there was a sense of achievement in becoming part of an establishment. Barnes saw this normal human vanity as having been ‘played upon with brutal success’. He cited cases where the warnings that were supposed to accompany joining up had been negated by humour.

Barnes saw in the Chatham location of the Hardship Committee’s address a grim echo of Charles Dickens’ first experience of impoverishment and its attend-ant shame. It was there that his family had moved when it fell upon hard times. He also made an analogy between one of Dickens’ well-meaning neighbours and the role played by Archer. He described her as ‘small, dark, pretty, poised, groomed

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and very, very precise’. Her voice was ‘pure bone china, or Cheltenham Ladies College’. He appeared to share the resentment that she provoked among Names who had need of hardship support, though he stopped just short of saying so.

Uncomfortable as the Barnes article was, he reported the belief of a few in better prospects, alongside the doom-mongers. He described Lloyd’s as behav-ing like an old criminal finally going straight. He did not try to predict how events would unfold, except to say that Lloyd’s had forever lost a certain sort of Englishness on which it once prided itself. For want of a better word, he said, it had lost its honour. It was hard to argue with that.

In an OLS interview in April 1994, Archer said that Names were under-standably very critical of the large losses; their hostility to Lloyd’s sometimes spilled over into criticism of the hardship scheme. Since the agreements were private and confidential, the critics were more vocal than the participants. She explained that Lloyd’s would not pursue members into bankruptcy if they agreed to repay what they could reasonably afford over time.

The hardship team was led by John Thompson, an individual with an inbuilt passion for fairness. Outside work, he was an amateur football referee. His team supported each other in the often heart-rending and thankless task of doing what they could to clear up the worst consequences of other people’s decisions – those of the negligent agent and the unwary Name alike. Case officers came from a variety of disciplines; their ranks included a former building society manager, legal experts, accountants, a former member of the Lloyd’s agency community and staff from many different parts of the Corporation. There was a lot of mutual support among them, with everyone sharing their specialist knowledge.13

RISE AND RISERobert Hiscox went from being a stern critic of the Lloyd’s leadership during the 1980s, writing frequent letters – ‘rants’, to use his phrase – to successive chair-men, to becoming a member of the task force. He was elected to the Council for 1993, serving as Deputy Chairman for three years. Afterwards he resumed his prominent backbench role in Lloyd’s affairs while building up a widely admired business. He retired wealthy and successful in 2013, when he was awarded the Lloyd’s Gold Medal.

As Deputy Chairman, Hiscox succeeded in introducing corporate capital to Lloyd’s. He found the role of playing second fiddle uncomfortable at times; within his firm, he had been the undisputed boss for over 20 years. From Rowland’s point of view, Hiscox was a constant internal critic. Each morning he would meet Rowland and would express his forthright views, often saying how he should have played the events and issues of the previous day. Irritating

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though this sometimes was, Rowland also found it invaluable. There is noth-ing worse for a leader than being surrounded by sycophants. Hiscox’s some-times strident pro-market views were a valuable counterweight to Middleton, who ensured that the action groups were understood. Rowland likes to proceed through dialogue, exposing the arguments. This is how he had run the task force. He was well aware of the dangerous effects of a lack of internal debate – a major theme of Tim Harford’s book Adapt,14 which cites the example of the US White House under Lyndon Johnson, when the President suppressed dissent over the Vietnam War, with disastrous military and political consequences.

Hiscox15 was educated at Rugby School and Corpus Christi College, Cambridge. He took over his firm on the death of his father, aged 28, when it employed ten people. He has been described as the enfant terrible of Lloyd’s. He often feels compelled to speak out of turn. He is both serious and impish, with a lively sense of humour. He has a deep attachment to private enterprise – a conviction entrepreneur as much as Margaret Thatcher was a conviction politi-cian. He is profoundly mistrustful of authority and very sensitive to its abuse. He is sparing in his praise and liberal with his criticisms. He has the underwrit-er’s ingrained scepticism, but is always on the look-out for opportunities. He is remembered by task force members for challenging others to be ready, as he was, when the facts changed to change their mind. The old-fashioned word ‘honour’ still crosses his lips frequently. Many Lloyd’s characters felt a curious mixture of pride in the institution and resentment at the restrictions it tried to impose, often finding them misguided or heavy-handed. It was brave of Rowland to ask the newly-elected Hiscox to be his deputy, adding an almost revolutionary ele-ment to the new leadership team. Hiscox was very ‘rattled’ about the future, say-ing later16 that he fully expected to drive in one morning and find a police tape round Lloyd’s saying ‘no entry, we’re closed for business’. He believes that the advent of corporate capital saved Lloyd’s: ‘In 1993 Names were running out the door. Capacity was heading down to £5 billion. Corporate capital came along, and the Names turned round like a cartoon mouse and come back in when they realised we had raised a billion.’ He was sometimes characterised as an insider who was unsympathetic to the Names who had incurred big losses.17

BUILDING THE RING FENCEA widely respected underwriter, Richard Keeling, was made Deputy Chairman to succeed Merrett in September 1993. He was already closely involved in the Newco project. He recalls Rowland saying to him: ‘this is the worst job offer I’ve ever put on anyone. You have to be Deputy Chairman, there isn’t anyone else’. Although deeply unattracted to a political role of any kind, he did not hesitate for long; he

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knew matters were desperate. He still regards himself as one of those who, if cut open, would have Lloyd’s written through him like a stick of seaside rock.

Heidi Hutter took up her position as Newco project manager in late October 1993, joining Lloyd’s from the US subsidiary of Swiss Re. She recalled later that many US insurance colleagues told her she was committing career suicide – didn’t she realise Lloyd’s was going under next week? She knew that many of those involved at Lloyd’s had no alternative, but that Rowland and Middleton, among others, had taken on the challenge by choice. She knew that the insur-ance industry did not want to see Lloyd’s fail and thought that somehow there had to be a solution. Keeling told her privately that if the Newco operation went down, it would be written on her gravestone. There was no way this would be a ‘patch-up job’, he said; it had to be the best possible result, building a company that would last.

The business plan described the approach as building on the work of the open years panel, which had brought together action group leaders and market profes-sionals with a common interest. The basic idea resembled Lloyd’s’ solution for the PCW syndicates seven years earlier. Their liabilities were reinsured by an insur-ance company called Lioncover, but Newco was far more ambitious. Two phases were planned: defining the necessary reserves for ‘old’ liabilities up to 1985, then reinsuring them all into a new reinsurance company. The whole project would take two-and-a-half years. The idea was to draw a line between the past and the future, for the benefit of the current Names and also future capital providers. An existing vehicle, Centrewrite, would reinsure open syndicates after 1985.18

Newco would need to be licensed by the DTI. Meanwhile, several measures would provide interim support to Names. Centrewrite would close the ‘easier’ run-off accounts – those not attributable to long tail liabilities or LMX losses – during 1994. Surplus deposits would be released and information would be passed to enable PSL claims to be speeded up. A decision had been made that the reinsurance of all Lloyd’s’ pre-1986 liabilities would be compulsory. This was designed to create a strong ‘ring fence’ for existing Names and new capital alike. All syndicates would be required to separate their pre-1985 reserves and to bring them to a common standard. This would require independent scrutiny of all syndicate reserves, meaning an unprecedented degree of central oversight – a move justified by the benefits to Lloyd’s as a whole.

To finance Newco, many Names would be faced with further calls to fund the necessary reserve strengthening of their syndicates. While they could not be freed from these obligations, flexible arrangements could be made to help them manage their payments. Not all of the money would be needed immediately – structured payment schemes would be integrated with Newco’s overall asset and liability management approach. PSL policies and the new high-level stop

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loss scheme might give some relief. But would this release be final? The plan said that in the past, RITC19 had proved effective in releasing Names. It acknowl-edged that Names on all closed years remained liable in theory, but that closure was for all practical purposes final. Reinsurance by Newco would achieve ‘the same practical finality’. The plan noted the difficulties: the restructuring was a huge challenge, bristling with technical difficulties.

When he took over in September, Richard Keeling lost no time in summon-ing his right-hand man, David Shipley. He showed Shipley his proposed group structure, scratched out with a blunt pencil and asked for suggestions of top-quality market people to fill in some of the boxes. He wanted to be sure that all areas were covered and that there was enough intellectual firepower to ensure the project’s success. By involving the best practitioners, Keeling wanted to instil a sense of ownership and to build an ability to resist any subsequent challenge.

Shipley believes that one of Keeling’s qualifications for leading the project was his own scepticism about it. His attitude was that his syndicate – and much of the Lloyd’s market – had spent the last 15 years suffering the pain of trying to get their reserves right while dealing with a wall of asbestos and pollution claims. They had ‘sweated blood year after year’, ongoing profits had been dented sub-stantially and the personal profit of underwriters had been hit hard. Now it was proposed to put these hard-won reserves into a bucket with people they believed to be much worse reserved: there were notorious stories of underwriters who literally threw away their pollution notifications.20 Simple calculations applied to others’ balance sheets and accounts indicated that there were wide variations in terms of reserving philosophy. The only way that Keeling and others who felt like him would accept being in a pot with the others would be if the alternative was for the lights to go out at Lloyd’s. His doubts became even more significant when the scope of the project was dramatically enlarged 18 months later. He confirmed afterwards: ‘I remember I was dead against it, because I felt my pot of money was right; we could manage it. I remember Rowland saying, it was tough, you know: in life, the good are going to have to suffer to pay for the sins of the bad.’

Before this project was mooted, in the ordinary course of business, the Sturge in-house actuary, Tony Jones, had grilled Keeling and his team intel-ligently about his reserves, showing a good grasp of the thorny issues around asbestos and pollution liability. Keeling wanted him involved in the project, along with several capable and trusted underwriters, including Shipley, together with claims experts and external actuaries.

Hutter was an American actuary with an aura of expertise and an engaging manner. She impressed her colleagues in the Lloyd’s management team with her obvious intelligence, propriety and thoroughness. She was a good speaker and much in demand. Both market practitioners and Names were keen to hear her

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plans for solving the seemingly intractable problem of old year liabilities. She knew this would be a tough assignment. She was appalled at what she found. Her previous employer, Swiss Re, was a well-organised corporate body. Lloyd’s was a marketplace of 400 syndicates, diversely owned, each with its own house style and no effective form of central control. The staff of the Corporation had specialised and often subservient roles. Her impression was that many of them knew next to nothing about what took place in the market. They could not help much with her first task: to create a realistic estimate of the amount needed to pay off every syndicate’s pre-1986 liabilities. Her second task was to build an outfit that could manage all these claims and recoveries. Later she found very few Corporation staff applying for these posts.

Keeling’s ideas for organising the project were driven by thinking ahead and worrying about an attack by both the Names and the market, who might both seek to challenge the results. He tried to anticipate a challenge in design-ing his structure. He also wanted to bind the best players in the market into the project. Hutter had worked with companies troubled by asbestos and pollu-tion liabilities before, but the Lloyd’s problems had extra dimensions. If all that had been necessary was to aggregate the reserves and liabilities of Lloyd’s, she thought that the project could have finished a year sooner. The problem was that accurate numbers were needed for each individual Name: everyone had to pay only for the loss they had incurred through their syndicate portfolio.

By November 1993, Hutter had started to build up a team around her. This included a journalist, William Pitt, as Communications Manager, who pro-duced a series of newsletters to explain the project to the market and to Names. The initial project structure21 was overseen by a reserving project steering group, comprising Keeling, Hutter, Jones and Richard Youell, a thoughtful and respected underwriter from Janson Green.

An early newsletter invited suggestions for Newco’s eventual name. Over 800 ideas came in, ranging from the prosaic Lloyd’s Ltd to the silly like Heidi Ho Company, Limejuice, etc. In the event, Dayrell Gallwey from the Republic of Ireland won the prize for suggesting United Equity. This idea led Sarah King, the project business manager, to consider variations on the theme of equity. She was struck by the fact that equity between syndicates and Names was one of the key principles on which the project was based. Equitas turned out to be the Roman goddess of fair dealing – an obscure member of the pantheon. The word seemed to encapsulate the principles of the project.

Hutter’s team eventually rose to hundreds. While some syndicates had good controls and were able to respond promptly to the data requests, they soon found many syndicate records ‘a shambles’ and amateurish – record-keeping was extremely uneven, with huge gaps in crucial data. Hutter said that ‘even the

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worst company I’ve ever been to in the United States had some basic data, and because of US requirements would have had external actuarial reviews. Some of the basic things that I would take for granted were not present, so the experi-ence was unique’. The project started enlisting the help of more actuarial firms practising in the London market. Before long, the rumour was that nearly all the actuaries in London were working on the project. The cost of the operation began to rise sharply.

The plan to compulsorily reinsure all the pre-1986 liabilities encountered plenty of opposition. It was against all of the traditions of Lloyd’s for syndicates’ reserves to be probed and second-guessed by their peers; while auditors had started to do a more professional job over the last few years, the idea of other market practitioners opining on reserves was anathema. It was more radical still for central authority – ultimately the Council – to prescribe the correct level of reserves. That is why Keeling was insistent on involving what he calls ‘the A team’ in the market and being prepared for legal challenges.

Meanwhile, among the many ideas coming forward from Names, Peter Middleton received a short paper by Richard Spooner, proposing a new com-pany to reinsure all Lloyd’s open business as at 31 December 1992. The market would continue to operate under the Lloyd’s Act for future years. All the assets and liabilities of the Corporation would be transferred into the new company, except those needed to allow the market to continue. The company would then take over all Names’ outstanding liabilities in exchange for their deposits, with Names receiving shares in the company. It would offer not to issue writs for debts in excess of their deposits in return for Names dropping all litigation against Lloyd’s and agents. Spooner offered a financial analysis to demonstrate that this was viable. The basic idea was that the cost savings from rolling hun-dreds of syndicate run offs into one, plus better investment returns from pool-ing funds matched to liabilities, would improve the chances of a solvent solution for the market as a whole. Middleton wrote to Spooner, commending the quality of his ideas; he was invited to join the Newco project supervising body.

THE GOODA WALKER CASEThere is no hit without a writ.

Music business saying, according to Michael Deeny

The Gooda Walker managing agency ran four LMX syndicates. The syndicates’ total losses on the 1988 year of account were declared in summer 1991. This was a triple whammy. Cash was not just wanted for the 1988 year of account, but also for the still-open 1989 and 1990 years, which were already loss-making on a

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huge scale. The agency’s total losses exceeded £800 million. The Gooda Walker Action Group (GWAG) committee was formed with Alfred Doll-Steinberg as Chairman. The following month, Deeny was invited to join the committee: ‘Partly, my own losses were large enough to be painful ... but the real reason was that the more I found out about it, the more angry I got as it emerged that we weren’t victims of fate, but of negligence.’

Conventionally dressed in a pin-striped suit, Deeny was far from a conven-tional English Name. He was a tough-minded Northern Irishman, educated at the same Jesuit boarding school in the Irish Republic as James Joyce. At school and university, he was a keen debater, partly to help him overcome a stammer. He studied history at Oxford, became a chartered accountant and then moved to Dublin. There he turned his live music interest into a role that suited him: organising and negotiating live concerts. He is a born negotiator. He joined Lloyd’s in 1985, hoping to supplement the ups and downs of concert promotion with a steady second income. He has natural Irish charm and seems at ease with risk-taking, saying: ‘With concert promotion, you are effectively gambling on how many tickets an artiste sells. Every concert promoter goes through the experience of making large amounts of money and occasionally losing large amounts.’

The independent Lloyd’s loss review into Gooda Walker, led by Kieran Poynter, a partner at Price Waterhouse, was published in October 1992. Meanwhile, the committee explored various courses of action that might be taken either against Lloyd’s or against Gooda Walker. Membership grew to 3,300, making it the largest of the Lloyd’s action groups.

Later, Deeny recalled22 that there was a range of attitudes among the mem-bers of the GWAG committee. Alfred Doll-Steinberg, the founding Chairman, favoured a frontal assault on Lloyd’s itself. A judicial review of Lloyd’s was sought. Deeny was doubtful about this tactic. When the court rejected it, Doll- Steinberg wanted to go to the Court of Appeal. Deeny persuaded the committee against this course. He thought that a much clearer route to securing compensa-tion lay in suing the agents, invoking their E&O insurance cover. He had done a lot of homework on the subject and was very well aware of the writ issued by the Outhwaite Names Association. He also knew that ‘if you employ an agent to conduct business on your behalf, and if he does it negligently, and loses your money, you have a claim against him. I did know a fair amount about litigation because of my music business background’.

In September 1992, Wilde Sapte were appointed as the GWAG’s solicitors. As Chairman of the AG’s litigation subcommittee, Deeny began a series of authoritative newsletters23 to his members. He estimated that the Gooda Walker managing agency had at least £82 million of insurance cover; the members’

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agents had at least £1.1 billion of cover over the three years of account. He said ‘our position is that every last pound of the losses was the result of negligence and our claim will be for the entirety of these losses’.

Deeny set out the rationale for choosing Wilde Sapte: they had no conflicts of interest, a large litigation department and relevant experience. He described the choice of Jonathan Mance QC to represent them as one of the leading insurance silks in Britain with extensive experience of Lloyd’s. He had acted as junior in the Sasse24 case and had cross-examined Derek Walker in another case. He saw the independent loss review report as ‘a marvellous kick-off ’: it was ‘replete with criticism’ of the business. He explained the importance of expert witnesses and the difficulty of finding those willing to testify because they did business with Lloyd’s. Deeny was elected Vice-Chairman of the GWAG at the end of November 1992. Six weeks later, he was elected Chairman, to take effect from March 1993. Doll-Steinberg had made proposals for the GWAG committee to be quite heav-ily incentivised. He resigned after these went down badly with the membership. His committee increasingly favoured a changed legal strategy, giving priority to litigation against agents. Tom Benyon was one of several to recognise Deeny’s steeliness and sure sense of purpose, encouraging him to take over.

In March 1993, proceedings were issued by the action group against Gooda and partners, Gooda Walker and 69 other members’ agents, alleging negligent underwriting. Deeny thanked all those involved, saying that the members of the Wilde Sapte team had often worked seven days a week and sometimes until midnight. He was working very long hours himself. The action group raised over £5 million. The final number of Names involved was 3,095 – the largest number of plaintiffs on a writ in English legal history. In July 1993, the GWAG was granted an expedited hearing of its case to take place in April 1994.

HURDLESIn June 1993, Lloyd’s List25 reported that representatives of the legal panel had made a presentation the day before to Mr Justice Saville, the Commercial Court’s listing judge, who was holding the second day of meetings intended to find a way to process Lloyd’s Names’ litigation. Saville’s timetable for the hearings of the various disputes proved to be important, allowing issues to be determined in a logical sequence.

Lloyd’s List also reported on some of the problems involved in reaching a settlement. For example, if any money was to be paid by the E&O under-writers, it would be against normal commercial practice for insurers to make payments to people who had not pursued a claim against that insurance. That would mean no compensation for non-litigating Names. A possible compromise

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was for money coming from E&O to be used solely for payments to litigating Names, but for funds coming from Lloyd’s centrally to be used for the benefit of all Names on the syndicates concerned.

A number of preliminary issues were heard in the High Court. The agents alleged that Names were contractually obliged to pay 100 per cent of their losses before they could sue their agents. However, in July 1993, Saville ruled that Names who had not paid cash calls could sue their members’ and manag-ing agents for breach of duty, despite the so-called ‘pay now, sue later’ clause in agency agreements. The judge said that ‘there was no good reason to shelter them [the agents] from liability for failing to perform their duties’. This was appealed. Despite this judgment, the agency agreement still required Names to pay their cash calls and judgments for them could be enforced.

On 31 July, the Court of Appeal26 decided in favour of the Gooda Walker and Feltrim Action Groups on the ‘pay now, sue later’ issue, confirming the judg-ment of Mr Justice Saville. Its judgment was unanimous. Sir Thomas Bingham, the Master of the Rolls, said that the agents’ construction of their contracts would ‘work severe hardship to the Names without corresponding benefit to the market and would give rise to offensive anomalies’. Lord Justice Hoffmann said that ‘the construction for which the agents contend means that if they are going to be negligent, they should rather ruin their Names entirely than leave them with enough resources to pay their calls’. The top of the English judiciary appeared convinced that the Names had a case.

September brought Gooda Walker Names more good news. A number of members had applied for legal aid and had been rejected. They were successful on appeal. The members’ agents also tried saying that they were not contractu-ally responsible for any negligence by the management and underwriters of the syndicate they selected for Names prior to 1990 (when the contracts changed). Saville27 found in favour of the Gooda Walker and Feltrim Names on this fun-damental issue of the legal liability of members’ agents for the underwriting in 1988 and 1989. The Times described this as ‘an important High Court victory’. The Action Groups were also awarded costs in full, to be paid immediately. Deeny told his members that this finding was vital to all Names action groups that relied on these contracts. In the GWAG’s case, the issue was the last major legal hurdle before the main hearing. It was appealed, but the Names won that too in December. The agents appealed to the House of Lords.

DIVIDED VIEWSIn early 1993, GWAG members were reminded that the LNAWP sought to ensure that action groups worked together for the common good and to profit from

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one another’s experience. Deeny’s committee was then a strong supporter of the LNAWP, believing that it had a valuable part to play in discussions with the senior management of Lloyd’s. Interviewed later, Deeny explained his strategy: ‘Quite a lot of action group leaders were too impatient. They didn’t like suing the agents, because they saw it as a long lengthy process. They wanted to find some nuclear weapon that would blow up Lloyd’s overnight, or force Lloyd’s to compensate us.’ This debate went on inside many action group committees. Another point was more important to him: ‘I never believed that Lloyd’s as an entity, either as a mar-ket or the Council of Lloyd’s, had deliberately set out to defraud the Names. I do think ... that there was a pretty grave error of judgement and a failure of regula-tion in the over-expansion of the market in the 1980s.’ He says that part of what drove the early action groups and their anger was the initial reaction of the Lloyd’s establishment to the big losses: ‘There was a good deal of old Etonian arrogance which was ill judged.’ Peter Middleton’s appointment changed the atmosphere.

Deeny went on to say that: ‘I took the view that the appropriate strategy, eventu-ally followed by other action groups, was that we wouldn’t try to bring Lloyd’s down or sue Lloyd’s centrally or attack it, but we would vigorously sue our agents. But it was always a parallel strategy that we would negotiate with Lloyd’s. We had to revise the committee a lot and get rid of the extreme anti-Lloyd’s element.’ Deeny agreed to serve on the financial panel,28 saying that, while onerous, it should enable him to get a first-hand view of what contributors might be prepared to offer and would give him a chance to apply direct pressure in relation to the size of the offer.

At one point, their committee reminded GWAG members that in some circumstances applying to the Hardship Committee could be a better route. Any member in this position was told that he could apply to withdraw from the proceedings. The GWAG committee had discretion to refund litigation subscriptions.

SETTLEMENT OFFERWith several roadblocks removed, the route ahead for the GWAG was looking fairly promising. But now it had to confront an alternative course. The efforts made by Lloyd’s to put together a comprehensive offer to all litigants were about to materialise. In principle, this was Deeny’s preferred option. He prepared his members for the likelihood that Lloyd’s would tell them that the forthcom-ing offer was the last and only chance of a settlement. He told them ‘not to be swayed by Peter Middleton’s passionate advocacy, but instead to engage in a purely factual evaluation of what an offer would mean for each of us financially’. Later on, he urged the deepest scepticism, telling members not to sign any docu-ment before receiving the Action Group’s advice. He warned of the probably

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insuperable problem of a cap on future liabilities, saying that a Name with open years always had to be concerned with the possibility of future deterioration. He said that Middleton had indicated that there would be a cap, but ‘we fear this may be another promise he may not be able to keep’.

At this stage, Deeny told his members that ‘you may have seen press comment suggesting that the offer might amount to 30 per cent of our losses. In our case this would come to £165 million. It would be wrong to describe such a large sum of money as insulting or absurd’. However, he came down firmly against it: ‘We believe it is substantially less than what the action group would recover through litigation, and we would not under any circumstances recommend acceptance at this level or anywhere near it.’ Deeny also said that another major issue in the negotiations was the repeatedly expressed desire of Lloyd’s ‘to treat all Names alike’. On this he said: ‘These are weasel words indeed. What sounds like equity actually involves paying away E&O insurance money and central fund money to people who are pursuing no legal claims and who, because of their stop loss insur-ance, may have suffered losses that in real terms are much less than ours. These people also include the Lloyd’s insiders who are not members of action groups.’

The work of the legal and financial panels eventually bore fruit. Lloyd’s issued a settlement offer29 in early December 1993. The GWAG held a Special General Meeting to hold its own vote on the Lloyd’s settlement offer. Sir Francis Dashwood, a members’ agent attending the meeting, asked Deeny how he could possibly recommend rejecting the last and final offer of Lloyd’s. The reply, deliv-ered with a smile, was: ‘Sure, that is what men say every year at the horse fair in Ballinasloe.’ Substantial though the first Lloyd’s offer was, it would still leave many members of GWAG facing ruin; Deeny was confident that a legal victory would force out a better offer.

Without support from the largest action groups, the offer was doomed. Lloyd’s had indicated that it would require acceptance by at least 70 per cent by value before it would consider declaring the offer unconditional. When the offer closed on Valentine’s Day, 14 February 1994, 12,103 forms of assent had been received, representing a slender majority of 51.6 per cent of those to whom the offer was made. By value, this was only 38 per cent. Rowland regretted the final results. It meant that litigation would need to proceed. This was, he said, an untidy, lengthy and expensive route which might yield benefit to some, but would be disappointing to others. He said that the commitment of Lloyd’s to implementing the radical proposals in the business plan was unchanged.

The experience of the first offer had been salutary. It was now obvious that to succeed, more money and more certainty would be needed. The key to get-ting more money on the table from the E&O underwriters would be a decisive court judgment in the Names’ favour. The courts obliged six months later.

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ENOUGH IS ENOUGHWhat institutions lack is the equivalent of an old family friend, a man in black, a figure of sympathetic authority who can ask the ultimate question and pronounce that enough is enough.

Leader in The Spectator, January 1994

The Spectator’s leading article30 was headed ‘The Case for Liquidation’. It said that 1993 was a terrible year for institutions. The pillars of established order and familiar custom had been shaken: ‘In every sphere they have been under attack: Lloyd’s of London, the BBC, the Crown Prosecution Service, British Rail and the British Commonwealth to name a few.’ Sometimes it was necessary to say that enough is enough. It criticised the habit of ‘striving officiously to keep such creatures alive’, saying that in the case of Lloyd’s, closure was a solution. It was an enfeebled shadow of its former self. Its death was far from unthinkable. It conjured up an image of a queue forming in the City for a hearing with the Man in Black, the liquidator. Rowland would be near the front.

By contrast, Rowland’s 1994 new year message spoke of his certainty that he had the most interesting and challenging task in the world of insurance. There was hard evidence of progress. New capital had arrived in just the right meas-ure. He believed that the offer to settle litigation was in the interests of the vast majority of members, but it was for each individual to make his own decision on where his best interests lay. By then, both Rowland and Middleton had already realised that the chances of the big action groups accepting were slim. They avoided a hard-sell approach, preserving their credibility. It was quite unlike their position on corporate capital: back us or we will resign.

Chatset forecast losses on the 1991 account of just over £2 billion. This time, Lloyd’s did not contest its prediction. In March, Salomon Brothers produced a report entitled Lloyd’s and the London Insurance Market: A Pivotal Year. It said that in the span of two years, Lloyd’s and the London market had become a dra-matic – although unintended – model for navigating the roughest waters that property casualty insurers worldwide were encountering. It also described 1993 as a pivotal year for insurers everywhere.

In March 1994, Mr Justice Cresswell, now the listing judge, issued a state-ment on the Commercial Court’s approach to the case management of Lloyd’s litigation. He said that it was necessary to impress upon the parties that there was a distinct possibility that even if the claims were sound in law, there might be insufficient money to satisfy them all. The court would continue to meet the challenge of the Lloyd’s litigation while maintaining an appropriate bal-ance between it and other demands. He emphasised the heavy responsibility

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on all solicitors and barristers concerned to help the court to ensure that cases were conducted efficiently, costs were contained and unnecessary delays were avoided. The litigation had been divided into six categories: LMX cases; long tail cases, including run-off contracts and reinsurance to close; PSL cases; portfolio selection cases; central fund litigation; and other cases.

The court had already decided a number of preliminary issues and would assist in resolving issues of principle common to one or more category of case. It would continue to select from cases in a particular category, lead or pilot cases for trial as to liability and principles relating to quantum, if appropriate, ‘in the hope that decisions in these cases might provide broad guidance in relation to others in the same category’. Where appropriate in group cases, the claims of sample Names would be considered to save expense. A liaison committee had been established to help distribute information to all the parties involved.

In April 1994, Lloyd’s said legal action might be taken against the 2,500 Names whose debts to policyholders had fallen to the central fund, but who were believed to be able to pay their losses. They would be asked to make arrange-ments to pay or, if necessary, to seek the support of the hardship fund. Graeme King, Manager of the Financial Review Department, said that the vast majority of members had ‘often with considerable personal and family sacrifice, fully met their obligations to policyholders’.

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New interest groups took shape. Lady Delves Broughton welcomed the estab-lishment of a new association to represent corporate members, the Lloyd’s Corporate Capital Association (LCCA), chaired by Jonathan Agnew. A group of Names formed themselves into a lobby, later known as the High Premium Group (HPG), which represented the interests of members of Lloyd’s who wrote £1 million or more in premium income. It aimed to attract around eight per cent of the overall Lloyd’s membership, representing about 20 per cent of capacity – roughly £1 billion. Although not linked to the ALM, relationships were friendly. Twenty years later, it is still flourishing.

RAISING STANDARDS, CHANGING CULTUREIn April 1994, Lloyd’s appointed Peter Lane as Director, Marketing and Public Affairs. A graduate of the Harvard Business School, Lane had worked previously with Shell and HM Treasury. He saw the job as a double challenge, sustaining confidence among brokers, clients and overseas regulators, while recognising the issues affecting Names. He brought a new professionalism to the role of

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central marketing and public relations for Lloyd’s, including a need to mea-sure systematically the state of opinion among key stakeholders. To that end, he engaged Mediatrak, which provided Lloyd’s with a regular independent assess-ment of the amount of news coverage, classifying articles and news items as favourable or unfavourable, in Britain and the US. This tool enabled the Lloyd’s PR team to issue rejoinders and to concentrate on briefing journalists suitably: feeding them with positive information, correcting misunderstandings and so on. Fresh efforts were made to engage with opinion among overseas Names, with panels of prominent Names set up in Australia and the US. A few months later, Lane appointed Burson-Marsteller to advise Lloyd’s on communications strategy, especially in North America, and J Walter Thompson to support mar-keting operations. Eventually, Lloyd’s also hired Angus Maitland, a thoughtful, quietly spoken Scot who was expert in financial markets, as the focus shifted to communicating the offer to Names and their advisers.

Also responsible for Lloyd’s international offices and worldwide licences, Lane brought in many people of high quality and relevant experience, building a more effective team for supporting Lloyd’s trading overseas. Despite the crisis, he ensured that Lloyd’s secured a licence to trade in Japan and Singapore. To Lloyd’s traditionalists, Lane seemed to overstep the authority of a Corporation executive. He had an aggressive style. He was also ambitious, believing that he was the only serious inside candidate to succeed Middleton as the CEO of Lloyd’s.

A new commitment to continuous professional education (CPE) was launched in April 1994. Many underwriters had little knowledge of business management, while agency managers tended to have insufficient experience of technical insurance. The Lloyd’s CPE programme aimed to redress this imbalance.

Middleton made big efforts to change the culture of the Corporation. Ten core values31 were identified. These were written on a red plastic card that was issued to every employee. Cynics saw this as an echo of Chairman Mao’s Little Red Book, which was waved around during the Cultural Revolution in China. The ‘Values’ were intended to bring about a change of attitude towards work, making people more conscious of the essentially commercial support role that most of them performed.

The performance appraisal system was re-vamped to reflect the new approach to values. Various moves were encouraged: from tasks to results; reac-tive to active – ‘do it, fix it, try it, ask questions’ – lack of involvement was to be replaced by listening to the user; complex hierarchical structures were to be replaced by simple, lean and tight structures; and risk aversion by account-ability. The shift from the traditional to the new approach was summarised as moving from doing things right to doing the right things.

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ACCESSING VALUEDespite pre-occupations with litigation, debt recovery and old liabilities, cur-rent trading conditions and prospects were excellent in 1994. Market profes-sionals, new capital and ongoing Names were excited about the opportunities for future profits. This background provided an opportunity to accelerate the pace of change in the supply of capital. Hiscox led the work, this time chairing the Value Group.32 It included outsiders, insiders and Names.

Value at Lloyd’s was published by the Value Group in early May 1994, cov-ering the creation of value in syndicate participations, efficient capital alloca-tion, and transferring and realising value. Members’ rights, including tenure and pre-emption, were to be strengthened. Rowland said that this was the next logical step in the Society’s development. The Council had kept several princi-ples in mind in endorsing the group’s recommendations: Lloyd’s had to con-tinue to be attractive to individual Names; the proposals were evolutionary; it was important to ensure a fair and reasonable balance between the interests of Names and agents; the framework for change should leave room for choice to be exercised by Names and ‘ingenuity and innovation’ from others; and finally, the security of the Lloyd’s policy had to be preserved.

The report proposed steps to encourage the efficient allocation of capital within the market. The unrestricted growth and excessive concentrations of capacity of the 1980s could not be allowed again. Similarly, the leveraging effect of the partly paid capital structure of Lloyd’s could not be allowed to encour-age imprudent underwriting. Each member needed to know that his capital requirements were aligned as closely as possible to the risks he was writing. Accordingly, the Council had approved the introduction of a system of risk-based capital (RBC) and solvency requirements. The report cited the National Association of Insurance Commissioners (NAIC) in the US as the exemplar in having introduced an RBC system for insurance companies. Risk weighting at Lloyd’s would be introduced in shadow form at first, taking full effect in 1996.

The Council also reaffirmed its commitment to intervene to prevent unjus-tified increases in the capacity of the market, using measures that represented a much higher degree of control over the market than had ever been contemplated before. There were few objections; the LMB was seen as competent, working to promote the commercial advantage of Lloyd’s. In May 1994, new appointments to the LMB were announced: Andrew Beazley, a task force member, and Mark Brockbank brought more underwriting and business expertise to the board. Stephen Hall, Lloyd’s Finance Director, was also appointed.

The second part of the Value Report was consultative. It discussed several possible methods of realising the value implicit in a place on a good syndicate,

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including auctions, conversion schemes and corporate syndicates. The Council wanted to gauge market and membership reaction before deciding whether to press ahead with allowing fully corporate syndicates. The timetable set out in the document was fairly protracted. During the rest of 1994, a series of steps would be taken to enable members who wished to do so to sell their syndicate participations by auction in the second half of 1995.

In 1997, Hiscox had mixed feelings about the operation:

I wanted to redress the balance between the new corporate members and the remaining unlimited Names. The Corporates had immediate value from their participation in syndicates visible in their stock prices, whereas the Names had no equivalent value for their participations. I and the other managing agents who agreed to it did it for fairness, despite it doing serious harm to our businesses. We agreed to give secu-rity of tenure to the Names and thereby lost control of the capacity in our syndicates which was clearly worth a lot of money. The indi-vidual Names always thought I opposed their existence (having cre-ated Corporate Membership) and were quite antagonistic to me, so it amused me to stand up in front of them and tell them I gave them value for their Membership.33

The traditional reliance by Lloyd’s on personal relationships, discretion, favours, etc. in the matter of syndicate access was also regarded with suspi-cion by Sir Laurie Magnus and the City world. They wanted to replace it with an open system of buying and selling, where price was the only determinant of who was on which syndicate. This transition was central to those who wanted to bring Lloyd’s into the mainstream of capital raising. The Value Report showed just how complicated this was. It acknowledged that some managing agents might regard ‘assignment’34 – an essential building block – as an interference with their freedom to choose their Names. There was judged to be insufficient liquidity for a continuous market, and so an auc-tion-based tender was proposed. There remained plenty of legal and practical barriers to overcome, and the first auctions were not held until the late sum-mer of 1995. A total of £246 million of syndicate capacity changed hands at a total value of £4.2 million. The following year, a total of £1,424 million of market capacity sold for £35 million. It became clear to Magnus and others that the main value in Lloyd’s businesses lay in the managing agencies rather than the syndicates. A wave of merger and acquisition activity would follow over the next few years, with managing agencies commanding significant goodwill valuations.

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The consultative part of the Value Report also raised the possibility of a transitional scheme for Names to convert their positions to a share in a corpo-rate member. It also mentioned the idea of corporate syndicates, stressing their many advantages over the traditional annual venture. Nowadays, many Lloyd’s firms take this legal form.35

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In March 1994, The Independent reported that Sturge, the firm of which Coleridge was Chairman, had suffered a large loss. James Macdonald, Group Finance Director at Sturge, cited Names’ rejection of the settlement offer as one of the factors that had increased losses on the flagship Syndicate 210: many underwriters had increased their reserves, leading to a rush of claims by members on their stop-loss policies. Syndicate 210 and others had underwrit-ten plenty of PSL insurance. At its peak, this was one of the largest syndicates, with 6,661 members; after a flood of departures, it ceased trading. In May, The Independent reported that a further eight Sturge syndicates would close. They had lost a combined total of £222 million in the 1990 year of account.

The 1994 AGM, which was held at the Royal Festival Hall, was attended by 1,300 members, fewer than in recent years. Rowland said that when he first took up his appointment, he had not known if Lloyd’s could surmount its problems. Seventeen months later, his passion was undimmed. Now his belief was sup-ported by knowledge: ‘Now I know that we will succeed.’ Losses for the 1991 underwriting year were just over £2 billion. With his customary optimism, Rowland described this loss on the ‘pure’ year as the beginning of an improving trend. Nearly a further billion had been needed for reserve strengthening.36 He acknowledged that it was small consolation to members feeling great financial strain to be told that Lloyd’s was among the very best-reserved institutions in the world.

In August 1994, the Evening Standard37 reported that Middleton blamed work pressures for the break-up of his 30-year marriage. Lucy Roberts, a 26-year-old journalist, was reported as expecting to marry him. The Standard also said that her father was a Name who owed Lloyd’s £3.8 million.

THE GOODA WALKER TRIALIn May 1994, Deeny’s newsletter brought GWAG members more good news. The House of Lords had decided in favour of Names on the fundamental issue of the contractual liability of the members’ agents for underwriting. They had heard the appeal ‘with exemplary celerity’ and had upheld the ‘admirable

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example of the Commercial Court and the Court of Appeal’ in appreciating the ‘extreme urgency’ of the litigation for many Names. The trial of the main action was now starting much sooner than had been expected, despite the complex-ity of the legal issues and the large number of plaintiffs. Philip Rocher and his Wilde Sapte team had taken just over a year to win a series of preliminary issues. Deeny thought Rocher ‘quite simply the best litigator in the City of London’.

The litigant Names were claiming their declared losses to date (amount-ing to £629 million) and an indemnity against future losses on the same syn-dicate years. Nearly every day for three months, Deeny sat in the High Court. The plaintiffs called Ulrich von Eichen as an expert witness. He had been head of the British subsidiary of Munich Re and had testified to devastating effect in the Outhwaite case. He likened the attitude of LMX market participants to: ‘Someone falling from a 70th floor of a building who says “so far so good” as he passes the 30th floor.’ He also said that if you were in the catastrophe business, you could not possibly base your activities on there not being a catastrophe. Under cross-examination, Geoffrey Vos QC established that neither of the two Lloyd’s underwriters called as key witnesses was willing to say that any of the three defending underwriters were competent.

The enormous losses of the Gooda Walker syndicates resulted largely from the LMX spiral. This pattern made it extremely difficult for the syndicates in question to evaluate what is called the ‘probable maximum loss’ resulting from any given catastrophe. Expert witnesses for both the plaintiffs and the defend-ants agreed that the only safe assumption was that a major catastrophe might produce 100 per cent losses on all the reinsurance of reinsurance business which they wrote.

It emerged during the course of the trial that Derek Walker, Stan Andrews and Anthony Willard, the underwriters responsible for the syndicates involved, had never calculated their probable maximum losses on this basis. Geoffrey Vos QC accused them of ‘incompetence on a spectacular scale’. He asked Derek Walker: ‘Was your writing generally, your syndicate’s business, really dependent on there not being any catastrophes?’ Mr Walker agreed. Mr Vos continued ‘and we see that when there are catastrophes, the business is destroyed’. ‘Correct’ said Mr Walker.

Deeny remained confident of a judgment in the favour of Names, but was less sure how the judge would approach the all-important question of the size of the award, known as the quantum. A judgment was expected in October.

SPLIT AND VICTORYThe GWAG August 1994 newsletter devoted four pages to its relationship with the LNAWP. A year earlier, members were reminded of the importance of

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solidarity among its participants. Now, with a substantial court victory within their grasp, Deeny’s committee said there could be no doubt that Lloyd’s had a collective responsibility for allowing negligence and dishonesty to flourish. Although it was ‘understandable that many Names should regard it as an insti-tution that has destroyed their lives and that it in turn should be destroyed’, it was against policies ‘which may be emotionally appealing to some Names, but which do not necessarily advance their interests or offer a realistic solution to our problems’. Whatever the underlying position, it was not in the interests of Names to publicly claim that Lloyd’s was insolvent. Nor was it advantageous for Lloyd’s to be forced into liquidation. These policies were described as the ‘Armageddon approach’; it was ‘always hard to forecast who would survive an apocalypse’.

Members were told that a full meeting of the LNAWP decided against advo-cating insolvency or liquidation. The Chairman of the LNAWP, Christopher Stockwell, then proceeded publicly to advocate both. This might be under-standable in an informal organisation supported by people who worked for nothing: ‘However, a chairman charging fees of over £60,000 per annum must accept some obligation to reflect the views of those who finance the organisa-tion.’ Elections were planned, but they had not taken place. Deeny accepted that ‘those who hold different views are completely sincere in their opinions’, but he said that ‘it creates a wholly false position, to continue to maintain a pretence of unity, when unity no longer exists’. The GWAG withdrew its support and subscription from the LNAWP.

October 1994 brought news of Mr Justice Phillips’ judgment. He found that the Gooda Walker underwriters had been negligent in every single syndi-cate year involved in the action. He also laid down the principles of quantum. Wilde Sapte estimated that the application of these principles would produce an award to Names of £504 million. This set new records. It was more than twice the amount under the Lloyd’s settlement offer and was roughly three times the amount of the previous record damages awarded in an English court. Deeny paid tribute to the judges who had been willing to alter the normal legal time-table and give expedited hearings at short notice. He thanked his legal team, who had ‘delivered a formidable combination of great intellectual ability and a ferocious work rate’.

The judgment ran to almost 150 pages. Its particular focus was on the under-writing of five major catastrophe risks – Piper Alpha, Exxon Valdez, Hurricane Hugo, Phillips Petroleum and the North European windstorms known as 90A. Deeny expressed delight with the judgment and disagreed with those who sug-gested that it would exhaust the E&O insurance available before other action groups could obtain a judgment. The ALM said that the result fully vindicated

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the Names involved and formed a precedent on which other spiral syndicates could be judged. It also suggested that the judgment could provide the basis for a revised settlement offer which would be in the interests of both E&O under-writers and Lloyd’s as a whole. Val Powell, the ALM Chief Executive, said: ‘The time has now come for another offer to end much of the litigation that is facing Lloyd’s.’ Lloyd’s was not a party to the action, but welcomed the clarification brought by the judgment.

The GWAG committee sought approval for further subscriptions in order to help convince their opponents that they remained determined and well-funded. It also announced its intention to sue both the auditors and the brokers, saying that there could be as much as £300 million further cover available to these two parties in the event of a judgment against them. Deeny also set out the conditions on which he would entertain a Lloyd’s-sponsored central settle-ment. It would need to meet at least three tests: more money than the judgment; a full audit of the E&O cover; and a cap on future liabilities. These require-ments exercised considerable influence over the eventual shape of the next offer from Lloyd’s. Deeny was talking from a position of strength. To negotiate with Lloyd’s, a new body emerged – the Litigating Names Committee (LNC) – which was chaired by him.

In less than three years, Deeny had dislodged the first Chairman of the largest action group, conducted the most successful commercial litigation in the country’s history, rejected the first offer of a central compromise, set out the terms for a better offer, replaced the main forum for negotiations between Names and Lloyd’s, and established his position as its leader. To those who saw the whole edifice of Lloyd’s as a Goliath, David had emerged with a few smooth pebbles in his pocket. What would he do next?

We will fight you in the Law Courts ... we will fight you in Parliament and we will use whatever weapons come to hand, regardless of the damage they may do to Lloyd’s ... We accept your declaration of war and tell you we will take no prisoners.

Action Group leader1

5

THE CHASM

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The optimism of the first two years of new leadership faded gradually. Each of the three main legs of the business plan began to look shaky: the Equitas

project team was struggling to quantify the old liabilities of Lloyd’s; the scale of the first wave of corporate capital was not maintained; and the expectations of litigating Names were raised by the GWAG court victory. Meanwhile, the losses continued to mount and were proving hard to collect. Regulators in Britain and the US began to get nervous about ability of Lloyd’s to pay policyholders.

COLLECTING CASHIn December 1994, the aggregate resources of the Society stood at £27 billion, while provisions for current and future liabilities were £20.4 billion. Declared assets were therefore 127 per cent of liabilities. But there were practical and legal obstacles to gaining access to part of these assets. Some members were unwill-ing or unable to use them to pay cash calls.

Lloyd’s had welcomed the decision by Mr Justice Saville, delivered in mid-December 1993, on various preliminary issues in two cases, Lloyd’s v Clementson and Lloyd’s v Mason, to recover money paid out by the Lloyd’s central fund to meet the insurance obligations of some Names. The judge determined that the various defences and counterclaims so far deployed were without substance. But these issues were to follow several twists and turns over the next two years, as some Names fought hard to deny the right of Lloyd’s to recover. The case was appealed; the Court of Appeal’s inconclusive answer, described below, was not received until November 1994.

In July 1994, Lloyd’s announced plans to sharpen its focus on debt recov-ery. In September, Philip Holden, a young insolvency partner of solicitors Dibb Lupton Broomhead, was appointed as head of the Financial Recovery Department (FRD), where responsibility for all debt collection and hardship would be centralised. The Members’ Hardship Committee was to stand down.

David Rowland said that efficient procedures for the collection of money owed were an essential and responsible part of any commercial operation. The duty of Lloyd’s to all its members, especially those who had promptly settled their debts, was to ‘fairly but firmly’ pursue those who had not. He emphasised that those who were unable to meet their liabilities would be treated fairly and equitably.

Aged 28 and exuding self-confidence, the jaunty Holden was unfazed by his new responsibilities. Like Middleton, he sounds very different from most of the smooth privately educated accents that are the norm in the City. He has a very direct and engaging manner. He thinks he was picked because at his interview, he disagreed, in his usual forthright manner, about the best methods

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for collecting debt. Middleton was impressed and asked him to write up his pro-posals. It was not long before the press branded Holden as Lloyd’s’ Rottweiler. He responded that he was ‘more of a Labrador – nice and cuddly, but could bite if provoked’. Holden admits that he didn’t realise ‘what a storm I was walking into’. He believes his relative naiveté meant that he just did what he thought were the right things, rather than worrying too much about how they would look.

Soon after taking charge, Holden decided to send a letter directly to the 4,500 British Names who owed money either because they had not responded fully to a cash call or because of a solvency deficiency. Names with hardship arrangements and those who lived abroad were excluded. The letter invited each Name to ‘talk directly to Lloyd’s’. Holden says the reaction was as though the sky had fallen in. Lloyd’s had never received so many complaints – both from Names and the members’ agents who normally handled such communications. Many were outraged and appalled by Holden’s direct approach. However, the letter achieved an almost immediate improvement in the solvency position of Lloyd’s of around £70 million.

A new subcommittee of the Council was established to oversee Holden’s work, chaired by Bernard Bradford, former head of debt recovery at the NatWest bank. The Financial Recovery Committee (FRC) also included Mary Archer and Peter Middleton. Many members expressed themselves pleased to read that Lloyd’s was about to start taking debt collection seriously. In October and November 1994, the LMB and the Council approved the FRD’s approach to debt settlement – basically accepting that some Names could not pay their debts in full. Subject to a rigorous analysis of their means and ability to pay, a deal would be done that would give Names finality. Holden argued that the pragmatic annual debt write-offs involved would be better for Lloyd’s than some of the agreements entered into under hardship arrangements, which required Lloyd’s to pre-fund the amount owed by the member. The old arrangement had put an extra strain on the liquidity of Lloyd’s.

On 10 November, the Court of Appeal handed down a judgment in the case of Lloyd’s v Clementson. In one respect, it could not come to a quick conclu-sion: the ‘European law’ arguments were that the central fund and the rules restricting solvency credit for reinsurance placed outside of Lloyd’s were both in breach of European competition law. The judges held that it was arguable that prohibited effects on competition might result, although no evidence had yet shown this and no conclusion was drawn. The court simply did not have the facts to decide the issue at this stage. Lord Justice Steyn considered that Clementson’s community law defences would ultimately fail. The Master of the Rolls, Sir Thomas Bingham, said that he differed from the judge of first instance ‘with diffidence, reluctance and regret’.

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This decision on the European issue affected the ability of Lloyd’s to obtain judgments against members for debts owed to the central fund. At first, Lloyd’s planned to petition the House of Lords for leave to appeal on an expedited basis. After a big debate, it switched tactics, applying to the Commercial Court for a full trial about the European issues. As it looked likely that Names would soon start winning big awards from the courts, attention turned to how their awards might be used. From the point of view of Lloyd’s, it was obvious that the first call on this money should be to pay outstanding cash calls or repay the central fund. A debate raged internally between the hawks, who wanted to toughen the stance, and the doves, who thought that it would be provocative and largely unsuccessful.

THE SOLVENCY CRUNCHDuring 1994, Lloyd’s staff kept an anxious eye on the year-end solvency posi-tion. Each member’s assets had to be compared annually with his liabilities. Where there was a shortfall, central assets were ‘earmarked’ to cover the defi-ciency. The number of members with insufficient funds at Lloyd’s to meet their liabilities had grown to just over 10,000 by the end of August 1994. In a worst-case scenario, members’ liabilities could exceed their assets by £474 million. It was therefore necessary to bring another factor into play: ‘the E&O asset’ – an amount already reserved by E&O syndicates.

By counting the E&O asset when applying the member-level solvency test, Lloyd’s was eliminating an anomaly: the prospective payments by E&O syndi-cates were already counted as a liability for some Names, but when they were paid out, they would be a receipt for others. However, there was a potential snag: what if the receiving Names did not use them to pay Lloyd’s losses, but spent them or repaid other creditors? Even counting the E&O asset, with liabilities totalling over £20 billion, the worst-case scenario showed Lloyd’s passing mem-bers’ solvency by the slenderest of margins of only £66 million.

Months later, Lloyd’s was able to say2 ‘as at 31 December 1994, solvency shortfalls amounted to £1.058 billion, compared to £661.6 million a year earlier. They were covered by the available assets of the central fund, the net assets of the Society and a credit for part of the double count in respect of losses that are covered by E&O reserves’.

In the US, regulators were concerned by dollar solvency. This was an elu-sive concept. US regulators wanted to be sure that Lloyd’s could discharge all its obligations to policyholders in the US. But the funds held in the Lloyd’s American Trust Fund (LATF) in New York, with Citibank as trustee, were sim-ply dollar receipts. Because dollars were in widespread use for many kinds of

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transactions, they did not all come from US policyholders. Furthermore, the money held there was often a net residual amount, after a large chunk of dollar premium receipts had been paid away to buy reinsurance. The way this looked to the New York Insurance Department is discussed in a later section.

Lloyd’s thought that the recoveries made by Names should first be used to meet what it saw as obligations. At internal meetings, Lloyd’s officials spoke of the risk of ‘leakage’ from the system; many Names saw it very differently. When these issues had been argued in court, to the surprise and indignation of Lloyd’s, Saville ruled in favour of the Names. From that day forward, Lloyd’s had been considering an amendment to the PTDs. Legal advisers said that this was technically possible, but that changes required the approval of the Secretary of State for Trade and Industry. Amending the Deeds was the only way to ensure that Names would use their winnings to pay their Lloyd’s debts.

There were arguments against this course. It seemed aggressive; some argued that it would sour the atmosphere and would reduce the prospects of set-tlement. While there was no immediate prospect of litigation recoveries, there had seemed to be no compelling argument for proceeding with this potentially divisive move. When the Gooda Walker case looked likely to deliver a verdict in favour of Names, it was forcibly argued that Lloyd’s could delay no longer.

Lloyd’s began by consulting members. Rowland wrote to them in October 1994 seeking views on the planned changes to PTDs, under which proceeds of litigation or settlement between members and their agents would be used, to the extent necessary, to pay members’ liabilities and thus discharge their obli-gations. From the point of view of Lloyd’s, the proposed changes would ensure equity between members and would safeguard the interests of policyholders. The proposals prompted many responses. Sir David Berriman said that while the ALM agreed with the objectives of Lloyd’s, it favoured a voluntary approach. The ALM had been advised by counsel that Lloyd’s did not have the power to make the changes without the written agreement of each individual. Lloyd’s said it could not share the ALM’s view that everyone ‘would do the decent thing and pay up. Our evidence is to the contrary’.

The reaction of some Names was very hostile. The chairman of one action group wrote to Middleton, saying:

everybody to whom I have spoken is utterly determined that these pro-posals will be fought by all means at our disposal. We will fight you in the Law Courts, we will fight you in general meeting, we will fight you in Parliament and we will use whatever weapons come to hand, regard-less of the damage they may do to Lloyd’s. Hitherto I have not been one of those who wanted to ruin Lloyd’s, as it has ruined me. But now you

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have gone too far, you have declared war on your own membership. We accept your declaration of war and tell you we will take no prisoners.

In November 1994, the chairmen of the action groups that had already been successful in court and others who were close to a court hearing met to con-stitute the Litigating Names Committee (LNC). This would act as an executive to run the proposed High Court proceedings aimed at stopping Lloyd’s from amending the PTDs. Michael Deeny was to be its Chairman and Alan Porter its Treasurer. This soon became a rival representative body to the LNAWP, which was chaired by Christopher Stockwell. The LNC wrote a powerful message to all Names,3 saying that three QCs had advised it that the changes should be challenged in court as unlawful: Lloyd’s was seeking to put itself in a preferen-tial position ahead of other creditors. It argued that if Lloyd’s was successful, it would greatly diminish the prospect of an acceptable settlement. As such, it urged Names to write to the independent, nominated Council members and to Michael Heseltine MP, the Secretary of State.

In December 1994, the Council agreed to try for a new settlement offer. In order to give it the best chance of success, it now decided to suspend the amend-ment of the PTDs. Rowland said the Council had always believed that a nego-tiated settlement offered the greatest chance of a fair resolution of members’ disputes. However, if its initiative was unsuccessful, it would have no option but to seek the consent of the Secretary of State to proceed with the amend-ments. Lloyd’s would then seek to test in court the validity of the proposals. The ALM welcomed the initiative. Deeny said a just and equitable settlement would be difficult to achieve, but could be done. It was good news that Lloyd’s had returned to the negotiating table.

Also in December, The Economist4 described Lloyd’s as still in troubled waters. It thought that a centrally agreed settlement of disputes was essential. Its rejection could not be afforded, ‘for that would bring the whole edifice, and all the hard-won reforms, crashing down’. One member argued that the ‘debts’ Lloyd’s sought to collect were completely unlike normal commercial bad debts. They were estimates of possible amounts that would need to be paid in the fol-lowing century. They did not in any sense represent normal debts, nor was the approach fair. To bankrupt the membership to ‘improve the equity prospect, mainly to preserve careers based on the cachet of Lloyd’s name’ was ridiculous. It was an inadequate attempt to morally justify the policy of bankrupting most of the members.

The Appeal Court judgment in Clementson5 made it almost impossible for Lloyd’s to recover money paid by the central fund, or earmarked against it, throughout 1995, putting enormous pressure on the liquidity of Lloyd’s. This

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led Holden to propose that Lloyd’s should stop drawing money from the cen-tral fund; instead, the fund should simply lend money to agents, leaving the underlying cash call intact. He thought that the cleanest way to recover money from Names was to invoke their commitment to ‘pay now, sue later’ under their underwriting agency agreements. Agents were brought together for a briefing meeting held offsite at the Tower Thistle hotel. It was explained that they were in the best position to collect from Names. Holden orchestrated a test case in which a managing agent, Marchant and Elliot, sued an individual name, Dr Higgins, for the modest sum of £6,000 in order to establish beyond doubt the validity of the ‘pay now, sue later’ clause. Gordon Pollock QC was engaged and it took a year to resolve. Holden recalls getting Bob Hewes, by then Finance Director, out from ‘yet another emergency Council meeting’ at 6.30 pm one evening to tell him the case was finally won.

Throughout the long wait for this judgment, a source of future unfairness was being generated. Some Names responded to the cash calls made by agents, whereas others waited to see what would happen. Although some allowances were made in the eventual settlement for money already paid in, the truth remains that those who sat on their hands, refusing to pay, gained some advan-tage over others in the final formula for writing off a portion of their debt.

With the 1994 court decision in his favour, Deeny was now in a much stronger position, but he wanted a bigger and better solution. Interviewed in 1997, he said: ‘I always thought that to solve the whole problem, it had to be a comprehensive settlement, because I knew right from the beginning the E&O cover was limited. We did a lot of research and now it is all over, I can say that I knew damn well there wasn’t that much E&O money there.’ He went on to say that: ‘I was always critical of the E&O insurers because they would have saved themselves a lot of money if they had come with a bigger offer earlier on. Rowland and Middleton convinced me they had really done their best to get them to contribute as much as possible. When the figures emerged, I think they knew that it was probably not going to be enough. I thought they were very wise in not doing a hard sell on the first offer.’ He remembered that ‘the week after it went down, sitting in David’s office talking about the next one’.

Deeny recalled being interviewed on the BBC Today programme with Middleton: ‘They expected a confrontation where I would be terribly hostile at the time of the first offer. In fact I said “Mr Middleton has done his best, the offer is not enough but it isn’t his fault”.’ He was critical of action group leaders who adopted ‘much more negative and destructive attitudes. They for-got what I always thought was a very important point – that although quite a lot of the action group members had ceased underwriting, lots of them were continuing’.

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***

Adam Raphael’s very well-informed book about the Lloyd’s crisis, Ultimate Risk, mentioned earlier, was published in the early summer of 1994. Although it was very critical of much that had happened, he was surprised to find that he was permitted to hold a well-attended launch in the Lloyd’s building. Mary Archer reviewed6 this book. She said it was a much more accurate account of the current Lloyd’s than was the book’s cover, which spoke of a devastating expo-sure and a fast developing financial nightmare. She acknowledged that many of Raphael’s anxieties were hers too. She described him as nailing his colours care-fully to the fence on the issue of whether Lloyd’s would survive or collapse. She quoted approvingly his view that the market had professional skills, a world-famous name and an institutional resilience which should not be under-esti-mated. ‘Amen’ she said ‘to that.’

CONTAINING THE PASTAs work was proceeding on the Newco project, there was plenty of debate about the scale and injustice of the US liabilities inherited by Lloyd’s. Individual mem-bers expressed strong views, some proposing that Lloyd’s should simply refuse to pay up. In June 1994, a member’s letter spoke approvingly of Merrett’s sub-missions to the US Congressional subcommittee considering a replacement to Superfund. He could see that serious efforts were being made to contain the growth of pollution liabilities, but asked for a firm attack against asbestos claims. He had heard of teams of American attorneys equipped with mobile medical screening units, touring the US to recruit new litigants. He called for a tough line.

Jim Teff, who headed the specialist claims unit, explained Lloyd’s under-writers’ stance on handling asbestos, pollution and health (APH) claims. Teff was originally a solicitor who, as Janson Green’s claims man, had been a member of the asbestos working party.7 He was also the co-ordinator of the environmen-tal claims group (ECG) and helped create the London Market Claims Service (LMCS). Together with a team including Chris Ventiroso of Keeling’s Syndicate and Gary Bass of DP Mann, Teff reviewed asbestos and pollution developments and a third area of claims being handled by the Specialist Claims Unit (SCU): health hazard. The commonest sources of health-related claims were silicone implants, tobacco and electronic magnetic fields, but other causes included lead, pesticides, drugs and radioactive materials. Within this field, the SCU cen-tralised and co-ordinated underwriters, looking at legal and factual defences in much the same way as asbestos and pollution. Implant manufacturers had now

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negotiated a global settlement with plaintiff lawyers to the tune of $4.2 billion, without consultation with insurers.

There were hopes that US Superfund legislation would be amended. An OLS leader8 said: ‘To clean up America was one thing; for lawyers to clean up at the insurance industry’s expense was another.’ However, proposals to reform the Superfund legislation failed to be approved on Capitol Hill before the end of the last session at the beginning of October 1994. Although its passage through both Congress and the Senate had been fairly smooth, it ran out of time. It was hoped that the progress made would be of value in the next session and would increase the chances of winning approval. The uncertainty about the likely eventual cost of pollution claims hung like a sword of Damocles over the whole Lloyd’s market. It was one reason why the number of open years continued to grow.

In August 1994, it was announced that Anthony Bartleet, by then Chairman of Murray Lawrence & Partners, would chair a group of senior underwriters to develop a strategy for handling the open year liabilities that would not be going into Newco (which was only dealing with pre-1986 liabilities.) The group included underwriters Tony Cassidy and Barnabas Hurst-Bannister.

In October 1994, a year after her arrival, Heidi Hutter acknowledged some delay in the project, saying there was a vast amount of data to gather and some of it had proved hard to collect. She did not want to come out with premature estimates of reserving requirements based on incomplete or unreconciled data, only to find that it would need radical revision. Not long after this, the leader-ship were briefed privately on the state of the project. Hiscox9 was horrified by the methodology of the macro team, which he saw as looking for trouble: ‘One of the frightening meetings I attended was when Rowland, Middleton and I went to hear Heidi Hutter’s presentation. This was about 18 months after she had spent millions of pounds. We went into that little room with no windows on the 11th floor. She and Tony Jones told us how horrendous all these liabilities might be: massive top-down theoretical exposures. They got all excited showing us the huge possibilities of claims. I came out and said “that’s a complete catas-trophe. They are absolutely going to kill us. We will never ever cover all these liabilities”.’ Hiscox disliked the ‘top-down’ approach. This view was not shared by others in the core team, but it did find echoes in the market. There was an antipathy to actuaries in some quarters and a belief that their expertise was more relevant to life insurance than to the Lloyd’s world of non-life business. Hutter and Jones believed the project could still be managed.

Various options about Newco’s future were reviewed in a thorough ‘what if?’ discussion paper entitled Newco Business Strategy.10 Hutter told Rowland pri-vately in late January 1995 that she would be returning to Swiss Re in due course;

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she would not be a candidate for the job of running the new company once it was established. This did not leak out for some time, as it would have sapped confi-dence in the project. Interviewed in 1997,11 Hutter felt that the transition from the project to Equitas as a company could have been better managed: ‘I think we all failed to recognise that we should probably have split project and company sooner ... That there was much more work to organise the company than I was capable of giving time to, and if we had Crall [the eventual MD of Equitas] on board, say in April, it would have helped tremendously.’ She recalled that the project was far more difficult and far more complex than anyone had grasped from the outset: ‘If we had known then what we know now, I think many of us would have run for the hills and said: forget it, this is just too difficult.’

Concern about the problems of collecting money from Names was not con-fined to those responsible for applying the annual solvency test. Hutter and her team were beginning to wonder how enough money could be collected from Names to pay the necessary premium. Estimates of this were rising steadily. Elsewhere, Joe Bradley and his CSU team were building a comprehensive data-base of the known assets and liabilities of all Lloyd’s members. They were uncov-ering some big deficiencies. The more they learned, the lower their morale sank.

LEGAL SKIRMISHESThe propaganda war heated up. Lloyd’s approached the Advertising Standards Authority (ASA) complaining about advertisements placed by the Wellington Names Association in the British press headlined: ‘How many more people have to die before Lloyd’s is brought to account?’ The subheading below stated: ‘At least 31 suicides and premature deaths have been attributed to the losses sustained by Lloyd’s Names.’ Lloyd’s objected, arguing that the headline and subheading were inaccurate, grossly misleading and offensive. The ASA upheld the complaint, saying that the evidence as to the cause of the deaths was not convincing and that the abridged quotations were misleading.

Mr Justice Gatehouse ruled that 1,000 members of the Merrett 418 Syndicate were unable to litigate against their members’ agents due to the expiry of the rel-evant limitation period of six years.12 This meant that about half of the potential litigants were unable to participate in the trial that was due to come to court in March 1995.

In October 1994, settlement was finally reached in a six-year antitrust suit by Attorneys General of 20 US states against major US insurers and several British insurers, including 11 Lloyd’s underwriting agencies and two brokers. The vari-ous cases were consolidated before US District Judge William Schwarzer, who in October 1989 dismissed all claims against all defendants. In June 1992, the

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US Court of Appeals overturned the dismissal and reinstated all claims – except state law claims – against Lloyd’s and London defendants. A year later, the US Supreme Court upheld plaintiffs’ claims and rejected the notion that the US court should not have jurisdiction over the wholly foreign conduct of foreign reinsurer defendants. The Attorneys General and insurers and reinsurers then entered into a lengthy period of negotiation, resulting in the settlement. Although satisfied with the settlement reached, the Lloyd’s defendants denied any misconduct.

The Texas Federal Court scheduled a full hearing of allegations of fraud against Lloyd’s for January 1995. The case followed damaging findings in the case of Leslie v Lloyd’s in the US District Court, Houston, in which Texas Name Charlie Leslie was attempting to prevent the drawdown by Lloyd’s of his deposit, a letter of credit from the Texas Commerce Bank. Lloyd’s had not expected Leslie’s fraud allegations to be considered at this early stage of the case. They were later dismissed by the Appeal Court.

***

Rosalind Gilmour was appointed as the new Director, Regulatory Services. She had spent much of her career at HM Treasury and had more recently been the Chairman and Chief Executive of the Building Societies Commission and Chief Registrar of Friendly Societies. She had worked in the World Bank in Washington for three years and was a non-executive director of the Securities and Investments Board in 1993. In 1992 she had been seen as an outside candidate for the role of Governor of the Bank of England. Her arrival soon released Bob Hewes to take up the increasingly hot seat of Finance Director.

LIQUIDITY PRESSURESAn integral part of the overall Lloyd’s market operation is the provision of com-mon financial, tax and trust services, which includes central accounting, let-ters of credit, and centrally run overseas trust funds and deposits. This area of the Corporation came within the remit of Ken Goddard as General Manager Market Finance. When he retired, Mark Camp, manager of Market Financial Services (MFS), found himself on the front line.

One Friday afternoon in 1993, Camp received a call from the New York Insurance Department (NYID) Deputy Superintendent, Vincent (Vinny) Laurenzano. The NYID acknowledged that earlier explanations had seemed rea-sonable, but that it found the current scale – $400 million – of the negative bal-ances13 ‘completely intolerable’. It felt badly let down. Camp was told that Lloyd’s had to get the figure down to below $100 million within the next 30 days or the

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Department would suspend its licence to write new business. If this happened, all other state insurance regulators would follow suit, leaving Lloyd’s unable to trade in the US, its largest market. The NYID imagined that the problem could be solved by the transfer of central fund assets into the LATF to fill the relevant holes; this is what the famous Lloyd’s ‘chain of security’ had always implied to them.

Although the central fund could be used in this way, the legal advice was that this would imperil, if not nullify, any chance of recovery from the Names concerned. A solution had to be found quickly or Lloyd’s would be dead. A plan was conceived to make loans from the central fund to the relevant syndicates which would not prejudice recovery from Names at a later date. This required a Council resolution. The fund was also re-profiled with more dollars to meet the likely requirements. This action saved the day for the time being, but bigger problems were to come.

These liquidity pressures were also evident in many other ways, including the balance sheet of a Corporation subsidiary company, Additional Securities Ltd (ASL),14 which funded the deposits required in various other overseas ter-ritories where there were no trust fund arrangements.

After all these and other experiences, in January 1995, Mark Camp suffered a heart attack. Ken Goddard was asked to return from retirement to hold the fort, but Camp was back at work, on a part-time basis at first, by April. He now reminisces that his main contribution was akin to the Dunkirk operation early in the Second World War: giving time and space for others. By January 1995, Lloyd’s was grappling with a highly adverse draft NYID report on its whole solvency position in the US, which is discussed later on.

Picture 8 The Rt Hon Michael Heseltine PC MP, Secretary of State for Trade & Industry and the Houses of Parliament. The Lloyd’s membership included 64 mem-bers of the House of Commons and 230 members of the House of Lords

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ANXIOUS GUARDIANSDr Jonathan Spencer was promoted to the role of Under Secretary in charge of the DTI’s Insurance Division (later Directorate) in October 1991. As an amal-gam of previous departments, the DTI had several traditions: regulation of trade and commerce, its historic role; export promotion, a more recent concern; and ‘sponsorship’ of sectors of British industry, the roots of which lay in wartime control of the economy. Spencer’s own previous DTI jobs had exposed him to both sponsorship and international/EU trade policy, and to strategic policy for the Department as a whole, but not domestic regulation. By background he was a Cambridge natural scientist with a PhD in materials science. DTI general-ists like him regularly stepped lightly from one role to another. This was part of the job’s appeal; the Department believed that it helped to maintain a fresh approach. There was a sense in which high-flyers like him saw themselves as itinerant trouble-shooters.

Michael Heseltine was appointed as Secretary of State for Trade and Industry in 1992. In his autobiography, Life in the Jungle, he describes the culture of the old Department of Trade as the high altar of non-intervention. Ironically, he chose the traditional title of President of the Board of Trade, but did not belong to its school of thought; on the contrary, a self-made businessman, he once famously pronounced himself ready to intervene before, during and after breakfast. He found that his predecessor at the DTI had forbidden the use of the word ‘sponsor-ship’. He reversed this, telling his officials that they should interest themselves in the success of the sectors for which they were responsible. He cited the examples of the British fashion industry, which he did much to promote, and the insurance industry, where he felt that performance could be restored.

Spencer’s Division was equipped with the powers conferred on it by the 1982 Insurance Companies Act, the brainchild of a civil servant, Philip Brown. In the wake of the collapse of the Vehicle and General Insurance Company (V&G) in the early 1970s, Brown devised a durable form of insurance regulation that lasted until the Financial Services Authority (FSA) was created 25 years later. ‘PAR’ Brown – a nickname based on his initials – belonged to the tradi-tional British school of financial services regulators. The focus was on policy-holder protection, delivered through oversight of the ‘fit and proper’ character of the directors, the financial strength of the companies and a strict licensing regime for newcomers. A heavy-handed inspectorial approach on the continen-tal model was avoided in favour of disclosure and strong powers of intervention if things went wrong.

Several European directives were implemented during Spencer’s period, which led to the new ongoing obligation of ‘sound and prudent management’

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for insurance businesses, and the subsequent greater focus on risk management and governance. An absence of recent insurance crises in Britain meant that the division had been run down until the late 1980s. Some London market com-panies ran into trouble then for the same reasons as Lloyd’s syndicates: asbes-tos and pollution liabilities and the impact of catastrophes. There were about a dozen company failures in the two or three years before Spencer took up his role. Accordingly, the division was starting to take a more intensive approach to insurance supervision: with more resources, it began a more systematic review of each company’s extensive annual returns, and periodic visits to discuss its analysis and their financial health. One of Spencer’s first duties was to accom-pany Richard Hobbs, his deputy, on a visit to the Walbrook Insurance Company in 1991, to inform it that it was time it filed for insolvency proceedings.

Hobbs dealt with London market companies and with Lloyd’s. He also han-dled terrorism insurance: after the IRA Bishopsgate bomb in 1992, a national scheme was devised to provide cover against terrorism, which was beyond the scope of commercial insurers to cover on their own. It was called Pool Re, began trading in 1993 and still exists. Both officials were in touch with Lloyd’s from 1992 onwards as the DTI’s regulation of Lloyd’s, as prescribed in the 1982 Act, was of Lloyd’s as a whole. Spencer’s main day-to-day contact was Bob Hewes, a former DTI colleague, who was head of regulatory services. He believes this made the relationship with Lloyd’s easier than it would otherwise have been:15 ‘in the sense that I felt that Bob, from prior knowledge, was always going to be straight. I don’t think we gave Lloyd’s any quarter on the numbers’. He also had some limited contact at the chairman level, which increased when Rowland took over: ‘quite quickly, that was a much healthier relationship, and more open’.

Meanwhile, the division encountered a dress rehearsal for handling a bigger insurance crisis which had a bearing on the solutions used later for Lloyd’s. A company called Municipal Mutual (MMI), which insured all of Britain’s local authorities, had expanded rapidly, creating a subsidiary that underwrote much London market business and suddenly found itself in severe financial difficul-ties. MMI was a big focus of the DTI’s regulatory attention from the spring of 1992 until the end of the year. Britain’s tenth largest general insurer ended up in a provisional Scheme of Arrangement: if it became insolvent, it would still be able to discharge its claims on a proportional basis. Spencer’s right-hand man dealing with MMI was Paul Sharma, who was originally seconded from the large accountancy firm Ernst & Young and who many years later became the deputy head of the Prudential Regulatory Authority.

It was obvious to the DTI that a new vehicle to run off the old liabilities of Lloyd’s, as proposed by the task force and the Lloyd’s business plan, would need its authorisation, setting in motion a huge programme of review of Lloyd’s

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liabilities by actuaries and others. Later, when Heidi Hutter was recruited to run the Newco project, officials saw her as highly competent. Her early dealings were mainly with the Government Actuary, Chris Daykin. He seemed pleas-antly surprised to learn that Hutter would be sharing any information he would need for the approval process, implying that Lloyd’s had not always been so forthright. Hutter believed that this was essential.

By 1994, the DTI was increasingly frustrated by the seemingly slow pace of work. Spencer recalls: ‘We felt that if things were as serious as Lloyd’s said they were, there needed to be more urgency. We were beginning to see through the annual regulatory statement that Lloyd’s were going to run out of road in a foreseeable period.’ The DTI saw the solvency of Lloyd’s coming under increas-ing strain. Some form of restructuring would need to be in place no later than 1996. Spencer’s job involved liaison with regulators in other countries, including the US and Europe. He says that initial attempts by Names to involve Brussels directly were ineffective, essentially because the Commission had no relevant powers. It also helped that the Director General for Financial Services at the time was John Mogg from the UK, ‘who was quite open to argument from us. Nevertheless, the Names did evoke a bit of sympathy in Brussels’.

Heseltine’s time as Secretary of State from 1992 to 1995 was followed by his elevation to the position of Deputy Prime Minister. Regulation as such interested him much less than the health and success of the insurance indus-try. He was normally happy to delegate regulatory matters to a succession of junior ministers. However, the risks to the future of Lloyd’s, the central role of Equitas in the resolution and the need for DTI authorisation were of a different order: the Secretary of State could not avoid a personal involvement, as he read-ily recognised once the background had been presented to him. This usefully continued after his promotion to Deputy Prime Minister, since his successor at the DTI, Ian Lang, was a Name and so could play no part in the decisions (in fact, Lang was an action group member). Heseltine was absolutely clear that the principal government responsibility as set out in the 1982 Act was policyholder protection. He could see the politics surrounding Names’ misfortunes, but was unsympathetic. Although those Names might be mostly natural Conservative voters, there was no mileage for the government at all in appearing to side with them, and he had always taken the personal view that becoming a Name was a risk he was not prepared to take.16 Nor was there any willingness in government to provide financial assistance to Names. This line was later reflected in DTI evidence to a parliamentary committee, which is described later.

The DTI nonetheless had quite extensive correspondence with a variety of Names of all shades of opinion. The most productive was a regular exchange with Deeny, which helped the DTI to understand the Names’ perspective. Hobbs

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developed his contacts with Deeny, who became well informed about the DTI’s approach to Lloyd’s issues, further strengthening his negotiating hand.

The author visited the DTI at an early stage of the crisis to explore contin-gency options. He had imagined that if the worst happened and Lloyd’s was unable to achieve an overall solution, there might be ways in which some of the very strong managing agencies within Lloyd’s could find a way of continuing in business – either under the banner of Lloyd’s or, if necessary, the London mar-ket. Some had strong reputations and would have no difficulty in raising more capital. If the business plan were to fail, he hoped to be able to present a fall-back option that would save the best parts of Lloyd’s from the wreckage. After a depressing discussion, he left the insurance division in no doubt that officials were convinced that there was no way any part of Lloyd’s could escape in the event of a failure to pay claims. Spencer confirms this view: ‘if you look at the way that the legislation regulated Lloyd’s ... it was all or nothing. The legislation doesn’t recognise managing agents or syndicates. All it recognised was Lloyd’s as a complete entity and the Names as individual underwriters’.

The DTI had statutory responsibilities in relation to Lloyd’s. Traditionally, the Bank of England has played a role as the senior institution in the City of London. It had formal responsibilities in relation to banking supervision and exchange control. In relation to Lloyd’s, it had the limited formal role of approv-ing the nominated members of the Council, but it had always taken an interest in the institution – and a close one when the problems of Lloyd’s began to affect the reputation of the City as a whole. Gordon Richardson had played a big role in persuading Lloyd’s to accept its first Chief Executive. More recently, the Bank had helped to ensure that the Rowland/Middleton team was put in place. More help was provided in introducing corporate capital when the Bank encouraged the Stock Exchange to give every assistance to the listing of corporate capital vehicles.

During this crisis, the Governor of the Bank, Eddie George – sometimes called ‘Steady Eddie’ by the press – played the role of a financial father confes-sor to David Rowland. He expected to be kept in touch and given a fairly full account of the state of play. This was more of a sponsorship role than a regula-tory one; at every turn he was extremely supportive. Rowland drew great value from knowing that George was on his side in finding a solution to the problems facing Lloyd’s.

A BRAVE FACEUnlike the previous two years, 1995 did not open with an optimistic New Year message from David Rowland. There was a chance that fresh negotiations would

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make progress towards a settlement, but the gap between action group demands and what seemed possible was huge. The Equitas project was struggling. The debts were accumulating. Outwardly, Rowland maintained a brave face. Inwardly, he was troubled about the future prospects. He made plans to take stock with the management team at a two-day meeting in a hotel in Kingston, on London’s south-west fringe. He decided that it was time, once again, to ask for the help of Charles Roxburgh, the McKinsey partner who had been invalu-able to the task force and in helping to produce the 1993 business plan.

The inner team changed in several ways. Jo Rickard was appointed Director, Legal Services. She was seconded from Freshfields, where she had been a litiga-tion partner for 14 years, and was tough and experienced. This was part of a move to strengthen and re-organise the legal services of the Corporation. Rickard now reported directly to Rowland. Before, the solicitor and his growing depart-ment of 30 lawyers reported to the Director, Regulatory Services. But Rowland wanted more direct control of decisions on legal issues: they had become more and more critical to the future survival of Lloyd’s. He had been unnerved by the recent setback in the Clementson case, which had brought central fund debt recovery to a standstill. The Lloyd’s job had become one of the hottest seats for a lawyer to occupy in the City of London. He felt that the Solicitor to the Corporation was struggling to cope with it.

John Stace, who had just been elected as a member of the Council, was appointed Deputy Chairman. He replaced Richard Keeling, who had completed his two-year term. Keeling had told Rowland that he could not extend his time in the role because he had a company and a syndicate to run. He would, how-ever, continue to lead the Equitas project and complete its oversight. Stace, a New Zealander, had co-founded Stace Barr, the first new members’ agent for many years in 1986. It now controlled market capacity of £382 million, made up of traditional members and Angerstein Underwriting Trust, a new corporate member. A member of the LMB since it began two years earlier, Stace had a big stake in the future of Lloyd’s. He was pleased to be elected to the Council. A colleague mused how this had been possible: ‘You didn’t get the Eton vote; you didn’t get the freemason vote – how did you do it?’ Stace said it must have been the New Zealand vote (there were fewer than 300 such members). His wider support owed much to his conspicuous energy and his willingness to work hard on communicating with Names. He was ‘thrilled’ to become the first Deputy Chairman drawn from the ranks of the independent members’ agents. He also knew that the predicament facing Lloyd’s was critical.

Total capacity for underwriting in 1995 was announced as £10.2 billion, compared with £10.9 billion for the 1994 year. Individual members provided 77 per cent of capacity and corporate members 23 per cent. Rowland said that

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this was in line with expectations. Around the Board table, this six per cent fall in capacity – more if an allowance was made for inflation – was disappointing. In a rapidly expanding economy, market conditions remained good; a modest increase would have looked much better to brokers and clients. The first year of corporate capital had brought in an extra £1.6 billion of capacity, but the second year had added only £600 million.

CAPITAL MATTERSMore capital was needed. Up to this point, the rules for new capital had been framed with a particular concern to maintain equity with Names. Some US insurance companies were interested, but their preferred format was differ-ent: they would want control of their investment. Could Lloyd’s accommo-date them? Could it afford not to? Against this background, a working party on Lloyd’s capital structure was formed,17 chaired by David James, one of the external members of the Council. It was to consider the eventual capital struc-ture, or structures, towards which Lloyd’s should aim. Did the pattern need to be uniform? The working party considered the measures by which the interests and rights of different sets of investors were each protected. Its membership was carefully constructed; widely different views began to emerge about the right course for the future. Robert Hiscox, who had spearheaded the introduction of corporate capital, was included.

Of the 25 corporate members who joined Lloyd’s in 1994, the London Insurance Market Investment Trust (LIMIT) was three times the size of its nearest direct competitor, CLM Insurance Fund. LIMIT first raised £280 mil-lion from City institutional investors in November 1993. Its capacity for 1995 had risen to £595 million; its shares traded at a premium to the net asset value of the company’s investment portfolio, the acid test for a well-regarded invest-ment trust. Jonathan Agnew, its Chairman, credited the successful launch and continued appeal of LIMIT to the company’s unusual relationship with syndi-cates. In contrast to most corporate members, LIMIT used in-house advisers to analyse and monitor underwriters. Its size helped it to gain increased access to the most desirable underwriting syndicates. Its investments were conservative, tracking the FT 350 index. In January 1995, Agnew became the first corporate member to join the Council. He foresaw few conflicts between Lloyd’s old-style and new-style Names, but was firmly opposed to increasing the central fund levy on Names to finance Equitas. Corporate members had agreed to pay 1.5 per cent of their capacity as a central fund contribution for the first three years. They did not want to pay more. Agnew was also a member of the James working party, as was the author.

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A few people within Lloyd’s held the view that it was time to jettison the old pattern of capital provision, lock stock and barrel. Around the world, the limited liability company had proven itself as the most successful corporate form. The laws surrounding companies were well-known; they did not need to be invented or policed by Lloyd’s. According to this view, the Lloyd’s market should move quickly towards one of competing insurance companies. This would make it attractive to the most obvious source of capital: existing insurers. They could buy up existing agencies and turn them into subsidiary insurance companies. They could also set up new subsidiaries. On this basis, running Lloyd’s would be much simpler. There would be no need for Names and all the problems they presented to running a business. Existing Names could sell their syndicate positions. If they still wanted to participate in Lloyd’s, they, like everyone else, could buy shares in the insurance companies on the stock market. Lloyd’s could be made much simpler, more efficient and more attractive to outside capital. People with this vision of the future thought the only issue worth talking about was how to get from here to there.

The opposite point of view was that a market of competing companies would be no different from the nearby London company market. These companies co-operated with each other, and with Lloyd’s syndicates, in much the same way as Lloyd’s syndicates co-operated with one another. They were all members of a mar-ket association known as London Insurance and Reinsurance Market Association (LIRMA). Lloyd’s had always thought itself a cut above this collection of com-panies: it had greater coherence, partly due to the shared interests of its partici-pants. Because individuals spread their interests among syndicates, the institution enjoyed a unique blend of collaboration and competition. Although many mem-bers had lost money in recent years, those able to trade through to a better future wanted to keep the tax advantages of sole trader status. Existing members believed they owned Lloyd’s; they wanted to retain their place in the sun.

A third view was that these different structures should somehow be accom-modated and that the market should be allowed to evolve. Its future would be determined by market forces. This approach was referred to as ‘mixed bath-ing’ and was attacked as a messy and expensive compromise by proponents of the more radical view. Over the next few months, the working party continued to debate these issues and the rules needed to maintain equity among differ-ent kinds of members and protect Lloyd’s security. Meanwhile, its preliminary ideas on capacity allocation by means of an auction-based tender system were published in April 1995. As recommended by the Value Group, the position of Names had been strengthened by rights of tenure and pre-emption. The new system envisaged a series of weekly auctions for future syndicate participations in July and August each year.

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Sir Laurie Magnus, Deputy Head of UK Corporate Finance at Samuel Montagu & Co., reviewed the corporate capital debate in an OLS article.18 He saw Lloyd’s as an exciting investment opportunity. It was cleaning up its act, cutting costs, introducing professional practices and generally emerging very belatedly into the business world of the approaching twenty-first century. He thought it would be a mistake to move solely to 100 per cent permanent capi-tal, represented by perhaps 10 or 12 Lloyd’s insurance companies. This would remove the great advantage of the existing annual venture system, which his-torically had acted as a classic form of venture capitalism, catering to the entre-preneurial requirements of Lloyd’s underwriters, particularly new ventures, mostly with success. His vision of the next few years was of a Lloyd’s capital base with a number of features: some syndicates operating as annual ventures and some as insurance companies with permanent capital; some incorporated investors spreading their risk across a number of managing agents and others supporting one managing agent alone; and some investors remaining unlimited sole traders either as a MAPA or a bespoke Name. He argued that the advantage of this approach was that it provided a place for a range of investors in Lloyd’s, accommodating a variety of structural preferences. All investors had a propri-etorial interest in the ongoing business, both under the Value Group rules and, he argued, as a matter of moral right. Whatever Lloyd’s did, it must be seen to look after their interests – if only to demonstrate a real sense of responsibility to capital that could justify the trust of both existing and future investors in the years ahead. These views prevailed; they meant something for everyone.

MORE LOSSESEarly in 1995, independent Lloyd’s analyst Chatset expected the 1993 year of account to be an excellent year, with overall profits of around £800 million. This would have been greater still but for the cost of 53 syndicates that ceased to trade at the end of the year. Chatset was also optimistic about the 1994 underwriting year, forecasting profits of £500 million. However, for the 1992 underwriting year, it expected Lloyd’s to announce yet another loss of at least £1 billion. This would include more deterioration on old years and a reduced ‘pure year’ loss, this time of £250 million. Charles Sturge, the editor, commented that an out-of-court settlement of current litigation was critical to the survival of Lloyd’s. He thought that the Corporation had to find a solution that would produce a reso-lution of the ‘mounting and largely wasteful litigation. It must provide finality so that members can exit from Lloyd’s’. Names should realise that recent court judgments meant the E&O pot was going to rapidly diminish.

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Once again, Lloyd’s did not challenge these figures. They were more pessimistic than the syndicate predictions that Lloyd’s had collected, but, as usual, they proved closer to the mark. In fact, the losses for 1992 were £1.2 billion, bringing the cumulative losses for 1988–92 up to a staggering £8 bil-lion. Most people expected that there would be still more to pay for Equitas; they were right.

The Kobe earthquake struck Japan on 17 January 1995. A major event was not expected in that region, where the last major quake had occurred 400 years earlier. It caused extensive fires and disruption to transportation systems. More than 5,000 people were killed and 300,000 people lost their homes. It was a year to the day after the Northridge earthquake in California. Ironically, only 40 miles away, a joint US/Japan conference on urban seismic hazards was in progress at the time. The impact on the London market was relatively small, but it was a reminder that even more losses could be around the corner.

Floods hit Northern Europe at the end of January 1995, with estimated damages of £2.5 billion. Thirty people were killed and hundreds of thousands had to be evacuated from their homes in France, Germany, the Netherlands and Belgium. Flood levels in parts of the Netherlands and the River Rhine had risen to the highest levels recorded. Inland waterways in Northern Europe were closed to commercial traffic. Although little of this business was insured by the London market, it was hoped that it would help harden rates.

A furious debate took place in the columns of OLS as Names reacted in different ways to their plight. Some wanted to spread the losses, while oth-ers were fiercely opposed. Some wanted Lloyd’s to stop paying claims, others wanted Names’ debts pursued vigorously, while yet others pleaded for justice. Some were shocked to find their action group subscriptions supporting militant

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Figure 5.1 Overall results at Lloyd’s after personal expenses, 1980–96 (in £ millions)19

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groupings, while others condemned those who were not participating in the litigation.20

PARLIAMENTARY SCRUTINYIn January 1994, the House of Commons Treasury and Civil Service Committee began a wide-ranging inquiry into the adequacy of the regulation of financial services. A year later, it decided to turn its searchlight on Lloyd’s. The Committee contained several critics, including Brian Sedgemore MP, who had been vocifer-ous in his opposition to tax breaks for Lloyd’s members in 1991. The ever-active LNAWP made a 23-page submission. The Committee also took evidence from the Names Defence Association, the ALM, several experts, DTI officials and the Lloyd’s leadership. Much of the evidence gave an impression that self-regulation at Lloyd’s had failed.

The Committee questioned Lloyd’s leaders aggressively. It found a willing-ness to acknowledge past errors – Rowland denounced the ‘incompetence’ of the market, stressing how different the system now was. Lloyd’s argued that the LRB was now as good as an external regulator could be, and possibly better. It comprised most of the elected external members of Council, plus all of the appointed members. This was augmented by senior officials with regulatory and legal responsibilities. Several carefully chosen practitioners helped keep the board abreast of market practices, but were too small a minority to predominate or prevent the board from investigating any issue. All this was unlike the past, when the Council had largely delegated market supervision to the Committee of Lloyd’s – comprising practitioners only.

The MPs on the House of Commons Treasury and Civil Service Committee disapproved of the lack of E&O insurance for agents at Lloyd’s and the will-ingness of regulators to tolerate this. They were impressed by Names’ claims of past concealment. The questioning was at its most aggressive when Diane Abbott attacked Sir Alan Hardcastle, the LRB Chairman. She described him as a nice man with a distinguished record in accountancy in public services, but ‘as external regulators go’, she said, ‘you are a pretty sad case’, She had noticed that contentious questions always brought Mr Rowland ‘straining at the leash to answer for you; in some cases he jumps in straight away. I have never seen a regulator come before this committee whose strings are so obvi-ously being pulled by the organisation he purports to regulate’. She continued: ‘as an external regulator, the saddest thing about you is that you are totally incurious ... you have no curiosity whatsoever about anything which happened before you came’. Sir Alan protested that this was not the case, but the impres-sion lingered.

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Abbott told the group of Lloyd’s agents who testified that they looked tre-mendously respectable and very pious. They spoke of the bad press, lack of training and the benefit of hindsight. Missing, she felt, was a public perception that there were some crooks and ‘there is something systemic about the sys-tem of regulation at Lloyd’s which allowed that crookery to flourish’. Stockwell gave the Committee a brash and polished performance about all that had gone wrong. Many of his criticisms had substance. His central thesis appeared to be that the liquidation of Lloyd’s would be a better solution for Names. Rowland said he could not imagine that any responsible liquidator would not seek to ensure that policyholders were paid. This would make life no easier for Names who had liabilities; in fact, it would be worse.

The Committee questioned Jonathan Spencer, the senior DTI official, aggressively, accusing the Department of complacency and complicity with Lloyd’s. Spencer gave a robust explanation of government policy. Sanctioned by Heseltine, he said that the DTI’s role was to protect the policyholder, not the Names: responsibility for protecting Names’ interests lay with the Council of Lloyd’s. The DTI’s role was spelled out in a memorandum: regulation and sponsorship. The Lloyd’s Act had proved sufficiently flexible to accommodate big changes in the way that Lloyd’s was organised: the LRB now provided a substantial degree of independence for the regulatory functions. In the light of this, ministers thought that the current priority was for Lloyd’s to implement the reforms proposed by the task force and the business plan. It was doubtful whether changes in the statutory arrangements would make sufficient differ-ence to justify their implementation. Lloyd’s should devote its energies to issues of substance on both the regulatory and commercial fronts for the benefits of all parties.

Spencer defended this position against some very robust and sceptical questioning. He explained that LMX was not confined to Lloyd’s. He cited the Victory Insurance Company, which had been acquired for £120 million in 1990; it subsequently required £280 million of external support to write off its LMX business. Richard Hobbs described the DTI’s regulation as ‘a light touch regime’; Spencer said it was designed primarily to protect policyholders, not to protect capital.

Some MPs became increasingly frustrated by the DTI’s testimony. Sedgemore asked whether Spencer could see the Committee’s problem. It had received a lot of evidence about what the asbestos working party knew in 1982. It appeared that the DTI and Sir Alan Hardcastle both wanted to forget it and turn their attention to the future. Spencer was aware of the allegations, but explained that he had ‘no locus’. Sedgemore found his attitude strange. Spencer said he would rather not act as a postbox. It would be better for John Donner, a

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Lloyd’s members’ agent, or others to refer these matters to those competent to investigate them. Diane Abbott told Spencer that the real reason the DTI was keen on self-regulation was that it was desperate not to be stuck with it: it was a can of worms.

Lloyd’s and the DTI were pressed hard on the former’s solvency. Both were able to say that, despite the pressures of large claims coming from the US, Lloyd’s was better reserved than most of its company competitors, especially American insurance companies, to meet these challenges. Spencer declined to speculate on Stockwell’s predictions that it would shortly become insolvent. He was very supportive of the ‘groundbreaking’ work being done by the Equitas team to get a better fix on the ultimate reserves that were needed. He was questioned closely on the scope for discounting the reserves and defended the principle of dis-counting, ‘provided it is properly done’. He spoke with authority about the atti-tudes and practices of many other regimes in America and Europe, and about developments to improve solvency standards.

Spencer explained that the DTI would need to take a view on the adequacy or otherwise of the reserves proposed and the capital required by Equitas. He thought that the framework of legislation provided by the Lloyd’s Act and the Insurance Companies Act and their interactions could be looked at again in three to four years’ time. At that stage, the composition of the Lloyd’s market might have changed extensively towards a more corporate market. It would be best to avoid the distractions of this now.

The Treasury and Civil Service Committee’s report was issued in May 1995.21 It supported the LNAWP’s view that the relationship between the DTI and Lloyd’s was too close, saying: ‘The willingness of the DTI to defend the apparently indefensible at Lloyd’s in the last year has been remarkable.’ It observed that the DTI had no interest in the declaration of insolvency of Lloyd’s, since it could then face the prospect of regulating each insolvent Name indi-vidually. It thought that Lloyd’s had failed in its regulatory obligations towards members in the past, citing Rowland’s own ‘equivocal defence’ of past actions and saying: ‘An efficient regulator, even if it did not have detailed knowledge of the scale of the losses arising from [old liabilities], should have warned potential investors in Lloyd’s of the existence of specific risks. This did not happen and some Names ended up paying for losses, the existence of which, if not the scale, was apparent to some ... before the Names joined.’

In his testimony, Middleton had disputed this interpretation of events and had likened the emergence of the asbestos problem to his own gradual appre-ciation of the adverse effects of damage to the ozone layer on the climate. The Committee rounded on this argument, saying that it was fundamentally flawed. It was ‘facile to compare the layman’s assessment of climatological phenomena

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with the underwriters’ assessment of risks. The latter were professionals and the information had been available at least since the 1930s. Furthermore, insiders at Lloyd’s took the problem of asbestos related losses seriously. Third, the lack of knowledge over the scale of long tail losses does not absolve an efficient regula-tor from ensuring the disclosure of the existence of such risks’.

The report also concluded that the admission by Lloyd’s of many new members – whom Rowland agreed should never have been members – was a signal failure of Lloyd’s to regulate itself. Middleton’s argument that ‘I do not believe in the theory that a lot of unwilling people were dragged kicking and screaming into Lloyd’s’ was described as trivialising the argument. Few Names would make that claim; rather, they were given inadequate informa-tion. The Committee was also critical of Names who had been happy to make profits without asking questions. It was only when the losses occurred that they started to take an interest. However, this did not absolve the Lloyd’s authorities of their responsibilities.

The Committee felt that a great deal of evidence had been presented that indicated ‘a disturbingly low quality of professionalism’ among Lloyd’s agents and underwriters, and had contributed directly to recent losses. Again, it cited Rowland’s own description of the LMX spiral as ‘a grossly exaggerated use of a mechanism which has existed for a very long time. It grew out of control in the second half of the 1980s’. The Walker report (see Chapter 3) was also cited. More rigorous regulation might have prevented the abuses of the LMX spiral developing in the extreme way that it did. It cited the LNAWP’s remark that ‘Lloyd’s suffers with a problem not of self-regulation but of insider regulation’. The Committee was convinced that if the interests of the market and regula-tory boards were to clash, it was still likely that the LMB would prevail. It was unimpressed by Rowland’s argument that corporate capital would exert more discipline on the market, saying it was ‘rather indelicate’ for him to claim credit for the introduction of corporate capital ‘when the main impetus to such a move was the biggest crisis in the history of the Lloyd’s market, which left thousands of individuals financially ruined’. Equitas was described as a brave and ambi-tious project.

While concluding that regulation of Lloyd’s needed to be more independ-ent, the Committee wrestled with the best way of achieving this. One would be to make changes in the Lloyd’s Act, but this seemed unlikely to achieve much. The second was to bring Lloyd’s within the scope of the Financial Services Act. A third possibility was to create a new independent regulator with responsibility for the whole Lloyd’s market. Logically, it should be answerable to the Treasury, in common with the rest of the financial services industry. The Committee concluded that despite the improvements that had been made, the system of

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self-regulation at Lloyd’s ‘is fundamentally and irretrievably tarnished by past problems’ and that ‘the loss of confidence in regulation cannot be restored within the current regulatory system’. It recommended legislation to transfer responsi-bility for the regulation of Lloyd’s to an independent body. It also thought that the lack of E&O insurance should be addressed as a matter of priority; regis-tration should be extended to cover agents’ employees below board level; there should be more external non-executive directors on the boards of managing and members’ agencies; and a wider investigation into Lloyd’s was needed.

Officials at the time felt that little purpose had been served by the exercise. However, the report was probably influential in the Labour government’s deci-sion, when establishing the Financial Services Authority, to place the respon-sibility for the regulation of Lloyd’s within it. This happened a few years later following a change of political leadership in Britain.

When Sir Alan Hardcastle’s performance was questioned at a press confer-ence later, Rowland refuted criticism of him, saying: ‘There is a truth about the Society and its governance which everybody who comes into it has to under-stand. It is that however immaculate their reputation, however wise they are, they will, within a short period of weeks or months, be regarded as just about as useless as everybody else that ever sat on the Council of Lloyd’s.’ His job as Chairman was to choose the very best people as guardians. He thought the qual-ity of people ‘quite extraordinarily good’. Their devotion and work intensity was ‘absolutely phenomenal’ and the quality of their work was remarkable. With his distinguished career, Rowland thought Lloyd’s ‘quite extraordinarily lucky to be able to entice’ someone like Hardcastle. He did not regard ‘bludgeoning by a select committee as being any sort of yardstick of his performance’.

COURT DECISIONSIn January 1995, Mr Justice Phillips made several judgments relating to E&O insurance coverage. Significantly, he re-affirmed that available cover was to be applied in the order in which judgments were made. This was known as the ‘first past the post’ principle and had major consequences for action groups whose court hearings were later. No matter how large an award might be made, agents’ E&O cover might already have been used up by earlier awards. An order for an interim payment of £210 million to the Gooda Walker Names was made in February 1995, a decision that was appealed. Several action groups, form-ing the long-tail Names action group, disputed the ‘first past the post’ ruling, which they said was unfair. They argued that any monies should be shared between all Names with claims against their agents on a more equitable basis. Mr Justice Phillips extended the deadline for payment of the interim award

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until 10 March. His decision on ‘first past the post’ was upheld by the Court of Appeal in May.

In February, the Lloyd’s leadership changed its mind again. Two months earlier, they had postponed any amendment to the PTDs while a further attempt at a negotiated settlement of outstanding legal disputes was explored. They now decided to press ahead: circumstances had changed. Rowland wrote to all members explaining the change of heart. The amendment would ensure that litigation recoveries would be used to meet members’ obligations. The Council still believed that a settlement offered the best chance of a fair resolution of the disputes; it would work to achieve this. But Rowland noted recent judgments, foreseeing imminent interim payments in the Gooda Walker case. Unless the PTDs were amended promptly, there was a serious risk that money would flow elsewhere. He said that this would result in unfairness to the great majority of members who had met their losses.

In early March, the Secretary of State for Trade and Industry, Michael Heseltine, announced that he had approved the amendments to the PTDs. In doing so, he had considered the request carefully in accordance with his respon-sibilities under the Insurance Companies Act 1982. The proposed amendments maintained and enhanced the protection offered to policyholders and there-fore met the requirements for approval. Rowland welcomed this, saying Lloyd’s would continue to work towards achieving a settlement of disputes. The PTD amendments would be tested in court. It was not part of the Secretary of State’s function to adjudicate between the Council and members of Lloyd’s, as that was governed by private law. Heseltine also noted that the Clementson case was due to be heard in the Commercial Court in October. His legal advice was that the European arguments were unlikely to succeed, but Lloyd’s had undertaken not to make recoveries from Names without his consent until this issue had been settled in court.

In March, Mr Justice Phillips ruled on the Feltrim22 case, which involved 1,640 Names claiming over £600 million. He found the reinsurance pro-grammes for their syndicates to be unsatisfactory and ruled that Patrick Fagan, the underwriter of all but one of the syndicates, ‘had failed to take the steps that a competent underwriter should have taken to ensure that his Names were not exposed to greater losses that they could reasonably be expected to bear’. The supervision and monitoring of Fagan’s underwriting by the Feltrim board was inadequate. An assessment hearing would quantify the damages.

A judgment23 handed down in late March 1995 held that Gooda Walker Names could only recover losses which they had already paid, with claims for future losses being reviewed at a later stage. Solicitors for the E&O underwriters

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said the date for this would be very relevant to other action groups competing for the limited E&O pot. The GWAG had reduced its claim from £504 million to £459 million prior to the hearing. The judge ruled in favour of the E&O insurers on a number of technical points. The Merrett Names Association case, which contested the wrongful closure of certain years of account, began in the High Court in early April. The Names alleged negligence against the underwriter, the agency, other Lloyd’s agencies and the syndicate auditors, Ernst & Whinney.

Lloyd’s announced measures to sharpen the debt recovery process by putting pressure on agents to collect money from Names. Rowland said the steps would strengthen the ability of Lloyd’s to collect money owed, recognising the legiti-mate concerns of the majority of members who had paid their debts in full and who expected others to do the same. Holden’s department was holding discus-sions with almost 3,000 Names who wanted to conclude their underwriting. A total of 2,300 hardship cases were under review, with 735 agreements completed. Holden stressed that 23,000 members wanted to settle their debts. The intention was to create a market-wide initiative based on individual writs, which would be issued and managed as one. This would help to contain the legal costs of pursuing litigation for unpaid cash calls. All members’ and managing agents were asked to take all reasonable steps to ensure the collection of outstanding cash calls from members who were not paying. Failure to comply could result in the agent being found ‘not fit and proper’ to carry on business in the Lloyd’s market.

The pressures on Names intensified. One pointed out that counselling was widely used to help people confronting stressful situations. As he put it, ‘you don’t have to be facing imminent bankruptcy to suffer sleepless nights, feelings of overwhelming panic and helplessness. A lot of us are ordinary people who have no way of knowing how to cope with what seems to be an endless situ-ation. How do we face the family, our friends, what do we say to them? How do we cope with the feelings of guilt, that somehow it must be our fault? We feel humiliated and inadequate and don’t know where to turn. Coping with finances is one thing; coping with yourself is something else and probably more important’. He suggested a counselling service for members, somewhere to talk through worries to a sympathetic ear and get sensible advice. Gillian Wilson of the Lloyd’s helpline replied, saying that Lloyd’s had encouraged, and in some cases supported, independent initiatives to provide this. Together with the hel-pline itself, it was the most effective way to succour the membership. Members were urged to call her for contacts.

An attempt by more than 600 US Names to bring legal proceedings against Lloyd’s in the US courts was rejected by Judge Irma Gonzalez of the US District Court, Southern District of California. The members, backed by the American Names Association (ANA), had sought to show that Lloyd’s had acted fraudulently

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in inducing them to join the Society, breaching US securities laws and other statutes. The court found the evidence produced insufficient to allow the case to proceed in the US courts. The judge upheld the validity of the undertaking signed by all members that all disputes with the Society or agents must be heard in England. He ruled that the members had ‘merely recycled’ arguments which had previously been rejected by a number of American courts. So far, the line was being held. But other problems in the US soon materialised.

Non-litigating members of the Outhwaite Syndicate excluded from the out-of-court settlement made in 1992 argued they should not be time-barred. Overturning a judgment by the Court of Appeal, the House of Lords24 ruled that the six-year statute of limitations could be extended in circumstances where rel-evant information had been deliberately concealed. It ruled that the statute of limitations came into effect at the time at which the concealment ought reason-ably to have been discovered. This left the Outhwaite members still having to prove that negligence and concealment were perpetrated by their agents.

The Writs Response Group (WRG) issued a writ against Lloyd’s on behalf of more than 2,000 members, seeking damages for breach of Article 85 of the Treaty of the European Union, formerly known as the Treaty of Rome. It argued that various Lloyd’s byelaws had contravened the article. These issues had already been raised in the Clementson case in the context of Lloyd’s claims for recovery of central fund monies paid out on Clementson’s behalf. This case was due to be heard in October.

Picture 9 The Law Courts, London and Sir Thomas Bingham, Master of the Rolls

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In May 1995, the Court of Appeal25 upheld the ‘first past the post’ ruling. Sir Thomas Bingham, the Master of the Rolls, in giving the decision of the court, said ‘there is obvious hardship for plaintiff Names if, having obtained the favourable judgments and very great expense, they are denied the fruits of their judgment, perhaps facing bankruptcy’. It was clear that some senior judges would prefer to see a comprehensive settlement, but they were unable to impose one.

Decisions by US courts had altered the course of the history of Lloyd’s and had imposed huge losses on many Lloyd’s Names. The decisions of the English courts would help determine on whom the losses would fall. Others, including British parliamentarians, sought to influence the course of events. In Brussels, Names were active with complaints to the European Commission; in Strasbourg, they lobbied Members of the European Parliament (MEPs). In the US, groups of Names had made determined efforts to get released from their personal lia-bility from losses; ironically, these losses were largely the consequence of US court decisions about liability. So far, US Names had been rebuffed by the legal defence that all disputes were to be resolved in England under English law. They tried other avenues. They met congressmen, they complained to the SEC and they also tried US state securities regulators. In a few states, they found a response. This became a potentially deal-breaking saga, which is described in a later chapter.

Don’t be afraid to take a big step when one is indicated. You can’t cross a chasm in two small steps.

David Lloyd George

6

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Optimistic talk of settling disputes was not matched by the financial facts. How could Lloyd’s find enough money to make an offer that stood a chance

of acceptance? Without a deal, could the Names’ awards in court be kept within the system? Would Equitas be able to deliver an affordable exit route? On both sides of the Atlantic, the external regulators of Lloyd’s were getting worried about its future.

ROXBURGH TO THE RESCUEIn January 1995, Rowland and Middleton convened a two-day ‘off-site’ meeting in Kingston. The idea was to take stock of progress in an atmosphere like that of the task force, away from the day-to-day office pressures. The Chairman, his deputies, the CEO, several members of the LMB and Corporation directors were present. Charles Roxburgh, the McKinsey partner who had played a key role in the task force and the production of the first Lloyd’s business plan, had been invited. At the time he was based in Washington, where his wife worked in the British Embassy. Those attending this meeting brought with them a mixed bag of concerns. There had been some real achievements in terms of implementing the business plan – notably the successful introduction of new corporate members for 1994, which had been repeated, on a reduced scale, for 1995. The Equitas project had made some progress, but, as already noted, it was running into problems. It looked as though the total amount of reserves needed to cover the 1985 and prior liabilities might be unaffordable. A separate review of this project would be needed soon.

There was a sense of frustration among those present: market optimism about recent profitable trading was obscuring a proper appreciation of the crisis still facing Lloyd’s. The hidden trains described in Chapter 2 were still bearing down on the membership with no loss of momentum. The energies of even the best underwrit-ers seemed to be devoted more to competing among themselves than to helping to solve the fundamental problems. There was a sense that only a few were doing the thinking and contributing to boards and committees. How could more people feel involved and share ownership of central decisions? Some ideas were canvassed about how to secure increased recognition of the value of the Lloyd’s underwriting franchise – in which everyone had a stake. There was also a view that the time had come for a more directive central approach to long-standing problems, like common IT systems. Contemplating these problems, the group agreed to advance the idea of an underwriters’ forum which might draw more people into the construction of the next business plan. This would need to chart a way ahead for the market to become more competitive and better able to find new sources of profitable business.

These fundamental anxieties provided some of the background to a discus-sion around two crucial issues: the solvency outlook and the chance of securing

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a settlement. Bob Hewes had recently taken over as Director, Finance from Stephen Hall, who had wrestled with an increasingly difficult job on an interim basis for 18 months. Hiscox was frustrated that he did not have all the numbers needed to project forward the solvency position of Lloyd’s. There was also gen-eral concern about the Equitas project; it was decided to review this fully in the following week. The general tone of the meeting became short tempered.

BREAKING THE MOULDOn Friday afternoon, Middleton stood up to discuss his approach to a new set-tlement. It was nearly 12 months since the failure of the first offer. He had no notes, no slides – nothing to indicate any preparation. He had been in discussion with action group leaders, notably their newly-established leader Deeny and he knew much more about their attitudes than anyone else in the room. Deeny’s hand had been strengthened by his massive legal victory. Names had just won a key legal decision in the Clementson and Mason cases, meaning it could take at least another year before Lloyd’s could resume debt recovery proceedings. Others still regarded action group leaders as traitors.

After a few minutes, Middleton dropped a bombshell. The only way that there could be a settlement was to cap Names’ liabilities and write off some of the debts from people who were not willing to pay, as well as from those unable to pay. The two Deputy Chairmen, Hiscox and Stace, were outraged. For them, it was unthinkable to let ‘won’t pays’ off so lightly. After only a brief discussion, Middleton announced that he had a private engagement and left the gather-ing altogether. In his absence, he received much criticism that evening; gloom descended as the meeting finished earlier than planned on Saturday morning. The general view was that Middleton had become over-influenced by the action group leaders; in short, he had gone native.

At a separate review soon afterwards, an expanded role for Equitas was considered, beyond the remit of reinsuring all Lloyd’s liabilities up to 1985. The 1986–92 period also contained many still-open syndicates, as well as many that were well-reserved. Including these years as well could achieve several things at once. First, it could bring a larger amount of reserves to add to the total assets. This would provide a bigger cushion against the inherent uncertainty in such an enterprise. Crucially, it could also allow more of the future liabilities of Lloyd’s – many of which would not arise for many years – to be discounted to their present value. Lloyd’s’ own rules did not permit discounting for syndicates’ liabilities. Once discounted, the cost of future claims just might enter the realm of the affordable. A bigger role for Equitas would also extend the massive economies to be reaped by the central management of claims. The uncertainty created about

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Equitas’ long-term ability to pay, and its expected hard-nosed attitude, would give it a strong negotiating position with claimants.

In mid-February, the Kingston group met again, this time around the highly polished mahogany table in the special dining room on the eleventh floor at Lloyd’s; by now the fake pillars had been ejected. This was the first of many ‘core group’ meetings held there. Today, a silver platter signed by most of the key people is on display in this room. The meeting reviewed progress on various pieces of work under way, including Equitas. Roxburgh had put together a short paper for the meeting which represented the first appearance of some of the ideas that would later become central to the plan that followed. It took Middleton’s revolutionary idea a stage further and spoke of a scheme to give Names vouchers that they could use for the payment of their debts and Equitas premiums. They would be funded by future revenue streams from ‘say, a premium fee’. Roxburgh said later that the idea was modelled on the Russian privatisation scheme, whereby the government gave citizens vouchers to buy shares in privatised companies. The paper implied a scale of voucher issuance in the hundreds of millions and suggested a range for the new settlement offer of around £1.5–1.8 billion. In later rounds of thinking, these vouchers reappeared as ‘debt credits’, amounts by which Names’ debts could be forgiven. This paper also contained the first appearance of ‘central fund 2’, a new central fund with no obligations for past liabilities.

The paper described two timetable options: a fast-track option with Equitas reinsuring spiral syndicates in mid-1995, with the rest to come at the end of 1996; and a slow track option with all quantification finished by mid-1996, with detailed numbers held back from Names until the work was completed. These options reflected the challenge of reconciling Names’ thirst for information and the lack of reliable data. Names’ leaders were becoming impatient and were pressing Middleton for a deal, including a cap, during 1995.

MORE RECRUITSMeanwhile, Rowland and Middleton had decided to strengthen the central in-house team. A new post of Head of Strategy was created, leading to the appoint-ment of Nick Prettejohn, a former President of the Oxford Union, who had been working in venture capital. During the recruitment process, another impressive character, Ron Sandler, showed up. As an ex-CEO, he was over-qualified for the strategy job, but seemed to his two interviewers – one of whom was the author – too obviously talented to miss. Sandler had wide experience as a senior man-agement consultant with the Boston Consulting Group, had obvious abilities and presence, and had run a money market operation. Middleton met him and

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wasted little time in hiring him as Director, Special Projects. He joined in March 1995.

In February 1995, Rowland called Roxburgh in Washington DC to ask if he could come to London for about four or five weeks. He and Middleton thought they needed help in pulling together the various strands of work that had been set in motion. He struck lucky, as Roxburgh had just finished two studies for New York clients and was about to start two new ones. He was able to extricate himself from one of these and free up enough time to come to London from the end of February. He assured his US colleagues that it would only be for a few weeks. Roxburgh’s routine was to cross the Atlantic on Sunday night, the infamous ‘red-eye’ flight. Despite the five-hour time shift, he came straight to an office on the twelfth floor of Lloyd’s, opened his IBM ThinkPad (an early laptop) and got down to work, often until late in the evening. On Friday after-noon, he left a little earlier than his colleagues, his only concession to living 3,000 miles from Lloyd’s. In the event, the assignment lasted for 18 months, with weekly transatlantic commuting for the first three months.

Roxburgh did not gain a real sense of crisis at the Kingston meeting in January. Concern had obviously risen during the following month; by early March, the outlook was much bleaker. He was struck then by how awful the picture looked. The scale of the financial problems was now clearer. Joe Bradley’s CSU team were by now producing their first spreadsheets showing the scale of debt that had built up against non-paying Names. When added to the Centrewrite estimates of the losses still to come, Roxburgh saw the results as ‘truly shocking’.

The litigation problems were now also clearer. Names were winning their early cases against agents. There was rising concern on the twelfth floor about the efficacy of the PTD amendments, as they had still to be tested in court, and the ability of Lloyd’s to count on the ‘E&O asset’ in the solvency numbers. At that stage, the legal opinion was that there was a better than 50/50 chance of winning the PTD case. But if this estimate fell below 50 per cent, it would be question-able for Lloyd’s to assume that action group winnings would be available to help meet Names’ losses. They could leak from the system, pushing Lloyd’s towards insolvency. More pressures were added by the Parliamentary Select Committee, which gave airtime to Christopher Stockwell and other critics, and proved a bruising experience for the Lloyd’s witnesses.

THE VIEW FROM NEW YORKA fresh source of pressure emerged at around this time. In 1994, Vincent ‘Vinny’ Laurenzano was Assistant Deputy Superintendent and Chief Examiner at the

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NYID. He recalls that as the chief regulator of Lloyd’s in the US, he was becom-ing increasingly concerned about it: ‘there was a lot of publicity and there were huge losses, and Names were resisting paying’.1 He wanted to make sure ‘I knew what was going on in case things really got bad. I commissioned the guys to go out there and examine the trust funds’.

Shortly before Christmas, the NYID had met Bob Hewes, who was in transition from his role as Director, Regulation to Director, Finance, and Peter Middleton. The NYID had not seemed to them unduly concerned at that stage; the examiners’ report was not yet finalised. LeBoeuf’s senior partner, Don Greene, said later that he had been warning for some time that the NYID was pressing for Lloyd’s to hold funds in the US that matched its gross US liabili-ties. These included all the asbestos and pollution claims that might arise in the future, estimates of which had been growing steadily.2 The practice of Lloyd’s had been to hold funds in the US that were sufficient to cover its net dollar liabilities – after allowing for amounts recoverable from reinsurance. Much of its dollar business was not located in the US.

In the early months of 1995, the NYID became much more concerned. The 1993 business plan had encouraged syndicates not to call cash until it was needed. This contributed towards an erosion of dollar solvency: growing esti-mates of the reserves needed were not matched by dollar assets. Bob Hewes recalled afterwards: ‘The more we discovered, the more we realised they were saying some damaging things. We felt they were mixing several things and tak-ing the worst approach on each.’

The NYID examiners had focused more clearly than before on the fact that the LATF did not correspond to risks based in the US: it was a trust arrange-ment first created in 1939 to give assurance to US policyholders that payment of claims would be uninterrupted, notwithstanding the imposition of exchange controls in the run-up to the Second World War. In the early 1990s, it still reflected its historic origins; Citibank acted as the trustees. The examiners had several concerns: the US business was not segregated; each Names’ US business was not calculated; the tests used to calculate the amount of reserves needed were less stringent than those used by the DTI in Britain to measure overall solvency; the liabilities were reported net of ceded reinsurance, whereas a recent NYID regulation required adequate funds to be held gross of any reinsurance. The examiners’ various estimates of these factors meant that they calculated the total LATF deficiency as over $18 billion.

The scale of this deficiency in the eyes of a crucial regulator was huge. If it could not be resolved, the NYID had the power – and possibly the duty – to stop Lloyd’s from trading in New York State, thereby starting a domino effect else-where. This would kill the market commercially, even if all the other problems

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could be solved. Laurenzano said later: ‘the result was a revelation to me, and probably to most people in the US, that the trust account wasn’t really available for policyholders’.3 There was, as he saw it, ‘a huge, tremendous shortfall. It was a disappointment the way they calculated the liabilities in the trust’. He realised that the publication of the report would probably precipitate a crisis. His first instinct was to work with Lloyd’s to get a solution. New York also felt exposed because other states had looked to it to lead on Lloyd’s issues, but were each responsible for insurance activities in their own state.

When George Pataki was elected as the Republican Governor of New York State, he made many fresh appointments. He knew exactly who he wanted to put in charge of the NYID. He had been on the receiving end of many com-plaints from insurers about its slow workings. In the US, prior approval is often needed from insurance regulators for policy forms and rates. For several years, Ed Muhl, a senior insurance company executive, had been asking him, if elected, to put someone in as superintendent who could help speed up the proc-ess. Muhl says ‘it was excruciating; if you wanted to compete against someone you had to get a form approved’. He had given Pataki an example ‘where we took a form approved by the Department for another firm, changed [only] the name and submitted it’.4 Two years had passed with repeated attempts to get the form approved.

Once elected, Pataki rang Muhl and said: ‘I need your help. I don’t know anyone who has complained more about [the] NYID than you; I’m going to give you a chance to fix it.’ Muhl said no. A few years previously, he had proved a popular and capable insurance commissioner for the State of Maryland. His fellow regulators had elected him President of the NAIC. Taking the job as Superintendent for the NYID would involve a big pay cut and an inconvenient move from Philadelphia, where his two sons were in college and high school. But Pataki would not take no for an answer. The third time he called, he said: ‘I’m submitting your name so you’ve got to help me.’ Muhl finally agreed, on the basis that he would do the job for a limited period of time and be given a free hand. Pataki said that this was guaranteed.

On the first day he took up the job, Muhl called the senior staff together. Employing 1,850 staff, the NYID was about six times the size of his former insurance department for Maryland. Most of them had been there for 20 years or more. They were ‘pretty much set in their ways, but good qualified regulators; they knew their stuff ’. He explained that there were going to be some changes in the way the Department was run. Instead of the old ‘desk drawer rules’ whereby the Department would seek to extract commitment letters in return for form or rate approvals, they would only regulate where they had authority to do so. At the end of his speech, he asked if there was anything significant he needed to

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know about. Was there anything important that needed to be signed? He says: ‘I should never have asked the question because a young lady from the legal department raised her hands, and said “you probably ought to know about this, Superintendent”. She handed me a report on the Lloyd’s of London US trust fund, saying “Lloyd’s is insolvent. We need to de-accredit Lloyd’s in the US as a surplus lines writer and as an accredited reinsurer”. There was probably a very loud sound when my jaw dropped and hit the desk.’

Muhl was dumbfounded. The Department explained that the issue had been around for some time; he deduced that the previous administration had decided to leave this hot potato to the next incumbent: ‘I sat there in absolute disbelief, flipping through the pages, and at the end of this legal document, if I signed it, it would have de-accredited Lloyd’s in the US. I asked for a recom-mendation and was told, “well Superintendent, you really have to sign it”.’ A few months later, when the matter had been made public, he had a conversation with his two immediate predecessors and asked what they would have done. He says he was shocked that both told him they would have signed the document. In fact, the previous administration might not have taken such drastic action. When the draft report on Lloyd’s became available, the previous superintendent had become a ‘lame duck’ in the sense that he was about to lose office. It was arguably reasonable for him to leave this issue to the next administration.

Muhl took a few hours to consider this with his close inner circle. He called the Governor, who asked him how his first day was going. He explained that he had a major problem on his hands, but that he would deal with it. He asked his staff to do some quick research on the impact on US insurance companies if Lloyd’s were to go out of business. They reconvened towards the end of the day, with Muhl saying it might be necessary to spend the night in the office. He was told that no less than 305 US insurance companies could be made insolvent at a stroke if the plug was pulled on Lloyd’s. Probably every US airport would shut down; Long Island Rail Road and the New York Port Authority would be in trouble. He swore a lot and demanded ideas. Amid the ensuing debate, the very same young lady that had invited him to sign the report suggested that all that had happened was now in the past. To buy some time, he could force Lloyd’s to create two new trust funds; everything it underwrote in future could be writ-ten on new terms, with 100 per cent funding to support US liabilities, held in the US. Muhl says he got up and walked over to congratulate her. He told the Department to start developing this idea into a more solid proposal that could be put to Lloyd’s.

After this, Muhl called Don Greene at LeBoeuf and introduced himself. He asked him to arrange for the Chairman of Lloyd’s to make an immediate visit to New York. Rowland came quickly, via Concorde, accompanied by both Greene

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and Peter Lane. Lane started to defend Lloyd’s vigorously. Muhl says that during this ‘impassioned speech’, he quietly asked Rowland if he would like him to sign the order now or later. Lane was cut short and agreement in principle followed swiftly. Muhl sent a team to London to look more closely at ‘how deep the hole really was’ and ‘borrowed some folks from California and Illinois and other states to go too’. The NYID had to exert its domestic authority. Some of the states felt badly let down by New York, alleging that it had fallen asleep on the job. But Muhl’s personal credibility remained high: the situation had developed before his arrival and he was a past President of the NAIC. Few others in the US regulatory world had his level of experience and personal standing among his regulatory colleagues.

Muhl had several meetings with Rowland and established a level of per-sonal trust. He explained to the author5 that the key moment in his evaluation of Rowland came when he asked privately whether his ambitious hopes for a Lloyd’s reconstruction, including a deal with the litigating Names and the crea-tion of Equitas, were all going to work. ‘I don’t know’ said Rowland. From that moment onwards, Muhl felt he was dealing with an honest man.

Despite Muhl’s personal standing, huge efforts were needed to placate regu-lators in other US states. Some even wanted to move the Lloyd’s trust funds from New York to their own state. LeBoeuf staff and Peter Lane lobbied intensively at regular meetings of the NAIC, with a focus on key states like Texas, Louisiana, California and Illinois, where Lloyd’s was a key player. These efforts were in the face of intense criticism of Lloyd’s by competitors, led by the Reinsurance Association of America (RAA) and by disaffected Lloyd’s Names who worked in the industry. LeBoeuf felt that many Lloyd’s people did not understand how fragile the trading rights of Lloyd’s were in the US. One commented that Lloyd’s ‘was within a hair’s width, multiple times, of being shut down’.

MOUNTING CONCERNFurther strain was placed on the position of Lloyd’s in the US by some claimants seeking to persuade US courts to require it to put up ‘pre-answer bonds’ – advance funds that would ensure that any court award would get paid. These seemed a very serious threat as Lloyd’s did not have the liquidity that would allow the mul-tiple posting of such bonds. Around this time, one of Freshfields’ leading corpo-rate partners, Barry O’Brien, was becoming sufficiently heavily involved that he too was given an office on the twelfth floor. Much of the focus of Freshfields was on insolvency issues, the duties of the Council, the alternatives, the going con-cern assumption and the consequences of a Lloyd’s failure. A clear definition of the alternative would be a crucial building block in the future rescue plan.

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Early March was a depressing period. One threat after another bubbled up. A lot of people lost confidence and morale began to plummet. As the prob-lems worsened, no clear answer was apparent. It took a strong pep talk from Rowland one morning to reverse the rising pessimism. The collapse of Barings Bank, brought down by a single rogue trader, was a reminder that long-estab-lished institutions could fail spectacularly. Around this time, some of the exter-nal advisers began to doubt privately the ability of Lloyd’s to survive. Rosalind Gilmour, recently appointed Director, Regulation, appeared to lose confidence; among colleagues, she was quite openly sceptical about the chances of Lloyd’s of making it. She had not intended to join a sinking ship. Her replacement was announced in October.

There was mounting concern about the annual report and accounts, due to be signed in April, which required a public and audited statement that Lloyd’s was still a ‘going concern’. The DTI had already seen a dozen London market failures. It suggested that Lloyd’s retain a leading insolvency partner, who began looking at the liabilities of Lloyd’s and what might happen if it ceased to be a going concern. This raised more worries about the scale of the contingent liabil-ities of Lloyd’s. In April, the ground rules were explained to Council members. Their position was similar to that of a board of directors of a public company. They had to satisfy themselves that Lloyd’s remained a going concern. It was an offence for company directors to continue trading once a contrary view was formed. The only safe course was to assume that the same applied to Council members. A sombre mood descended as they contemplated these heavy respon-sibilities. All traces of complacency had evaporated.

THE CORE GROUP DEBATERowland formed an inner group to help devise a fresh plan and later to imple-ment it. This emerged gradually, described at first as the core group and later as the plan’s steering group. Membership fluctuated. By mid-March, it was still unclear whether there could be a fresh settlement offer. The team were toying with every possible change to the Equitas timetable, including slowing it down by up to 18 months or speeding it up and getting it all done in 1995. Middleton transmitted to others the urgency he was hearing from Deeny and others. No one knew the likely scale of the final Equitas numbers, the capital structure and domicile of which were still under debate.

The pressure of events precluded lengthy discussions. Rowland urged the group, particularly Middleton, ‘not to believe in fairy tales’ when it came to timetabling. The Council was due to meet on 5 April, preceded by an audit com-mittee meeting fixed for 29 March. In the circumstances of possible insolvency,

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it was essential to fully inform the audit committee before each Council meeting. This meeting of the audit committee was a key milestone. Bob Hewes presented the full story on the financial position: 1995 solvency still looked satisfactory, but looking ahead to 1996, there was only a slender margin and a serious risk that the central fund would be depleted. Middleton, Hewes and Roxburgh then outlined the other mounting threats, including the US situation. The option of filing under Section 304 of the Bankruptcy Code in the US was explained. This had been code-named ‘Granita’ after the smart Islington restaurant in which a group of advisers had first discussed it. The team then presented the audit com-mittee with the two front running options. The audit committee took it very well. Roxburgh described its Chairman, Sir Jeremy Morse, as a ‘rock of prag-matic good sense’. It urged the team to narrow down the options to a single plan as soon as possible. The Council meeting was just a week away.

Throughout Rowland’s chairmanship, especially during 1995 and 1996, the Council of Lloyd’s played an active role. In 1993, it was Morse, a ‘nominated’ member, who chaired a panel on preparatory work for the first attempt at a set-tlement. Freshfields warned that the use of Council powers, notably to compel reinsurance into Equitas, was very likely to be subject to a legal challenge. It would be necessary to show that it had used its discretion reasonably after due consideration of the alternatives. Names wrote to Council members frequently, strongly expressing their views on policy.

Rowland’s political instincts reinforced the legal advice: it was vital to secure consensus among Council members. Inevitably, this meant many long meetings at which issues were fully exposed and debated. Rowland believes this was a critical to finding the best available solution. The Council’s three-part constitution meant that elected representatives of Names, market representa-tives, and independent nominated members of stature and experience were all closely engaged. Sir Jeremy Morse was an authoritative voice. Having seen many crises in different contexts, he brought the widest perspective to the market’s problems. Anthony Isaacs, a lawyer, and later, Brian Pomeroy, an economist, brought a professional independence of view. Each played key roles.

SHAPING PLAN AOver the next 24 hours, Roxburgh turned the remaining options into ‘Plan A’. As it turned out, this was fairly close to the final R&R plan. With Middleton away on a trip to New Zealand, Rowland and his two deputies, Hiscox and Stace, took a series of big policy decisions:6

To go for a global settlement of all litigation. ●

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The headline figure of £2.8 billion – comprising £800 million of ●

E&O receipts and £2 billion of debt credits. It was not known for sure whether this was affordable, but the plan required a large number.The inclusion of all 1986–92 reserves, including closed years. This ●

was hugely controversial and would be hard to sell to the Lloyd’s market, but it was essential to secure the value of discounting the reserves on transfer to Equitas.The ‘triple close’ based on a move to annual accounting. This was ●

later changed to a ‘triple release’. It meant an early release of profits for 1993, 1994 and 1995 to help members pay their bills.A levy of £500 million – later reduced to £450 million to look smaller ●

than the 1992 levy. At this stage, the levy was not refundable; there was no agents’ contribution in Plan A.Central fund 2 (CF2), with initial cash of £100 million – the bare ●

minimum possible. The structure of CF2 with a cash layer and a callable layer was modelled on the central fund at the Illinois Insurance Exchange. Peter Demmerle at LeBoeuf had faxed details of this to Roxburgh, suggesting he might find the concept interesting.

Plan A also contained elements that did not survive to the final plan. It included a move to 100 per cent corporate capital with Names phased out by the end of 1997. After that, all underwriting would take place in permanent, fully paid cor-porate vehicles – the kinds of Lloyd’s insurance companies envisaged by some in the capital structure working party, mentioned earlier. Under this scenario, existing Names could only continue as shareholders. The plan also included a ‘temporary cessation of litigation’ as a ceasefire before a peace settlement with the action groups.

Plan A was circulated to the core group on Friday 31 March. Over the week-end, Hewes and the finance team ran the numbers to see if the plan could be made to work. With a £2 billion write-off and heroic assumptions about Equitas premiums and the value released by discounting the reserves, there was £300 million left. This was needed to buy out the obligations of Lloyd’s towards Lioncover, the existing reinsurance vehicle for PCW liabilities, and provide the cash for CF2. Lioncover was expected to need about another £200 million. Plan A soon began to look financially viable. The team also began testing the plan’s ‘political viability’ using a simple chart devised by Roxburgh showing for each constituency what they received and what they gave. This was a powerful frame-work for understanding whether the plan could win the necessary support from

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all constituencies and where persuasive effort would need to be applied. A ver-sion of it was included in the eventual R&R plan.7

As Heidi Hutter recalled it later,8 the incredibly intense period of spring 1995 leading to the creation of the R&R plan came out of grasping the fact that reinsuring 1985 and prior liabilities alone ‘couldn’t work’. It had to give way to a broader project, pulling together everything that needed to happen, formulated in an environment of ‘real doom and gloom’. Up to that point, the team had failed to grasp the interconnectivity of the issues and the solutions. As Hutter put it:

at the end of 1994 we hit the point where we actually had somewhat reasonable decent estimates on 1985 and prior. We thought we could bring it home, only to find out that the only way we could was by tak-ing virtually all the cash out of the Society, leaving nothing to pay the short-term claims on 1986 and forward. That’s where it really ‘hit us like a shot right between the eyes’ [that the original project could not be done without dealing with the later period]. And you weren’t going to solve the spiral claims without also resolving the litigation. And we weren’t going to resolve the litigation without coming to a settle-ment. And so that whole interconnectivity and simultaneity really only became apparent quite far into it – only at the time we defined R&R.9

There were still plenty of sceptics. Some of the lawyers doubted that Plan A could succeed in the face of the many external threats. Plan B also had to be developed. This was a contingency plan, effectively winding up Lloyd’s as it was, but hop-ing to preserve enough of a skeleton to start a new Lloyd’s. American Airlines had filed for bankruptcy protection in the US and kept flying, but such a move was unprecedented for an insurer. Rowland called a meeting with all the legal advisers present. He commented about the extraordinary cost of the meeting, as lawyers charged on a time basis. As Shearman and Sterling, a US law firm, espoused the proposal for filing under the US Bankruptcy Code, Don Greene of LeBoeuf, who had advised the last half-dozen Lloyd’s chairmen on all US mat-ters, leaned towards Rowland and whispered: ‘You will only do this over my dead body.’ Years later, Laurenzano told the author that if they had heard that Lloyd’s were even considering this option, they would have seized the New York-based trust funds immediately, setting in motion an end to US trading.

The Council meeting on 5 April 1995 was one of the more dramatic ses-sions during the whole R&R process. The historic Adam Room – with its ornate plasterwork, silk curtains, chandeliers and paintings of ancient sea battles – was packed. In addition to the Council itself and senior Corporation staff, Rowland

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had invited every adviser then working for Lloyd’s. Middleton, Hewes and Roxburgh did most of the presentation. Council members on the audit commit-tee already knew much of it, but for some others the scale of the accumulated problems came as a big surprise. Some were clearly shocked. The discussion focused on the fundamental question, as Cockell put it: ‘Are we bust?’ The answer to this was ‘no’, but without a radical plan being adopted now, Lloyd’s soon would be. The discussion gave Council members sufficient reassurance that they felt able to continue with the going concern assumption, mindful of the advice from the insolvency expert.

REFINEMENTSThere remained a mass of detail to fill in to make this a plan that would with-stand the scrutiny of the sceptical world of journalists, analysts and rating agen-cies. Ron Sandler had now become an active member of the team putting the plan together. He took the lead on the details of the settlement financials, work-ing closely with Middleton and Hewes. He also worked closely with Bradley, whose team were now developing the model to allocate debt credits and E&O monies to the various categories of Names. A big conceptual breakthrough came when Roxburgh and Sandler filled the whiteboard of his office with the ‘opening Equitas balance sheet’. They took the finance department’s analysis and recast it as a balance sheet with all the assets on the left and the liabilities on the right. The whiteboard analysis eventually became Chapter 4 of the final plan. A succession of senior people walked into this room and gazed at it in wonder, rather as one might stand before a shrine. Could it be true? There was a note at the top addressed to the office cleaners, in block letters, saying ‘PLEASE DON’T RUB OUT’.

It became clear that Lloyd’s could write off at least £2 billion provided that it could allocate the debt credits ‘efficiently’, i.e., to those Names who had the greatest outstanding debts as opposed to those who had suffered the great-est losses. This debate between efficiency and equity became central to delib-erations later. There looked to be some scope for increasing the write-off still further, but it was decided to hold this back as a reserve in case the offer had to be increased to gain acceptance. Some conservatism was also built into the assumption made about what was called ‘the Equitas premium’ – the extra amount needed to reinsure all the past liabilities of Lloyd’s and its members. The team assumed that an extra £1.9 billion would be needed. At a later stage, the estimate rose to this level before falling to around £1 billion as the numbers were improved and refined in early 1996. Looking back afterwards, Roxburgh noted that the impact of PSL had been left out of the analysis. Much of the

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creative thinking happened around the whiteboard mentioned above. Details and computing power came later.

There was a lot of pressure from Council members to drop the more radi-cal proposal to phase out unlimited Names and move to 100 per cent corporate capital. Rona Delves Broughton led the resistance, saying that Names would be unwilling to forgo the ability to offset losses against tax on future profits. By the next meeting on 25 April, this element of the plan had been watered down to a ‘transition’ to corporate capital. By the final May document, it had become a rather bland chapter entitled ‘increased role for’ corporate capital. Rowland decided that he could never carry the Names’ support for a plan that had only a shareholder role for them beyond 1997. Hiscox took a different view. The other big concession was to make the levy on members refundable, treating it as an offset against future contributions. Representatives of corporate capital pressed hard for this, wanting to maintain the value of their shares. They found allies among ongoing Names who wanted to minimise their costs.

Pressure also built up for a separate levy on agents. This too proved very controversial, but Rowland and Hiscox persuaded agents that a contribution based on their expected profit commission for the three good years had to be part of any package that would be seen as fair. On 3 May, the Council tied up many of the remaining loose ends around funding sources and finances. The critical decision to take all market reserves, including closed years, up to 1992 into Equitas was affirmed.

When discounted, these reserves would release a large amount of head-room with which to finance the debt credits. These enabled the settlement to proceed. Whose idea was this? It came from multiple sources. Andrew Beazley, a member of the LMB and the core group, often pointed out that he believed that the market was over-reserved for the more recent years and that there was value to be found there. Hewes and Roxburgh were attracted by the idea of discount-ing as many assets as possible to create as much surplus as could be secured. Middleton wanted something big and dramatic, and was attracted to the idea’s radical nature. Rowland saw the economic necessity, but was acutely aware of the market opposition. In reality, Roxburgh believes that Lloyd’s had no choice. Without the critical step of taking all market reserves, the numbers would not work.

The next draft of the plan provided for a £200 million contribution from agents and a further £200 million from City institutions as an investment to bol-ster the Equitas balance sheet and bring its surplus up to around £500 million. It was unclear which institutions these would be. As the plan was being refined, the pressure from the NYID intensified. There had been detailed discussions between Lloyd’s and the New York regulators about the ‘deficiency’ as they saw

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it. The NYID wanted to see all US liabilities matched by dollar assets, held in the US. As the numbers clarified, they deteriorated. It now became clear that the NYID intended to publish its highly critical report at the end of May. Some of the more pessimistic advisers in London felt that this would cause a crisis of confi-dence in Lloyd’s and would precipitate Plan B. It became obvious that the Lloyd’s plan had to be published first in order to pre-empt the impact of this adverse report. This moved the deadline for the Lloyd’s plan forward by ten days.

FEEDING FRENZYIn April 1995, some newspapers reported that Lloyd’s was in talks with the Bank of England about a rescue. For a financial institution that depends on confi-dence, this can be regarded as the kiss of death. When similar reports appeared about Northern Rock 12 years later, queues began to form outside their bank branches within hours. Rowland had to try to hold the line. He later described a moment of great personal anxiety when travelling to be interviewed for the BBC’s World at One daytime radio show. He was, as ever, determined to be hon-est about the situation. He knew it was grim; he also knew how easy it would be to spread panic. He thought that if he stumbled or seemed more concerned than usual, he could start a run on the bank. For a moment, the thought of how a slip of the tongue or even a hesitation could precipitate such consequences filled him with terror. By the time he arrived at the studio, the moment had passed. He told the truth, but managed to conceal his anxieties. He said there were no talks about a rescue.

On 30 April, The Independent reported that ‘the crisis at the Lloyd’s insur-ance market deepened this weekend as it emerged that one of its biggest under-writing agencies, the listed Sturge, has had a cash request turned down by its bankers. Sturge’s cash problem comes hard on the heels of revelations in last week’s Independent on Sunday that the Lloyd’s market is suffering a liquidity crisis that threatens it with closure, unless a rescue plan is put in place by the end of the summer’. The newspaper said that Sturge was having difficulty col-lecting cash calls from its members and that ‘Lloyd’s insiders’ said similar prob-lems were hitting large parts of the rest of the market. Chatset had predicted that the market would need to raise £1.5 billion either from Names or the Bank of England. Lloyd’s had embarked on an aggressive new debt collection pro-gramme. It was also threatening Lloyd’s agents with expulsion from the market if they failed to pursue Names.

Rowland said he expected to be able to say more shortly at the AGM on 30 May. Independent analysts had confirmed the market’s view that 1993 and 1994 should show a strong return to profit. Again, he denied that Lloyd’s was in

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discussions with the Bank of England about a rescue package, nor did he fore-see the need for such talks. The DTI’s Richard Hobbs wrote to brokers refer-ring to recent ‘irresponsible and incorrect’ coverage, making four observations: first, that the DTI expected Lloyd’s to meet its statutory solvency requirements in 1995; second, that it was far too early to speculate about 1996, just as it would be for any other UK insurer; third, that press reports on the weekend of 22–23 April had misquoted a letter from the DTI to a Name; and, fourth, that the DTI consid-ered that the current priority of Lloyd’s was to implement its business plan.

In an article entitled ‘Smoke and Mirrors’, which analysed the solvency of Lloyd’s, the World Insurance Report, a US trade magazine, said: ‘The UK press had another of its feeding frenzies over Lloyd’s, prompted by the Independent on Sunday’s predictions of the market’s imminent collapse.’10 Charles Sturge11 warned that the central fund was ‘very, very sick’, that another levy was immi-nent and that he thought a soft loan from the Bank of England would also be needed.

Middleton continued to assure the press that the Council was studying a range of options and was seeking to produce a settlement of all outstanding litigation in order to bring finality to the Lloyd’s affairs of many members and to secure a profitable future. He complained of ‘candyfloss’ journalism: ‘big and colourful, but when you sink your teeth into it, there is nothing there’. In a thoughtful and well-informed piece,12 Ralph Atkins of the FT hinted at the shape of the plan to come and said media pot-shots would continue so long as big uncertainties remained.

Reassurances were wearing thin. The moment of crisis had finally arrived. The British press, troubled by five years of losses adding up to over £8 billion, were unforgiving. They did not know then of a NYID report portraying Lloyd’s as $18 billion short on dollar assets. They did not know that the cost of Equitas might drain the market of nearly all its resources or that Hutter was planning to leave. The Chairman knew these things and more. He could see the buffers looming ahead.

***

Sandler and Roxburgh started drafting the plan immediately after the Council on 3 May. The first draft was entitled ‘Resolution and Reconstruction’. ‘Reconstruction’ came from the title used to describe one of the options under consideration13 and ‘Resolution’ was taken from the Resolution Trust Corporation – the US agency established to clean up the savings and loan cri-sis. Roxburgh liked the alliteration. Middleton hated it and it was dropped. The next draft was entitled ‘Resolving the Past, Building for the Future’. This

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remained the working title for many drafts. As the printing deadline approached for the covers, Middleton suggested a fresh title – ‘A Plan for Renewal’. Late in the day, O’Brien said: ‘We should call the plan what it is: a reconstruction.’ A compromise was agreed: Reconstruction and Renewal. This soon became R&R for short.

The team also struggled with expressing the ‘finality’ provided by Equitas. The business plan had described it as the same as the practical finality provided by the RITC. The exact nature and degree of finality was not an academic ques-tion: it would determine whether thousands of Names could sleep at night and whether their estates could be closed when they died. William Pitt, an ex-jour-nalist member of the communications team, argued strongly against retaining the quotation marks around ‘finality’, which drew attention to its limitations. O’Brien said that this was the whole point; the awkward quotation marks were retained. They hovered over the true nature of Names’ releases from Lloyd’s for another decade.

Selling this new and radical plan to the NYID was one of the toughest assignments. Later, the normally unruffled Rowland recalled a moment on the journey to New York when he gulped at the prospect of the day ahead. Early drafts mentioned the possibility of a statutory transfer of the liabilities to Equitas, saying that it was not possible under current legislation, but would be further explored with the DTI. When the NYID saw this, it reacted very badly, insisting that it should be removed. It was; the NYID’s reception to the plan was critical. A fragile deal was struck with the NYID, which was reflected in the plan. Statutory transfer became a live issue again more than a decade later, which is explained in a later chapter.

The size and nature of the agents’ contribution was controversial at every stage. Two Council members refused to agree the draft unless the agents were required to contribute far more than £150 million. In the end, some compli-cated words were agreed which set the contribution at £200 million. Whether the agents’ profit commission was to be struck before or after the Names’ spe-cial contribution was also debated. The final draft glossed over this problem, resulting in a highly contentious debate 12 months later. The week of 15 May was one of constant drafting, with sessions lasting until the small hours every night. Sandler had editorial control. Rowland’s own foreword14 to the document was worked on separately and contained the phrase: ‘We have considered the alternatives and they are stark.’

On his flight back to the US, Roxburgh noticed a cartoon in a recent issue of the New Yorker. It showed a crusty old chairman sitting behind his desk on the phone, saying: ‘1 billion is 1,000 million? Why wasn’t I informed of this?’ He faxed it to Rowland and Middleton with the message: ‘Good luck explaining

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the numbers!’ A few days later, a Name called the Chairman’s office and asked for clarification: was the settlement offer £2.8 billion in old British terminology (i.e., million millions) or in American terminology (i.e., thousand millions)? When told it was American billions, he expressed polite disappointment that the offer was only worth £2,800 million.

THE RECONSTRUCTION PLANReconstruction and Renewal was launched in late May 1995. It aimed to resolve the problems of the past and build a strong market for the future. It began by reporting on progress since the 1993 business plan. Profitability had been restored; 1993 was expected to produce a profit of £1 billion, followed by ‘good’ profits in 1994 and 1995. The numbers were not yet available, due to the three-year accounting system of Lloyd’s. New corporate capital had been attracted, so far to the tune of £1.2 billion. The market continued to enjoy powerful competi-tive advantages.

Several key problems were acknowledged. The 1992 results, which were due to be declared shortly afterwards, would show a further loss of £1.2 billion, including deterioration on earlier years. The amounts owed by Names were ris-ing: £732 million in respect of unpaid cash calls. A further £2.2 billion was owed but had not yet been called. Some Names were unable or unwilling to meet their obligations. The central fund was facing ‘a strain on its resources’. The problems remained of widespread litigation involving Names and the need to change the basis of trading in the US. Unless decisive action was taken, the cumulative impact of these developments would erode the financial stability of Lloyd’s and would weaken confidence in the market.

To resolve the problems of the past, four steps would be taken. First, there would be an acceleration and expansion of Equitas, which would now reinsure all 1992 and prior liabilities from both closed and open syndicates, providing Names with ‘finality’. Equitas would have assets of around £16 billion. Second, there would be a £2.8 billion settlement offer, designed to achieve a compre-hensive settlement of all litigation. This package would comprise £2 billion of debt credits towards the cost of finality and a fund of at least £800 million from E&O underwriters and others involved in litigation. Third, there would be an early release of the £2 billion of profits estimated to exist within the sys-tem by spring 1996, which would help Names to pay for their past liabilities. Fourth, there would be a strengthening of central finances to be achieved by a returnable ‘special contribution’ of £450 million from members, and non-returnable contributions from agents and the future market, worth another £450 million.

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In order to build the new Lloyd’s, the plan set out five steps: first, the separa-tion of the past from the future – a secure ‘firebreak’ was needed to attract new capital; second, an increased role for corporate capital – many of the current limitations would be lifted; third, the creation of a new central fund, partly paid up and partly ‘callable’, free of obligations towards the past; fourth, a restructur-ing of the basis of trading in the US to meet the concerns of the NYID – new trust funds would be created and the US central fund would be replenished; and, fifth, an active capital raising strategy to alter the balance between tradi-tional Names and corporate capital.

The plan explained the benefits it offered to all parties. Policyholders would gain increased security as money owed by Names was collected. Members would gain ‘finality’ and an equitable settlement. Underwriters, agents and brokers could build their businesses with confidence in a more favourable environment. There were gains for all members: those who wished to continue underwriting, those who wished to resign and those who were litigating. It also contained an explicit warning about the nature of ‘finality’, saying ‘It is not within the power of Lloyd’s to grant Names an absolute release from their liabilities’ and describ-ing the ‘residual risk for Names in the event of failure by Equitas’.

REACTIONSThe last week of May 1995 provided a torrent of news and comment about Lloyd’s in Britain and the US. The R&R plan was launched just two days ahead of the publication of the NYID and the parliamentary reports, thus greatly reducing the stings that each contained. The results for the 1992 year of account – yet another loss – were also eclipsed by the more dramatic news of the plan.

The morning after the launch of the plan, around 180 separate items appeared in British newspapers and on the airwaves. The broadsheet newspa-pers described the plan as daring, ambitious and radical, providing detailed commentaries on the structure and effectiveness of what was proposed. According to the FT, the plan had won ‘broad support’ from the membership, who welcomed the package as offering a real prospect of ending years of litiga-tion. Focusing on the detail, the FT commented that ‘the calculations are tight – and Lloyd’s has little cash to spare if its projections prove inaccurate’. If suc-cessful, however, the old Lloyd’s would have been wound up; in its place, the new Lloyd’s would be built. Loss-making members of the insurance market claimed victory. Corporate investors were content that they were not being stung for the bill. The stock market marked up shares in Lloyd’s investment trusts by about five per cent. There were still hurdles to surmount. The real test would not come until the autumn, when approval was sought for the proposed levy.

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Picture 10 David Rowland introducing the reconstruction plan to the Lloyd’s market. Reproduced by permission of Lloyd’s

Names’ representatives generally welcomed the plans to reconstruct the Society and put an end to uncertainty. The LNC saw the proposals as a major step forward, saying ‘it has become vital for Lloyd’s to settle the litigation and resolve the problems of the past in order to have the possibility of a future’. Deeny said the devil would be in the detail. The LNC believed that Equitas could provide finality for the Names, but must have sufficient assets to meet the valid claims that it would face. It was vital that Names controlled both the

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process of creating Equitas and its operations in order to ensure that it provided a permanent shield to protect them in future. The ALM described the proposals as bold and imaginative.

Rowland said that there were many advantages of unlimited individual mem-bership of Lloyd’s and that ‘we should not throw those away just overnight’. The Council had agreed that the market should be capitalised by different forms of members ‘for as long as a substantial number of people wish it to be so; this is per-fectly reasonable’ said Rowland. The main point of criticism related to the agents’ contribution, which was pitched at £200 million in the document. Since agents would soon be receiving a triple profit commission of £600 million in addition to their fee income, there was a demand from Names for agents to pay more.

Middleton assured members that Names would not be disadvantaged just because they had entered into hardship agreements. Over the next few weeks, he would discuss with Names’ representatives fair principles for distributing the £2.8 billion package. ‘We want to be flexible, we want to build consensus’, he said.

After allowing for the double count, the 1992 results amounted to an overall loss of £1.19 billion. Within this, there was a pure year profit of £86 million – a big improvement on 1991, which contained a pure year loss of £615 million. Commenting on the results, Rowland said ‘the world’s insurance industry was affected by a number of major catastrophes in 1992. It showed a welcome reduc-tion from the loss of a year earlier’. It was the end of the period of serious losses. All parties needed to see a means to resolve the problems from the past. This was addressed in the R&R plan.

Picture 11 David Rowland explaining the reconstruction plan to Lloyd’s mem-bers. Reproduced by permission of Lloyd’s

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Announcing an agreement with Lloyd’s, Superintendent Ed Muhl of the NYID said: ‘Lloyd’s has been meeting its obligations for over 300 years and remains a vital market for excess lines and reinsurance business both in New York and throughout the United States. I believe we have reached an agreement that allows Lloyd’s to continue to write new business in compliance with New York regulations, while remaining fully obligated to pay past US liabilities.’ This overt support kept the concern generated by the dollar deficits to a minimum. Nevertheless, the National Underwriter, a US trade magazine, ran the headline ‘NYID Finds Lloyd’s US Reserves Short by $18 billion’, attributing $11.5 billion of this to the difference between gross and net funding, and $8 billion due to a formula approach to reserves rather than the stricter test of using each syn-dicate’s estimates of ultimate liabilities. Middleton said that the NYID’s meth-odology was ‘selective’ and ‘misleading’. A more detailed Lloyd’s critique was published alongside the report itself.

In Britain, several newspapers, including the FT, described the cross-party Treasury and Civil Service Committee’s report as ‘highly critical’, citing its description of self-regulation at Lloyd’s as ‘fundamentally and irretrievably tarnished’. Christopher Stockwell welcomed its call for external regulation of Lloyd’s, saying that it was ‘absolutely what we wanted’. Deeny stated that: ‘Self-regulation at Lloyd’s has been an abysmal failure. It has cost the Names billions of pounds and the government must find time for Parliament to abolish it.’

With all three reports published, the Sunday Times15 described Lloyd’s as bat-tle weary. From his lofty office, it said, Rowland could stare through a glass wall into the abyss. If the plan failed, Lloyd’s could suffer a meltdown that would make the recent Barings collapse look like a corner shop running out of petty cash.

With the plan launched, valuable support from the US and British regula-tors, and a cautious welcome from most Names’ leaders, there was time for only a brief sigh of relief. Many huge obstacles loomed. So far, an ambitious plan had gone down better than most of the key people had dared to hope. Making it hap-pen would still be very hard. The ALM’s Chairman, Sir David Berriman, said: ‘Lloyd’s is now drinking in the last chance saloon.’ The daily sense of crisis on the top floors of Lloyd’s was to last for more than another year.

PROBLEMS AHEADBy mid-July 1995, it was evident that making the plan happen was beset with prob-lems. At a senior staff away-day, with Ron Sandler in the chair and legal advisers present, some of the outstanding issues were reviewed: getting Equitas authorised, collecting money and winning the acceptance of Names. A big debate was start-ing about whether it was a good idea to send Names indicative statements ahead of their eventual final offer. There were strong protagonists for and against this.

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The meeting was told that the DTI was unhappy with the prospect of large receivables in the balance sheet of Equitas; it wanted cash. Money from Names typically took around three months to arrive; DTI asset valuation rules did not recognise premium debts more than three months old as admissible for solvency. It would be necessary – at least to some extent – to apply debt credits ‘commercially’, meaning that money should go to those who could not pay. Naturally, some Names wanted recognition for losses already paid, but this was ‘inefficient’, in the sense that such payments would neither help to plug the Lloyd’s solvency gap nor improve the Equitas balance sheet. If some recognition of payments made could be incorporated into the debt credit allocation, this would improve the perception of fairness; full recognition was unaffordable. Lloyd’s had committed itself to supplying debt credit information relating to each Name to the action groups. This meant that action group league tables might be drawn up to assess their relative performance in the share-out.

There was concern that reinsurers outside Lloyd’s might see debt credits as offering them rights to reclaim what they had already paid out. Defining the precise boundary of the ring fence – what constituted 1992 and prior liabili-ties – was proving difficult. It was evident that the central fund levy could only be made if and when Equitas went live, as it would only be endorsed on that understanding. There was a particular concern about the very large claims aris-ing in the Exxon Valdez case. A material adverse movement could impact the authorisation of Equitas.

There was also concern at the DTI about whether the reinsurance into Equitas constituted an RITC. If it did not, then members would still be carrying on insur-ance business and therefore would be unable to resign. Furthermore, PSL under-writers were of the opinion that if Equitas was not an RITC, then payments to it would not constitute a claim on PSL policies, and they would not pay. It was argued that a precedent had been set when Names on the PCW syndicates had been allowed to resign after reinsurance into Lioncover, which was treated as an RITC. This topic would require further discussion with Jonathan Spencer at the DTI.

The Equitas premium would result in uncalled losses of around £2 billion being made, which would trigger claims on PSL policies. PSL underwriters argued that without Equitas, the losses might not have been crystallised for many years. PSL losses were expected to run into billions of pounds, but currently there were only £350 million of reserves in the market. Any indicative statements would need to say that PSL underwriters had not yet accepted that claims would be triggered. Without these recoveries, the plan might go no further. Before the PSL model could be run, Equitas would need to provide syndicate-level figures.

A principal asset of Equitas would be the amounts collectable from syndi-cates’ outward reinsurances. Until now, the transfer of the benefits of such policies

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by RITC had always been accepted by reinsurers outside Lloyd’s, but there was no legal precedent for the transfer to Equitas. The new Equitas board would be una-ble to accept the liabilities if serious doubt existed over the recoverability of the reinsurances. A public document presenting Equitas to the outside world would be needed, including an independent sign-off from Freshfields, Rothschilds and Warburg & Co.

The E&O settlement money needed to be released early so that Names could use it to pay their finality bills. Auditors would want an indemnity from future litigation. Names had high expectations of securing £700 million from auditors, but they were very unlikely to offer a settlement on this scale; historically, they had fought cases very hard. The level of acceptance by Names that would justify making the offer unconditional would need to be decided by the Council.

Anxieties were reported in the market about the small scale of the visible level of the future central fund at only £100 million. Hewes explained the think-ing: this amount was the last line of defence. Tillinghast, the actuaries, believed that with stronger premium trust funds and no old year problems, the long-term average annual requirement for the central fund should not exceed £10 million. Yet, however logical this was, it might worry clients and brokers.

Agents could not legally agree to make a contribution that would lead to them becoming insolvent: commercial suicide could not be reconciled with their duties. Any payments made prior to insolvency could potentially be a pref-erence, recoverable by a liquidator, and could lead to penalties being imposed on the directors. A legal challenge to the imposition of the agents’ contribution might take place. Profit commissions would be severely reduced if the central fund levy was taken first. Agents had indicated that they might be prepared to offer 40 per cent of their profit commission. Members’ agents knew they had no future outside Lloyd’s. Managing agents were, at least potentially, in a different position. This remained a highly sensitive issue: some of the best agency teams were believed to be receiving offers to set up outside Lloyd’s.

Contingency planning was discussed around three sets of circumstances. The first was to maintain continuity and keep trading. The second was an orderly sol-vent run-off: a provisional temporary liquidator would be appointed and no new legislation would be passed unless requested by Lloyd’s. The third was a loss of control, with Lloyd’s becoming insolvent. Emergency legislation would be passed to amend Part II of the Insurance Companies Act. The DTI would become regu-lator of Lloyd’s. Although the DTI was strongly behind the plan and wanted to see Lloyd’s trade out of its problems, secret preparatory steps for this contingency were necessary. These included having a draft emergency byelaw ready and a draft application to file for bankruptcy protection in the US. Meanwhile, it was impor-tant to keep up a regular dialogue with both the DTI and the US regulators.

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A heavy workload stretched ahead for the next 12 months for Rowland, Middleton, Sandler, Hewes and in fact for the whole senior management team and key advisers. They had to ensure that their own teams, in turn, could see a flickering light at the end of the long dark tunnel before them. Not all the news was bad. Lloyd’s and other London market insurers achieved a significant legal victory in the US. Lockheed had sought to impose a $475 million security bond in its coverage claim for pollution liabilities at Burbank Airport. The company had sued London market insurers on almost 40 years of general liabilities insur-ance policies dating back to 1949. It had claimed hundreds of millions of dollars for the clean-up of 12 polluted sites. The California Insurance Code allowed for pre-defence bonds in actions filed against foreign insurers who were regulated but not licensed by the California Insurance Department. These had never been invoked. There was much concern about their potential effect on the liquidity of Lloyd’s. In late June, Judge Alden Danna denied Lockheed’s motion for a ‘pre-answer bond’ at the Santa Clara Superior Court, California. The meeting ended with a sense of relief that at least this immediate threat had receded.

SHARING THE OFFERSir Adam Ridley, Deputy Chairman of the ALM, received a phone call from Rowland in May 1995. He was told that a new offer was shortly to be made to settle the litigation. Would he chair a panel to propose a share-out of the new offer to Names? He had been closely involved in the saga of the first offer 18 months earlier: he had been Neil Shaw’s alternate on the Morse panel set up to consider the first settlement offer. Like others, he had thought the £900 mil-lion offer inadequate: crucially, in his view, it needed to include a cap on future liabilities. He expected that this latest offer too would be insufficient. Was there a cap? How much would be on the table? Rowland told him that Equitas should provide the cap; the offer would be close to £3 billion. Ridley says he nearly fell of his chair. This had to be taken seriously. After consulting his boss, he said yes. His services were provided by his employer, Hambros, a merchant bank, at a standard daily rate of £2,500. His Chief Executive, Sir John Chippendale ‘Chips’ Keswick, said that he would not expect to charge an enormous success fee; he saw helping Lloyd’s find a solution as a contribution to public policy. Sir Ian Morrow, who had played a central role in achieving a settlement for the PCW Names, was a non-executive director of Hambros.

Ridley had his own share of losses; he was ‘singed but not burnt’. He had the patience and the intellectual capacity to thrash through the detailed interplay of a complex set of inter-related numbers and competing egos. He had exten-sive experience of finding compromise solutions to difficult problems in other

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financial markets, having led for the banking world in the handling of the col-lapse of the International Tin Council in 1985. He had also helped sort out a financial scandal in Hong Kong. He understood that fairness had to be balanced by pragmatism, as keeping Lloyd’s solvent was an overriding objective. His appointment as chairman of a panel, later described as the Names’ Committee (NC), was announced soon after the publication of the R&R plan.

Not long after becoming a member,16 Ridley was exposed to one of the first Lloyd’s frauds: Brooks & Dooley.17 He helped Mark Farrar, who began one of the first action groups; this gave him ‘a fairly painful introduction to everything’. Farrar invited Ridley to join the ALM Committee. They shared a view that Lloyd’s was complacent and in need of reform: the ALM was a strong source of pressure for what became the Lloyd’s task force. Its other pre-occupations were improved relationships between the Corporation and Names, helping members with large losses, and assisting action groups in getting started and learning from one another. Ridley recalls that people with losses came to the ALM relatively early on, asking: ‘What the hell shall we do?’ Ridley’s NC members were announced in August. They were six action group chairmen, including Deeny; three other Names nominated by the High Premium Group;18 and a working Name, John Robson, a members’ agent. Middleton planned to attend all meetings of the panel as a facilitator. Rowland said that the work would help ensure a settlement formula that was fair and reasonable to members and in the best interests of Lloyd’s.

Several of the action group chairmen were regarded by Ridley as ‘solid and experienced no-nonsense businessman’. John Mays was an ex-Lloyd’s broker and knew the market well. Alan Porter was closely associated with Stockwell. Ridley says his position caused the most difficulty for the rest of the group, but if the worst came to the worst, he was expected to write a minority report. He found that the biggest contributor to the group was Richard Spooner, ‘who had a very good sharp analytic mind, was very balanced and had a strong moral sense’. Deeny also exercised a strong influence throughout as Chairman of the LNC.

John Robson, a members’ agent, had a very keen sense of the agony that Names’ losses had caused. Robson and his brother, David, were directors of Anton, originally the members’ agency arm of the Merrett Group, which they had bought out. Ridley recalls Robson’s contribution to the work of the com-mittee as very constructive and applied with ‘a strong moral awareness’. David Durant complained that the NC did not include any of the 3,000 members who had either accepted hardship agreements or applied for them. He thought that this failed to reflect Middleton’s assurance that hardship names would not be disadvantaged under a settlement.

Outside the NC, powerful pressures were being exerted. Ridley recalls: ‘There was a furious exchange of bits of paper, meetings, counterclaims, writs

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going on all the time; Stockwell with his monthly newsletter and the United Names Organisation ... and God knows what and all these other bodies. So there was a great deal of skirmishing.’ Ridley recalls that Stockwell, regarded as the leader of the refuseniks19 faction, would ‘shroud it all in technical plausibil-ity’. Ridley felt that Stockwell paid little attention when he was refuted: reality seemed to be re-written. Stockwell’s views are discussed later.

There were also pressures from continuing Names, not all of whom had lost money. While the non-litigating committee members were each moderate, the HPG had an outrider in the form of William Arbuthnot, who gave vivid expression to what, in political terms, might be described as a ‘right wing’ point of view. Ridley recalls: ‘He wrote acid papers from time to time usually about the iniquities of the won’t-pay Names; and the right of the good, honest tradi-tional supporters to continue their livelihood with no let or hindrance.’ Ridley considered orchestrating an offensive reply, but thought that it was better not to dignify Arbuthnot’s point of view with too much attention. For the most part, he thought that the latter’s message fell on stony ground.

The NC’s terms of reference were to advise the Council on the allocation of the £2.8 billion settlement offer so as to achieve three objectives:

to assist Names to achieve affordable finality; ●

to help the hardest-hit Names; ●

to settle litigation. ●

The definition of ‘helping the hardest-hit Names’ was taken from the words of the R&R plan: ‘those Names who, by virtue of having suffered disproportion-ately large losses, will have the greatest difficulty in meeting their finality bills’. The NC spent much time exploring ideas of fairness that lay at the heart of their task. It agreed on four fairness principles:

As all members of the Society have contributed the funds, in prin- ●

ciple all members should be eligible for debt credits, whether they were litigants or non-litigants, or were continuing to underwrite or having ceased. However, given the limited size of the settlement fund, no Name should receive more than his debt to Lloyd’s.Debt credits should be directed at losses above a threshold of nor- ●

mal commercial loss.The allocation should be in relation to a Name’s overall underwrit- ●

ing experience over a number of years.Disproportionate loss should be defined in proportion to Names’ ●

premium income limit (PIL).

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This last point meant that those who underwrote on a smaller scale than oth-ers might still receive relief if their losses were proportionately large. The NC pointed out that by focusing on losses rather than outstanding debts, the so-called ‘won’t pays’ would not be rewarded for not paying their obligations. The database showed each Name’s funds held at Lloyd’s; it did not show the resources they might own elsewhere. This was often the subject of suspicion. Time and time again, when a system for allocating monies was suggested, someone would say: ‘But look, isn’t this going to over-reward the people who are best at conceal-ing their assets, or just refuse to tell us, or send in false information?’ The group decided that the best solution to this dilemma was to proceed on the assump-tion that members could meet their finality bills. Ridley said: ‘And if they can’t, they’ve got to prove they can’t. By shifting the onus of proof, we solved the prob-lem, not perfectly, but I consider that was a pretty ingenious way.’ He had no patience with those ‘who said they were skint, but didn’t want to prove it’. That was fundamental to him: ‘you had to rub your friends’ noses in those sorts of things’. He thought that in the debate, ‘the “won’t pays” were both emotionally a genuine source of concern to everybody and intellectually one of the disrepu-table refuges of those who wanted to undermine the integrity of the proposals’. The NC’s interim report, delivered to the Council in November 1995, tried to put the issue into perspective by setting out some facts not widely understood among the membership, at Lloyd’s or by the press:

Of the £7 billion of losses called to date, £1.5 billion (or 20 per cent) ●

was still outstanding.There were 13,500 Names with unpaid calls, amounting to nearly ●

40 per cent of the membership. Of these, 1,500 Names had received or accepted an offer of hardship, while many more were in discus-sion with the financial recovery department.Names who had paid all their losses had on average paid £120,000; ●

Names with unpaid calls had been asked to pay on average £250,000 and so far had paid on average £145,000.About half the Names with unpaid calls were litigating and there- ●

fore had some prospect of offsetting their losses.

It was common for insiders at Lloyd’s to rail against the so-called ‘won’t pays’. They were often demonised without much thought. The NC uncovered a fresh perspective: on average, those with outstanding debts had already paid signifi-cantly more than others.

Ridley’s approach was to get all the information and facts in front of all rel-evant parties and then to engage in a rational discussion. The group then tested

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possible solutions; by using this process, they were able to ‘narrow down their perception of the possible, to the realistically feasible common view’. To do so, the group was greatly assisted by the work that had been done by Joe Bradley’s CSU in building a proper database of information about the way in which losses were distributed among Names. This did not exist at the time of the first offer nearly two years earlier. Ridley says that various solutions were tested: ‘we could successively take things through week after week, slowly grinding it down, lis-tening to new concerns, rubbing another rough edge off ’.

The job required enormous patience. Ridley had been told that a compu-ter model would make it easy to change assumptions and see the impact on distribution, but it was neither quick nor simple. In practice, the CSU’s Dave Pettitt, ‘the great master of the model, had to spend incredible amounts of time fixing the thing. It took a devil of a lot of hard work to get one good run a week’. Richard Spooner’s experience with financial modelling was important: he could check the model’s soundness and express the group’s questions in the technical language needed to get answers about the affordability of alternative ideas. The ‘redoubtable’ Bill Ramsay – a secondee from Deloitte – explained the PSL model, which was ‘at the outer limits of computability in those days’. Sarah Wilton, originally a secondee from Coopers & Lybrand who worked closely with Middleton, was the NC’s Secretary. She also attended many meetings between Middleton and the LNC, gaining the trust of Names’ leaders.

The NC met 16 times before issuing its interim report. Having established the fairness principles, it modelled many different ways of allocating debt credits. It became clear that the money available fell far short of the amount needed to relieve everyone of what most people would call abnormal losses. A cap applied to all syndicate losses of over 100 per cent was not remotely affordable, costing £4.3 billion; a cap applied to Names’ losses over 80 per cent – the threshold for the high-level stop loss scheme – would cost £2.3 billion. This would not leave enough funds to settle the litigation: the action groups were expecting to divide up the £800 million contained in the litigation settlement fund and wanted more. Without this, many litigants would be left with less compensation than they had already won in court. At an early stage, the NC decided to concentrate on sharing the £2 billion of debt credits, leaving the £800 million of litigation proceeds to the action groups. This became a largely separate process of negotiation among them, though several of the key players were also NC members.

One approach considered only briefly by the group was to spread the debt credit funds equally over every member of the Society, giving about £60,000 to each Name. This option had two radical weaknesses: it would not help the hardest hit-Names and it would leave over £2 billion of unsecured debt, much of it uncollectable, which would prevent Equitas from being authorised. The

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Committee therefore recommended that the limited funds should be used in a targeted way: first, related to disproportionate loss; and, subsequently, to the inability to pay the losses that remained. Accordingly, it proposed that debt credits should be allocated in three slices or ‘tranches’:

The first tranche would allocate debt credits pro rata to each Name’s ●

cumulative net losses as a percentage of his PIL, above a standard threshold of, say, 100 per cent of PIL.The second tranche would allocate debt credits to those who, after ●

they had used their funds at Lloyd’s, were still likely to have diffi-culty in meeting their finality bills.The third tranche could provide a reserve to assist the hardest-hit ●

Names who could demonstrate their inability to pay, even after the first and second allocations.

The interim report explained that such a process would be efficient financially because it resulted in a lower level of doubtful debts than other feasible methods.

The NC report showed a predictable correlation between an individual’s scale of loss and his propensity to litigate: nearly 80 per cent of those with big losses were litigating, while only 20 per cent of those with more modest losses were doing so. This data helped others, including Council members, to better appreciate the litigants’ frame of mind.

Figure 6.1 Propensity to litigate20

1986–92 Result to FinalityNumber of

litigating Names

Number of non-litigating

Names

Litigating Names as percentage of

total

In profit 200 2,300 8In loss: zero to -£200k 2,700 10,700 20

-£200k to -£400k 4,000 4,900 45-£400k to -£600k 2,800 1,500 65Over -£600k 3,900 1,100 78

Total 13,600 20,500 40

In November, the NC’s interim report proposed a way of allocating the avail-able funds, but also concluded that £2.8 billion was simply not enough. More was needed for two main stated reasons: to provide more incentive to accept and a margin to provide for coping with larger Equitas premiums. It would also put more pressure on contributors. The interim report stated: ‘Without appropriate

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help, some may have insufficient incentive to support the plan, and may find preferable protracted litigation or, possibly, even insolvency.’ Ridley believed that Rowland and Sandler understood the reasoning. He thinks it was critical to the eventual outcome that Lloyd’s came up with a materially bigger sum.

Ridley recalls reporting to the Council:

I was pretty worried in advance of us producing this document that there would be a hostile reaction to the suggestion of more money. There was a faction in the Council and the market who thought that all actively anti-Lloyd’s Names were traitorous lunatics and were moti-vated by some extraordinary devilish agenda. We hoped that by pre-senting this in a very balanced and technical way, and showing who we were, that it would take the wind out of their sails.21

Ridley’s tactics worked. By the time the interim report was issued, he had already appeared before the Council on several occasions to explain the group’s approach. He found that this ‘enormously enriched’ the process: he could tell his Committee about the reactions and it also meant that he got to know the Council members, gradually establishing their confidence in him. He recalls one Council member, who was ‘perhaps most crotchety sceptical, making acid comments from time to time’, but felt that these were as much directed at the architects of the reconstruction plan as they were at him. He suspected that this individual’s reactions amounted to ‘personal sour grapes’. He would have liked to be in charge and clung to an idiosyncratic view that the reserves needed for Lloyd’s past liabilities were greatly exaggerated.

The NC was anxious to establish solid credentials as a consensus-builder in the eyes of the Council, the market and the wider Lloyd’s membership. Instead of listing its members’ names at the end of the interim report, it declared that ‘The twelve members of the Names’ Committee represent a wide range of inter-ests and expertise’, describing their many roles within and outside Lloyd’s. The interim report mentioned the delay – mainly caused by the difficulty of assess-ing the premiums required for Equitas – in issuing indicative statements, now expected to be issued in March 1996. After many more meetings, the NC pro-duced a final report just before Christmas. After this, Ridley worked closely with the Council to refine the package.

7

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The two most powerful warriors are patience and time.Leo Tolstoy

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If the R&R plan could be made to work, Lloyd’s had a chance to cross the chasm. However, there were many obstacles: court battles in the US and

Britain; tense negotiations with the DTI; threats from US regulators; and tough bargaining over a settlement.

Since the original proposals, the scope of Equitas had been more than dou-bled. The original project was unfinished after two years. New methods had to be found to ‘nationalise’ all Lloyd’s liabilities up to 1992, creating a fire-break between the past and the new Lloyd’s, otherwise new corporate investors would not be interested. Investors also wanted further concessions. Meanwhile, those traditional Names who were able and willing to continue were feeling unloved.

At £2.8 billion, the new offer was three times the size of the failed earlier one, but it met only one-third of the losses already announced. Its acceptability would depend on many factors, especially how it was targeted. This was the subject of intense debate by Names and their leaders. Meanwhile, the money to finance all of this had to be found. By the Council’s own admission, insolvency loomed. Against this background, a steady flow of profitable business had to be attracted.

EQUITAS RE-DOUBLEDThe R&R plan explained that the scope of Equitas was to be greatly expanded. It would now take all past liabilities of Lloyd’s up to the end of 1992. So far, Heidi Hutter and her team had been working on liabilities up to 1985, super-vised by Keeling’s Reserve Group. How was this new exercise to be under-taken? Middleton was getting impatient. He decided that an extra team of people would be needed. Running off the liabilities of ceased syndicates was becoming a new industry at Lloyd’s. Ken Randall, a former regulator in the Corporation and more recently Chief Executive of the now-defunct Merrett Group, had created Eastgate, a business that specialised in running off Lloyd’s syndicates. Middleton decided to engage Randall to undertake the task of estimating the assets and liabilities of all Lloyd’s syndicates for the 1986–92 period.

Keeling says ‘we woke up one day and found Randall was in and no one had told me and no one had told Heidi. There was a real tension about what Middleton was doing’. The two projects were soon merged. When the under-writers who had been working on the original project saw Eastgate’s first cut, Keeling says ‘they just went ballistic, they just thought this is a joke. It was actu-ally so funny we all laughed. Anyway, so after the first cut with Randall we started merging the projects together and getting market people in’.

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Randall brought in Dr Roger Sellek, an astrophysicist turned squash coach who had been working with him at Eastgate. While seriously bright and disarm-ingly cynical, Sellek had minimal experience of the Lloyd’s market with all its quirks and complexities. He had boundless self-belief and energy, and a healthy pragmatic approach, unencumbered by the baggage of feuds and frustrations carried by some of his underwriter colleagues.

The enlarged scope of Equitas and an atmosphere of much greater despera-tion combined to galvanise the project. Each syndicate had to produce data in coherent fashion, with an independent actuarial sign-off. If it was below a cer-tain quality, there was a surcharge on held reserves. The historic Adam Room was commandeered for underwriters to undertake a peer review exercise on all 450 syndicates, working early mornings, evenings and weekends.1

Asked what drove him and others to work so hard on the project, David Shipley replied: ‘Absolute blind terror. We were all potentially bust. We had unlimited liability in our syndicates; the old basis of agencies supporting people to become Names at Lloyd’s at an early stage in their career. I wasn’t wealthy. I felt that we had equity in the strength of our reserves, which turned out to be true and we had a decent release at the end.’2 This equity was their reward, but it lay in the future. They had ‘third quartile basic salaries and decent profit com-mission. So if you reserve conservatively then it’s all jam tomorrow’. Provided Lloyd’s continued, Shipley acknowledged that he had ‘an expectation of a career and an expectation of equity. I had a big mortgage. If the project failed, then my funds at Lloyd’s would be called upon. I had a bank guarantee; the bank would ask me for the money. I would be bust and potentially homeless. And possi-bly going through the rest of your life with the stigma of being part of a failed Lloyd’s; you might be unemployable’. Keeling now sees fear as only one factor. He attributes the willingness of some of the market’s best practitioners to work together on the reserving project to a deeply felt commitment to Lloyd’s. At the height of the crisis, many people, including him, turned down opportunities to work elsewhere.

Shipley says that some reserve group members were also terrified of being sued personally: ‘We thought we might be a target as we were making deci-sions that affected people’s businesses and inevitably these were being done in a relatively ad hoc way.’ The reserve group had an extraordinary degree of com-mercial power, resting on the Council’s power of direction. He recalls a very irritable meeting with Freshfields when the latter tried to advise on the indem-nities offered by Lloyd’s. The reserve group members thought that Freshfields could not offer proper advice because it was acting for Lloyd’s on one side of a transaction in which Lloyd’s was indemnifying the practitioners brave enough to carry out this work. Shipley says: ‘We threw our toys out of the pram and said

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we needed our own lawyer.’ They got one: with his help, they reached agree-ment, but some still lived in fear over the next five years that there would be a comeback from disaffected parties.

Shipley recalls that as well as the individual actuarial sign-offs required for each syndicate presentation, an overall independent approval was needed from the actuaries Tillinghast. He thinks they were tough and fair, and helped to ‘keep us honest. In fact they made us jump through hoops’. The Government Actuaries Department (GAD) was also shadowing the activities of the reserve group. The DTI needed its positive opinion on the work before Equitas could be authorised.

LEADING EQUITASWith the bigger role now planned for Equitas, its credibility became even more critical. David Rowland had spent several months looking for the right chair-man of the company. A number of well-known City figures had turned it down. He knew from an earlier conversation that David Newbigging, an LMB non-executive director, was interested in the role and had recently freed himself from his role as Chairman of Rentokil. He had been appointed to the LMB on the basis of his widespread international business experience as a ‘Taipan’3 and because, as a Name, he had a reputation as an informed and awkward customer, who demanded explanations for losses from his underwriters. He was also a tough negotiator: as a former insurance buyer, he once shocked a complacent underwriter by moving his business away from Lloyd’s in order to get much better terms. Rowland thought that this was the kind of grit in the oyster he sought in creating a businesslike market board for Lloyd’s. (His other LMB non-executive directors were Paul Myners, a Name with a heavyweight reputation in the investment management world, and Nicholas Pawson, an extremely clever mathematics graduate from Cambridge, who was Chairman of the CSU and ran his own IT company.) Newbigging and Myners were in the habit of asking tough questions at the LMB and not accepting bland answers.

Newbigging had wide experience of the insurance industry. The Jardine Matheson Group, for which he worked for 30 years and of which he was Chairman and Chief Executive from 1975 to 1983, had a listed insurance under-writing company, which he also chaired, and an insurance broking subsidiary headquartered in London. He had extensive international business experience, having served as chairman, chief executive or director of several major compa-nies in the Asia-Pacific region, the UK and North America.

Rowland invited Newbigging to become Chairman designate of Equitas, explaining that this would be a part-time role. Shortly afterwards, he told him

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that Hutter would not be a candidate for the role of Equitas Chief Executive. As already noted, she had privately informed Rowland in January of her plan to return to Swiss Re in due course. Newbigging wanted to take a very close interest in this key appointment. Rowland told him that Middleton was handling it, so he went next door, asked for the file and took it back to study. When he opened it, he immediately realised that he had been given the wrong file: it related to the appointment of the chairman. He found that he was near the bottom of a dis-tinguished list of possible candidates who had all declined. He called Rowland, saying he’d had a ‘bloody good laugh’ over this and thought he should know. Rowland said: ‘Oh my God, well, are you still interested?’ Newbigging accepted the job, saying ‘as I was bottom of the list, I think I’ve got something to prove’.

To find a chief executive for Equitas, Lloyd’s had begun by using one of the big recruitment agencies. No candidates appeared satisfactory to Newbigging. He was introduced to Victor Calleo, an idiosyncratic headhunter who operated ‘out of a phone box’ with very good connections in the US insurance industry. Michael Crall, President and CEO of Argonaut, a Californian insurer, was con-tacted by Calleo. He did not take the approach very seriously at first, believing that Lloyd’s would hire someone British ‘through the good old boy network’. Crall had been headhunted for Argonaut, which specialised in workers’ com-pensation in California, when it was in terrible shape. He turned it around and was ready for his next move. His achievement appealed to Newbigging for the Equitas role. His first interview with Newbigging in a New York hotel went well; the prospect of a further interview in London was attractive. He had worked in Europe before.

In November 1995, several key executive appointments were made to the board of Equitas. Michael Crall was made Chief Executive designate. Jane Barker, whose most recent posts were those of Chief Financial Officer and Chief Operating Officer of the London Stock Exchange, became Finance Director designate. Barker was a Fellow of the Institute of Chartered Accountants. Before joining the Exchange five years earlier, she had spent 14 years with the bro-ker C.T. Bowring. Jim Teff, head of the specialist claims unit at Lloyd’s, was made Claims Director. Andy Coppell, former systems head at Lloyd’s, became Operations Director. Alan Pollard headed administration. John Webster, a non-executive director, chaired the investment committee.

Crall took up his new role on the same day as his Finance Director, Jane Barker. Each felt they should have had more chance to assess the other before committing themselves. In practice, they had two hours – ‘a last chance to bail’ – to decide if they could form a working partnership. They discovered, among other things, that they had been living within ten miles of each other in San Francisco. Crall started on 1 January 1996. The days were short in London; it

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was raining and miserable. His wife, Dee, a Californian girl used to the sun, was far from overjoyed to be there.

Before long, Hutter left the scene. Crall believed that his expertise was well suited to his eventual task: to run Equitas as an efficient operating company. At this stage, however, he found himself replacing part of Hutter’s role and felt ill-equipped: ‘nobody would hire me to head an actuarial project; I don’t have the skill sets’. Although he attended various reserve committee meetings, he regarded this as more of an observation process until he encountered an area where he was expert: expenses. He recalls throwing a tantrum at one point over an attempt by a committee of underwriters to lock him into an inadequate expense budget. He insisted on making proper provision for running what he planned to be a mas-sively more efficient organisation than the previous system.

At that early stage, with the advantage of hindsight, Crall recalls being ‘suckered into believing that we really had got a handle around asbestos, which was totally wrong of course. Not even close. That was the best thinking in the world at the time’. Against this, he foresaw a potential goldmine in terms of reinsurance as an asset, especially the reinsurance credit against pollution. He also believed that the ‘balance of account’ contained plenty of precautionary reserves. Inevitably there were big uncertainties. The pressure from the DTI for adequate reserves was welcome. In the end, the question became whether the available assets were sufficient ‘to give us a reasonable shot at running this thing off, and not blowing up any time soon’.

Crall’s first nine months before the go live date were intense: ‘Lloyd’s is extremely complicated, and just keeping track of who’s doing what, and all the initials and interrelationships was extremely difficult as an outsider to try to sort out.’ Throughout this time, he was very conscious of the role played by Rowland, whatever the obstacles or setbacks: ‘So David managed to keep this unruly beast called the Lloyd’s market generally headed in the right direction, with constant optimism and energy. It was just amazing to see. It was one of the most remarkable leadership jobs the business has ever experienced.’

As Equitas was taking shape, all kinds of issues began to emerge in which the interests of the new run-off company would diverge from the interests of Lloyd’s itself. Most obviously, Equitas would wish to be as well-reserved as possible; Lloyd’s did not want to burden Names with an unacceptably high premium to pay for their reinsurance by Equitas. The process by which the transfer of liability, funds, records and claims handling would take place all needed to be hammered out and described in legal documentation. Pressure from Newbigging to appoint his own firm of legal advisers became heavy. Barry O’Brien knew that two separate law firms would soon be at loggerheads, slowing down and complicating the process. Instead, Freshfields had assigned a separate

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team, headed by Graham Nicholson, to look after the interests of Equitas, while O’Brien’s team advanced the interests of Lloyd’s. Because they were part of the same firm and shared the higher aim of getting Equitas successfully launched, they were able to resolve most issues quickly. When pressure for separate lawyers intensified, O’Brien proposed that the Equitas team should have their own QC. Newbigging ‘went for it, so long as it was the best QC in the country’. Tony (now Lord) Grabiner QC accepted the brief with alacrity, giving the Equitas team ‘the comfort they needed, but allowing Graham [Nicholson] to get the job done’. The Equitas Board took further shape with the appointment of Sir Roger Neville, formerly Group Chief Executive of Royal Sun Alliance, and James Joll, former Finance Director of Pearson plc, as non-executives. Professor Tim Congdon and Michael Hart were made advisers to the investment committee.

A simmering issue was how the control of Equitas should be exercised. There was little doubt that it should be owned by Names collectively, whom it would reinsure. But it would be responsible for the management of all Lloyd’s past claims up to 1992. Acutely conscious that the reputation of any insurer depends on the way it deals with claims, the market was nervous that Equitas could jeopardise the standing of Lloyd’s. At the same time, most people wanted to see a tough professional attitude being taken towards old liabilities, includ-ing APH claims. It was always going to be a difficult balancing act. The market would want to see experienced practitioners with a stake in the future of Lloyd’s exerting some influence over Equitas.

Plans for the governance of Equitas and a timetable for the next six months were outlined in an October 1995 progress report to members. Two main options had been evaluated: the distribution of shares in Equitas to Names and a trust arrangement. Regulatory, tax and securities law issues in Britain, the US and other major jurisdictions favoured a trust. It would ensure adequate control of major policy decisions and equal treatment of members, whatever their nationality or place of residence, and would satisfy the DTI and other regulators. Names would have the right to share in any surplus over solvency requirements that might arise within Equitas. This would be distributed pro rata to their share of the total Equitas premium through a premium rebate. No surplus was expected in the near future. Half the trustees would be elected and half appointed. Each half would nominate a board director. The trustees would approve the appointment of the Equitas Board.

The Equitas Board was expected to comprise 12–14 members. It had now been agreed with the DTI that the reinsurance would constitute an RITC, so Names could resign after reinsuring into Equitas. A big issue was whether exec-utors would be able to close estates; this confirmation of RITC was expected to provide significant comfort to an executor in reaching that decision.

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US LOBBYINGShort of writing a cheque, the British government could not have been much more supportive. The DTI and the Bank of England listened sympatheti-cally to the problems of Lloyd’s, giving advice where they could. The courts dealt with the many issues that were brought to them with reasonable speed and detachment. In the US, it was different in some respects. To British eyes, some courts appeared susceptible to emotion rather than a strict enforcement of contracts. The legislation surrounding pollution imposed heavy duties on corporate America retrospectively. The legal profession seemed to be gaining more from these laws than the population or the environment. Manufacturers and insurers sought changes to the laws surrounding liability in a campaign that had become known as ‘tort law reform’.4 Many US states did amend their laws in the 1980s, but eventually this movement lost momentum. There was also pressure to reform the Superfund legislation in the light of experience.

Picture 12 Cartoon by Richard Cole. By February 1995, the precariousness of Lloyd’s was widely understood. Secretary of State Michael Heseltine, CEO Peter Middleton and Chairman David Rowland are shown trying to keep it upright. This cartoon is reproduced by kind permission of Richard Cole

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Foreign insurers like Lloyd’s had to tread carefully in this arena. Bleating about the effect of US laws on them was not their prerogative and was likely to be counterproductive.

In Washington, Lloyd’s General Counsel, LeBoeuf partner Charles Landgraf, was well connected with the Senate, Congress and the various organs of US federal government. His first acquaintance with Washington was as a ‘page boy’ when still at high school at the age of 16. He returned to his native Texas for university and spent a summer as an intern with the House Judiciary Committee. After graduating from law school in New York, he joined LeBoeuf; with his strong interest in politics, he was posted to their DC office. At first, he worked on issues affecting energy, nuclear and environmental regulation, writing appellate briefs for the DC Circuit and the Supreme Court. He observed a Bill in Congress that would have various effects on Lloyd’s business. From this grew the role of monitoring federal legislation that might affect the trad-ing position of the Lloyd’s market or the wider insurance industry. This led among other things to lobbying work on the Oil Pollution Act of 1990 after the Exxon Valdez accident, trying to shape it in a way that protected the interest of insurers.

From 1989 to 1991, Landgraf was sent to London to be the Managing Partner of LeBoeuf’s small office in the Lloyd’s building. He says that ‘in Washington, I was the advocate for Lloyd’s and in London, I was the consulting physician, or something like that, dealing with underwriters and their day to day business in the US’.5 On returning to Washington, he helped to get Lloyd’s a seat on the National Commission on Superfund in 1992.6

The result of lobbying efforts was a significantly reduced bill for Equitas, which was reflected in the amounts payable by Lloyd’s Names. LeBoeuf’s effec-tive work on behalf of Lloyd’s was not confined to pollution. When corporate membership of Lloyd’s was about to be introduced in 1994, it was necessary to secure the approval of each one of the 50 US states. In the run-up to the creation of Equitas, similar approval was needed, with amendments enacted in the regu-lations surrounding Lloyd’s. A new model law was being introduced through the NAIC, providing a useful platform on which efforts to make these changes could piggyback. Nevertheless, huge effort was required to persuade every state to make the necessary changes quickly. Peter Demmerle, a LeBoeuf partner, masterminded this operation.

Disputes arose in several states (discussed in the next chapter) between state securities regulators, heavily lobbied by angry US Names, and insurance regula-tors, whose concern was to protect policyholders. LeBoeuf sought to persuade the courts that Lloyd’s was critical to the US economy. Jim Schacht, a former Illinois Director of Insurance, was deployed as an expert witness. He was able to

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argue that if Lloyd’s were to collapse, lots of other things would unravel in the US insurance world. Landgraf says: ‘The antagonists were arguing that Lloyd’s really wasn’t that important, really neither here nor there, so we had a witness to say no, it matters a great deal.’ He came up with Schacht’s evidentiary state-ment: ‘I was able to draw upon arguments why Lloyd’s was critical to, say, the liability regime for nuclear power plants in the US. Basically, Lloyd’s was rein-suring the nuclear power pools, which was our way of handling the potentially unmanageable liability of extraordinary radiation release at a commercial reac-tor.’ Landgraf was also able to show the importance of Lloyd’s to the offshore oil and gas industry, the US aviation industry and to the provision of earthquake cover in the US.

A letter from Richard Rosenblatt of the ANA on 7 June 1995 set out his view about the difference between fraud under English and US law:

In England, the caveat emptor system puts the burden on the buyer of the security, such as going into Lloyd’s, to discover everything about his investment. In the US we have non-disclosure fraud. That means if you sell infected cattle to an innocent buyer and you know the cattle are infected and the buyer does not, then he has the right to rescind the deal. In England it is quite the opposite. Both systems work, in a man-ner, but to sell people who are used to the full disclosure system under the caveat emptor system is manifestly unfair. We contend that, at the time that we were sold the forum selection clause, we were defrauded, based upon non-disclosure fraud. That was, after all, before we had actually signed the forum selection clause (getting us to use English law) and, therefore, the fraud preceded the forum selection clause and we were entitled to have the clause rescinded and, therefore, we are operating under US law.

Rosenblatt continued to argue that LMX was fraud. As he saw it, the biggest profiteers from misdeeds were regularly elected to the post of Chairman by the insiders. He saw the biggest perpetrators, time after time, as the Chairmen, from Miller through Coleridge and Rowland. Rowland’s firm, Sedgwick, he said, was the largest profiteer in the LMX spiral. The outcome of these fraud allegations is described in a later chapter.

ALTERNATIVE ANALYSISAlthough Freshfields had produced a legal analysis for the Council, there were persistent calls for a more independent view. In late 1995, an independent

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Validation Steering Group (VSG)7 was established, with Sir David Berriman as Chairman. Other members were Damon de Laszlo (representing the LNC) and Alan Porter (representing the LNAWP). Slaughter and May, a leading firm of City solicitors, was appointed as legal advisers.

Six months after the plan was published, the LNAWP produced a discus-sion document,8 largely written by Christopher Stockwell. The foreword said that the initial response of Names’ associations had been to give the plan a cautious welcome. They had also welcomed the appointment of the Validation Steering Committee. But it noted the delays in estimating the Equitas premium and the NC’s view that a £2.8 billion offer was insufficient. It pressed for a bigger settlement pot, saying that it would not add much to leave ruined Names with some reasonable standard of living. It also wanted radical alternatives to Equitas looked at urgently.

Stockwell’s main objection to Equitas was the need for Names to pay up. The document argued that instead of crystallising cash requirements ‘which could otherwise be spread over many years’, the existing Society and all its syn-dicates should be put into an orderly run-off. This operation should be managed in a similar way to that envisaged for Equitas, with the many benefits of central-ising investment and claims management. He proposed a new ‘Lloyd’s Run-off Board’, controlled by external Names; the ongoing and profitable underwriting business would continue in new entities – perhaps as small insurance compa-nies – outside the Lloyd’s structure as part of something like ‘Lloyd’s Exchange plc’, which could combine forces with the London company market, achieving big savings in common processing. A note on how he developed the argument is given in Appendix 5.

Michael Deeny was deeply sceptical of the LNAWP plan ‘because Names want finality and this doesn’t represent finality’. This view was supported by Chatset: ‘even past Names who are not underwriting but who have open years will benefit in having finality, albeit at a price, rather than the prospect of uncertainty for an indefinite period of time, with overall costs higher than Equitas’.

In January 1996, Lloyd’s compiled several sets of comments relevant to Stockwell’s alternative proposal. In a foreword, Ron Sandler said ‘we firmly believe that insolvency or some form of managed run-off is not an attractive option for Names. This document sets out the clear thinking behind this belief ’. Included were a letter from the DTI, extracts from Stockwell’s paper and a com-mentary from the Janson Green Action Group. The press were briefed on all these arguments.

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INDICATIVE STATEMENTSDuring 1995, there was an intense debate within the Lloyd’s leadership team about whether or not to first make an ‘indicative’ offer to each Name. The argu-ments for doing so were numerous: it would test the ability of Lloyd’s to assem-ble all the complex data required and translate it into a personal offer; it would give Names a chance to understand how the eventual offer would be structured and the implications for them; and it would turn an abstract concept into firmer reality, conditioning expectations.

Against this, some experienced voices were raised. The most vociferous opponent of early indicative statements was Deputy Chairman John Stace. Uniquely in Rowland’s inner team, he was a members’ agent; he felt he had more insight into the Names’ minds than others. He argued that at this early stage, many of these ballpark personal statements would be wrong and mis-leading. Names were used to receiving news about results from their agents, not from the Corporation. A calculation like this had never before been attempted. It would worry many Names unnecessarily, arousing resentment.

Picture 13 The 1995 Lloyd’s Council that adopted the reconstruction plan9

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Keeling’s Reserve Group had not yet finished its work, so the Equitas pre-mium could only be roughly estimated. Better to get the numbers right before going to Names with anything so clear and direct as a personal offer. Debate raged. Middleton was keen to make progress by getting some numbers out. Joe Bradley was keen to demonstrate the usefulness of his database and iron out any residual bugs.

Rowland had to steer a course among these arguments. In October, the decision was to send out the indicative statements, but to delay until more reli-able figures for the Equitas premium could be produced by the Reserve Group. Rowland wrote to members saying that progress on all aspects of the reconstruc-tion plan had been reviewed and that conclusions were positive. It was now clear that more time was needed for indicative statements, which would be delayed. Ridley’s NC had also asked for more time in the light of the latest Equitas reserv-ing information. The NC was working through some extremely complex issues that were fundamental to a fair settlement. Its interim report to the Council would be submitted within the next few weeks, while the final report would be ready early in the new year.

Middleton said that the reserving work for Equitas had made immense strides. In the four months since May, firm foundations had been laid for a com-pany more than double the size originally envisaged. He attended a fringe meet-ing during the Labour Party conference in Brighton, which was also addressed by Alistair Darling, Opposition spokesman on City affairs. Middleton told the group that Rosalind Gilmour had spent several months reviewing how regula-tion operated under the existing regime and how it might be improved. Her report would be published and implemented through the LRB the following year. Lloyd’s had frequently said that it was a matter of indifference whether it was regulated internally or externally. The issue was that it should be well regulated.

The DTI’s response to Parliament’s Treasury and Civil Service Committee10 rejected its recommendation that henceforth Lloyd’s should be externally regu-lated. The government was aware of the extensive work currently being under-taken by Lloyd’s to tackle the problems and to enable Names to cope with their losses. It pledged to undertake a longer-term review of the statutory framework of Lloyd’s regulation. This would come later; a review now would be a major distraction.

Late October brought elation to the Merrett Action Group. Its leader, John Mays, said that the court’s decision – contained in a 640-page judgment – was a great relief and a full justification for all the time, trouble, effort and money that had been expended. He told a press conference ‘this is a stunning victory. If we’d written the judgment ourselves, I don’t think we could have come up

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with a better one’. Mr Justice Cresswell11 found all the defendants, including the auditors, Ernst & Young, liable for negligence, incompetence and dereliction of duty. He was especially critical of Stephen Merrett, saying ‘I regret to say that I have serious reservations about many aspects of Mr Merrett’s evidence and serious reservations about his approach as underwriter to 418/417’. The judge said that Merrett had given inadequate time and attention to his duties, and was ‘unconvincing’ in his evidence in court. Many market colleagues regarded these criticisms as unduly harsh: Merrett had worked hard on behalf of the whole market to combat the affliction of US long tail claims. Lloyd’s decided to mount an investigation.

CONTINUING SOLVENCYEach month, the Council had to decide, as a matter of great seriousness, whether Lloyd’s really was still a going concern. An insolvency expert was ushered into meetings to give his solemn opinion that the Council was entitled to take a view – but that the judgment must be theirs – that Lloyd’s could continue to trade. Council members were reminded of the very real personal risks involved in making this decision.

The decision to continue trading weighed more heavily on some than oth-ers, but all Council members – both those elected and nominated – took their responsibilities seriously. The volume of papers couriered to them each week-end before meetings grew larger and larger. One member recalls seeing strange lights at the end of his farm drive at 2 am. He went down to investigate in his pyjamas to find an exhausted courier asleep at the wheel. The full Council met 35 times in 1995.

Freshfields advised that all decisions might one day be tested in court; there would need to be firm evidence that discretion had been exercised reasonably, with proper consideration of the alternatives. Meetings were both frequent and long; stamina was essential. There were some resignations through ill-health. Several times, Rowland chaired long Council meetings straight after returning on the overnight flight from the US. He rarely showed the impatience he some-times felt. Rona Delves Broughton, an elected two-term member of the Council throughout the crisis, recalls it as gruelling but enjoyable. ‘Life is much duller now’ she says ruefully. This sentiment was widespread among Council members and Corporation employees 17 years later. Surprisingly, the fight for the survival of Lloyd’s is often compared to their parents’ experience of the Second World War. One Corporation member told the author his record was a 47-hour stretch in the office.

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The R&R plan said Lloyd’s fully expected to pass the solvency test in August 1995, but ‘to be confident about our longer-term future’, the financial challenge had to be confronted: ‘unless decisive action is taken, the resources of the cen-tral fund may be exhausted before the end of 1996’. This forthright statement about impending insolvency was unusual and risky, but was judged necessary to galvanise support for the ‘decisive action’ proposed. It might have led to a haemorrhaging in the supply of business had there not been a sustained effort to re-assure brokers and clients that, despite appearances, Lloyd’s was secure. Few clients deserted, but many more cut back the percentage of their business placed at Lloyd’s.

On over 60 occasions, Rowland led presentations to rooms full of brokers and clients, mostly at Lloyd’s, sometimes overseas. Many brokers chose to bring their clients to see him or others more privately. The uniqueness and complexity of the structure of Lloyd’s indirectly helped to re-assure many anxious clients. It could not readily be compared with other insurers and it was not then subject to a security rating by an independent rating agency. Nor did Lloyd’s have a share price; at several low points, this was a blessing. The ‘Chain of Security’ at Lloyd’s was explained to anxious clients and brokers with a chart that showed some big numbers. The total value of funds held at Lloyd’s was still impressive, but one member’s assets could not be used to pay another’s claim. The total value of members’ assets was greater still, but collecting debts from big losers was prov-ing difficult. The central fund was a worthwhile asset, but already members’ sol-vency deficiencies ‘earmarked’ against it were bigger. To those who understood all this, including the author, the Q&A sessions were nerve-wracking. However, few really awkward questions were asked. Lloyd’s brokers did not want to rock the boat.

TEAM CHANGESBy November 1995, the Equitas project was struggling to define the amount required to take on all of the pre-1993 liabilities of Lloyd’s. Stockwell was step-ping up his campaign for an alternative to Equitas. The NC and the action groups were asking for still more money to settle the litigation. A fresh threat had emerged in the US, where the State securities regulators made complaints that Lloyd’s had breached their laws.

In early October, Middleton agreed to meet a Name who also ran a recruit-ment agency. Assuming his interlocutor wished to discuss Lloyd’s, he was sur-prised to be told this person had been commissioned by Salomon Brothers to find a chief executive for its UK and Europe operations. Several meetings followed in

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London, then Middleton was flown to New York in secrecy over a weekend. At his last interview, Middleton recounts that he told Derek Maugham, Chairman and CEO of Salomon Brothers, he could not leave Lloyd’s until April 1996, when he expected the R&R settlement to have been agreed. Salomon Brothers under-stood this. In recruiting Sandler, Middleton had encouraged him as a potential successor. He and Rowland had agreed in principle that their departures should not coincide. He knew that Rowland planned to continue at least until the end of 1996.

Middleton thought the action group leaders would be anxious to seal a deal while he was still there. He says12 he wanted to achieve that by April, leaving Ron Sandler to take up the reins thereafter. Rowland walked into his office on Friday 10 November to find a handwritten personal letter in the centre of his desk. Middleton, his Chief Executive, had resigned. He reacted with fury, see-ing this as nothing less than a betrayal. He thought Middleton would become a ‘lame duck’ as soon as it was known, losing all authority. Rowland’s first meet-ing that day was with Newbigging, who encouraged Rowland to wave goodbye to Middleton promptly, making a strong case for a smooth transition to Sandler as an immediate internal replacement. Rowland’s two Deputy Chairmen, Stace and Hiscox, both said the same.

Middleton’s resignation was a bitter blow to Rowland. He telephoned all his closest advisers that day. The author took a call in a noisy Rotterdam hotel kitchen, adjacent to the room in which he was re-assuring Dutch brokers about the strength of the security of Lloyd’s. Council members were telephoned. Middleton flew to the US to take Rowland’s place as a conference speaker. Two directors who had also contended for the job when Middleton was first appointed were asked to meet Rowland on Sunday to ensure that they would support his next move. They did: there was a consensus that Sandler was a natural successor to Middleton. Some thought that he might even be better equipped to see the plan through implementation. Middleton had broken the mould, but some were beginning to question whether he was the right man to finish the job. Some market people were increasingly concerned that he had, as Hiscox put it, ‘fallen in love with the action groups’. It was true that Middleton had given high priority to understanding their point of view and to cultivat-ing his relationship with them; as an outsider, he was uniquely placed to do this. He and Rowland had an informal understanding that he would deliver the action groups, while Rowland would deliver the market. Nevertheless, his close relationships with action group leaders, his known sympathies for their position and his background in espionage all conspired to lead some insiders to mistrust him.

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Middleton’s supporters among the litigating Names groups were at first aghast at hearing the news. The headline of the next edition of the Society of Names (SoN) newsletter said: ‘The King is dead.’ But below this, Tom Benyon, its author, explained that the eighteenth-century politician Talleyrand had been famous for his hidden agendas. When he died, Prince Metternich had asked: ‘I wonder what he meant by that?’ Benyon went on to say that members should not over-complicate what had happened: ‘Let’s keep a sense of propor-tion. A hired gun has been hired by someone else, that’s all. No one is indis-pensable ... A financial market can change Chief Executives without any lasting damage.’

Rowland took several days to calm down and to agree to issue a state-ment recognising Middleton’s achievements, but the two men never met again. Middleton co-operated with Lloyd’s by telling journalists there was no hidden agenda, no row, and that he remained confident that the plans could be brought to a successful conclusion by Rowland and Sandler. He had been lured to take up a new challenge that was very well paid. He did not wish to disrupt the process by saying he had hoped to stay until April, which he now says13 he had seen as the responsible thing to do. Afterwards, when chided by banking colleagues for leaving Lloyd’s abruptly, he says that Derek Maugham assured them, privately, that he had left sooner than he wanted to.

Citing a Lloyd’s spokesman as saying ‘it’s always a bad time for someone to leave’, The Economist14 added that ‘the truth is that Mr Middleton could hardly have chosen a worse one’. His exit would make the achievement of R&R ‘immeasurably harder, however good his replacement proves’. Middleton, as an outsider, was one of the few Lloyd’s people whom the Names trusted. If Names feared that their interests were not properly protected, they would be unlikely to back the recovery plan – ‘which could mean the end of Lloyd’s itself ’.

With Rowland’s strong backing, there was a widespread willingness to rally around the engaging and highly intelligent Sandler, who, with his back-ground in engineering, finance and consultancy, was building a good reputa-tion among those he encountered in the Lloyd’s market. Sandler soon gave a much stronger impression of being a finisher than his predecessor. He had a soft-spoken modest style that engendered trust among market players and liti-gating Names alike. His former experience as a management consultant meant that he had seen through a wide range of business problems in the US and Britain. Those with whom he dealt found him refreshingly reliable and con-sistent. His attention to detail and sheer all-round competence matched the complex task before him.

Picture 14 Three phases of leadership. Reproduced by permission of Lloyd’s

David Rowland and Peter Middleton after publication of Lloyd's first Business Plan, Spring 1993

David Rowland and Peter Middleton approaching the chasm, December 1994

David Rowland and Ron Sandler selling the reconstruction plan, Spring 1996

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Sandler was already engaged in many aspects of the plan. He now took the principal position as negotiator with the action group leaders. From the outset, he approached this with an absolute commitment to getting an agreement. He says: ‘There were obviously meetings where we disagreed, sometimes quite heat-edly, and there was a lot of table thumping at various times from both sides. But there was always a recognition that this thing was only going to work if it was ultimately collaborative and enjoyed a lot of buy-in. Therefore I was determined to avoid taking a position that would ultimately cause a rupture.’15 He recog-nised from the outset that the R&R plan was likely to take around 15 months to bring to fruition and did not share Middleton’s view that it could all be finished by April 1996.

Another senior appointment had taken place a month or so before Middleton’s departure: David Gittings was appointed as Director, Regulatory Services in succession to Rosalind Gilmore. Gittings, a law graduate and bar-rister, had plenty of regulatory experience: he joined the Securities Association, the forerunner to the Securities and Futures Authority, in 1987. Explaining key departures from Lloyd’s had presented the PR department with something of a challenge. In the case of Gilmore, the news was softened by an announce-ment that she would continue to be a member of the Regulatory Board and was undertaking a review of the current regulatory system. In July 1995, Lloyd’s had revealed Heidi Hutter’s future. She would complete her assignment on the project before taking up a new position as Chairman and Chief Executive of Swiss Re America the following year. Hutter wrote in the Equitas newsletter that both Swiss Re and Lloyd’s had made it clear that her move would only happen when she had completed her assignment at Lloyd’s and she would not have it any other way. The project was progressing well, leadership would transition to Tony Jones, Hutter would remain a member of the Reserve Group and Mike Crall was busy organising the company. Nevertheless, commentators were unsettled by these departures.

Other changes followed soon afterwards. Deeny had already emerged as a key leader among the litigants. A pragmatist with whom Lloyd’s could negoti-ate, he was elected to the Council for 1996. His role was critical, although it was resented in several quarters. The market felt he drove too hard a bargain; some fellow litigant leaders resented his predominance. But when the eventual deal emerged, Deeny played a vital role in delivering the near-unanimous support of litigating groups, without which it could not proceed.

Rowland was re-elected to the Council and continued as Chairman. Stace remained one of his deputies. Hiscox’s three-year term of office was complete. He left the Council at the end of the year. At the Old/New Dinner – an annual event attended by Council members from the old and new Councils in January

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1996 – Rowland gave him a chain to mark the breaking of the shackles of being on the Council. Hiscox said a few words and some of them were directed at newly elected Council member Deeny. He recalls saying something along these lines: ‘You are sitting there smugly, thinking that you have done great things for your Names. But you have damaged the Society and especially the decent honourable people who have paid their debts.’ He recalls that he was very upset and very pleased that he would be off the Council when they decided that some people would not have to repay their debts. In sharp contrast to the rest of the leadership team, he still regards it as one of the most disgraceful events in the history of financial services. He had gone around meetings of Names for three years re-assuring those who said: ‘I paid all my losses and am I going to be paid back if there is ever a settlement?’ ‘Of course you will’, he had said. Shortly before he stepped down, he reminded Rowland of this. He was told it would be impossible. As he sees it, ‘the mean little fellow who used to shout at me at meetings of Names, and would not pay his losses, was now being forgiven most of his debt, whereas the honourable colonel, who had always paid up, would get nothing back. I told Deeny that he had fought for this little crowd of non-payers, and not for Lloyd’s’.

Hiscox was replaced as Deputy Chairman by John Charman, who had just been elected to the Council. Within Lloyd’s, Charman was widely respected as a highly successful businessman. He had done particularly well out of the war risk insurance written during the 1991 Gulf War. His own firm had grown from small beginnings to occupy a leading position in the Lloyd’s market. He was described by the FT as ‘famously strong-willed and opinionated’. At Lloyd’s, he was known as an early and loud advocate of the complete removal of the old barriers between traditional markets: his syndicate was a leading example of a composite, writing a range of business including both marine and non-marine risks. He had made a point of cultivating the Far Eastern markets as sources of business and saw their potential for providing capital too. He was a moderniser in nearly every sense, but he also had very strong views about his right to run a business without interference. This is part of the DNA of the Lloyd’s underwriter; he expressed it more forcibly than most. Like Hiscox, he was used to getting his own way. The role of Deputy Chairman within the Lloyd’s management team could be very frustrating to people with this background. Neither Hiscox nor Charman was interested in the status some-times associated with the job: both wanted to make sure Lloyd’s succeeded because it was home to their business. Charman’s appointment ensured that that Rowland’s inner team continued to have the authentic voice of the Lloyd’s market in its midst.

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David Rowland, Chairman of Lloyd’s 1993–7

Brian Garraway, first Chairman of Lloyd’s Regulatory Board, January–September 1993

Sir Alan Hardcastle, Chairman of Lloyd’s Regulatory Board 1994–7

Stephen Merrett, Managing Agent and Underwriter, Deputy Chairman of Lloyd’s January–September 1993

Richard Keeling, Managing Agent and Underwriter, Deputy Chairman of Lloyd’s September 1993–December 1994

Robert Hiscox, Managing Agent and Underwriter, Deputy Chairman of Lloyd’s 1993–5

Picture 15 Continued

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Picture 15 David Rowland and his seven Deputy Chairmen

John Stace, Members' Agent, Deputy Chairman of Lloyd's 1994–7

John Charman, Managing Agent and Underwriter, Deputy Chairman of Lloyd’s 1996–7

THE VIEW FROM GOVERNMENTA few days before Christmas 1995, Jonathan Spencer, head of the DTI’s insur-ance division, wrote to Sir David Berriman in his capacity as Chairman of the VSG. The DTI considered that the prospect of insolvency would greatly increase if Lloyd’s were placed in run-off, as proposed by the LNAWP in its discussion document. The letter stated that ‘in the light of our experience of other insurers in run-off, the very act could lead to a rapid crystallisation of claims’. The letter took issue with the suggestion that by going into run-off, Names could simply pay claims as they arose. Instead, it raised the prospect of forcing Names to hold assets in trust to meet all their liabilities, saying ‘to do otherwise would run the risk of earlier claimants being preferred to later ones; for this reason it would not be acceptable for Names only to provide funds when claims were due’. There was no regulatory requirement for Equitas to maintain a solvency margin of 16 per cent in excess of its liabilities, as the dis-cussion paper had said.

The DTI’s letter was one of a number of documents under review by the VSG. Others included a memorandum explaining why the Council of Lloyd’s thought that the reconstruction plan offered big advantages over the run-off alternative. This contained legal advice to the effect that the £2 billion in relief from debts would not be available in the event of the Lloyd’s market going into run-off. This was for several reasons: the central fund and other assets, like the building, would need to be preserved to meet the liabilities to the Society’s own creditors, which included Lioncover, Centrewrite and hardship Names; and the Council would not have a proper basis for imposing the special central fund levy and the agents’ contributions, together amounting to £650 million.

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Equally importantly, none of the alternatives considered by the Council would offer Names a resolution of their liabilities. By contrast, Equitas should offer an exit route.

A powerful letter from the Janson Green Action Group was also highly crit-ical of the run-off alternative. It argued that the LNAWP’s proposals were per-meated with the ‘wishful thinking’ of which some underwriters had been guilty in the past, saying that ‘thousands more Names could be faced with bankruptcy if Lloyd’s goes into run-off than if Equitas is established and Lloyd’s remains solvent’. This was included in a pack sent by Lloyd’s to Names, along with the DTI’s advice and a message from Sandler.

Support for Lloyd’s came from leading politicians on both sides of the House in a pre-Christmas Commons debate on financial services regulation. Alistair Darling, Labour’s City affairs spokesperson and a future Chancellor of the Exchequer, acknowledged the work that Lloyd’s had been doing to secure the future of the market. He emphasised the need for external regulation. Replying, Angela Knight, Economic Secretary to the Treasury and a future lobbyist for banks, said that the government had agreed on the need for a fundamental review of the regulatory arrangements in due course.

The long-running Clementson case had shown that it was easy to run competition arguments against Lloyd’s, but difficult to dismiss them. Earlier, Lloyd’s had made a protective notification to the European Commission about the central fund arrangements. The notification was challenged, facing the Commission with the threat of being taken to the European Court of Justice. To avoid another challenge to the R&R plan, Lloyd’s notified the structure of the market as a whole, along with specific elements of the plan. Freshfields organ-ised this complex filing, with detailed explanations of the structure of Lloyd’s and why it was not anti-competitive. Meanwhile, the Freshfields competition team also had to consider whether the compulsory reinsurance of Names by Equitas needed to be registered with the Office of Fair Trading (OFT). Without this, there was a risk that dissident Names would challenge the settlement or Equitas. Eventually, the OFT accepted that Lloyd’s was acting in its statutory capacity as a regulator, that its byelaws have the force of law and that the settle-ment arrangements imposed under its byelaws were not registrable.

CAPITAL CHANGESCapacity for 1996 fell again, from £10.2 billion to £9.9 billion, with corporate capacity increasing its share to £3 billion or 31 per cent of the total. Twenty-three new corporate capital members brought with them £350 million of new capacity. The listed spread vehicles became eligible to apply for investment trust status, making them exempt from capital gains tax on assets.

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The previous year, the Kiln agency had set the pace for new structures. Kiln Capital plc was the first and only corporate member with trading com-pany status with a listing on the London Stock Exchange. Each of the other 16 listed corporate vehicles had been structured as investment companies and so did not require a three-year track record for a listing. In Kiln Capital’s case, this requirement was fulfilled by the syndicates in which it invested, setting a precedent that was soon followed by other corporate syndicates. Like Hiscox, it was also one of the first corporate members to ‘dedicate’ capital exclusively to a single managing agent. With £500 million of capacity, Kiln was now the fifth largest managing agent, with nine syndicates.

Andrew Fleming Williams, Kiln Executive Director, said that Kiln Capital’s placing activity focused on familiarising investors with the Lloyd’s market. In the past there had been a strong dividing line between the financial and insur-ance sides of the City. He believed that dedicated vehicles would increase their share of corporate capital. Analysts spent time with syndicates, learning about their business practices. At Kiln, he said, day-to-day management was tight: senior underwriters reviewed all risks underwritten daily and each syndicate’s operation was reviewed weekly.

In 1995, a consultative document was issued about RBC – the system for relating premium capacity to capital which took account of the inherent risk of each class of business. This was an early forerunner of the FSA’s Individual Capital Assessment (ICA) regime. RBC systems were becoming standard prac-tice in other financial markets. Banking regulators around the world were relat-ing capital adequacy more closely to the risks involved. Insurance regulators in the US had already implemented RBC for the life/health market and the prop-erty/casualty business.

The Lloyd’s working party on RBC was chaired by Mark Brockbank. Tillinghast, the actuarial consultancy closely involved in the US design, helped develop a system suitable for Lloyd’s. Practical advice had been sought from leading underwriters, managing agents, capital providers and their advisers, and from Corporation staff. The risk assessment would take account of planned new business activity and liabilities inherited through RITC or arising from run-off years. Members’ agents would be provided with a computer disk which combined the risk weights with syndicate business plans. The intention was to introduce the system for the 1997 account; it would also be used to help deter-mine 1996 capital requirements for corporate vehicles. Hardcastle said that the work was of fundamental importance to Lloyd’s. It was also ‘a vital part of the Society’s commitment to embracing new concepts’, which would improve standards and controls, putting Lloyd’s ‘at the forefront’ of the British insurance industry.

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Many of the limitations imposed on the corporate members of Lloyd’s were lifted for 1996. The integration of corporate members and managing agents became possible; so did an interest in a managing agency by an insurance com-pany. The largest such new investor in 1996 was Brockbank/Mid Ocean, a group that brought together a large, leading Lloyd’s managing agent with a £450 mil-lion premium income, and a major world reinsurer, based in Bermuda. The deal was contingent on the successful implementation of the R&R plan. Brockbank syndicates had been consistently profitable over the last ten years. The Chief Executive, Mark Brockbank, a member of the LMB, said that his company’s search for a dedicated corporate capital partner had begun two years earlier. He thought that the traditional Lloyd’s structure of an annual venture, under which capital was committed by individuals on a year-by-year basis, inhibited long-term planning and business development. The new structure would allow a seamless transition from one year to the next, creating greater confidence in long-term prospects.

For the first time, a Lloyd’s underwriting group acquired an insurance com-pany operating outside of the Corporation. Hiscox Dedicated Insurance Fund plc bought Economic Insurance Holdings Ltd for £35.5 million in early 1996 and increased its ownership of the Hiscox managing agency from 25 per cent to 100 per cent. The combined group had a gross premium income of £525 million in 1995. At that stage, £75 million would be written outside Lloyd’s.

When first discussed at the capital structure working party, the integrated Lloyd’s vehicle (ILV) had been a theoretical concept. It was the Holy Grail for some, but looked much too much like a conventional insurance company to those who wanted to preserve the concept of capital spread among a variety of syndicates. In late 1995, it became real. Cox Insurance Holdings plc was listed on the London Stock Exchange, becoming the only Lloyd’s corporate member to acquire an existing managing agent and, in turn, its syndicates. Cox effected a marriage of underwriting capacity and management similar to an insurance company. A US venture banking fund subsequently took a 26 per cent share in the business, valued at £21 million. Michael Dawson, Chief Executive at Cox, felt sure that more corporate investors would now follow this model. This was known as fully aligned capital and management. Later, Dawson joined the Council and the LMB as the second representative of corporate members for 1998.

FAIRNESS VERSUS PRAGMATISMIn allocating the debt credits, there were two opposing principles at work. The fairest thing to do was to give as much relief as possible to those who had suffered

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the biggest losses. The most efficient or ‘commercial’ approach was to write off the debts that had not been paid and that would be very hard and expensive to collect. The Names Committee (NC) began life with a heavy emphasis on the fairness principle. The NC itself and then the Council ended up with a formula much more heavily dominated by pragmatism: writing off uncollectable debt. At the final stages of the offer, this was tweaked further, improving the deal for those who had paid up.

In February 1996, the Council published Reconstruction and Renewal: Allocating the Settlement. It included an executive summary of the final ver-sion of the NC’s report. There were now four tranches of debt credit in place of three. The third tranche would provide a limit or cap on finality bills, after use of all funds at Lloyd’s (FAL) and PSL recoveries, while the fourth tranche would provide means-tested assistance to Names unable to meet their final-ity bills. Critically, the NC also proposed that litigation and administrative expenses of action groups should be reimbursed from the litigation fund as an extra incentive for litigants to settle. The cost was estimated to be in the region of four to five per cent of the settlement fund, i.e., £32–40 million. In the event, it cost more – £75 million – but it was extremely helpful to action group decision makers, many of whom had stretched themselves to get this far.

The NC stipulated that its support for a means-testing process depended on a fresh approach to this delicate subject. Those likely to need help should be con-tacted; a set of precise financial guidelines should be prepared with advice from Names’ representatives; the group to oversee this process should be re-named and reconstituted, with significant representation of action group chairmen and external Names; and a more wide-ranging telephone helpline service should be established. The NC also wanted to undertake more work on the impact on Names of drawing down £1.25 billion or more of funds held at Lloyd’s. Part of this would take the form of guarantees or letters of credit secured on Names’ homes. It hoped to be able to propose a loan facility, secured on property or other assets, providing long-term finance at a favourable interest rate to replace such guarantees. If affordable, a subsidy would greatly increase the acceptability of the settlement offer.

The NC emphasised that some aspects of its recommendations were una-voidably provisional until the Equitas reserving exercise was complete. Only then would the final amount owed by each Name become apparent. The four new tranches are described in the figure that follows.

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The Committee made several recommendations about the threshold levels to be used for these tranches of relief. The first would be allocated pro rata to losses above 100 per cent, including expenses. The NC said the division of the £2 billion between the four tranches would be determined by the need to achieve a minimal level of residual debt. Within this constraint, it recommended that the first tranche should be as high as possible as it believed this would be – and would be perceived to be – the most equitable of the four methods of allocation. Despite this remark, the new proposals represented a shift from the Committee’s original fairness principles. The cap on further payments – the third tranche – was a huge benefit to those who had not paid. At this stage, however, the Council pitched this cap at £100,000 rather than the £50,000 level that the NC had hoped for.

There was much heart-searching around the Council table when these pro-posals were made. Among many issues, the biggest single concern was that ‘rich won’t pays’ could benefit disproportionately from the third tranche. Some found the scale of debt write-off ‘immoral’. Several members wanted more widespread means testing, but had to accept that this would be impracticable. Now a Council member, Deeny ensured that the position of litigants was well understood. With his usual skill, Rowland steered a long discussion towards eventual agreement that a filter would be applied to those receiving large allocations through the

Figure 7.1 The NC’s final proposals for the allocation of debt credits16

Tranches of debt credit (DC) Debt credit applied to: Stated objective

Allocation proposed by Council (not NC)(£ million)

DC1 Cumulative loss to finality above a threshold

To relieve dispropor-tionate loss

300–500

DC2 Finality bills less FAL, unpaid debt and central fund debt, above a threshold

To recognise those who have paid their debts to Lloyd’s

200–300

DC3 Finality bills after FAL above a cap

To relieve difficulty in achieving finality

1,000–1,300

DC4 Means-tested assistance fund

To help those who cannot pay their finality bills in part or in full

100–150

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third tranche. In Allocating the Settlement, the Council accepted the NC’s rec-ommendations about the structure of debt credit allocations; it remained con-fident it could offer at least £2.8 billion at the end of May. It was trying to raise more, but there could be no guarantee of success. Negotiations were continuing to secure a contribution from auditing firms. If successful, the offer would be increased.

The Council’s document also said that Lloyd’s would continue to work with banks and others to develop a structured payment plan. This would allow Names who could not afford to pay their finality bills straight away to spread payments over a number of years. The NC would have a continuing role in providing advice to the Council on the allocation principles governing the final offer until it was made. It would advise on general issues of fairness and acceptability, and also on specific issues such as more measures to help the hardest-hit Names.

The Council accepted the NC’s view that the litigation settlement fund should go only to those Names who were actively litigating against their agents. It had to recognise that some Names had already won in court and therefore needed an offer that was more attractive than the alternative of continued litiga-tion. The Council was also concerned to mitigate the unfairness of the ‘first past the post’ principle governing court awards. The level of awards would reflect the status of each action group’s litigation at the end of 1995. Those with a favour-able court judgment would be offered more than those still at an early stage. The following range was likely: active litigants with a favourable judgment would receive 30–35 per cent of their share of the syndicate’s losses; those with hearing dates before June 1996 would receive 25–30 per cent; those with hearing dates between July and December would receive 20–25 per cent; and others classified as litigating would receive 10–20 per cent.

In practice, the Council had not felt able to follow the NC’s advice to put a large amount into the first tranche, which it had described as ‘the most equi-table’. Nor was this compatible with the NC’s recommendation to place a cap or limit on the amounts to be paid – the whole idea of the third tranche. The Council was ‘acutely aware’ that a cap on outstanding debt worked to the ben-efit of some Names who had refused to pay their debts to date. Even at a limit of £100,000, this tranche would use up over half of the total £2 billion available. It explained that many alternative approaches had been considered. The main benefit of the cap was to help those Names who had large bills and who, having used all their funds held at Lloyd’s, would face difficulty in meeting their bills. The NC collectively, and many action group chairmen individually, had strongly urged that a cap on outstanding debt was a critical element in winning support for the reconstruction plan and in encouraging those Names with resources to pay up to this limit and settle their Lloyd’s affairs once and for all.

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The Council’s document had two central messages about affordability:

No one would face a bill of more than £100,000 above their funds ●

at Lloyd’s.No one would be prevented from acceptance by lack of funds. ●

An offer along these lines would make finality much more affordable for many thousands of Names. Without it, over 9,000 Names would face bills in excess of £100,000 after using all their funds at Lloyd’s. Of these, over 2,000 would face extra bills over £400,000.

Nearly two-thirds of Names would be able to meet the cost of all their bills from their existing funds at Lloyd’s. A total of 5,000 Names were expected to have cash receipts following the reconstruction. The document also set out the attractions for litigants that could not be realised through continued legal action. These included a final reckoning of their Lloyd’s liabilities; a cap on total exposure across all syndicates up to and including 1992; a high share – approxi-mately 75 per cent – of the total settlement offer; and substantial allocations of debt credits to assist the hardest-hit Names. The average allocation for the 6,800 litigants receiving debt credits was estimated as £200,000.

The full extent of the sacrifice of fairness to pragmatism was not evident. Although the third tranche was now to take the lion’s share of the debt credits, it was by no means all going to benefit the infamous ‘won’t pays’. It was not possible to tell their share from the published data. Furthermore, as the NC’s interim report had explained, the so-called ‘won’t pays’ had, on average, already paid more than others.

This did not prevent some people from denouncing the package as a debt-ors’ charter. For them, it was unconscionable that those who had failed to pay up in full should gain any advantage over the ‘honourable’ people who had paid. Some were even doubtful about the principle of alleviating other people’s losses in any circumstances, preferring to rely on the traditional formula that each member alone was responsible for his own underwriting and its consequences. There was little hope that people holding this minority view could be reconciled. The battleground was over mainstream opinion: most people accepted the need for a package and expected it to contain a mixture of fairness and pragmatism, but could easily lose faith if they believed that others were ‘getting away with it’ to an unreasonable degree. A struggle ensued for the hearts and minds of the Lloyd’s membership on this issue.

As recommended by the NC, the Financial Recovery Committee was duly re-named and now included Names’ representatives. Richard Spooner joined the new Assistance and Recovery Committee (ARC) working on a better response

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to the hardest hit, so that more of this group too could support a deal. Philip Holden, who had spearheaded debt recovery, says the ARC’s role changed from purely debt collecting: it now became concerned with making the settlement offer work: ‘Spooner, I thought, was very clever, very able with data. He took our modelling to a different level. But because he was a Names’ representative, you were always at odds with him, because no matter what you did, it was never enough.’

After the NC had finished its work, the ALM and the LNC continued to be closely involved in the details of the settlement. They now formed a Settlement Agreement Advisory Group to review with Lloyd’s all the legal documentation relating to the plan. Both organisations were represented by their Chairmen, Berriman and Deeny. In practice, Ridley represented Berriman during much of these deliberations and continued to work practically full time on Lloyd’s affairs. Philip Rocher of Wilde Sapte, the solicitor who worked so effectively in the Gooda Walker case, was their legal adviser. Although resented by many market practitioners and by some smaller action group leaders, court victories had put Deeny in a very strong negotiating position.

In October, Names had been told that indicative statements would be delayed. Now they heard that statements should become available in March. This had been a long-running saga. Rough estimates of amounts needed for Equitas were still worryingly high.

8

T IGHTROPE

One day, in retrospect, the years of struggle will strike you as the most beautiful.

Sigmund Freud

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With Equitas not yet authorised, a deal not yet struck with Names’ leaders and rough estimates still not sent to each member, the tightrope stretched

out ahead. There were still big uncertainties: strong opposition from a vocifer-ous minority; many other Names still unpersuaded; funds to make the offer affordable still to be raised; a vote on a central fund levy to raise £440 million still to come; and a bridging loan needed to convert future contributions to cash. A massive effort was still needed to win acceptance for the R&R plan.

In the US, fresh crises kept breaking out as securities commissioners came under heavy pressure from angry US Names. Intense efforts were made to douse the flames, as a hit squad of lawyers and lobbyists, led by Peter Lane, tried to per-suade the authorities to hold off and come to the negotiating table. Court action was still unpredictable, as groups of Names went ‘forum shopping’, searching among 50 states for the jurisdiction most receptive to their arguments.

RAISING FUNDSIn January 1996, the sale of the publishing subsidiary of Lloyd’s, Lloyd’s of London Press (LLP), was announced. A management buyout, backed by ven-ture capitalists 3i, raised £82.5 million. Royalties would be paid for the use of Lloyd’s name in LLP’s 50-odd publications, including Lloyd’s List, the world’s oldest daily newspaper. Lloyd’s appointed international property consultants to advise on a sale and lease-back for the iconic building. Within a short time, the freehold was bought by a German property fund for £180 million. A 35-year lease was arranged at an annual rent of £11.5 million. Beyond the substantial amounts of money raised, both steps were intended to demonstrate to Names that no stone was being left unturned in the efforts to assemble as much as pos-sible for the settlement offer.

Feelings ran high among Names that Lloyd’s agents should pay a substan-tial amount. A minority of managing agents were being sued, but their assets were strictly limited. Some were already out of business. More serious money could only be raised by a contribution from all of the agents, including profit-able businesses that argued passionately that they had not caused the problems that beset both Names and Lloyd’s. In 1995, Brian Pomeroy, a former nominated Council member, was asked to chair a group to hammer out a way of sharing this burden. It met 19 times, eventually agreeing to a split whereby 77.5 per cent of £200 million would come from managing agents, the balance of £45 million coming from members’ agents, advisers and corporate entities. The contribu-tions would be linked to aggregate capacity – the simplest method of allocation. In 1996, the Council’s external Names, now including three action group lead-ers, felt strongly that agents should pay still more.

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For two and a half years, Rowland had enjoyed the support of most agents as the leader who could speak up for Lloyd’s, handle the press, the US regu-lators and deal with the British government. He was also extremely active in re-assuring brokers and clients that, despite the adverse publicity generated by losses and litigation, Lloyd’s remained a safe source of secure insurance. Now he had assembled a team which had produced a credible plan that stood a good chance of success. As he reminded everyone in the market, this plan was their best chance of trading through to a time when the profitability and potential value of the Lloyd’s market could be restored. Despite all this, even Rowland’s credibility became strained when he called for more from agents. Many simply could not believe that it was fair or necessary. Some said – and others felt – that it was a sell-out to litigating Names: it was ‘political’ rather than crucial to the numbers needed to make a settlement offer fly. In private, some harsh words and home truths had to be spoken. Notions of fairness had to be re-visited by market professionals, just as they had to be among Names. The way litigants saw it was critical to gaining their support. In the end, not without some lingering bitterness, agents agreed to contribute £25 million more, based on their assets, or what they stood to lose in the event of a liquidation. Philip Holden’s expertise was used to negotiate this figure with each agent. Later, when Rowland tried to increase this further still, he ran into a brick wall.1

In June 1996, Stephen Catlin, a successful underwriter, expressed his view that further increases in the amount to be contributed by the agents would leave his business with ‘no choice but to review our position’. He did not wish to leave the Lloyd’s marketplace, but the value of any franchise was cost-related and if the cost became too high, ‘hard-nosed business decisions will have to be taken’. He explained that in 11 years of trading, his agency had never made a loss for its Names and had re-invested most of its modest profits in the future. His agency’s contribution, which was not re-payable, was twice the level of profits earned during the whole of the past 11 years. He pleaded for an informed debate, rea-sonable courtesy and a balanced view of the realities of business.

The 1982 Act had required brokers to divest themselves of Lloyd’s managing agents, but there remained something almost proprietorial about the attitude of Lloyd’s brokers towards the Lloyd’s marketplace. Without brokers supply-ing business, the ‘market’ would not exist. Some brokers had played a big role in causing some of the problems, notably the LMX spiral. All brokers had an interest in the continued survival of the Lloyd’s market. To an outsider, it might seem unlikely – even preposterous – that brokers, whose prime duty is to shop around among insurers on behalf of their clients, should make a direct contri-bution towards resolving the problems of any insurer. However, that would be to misunderstand the relationships within the Lloyd’s community. There was

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never much doubt that they would feel duty-bound to contribute. They agreed to contribute £100 million. But that too involved haggling. They exacted a price: a renewed commitment that all commercial business would continue to come to the market exclusively through Lloyd’s brokers.

The leadership, the Council and the litigant leaders all had to be convinced that each available lemon was being squeezed until its pips squeaked. Some of the auditors were being sued; the Merrett court judgment had at last established their responsibility in that case. They too were persuaded to join in a settlement of hostilities, contributing £116 million. Negotiations continued with the E&O underwriters; Ron Sandler recalls ‘that was one of the hardest bits of the puzzle. It was like pulling teeth. We had weekly meetings’. These underwriters in turn needed to secure the support of their reinsurers – largely big outside reinsurance companies. A consortium of three banks agreed to extend significant lines of credit to the new Lloyd’s in order to convert future pledges into current cash. Each one of these bricks in the wall involved tough negotiations. Sandler found that his own office attracted a number of market players for informal debate because, unlike the rest of the building, he declared it a zone where people could smoke. He was often a much better informed negotiator as a result.

MORE LEGAL BATTLESIn January 1996, the Appeal Court upheld2 the earlier judgment by Mr Justice Rix. In a test case to establish the validity of the ‘pay now, sue later’ clause, it had been argued that the operations of Lloyd’s breached European competition laws, rendering the clause invalid. Lord Justice Leggatt said that the Name con-cerned, Dr Higgins, had promised to ensure without question that at all times there were sufficient funds available to pay all claims. It was obvious that unless Names fulfilled that promise, Lloyd’s would cease to exist. He continued: ‘The obligation to pay debts is as old as commerce. Dr Higgins received premiums for the acceptance of a liability to pay if losses eventuated from prescribed risks. They did. He is liable to pay the insured.’

The three Lords Justices of Appeal, Leggatt, Rose and Roch, also ordered indemnity costs against the appellants and refused their application for leave to appeal to the House of Lords. The effect of this judgment was to enable agents to obtain summary judgments against those members who did not respond to cash calls and writs requiring payment. Potentially, thousands of members could now become the subject of writs involving the collection of millions of pounds in unpaid cash calls. Holden said that the judgment was an unambigu-ous warning to those who ‘won’t pay’, but that it would not be applied to those who ‘genuinely cannot’ meet their Lloyd’s obligations.

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So far, the US courts had generally upheld the ‘forum selection clause’ whereby US Names had agreed to resolve disputes under English law in English courts. Frustrated Americans turned to their state securities regulators, arguing that membership of Lloyd’s was a security and had been sold to them in breach of US securities law. Advised by LeBoeuf, Lloyd’s had always been careful to ensure that the rules of the Securities Exchange Commission (SEC) – a federal body – were not breached. Although membership of Lloyd’s was not an invest-ment in the ordinary sense, it shared some characteristics with investing. Years earlier, it had been agreed with the SEC that Lloyd’s would operate under ‘regu-lation D’ and would only admit US members who met the criteria laid down for ‘sophisticated investors’. Broadly, these were wealthy individuals with at least $1 million in net assets (the tests have since been increased). The number of US Names was relatively small and the SEC was content. Lloyd’s was unaware that each individual state in the US also had a securities regulator. These are some-times known as ‘Blue Sky’ commissioners, first established in response to the sale of securities with ‘nothing but blue sky behind them’. Blue Sky laws judge the merits of proposed investments; the SEC only judges the adequacy of disclo-sures made to encourage investments.

In some states, complaints from angry Names made no headway, while others, notably Arizona, Texas and California, were more receptive. Securities regulators spoke to LeBoeuf, for whom this kind of enquiry was routine. Later, lawyers representing Names made more progress with state securities commis-sioners in Colorado, Illinois, Missouri, West Virginia and Ohio. In December 1995, Colorado secured an injunction preventing Lloyd’s from drawing down on letters of credit provided as security at Lloyd’s. Eventually, most states became involved.

Jo Rickard, legal director at Lloyd’s, approached Harvey Pitt at Fried Frank, a US law firm, largely because Pitt, an ex-general counsel at the SEC, was an acknowledged expert in the field of securities law. Pitt approved most of what had been done to date, but suggested that the securities commissioners should be asked to form a committee to represent all the states so that there could be a single resolution of their concerns. LeBoeuf feared that this would increase state regulators’ power and influence and might prove counterproductive. Up to that point, the 50 states had never engaged in an omnibus resolution with promot-ers of investment interests. But Pitt cautioned that, once a single state obtained relief, the others would also be able to piggy-back on its success. Pitt’s advice was taken: by now the bandwagon was rolling and hopes of stopping it with individual deals were faint.

Names in California were unable even to receive their indicative finality statements: the state’s Department of Corporations (DoC) had issued orders

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preventing Lloyd’s from promoting Equitas or the reconstruction plan to Names who were resident in California. The DoC had also issued ‘cease and desist’ orders to prevent Lloyd’s from drawing down on members’ deposits and was seeking a court order to freeze, for Californian members’ use, the LATF. Lloyd’s vigorously defended these actions, insisting that membership of Lloyd’s was not a security; members were sole traders in insurance. Historically, the SEC had accepted this. Normally, state regulators followed the SEC’s lead. However, the SEC’s evidence to the California court now argued that the ‘anti-waiver’ provi-sions in various state securities laws were an important protection for US citi-zens and should be upheld.

Rickard told Rowland that the growing problem in the US had to be solved. He asked Peter Lane to go to the US and fix it. Rowland spoke to Citibank, which recommended Kekst and Co, a PR consultancy, whom Lane describes as superb: ‘They understood street fighting, the need for rapid responses, always to the point, quick in correction and rebuttal and clear in the message to get across.’ They knew who Lloyd’s should engage across the US: a different lobbyist in every state and, in some, several. The operating pattern was a daily interna-tional telephone review meeting involving Fried Frank, LeBoeuf, Kekst, Lane and Rickard, regardless of location. These were very taxing, but essential. The main Kekst executive on the job suffered a fatal heart attack, which was partly attributed to overwork. Lane and Pitt also retained local law firms with exper-tise in the securities field in each state where trouble broke out. No expense was spared. The operation was run like a military campaign.

The attempt by the securities regulators to freeze Lloyd’s assets in the LATF brought a swift rebuke from insurance regulators. The California Insurance Commissioner, Chuck Quackenbush, was concerned to protect policyholders. He filed a suit to prevent action by the DoC. In a classic turf war, a pitched battle took place in several other states between insurance and securities regulators. The close relationships enjoyed by Lloyd’s with insurance regulators and intense lobbying efforts paid off. The widely respected Ed Muhl at the NYID, also helped to ensure that other insurance commissioners were strongly opposed to these moves: their duties were to protect policyholders. The NAIC said that any freezing of assets in the LATF could have permanent, catastrophic effects on US policyholders and beneficiaries, as well as a massive adverse effect on the entire insurance industry. Lane recalls Jim Brown, the Insurance Commissioner in Louisiana, who headed the key NAIC’s Surplus Lines committee, pointing at a massive oil refinery, saying that Lloyd’s was needed if it ever blew up.

Since the Northridge earthquake in 1994, Californians had found it vir-tually impossible to obtain earthquake cover. Quackenbush tried to launch the California Earthquake Authority (CEA) – a publicly managed, privately

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financed carrier that would provide earthquake insurance to householders. Reinsurance of this vehicle was sought. He had visited Lloyd’s, among others, saying ‘the participation of Lloyd’s is crucial ... The reputation of Lloyd’s as a leader in the world reinsurance market will count for a great deal’.

Philip Holden, debt collector for Lloyd’s, helped deal with US Names’ attempts to stop Lloyd’s from drawing down their assets: ‘I spent a lot of time travelling around the US every time a fire broke out – where groups of Names were threatening to seek a Temporary Restraining Order [TRO]. I would meet with the group, outline the process, and they would agree not to obtain a TRO if we would agree not to draw down their funds at Lloyd’s.’ As Holden saw it, effective TROs would destroy one of the underlying premises of the settlement offer: that funds held at Lloyd’s would be taken.

Holden did a lot of speaking in Britain and also in North America. Other speakers explained the terms and benefits of the offer; his role was to say ‘what happens if you don’t accept: it was carrot and stick all along’. Holden managed to convey a suitable mixture of charm and determination: ‘I think people expected me to be some sort of carpet-gnawing madman that was frothing at the mouth; I was never that interesting.’ On several of these occasions in the US, attempts were made to serve writs involving fraud allegations on Sandler. Holden recalls that ‘we had to be guided through the back stairs of all the hotels where we were speaking. We were relocated to different hotels so they couldn’t find us. We managed to dodge them’.

One day Holden was told that a death threat had been issued. At a cock-tail party someone had warned that ‘the next time the debt collector goes to America, he’s a dead man’. The head of security at Lloyd’s was an ex-protection officer. Holden recalls that ‘he came to see me and said, listen, basic rules, never meet in a hotel room, always meet in an open place if you’re meeting Names, always have your back to the wall and if someone pulls a gun on you, run. Then he produced this plastic laminated sheet with all of these instructions. I always thought that if I got shot you could just wipe the blood off and give it to some-body else next time’.

Philip Feigin, the Colorado Securities Commissioner, chaired the coordi-nating committee of the North American Securities Administrators Association (NASAA). Lane recalls his first meeting with the committee. As representatives from various states filed into a large meeting room, he tried to shake hands with each one: ‘Some did; some didn’t; some wouldn’t even look at me. They thought I was a crook who had committed securities fraud.’ Lane was well used to tough negotiations with trade unionists at Shell, regulators and all kinds of stakehold-ers, but he had never encountered anything like this reaction. He recalls that the ice was only broken when Harvey Pitt tried to adjust the air conditioning

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and the controller came away in his hand. Laughter broke out, but negotiations remained extremely difficult.

In April 1996, Lloyd’s entered a one-month standstill agreement with the NASAA. Lane saw this as a chance to educate the securities administrators about the Lloyd’s market and the important role it played, and why the concerns expressed by a few of them – ‘who leapt before they looked’ – were based upon misunderstandings. Feigin hoped that the two sides could ‘promote equitable and comprehensive solutions to these important problems’. It was eventually suggested that Lloyd’s could help alleviate the worst hardship among American Names by providing them with some extra debt relief.

Feigin led a delegation which came to visit Lloyd’s, where they were pro-vided with a temporary top-floor office. They were also taken to meet the Bank of England and the DTI. Rosemary Beaver, a corporation manager, recalls tak-ing the group to a meeting with the Bank’s Governor, Eddie George, who told them in the clearest possible terms that he was not writing a cheque to bail out Lloyd’s. Huge efforts were made to persuade this group that the activities of Lloyd’s in the US were entirely legitimate and did not transgress US securi-ties law. The group also heard from others: they spent a day with Christopher Stockwell in Oxfordshire. He thought he had stiffened their opposition to Lloyd’s, but the group was already engaged in negotiations.

The NASAA standstill agreement was extended until 15 May. Lloyd’s agreed not to draw down on US Names’ letters of credit or other assets. The NASAA agreed not to – and to recommend that all states did not – take any action that would interfere with the implementation of the R&R plan, the payment of claims to policyholders or communications with Names. Despite this agreement, two states, Utah and Tennessee, took action to prevent Lloyd’s drawing down on members’ deposits by means of court injunctions. The battle with the California DoC continued: its attempt to enjoin Lloyd’s was struck out for the third time by the Federal District Court. Judge Terry Hatter also fined the DoC and its attorney $20,000 for ‘feebly attempting to deceive the court by manipulating the form of the second re-filed motion to circumvent the law court’s local rules, thereby continuing to exhibit disrespect for the court’. The motion would have effectively prevented Lloyd’s from continuing to do business in California. Lane said that of Lloyd’s 34,000 Names worldwide, the 564 in California were unable to receive the offer. They would otherwise be eligible for more than $100 million in financial assistance. Some Californian Names were sufficiently frustrated to file a motion to overturn the DoC’s block on the settlement offer.

A deal took shape whereby American Names in participating states would be offered an extra sum of up to £40 million of ‘state credits’ to relieve hardship. Unlike the formula designed by the NC for Lloyd’s as a whole, these credits

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would be allocated by a process designed by the state regulators. The agree-ment was conditional on acceptance by states representing at least 80 per cent of eligible state credits. Those that favoured it were soon putting pressure on others. Before long, most states had signed up. Like all debt credits, the deal was also subject to the Council declaring the settlement offer unconditional. States signing up agreed not to pursue Lloyd’s any further and that US Names who so wished could continue to underwrite.

Early in May, Roderick MacDonald, a regional organiser for the ALM in Boston, Massachusetts wrote to all US Names urging them to support the reconstruction plan. His letter commented on the consequences of the plan fail-ing ‘for those who think that neither Lloyd’s nor the DTI will be able to touch your assets in the US if the reconstruction plan fails, you may want to read a decision by the Maine Supreme Court which recently upheld the enforcement of a $50,000 judgment which Lloyd’s obtained in England and then brought to Maine to enforce’. He assured US members that the only parties that would be better off if there was a government-supervised run-off of Lloyd’s would be the accountants, actuaries and law firms all over the world. MacDonald also said that the R&R plan would provide US Names with a unique tax benefit that would greatly reduce the cost of most of their finality bills. Meanwhile, Quackenbush dismissed reports that he was seeking to replace Lloyd’s reinsurance commit-ments for the CEA as totally fallacious. Nothing could be further from the truth. He said that the Equitas reorganisation plan was a sensible approach to resolv-ing the well-documented problems.

The battle to retain the trading position of Lloyd’s was not confined to the US. In other international markets, notably Australia, South Africa, Japan and continental Europe, constant efforts were needed to re-assure regulators, brokers and clients that Lloyd’s remained a reliable insurer. Lane’s team were fighting on many fronts. He became exhausted through travelling continuously, from meeting to meeting in different states, and internationally, sustaining the worldwide operations of Lloyd’s. He and his wife were getting divorced. He had set up Lloyd’s America in the teeth of much opposition from those who thought that Lloyd’s did not need an office in the US. Rowland then asked him to run that office and to be based in New York, with responsibility for both the US and Canada, with staff split between London, New York and several other North American locations.

HOW MUCH?The long-awaited indicative statements were finally dispatched to the 34,000 members of Lloyd’s in early March 1996. No one was required to pay more than

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£100,000 in excess of their funds at Lloyd’s. The figures were far from pain-less for many. For some, their funds held at Lloyd’s were considerable, while for many they took the form of a bank guarantee based on their home. Lloyd’s said that the transfer of liabilities to Equitas would be the largest single reinsurance transaction in the history of insurance. The calculations to establish the right reserve level for Equitas had been one of the most rigorous ever undertaken. The project currently employed 327 people. Quotations had been calculated for 745 individual syndicate years, 584 of which were still open. The aggregate value of the Equitas premium used in the indicative statements was £13.2 billion. The additional net premium – above existing reserves – was £1.9 billion.

Each member received a detailed personal statement showing the likely cost of achieving finality for them and how that number had been calculated. The explanatory guide ran to 48 pages. Names were encouraged to start planning for the payment of the final bill as soon as possible. In the meantime, there were four important steps that each should consider: consulting a professional adviser; reviewing tax implications; considering means of spreading Equitas payments; and considering applying for extra debt credits (tranche four – see Chapter 7).

The tax implications varied according to individual circumstances. Some Names were able to offset losses against other income and thereby generate a repayment that might exceed their finality bill. Others had their funds at Lloyd’s secured on property or shares that would attract a large UK capital gains tax liability if sold. Tax would be a major element in any cash-flow forecast made by Names’ personal accountants. Lloyd’s was seeking to make provision for those who wanted to defer payment of their finality bill through a structured payment scheme. The fourth tranche of debt credits would be allocated on the basis of need for those who still found the bill unaffordable. Lloyd’s re-asserted that no one wishing to accept the final settlement offer should be prevented from doing so by the lack of means.

An FT article3 described the proposal and cited some reactions, including that of Lord Mount Charles: ‘This is the biggest game of poker in town. I want this to fly. I want it to fly properly not like Icarus – it sticks in my gullet that there are people out there who have avoided paying their debts and may now have their losses capped.’ Another described the Lloyd’s offer as ‘quite cleverly balanced. I am hit quite hard but think I will accept’. Stockwell was critical, saying that large groups of Names found the package unacceptable and that the worst-hit Names would be better off litigating.

One member thought that it was now clear that most losses were attributa-ble to systematic under-reserving over three decades, mainly because the Inland Revenue would not allow adequate reserving, forcing underwriters to distribute profits which were then heavily taxed. He proposed that Lloyd’s should sue the

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Inland Revenue for negligence and should use the award to help fund R&R. Another was ‘astounded and appalled’ that he should be encouraged to seek advice from his members’ agent. Since agents had shown ‘gross incompetence and a total lack of knowledge and responsibility in placing us on bad syndicates in the first place’, he thought that they were the last people to listen to. Others complained that the settlement package contained very little reward for the loy-alty of those who had paid all their cash calls and had refrained from joining the ranks of the litigants.

PERSUASIONFor every complex problem there is an answer that is clear, simple, and wrong.

H.L. Mencken

Among Names, there was a wide spectrum of attitudes. To win over the scep-tics, it was necessary first to engage them, actively persuading them to consider accepting the offer. To this end, Lloyd’s and the ALM organised a series of meet-ings in Britain, the US, Canada, Australia, New Zealand and South Africa – many of which were led by Deputy Chairman John Stace. A recurring theme at these meetings was the concern expressed by Names who had paid their losses that others should be made to pay too, unless they really were quite unable to do so. Lloyd’s had already begun a process of tracking opinion among Names towards the settlement offer, using Market Opinion Research International (MORI). Professional PR advisers were brought in to advise on the campaign. Although external advice was sometimes helpful, the main ideas came from the leadership team; all the heavy lifting came from the Lloyd’s communication department. Early every morning, Rowland reviewed the day’s press coverage with Peter Hill. Ron Sandler recalls the ‘spectacular job’ they did in the face of intense press scrutiny.

Sandler frequently explained to Names that it was wrong to see the difficul-ties of Lloyd’s in terms of an adversarial relationship:

It was not that we were trying to solve our problem – we being the centre and the market – by buying off the Names. The Names had a problem. It was their problem, their losses. We were trying to orches-trate a solution. If you are staring at all of your open years and your bills mounting up, and you have a report which says if the Society collapses, you are stuck forever with huge costs, huge liabilities deteriorating for the rest of your days and beyond, someone at some point has got to say

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‘wait a minute, this is my problem and does R&R solve my problem?’ That was the attitude we worked hard to try and establish.

A full range of views continued to be expressed by individual Names. One, an insolvency practitioner, wrote to OLS, saying that the liquidation of the Society would be by far the most complex and time-consuming liquidation ever under-taken in Britain and that the consequences for Names, both past and present, were likely to be even more catastrophic than those currently being faced. Foreign assets and deposits would be seized by individual regulators, accounting infra-structures would break down, E&O reinsurance would become harder to collect and fund, and the litigation would continue unabated if not grow tenfold. He stated that: ‘The LNAWP does all Names a disservice in not considering all the facts fairly and squarely.’ The time had come for the ‘silent majority of Names’ to unite in the fight for survival. He was supported by another who said that ‘vocif-erous wreckers must not be allowed to wreak their vengeance on the Society, to the detriment of those who wish to support it and see it survive’.

Another Name wrote of his concern at the attitude of some ongoing Names towards those who had been ruined. He argued that they should look at the situation objectively. It was a delusion to think that worst-hit Names had taken up a vindictive position on whether Lloyd’s should be wound up. Ruined Names like himself should not be stereotyped. Many had paid up, like he had, until they could pay no more. Talk of ‘loyalty’ to Lloyd’s by those in whose financial inter-est such ‘a bizarre concept of loyalty lay’ was hypocritical. Instead, the lucky survivors should ‘loyally recognise their debt to those whose ruin enabled them to continue underwriting’.

To some, the problem of debt collection was simple. One member wrote to say that ‘at the risk of being called a simpleton’, what was wrong with sending in the bailiffs? ‘The seizure of a chap’s car(s) and furniture has a quite remarkable effect upon focusing a debtor’s mind upon his liabilities. Most wives would also take a dim view.’ Alternatively, he suggested publicly naming the ‘won’t pays’ or getting an investigative television programme to focus on affluent Names who had not paid up.

One member wrote in, recalling that when he first joined Lloyd’s in 1960, it was the custom to serve huge and expensive lunches to the Committee, presided over by the chairman. Some time ago he had visited Lloyd’s and was cordially received by Rowland without any formality or prior appointment. He then pro-ceeded to the staff self-service restaurant to obtain a meal, ‘suited to the lowly state of a ruined Name’. Who should he see ‘standing patiently in the queue, tray in hand, but our Chairman? What a contrast with the pomp and ceremony surrounding his predecessors’.

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There was a constant clamour from those who urged the collapse of Lloyd’s as a better solution than reconstruction. Freshfields’ analysis was clear: Names could not escape their liabilities. However, a suspicion remained that this view was less than independent. Stockwell and others had built publicity machines that were quick to respond with a cynical riposte to any announcement from Lloyd’s, often laced with a call for market demise or collapse. How best to coun-ter Stockwell was constantly debated within Lloyd’s: hawks wanted a public slanging match, while others wanted to take a more subtle approach.

In June 1995, an exasperated John Stace had attacked Stockwell at a meeting in Somerset by reading out some unflattering remarks about him made by the judge in a court case five years earlier. Many Names wrote to Stace applauding his actions; they were almost certainly supporters of the R&R plan. Others said they were shocked at the use of ‘dirty tactics’ against Stockwell; they were prob-ably his supporters. The result was no better than a draw. It helped to build a fresh wave of solidarity among Stockwell’s LNAWP supporters, who were told by John Mays of ‘an attempt to blacken Christopher Stockwell’s name’ over a matter that had already been declared and investigated to their satisfaction. Rowland was irritated by this confrontation, which he had not authorised and at first thought ill-considered.

Tom Benyon analysed the state of opinion among litigating names.4 He said that action groups had ‘fissured into three warring factions’: the moder-ates, under the leadership of Michael Deeny, favoured the plan but wanted more money for litigants, claiming 70 per cent support; the LNAWP, under the lead-ership of Christopher Stockwell and Alan Porter, who were deeply sceptical but claimed to be open to rational argument, with around 20 per cent support; and the remaining 10 per cent, mainly made up of defence group supporters and US activists who believed they were the victims of fraud and who hoped to destabi-lise the market so that it failed and they could dance on its grave.

Benyon offered readers his view that Stockwell and the LNAWP had served Names well over the years, citing their rejection of the inadequate first offer. Many concessions had been dragged out of a reluctant Council. While admir-ing their warm hearts, he advised preserving a cool head, heeding Mencken’s remark quoted above.

The key issue of whether or not litigation recoveries fell within the PTDs (discussed in earlier chapters) was still under appeal. Benyon said that Deeny’s lawyers advised agreeing to adjourn the PTD case: even if Names won, the liti-gation recoveries would remain frozen for a long time, while if they lost, their bargaining position would be weaker. Those who hoped for an early release of cash were chasing a rainbow. The LNC supported this by 22 to 5. However, the minority persuaded the judge, Sir Richard Scott, to refuse the adjournment. As a

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result, the PTD case went ahead. The court found in favour of the Names, decid-ing that litigation recoveries were not caught by the PTD (following Saville in 1992 in the Outhwaite case) and that the amendments made by the Council and approved by the DTI in 1995 were not valid. Lloyd’s appealed. Meanwhile, the judge refused a request from Gooda Walker Names to distribute more of their winnings, which were being held in escrow. In late July, the Court of Appeal5 ruled that the PTD did catch damages for negligent underwriting, reversing Scott on this point, and also Saville’s 1992 decision, which Lloyd’s had not appealed at the time in the interests of promoting harmony. This made Scott’s adverse verdict on the 1995 amendments, which the Court of Appeal upheld, less important, although there remained the unresolved question of whether damages for negligent advice given by members’ agents on stop loss and syndi-cate selection were caught.

Meanwhile, Lloyd’s did its best to convince members that regulation was now on a much firmer footing than ever before. At the outset of 1996, a new regulatory plan was published. Core principles governing the conduct of agen-cies were introduced; a system of individual registration would mean a detailed character and suitability review of up to 6,000 market practitioners. All syndi-cates were required to produce business plans by August. A shift was declared from a ‘reactive’ approach to one that was more proactive, selective and pre-ventative, trying to head-off emerging systemic issues, like spirals, in future. The 20-strong monitoring team was built up in terms of both size and quality.

EQUITAS EMERGESEach of the major components of the plan was dependent on others. The DTI could only finally authorise Equitas when it could be certain that the premiums would be forthcoming. This, in turn, would require a sufficient number of Names accepting the settlement offer and members – both individual and corporate – agreeing to the new central fund contribution. The DTI and Lloyd’s developed a way through this conundrum. Early in 1996, the DTI would give an authorisation for Equitas, subject to conditions, setting out the main financial parameters. It would also demonstrate the benefits of Equitas from the regulator’s perspective. This would in turn enable Lloyd’s to construct a final settlement offer at the level of the individual Names based on solid numbers. If the Names accepted the offer, the various transfers of assets could take place so that Equitas could simultane-ously receive its reinsured liabilities and the matching assets. This in turn would unlock the unconditional authorisation, probably in September 1996.

The first stage of this process required Richard Keeling’s Reserve Group to complete its huge task. With the project’s massive expansion to include the

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1986–92 years, it had spawned new subgroups, including underwriters and actu-aries. At its peak, over 500 staff and advisers were working on different aspects of this project. An army of market practitioners were also involved. Eventually, the Reserve Group had the power to recommend to the Council an appropriate amount to charge each Lloyd’s syndicate for all its net outstanding liabilities for all years of trading up to and including 1992. To do this, the group had to apply common principles to the individual circumstances of every Lloyd’s syndicate – a mammoth task – which involved hearing all their representations. For some well-reserved syndicates, this common standard meant a rebate to Names from their reserves, but for many syndicates, and for a large majority of Names, there was an additional premium to pay. This was a big component in the eventual calculation for each Name.

At each stage of the work of this Reserve Group, the DTI’s advisers, the Government Actuary’s Department (GAD), were able to participate in the debate and ensure that all likely factors had been taken into account. Just as the asbes-tosis and pollution problems had grown from small beginnings, so the team had to consider what else might be lurking as sources of future claims. They did this exhaustively. Eventually, the Reserve Group took a view on the right level of extra premium for all these liabilities, then applied an appropriate level of discounting to allow for the delayed nature of many of the expected claims.

As this work took place, it was unclear whether the amount needed to sat-isfy the DTI, advised by the GAD, would be too much to be affordable to Names. There was an acute timing problem. In order to give each Name a rough estimate of the cost of the whole package to him, preliminary estimates had to be used before the detailed work had been done. In early 1996, these appeared to show that an extra premium of £1.9 billion was needed across the market. Because of the policy of working very closely with the DTI, this estimate was shared with them. It quickly became an expectation and was later very hard to dislodge.

It is hard for someone who is not an underwriter to understand what it meant to strip a syndicate of its accumulated reserves. Imagine yourself as a lifelong saver who has carefully built up a pot on which you expect to be able to draw in future. This story has concentrated on the badly performing syndicates, whose underwriters and agents were the subject of legal action for the alleged negligence that led to heavy losses. But at Lloyd’s there were also many success-ful syndicates that had been making steady profits and were well reserved to meet any future claims. Reserves were often regarded as a protective cushion against an uncertain world. The plan’s proposition that all syndicates’ pre-1993 liabilities should be put into Equitas – along with the painstakingly accumulated reserves to meet them – was seen as extreme by many practitioners. Keeling himself saw it as ‘the good paying for the bad’ and he was now in charge of the

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exercise. The first cut estimates had done little to re-assure the market that the central estimates of the reserves required would be fair and reasonable. Despite these concerns, the application of common reserving standards meant a release of excess reserves for some syndicates and their Names.

In December, a market meeting was held at which various strong market characters with good reserves spoke up to express their concerns. In particular, John Charman argued that it was essential that a strong market peer-review system should be put in place to ensure consistency and avoid subsequent legal challenges, which could in turn lead to Equitas unravelling. This was agreed, but those first assembled to do it were not, in David Shipley’s view, up to the task. Ralph Bailey, Raymond Dumas and he went to Charman, who invited them to see if they could get a better qualified group together. Shipley recalls:

We called in every favour of everybody we knew, and we got the market to come and do peer review. We had pretty much every named under-writer or his number two that could be found up there in the Adam Room going through files and going through a checklist. We had a sec-retary who worked out the conflicts and knew who should not look at which file. People would come in at, say, 7:30 am and spend a couple of hours going through files, sometimes returning after work in the evening. Some were doing it at weekends as well. It was all unpaid and there were quite a few of us doing it.6

Shipley recalls the enormous contribution of Tony Taylor, running the spi-ral side, and William Ramsay, who was in charge of difficult syndicates. He also recalls that Roger Sellek had built a system that could translate changes in assumptions, which eventually became critical, into bottom-line finan-cial impact – an invaluable tool when assumptions were being debated with Tillinghast, the actuaries.

At a fairly late stage in the process, efforts intensified to eliminate the dou-ble count that is intrinsic in Lloyd’s reserving. When syndicates make a reserve to pay out money on reinsurance policies bought by other syndicates, on E&O insurance or on PSL policies, these payments will eventually flow to other syn-dicates and other Names. This gives rise to the double counting of reserves. As all of these policies were to be reinsured by Equitas, it was only the net amount of reserves that needed to be paid over, representing the amount to be paid eventu-ally to outside claimants. Another source of double count came from the inter-action of different sections7 of the project, where an exposure had been counted in both exercises. Working through the extent of the intrinsic double count was a complex and tedious but critical task. On the first cut of the figures, this had

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not yet been completed. That meant that the total bill for Equitas appeared larger than necessary. On the face of it, says Shipley, in early February 1996, ‘Lloyd’s was bust and it was time to turn the lights out. We were terrified’.

This picture was only known to a handful of people, including Keeling and his intimate associates – half a dozen in total. They knew it was incomplete, but not by how much. The burden of containing this information weighed heavily on this small group. Eliminating the double count was the key to producing a realistic estimate. By now, Heidi Hutter had left. Huge efforts began to eliminate sources of double count. As Shipley recalls:

You never know which hour of effort is the hour that makes a differ-ence between success and failure, so do it anyway. If you ever thought ‘I could have checked this out but didn’t’, and that was the thing that meant the project failed, you would never forgive yourself and history would never forgive you. So you had to do it ... It was the most stupid hours. I went out to dinner one night with a client, putting a brave face on things, then Greg Schneider and I went back to his parents-in-laws’ flat in Pimlico and worked on the double count until 1:30 am. I got home at 2:30 and was back in the office at 7.30 the next morning.

Keeling had given them carte blanche to look across the project, which had, to some extent, been carried out in separate silos up to that point. He told the team to look for over-amounts as well as under-amounts. If external actuaries or the DTI were to find under-estimates, the credibility of the work would be under-mined. Putting together a spreadsheet and working through the numbers, they located a total of £1.1 billion of double-counted reserves. In Shipley’s words, Tillinghast ‘audited the crap out of them’ before they could sign off on the esti-mates, as the DTI required.

Shipley recalls that the fourth birthday of his twins coincided with a peak of effort on this project:

We had 32 four-year-olds in our house for a party. The entire nursery school was in our house with a children’s entertainer who wasn’t very good. So Anita and I were running around trying to round up these children who kept running away. At the same time Roger [Sellek] and Greg [Schneider] were debating the crucial balance of account assump-tions with Tillinghast. During that meeting I had said call me up every hour or so and I’ll take five minutes on the phone to find out how it’s going. We would have a tactical discussion about critical issues – what to hold fast on and which points could be conceded etc – and I would

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get back to dealing with the kids. During the course of that fourth birthday party, Roger and Greg got £350 million in principle off the bill. It was most fabulously surreal.

Essentially, Tillinghast ended up saying that it could not sign up to a best esti-mate without a margin of prudence of £1.2 billion above it, plus the equity capi-tal required by the DTI, which was expected to be around £500 million.

There was a sad postscript to this monumental exercise. After all this effort, in 1996, Keeling and his syndicate were fined for putting in a syndicate return late. Shipley says:

We just wanted to cry. The three most senior people at the syndicate had been effectively working an extra 40 hour week unpaid on the proj-ect for the last six months and they turned around and fined us for having been a week late with some paperwork. They said ‘Oh Keeling thinks that because he’s chairman of the Reserve Group he is above the law and we’ve shown that everybody is equal’. After that Richard [Keeling] got on the wrong side of the regulators. Some of them found his laid-back demeanour arrogant, and they wanted to take him down a peg, which was wrong.

In 2009, Shipley became Chairman of a now-transformed Equitas, which is dis-cussed later on.

The final results, allowing for all the reserves that were already in place, showed that an extra premium of closer to only £1 billion was needed. This cre-ated a problem for the DTI. Had the Reserve Group trimmed its figures to make the transaction more affordable for Names? By then an Equitas shadow board and management team had been created, advised by their own separate team of corporate lawyers from Freshfields. They too had views on the adequacy of the Equitas premium as they would have to live with the consequences of an inad-equate reserve. David Newbigging insisted on a safety margin. He had a heated debate with Rowland, who said: ‘Do you realise you are the most unpopular man in Lloyd’s?’ ‘That probably means I am doing my job’, came the reply.

After inflated first estimates of the total liabilities of Lloyd’s were provided to the DTI – operating on the principle of complete openness – it became dif-ficult to secure their agreement to reduced numbers. Jonathan Spencer says that the key to resolving this was the DTI’s insistence that each syndicate’s liabilities needed to be subject to actuarial assessment. He could see that the notion of netting out intra-market transactions was perfectly legitimate, but evidence was needed to justify it. The DTI knew Tillinghast and was ready to accept some

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removal of double counting. Spencer also used Chris Daykin, the long-standing Government Actuary, to review all of the actuarial work. He looked ‘beyond it where necessary’ so that he ‘could give us a personal sign-off that it was all acceptable’. Some of his staff would have been intrinsically more cautious, lack-ing his seniority and wider worldview. They were non-life actuarial specialists, a rare breed then, but nevertheless a bit naive in commercial terms. Daykin’s sign-off had standing; his professional credibility was at stake and he was regarded as impartial. The key submissions that went to ministers to sign off on the deal always had a big report from him on the back. The DTI looked for a worthwhile margin of free capital – around £800 million. Daykin also advised on the rea-sonableness of the proposed discount rates.

Spencer recalls an amusing incident around February 1996 ‘when the hag-gle about numbers was at its height’. On the day when Rowland and the Lloyd’s team came to the DTI to make a presentation in the run-up to Equitas authori-sation, Spencer’s own teenage daughter was in the office gaining work expe-rience. Although only 13, she was sharp and mathematically inclined. Lloyd’s was followed by Newbigging, the Chairman designate of Equitas, and his team on the same day. Charlotte Spencer was the first to spot that one of the critical numbers in Newbigging’s presentation was noticeably different from those in the Lloyd’s figures.

This discrepancy did not last long. Soon afterwards Newbigging’s General Counsel, Gisela Gledhill, called Keeling one evening around 8 pm. She said that her Chairman wanted to see him first thing in the morning. Little effort was made at politeness either in summoning him or when Keeling arrived early the next day. He had barely sat down when Newbigging said ‘I want another £500 million’. Although this seemed unwarranted to Keeling, from Equitas’ point of view, the downward revision of the reserve requirements made the whole operation more risky. However, it did accept a large overall reduction in the first estimates.

The submission to ministers on the Equitas authorisation was supported by a report from Daykin. Conditional authorisation implied that the final step would be possible and that the numbers were close enough to acceptability. It would still be important that the reserves were sufficiently solid and that there was not likely to be an early erosion of the capital base, which Spencer says ‘was always going to be much smaller than we would ever accept for a normal new start company. This was a completely unique situation’. The rules around authorisation were discretionary and were not set out in any statute. They had been developed with experience and were based around the new company hav-ing a credible business plan and enough capital to see it through its first few years of trading, and in particular meeting the normal, statutory and annual

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solvency margin tests. The same is true for authorising a new bank: a minimum capital requirement would be set, based on a business plan specifying the vol-ume and nature of business intended in its early years. But Equitas was totally different. It was to assume around £15 billion of liabilities in return for a single set of premium payments in late 1996. Accepting no new business, it would spend the next 50 years running off those liabilities.

The DTI had to decide whether to exercise its discretion to waive the nor-mal solvency margin tests. As it debated the issues, an argument that Spencer himself contributed went as follows: at the level of principle, would this be better than not doing it? In the event, the DTI found quite overwhelming reasons why this test was met, which were set out in the parliamentary statement of 29 March 1996:8 there would be extra money for policyholders; a strong prospect of lower claims costs and higher investment yields; an uninterrupted flow of claims pay-ments through proportionate cover (explained below) if resources ran out; and better security for Lloyd’s policyholders from 1993 onwards. The DTI consid-ered that the proposals put forward by Lloyd’s were a ‘well-judged response’ to the situation and were in the interests of policyholders.

If, against the Government Actuary’s central expectation, Equitas were to prove unable to pay off its liabilities as they fell due, leading to insolvency, it would have been much more straightforward than putting Lloyd’s into insol-vency. The DTI had experience of companies in such a situation. As Spencer put it: ‘We had done it many times before. Putting Lloyd’s into insolvency would have taken us into completely uncharted territory for which there was no very solid statutory underpinning. We’d been round this quite extensively. So that was one of the critical pieces.’

Another source of comfort for the DTI, for which Paul Sharma’s earlier work on the Municipal Mutual9 case was relevant, was the concept of ‘proportionate cover’ if Equitas were to become overwhelmed. This would enable an insolvent Equitas to continue making partial payments to policyholders within the limits of its resources. When the concept was mentioned to the New York regulators, Vinny Laurenzano drew breath, saying that it was ‘some scheme’. DTI officials at first thought this signified approval, but Laurenzano explained that in the US, the word ‘scheme’ is pejorative. The NYID was very strongly opposed to the proposition that US policyholders might one day be short-changed. It main-tained that if proportionate cover were ever invoked, it might revoke the licence held by Lloyd’s to trade in the US. This was one of the reasons why the parlia-mentary statement referred explicitly to the residual balance of claims falling back on to Names in this eventuality (it was also the legal reality). The state-ment was directed at several audiences – at policyholders, especially in the US, to indicate that they were getting a good deal; at Names, to encourage them to

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settle; and at all classes of actual and potential litigants. The DTI was very alert to the risk of judicial review in Britain and in the US.

In the run-up to the decision on authorisation, the DTI’s priority was to see Equitas’ reserves as solid – large and reliable – as possible. The DTI therefore found it very difficult to deal with a reduction in the proposed reserves at the late stages of the exercise. Spencer says: ‘We needed them evidenced and for Chris Daykin to be comfortable in signing it off. Having got to that point, how-ever, we were then open to arguments about the scale of the capital cushion on top.’ This needed to be enough to be credible and to give some comfort for at least a period. ‘We could also see that making it too big might push it beyond the bounds of affordability’ and therefore the ability of Lloyd’s to achieve a settle-ment and collect the money. Once launched and in negotiation with policyhold-ers, it was better for the company to have strong reserves than very much visible free capital. Equitas did not want to be thought to have deep pockets – that had been a large part of Lloyd’s problem.

The Treasury and the Prime Minister’s Office seem to have had little influ-ence over the course of events. Spencer confirmed that the Prime Minister, John Major, ‘got a bit twitchy occasionally’, but this was mostly dealt with in correspondence. Hobbs briefed an official in the No. 10 Policy Unit regularly. Michael Heseltine continued to maintain oversight after he became Deputy Prime Minister, because his successor as Secretary of State, Ian Lang, was a Lloyd’s Name. Heseltine retained control: Anthony Nelson, the Minister of State in the later stages of the authorisation process, had no real scope for an independent view. When DTI officials went to see Heseltine in the Cabinet Office, they took lawyers or actuaries with them and he tended to ask actu-arial questions when the lawyers were present, and legal questions when the actuaries where there. Eventually they took both. In February 1996, when the final submission was being made to give Equitas conditional authorisation, Heseltine decided that he would like a completely independent view by ‘the most expensive silk’ available. The DTI legal department identified Jonathan Sumption QC for this role, the same expert from whom Lloyd’s had received guidance on the admissibility of corporate members and later a member of the English Supreme Court. He agreed to cancel his mid-February skiing holiday in order to spend the week reviewing the papers. He gave Heseltine the assur-ance that he needed.

The DTI’s ‘conditional authorisation’ in late March 1996 was a daring act: it was to be the largest new insurance vehicle ever created in the world, acquir-ing £14.7 billion of liabilities, many of which had been previously regarded as unquantifiable, with a very slender solvency margin. Rowland welcomed the move, describing Equitas as the cornerstone of the reconstruction plan.

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VALIDATION VERDICTThe VSG, which was overseen by the ALM Chairman, with LNC and LNAWP representation and equipped with independent legal advice, was a crucial ele-ment in building the case against the opponents of R&R. Sir David Berriman and Damon de Laszlo10 wrote to all Names in early April, enclosing the VSG’s summary of the conclusions reached by Slaughter and May, together with rec-ommendations with a view to improving the R&R proposals. They urged Names to read the legal report ‘carefully and in full’. They regretted that Alan Porter, who ‘had contributed greatly to its deliberations’, had declined to sign the letter. Porter did not agree with all of the findings of the legal report for reasons that his two colleagues thought largely beyond their terms of reference.

Slaughter and May had taken evidence from many sources. It had reviewed the opinions of 17 leading QCs. Its report11 reminded readers of the limita-tions of legal opinion and analysis, saying that financial, actuarial and other expert analysis was also needed; even then, analysis alone could not provide the answers. Ultimately, a judgment was required by each Name in the light of his individual circumstances. Slaughter and May thought the word ‘Validation’ was unfortunate because it gave an impression of more than could be achieved.

Among other things, Slaughter and May reviewed an argument it referred to as ‘Dead man’s stop’. This said that policyholders would have to sue on the original insurance policies issued by Lloyd’s, some of which were written many years ago, and would find themselves ‘stopped in their tracks’ to the extent that the original underwriting Names were either dead or bankrupt. The report said that policyholder claims did not cease or disappear in these circumstances. The estates of dead Names remained liable and were entitled to benefit from the RITC provided by Names on the succeeding syndicate. The report also considered whether fraud, if proven, could provide a basis for avoid-ing liability. Alternatively, could liability be avoided on the grounds of material non-disclosure or on the grounds of a possible breach of European law? None of these appeared to offer an escape route.

The report also explicitly examined the LNAWP’s alternative proposals. Its authors acknowledged the time and trouble taken by Stockwell and Giles Clarke in meeting them on several occasions to debate the advantages and disadvan-tages of the plan. They included as an appendix a summary of the LNAWP proposals and the benefits claimed for them. However, they set out the reasons why they doubted that in practice it could bring many – if any – of the benefits described.

In conclusion, Slaughter and May said that ‘many Names are outraged by what has happened in Lloyd’s. There is little doubt that Names occupy the moral

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high ground. However, Names’ fundamental problem is that they cannot rea-sonably expect to escape from their underwriting liabilities’. A variety of ‘ingen-ious defences’ had been deployed with considerable ‘vigour and skill’ and had succeeded in bringing Lloyd’s to its present position of proposing the R&R pack-age. The Council had more or less acknowledged that if these proposals failed to gain acceptance, this would mean the end of Lloyd’s. Slaughter and May stressed that it was not recommending Names to accept the proposals – this was a com-mercial decision for each one. It understood that more funds might be required to achieve acceptance, observing that ‘all sections of the Lloyd’s community are currently engaged in an elaborate game of “chicken” as they head towards the brink’. It expressed the hope that the Council would succeed in finding enough extra money to make it easier for Names to accept. This report helped to per-suade many members that there really was no alternative to accepting the plan and the offer. It also helped persuade the leadership to improve the terms.

As the moment for decisions on the offer approached, Sandler wrote to action group leaders in early April, calling on them to review their own rules in order to ensure that Names were free to accept the settlement offer. Most action group rules had been drawn up in the context of specific litigation and were not designed to cope with a global settlement offer. They had required members to delegate decisions to a committee and agree to be bound by them. Lloyd’s fully accepted that action groups would have views on the offer as it related to their own litigation and should be free to recommend acceptance or rejection. The ALM supported the view that acceptance should be a personal decision for indi-vidual Names and should not be constrained by action group rules.

NAMES’ RIGHTSThere was a strong sense among existing members that many agents preferred to deal with corporate capital. The increasing fashion for capital to be dedicated to the support of a single business alarmed some Names. It seemed to spell the end of the old ways by which individuals had spread their interests among a large number of syndicates. Pressure was exerted from traditional Names to keep a place in the sun for them. The ALM and the HPG raised a number of issues in a document they called a ‘Bill of Rights’. They correctly sensed that their negotiating position would never again be as strong as in the run-up to critical votes on the levy and the settlement offer.

This led the Council to set out the current rights of Names in a long article in OLS, with a fuller document that brought together the rights of relevance to those still actively underwriting, which was available to Names on request. It covered members’ rights in respect of the Society, including elections to the

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Council, rights of appeal and undertakings made by the Council. It also sum-marised the obligations of agents towards members and the relevant codes of practice. It covered members’ security of tenure on syndicates, pre-emption rights and the ability to sell syndicate participations, as well as summarising members’ rights to information. Finally, it covered matters like complaints, dis-putes and compensation. To quell fears about a drift towards corporate member-ship, it re-asserted that the Council’s policy was not to mandate changes in the capital structure of the Corporation; instead, it was to facilitate change against the background of the rights described. One of the principal sources of pressure on Lloyd’s was Peter Nutting, who was by 1996 Chairman of the Names Rights Group. He expressed himself as generally encouraged by a large part of the dec-laration and the apparent desire to meet Names’ concerns. Nevertheless, there were still points on which he was not yet satisfied.

A BETTER OFFERIn April, Rowland wrote to all members responding to the VSG’s suggestion that the plan be made more attractive. He now conceded that resigning mem-bers too should be eligible for full refunds of their special contribution. Efforts were being made to raise extra funds to improve the offer. Intensive work on Equitas reserves suggested that the required premium could be reduced, but he warned members not to expect too much.

In May, Rowland wrote again to confirm a series of improvements in the offer, enclosing a short document, Towards the Settlement. It had now been agreed with the DTI that the extra premium for Equitas would fall from £1.9 bil-lion to around £1 billion. The offer would increase by £300 million to £3.1 billion: brokers would contribute £100 million through a levy; agents would contribute around £200 million on a non-refundable basis; auditors would contribute at least £100 million; and E&O underwriters had now agreed to around £800 mil-lion. A month later, the offer was increased a little further to £3.2 billion.

As a result, there would be more help for Names who had paid all their Lloyd’s obligations and for those with extreme losses and facing the greatest financial difficulty, and more for litigants too. Names currently underwriting, who had paid all their obligations, would not have to pay any more than their funds at Lloyd’s to achieve finality. They would also be eligible for extra debt credits to help protect their funds held at Lloyd’s. Those no longer underwrit-ing, who had paid all debts, would be capped at the reduced level of £50,000. For those facing extreme difficulties, the £100,000 limit could be reduced, with more funding available for discretionary help, for which full disclosure would be needed.

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There would also be extra money for litigants in order to improve the pros-pects of settling all suits. The litigation settlement fund would increase to £1 billion. The percentage of loss given to various categories of litigant was now increased. The allocation to meet expenses would be increased to £75 million and used to reimburse ‘all properly incurred expenses’ rather than just legal expenses. Although the PTD issue was still before the courts, a concession was also made to allow Names to keep some of their awards, regardless of the outcome.

With these improvements came another message: Rowland was more con-fident about the legal position. He mentioned the VSG’s conclusions, the court decision on the long-standing Clementson case, and the Court of Appeal’s affir-mation in the test case involving Dr Higgins of the right of agents to sue Names for their debts. He said that judgment was expected soon in the PTD case. Whatever the outcome, it was likely to be appealed, but Lloyd’s was fortified by recent doubts expressed by the House of Lords about the original decision on the PTD issue. He reminded members that the US courts had consistently upheld Names’ obligations to policyholders, expressing confidence that an accommodation would be reached with the state securities regulators. He told members that revised indicative statements would be issued in June, reflecting lower Equitas premiums and improvements to the offer. These would inform members when voting in July on the extra central fund contributions.

On the basis of the new figures, members underwriting in the 1993, 1994 and 1995 years of account would be asked to approve a special contribution from those years. The votes would take place at the Lloyd’s Ordinary General Meeting (OGM) on 15 July.

THE HARDEST HITThe Council directed the ARC that in appropriate circumstances, the incomes of hardship Names could be supplemented and funds at Lloyd’s should not be drawn down if this would threaten a family’s reasonable need for a home or minimum income. Berriman stated that ‘this is what we have been waiting for. Lloyd’s has agreed to protect the home and incomes of the very hardest hit. It is one of the last pieces in the reconstruction and renewal jigsaw that will now make the offer acceptable to the vast majority of Names’.

In early June, key Names’ leaders issued a letter welcoming what they described as ‘significant concessions’ in the improvements to the plan. In par-ticular, they said that Lloyd’s had both met litigants’ demands for more and had improved the position of those who had paid their called losses in full. The group had also received assurances from Rowland that the commitment of Lloyd’s to

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helping the hardest-hit names was unequivocal. This was the advocacy that Lloyd’s needed. The letter was signed by Berriman, Ridley, Deeny, Spooner, de Laszlo and Benyon. It said that the signatories had been contemplating calling an EGM to request the commitments they had now received. They now believed that this was not needed and thought that the demands of other Names’ organi-sations were unrealistic and unattainable. They did not advocate support for resolutions calling for yet more levies on the future market and an improved deal. The letter also pointed out that the proposed agents’ contribution of £200 million in the original plan issued a year earlier had been based on profit com-mission for the three good years of £600 million. Now that this profit commis-sion seemed likely to be greater, they believed the agents’ contribution should be increased. Rowland had told them that he was trying to achieve this.

Rowland vividly recalls a closed meeting in which he told agents that with-out a further contribution, the plan might not come off. His own morale hit a low point when he was unable to persuade them. He now cites their rejection as evidence of the wisdom of markets. He now thinks they correctly judged that enough concessions had been made to secure widespread acceptance. At the time, their lack of response caused him to tell his wife that evening that he was thinking of resigning; she helped to persuade him otherwise. The next day, he resumed his role as the indefatigable leader of the whole operation.

Ridley and others attached particular importance to the commitment of Lloyd’s to supplementing the income of the hardest-hit Names where needed. The ‘reasonable minimum level’ of income was defined as being in real terms no less than the benchmark income figures used for hardship agreements. The hardest hit were also protected against draw-downs of their funds at Lloyd’s to the extent needed to ‘avoid threatening the family’s reasonable need for a home, minimum income or both’. In effect, Lloyd’s was taking on welfare obligations.

***

Deeny felt especially strongly that the help available through the settlement offer should not be extended to those who were in some way responsible for the losses. The Council accepted this principle. A total of 170 working names were set to lose £18 million of debt credits out of a possible £32 million for which they would otherwise have been eligible. On legal advice, their names were not pub-lished. They included 33 former active underwriters, 131 directors and partners of managing agents, 62 directors and partners of members’ agents, and a hand-ful of those found guilty of serious disciplinary offences. These individuals were able to make their case to a small Council sub-committee.

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HIGH STAKESIt was no accident that late August 1996 was the deadline for acceptance of the settlement offer. It was one large and crucial piece of a complex set of interlock-ing pieces of a jigsaw. To keep trading, Lloyd’s had to keep proving its continued solvency – an excess of assets over liabilities. At the aggregate level, this was still possible. The Global Report published in July 1996 showed resources as 138 per cent of liabilities on a pre-R&R basis, rising to 171 per cent on a post-R&R basis.

However, Lloyd’s also had to show the solvency of each individual Name. As the impact of losses incurred and the provision for future claims had mounted, reality was closing in. Each year, at the end of August, a solvency test was applied to all Lloyd’s members; the results were provided to the DTI. In each recent year, this test had been harder to pass as more ‘earmarking’ of central assets had become necessary for an increasing number of Names. Lloyd’s had scraped through in 1995, invoking the building as an asset, which by now had been sold, and the E&O asset.12 In 1996, the numbers were simply not going to work any-more. The deficiencies had grown and the central assets had diminished.

It was now essential to move Names’ accumulated liabilities, up to 1992, on to Equitas. The solvency test could then be performed on each member in respect of his remaining liabilities for 1993 onwards. But the transfer could only happen if the settlement offer was declared unconditional. Lloyd’s had reached a fork in the road: in one direction lay the route to a new Lloyd’s, unencumbered by the past, but if the puzzle could not be completed simultaneously, the other route was a dead end – Lloyd’s would no longer be solvent and able to trade. This would mean that the doors would have to be shut to thousands of brokers and clients. The vultures would have a field day.

The number used to discount the liabilities would have a crucial effect on whether there was a narrow channel between two rocks: affordability for Names and adequate solvency for Equitas. It was much debated and had to be agreed with the DTI. In the event, liabilities were discounted by an average of 4.3 per cent in determining the premium that each Name should pay. Once Equitas assumed the liabilities, it was allowed to discount at the higher rate of 6 per cent, creating an extra margin of solvency of £880 million.

Those committed to bringing off this reconstruction had grown over the 14 months since the R&R plan was advanced. Rowland and Sandler were at the apex of a large team, including the Council, the LMB, the R&R Steering Group, Corporation staff responsible for many aspects of implementation, a large legal team from Freshfields, legal teams in the US, a shadow board at Equitas and its growing team of advisers. Beyond that, there was an army of very interested par-ties: the agents, the brokers, the Names, potential investors, market newcomers

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and so on. By now, the British government, the Bank of England and the New York regulators all saw reconstruction as the best way forward. Even the long-sceptical press now seemed to want the whole thing to go through. However, it could still be tripped up at some unseen hurdle.

OVERDRIVEEfforts intensified to persuade members that their best interests lay in accepting the offer. Among the measures taken was a video programme sent to all Names’ professional advisers so that, when Names turned to them, accountants, bank-ers and others would be well-informed about the offer. The video and accompa-nying material explained that the timing was tight and that those who needed to apply for extra debt credits should do so quickly. Personal financial information would need to be substantial and certified by an accountant.

Meanwhile, efforts were redoubled to ensure that Names understood the offer and the stark alternative. More meetings were held with members to explain the plan and answer queries. In Britain and the US, most were organ-ised by the ALM; Benyon also welcomed Lloyd’s speakers to his SoN meetings. Overseas, many were organised by Lloyd’s with local ALM assistance.

The Lloyd’s leadership team held frequent internal meetings with PR adviser Angus Maitland to digest and respond to the state of opinion. Rowland and Sandler also held regular briefings with key journalists and other opinion-formers. The state of opinion among British members was measured at monthly intervals by MORI using a sample of 500 Names, cleansed for known hard-ship cases. Qualitative research was also undertaken to supplement the trends with more insight into the outstanding concerns. Lloyd’s was at last extremely responsive to attitudes among its Names.

The MORI data showed a rising trend of support for the plan and an increas-ingly widespread understanding of the alternative to R&R from a low base in the early months of 1996. It was clear that the exhaustive VSG report, lent cred-ibility by Berriman and de Laszlo, had helped many Names to understand what would happen without a reconstruction.

In the run-up to the vote, members received a torrent of communications from Rowland and Sandler. In June, they received a second round of individual indicative statements, with more accurate figures, reflecting many develop-ments. These included the results of a very complex set of negotiations over the treatment of PSL policies held by 24,000 Names, led by Michael Cockell. The High Level Stop Loss Fund paid recoveries to some, while the remaining accu-mulated premium was returned to Names.

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The Settlement Information Document (SID) was sent to members on 20 June. Rowland’s covering letter expressed regret that the plan had been nec-essary and acknowledged the damage that membership of Lloyd’s had caused thousands of people. He said the plan was not perfect, but that it offered Names the chance to carry on with their lives, relieved of the uncertainty caused by their membership of Lloyd’s. No compromise settlement could eradicate the losses or their consequences. He urged members to vote for the special central fund contribution and against the LNAWP resolutions that could still jeopardise the plan. The Council remained firm that no section of the community would benefit from the plan’s failure and that everyone would be worse off. This time there would be no second chance. This was followed by more letters at weekly intervals from Sandler urging everyone to vote and asking members who had lost their forms to get a replacement.

After months of negotiations, an agreement on a framework for resolving all US state securities disputes was reached with the NASAA. Lloyd’s agreed to establish a ‘state credit fund’ of up to £40 million of extra debt credits which would be allocated by the NASAA to reduce payments by US Names. By mid-July, 34 states had signed up, representing more than 80 per cent of US members. The agreement also provided for US names to be free to continue underwrit-ing if they wished. A few states held out: Arizona, Illinois, Utah, Missouri and Tennessee refused to sign up at this stage.

82%

79%

65%

85%

80%

75%

70%

65%

60%

55%

50%Nov–95 Dec–95 Jan–96 Feb–96 Mar–96 Apr–96 May–96 Jun–96

54%

Figure 8.1 ‘Members likely to support the plan’13

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GETTING TO YESThe war has gone on long enough. It is time to make peace.14

Michael Deeny

Key action group committees began to add their support to the settlement offer. It was unanimously recommended by the GWAG committee. Deeny, its Chairman, said that Names were being offered more than they could be confi-dent of receiving through the courts: ‘In the case of the largest losers amongst us, we are being offered two or three times as much as continued litigation is likely to provide.’ More action groups, including those relating to Merrett and Janson Green, also supported the plan. At a series of meetings held in Australia and New Zealand, there was overwhelming support.

In Houston, Texas, Judge Lynn Hughes dismissed a case brought by 77 Lloyd’s members on the usual grounds that they had agreed to settle disputes in England, subject to English law. She also addressed the question of equity: ‘were members able to rescind their contracts, somewhere a crippled American will not be compensated for his injuries because an American Name refused to pay the claims against the policies he issued.’ She referred to efforts to invoke US securities laws, saying ‘the plaintiffs are inordinately proud that several Attorneys General and the SEC have intervened to interfere with Lloyd’s col-lection efforts in America’. She criticised such action at this late stage, saying that ‘25 years of silence from the SEC is more than glacial government; it is consent’.

The critical OGM15 meeting was held at the Royal Festival Hall on 15 July. Lloyd’s had just announced the 1993 results – the ‘pure’ year showed a return to record profits of over £1 billion after five years of losses. Rowland told the mem-bers that they were now ‘on the brink of decisions’ to resolve disputes and alle-viate suffering. He reviewed progress to date, including the recent agreement with US state securities regulators. He told them that, within the last few days, agents had agreed to raise their contribution to £225 million. The package had now reached a total of around £3.2 billion. Against the prevailing mood, Sally Noel thought that Names were being ‘bought off too cheaply’, demanding full restitution. Another member thought that brokers should pay the US claims on asbestos and pollution because it was in their business interests. David Durant was greatly heartened by the treatment of the hardest hit, but asked for more inflationary adjustments.

In speaking for the four resolutions, Alan Porter said it was not the spon-sors’ intention ‘to endanger Lloyd’s or to obstruct the settlement’. The resolu-tions called for an extra two per cent premium levy for 15 years; a doubling

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of the agents’ contribution; the exclusion of the auditors’ contribution to allow further litigation against them; the exclusion of Lioncover from Equitas; and the release of those no longer underwriting from payment of the special contribu-tion. Sandler told the meeting that he was in no doubt that R&R could not be delivered if these resolutions were adopted. Moves to implement them would very quickly lead to the collapse of Lloyd’s and he believed that the sponsors of the resolutions understood this ‘only too well’.

In early August, Rowland issued a covering letter with the latest edition of OLS which gave a full account of the OGM. By overwhelming majorities, mem-bers had supported the special contribution: 1993 members had supported it by 94 per cent, 1994 members by 96 per cent and 1995 members by 98 per cent. Corporate members voted 100 per cent in favour in all three years. Large votes (ranging from 84 per cent to 87 per cent) rejected the radical changes to the plan sought by those who requisitioned the EGM. The majority wish was now very clear. Rowland wrote again to urge members to accept the settlement offer by the deadline of 28 August, stressing that payments would not be due until 30 September. Help was offered in completing the form of acceptance. He explained the role of the Settlement Agreement Review Group, which had looked closely at all the settlement legal documentation to ensure that it took proper account of the interests of members. This comprised Berriman and Deeny, assisted by Wild Sapte, whose report was available from the ALM. Rowland also reported the decision of the Court of Appeal on 31 July, which ruled that litigation recoveries were, after all, caught by the PTDs.

The final amount to be paid by each Name was separately and centrally calculated. Each Name received a 300-page Settlement Offer Document, known internally as the SOD. He also received a personal finality statement, showing the combined effect of all the proposed transactions, including, for each mem-ber, their personal offer of settlement in return for ending all litigation. Deeny’s remark about making peace, cited above, featured prominently in the material sent to Names.

LATE CHALLENGESThe final offer amounted to £3.2 billion in total and was conditional on a suffi-cient number of Names accepting, as the package could only work on that basis. With the overwhelming support of members at the July meeting, hopes were high among the leadership team that success was within their grasp. The DTI still had to authorise Equitas unconditionally. It looked very likely to do so if the level of acceptance was high, but the NYID also had to authorise the transfer of the US assets of Lloyd’s to the new Equitas American Trust Fund (EATF). They

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were still in negotiation mode. With so many hurdles almost cleared, in August two legal cases arose that could stop the whole package in its tracks. In the US, a group of 90 Names had applied to a Virginia court for an injunction to stop the offer being made to US members.

Rowland reported that the 1,275-strong Paying Names Action Group (PNAG) had applied to the High Court for a judicial review of the R&R propos-als. Lloyd’s had not opposed the application, but pressed for an expedited hear-ing which would begin on 12 August. The PNAG maintained that aspects of the plan were unlawful, unjust and unreasonable.

On 16 August, the High Court handed down a 113-page judgment. Lord Justice Brooke16 dismissed the application for judicial review on three grounds: the court had no jurisdiction to interfere; the PNAG had delayed too long; and Lloyd’s had acted within its powers and had not acted perversely or irrationally. Already facing heavy legal costs, the PNAG did not seek leave to appeal. In the US District Court in Utah, Judge Dee Benson denied a motion to remand a law-suit brought by the State of Utah and said that the TRO against Lloyd’s by the state court was no longer in effect.

AUGUST CLIMAXMore drama continued to make this story into a classic cliff-hanger right up to the day before the deadline for the offer’s acceptance. Contrary to all expec-tations, in the Eastern District of the Federal Court in Richmond, Virginia, Judge Robert E. Payne’s decision brought the onward progress of the settlement to a standstill. This Court was known in American legal circles as the ‘rocket docket’, where it moved cases much more quickly than elsewhere. By now, most cases by Lloyd’s members in other courts were dismissed without a hearing, as it had been well-established that, on joining, Names had agreed contractu-ally upon becoming Names to seek judicial relief under English law in English courts. Unusually, Judge Payne agreed to hear the case. At the outset of the trial, the judge announced that before he had risen to the bench, he had had some association with the plaintiffs’ lawyers. This did not trouble him, but he wanted to declare it.

From the point of view of Lloyd’s, the trial went well. Among others, Sandler gave extensive evidence and returned to London. Harvey Pitt says: ‘We mopped the floor with the other side. It was a complete rout, and no one sitting in that courtroom, except perhaps the plaintiffs’ lawyers, thought there was the slight-est possibility that Lloyd’s would lose that case.’17 However, three days after the trial ended, the judge delivered a 170-page opinion, which amounted to a ‘crushing defeat’. Fried Frank immediately filed a notice of appeal. As normal

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procedures would take months, it also moved for an expedited appeal. As Pitt recounts: ‘The problem with Judge Payne’s decision was that it had enjoined Lloyd’s from proceeding, which meant that the reconstruction plan was stopped dead in its tracks, globally, by a judge sitting in Richmond, Virginia.’ The judge’s jurisdiction only extended to the 3,000 US Names, but they were too important a component for the offer to proceed without them.

The plaintiffs argued that their interests in Lloyd’s were securities. Under securities laws, there is a provision that any contract or agreement that requires someone to give up the rights and remedies provided by the US securities laws in advance of those issues arising is void. The Names were claiming securi-ties fraud that preceded them signing their agreements to litigate disputes in England under English law. Pitt explains: ‘Now this created a chicken and egg problem, because in order for that provision to apply, the instruments had to be securities, but in order to find out whether the instruments were securities, they had to have access to the US courts which they had contractually given up. The US law is pretty clear. Unless the contract that gives you an alternative remedy was procured by fraud, you have to assume its validity.’ The courts of appeals for other Federal Circuits had accepted it.

One of Pitt’s colleagues, Bonnie Steingart, encouraged clerks to call up appeal judges who were mostly on holiday. Pitt’s other lieutenants, Michael Rauch and Debra Torres, worked over the weekend on the submission to the court. It was filed on 26 August, saying that the injunction ‘effectively prevents Lloyd’s from consummating a $22 billion transaction which is crucial to main-tain the market’s very existence’. They argued that ‘the District Court erred as a matter of law, among other things, misapplying this Circuit’s standard for granting a preliminary injunction, and by parting company with the second, sixth, seventh and tenth circuits in failing to give effect to the parties’ agreement to litigate this dispute in England’. Pitt claimed that the English courts were a proper forum, and that as there were Names in 80 different countries, a single legal system was needed to govern these arrangements so that there was consist-ency, otherwise a marketplace like Lloyd’s would be subject to the vagaries of forum shopping.

Pitt and his colleagues contested the District Court’s attribution of losses to ‘one of the most far-reaching and serious insurance frauds anywhere’, say-ing that nothing inside or outside the record supported any suggestion that Lloyd’s had ever been found to be responsible for fraud. They cited numer-ous briefs submitted to the Court, notably the determination by the New York Superintendent of Insurance that a sudden cessation of the Lloyd’s market’s ability to underwrite would have ‘devastating effects on the US insurance mar-ket and on policyholders’.

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Meanwhile, Rowland was interviewed by John Humphries on the BBC’s national Today programme on the morning of Saturday 24 August. He spoke confidently about the prospects of success for the settlement offer and the reconstruction deal. Asked about this US court setback, he replied that he was sure that it could be surmounted. Within an hour of this interview, Charles Roxburgh recalls being asked to join a brainstorming session at Lloyd’s to try to develop a contingency plan. The upshot of much hard work was that there was no obvious route forward other than winning in the Court of Appeals.

Monday 26 August 1996 was a Bank Holiday in Britain. The communica-tions department had been active all weekend, briefing representatives around the world, expressing confidence in the outcome of the appeal. On Tuesday morning, the day of the hearing, Rowland held a meeting to brief senior figures in the Lloyd’s market. The atmosphere was highly charged. He told the mar-ket there was a real chance that the market would have to stop trading within days. If Lloyd’s was unsuccessful, the only available course of action would be an appeal to the US Supreme Court. He urged them to have faith.

The Baltimore courtroom was packed. The hearing was before three Appeal Judges of the Fourth Circuit: Judges Niemeyer, Michael and Mots. The Court ruled in favour of Lloyd’s. However, this was not the end of the drama. The plaintiffs decided to amend their complaint; they now argued there had been a fraud under another section of the law surrounding securities. They also claimed that this had not been resolved, either by Judge Payne or by the Court of Appeals. The judge scheduled a telephonic hearing. Pitt insisted on a stenographer because he said that he might need to seek further relief from the Court of Appeals. In a tense exchange, he told the judge that he did not believe that the District Court had jurisdiction, since the case had been thrown out by the Court of Appeals. The judge then decided to get factual submissions so that he could decide whether the new issue could proceed, setting a date for the hearing. At this point, Pitt sought an order of mandamus. This is an extraordinary remedy, in which it is argued that the judge has so abused his discretion that the Court of Appeals has to intercede because the damage to the client would be irreparable. Although such orders are exceedingly hard to come by, in this case the Fourth Circuit Court of Appeals promptly ‘man-damused’ Judge Payne, summarily ordering the case to be thrown out.

Barry O’Brien recalls telephoning London from the courtroom steps and hearing the cheers in the background. Sandler remembers that a small group, including Rowland and DTI officials, congregated in his office to await the call: ‘The release of tension and the upsurge of emotion was almost indescribable.’ John Stace was holding a meeting next door, thrashing out some troublesome aspect of the agents’ contribution. He recalls a tearful Rowland bursting into a meeting with the news.

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Pitt and his team all heaved a sigh of relief. But then the plaintiffs’ law-yers did something that Pitt found very surprising – they filed a request for attorney’s fees. In the US, each party normally bears its own costs. However, in some cases, when people win a class action, they have been able to claim for the fees they have incurred. Pitt says: ‘These people had lost big-time, but had the chutzpah to seek fees on the grounds that they had clarified the law.’ He told the plaintiffs’ lawyers that he would seek mandamus again if they were successful. In fact, Judge Payne, perhaps somewhat chastened, denied the request for legal fees. Yet, at the same time, he wrote a fairly lengthy decision, excoriating the Court of Appeals for all it had done to him and implying that, in the light of this, it would reverse any decision to award attorney’s fees and so he had denied the request.

FINAL HURDLESThe next day, the Council made the offer unconditional, having received 91 per cent acceptance from the worldwide membership. It also extended the deadline to 11 September so as to encourage anyone who had been waiting – particu-larly American members – for events to unfold before accepting the offer. The Council decided that Equitas funding could now be afforded and applied to the DTI for the removal of the conditions on its authorisation. More last-minute work was needed. During the weekend before the final deal was done, the DTI was still pushing for slightly more capital for Equitas. The only way this could be done would be to increase the amount of the syndicated bank loan, tenta-tively agreed at £300 million. When the banks were asked at this late stage if it could be increased by £100 million, their confidence was shaken. They said ‘if you are that concerned about £100 million now, that means this whole deal is so risky we shouldn’t be lending you anything’. It was a very torrid weekend. Eventually, the DTI was convinced there was no more money available and the banks were persuaded to proceed.

The following week, in the evening, the DTI, Lloyd’s and Equitas met to agree the authorisation. It was still critical to secure the NYID’s consent to transferring funds from the Lloyd’s US Trust Fund to a new EATF. As the hours passed without any signal from New York, Rowland and Sandler – both keen golfers – tried to relax the tension by practising their putting on the elev-enth floor. In a late telephone call, the New York Insurance Superintendent, Ed Muhl, took the opportunity to argue for still more funds for Equitas. He believed there was one more, so far untapped, source of funds. Shortly before midnight London time, he pressed his case. He recalls Jane Barker, the Equitas CFO, on the line speaking very deliberately in a slow voice: ‘Superintendent,

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there ... is ... no ... more ... money.’ Only then did he believe that the lemon had been squeezed as hard as possible.

Now Muhl sought a last-minute assurance from Rowland that Lloyd’s would stand behind Equitas should it run out of money. This could drive a coach and horses through the intended ‘firebreak’ between Lloyd’s and its past. An une-quivocal written assurance was impossible: only the Council could decide how to react to any circumstances that might arise in the future. If more central fund money would have to be raised, the question would need to be put to a vote among Lloyd’s members. Rowland somehow assured him that Lloyd’s commercial inter-ests would dictate that the ongoing market would act to prevent an Equitas failure. He was sufficiently persuasive for Muhl to take his words as a commitment. Just before midnight, he agreed to the transfer of the necessary funds to the EATF.

Citibank, as trustees of the LATF, said it could not authorise the transfer of $5.5 billion to the new EATF without a notarised consent from Muhl. There was no notary in the NYID building at 7 pm, so Muhl sent staff out to search the nearby streets for one. They found a notary and practically kidnapped her. Somewhat terrified, she duly notarised Muhl’s consent order and it was sent to Citibank by fax. These debates had taken longer than expected. To stick with the intended dates on all the transaction documents, the London parties agreed to adopt New York time, five hours earlier than London where the next day had already arrived.

A classic chicken-and-egg question arose over Equitas. Until it was author-ised, it had no money, but for Muhl to agree that Citibank could transfer funds from the LATF to the EATF, his legal advisers wanted evidence of Equitas’ sub-stance. The £100 million line of credit that Newbigging had negotiated months earlier, with no collateral, on a precautionary basis with HSBC was swiftly called upon. It proved to be critical as an initial asset.

COMPLETIONAll the critical and interdependent parts of the package now came together. The Council met to approve a directive to the specially created substitute managing agent, Additional Underwriting Agent 9 (AUA9), to effect a compulsory rein-surance transaction to Equitas for all members, including non-acceptors and dissenters of all kinds. This was done because some members had directed their appointed agents not to enter such arrangements. If some pre-1993 liabilities were not included, the intended ‘firebreak’ between the past and the new mar-ket would be breached. The DTI lifted the conditions attached to Equitas; all Lloyd’s members were duly reinsured. The reconstruction of Lloyd’s had been achieved.

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The Lutine Bell hangs in the centre of the Lloyd’s trading floor. Traditionally, it is rung once for bad news, like the loss of a ship, and twice for good news. On 4 September 1996, it was rung three times for the first and only time in the history of Lloyd’s. Why three times? Rowland said that the bell was rung ‘first, for sor-row, to mark and remember that this episode has caused real suffering and pain to thousands of people’, second, for joy, to mark success at having reached a des-tination with the help and support of so many, and, third, to signal ‘the begin-ning of a new journey for Lloyd’s’. He hoped that it would never again be rung thrice because it should ‘remind us that we came extremely close to disaster’.

Symbolically, Anthony Nelson, the DTI Minister of State, gripped the bell with Rowland, describing the reconstruction as a ‘triumph for the ingenuity of Lloyd’s’ and as a ‘market solution to a market problem, at no cost to the taxpayer’. Rowland looked forward to a return to the ‘frisson of pride and excitement’ that used to be associated with the Lloyd’s market. In a message to members, he con-demned past incompetence, calling for high standards and vigilance. He also said that ‘many of us at Lloyd’s have learned important personal lessons: adver-sarial habits of mind are easy to acquire and hard to shed’. He commended those who had overcome their bitterness and anger, and thanked the Names’ leaders for their skill and determination on behalf of members, and for their courage in advocating a settlement.

Rowland’s dealings with most people involved a degree of persuasion or negotiation. The burden of leadership at the top can sometimes be relieved by a quiet chat with a knowledgeable father figure. This role was played by Eddie George, the Governor of the Bank of England. He had a broad understanding of the wider political and economic context in which Lloyd’s’ struggle for survival took place. He also had a quiet authority. He listened intently at each briefing and was always supportive. At his regular meetings with Rowland, each was normally accompanied by a trusted official.18 Now, Rowland made a more pri-vate visit to the Governor’s office. As he entered the room, the normally reticent George rose, stepped forward and embraced him. He brought out a bottle of champagne, saying he had kept it cool for three years, and now it was time to drink it.

R&R might be described as a collective action solution to a collective action problem, one of those rare occasions when outsiders and insiders collaborate to find a solution neither can achieve on their own.

Richard Spooner, reflecting 16 years later

9

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The story of the reconstruction of Lloyd’s has some ragged edges. It did not finish with the 1996 ringing of the Lutine Bell. Some of those who accepted

the offer failed to pay up; a war of attrition began with non-acceptors. New opposition groups were formed and further rounds of litigation began. Some looked for relief from US authorities, others tried European institutions, while yet others returned to the English courts.

Within Lloyd’s, the extraordinary efforts made by certain people were rec-ognised. Rowland was knighted. New investors poured in. For the first time, rating agencies were invited to assign a rating to Lloyd’s security. A focus was resumed on gaining business, with a Lloyd’s presence established in several overseas markets. Efforts continued to apply information technology in the most efficient way to the conduct and processing of insurance transactions.

The future shape of the market remained a subject for sometimes heated debate. New external regulators were imposed. Some new disciplines were intro-duced, but proved insufficient to prevent further losses emerging as the market went soft. In 2001, a radical overhaul was in progress when terrorists struck in New York, causing huge losses. This led to a fresh round of reforms and a new approach to market supervision. After that, fortunes revived.

Many of the large majority of Names who accepted the settlement – whether they had resigned or were continuing to underwrite – kept an anxious eye on the fortunes of Equitas. If it ran into financial trouble, there remained a risk that the past could return to haunt them. This could have brought fresh threats to Lloyd’s too.

EQUITAS TAKES OFFAfter the bell was rung, Anthony Nelson, Minister of State, confirmed that the DTI’s conditions were now lifted: Equitas could proceed. He also explained that its opening solvency margin had been increased to £780 million. An unallo-cated claims provision of £900 million brought its total safety margin to £1.68 billion. Looking five years ahead, the DTI had also required Lloyd’s to provide an extra £100 million, if so requested by Equitas, in January 2002. This was to mitigate lower than expected interest rates or a shortfall in the contribution due from agents or brokers, in the event of either scenario arising. Thanking everyone who had worked so hard over nearly three years, David Newbigging said that Equitas had been described as the largest financial restructuring in the history of the City of London.

It was originally intended that Names would own Equitas as shareholders. Lloyd’s received strong legal advice that this legal structure could bring all kinds of unwelcome complications in the US. Instead, a trust structure was adopted.

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David Newbigging, Equitas Chairman 1995–8 Sir Adam Ridley, Chairman of Equitas Trustees 1996–2014

Equitas team receiving authorisation from DTI: David Newbigging, Jane Barker, Michael Crall (Equitas); Richard Hobbs, Jonathan Spencer and Martin Brebner (DTI)

Picture 16 Equitas: key people

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It was hoped that half of these trustees could be elected by Names. Legal advice said that this too would raise legal problems in the US. Instead, seven trus-tees were appointed by Lloyd’s after consulting Names’ representatives: Michael Deeny, Sir Adam Ridley and Richard Spooner were all members of the ALM Committee and the NC; Desmond Heyward was also on the NC; John Mays was a member of the LNAWP; Viscount Bledisloe QC was not a member of any Action Group; and Colin Murray was a former Deputy Chairman of Lloyd’s. All were Names.

Lloyd’s nominated Stephen Catlin, an underwriter, as a director of Equitas. The trustees chose Ridley as their Chairman. They appointed two of their number as Equitas directors: Deeny and Spooner. Newbigging and his board made further appointments. On 4 September, after the final hurdles described earlier, Equitas was fully authorised to accept the reinsurance of all of the liabili-ties of all Lloyd’s members up to the end of 1992. Mercury Asset Management was appointed to manage the transition of funds from Lloyd’s.

As a practical matter, the dividing line between old and new Lloyd’s was far from secure. The New York insurance regulators had made it clear that they expected Lloyd’s to help Equitas if it ran into financial trouble. They would not stand by and see US policyholders short-changed by an Equitas insolvency, nor would they necessarily accept Equitas invoking ‘proportionate cover’. They had a powerful pistol to Lloyd’s’ head: they could withdraw the market’s licences to continue trading in the US. If Equitas were ever to face insolvency, one could imagine tough negotiations over high stakes and a fierce debate within Lloyd’s about the right course of action to take.

COLLECTING MONEYAnger is blind.

Hindu proverb

The extension of the deadline brought the total level of acceptances up to 94 per cent. This represented 97 per cent of Lloyd’s members in Britain, but only 77 per cent of those resident in the US. A total of £500 million of debt was still outstanding from 1,850 Names.

In the year preceding R&R, little debt had been collected by Philip Holden’s team. Now his work began in earnest. Once they had accepted the offer, Names had 30 days to pay. If they did not, all debt credits were automatically removed under the settlement agreement. In order to run off all of the old liabilities of Lloyd’s, Equitas was paid the full premium by Lloyd’s. Most of the funds held at Lloyd’s could be assigned quite quickly. It was also necessary to collect the

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cash shown in each Name’s Finality statement. Any unpaid premiums due from Names were assigned, making Lloyd’s the plaintiff in collection actions.

Several thousand acceptors did not pay by the end of September 1996 dead-line. During the first wave of activity, this was the main focus for Holden and his team. By accepting, Names had given away all their rights to claim against agents, Lloyd’s or others, thereby placing themselves in a weak position. Holden was in a correspondingly strong position and maintains1 that he never conceded a better deal than that available under R&R. He was ready to extend the dead-line, write off the accumulating interest and reinstate the debt credits – pro-vided the individual paid up.

Non-acceptors were reminded that no one should feel prevented from set-tling because of inadequate means. In early October, they were warned that proceedings would be issued if payment was not received; a rolling programme began with the first batch of 200 writs issued on 8 October and fortnightly thereafter. A total of 1,500 writs were issued, claiming £332 million.2 As Holden recalls, ‘we started to litigate quite aggressively for the full extent of the liabili-ties’. A test case, Lyons, Leighs and Wilkinson, established the enforceability of the Equitas premium for non-acceptors. A year after the reconstruction, in July 1997, the Court of Appeal3 confirmed this, refusing leave for further appeal. Holden said this cleared the way for summary judgments.

A further test case, Fraser, rejected the allegation that a provision of the Equitas reinsurance contract had been inserted in bad faith. It also dealt with challenges to the way the liabilities had been quantified. Joe Bradley and the members’ services unit (MSU, formerly CSU), working with Holden, went through a ‘massive forensic analysis’ of how the underlying numbers in the set-tlement agreement had been constructed. Judgments were entered in March 19984 and these were confirmed by the Court of Appeal in July 1998. Holden recalls: ‘We then started issuing bankruptcy proceedings, after securing judg-ments, and the first bankrupt made by Lloyd’s was against a chap called David Rowland [no relation].’

Few deals had been negotiated in the period between the end of hardship assistance and the offer: once it was on the cards, everyone wanted to wait and see rather than commit to a deal earlier. In some cases, anger or stubbornness proved extremely expensive. Some Names believe that special deals were struck with MPs. Holden says this was never the case; they were given exactly the same treatment as anyone else. He is adamant: ‘I had one member chasing me all around the world to get a special deal. Nobody got a special deal. Everyone went through the same process.’

Another belief among those Names who were pursued (and also encoun-tered in the Lloyd’s market) was that Holden was on some kind of percentage

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payment for the money he collected. This was not so; nor does Holden believe that it would have been right for him to be incentivised in that way: ‘The job I was brought in to do was to sort out a problem. So the idea that I would ben-efit from screwing somebody so far into the ground that they couldn’t afford it ... was in my mind simply wrong.’

Holden dealt with the Canadian Names Association, which eventually ‘came to the table’ and supported settlement as part of the mop-up process. He took the 1996 settlement offer as a rock-bottom figure up to the several million dollars of gross liabilities that some people had, arriving at a deal somewhere in between, based on the Name’s means. He spent a lot of time in Toronto. He recalls one Name whose family losses were a ‘preposterous’ C$12 million. Canadian rules made it easier to trace assets than in the UK, strengthening the hand of Lloyd’s. Holden proposed what he thought was a fair number, consistent with the policy to date, but recognising that the Name could not pay C$12 million. After three and a half hours, they reached agreement on Holden’s original number.

Holden also dealt with various UK celebrities, aristocrats, MPs and oth-ers. The terms of individual negotiations remain confidential and cannot be reported here. He recalls one case where a titled couple had not paid up. The gross liability between them was around £2 million before debt credits were taken into account. The day before the bankruptcy order was due to be made, the couple phoned Holden and said they would pay £90,000 against the original £100,000 under the settlement offer. He offered to waive the interest, but said that the full £100,000 must be paid. There was a lot of pressure on him at the time to collect cash quickly. Two hours before the petition, they came up to £98,000. When he declined, they told him that he would never get a penny out of them because they had disposed of all their assets. They were made bankrupt. ‘After two and a half years of investigation, we uncovered their Lichtenstein trust, overturned it and recovered around £1.2 million.’

In the US, groups of Names persisted. In the Ninth Circuit Federal Court of Appeals, Harvey Pitt once lost the argument that Names’ complaints should be heard by an English court in a 2:1 judgment. He sought a re-hearing en banc, mean-ing that the case would be heard by the whole court, which in practice meant 11 of the 21 judges. A total of 223 US members out of the 275 who had not accepted the offer were involved in this case. Once again, Pitt argued that English courts were a proper forum; a single legal system was needed to govern arrangements affecting the many countries from which Names were drawn. The Ninth Circuit bought this argument. Meanwhile in the West case, the Supreme Court of California refused Lloyd’s leave to appeal the decision of the California Appeal Court.

Determined US Names kept looking for new tactics. Lloyd’s and its rep-resentatives stayed constantly on their guard. One Friday morning late in

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1997, LeBoeuf got wind of an unusual provision in an omnibus spending bill, comprising all the various uncompleted appropriation bills, in the US House of Representatives. It was 2,000 pages long and featured all sorts of miscel-laneous titles. A couple of pages were stuck in the middle by its sponsor, the Chairman of the House Appropriations Committee, who might have been lobbied by some Names in his state still in dispute. These two pages were unrelated to spending: they were a text that would have changed the securities laws of the US to say that Lloyd’s simply could not enforce a judgment against an American Name, obtained in a English court, without a fresh trial on whether Lloyd’s had violated the US securities laws. Charley Landgraf heard that it was going to the f loor of the House on Monday or Tuesday. He imme-diately called Rowland and Sandler, saying that if he could find Tom Bliley, who was the Chairman of the Energy and Commerce Committee, which had jurisdiction over securities and insurance, and convince him that an attempt was being made to change the law without going through the proper commit-tee, he would have something to say about it. He flew to Washington: ‘I found Tom Bliley at his church on Sunday in Richmond, Virginia and told him about it. He said “well Monday morning come and see me”. He confronted the Committee Chairman, who took it out of the Bill, and I f lew back to London.’5 Another attempt was made to change the legal position of American Names when the US bankruptcy laws were reformed in 2001. Landgraf ran an inten-sive lobbying campaign to stop it.6

THE HARDEST HITIn mid-September, Sir Adam Ridley felt it necessary to write to Rowland about the commitments Lloyd’s had made towards helping the hardest-hit names. He recalled how after intense discussions and receiving assurances, he, Berriman, Deeny, Benyon and others had all written to Names, supporting R&R. At the same time, they had withdrawn support for the EGM resolutions calling for still more money to be raised and other improvements. Soon afterwards, Lloyd’s had been faced with the need to establish a £40 million fund for ‘state credits’ for American Names. This had put a tighter squeeze on its resources, which, Ridley felt, had led to a less liberal fulfilment of commitments – in terms of promoting and administering lenient terms – than had been agreed. He now asked Rowland ‘to make sure beyond all peradventure that those commitments will be honoured, since this is the last chance to get matters right’. At the time he was re-assured.

After R&R, Gill Wilson continued to run the helpline. Her relations with Lloyd’s became ‘a little tense’ when she added her signature to a letter that went

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from a dozen people, including David Durant, Christopher Stockwell and many advisers, about various Names’ grievances, including the treatment of appeals and the lack of clear and transparent process. The letter cited Sir Adam Ridley’s earlier article in OLS: ‘it would be sad indeed if the many remarkable features of R&R’s success were to be marred forever by the bitter aftertaste which would be left if the needs of the worst hit are not met promptly and generously’. Wilson says that ‘one of the Lloyd’s directors was very upset with me when I put my name to that letter as Lloyd’s Helpline. I had to fairly robustly defend myself, pointing out that I had given advance warning to the CEO’s office and that I was engaged to operate as an independent facility. A lot of professional advisers had also signed this letter, because they thought Lloyd’s was being inconsistent and this was open to exploitation’.7 She appealed to Sandler to maintain the service a while longer and was supported.

For 1999, in order to maintain their real value under the Income and Housing Support Scheme and Hardship agreements, Lloyd’s up-rated the income sup-port payments by 3.3 per cent, building on an increase of 10.5 per cent in 1998. But in February 2004, Ridley felt that the commitment to maintaining the real value of the income of Names was once again under threat. He wrote again to Deeny, who was by now Chairman of the ALM and once again a member of the Lloyd’s Council, detailing all the past assurances.

In fact, Lloyd’s has since maintained the commitment to maintain the real value of income support under hardship agreements. For 2013, it also agreed to reduce the rate of interest charged on outstanding debts for the remaining recipients of hardship support, who number around 250.

Centrewrite, the vehicle first established by Lloyd’s to offer Names a quota-tion for reinsuring their open years, soon acquired other roles, as mentioned in Chapters 3 and 4. Amongst these, it took over the Estate Protection Plan, pro-viding reinsurance for Names’ liabilities upon their death. After the reconstruc-tion, Centrewrite continued to charge premiums and discharge its liabilities under the chairmanship of Nicholas Pawson. Over 17 years, it made a cumu-lative pre-tax profit of over £160 million, with a very low ratio of claims and expenses to premiums of under 20 per cent.

OPPOSITION CONTINUESIn January 1997, Christopher Stockwell’s newsletter described itself as the last of the LNAWP and the first of the Lloyd’s Names Association (LNA) – the latest body to ‘fight for Names’ rights’ and seek to ensure that Lloyd’s would be ‘a safe place for Names to underwrite to their advantage, rather than just to the advan-tage of their agents’. He offered a lively critique of nearly all that was happening,

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including the transition towards corporate membership, regulation, the terms of the settlement, the liquidity of Equitas and the slow arrival of surpluses due to over 12,000 Names, a topic also taken up by the ALM. A somewhat embar-rassed Sandler explained8 the complexities of the Debt Allocation Matrix (DAM) involving 20 different kinds of debt and 70 types of asset, over many years.

The LNA newsletters continued the role of stern critic of Lloyd’s. Stockwell was also very critical of a deal reached between Lloyd’s and Stephen Merrett whereby he would pay litigating Names £1 million, his agency would pay a £2.2 million contribution, Lloyd’s would drop a planned disciplinary investigation and he would not return as an underwriter. Under the terms agreed, Merrett could only return to court to challenge the finding of deliberate concealment, but not to seek to recover funds. Although he badly wanted to try to clear his name, he told the author9 that he was advised by his QC that without a financial inter-est, his case would get nowhere. This is something that still rankles with him.

Stockwell also became Chairman of the Names Action for Compensation and Defence in Europe (NACDE). His constant opposition exasperated many insiders and some Names’ leaders, who thought that his ambition was the destruction of Lloyd’s. He still believes10 the future market could and should have paid more to compensate the losers, and that many Names joined and con-tinued with Lloyd’s on what amounted to a false prospectus, due to widespread under-reserving.

THE MARKET’S FUTUREWithin weeks of the settlement, a group of four well-known insiders11 placed a one-page ‘Open Letter’ to all to all Lloyd’s market practitioners in OLS. It was a plea to retain some of the best traditions of Lloyd’s of fostering start-ups, inno-vation and flair. The authors expressed concern about ‘the increasing impe-tus towards ownership and control [of syndicates] by a single capital provider’. This was the continuation of the debate about spread capital and the outright ownership of syndicates by outside companies. The Council’s last expressions of policy on this subject had been a commitment to evolution and the comprehen-sive document about Names’ rights. Now that R&R was complete, some feared that the ensuing free-for-all would lead to a complete change in the market’s character. The debate rumbled on. In June 1997, the Council issued Principles for the Future Development of Lloyd’s, saying that it was determined to preserve the special features of the ‘diverse Lloyd’s marketplace’ that made it attractive to clients, brokers and highly talented individuals. It also declared that capital was welcome from diverse sources, including institutional, private and insurance-related sources. It assured Names that there would be no move to withdraw

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their rights to trade in annual venture structures, but also welcomed continuous syndicates, recognising their possible economic advantages.

Despite these commitments to evolution, a few voices were raised against the complexity and suitability of the annual venture, with its attendant costs. Some believed that the Council should take radical action to enforce an early change in the structure of all businesses at Lloyd’s, thereby removing the need for much of the regulatory structure designed to protect Names. Robert Hiscox was disappointed12 by the policy of accommodation of traditional Names: ‘In the end when the reconstruction had been achieved, I rang up Rowland and said now we have passed it, it’s through, we can do what needs to be done. Tidy up the Names and make Lloyd’s an all-corporate organisation. He couldn’t, because he had promised the Names.’

Hiscox would have liked to adopt a completely different approach once cor-porate membership was established as the way forward. He recalls a colleague saying, when the 1993 business plan was produced, that all Lloyd’s needed now to worry about was solvency: ‘Collect the money you’re owed.’ He thinks that a total concentration on debt collection would have been a better policy than what he calls the ‘appeasement’ that led to writing off billions of unpaid losses in the settlement offer.

Instead of announcing a six-month moratorium on debt collection soon after Middleton’s arrival, Hiscox believes that Lloyd’s should have slapped a writ on anyone who had not paid up in full. He regards that as a ‘cultural failure’. Names had signed agreements to ‘pay now and sue later’. When reminded that it was not easy to collect the money, Hiscox recalls seeing people, including his friends, taking steps to distance their assets. That was the case for moving swiftly: ‘There was a time when I wished we had a general in charge, and not a diplomat. I felt very frustrated. Rowland is a good man and he fronted it all, but he is not a fighter, he is an appeaser. I am a fighting general and I would have taken on the Names early on and demanded they pay. You say it was not easy but they had a contract and they should have paid.’

Hiscox is widely admired in the Lloyd’s market for the key part he played during R&R and for building a highly successful business. Although his regrets about the fairness of writing off debts were widely shared, many would disagree with his analysis. The issue was intensely debated at Council during 1996, shortly after he stepped down. It is hard to judge whether a very different approach to Names’ growing losses in 1992 and 1993 would have met with success. There were real obstacles to collecting money. Over £1 billion of the eventual offer was to settle litigation won by Names in English courts. A 1992 High Court ruling13 meant that Names were not obliged to use these awards to pay losses. A further £2 billion of debt written off under R&R was needed to reach agreement.

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How much of that could have been collected through a firmer approach, at an earlier stage, before some Names had the chance to distance assets? Up to that point, Lloyd’s had stopped short of driving Names from their homes, the only major asset of many who joined during the boom in membership. Although there were some wealthy non-payers, could enough to keep Lloyd’s solvent have been collected from people who could afford to pay? The English courts were awash with Names’ actions; many US securities regulators became sympathetic. Despite using professionals, collecting debts in both Britain and the US practi-cally ground to a halt.

Whatever the conclusion about policy several years earlier, the 1996 Council, of which Hiscox was no longer a member, faced a harsh reality: a deal had to be struck if the reconstruction was to proceed. Equitas would not be allowed to start life with a mountain of debt. Lloyd’s could not show solvency for much longer. During the last few months of negotiation, Lloyd’s improved the package signifi-cantly for those who had paid all their debts, but the biggest gainers from the settle-ment remained those who owed the most. Pragmatism triumphed over fairness.

***

In April 1997, Lloyd’s published a review of the chain of security behind its policies: the minimum capital was strengthened; the risk assessment framework was extended; syndicates were now required to calculate the impact of ‘realis-tic disaster scenarios’; the quality of assets used to support underwriting was reviewed; new requirements were introduced for actuarial reports; close moni-toring of reinsurance protection was introduced; and a single code of practice was created for investment across all premium trust funds. The solvency test for each member was also strengthened: in future, each member needed to demon-strate enough assets to cover his liabilities, plus a solvency margin. The Global Report published in May 1997 showed a strong position, with total resources as 184 per cent of liabilities.

Over the next few years, the proportion of each Name’s overall premium limit required to be deposited at Lloyd’s was increased, reaching 40 per cent in 2000. Minimum wealth requirements were also increased to £350,000 in 2002.14

RECOGNITIONIn early December 1996, the market stopped work briefly for John Stace to pres-ent Rowland with the Lloyd’s Gold Medal in front of the Lutine Bell, which was struck twice for good news. To loud applause, Stace said that Rowland had ‘achieved the impossible ... Cometh the hour, cometh the man’. Four people

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whose contribution had been especially critical to the success of R&R were awarded the Lloyd’s Silver Medal: Ron Sandler, CEO; Bob Hewes, Finance Director; Richard Keeling, the underwriter who had chaired the Reserve Group; and Barry O’Brien, who headed the Freshfields team, masterminding all legal aspects of R&R. For one stretch of 17 weeks and another of 13 weeks, O’Brien had worked without a day off. He began work on Saturdays at 8.00 am. His wife would bring his two young children into the office for Sunday lunch. His metic-ulous professionalism paid off: the court could find no legal flaw in the complex package whereby the Lloyd’s Council had exercised its powers to the very limit.

Rowland presented others who made big contributions with replicas of the Lutine Bell. Members of the R&R Steering Group and other key participants signed a silver platter which remains on display in the Special Dining Room at

The Lloyd’s medallists

Knighthood for Sir David, with Lady Diana

David Rowland ringing the Lutine Bell with Anthony Nelson MP

The Lloyd’s Gold Medal, presented to David Rowland by John Stace

Picture 17 Recognition

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Lloyd’s at the time of writing. No longer so closely involved in the final year, as the result of an oversight, Hiscox, Deputy Chairman for three long years, was not asked to sign it. Understandably, this rankled with him for years. However, on his retirement in 2013, he too was awarded the Lloyd’s Gold Medal for his services to Lloyd’s throughout a long career.

Rowland was also awarded a bonus of £400,000 by the Council, for which there was some muted criticism in some quarters. In the 1997 New Year’s Honours, he joined the ranks of many of his predecessors as Chairman: he was knighted by the Queen. As well as recognising his personal achievement, this helped to restore the place of Lloyd’s in the British pantheon. In the June Birthday Honours, Dave Pettitt of the Members Services Unit (MSU), who had, among other duties, worked tirelessly on the models for the settlement, was awarded the MBE.

When Rowland stood down in December 1997, he received many trib-utes. A valedictory by Edward Vale in the ALM News described him as being amongst the giants, praising his use of unconventional people and his rebuild-ing of trust. Vale said that Rowland never appeared to flinch, whatever his pri-vate doubts, thoughts and exasperations. Names had reason to be grateful to him for achieving ‘the best solution to a hugely complex, utterly disastrous and tragic situation’. He also warned that the market had ‘reverted to type, with self-interest stretching the authority of the centre ... How quickly are the lifeboatmen ignored once dry land is underfoot’.

Soon after the reconstruction was completed, the author was asked to lead a project to record some of the key elements of the whole exercise. In this he was assisted by William Pitt of the Lloyd’s Communications Department and two graduate trainees. The author and Pitt recorded a series of interviews with some of the key players, with a view to publishing an account that would help to draw out some lessons for the future. The whole team had many other pressing duties and there were fears in some quarters that the publication of any more details surrounding the reconstruction could be exploited by those who were continu-ing to litigate. After several months and 15 interviews – which have been used in writing this account – it was decided to shelve the project for the time being.

RIVAL VISIONSAfter the reconstruction, it was widely believed that the arrival of corporate capital had introduced a new dynamic. There was an expectation that this kind of capital would be much more demanding and that this would provide a new discipline in future. Although the LMB and the LRB did impose risk-based capital and require realistic disaster scenarios, it was largely ‘business as usual’

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in the years that followed. This was peacetime and the war was over. In some cases, parent insurance companies did subject their Lloyd’s subsidiaries to a new level of accountability, avoiding some of the obvious pitfalls, but this degree of control was at best patchy. There were also cases where corporate backing for indifferent businesses gave them an unwarranted new lease of life, serving to weaken Lloyd’s rather than strengthen it. It seemed that outside ownership was not the answer to maintaining the market’s quality.

While there were concerns about standards and profitability at both the LMB and the LRB, declining results were mainly attributed to the soft mar-ket conditions of the familiar downswing of the insurance cycle. Meanwhile, a debate continued among interested parties about the future capital structure of the market. The amount of private capital in the hands of Names continued to reduce as a percentage of the total; there was a slow move towards incorporation by those who remained. But for the most part, Names continued to trade with unlimited liability because it still gave them significant tax advantages. Rona Delves Broughton continued to chair the HPG, while Deeny took over the chair at the ALM. Both were ready to defend the interests of traditional names when-ever they felt necessary. Sir Adam Ridley was elected to the 1997 Council.

In 1997, corporate members represented 44 per cent of capacity; this rose in 1998 to 60 per cent. Friction between different forms of capital was frequently evident. By 1998, about half of the corporate capital was ‘aligned’ to a particular managing agent. Many agents had plans to achieve an integrated (ILV) struc-ture. By 1998, 92 per cent of the market’s capacity was in the hands of agents that were supported, at least partially, by aligned capital; the future pattern was becoming clearer. The constitution of Lloyd’s was lagging these develop-ments. The earlier Sheldon report had recommended that one representative should be elected to the Council when corporate members represented 15 per cent of capacity. Jonathan Agnew had fulfilled this role since 1994. Sheldon said that this should be reviewed if the proportion reached one-third. In 1997, the Council decided to increase corporate representation to two members for the following year; it commissioned a review of representation and voting arrange-ments under the chairmanship of Pen Kent, a director of the Bank of England. The group received many submissions. One consistent, nearly universal, strand of opinion was a desire to end divisiveness.

Kent reported in April 1998. For the immediate future, the group recom-mended a formula to more fairly reflect the balance of corporate and individual shares of capacity. For the longer term, with the prospect of external regulation by the FSA, Kent recommended seeking changes to the Lloyd’s Act, creating a single governing body (GB), condensing the roles of the Council, the LMB and the LRB. The trend towards the integration of capital and management was

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GETTING RATEDUnder some pressure from brokers and clients, Lloyd’s decided to seek official ratings from the better-known independent rating agencies. This was a long process, as Lloyd’s explained and revealed itself in some depth to teams from both A.M. Best and Standard & Poor’s. They were introduced to a succession of underwriters and businesses at Lloyd’s in what amounted to a lengthy beauty parade. The ratings were eventually secured in October 1997, applying to Lloyd’s as a whole. The two agencies use slightly different rating scales. Best’s produced

already undermining the old distinction between external and working mem-bers. A new GB would contain elected market and capital nominees, executives and appointed independents.

Rowland’s successor, Max Taylor, a senior Lloyd’s broker, welcomed the report. After a period of consultation and a few tweaks, it was also welcomed by both Deeny, as Chairman of the ALM, and Hiscox, now Chairman of the Corporate Capital Association. But the hope that it would end divisiveness was not fulfilled. A smouldering civil war continued between enthusiasts for different sorts of capital, each wishing to protect and advance its interests. A byelaw was passed, but a requisition was made for an EGM to overturn it. The promoters of the EGM argued that the changes would: ‘Cede control of the Council from the Names to the corporate capital battalions taking over the Society ... the outlook for all Names is gloomy if their remaining rights at Lloyd’s are eroded. The Kent byelaw erodes those rights terminally.’ The attempt to overturn the byelaw was defeated. The onward move towards corporate membership continued; growth resumed several years later. By 2012, only £700 million – around three per cent – of capacity was underwritten on an unlimited liability basis; most continuing Names had converted to some form of corporate membership. Private capital was estimated to provide around 12 per cent of the capacity of Lloyd’s.

Figure 9.1 Individual and corporate market capacity15

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

30,00025,00020,00015,00010,0005,000C

apac

ity (

£m)

Individual Corporate

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a rating of A (Excellent) and Standard & Poor’s produced a broadly comparable rating of A+ (Good). Some felt that their existence would impose a valuable dis-cipline on the market of the future. Thereafter, most policy and financial issues were subjected to the question: what will the rating agencies think? But it was at least arguable that they helped shelter the market’s weaker elements. In many ways, the new Lloyd’s of the late 1990s behaved much like the old one with a new lease of life. Market conditions became very soft; before long, Lloyd’s was making losses once again.

R&R had stripped most of the assets from the central fund. It was now structured with a historically low level of cash, initially £100 million, plus a ‘callable layer’ which would more than double the amount available if needed. Beyond that, another special levy could only be raised with the prior approval of the membership. Lloyd’s decided to test the market for an insurance policy that would reimburse the central fund in the event that demands upon it went beyond a certain level. After some delay and much negotiation, using two bro-kers, this policy was placed with several major outside carriers. When the secu-rity of Lloyd’s was described, this form of back-up to the central fund was cited as providing extra strength. Several years later, following the 9/11 attacks, the solvency of Lloyd’s was once again under strain. Taking credit for this insur-ance asset became critical to demonstrating its solvency to regulators and rating agencies. However, when claims were made on this policy, they were resisted and taken to arbitration. The eventual settlement remained confidential, but was widely rumoured to be disadvantageous to Lloyd’s.

CHANGING STRUCTURESRegulation is never popular. At Lloyd’s, the general view by the time of the recon-struction was that moving the main focus of regulation to an external body would be welcome. Proposals were discussed with the DTI for Lloyd’s to become part of the structure of self-regulatory organisations (SROs) within the statutory frame-work for investor protection. But in 1998, the Labour government decided on a dif-ferent course. A new independent Financial Services Authority (FSA) was created to bring together the supervision of banks, insurers, building societies, securities dealers and others under one roof. Lloyd’s would be accountable to this body for investor protection. The DTI’s solvency supervision would also move to the FSA. This relieved Lloyd’s of fighting a battle to retain responsibility for self-regulation, a concept the press had helped to discredit – ironically, in view of their stance when their turn came later. But it soon became evident that statutory regulation had limited purposes and limited abilities. It did not guarantee the high underwriting standards needed to protect the market from its own weaker participants.

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By 1999, the warring factions of the old underwriting associations had seen the logic of combining into a single body together with the association representing agents, known as the LUAA. Hiscox helped to force the issue, pro-posing that agents should not finance the rival associations. There has been a single Lloyd’s Market Association (LMA) ever since. Max Taylor was asked to attend an early meeting where the respective roles of the Corporation and the LMA were set out intemperately. Afterwards, one embarrassed attendee went to see the Chairman to apologise for the tone of the meeting. He was told that nearly every other attendee had done the same thing. Respect for the office of Chairman remained part of the Lloyd’s DNA, and still does.

Sandler recalls that he had agreed with Rowland that their departures should be separated by an interval. Sandler felt that the authority vested in him and the Corporation were bound to diminish after reaching a zenith during R&R; it was time to move on. He persuaded the Council that, in Nick Prettejohn, there was a very strong internal candidate to succeed him, with no need to conduct an outside search. In July 1999, Prettejohn took over as CEO, saying that he rel-ished the challenge of providing an environment for businesses to grow success-fully. In April that year, Prettejohn had told the ALM spring conference that it should have no illusions about just how tough, changing and highly competitive the insurance marketplace had become. A willingness to adapt and change was vital: ‘Passionate adherence to the status quo, or simple slowness on the uptake, will win no prizes.’ This applied to the Corporation, the market and the mem-bership. He also said that Lloyd’s was too complicated: ‘our passion for diversity cannot strangle the life it is supposed to foster’. He saw his future CEO role as providing an infrastructure in which market firms could secure attractive returns for capital providers: ‘in short it is to manage the franchise’.

Prettejohn told members to accept that many market players wanted to achieve ILV status, highlighting the dilemma of a market that wanted to move in one direction and a capital base – whose resilience he praised – that wanted to continue the status quo. This could amount to a stalemate or ‘a recipe for continued attrition and sporadic bursts of ill will’. He hoped that a new scheme under discussion could offer a solution. This would involve private capital in reinsuring ILVs, thereby sharing in their profits.

***

In December 1998, proposals were set out by the FSA16 for the Lloyd’s insur-ance market to be regulated externally. Using new powers under the Financial Services and Markets Bill, all managing and members’ agents would have to be authorised by it as fit and proper. Day-to-day monitoring of the market and

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discipline of wayward members would be undertaken by Lloyd’s, while the FSA would oversee Lloyd’s as a whole. The FSA took formal responsibility for regu-lating Lloyd’s from December 2001.

The long-running saga of the PTDs finally came to an end when the Society of Lloyd’s v Robinson case reached the House of Lords in March 1999. The Lords ruled that litigation recoveries from claims brought in respect of underwriting were indeed caught by the PTD. Claims brought in connection with advice about stop loss and syndicate selection were not caught, but changes made by Lloyd’s to the PTD in March 1995 to capture all litigation recoveries were held to be valid.

THE FRAUD CASEAs non-acceptors were sued by Lloyd’s for recovery of their debts, a group of 230, led by Sir William Jaffray, counterclaimed against Lloyd’s, alleging that they were recruited fraudulently. Collectively, the members of this group were reported to owe approximately £51 million. Jaffray was a former fine art dealer and loss adjuster who said that he was persuaded to join by a glossy brochure extolling the virtues of Lloyd’s as a sound blue chip institution. He had ‘lost my house, my wife, my family life’. In essence, the plaintiffs argued that the repre-sentations of Lloyd’s in its Global Accounts and brochures were untrue, given the market’s exposure to asbestos-related claims.

Mr Justice Cresswell made it clear that this allegation of fraud against Lloyd’s would only be heard once. Any further Names who wished to join the action were given the opportunity to do so. The remaining American Names who had brought actions against Lloyd’s in the US had been firmly told that they had to seek legal remedies in England. Those disputing their debts were largely failing to prevent recognition of Lloyd’s English judgments in the US. A total of 24 US Names joined the Jaffray action. Preparations for this trial took several years. Freshfields acted for Lloyd’s, assembling large volumes of evidence that was submitted to the court.

The trial began in February 2000. At the outset, the claimants briefed the press extensively. It is normally an accolade to make the front page of Time magazine, but the following words, inscribed on a cracked stone facade, were as bad a piece of publicity as Lloyd’s had ever received:

Lloyd’s of London1688 – ?

Its watchword is ‘utmost good faith’. So why does Lloyd’s standaccused of the greatest swindle ever?

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The 21 February edition of Time contained a 23-page special report by the journalist David McClintick, who said that the ‘decline and fall of Lloyd’s has been building to a spectacular dé nouement. The final act is now upon us and waiting in the wings are a group of Names who could yet prove to be Lloyd’s nemesis’. The article gave a purportedly detailed account of Ralph Rokeby-Johnson’s predictions in 1973 that asbestos claims would one day bankrupt Lloyd’s. It included pictures of well-known British and American Names, and the money they lost, including Camilla Parker Bowles, Sir Edward Heath, Jeffrey Archer and Stephen Breyer (named by Bill Clinton to the US Supreme Court), Dan Lufkin (a Wall Street entrepreneur) and Charles Schwab (a stockbroker).

The Time piece was distinctly one-sided. It described the Department of Justice inquiry led by the US attorney in New York City as ‘conducting an inten-sive, criminal investigation of Lloyd’s’. It also mentioned the upcoming civil suit brought by David West and his daughters in a California state court – where fraud was easier to prove than in England – which was due to go to trial the fol-lowing year. This was eventually settled. It contrasted Rokeby-Johnson’s retire-ment mansion in southern California with the trailer in which a damaged US Name was now living nearby, having been obliged to sell his house. It mentioned suicides and implied the eventual failure of Equitas. It also said that morale was low, describing Lloyd’s as a shadow of its former self, reeling from scandals and traumas.

The Jaffray trial lasted for eight months. Many witnesses were called to give evidence and to be cross-examined. Among these were former chairmen, including Sir David Rowland, who found his four days in the witness box a gru-elling experience. At heart, the litigants alleged that there had been a conspiracy to keep external names from knowing the full extent of the asbestosis problems. In his witness statement,17 Christopher Stockwell said that as Chairman of the Open Years Panel in 1993, he became convinced that some people had under-stood the extent of Lloyd’s under-reserving much earlier than others. More recently, he and his now deceased collaborator, Tony South, had estimated the ‘horrific’ extent of the under-reserving, convincing him that there had been a cover-up and misrepresentation.

Before a packed courtroom at the Royal Courts of Justice in London, Mr Justice Cresswell delivered a ruling18 in November 2000 that exceeded 600 pages. The Guardian19 reported that as the judgment was read out, there were gasps from the Names and their families who were packed into Court 4. The judge rejected the allegation that the Committee of Lloyd’s had deliberately conspired to conceal information from Names. He ruled that at all times during the period

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in question, the Committee of Lloyd’s had acted honestly. He was very critical of some of the witnesses who had alleged fraud.

However, the judge went on to acknowledge that there may have been fail-ings and incompetence on the part of certain agents and underwriters, express-ing sympathy for Names who had ‘suffered enormously in financial and personal terms’. Some examples presented to him had shown advice proffered that was ‘at best grossly negligent’. He also criticised the market, saying that ‘the catalogue of failure by underwriters throughout the 1980s is staggering and brought dis-grace on one of the City’s great markets. Names were innocent victims of this failure’. He suggested that an independent panel should be created to settle mat-ters of debt collection and the treatment of those who had still not settled, while acknowledging that this was not within his jurisdiction to order. He also said that it was ‘high time that the Lloyd’s litigation here and overseas came to an end’. The Times speculated that Jaffray and his cohorts might yet wish they had signed up for R&R, saying that with average losses of £469,000, they could have settled for an average figure of £64,000.20

Lloyd’s welcomed the judgment as bringing these long-standing allegations to a final conclusion. An independent panel, the Names Settlement Group, was set up and another offer made in January 2001 to the 687 Names who had not settled or paid. However, Jaffray vowed to fight on: ‘there will be no surrender to Lloyd’s whatsoever. We will certainly look at an appeal and it may end up getting settled in the European courts’. He insisted that the judgment had left Lloyd’s ‘covered in mud’ and declared the treatment of Names to be a national disgrace.

In July 2002, the Court of Appeal21 unanimously rejected the case, calling on Names to settle. Lloyd’s too advocated that a line should be drawn under the litigation and settling up to be achieved. However, the United Names Organisation was reported22 to be pleased at the verdict. Catherine McKenzie Smith, its co-chairman, said that although the court had ruled that there was insufficient evidence to prove fraud, Lord Justice Waller had agreed that Lloyd’s had ‘misrepresented’ its position to Names (the court had noted that the sys-tem of Lloyd’s for reserving had, with the benefit of hindsight, produced very inaccurate estimates of outstanding liabilities). She said the group would return to court, arguing that negligent misrepresentation had occurred. This action began later, but was not proceeded with.

In April 2005, the now-diminished group of 84 Names sought to amend their pleadings to include a claim of ‘misfeasance in public office’, a recently develop-ing area of law relating to lack of good faith by officials. Michael Freeman rep-resented the Names. Among the evidence provided to Mr Justice Andrew Smith was a witness statement from former Lloyd’s Chief Executive Ian Hay Davison.

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Freeman said that the realisation that his book could not be used as evidence had persuaded Hay Davison to act as a witness. Mr Justice Smith refused all applications. He considered that the new case had no realistic prospect of suc-cess. Sally Noel,23 a vocal Name who was not party to the case, told the court that she was sending her file of evidence to the Master of the Rolls, the Serious Fraud Office and the Treasury, saying: ‘We have been tortured, persecuted and held to ransom for years by criminals.’

Two weeks later, Sir William Jaffray made proposals to the Treasury for no more litigation; annulment of bankruptcies of Names; full and final settlement; and compensation for the hardest hit. He said he was looking for a political initiative. Together with Kenneth Adams, he formed a charitable organisation named Struggle Against Financial Exploitation (SAFE), arguing that Names could still find themselves required to pay if Equitas failed. They argued against a statutory instrument appearing before Parliament which could affect the solvency rules. This was in essence a European Union (EU) consumer protec-tion measure, with no obvious impact on Names’ US liabilities. Jaffray tried to argue that this routine step could put 34,000 Names at risk: ‘we can easily see 20,000 bankruptcies, and deceased ex-Names’ estates being plundered’. His campaigning group, exlloydsnames.com, accused the government of ‘jackboot capitalism’.24 It won few friends.

In February 2006, the Court of Appeal judges quashed an attempt by Sally Noel to bring a case alleging fraud. Lord Justice Brooke and Lord Justice Wilson insisted that the issues had been dealt with in the Jaffray case. They refused Mrs Noel leave to appeal the decision of Mr Justice Cooke in May 2004 to strike out her case against Lloyd’s. Lord Justice Wilson said that Mrs Noel had a ‘burn-ing, strongly felt sense of injustice’ over what had happened, but ‘sought to ride roughshod over the elementary rules for the time for litigation to end’. She had brought a ‘farrago of complaints into the court, as if it were a kitchen sink, which was an abuse of the process of the court’.25 A civil restraint order was subse-quently made against her.

In June 2007, Lord Justice Buxton and Lord Justice Moore Bick dismissed an application led by Jaffray for a rehearing of an earlier Court of Appeal case, describing the application as ‘completely hopeless’. Merrett had produced a 1981 letter from US attorneys to an agency within Rowland’s Stewart Wrightson group, which showed an alarming prospect for underwriters. Names alleged that Rowland had committed perjury by concealing what he knew about the inadequacy of reserves. The court thought it very unlikely to have been in the possession or control of Rowland personally. It dismissed similar complaints against former Lloyd’s Chairman Murray Lawrence. In July 2007, the Court of Appeal dismissed the actions brought by Names against Lloyd’s for misfeasance

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in public office, while in July 2008, the High Court struck out a claim brought by 49 names alleging that RITC had been fraudulently described. Mr Justice Steel found that Names’ understanding of RITC was well documented, describing the suggestion that some did not understand it as ‘truly startling’. The claim was in any event time-barred. Following this case, Lloyd’s applied for extended civil restraint orders to prevent further actions being brought without the express permission of the court. These were secured and confirmed by the Court of Appeal.

VINDICTIVE?At the time of writing, a few Names have told the author they still see the con-tinuing attempts by Lloyd’s to recover outstanding debts as vindictive. Lloyd’s executives disagree. The settlement offer in 1996 said that those who did not accept it would be pursued for the full amount they owed. In practice, for many years before and after 1996, Lloyd’s was willing to make compromises with those prepared to divulge their financial circumstances. Where Names were genuinely unable to meet their obligations in full, settlements based on means were routinely agreed.

As Lloyd’s sees it, all Names were offered the best compromise deal that could be assembled. The offer was accepted by the vast majority, although often with misgivings. Lloyd’s considers that it had a responsibility to those who paid not to treat non-acceptors more favourably than those who swallowed hard and accepted the offer. This view is strongly supported by many Names who paid up. Lloyd’s points out that all Names were reinsured by Equitas, thereby gain-ing substantial benefits. Without this, they might still be paying out losses. In March 1998, Lloyd’s obtained judgment for the Equitas premium against 560 Names.

Non-acceptors retained the right to bring claims in respect of their losses, which some did. After the Jaffray fraud trial, in 2001, a fresh offer was made to non-paying Names involving a substantial discount on their liabilities, poten-tially reduced to nothing on proof of lack of assets. By 2005, 99 per cent of Names had settled their position; 200 Names were still being pursued for their Equitas premium. In November 2005, Lloyd’s issued bankruptcy proceedings against 45 of these Names, regarding this as a last resort. Some of these people then settled. These actions seem vindictive to those who still do not accept responsibility for their liabilities. But to those who respect valid contracts as enforceable – the premise on which the system operates – it seems only fair to try to ensure that each Name pays as much of their Equitas premium as they are able.

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US INVESTIGATIONShortly after the original Jaffray judgment in 2000, Standard & Poor’s re-af-firmed its A+ rating for the Lloyd’s market. Lloyd’s continued to confront investigations in both the US and Europe. The Mail on Sunday26 reported that American fraud investigators planned to intensify their criminal probe into Lloyd’s, despite the High Court judgment, saying that the size of the US inves-tigating team had been increased. The American probe was being conducted by investigators from the US Postal Service, the same organisation that produced evidence to secure the infamous Ivan Boesky’s arrest for insider dealing in 1986. It was led by Jack Ellis, a key player in that probe. The newspaper cited reports that the US Attorney General’s office had not decided whether Lloyd’s should face criminal indictment, commenting that ‘this is a very complex case. We are looking at possible offences of securities fraud, mail fraud, wire fraud and breaches of RICO’. The Chairman of Lloyd’s, Max Taylor, hoped that the recent Cresswell decision on the Jaffray case would inform the US Attorney General’s office and that it would reach a similar conclusion. However, the American source said that its probe was totally independent of the Cresswell ruling: ‘We have different issues here.’

The policy of Lloyd’s was to co-operate fully with this investigation. Many underwriters, agents and executives, including the author, were called to give evidence to a hostile team in an airless room on an upper floor of the heavily guarded US Embassy in London’s Grosvenor Square. The US investigation was finally dropped soon after 9/11. It is widely believed that the authorities con-cerned halted the investigation so as not to disrupt the payment of a large amount of claims due from the Lloyd’s market in connection with the terrorist attack.

EUROPEAN COMPLAINTSAfter R&R, European institutions became another theatre in which still-dissident Names tried to plead their case. A group of Names approached the European Commission, urging it to take infringement proceedings against the British government in the European Court of Justice. The group argued that the British government had not correctly applied the EU insurance direc-tives to Lloyd’s. As a consequence, Lloyd’s was not properly supervised and as a result, many Names had suffered a financial loss. In these circumstances, under well-established principles, Names should be able to pursue a case for damages against the defaulting Member State.

These complaints were considered by DGXV, the directorate-general for the internal market, headed by John Mogg, a civil servant originally from the UK. There were several British staff in the insurance division, headed up by

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David Deacon. Commission officials held several meetings with the DTI and subsequently the FSA when it became responsible for regulating Lloyd’s. The Mail on Sunday27 reported that EU officials had ‘fired a volley of questions’ at the FSA; it was reported that they were told that issues surrounding audits car-ried out by Lloyd’s had been dealt with in the Jaffray case. After several years, the Commission reached a conclusion that it was not its role to take a view on the historical compliance of Member States with EU legislation; its sole concern was with current compliance.

By then, some Names had turned their attention to the Petitions Committee of the European Parliament. A British representative, Roy Perry MEP, was appointed as rapporteur for this topic. Several British MEPs had relatives or friends who had been Names and had lost a good deal of money at Lloyd’s. They were sympathetic to the complaints, including the charges of fraud, made by a group of Names. The Perry report proposed that the Parliament should establish a temporary committee of inquiry into Lloyd’s. There were a number of public hearings, at which Names had an opportunity to raise their financial plight, and numerous complaints. Alastair Evans, Head of Government Policy and Affairs at Lloyd’s, explained the R&R settlement and argued against the proposed inquiry. Eventually, the matter was debated in the European Parliament in September 2003. A resolution was passed by 358 votes to 0, with 35 abstentions, requesting the European Commission to furnish more information about any shortcom-ings in the the British government’s application of the directives. The Parliament also reserved the right to establish further inquiries. More importantly, however, there was no call for the temporary inquiry that Perry had recommended and his ‘Explanatory Memorandum’ was deemed legally inadmissible.

During a 40-minute debate attended by only 25 of the 626 MEPs, Commissioner Fritz Bolkestein gave his view that it was for the Commission to rule on only the current supervisory arrangements; they were satisfactory. Perry and his supporters argued that there had been a breach of justice due to a flawed regulatory regime. Three British MEPs made extensive criticisms of the Perry report as one-sided and inaccurate. Six Names watched from the public gallery. No journalists showed up for Perry’s post-debate press conference. Nearly three years later, the Petitions Committee Chairman, Marcin Libicki, wrote in an apologetic tone, telling the Lloyd’s Names that their petition was being closed. The reasons, he said, had more do with the limits of the powers of EU institu-tions than with the substance of their case.

Thus, in both of the major overseas jurisdictions of Lloyd’s, the US and the EU, strenuous efforts were made to resist payment by a few Names over ten years after R&R. Although they attracted some supporters, these campaigns all ultimately proved unsuccessful.

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Some of the very disaffected Names are prone to conspiracy theories about Lloyd’s. In a comprehensive study,28 David Aaronovitch says that very often, conspiracy theories take root among the casualties of political, economic or social change. Such theories can meet a need to explain and apportion blame for one’s misfortune, sometimes investing the supposed enemy with demonic ruthlessness and exaggerated powers. These myths can be powerful; for some, they are ‘the soul’s version of the truth’.

FIRM GRIPSoon after he took over as Chairman in 2001, Sax Riley formed the Chairman’s Strategy Group (CSG). Riley had been Rowland’s protégé at Sedgwick. He and his Lloyd’s Chief Executive, Nick Prettejohn, reflected a view, which was widespread among the better businesses of Lloyd’s, that standards were not uniformly high. This could be damaging to the reputation of Lloyd’s generally and all the busi-nesses operating within what they began to refer to as the Lloyd’s franchise. The firm of management consultants with which Prettejohn had once worked, Bain, was engaged to support the work of the CSG. Chaired by Riley, its membership included Prettejohn, Stephen Catlin, by now Chairman of the single LMA, Andrew Beazley, CEO of his own successful firm and former member of the task force and the LMB, Michael Deeny and several others. The group was asked to examine the major strategic threats and opportunities facing Lloyd’s, and to determine a future vision and strategy to maximise members’ wealth over the next ten years.

When hijacked aircraft were flown into New York’s Twin Towers on 11 September 2001, Lloyd’s losses increased further. Their scale meant that again the central fund became critical in demonstrating the solvency of the market-place. This helped to precipitate a view that had already been gathering pace at Lloyd’s. The CSG was already working on raising standards. A consensus was emerging that the independence of weaker elements in the market had gone too far; central control was insufficient. This time, the CSG rebranded the unpopu-lar but vital task of internal market supervision. Its key proposal was to move to what it called a franchise structure. This would create a disciplined marketplace of distinct independent businesses, placing clear obligations on the ‘franchisor’ (i.e., the Corporation) to promote the market’s overall profitability. The relation-ship between Lloyd’s as franchisor and managing agents as franchisees would be re-defined. Although the approach was to be ‘primarily facilitative’, Lloyd’s would become prescriptive where needed in order to promote and protect the market’s security and profitability.

The group also proposed changes to the capital structure of Lloyd’s. Annual accounting would be introduced, conforming to international accounting

AFTERMATH 303

standards, to replace the three-year accounting system. No further unlimited liability members would join from January 2003 onwards. Syndicates that wished to transition from spread to integrated Lloyd’s vehicles were to be sup-ported. A new Franchise Board would replace the LMB and the LRB. The rela-tively new LMA, mentioned earlier, was to be the primary body for consultation with franchisees. Amendments would be sought to the Lloyd’s Acts to fully modernise the governance structure. A new franchise performance director was to be appointed and a programme of cultural change introduced.

The CSG considered proposals for buying out all Names’ capacity in order to streamline the Lloyd’s structure. Deeny says this put him in a difficult position as Chairman of the ALM: his members wished to continue underwriting and he would need either to oppose a voluntary buyout proposal or seek improved terms on their behalf. Accordingly, he resigned from the CSG. Although buyout proposals were dropped, despite supporting the franchise proposals, the ALM recommended that members vote against the package, sending, they said, a clear message that Names were unwilling to be bought out of continued partici-pation at Lloyd’s. As a result, votes against the CSG proposals included a major-ity of Lloyd’s 3,356 members. But the 1,393 who voted for them represented 80 per cent by weight of capacity, which meant that they were carried. Names had fired a warning shot: on a one member, one vote basis, they might overturn any future byelaws threatening their continued role in Lloyd’s.

In 2003, the new Franchise Board29 took office. Henceforth all business plans would need approval by a franchise performance director. This impor-tant post was filled by an experienced insurance practitioner originally from Germany, Rolf Tolle. The logic was asserted that a common brand, reputation and a central fund required a tighter and more intrusive inspection process to back it up. This time, the market voices complaining about intervention were not loud, although there was plenty of muttering. Tolle set out his thinking and went about his task with great energy, backed by a determined Franchise Board, under the chairmanship of Lord Levene, Sax Riley’s successor from 2003.

Results improved as the cycle turned. Lloyd’s has since grown and enjoyed the most profitable decade of its history. In 2013, its gross written premium exceeded £26 billion and 91 syndicates made aggregate profits of £3.2 billion. Most Names who were able to stay on after 1996 have recovered more than they lost.

The capacity of Lloyd’s has grown strongly over the last decade. The ear-lier debate between spread and dedicated forms of capital appears to have reached an equilibrium, as shown in Appendix 6. Private capital still plays a significant part, although only three per cent of capacity now rests with Names

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underwriting with unlimited liability. Stronger managing agents have emerged, as shown in Appendix 1.

Figure 9.2 Overall results after personal expenses, 1997–2013 (in £ million)30

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THE EQUITAS OUTCOMESome cynics saw Equitas as a move to put all the accumulated problems of Lloyd’s into a rusty ship that would sail away and one day sink. Staffed with a strong negotiating team, a tough attitude and a visibly shallower pocket than Lloyd’s itself, Equitas was able to do deals with groups of claimants that would never have been possible for Lloyd’s syndicates. Unlike a normal insurance company, a run-off operation has three main operating functions: claims han-dling; collecting reinsurance; and managing its investments. In conventional insurance companies, claims handling is often seen as a poor relation, playing second fiddle to underwriting and not always attracting the best recruits. For Equitas, it was the core activity; Michael Crall set about creating an elite squad of world-class claims handlers.

Rumours reached Crall before he arrived in London of practices of which he did not approve. Some claims experts were said to accept ‘fairly lavish enter-tainment’ from law firms who sought business from them. He tried to make it clear from day one that ‘there’s a new sheriff in town’ and that this would not be tolerated: ‘Nonetheless I had barely arrived when one of the firms had some shoot in Scotland and invited people for a week!’31 He was determined that Equitas would be whiter than white, drawing a line between the bad old days and the future in this and many other respects.

To help establish the new culture for Equitas, Crall wanted a new claims director. He tried hard to find a suitable British candidate, but Scott Moser, an American, emerged as by far the strongest contender, with the potential to be

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CEO in due course. Initially Equitas was paying the Lloyd’s market around $20 million a year for claims-handling work on its behalf. It was so interwoven that ‘you just couldn’t tear it apart’, says Crall, but this made no sense to him. He needed complete control to manage claims the way he wanted. This involved a long and complicated process to disentangle Equitas from the Lloyd’s market.

One big area of opportunity was reinsurance. Most of the counterparties recognised an aggregate liability to Lloyd’s. A large reinsurer might have a reserve of, say, $100 million related to Lloyd’s business. Instead of fighting every single claim with them, Crall and his team devised a fresh approach: they proposed that the reinsurer simply paid over $90 million straight away. This immediately saved the reinsurer $10 million from its reserve and boosted Equitas’ own figures. ‘[So we] started to do something totally coun-ter-intuitive, which was to take down the reinsurance from the backend, say-ing to major external reinsurers: pay me a number and we will go away and you’ll never hear from us again.’ This enhanced the Equitas balance sheet, which already contained a big bad debt provision. Over time, the approach to remaining counterparties became increasingly sophisticated: teams of out-side advisers would help devise an approach and shape a proposition, taking account of the other firm’s financial position, priorities and even its own incentive scheme.

The approach also made subsequent negotiations with claimants far sim-pler because it removed the need to worry about protecting the reinsurance arrangements. Equitas could negotiate freely. It was a quite different from the approach adopted by some insurers of ‘going into a shell and not returning phone calls’. Soon, Equitas had built up a reputation as a claims operator with unusual breadth and skills. When Scott Moser was asked why he was willing to uproot and come to London, he said that joining Equitas was like competing in the Olympic Games.

Part of Crall’s distinctive style of management was to break down the barriers that often existed within insurance operations in the London mar-ket. He would always insist that claims negotiators, actuaries and account-ants looked at each deal together in order to evaluate the net effect on the company. He wanted Equitas to work as an integrated unit, taking care to ensure that people got on well with each other. He also rejected suggestions that Equitas should branch out – either by undertaking new business itself, for which it would have needed a new licence, or by taking on the run-off of others’ liabilities. He thought that everyone’s task should be focused on the primary mission to run off the Lloyd’s liabilities, a philosophy he describes as ‘keeping your eye on the ball’. He knew that many reinsured Names would not welcome any suggestion that he was about to put them back in the insurance

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business. This sense of mission was reinforced by a carefully designed set of performance-based financial incentives. At its peak, Equitas employed 900 people.

Once they began to operate, Crall and Scott Moser shared a philosophy, based on experience, that, as Crall put it: ‘Claims do nothing but get worse. The only thing to do with a claim is to get it settled. Stonewalling claims is just an invitation for things to deteriorate.’32 Moser added that ‘the most expensive and inefficient way to handle claims was to contest them until resolving them on the courthouse steps’.33 Many market practitioners and commentators expected Equitas to fail at some point. Crall received many delegations from brokers who wanted him to bear in mind ongoing relationships. He told them that this was not the job of Equitas; frequently they seemed content just to have been heard. Where necessary, brokers and Names were re-assured that Equitas would han-dle claims firmly but fairly. Looking back, he was surprised that no one from Lloyd’s ever came over and asked ‘what have you guys discovered that we might learn from? Nobody ... It was like once they have got that thing out of the way, they were just happy for it to be out of sight’.

It had always been said that one advantage of Equitas would be its ability to manage its assets more efficiently than Lloyd’s syndicates. Because syndicates were annual ventures, they were unable to take a long-term view. By contrast, Equitas had a 30-year horizon and could reap economies of scale. Within its first six months, some £8 billion of investment funds had been transferred to Equitas from Lloyd’s, a process carried out by Mercury Asset Management. Dick Barfield, former Chief Investment Manager of Standard Life, chaired the Board’s Investment Committee, applying techniques honed in his previous role. A small but high-powered team issued management contracts to around a dozen different external investment management firms, each with a portfolio of at least £500 million – ‘large enough’, David Newbigging, Equitas Chairman, explained, ‘for them to take extremely seriously, and regard as a priority account, but not so large that we become more dependent on them than they are on us’.34 Measures of investment performance were devised, allowing effective monitor-ing and comparison by an independent ‘scorekeeper’. The result was a consist-ently high performance which gave an average a return of over seven per cent each year during a ten-year period.

In 1998, Lloyd’s and Equitas both wished to remove the uncertainty sur-rounding the value of the obligation that the DTI had imposed on Lloyd’s to pay a further £100 million in 2002 in certain circumstances. Instead, Lloyd’s paid £66 million, which represented the current value of the liability.

By any standards, Newbigging’s achievement in getting Equitas off the ground was huge. He had assembled some heavyweight talent on his board

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and as advisers. He made an excellent choice in appointing Michael Crall as the first CEO – whom some called the ‘Quiet American’ – to solve what was predominantly an American problem: US claims. Crall in turn chose Moser, his eventual successor, a fellow countryman. But from an early stage, the trus-tees felt that Newbigging adopted a somewhat disdainful view of them. He did not seem to want to treat them as full participants. His corporate background meant that he had a strong sense that the Board should be in control. This became something of a personality clash between him and these Names’ rep-resentatives, which his critics say he invited. For their part, the trustees felt what Ridley describes as ‘a very special pride of parentage over the creation of Equitas and a very special responsibility for its success’. They sometimes felt entitled to more information than the executive wanted to furnish.

Newbigging’s formality at meetings was sometimes interpreted as arro-gance. Crall found an entirely different personality when he got to know him well: ‘I always found him fascinating because when you got him off script, he was spontaneous and clever.’ Crall says that ‘David was very good at figuring out who was critical to his success’. He did this with the New York insurance regu-lators and with the DTI, who both appreciated frequent contact. Both sets of regulators were very well aware of the risks they had taken in allowing the estab-lishment of Equitas, and the welter of criticism that would descend on them if it should fail. At first, sessions were held at least fortnightly with the DTI: Equitas’ Chairman, CEO and CFO meeting with Jonathan Spencer and Richard Hobbs, keeping them thoroughly in the picture. As the financial position stabilised and as Equitas’ operations began to get into gear, the need for such frequent contact gradually diminished.

Exxon Valdez was an especially difficult case. The insurance programme was complex, involving self-insured layers. Many in Lloyd’s were outraged by claims which they did not think were covered. The Chairman of Exxon, Lee Raymond, was not an easy person to deal with. Crall had the whole case reviewed by an independent expert before Equitas began. Exxon had a legal case going in Texas and another in New York, with all the right arguments in the right venues. Crall thinks that any settlement was likely to meet with huge criticism regardless of who made it. Newbigging had taken a close interest in this case: uniquely, it had the ability to sink Equitas at an early stage.

During 1996, a big source of uncertainty was Exxon’s claim for public liabil-ity over the Exxon Valdez oil spillage in 1989. It was reported that Exxon was looking for $800 million. A market view was that only $250 million was cov-ered. Attempts at mediation had so far failed. Soon after Equitas was formed, Newbigging was a keynote speaker at a big conference in Houston. He took the opportunity to ‘set out our stall’. Michael Peyton, a senior London lawyer, was

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sitting next to Exxon’s general counsel, who turned to him, saying ‘I think we may be able to do business with those guys’.

Knowing that the Texas courts were notoriously sympathetic towards Exxon, Equitas decided to approach them for a chairman level meeting to see if the out-standing issues could be resolved. Newbigging flew to Dallas, with authority to settle on behalf of his board and nearly all the following market, to meet Lee Raymond. Each was accompanied by only one other senior colleague rather than the usual legal team. Both men had reputations as tough negotiators who would stick to their word. They reached agreement at $480 million, a little below the London market’s upper limit, and shook hands on it. During the six weeks before this was finalised, the Alaskan Supreme Court handed down a judgment against Exxon of $5 billion. Newbigging thinks that many business leaders would have used that massive new development as a basis to unscramble the deal. He respects Raymond for not attempting to renegotiate what had been agreed on a hand-shake (the $5 billion award was substantially reduced by the US Supreme Court some ten years later). Exxon Valdez was the biggest ‘overhang’ when Equitas was authorised. Crall was relieved that it had been settled early – as were regulators on both side of the Atlantic – and still thinks it was the right course to have taken.

Nevertheless, there was criticism of Newbigging in some quarters, par-ticularly among the trustees, for personally handling the Exxon issue. He felt that it was his responsibility as chairman to try to resolve the largest potential claim overhanging Equitas as quickly as possible on acceptable terms, which he succeeded in doing. Relations between the trustees and Newbigging were uneasy and in 1998 he found a suitable successor. He had been impressed with the way that Mercury Asset Management (MAM) had handled the complex transition of funds to Equitas, and especially impressed that the Chairman of that company, Hugh Stevenson, had been personally involved at each of the several critical stages. He also heard that when MAM’s parent had been acquired, Stevenson had exercised his company’s right to stand apart from the deal. He made other enquiries and became convinced that Stevenson would be a good successor. Stevenson joined the board in April 1998 and took over as the next Chairman of Equitas in November. He had a quite different style of operation. He listened to everybody. Crall says: ‘he’s a very easy-going guy, except when an important matter of principle came up, he stood up and every-body said wow, this guy, we need to pay attention to him’. Paul Jardine, Chief Actuary from 1996 and a former partner at Coopers & Lybrand, joined the Board in early 1999.

In the first few years, the Equitas solvency margin climbed steadily from 5.6 per cent to 12 per cent in 2000. Once the relationship between the trustees

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and the board had settled down, Spooner felt that two of Equitas’ advantages were a lack of outside political interference and the absence of a sense of internal politics. There was the persistent focus on the main task. He recalls his time as a non-executive director: ‘It was a Rolls Royce of a company. When a problem was drawn to the board’s attention, the proposed solution was debated and approved and then swiftly actioned by executives of really high quality. They engaged some of the best law, accountancy and other firms as advisers.’35 However, he also recalls that ‘the only constant in the whole story is that there was another surprise coming up every two or three months. Big and complicated issues would keep coming around the corner’. The biggest of these surprises was the surge in US asbestos-related claims.

PERSISTENT SHADOWAbraham Lincoln often described our democracy as the heritage of all peo-ples, in all lands, for all time. Our judicial system has long been a part of our democracy most admired and emulated around the world. Yet today, many of America’s admirers can only look at our tort system and shake their heads in disappointment and disbelief.36

Griffin Bell, former US Attorney General

In 2001, the Equitas report and accounts contained a 12-page special report on the history of asbestos liabilities and their approach.37 After a long history of legal action, two cases reached the US Supreme Court, which urged Congress to intervene. But legislation before Congress in 2000 was rejected; it would have removed many asbestos claims from the courts and eliminated payments to unimpaired persons. This possibility may have helped stimulate yet more claims in an attempt to pre-empt reform. Within the diverse US legal system, the plaintiffs’ lawyers engaged in vigorous ‘forum shopping’, bringing cases where they were most likely to get a sympathetic hearing. When defendants resisted claims, this sometimes caused courts to award large amounts against them, including punitive damages. One response, so-called ‘inventory settle-ments’, involved offering a large number of smaller amounts to unimpaired claimants. This and other factors had led to a dramatic increase in the number of claimants in response to advertising and other measures by attorneys and agents. During the previous two years, eight major defendant companies had become bankrupt under the strain of a rising tide of claims.

Scott Moser reviewed the history of asbestos when speaking at the ALM conference in June 2003. He cited estimates that 80 per cent of claimants

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were not sick and a Rand Corporation report, which stated that 89 per cent of claimants had no malignancy but received 65 per cent of the compensa-tion. Joseph Stiglitz, a Nobel Prize-winning economist, argued that the eco-nomic costs had caused 67 bankruptcies and the loss of 60,000 jobs. Moser said that the medical evidence was often bogus: one doctor had ‘examined’ 14,000 people and found every single one was ill. Since 2001, Equitas had adopted a new strategy. This included a policy of refusing claims that were unsupported by medical documentation of impairment. Instead, it intro-duced Document Requirements (DRs) for claimants and reinsurers. Equitas was also trying to negotiate policy buyouts. It increased its asbestos reserves again very significantly by an undiscounted £1.7 billion, on top of an increase of £1.5 billion the previous year, bringing total asbestos reserves to just over £8 billion. The solvency margin slipped backwards, but only from 11.2 per cent to 9.5 per cent thanks to improvements in other areas. The burden of asbestos claims weighed very heavily on the Equitas team; there could be no certainty about the eventual outcome. As Moser said: ‘Life in run-off is not for the fainthearted.’

Various doom-mongers, including still-dissident Names, predicted that eventually Equitas would be engulfed by asbestos claims. Throughout the history of Equitas, there had been minority groups, including Christopher Stockwell’s LNA, who have stressed the risk of Equitas failing. As described earlier, Stockwell had favoured putting the whole of Lloyd’s into run-off, arguing that Equitas would encourage claims rather than deter them. A new group emerged in 2005, run by the former chairman and secretary of the Rose Thompson Young Action Group. A propaganda war continued between these groups and the ALM, which accused the former of scare-mongering with inaccurate speculation. It was a war of ideas: of quite different interpretations of the past and different visions of the future. It is seen by Sir Adam Ridley as a continuing crusade against Lloyd’s and the R&R settlement.

Equitas became active campaigners in the court of US public and political opinion. It hired lobbyists on a scale far beyond what Lloyd’s, as an active but ‘alien’ participant, could have contemplated. In 2002, encouraged by various par-ties, including Equitas, Griffin Bell, a former US Attorney General, denounced the way in which the US courts and the Plaintiff ’s Bar had handled asbestos claims.38 The tide of US opinion began to shift for many reasons, including the revelations of various judges and others. For several years, a legislative solu-tion to the asbestos issue was in prospect: the Fairness in Asbestos Resolution (FAIR) Bill. After several attempts, this Bill failed to pass in July 2005. Advocates of reform said that the huge volumes of spurious claims had elbowed out the

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genuine cases of real suffering. True victims had lost out, lawyers had gained and courts had allowed justice to be perverted.

In November 2003, Crall stepped down as CEO, remaining as a non-execu-tive director for two years. He was succeeded by Moser, who continued the cam-paign in the US to reform the approach to asbestos claims. Although progress at the federal level was limited, at the state level, a series of legislative reforms were introduced; the climate of opinion continued to shift. Eventually, Equitas completed over 220 buyouts and over 700 commutations, collecting over 90 per cent of the reinsurance asset taken on in 1996.

FINALITYNews reports first appeared of the interest shown by Berkshire Hathaway (BH) in investing in Equitas at an early stage in spring 1996, around the time that it was conditionally authorised. Stockwell told the author39 that in 1993, when he was on the Old Years Panel, an approach had been made to BH and to the US insurance giant AIG as probably the only operations with the depth of resource needed to take on the Society’s past. The uncertainties had proved too great then. Crall recalled that ‘right from the get go, I had a meeting with Ajit Jain [a close colleague of Warren Buffett, Chairman of BH], who offered what was essen-tially a financial reinsurance deal. We got into serious discussions somewhere around 2001.’ At that point, Hank Greenberg of AIG had ‘managed to wedge himself into the deal’. He had evidently called Buffett, suggesting some kind of reinsurance as a joint venture. Crall raised the possibility of a novation,40 but Greenberg resisted. AIG sent an actuarial consulting team into Equitas, which came back with the obvious conclusion that the range of possible outcomes remained very wide.

Not long after Crall left, Warren Buffett’s BH group returned to express interest in a two-step process. Meanwhile, Ridley, who was still Chairman of the Equitas trustees, began lobbying the Treasury to make possible an eventual nova-tion by statute. This could allay the nagging worry that Equitas was only a rein-surance of liabilities that still belonged, in theory at least, to Names.

In April 2007, Equitas completed stage 1 of a reinsurance transaction with the National Indemnity Company (NICO), a member of the BH group. Buffett’s annual newsletter to BH shareholders contained his own condensed version of the Lloyd’s story, in which he recalled that prospective Lloyd’s members ‘were always solemnly told they would have unlimited and everlasting liability – down to their last cufflink, as the quaint description went’. This warning had come to be viewed as perfunctory: ‘300 years of retained cufflinks acted as a

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powerful sedative to Names poised to sign up.’ Buffett said that many had pre-dicted that Equitas would eventually fail, but when he and Ajit Jain reviewed the facts in the spring of 2006, they concluded that ‘the patient was likely to survive’. BH offered to reinsure all the liabilities of Equitas: in essence, they would take nearly all its $7 billion in cash and securities plus the remaining reinsurance cover, undertaking to pay all its future claims and expenses up to $13.9 billion, which was $5.7 billion above Equitas’ own estimate of its liabili-ties. At this stage, Moser, now CEO of Equitas, summarised the transaction thus: ‘Names wanted to sleep easy at night, and we think we’ve just bought them the world’s best mattress.’

Under the agreement with BH, NICO would take on the staff and opera-tions of Equitas and would manage the run-off of its liabilities. Lloyd’s would contribute £72 million, while Equitas would pass over all its assets, less £172 million at this stage. When the transaction was complete, there was a modest return premium of £50 million, to be divided among 34,000 Names, against which any outstanding debts were offset. In stage 2, Equitas would seek the approval of the High Court to transfer all the liabilities of reinsured Names into an Equitas company. At this point, Lloyd’s would contribute another £18 million. An article written for Names by Geoff Atkins, an independent third party, was entitled: ‘A Marriage Made in Heaven.’ It said, among other things, that ‘the bride [Equitas] had married into money; father [Lloyd’s] had topped up the dowry, but it looked like a small amount to be rid of her; in phase 2, the groom [BH] might even buy the large extended family [the Names] a drink to celebrate’.

The solvency ratio, which had fallen back in 2002 to 8.7 per cent under pressure from asbestos claims, climbed back, then dramatically leapt as the two rounds of reinsurance were supplied by BH. Comparable solvency ratios were only published up to 2006; following the BH reinsurance, the notional solvency ratio climbed to over 70 per cent.

The Equitas Long Term Incentive Plan had been designed to reward senior staff according to results. It now paid out significant sums, though these seem modest in relation to other parts of the financial services sector. A total of £20 million was awarded to executive directors and staff, with individual payments of £1.6 million to the CEO and a little over £1 million to other executive direc-tors. The trustees felt that the bonuses were richly deserved. In 2007, Jane Barker succeeded Moser as CEO. In 2009, Hugh Stevenson was succeeded by David Shipley, the Lloyd’s underwriter who, a dozen years earlier, had worked closely with Richard Keeling on the reserving exercise.

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Just as the survival of Lloyd’s became the object of Rowland’s complete deter-mination, so its past failings have become a cause – perhaps an obsession – for a few individuals. At the July 2009 High Court hearing on the transfer of Names’ liabilities to Equitas Insurance Ltd (EIL), now a BH subsidiary, Christopher Stockwell and Stephen Merrett opposed the transfer. Mr Justice Blackburne summarised their belief that RITC operated to absolve Names from any further liability to the insured policyholder. The judge said that it had been ‘made clear repeatedly’ that RITC did no more than insure the liabilities of one syndicate into another. He cited a case a year earlier against Lloyd’s before Mr Justice Steel which turned on this issue and had been struck out. Refusing the claimants permis-sion to appeal, Lord Justice Longmore had described the applications as ‘totally without merit’. Mr Justice Blackburne also dismissed suggestions that Lloyd’s or Equitas lacked authority. His judgment then addressed a third point – whether Stockwell and Merrett were adversely affected by the transfer. He thought not, saying: ‘It seemed to me, as I listened to them, that Mr Stockwell and Mr Merrett wished to wage battles which have either long since been fought and lost, or raise issues which, at best, should be directed at others.’

With this judgment,42 the High Court in London approved the transfer under Part VII of the Financial Services and Markets Act 2000 of all the pre-1993 liabilities of the Lloyd’s Names reinsured by Equitas to EIL. A further $1.3 billion of reinsurance cover from the BH subsidiary, National Indemnity, was bought. This meant that policyholders would now benefit from a total of $7 bil-lion of reinsurance cover over and above existing Equitas reserves. The transfer provides complete legal finality under English law and throughout the European Economic Area.43 Although this interpretation is still contested by a handful,

Figure 9.3 The Equitas solvency ratio, 1996–200641

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including Merrett, to the vast majority of those involved, this transfer has put an end to residual worries that one day Equitas might fail, with liabilities return-ing to haunt Names, the original insurers. It means that Names, their heirs and executors can, as the final edition of The Equitasian put it, ‘now sleep more easily at night’. Thirteen years after the reconstruction of Lloyd’s, the shadow of the past had been driven away.

This book began with Queen Elizabeth II opening the new Lloyd’s building. Twenty-eight years later, in March 2014, there was standing room only for Her Majesty’s latest visit – to mark the 325th anniversary of this remarkably resilient institution.

Picture 18 The Queen’s visit to mark the 325th anniversary of Lloyd’s. Reproduced by kind permission of Gareth Hacker

10

REFLECT IONS

Picture 19 Reflections of the Lloyd’s building. By Thomasin Summerford

Unless we remember we cannot understand.E.M. Forster

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Readers will draw their own lessons from this story. This final chapter reflects on the unique roles played by certain individuals, without whom

the crisis might have ended very differently; some features of Lloyd’s that helped first to bring about the crisis and later to deal with it; and the part played by the wider institutions in Britain, the US and elsewhere that provide the framework within which these events took place.

EXCEPTIONAL PEOPLEThere can be no doubting the key leadership roles played by David Rowland, Peter Middleton and Michael Deeny. Without each of these three individuals in their place at the time, the chances of Lloyd’s surviving would surely have been much smaller. Rowland’s role as the conductor of the orchestra is widely recognised: he formed and ran the Lloyd’s task force in 1991; he took on the challenge of leading Lloyd’s as its first Executive Chairman in 1993, rebuild-ing some of the trust in Lloyd’s that had been shattered; he maintained morale and confidence within and beyond the institution; he managed its key external relationships; and he stayed the course for five arduous years. His performance offers a case study in modern leadership. The complexities of the predicament faced by Lloyd’s precluded Rowland having all the answers himself. He did not bring a solution to its problems; he led a search for one. He brought together the talent needed to get the job done, relied on key people, kept them motivated and ensured that they worked with each other, building a consensus on the way forward.

At every crucial juncture, Rowland’s abilities to cajole and articulate came to the fore – talents that were combined with a fierce determination to succeed. He is a natural politician, seeking to reconcile different sets of interests. He is also a natural strategist, looking several steps ahead at the bigger picture, refus-ing to be distracted by detail or setbacks.

While Rowland was moulded to his task by market experience, Middleton’s first qualification was the clean hands he brought to it. With no previous involve-ment with Lloyd’s, he was able to look at the scene objectively. He brought a strong sense of fairness to the table. Uncomfortable with aspects of Lloyd’s on the inside, he found the agonies of many members harrowing. Instead of dis-tancing himself, he became immersed in their problems, seeing the justice of their claims for compensation. He was not a bleeding heart. He had solid com-mercial experience and plenty of imagination. He thought outside the tram-lines that constrained those who had grown up in the Lloyd’s market culture, or who, like the author, adapted to it too readily. He sought to understand other

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points of view in order to reconcile differences. His techniques were unconven-tional. It was said that he sometimes promised more than he could deliver. But without him, it seems unlikely that the vast gap between the attitudes of Lloyd’s and Names towards paying losses could ever have been bridged.

Rowland and Middleton appealed to different constituencies, bringing them together to ensure the survival of Lloyd’s. Although their styles differed, they had a common purpose and found much to appreciate in each other, exhib-iting an obvious, though eventually diminishing, rapport. This was ended when Rowland realised that, for Middleton, the Lloyd’s cause was not a vocation. Three exhausting years were enough for Middleton when he was faced with a tempting job offer. Although he was willing to stay for several months longer, Rowland expected more. He found it inconceivable that Middleton would not see the job through to the bitter end. Fortunately, Middleton had taken the precaution of providing Lloyd’s with an excellent successor in Ron Sandler. A skilled and patient negotiator, Sandler was probably better suited to bringing home the complex reconstruction.

The enormous efforts of the leadership team would have failed without a constructive counterparty. Institutionally, the ALM provided much of this. It had a creditable track record: stimulating the task force, supporting new action groups and starting the dialogue that Middleton turned into a creative force. It played a critical role in working towards a solution. Sir Adam Ridley, its Deputy Chairman, took on the task of chairing the NC to recommend the best way of allocating the settlement offer. Sir David Berriman, the Chairman of the ALM, took on the role of supervising the VSG, whose analysis scotched the superfi-cially attractive option of folding the Lloyd’s tent. These were vital contributions to the eventual success of R&R. But the ALM could not itself speak for the raw power of the action groups it helped to create. These channelled much of the anger of Names into successful litigation against agents.

Action group success owed much to the efforts of their leaders, drawing on a spirit of self-help by outraged groups of Names intent on defending their assets. Against many entreaties, Peter Nutting persisted with a battle plan to win an Outhwaite settlement, followed by a fight for the right of Names to deploy their compensation as they saw fit. Tom Benyon had a smaller success with the Warrilow case, making, he says, many mistakes from which other action groups could learn. Nutting and Benyon both helped to spread the action group concept. Benyon helped start the Gooda Walker Action Group. Michael Deeny dislodged its initial leader, adopting a far more effective approach: carefully selecting and working with his lawyers, attacking the agents rather than Lloyd’s, overcoming many obstacles, sidestepping the inadequate first offer and eventually winning the largest award in British legal history.

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Deeny created a new, essentially constructive team of successful litigants, providing Lloyd’s with an alternative co-ordinator to the original grouping led by the disaffected Christopher Stockwell. Deeny emerged as the principal coun-terparty with which Lloyd’s could strike a deal. Although he spoke for many ruined names, he also spoke for some who wanted to carry on underwriting. With a strong sense of injustice and a gift for oratory, he was also a practical businessman and, above all, a very skilled negotiator. At first with Middleton and later with Sandler, he steered the action groups towards the global settle-ment he always wanted, in which available benefits were spread far more equi-tably than the simple results of litigation.

The reconstruction of Lloyd’s rested on three main pillars: the settlement with Names; a continued supply of new, corporate investors; and the creation of Equitas to deal with Lloyd’s’ ugly inheritance of past liabilities. The success-ful introduction of corporate capital owes much to the determination of Robert Hiscox and the persistence of Bryan Kellet, Michael Wade and others, who saw the limited future of unlimited liability Names. Equitas as a concept has many fathers: the Old Years Panel, which included Stephen Merrett and Stockwell, can claim a share of the credit for this idea. McKinsey saw value in separating the old from the new, drawing on the Mellon bank’s ‘good bank/bad bank’ separa-tion. Middleton had seen a similar move at the Midland Bank. Richard Spooner’s imaginative paper written in 1993 developed the idea of a more comprehensive separation between the future and the past.

The formidable task of estimating the reserves needed for Equitas – accu-rately enough to gain the DTI’s support and to withstand legal attack – fell to Heidi Hutter, Richard Keeling’s reserve group, Tony Jones and a host of outside actuaries. In the later stages, the work of David Shipley, Roger Sellek and others was essential to bridging the apparent gap between affordability and adequacy by eliminating much of the double count inherent in earlier estimates. David Newbigging had the courage to take on a chairmanship that better-known fig-ures had politely declined. He went through unconventional routes to hire excel-lent people to run the operation, including Michael Crall, Jane Barker and later Scott Moser. He took personal charge of a controversial settlement with Exxon. He established an effective board and investment strategy, passing the torch to a strong successor in Hugh Stevenson.

Many other individuals made critical contributions: Charles Roxburgh at McKinsey supplied imagination to the task force analysis, Lloyd’s first busi-ness plan, and the reconstruction plan, ensuring that all three were cogent. Bob Hewes translated the ideas into a workable financial plan. Joe Bradley provided the data and analysis that made it possible for the settlement to be designed and

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made to work. Barry O’Brien masterminded all legal aspects of the R&R plan, making it invulnerable to challenge. Jo Rickard handled the litigation deftly. Debt collector Philip Holden slipped a velvet glove over his iron fist. Peter Lane threw himself into the critical task of striking a deal with US securities commis-sioners. John Stace toured the world, listening and explaining to angry and dis-appointed Names. Graham Nicholson ensured that Equitas separated cleanly from Lloyd’s without the rancour and dispute that often accompanies divorce. The input of Freshfields in the whole operation was critical. Other legal advi-sors also played vital roles. The LeBoeuf team – led and trained by Don Greene – fought like tigers to defend Lloyd’s in the US and to advance its interests, per-suading the US regulatory system to accept first corporate capital, then Equitas. Harvey Pitt and his team from Fried Frank won crucial victories in US courts.

Lloyd’s used other advisers to good effect. J.P. Morgan helped Hiscox find a fast route to corporate capital in 1993; Samuel Montagu helped create the largest new player, LIMIT, elbowing Michael Wade’s pioneering CLM into sec-ond place. Rothschilds took on the role of financial adviser to Equitas when its chances of success were very uncertain. Lazards worked closely alongside Lloyd’s to raise funds for R&R. The skill of picking the right advisers, working closely with them and getting them to work with each other is obvious enough, but so is the scope for failure in terms of choice or co-ordination in a complex operation like this. Rowland’s leadership ensured that his team achieved a rare degree of integration with outside advisers.

The Lloyd’s Council was called upon to work far harder than is normal for non-executive members of a supervising body. At times, it required courage to conclude that Lloyd’s remained a going concern: there was plenty of scope for a different view. Instead of degenerating into factions, Rowland led the members of the Council to look for common ground. Many people involved in this saga look back on it with surprising enthusiasm. Their eyes light up when they recall intense demands upon their personal resources: they recall their imagination being stretched, working as a team and tapping new levels of stamina. This seems true for market players, corporation executives at all levels, Council members, action group organisers, a host of external advisers and even the external regula-tors. Motives varied, but most wanted to put right some of the damage suffered by so many Names and to save an historic institution which might yet have a better future. One could sense a collective will to survive. As Carolyn Williams, Secretary of the LMB, put it: ‘After 300 years, was our generation going to let Lloyd’s down?’

There was also a strong moral dimension to the actions of the Lloyd’s lead-ership, the Council, the ALM and the Lloyd’s community. This was reinforced

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by a watchful press. Although unsympathetic to a bailout by taxpayers, the seri-ous press saw an obligation on Lloyd’s to reduce the impact of the biggest losses. Hardship arrangements were first introduced in 1989 for those who could not pay all their losses; driving members to bankruptcy was then eschewed. David Coleridge and the 1992 Council searched hard for a more comprehensive way to alleviate the worst losses, but were unable to see how this could be afforded. Throughout Rowland and Middleton’s leadership, there was a very explicit acknowledgement of the responsibilities of Lloyd’s towards Names who had lost heavily through incompetence or negligence. Both men sought the moral high ground. Deeny and other Names’ leaders invoked moral arguments. More gen-erally, the mood at Lloyd’s shifted from an early indifference to a genuine sense of collective duty, at least towards those hit hardest and willing to pay within their means. This was a sentiment that was felt strongly around the Council table.

Thousands of individual Names were faced with a personal and a family crisis. Their way of life was threatened. Most stretched themselves to pay; oth-ers fought hard to delay or resist; some paid until they had nothing left. Many suffered anxieties too painful to recall and some perished by their own hand. When the offer finally came, the vast majority decided to accept the rough jus-tice that it was, often with misgivings, in a spirit of compromise. Each Name’s circumstances were different, but the courage often required to bury the hatchet should be acknowledged. A small band who felt too strongly to do this took ref-uge in conspiracy theories that led nowhere.

INSTITUTIONAL RESILIENCEIn the early part of this story, it is evident that Lloyd’s – the market and its weak internal system of regulation – was dysfunctional in some important respects. It was riddled with conflicts of interest. Collectively, Lloyd’s was slow to recognise the scale of the threat posed by North American liabilities. As these emerged, most people seemed more concerned to protect their narrow interests than to fully confront the problem. Many agents buried their head in the sand when their duty to others required more vigilance. The conspiracy theory has been examined in great detail: it did not withstand scrutiny. The author is in no better position to judge this than the court which heard all the arguments and reached an unequivocal conclusion. Perhaps the most telling evidence against it is the fact that key insiders, from Chairman Peter Miller downwards, were themselves aff licted by the problem they were alleged to have concealed.

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Although Lloyd’s was fully acquitted of fraud, it was rightly criticised for harbouring incompetence. The self-regulatory system it defended so jealously had failed to tackle this state of affairs. Agents who were too weak to be safe were registered and tolerated without enough independent scrutiny. Some underwriters entered fields they did not understand, while others tried to oper-ate in areas requiring sophisticated analysis without the essential disciplines or tools. Their failure to know what they were doing is often compared to the subsequent failure of the banking sector – practitioners, boards, rating agencies and supervisors alike – to comprehend the esoteric products they had devised and especially their systemic effects.

There was a strong – at times messianic – disposition to rely on market forces, rather than a willingness to look for and confront systemic risks. It was crazy to allow and worse to encourage the protections for Names – PSL, estate protection plan and agents’ E&O insurance – to be insured by Names them-selves. It was irresponsible to allow Names to underwrite amounts five times the value of the money they held at Lloyd’s. It was inexcusable to allow them to base their underwriting on a bank guarantee based on the security of their own home. Enthusiasm for headlong expansion blinded nearly everyone: over-capacity fuelled the mere recycling of business, with disastrous consequences. The ALM tried to call a halt to these practices; no one listened.

Disclosures made by agents to Names about their business and the risks from past liabilities and extreme recycling were often inadequate, and inad-equately policed, both by the auditors and Lloyd’s itself. Perhaps the biggest fail-ure was not to spot and stop the excesses of the LMX market. As with complex products in the subsequent banking crisis, blame for this at Lloyd’s is shared by many individuals, the author included, but also by the market as a whole. The system of controlling the risk exposure for each member used premium income as a proxy for risk. It was primitive by today’s standards, making no attempt to distinguish between high and low risks. There was no appetite for intrusive controls, reflecting everyone’s preference to be left alone: in that sense, practi-cally everyone was complicit in a failure to protect unsophisticated participants. Many practitioners were more intent on taking advantage of cheap reinsurance than recognising its likely consequences. Most failed to see that excessive risks taken by others threatened not only the Names concerned but also the market as a whole, including themselves. Instead of helping internal regulators – who were themselves poorly equipped – to spot problems, many practitioners resented or even despised them. These lessons have now been learned the hard way.

When the parliamentary committee looked closely at Lloyd’s, it saw that pure self-regulation (even the improved version then presented) still contained dangers. It urged independent oversight, which came about later with the FSA.

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Necessary as this was, it was not sufficient. Before long, the lack of informed internal market supervision was evident. It was only in 2002, with Sax Riley’s CSG and the chastening experience of further big losses, that Lloyd’s adopted the degree of market control that a common franchise requires. In order to work, this needs the active support of up-to-date practitioners, harnessed to fearless and competent professionals without interests to protect. Lloyd’s today comes much closer to this ideal. Protecting the market against unto-ward risks without stif ling innovation is never an easy balance to strike. The best chance of getting it right lies in lively and open debate, active engagement of the best practitioners, capable professionals and public accountability to external regulators. A well-informed press is also important. Recent experi-ence of the consequences of getting it wrong can be a useful influence. One hopes that this book will help stir memories and raise awareness of the bad old days, providing a useful case study in how some problems can be avoided in the future.

Despite all of the failings at Lloyd’s in the 1980s and its slow response to the crisis affecting many of its Names by the early 1990s, it eventually lived up to its reputation for imagination and resilience. Installing its best leader in the top job, it hired outsiders for key posts and the best advisers that money could buy. It built a bridge to its disaffected Names, engaging them in finding a solution. It welcomed fresh capital, accommodating many of its demands. Standards of internal supervision were raised and a risk-based capital system was pioneered. Its assets were sold, including the world’s oldest newspaper and the iconic building. Contributions were raised from all quarters, mortgaging its future. It accepted a fresh and initially punitive basis for trading in the US. The market supported and achieved a reconstruction involving, for many, the loss of hard-won reserves. It took a chance that Equitas would not undermine its reputation. Meanwhile, its standing and unique links with brokers and clients – probably its greatest asset – proved strong enough to keep business flowing in.

The introduction of corporate capital ended the relative isolation of Lloyd’s from many developments elsewhere in the City. It became subject to fresh disci-plines of disclosure and accountability to shareholders. To attract and retain the support of sophisticated investors, the Council became obliged to give under-takings about the future that brought benefits to all capital providers. The rela-tionship to capital was altered fundamentally.

Although the 1993 business plan contained all three ideas that saved Lloyd’s – a settlement, new corporate capital and Equitas – the first attempt at a settle-ment did not go far enough. The amount on offer was insufficient in compari-son to the likely gains from litigation; more seriously, it did not offer finality. Its rejection taught Lloyd’s many lessons about the need to improve and tailor the

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offer, based on a far more sophisticated analysis of the circumstances of each member, and to track and seek to influence opinion. Much more imagination was required. When a fresh offer was eventually constructed, it was against the background of clear legal victories by Names, influencing its size and shape. Powerful blocs had now emerged with powerful leaders. While most interests were best served by a package, there was plenty of scope for disagreement about how that package could most fairly be constructed. Lloyd’s had the sense to remit this tricky matter to Names’ leaders, who rose to the challenge. Once a broadly acceptable formula emerged, it was tweaked further several times to improve its acceptability to various sections and was finally given legitimacy by Council scrutiny and approval.

Once known for its secrecy and inwardness, under Rowland, Middleton and later Sandler, Lloyd’s became expert in communication. It received criti-cal support from many quarters, including brokers and underwriters, and overseas representatives led by Peter Lane. A dedicated in-house commu-nications team under Peter Hill built close relationships with many jour-nalists. The leaders spent much of their time ensuring that their plans were understood. Lloyd’s harnessed available techniques: tracking media activity and directing effort where it was needed, and measuring Names’ opinion objectively. In order to work, the plan required a high level of acceptance and pushed Lloyd’s towards new levels of responsiveness to the opinions of its members.

During the period covered by this book, the role of women at Lloyd’s changed significantly. At the outset, management and governance were completely in the hands of men. Elected external women like Mary Archer, Valerie Robinson, Rona Delves Broughton and Marie-Lousie Burrows brought fresh perspectives about the plight and wishes of Names, and a more sympathetic approach. Many women played an important role within the Corporation: Heidi Hutter brought professionalism to reserving for Equitas; Gill Wilson brought understanding to thousands of Names who turned to her helpline; and Jo Rickard brought fresh leadership to the beleaguered legal department. More slowly, women began to play a bigger role in the market. Christine Dandridge, the first woman to become an active underwriter, later served on the LMB. Jane Barker played a key role at Equitas as CFO, eventually becoming CEO. At the time of writing, Lloyd’s had just appointed Inga Beale as its Chief Executive, the first time that a woman has taken this role. She is also the first person with an insurance back-ground to hold the job.

The performance of Equitas was an object lesson in good management with a clear focus. It proved a much better way to handle past claims than the dis-parate market arrangements that preceded it. It turned its potential into reality,

Dr Mary Archer, Council member and Chairman of the Hardship Committee

Lady Rona Delves Broughton, Chairman and founder of High Premium Group, Council mem-ber, OLS columnist

Heidi Hutter, Equitas Project Director Marie-Louise Burrows, Lime Street Action Group leader, LNAWP activist, Council member

Jo Rickard, Director, Legal Services Jane Barker, CFO and later CEO of Equitas

Valerie Robinson, ALM Helpline, Council member Gillian Wilson, Lloyd’s Helpline

Picture 20 Women who helped change Lloyd’s

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exercising leverage, building formidable relevant expertise and investing for the long-term task ahead. Confronting a tidal wave of fresh and doubtful asbestos claims, it led the way in insisting on high standards of proof, helping to change the climate of US opinion by an intensive lobbying campaign. Eventually, its success was so compelling that it was acquired by one of the world’s strongest organisations, BH, which had been watching it from the beginning. Its mission was rounded off by achieving a new degree of legal finality for Names 13 years after the reconstruction.

Meanwhile the Lloyd’s marketplace has continued to change shape as stronger businesses displace others. The reconstruction of 1996 and the further reforms that followed have enabled Lloyd’s to flourish. More sustainable growth has resumed as the market has enjoyed the most profitable decade of its history. A vision of a still more international future has been developed.

In responding to the crisis, after a slow and faltering start, Lloyd’s exhibited the resilience that has enabled it to outlast almost all commercial institutions anywhere.

THE SOCIAL, POLITICAL AND LEGAL CONTEXTIn The Truth About Markets, an excellent explanation of why some countries are richer than others, John Kay explains his concept of embedded markets. The survival of Lloyd’s depended critically on the cultural and legal features of the societies in which it was embedded. These events were played out within the framework of regulation, law, democracy and public opinion in Britain, the US and Commonwealth countries. Often taken for granted, these interlock-ing institutions are the key to economic success. They are hard to invent or transplant.

DTI officials proved constructive and imaginative, drawing on a two-cen-tury tradition of support for commerce, without the corruption endemic in many parts of the world. Jonathan Spencer had the backing of a Secretary of State, Michael Heseltine, who believed in active support by the government for private sector organisations. He saw his primary duty as the protection of policy-holders, but supported his officials in a broader analysis of where those interests lay: the disaster of a Lloyd’s collapse would have served no one. In the US, Ed Muhl made a similar calculation about the interests of American policyholders, many of which were primary US insurers. In the face of some official advice, he applied industry knowledge and common sense. His predecessors might have taken a narrower view, with potentially devastating consequences for Lloyd’s, the US insurance industry and its clients. These supportive stances did not make negotiation easy for Lloyd’s, but did make it possible. On behalf of policyholders,

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both sets of regulators drove a hard bargain. In the final analysis, they were real-istic, but they stretched Lloyd’s to the limit in providing resources to Equitas.

The Bank of England, in the shape of the Governor, Eddie George, was encouraging and supportive at every turn. This was important to Rowland per-sonally; it also helped to shape a climate of support within the City. Investors saw the opportunity presented by the renewal of Lloyd’s.

The politics of more direct assistance to Lloyd’s were tested in 1991. The Conservative government flew a kite to see whether some extra tax break might fly. Although the Labour frontbench opposition were at first accommodating, the possibility was quickly howled down by backbench opinion in both major parties and the press. At a time of recession and hardship elsewhere, the press and the public simply would not support extra help for those they saw as privi-leged. From then on, Lloyd’s had to find a solution within the constraints of its own financial resources. This helped to make it work harder and more imagina-tively. This approach has often been compared favourably with the more recent massive state bailout of the British and US banking sectors. However, the sys-temic issues at stake in banking raise different issues. The comparison with state support for companies and institutions in other sectors is valid: Lloyd’s had to solve its own problems. It took another five years to do so, but somehow its reputation, relationships and support from its brokers were strong enough to allow that much time.

Within this political constraint, it is worth noting the part played by the taxation system. In brief, the extraordinarily high rates of tax in the 1960s and 1970s helped to drive many Britons to become Names – both the wealthy, who saw it as a legitimate way of reducing their tax bills, and the less well-off, who should not have been taking the risks involved. When tax rates were reduced in the 1980s, the risks increased as the cushion of offsets reduced, although few noticed. Throughout the 1970s and 1980s, pressure from the Inland Revenue was against prudent reserving, adding extra incentive to distribute profits. The resulting profits were exaggerated, bolstered by investment income, leading peo-ple to stay in and others to keep joining. A truer picture would have provided a different signpost. The 1990s finally saw the introduction of a much more balanced regime, with more incentives to Names to build up personal reserves – something first recommended by Lord Cromer in 1969. Meanwhile, the tax treatment of losses helped Names to meet the cost of finality, keeping many afloat and able to continue underwriting. Through this mechanism, which was available to all sole traders, the state contributed indirectly to solving the prob-lems faced by Lloyd’s.

Names’ court victories followed lengthy trials in the Commercial Court. As the crisis developed, many practitioners (and many lawyers) thought that

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a Lloyd’s underwriter’s honest commercial judgment could not be questioned. Although the Outhwaite trial stopped short of a verdict, the evidence pointed clearly towards a different view: the underwriter was accountable to his Names for the level of skill and care he exercised on their behalf. The large settlement reached outside the court reflected this.

When Deeny mounted the case against the Gooda Walker agency and all members’ agents involved with it, he encountered all kinds of obstacles. Judges cleared the path, ruling that the ‘pay now, sue later’ clause did not mean, as some contended, that Names had to pay before they could litigate. Other rulings and case management ensured that this key case was heard expeditiously. The result was clear: the underwriting had been incompetent and negligent, and the com-pensation award set a new record. This meant that E&O underwriters could claim more from their reinsurers than would have been possible in an out-of-court com-promise. The legal system’s response to contention among action groups was to assert the ‘first past the post’ principle. The potential unfairness of the results helped to drive key action group leaders towards a centrally negotiated package.

Eventually, the English courts dismissed the argument that the arrange-ments of Lloyd’s were in breach of European competition rules, re-asserting the duty of Names to pay their liabilities. They wrestled interminably with the dif-ficult question of whether or not compensatory awards fell within the PTDs and therefore must first be used to pay insurance liabilities. This was complicated by the efforts of Lloyd’s to re-write the deeds to say unambiguously that they did. Three years after R&R, the House of Lords eventually ruled that compensation from managing agents did fall within the deeds. Until the deeds were re-writ-ten, they did not catch awards made for negligent advice by members’ agents. However, the re-write was declared valid. To a layperson, the twists and turns of this process seem remarkably inefficient.

Whether intentionally or not, the vociferous critics of Lloyd’s helped to make the eventual formula more robust against subsequent challenges. An exhaus-tive analysis of alternatives was felt necessary in order to defeat the apparent option, which was superficially attractive to some big losers, of putting Lloyd’s into run-off, slowly discharging accumulated obligations. The more closely this was examined, the less feasible or advantageous it appeared from all points of view. The fact that it had been fully considered helped to persuade some Names who were sitting on the fence and assisted in demonstrating thoroughness when judicial review arose.

When a minority of Names declined the settlement and fought on, alleging fraud, the English courts focused all such complaints on one big case, reaching a clear conclusion, which was upheld on appeal. Subsequent attempts to re-open the issue were turned away. Readers will form their own view about the justice

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dispensed by the English courts. Their decisions went mostly in favour of Names against agents, but largely in favour of Lloyd’s against Names. They upheld con-tracts and the right to be heard, despite the ‘pay now, sue later’ clause. They made crucial judgments about negligence. Eventually they drew a line under the issues. At each stage, they provided the boundaries within which participants found a compromise. Later, the courts supported the transfer of Names’ liabili-ties to the Equitas subsidiary, now owned by BH. This put the seal of the law on one more aspect of the reconstruction of Lloyd’s.

It was once common at Lloyd’s to regret or decry the behaviour of the US courts. A London-based view was that these courts too readily laid the claims of asbestos victims at the doors of manufacturers, installers and their insurers, and therefore, ultimately, their reinsurers – the position in which Lloyd’s syn-dicates, and therefore Names, often found themselves. In this arena, US courts were faced with a dilemma. Readers may agree that legitimate claims by genu-inely injured parties deserved to be met somehow. During the late 1990s and early 2000s, the US courts sought the assistance of Congress in dealing with an upsurge of more dubious claims. Congress was unable to come to a conclusion, but the US courts did not prevent the increasingly tough line taken by Equitas with doubtful claimants, insisting on documentary proof of injury. Over time, the US climate of opinion began to shift.

In the US, environmental pollution raised extreme anger among voters when incidents like the dumping of toxic waste at the Love Canal site were first uncovered in the mid-1970s. The CERCLA ‘Superfund’ legislation on environ-mental pollution was arguably unfair in its impact, but Americans contend that legislation that Britons saw as retrospective – and therefore objectionable in principle – only imposed duties that were already implicit on US firms: not to cause deliberate pollution. Where insurers were able to prove that pollution was deliberate, the US courts sometimes accepted that insurers were not liable. The application of Superfund legislation was gradually modified, with more sensible clean-up standards than at first, in response to industry lobbying.

To British eyes, the US system of contingency fees can produce a spectacle of excessive litigation in which lawyers appear to be the major beneficiaries. In the face of mounting and doubtful asbestos claims, a former US Attorney General, Griffin Bell, was convinced that the US tort system needed major reform. But many Americans see their system as providing access to justice to those who might otherwise be unable to pursue their rights.

The US courts of first instance did not always uphold the clause requiring US Names to seek to resolve their disputes with Lloyd’s in England under English law, as they had agreed to in the General Undertaking. But all Federal Circuit Courts of Appeals upheld the clause, satisfied that American Names could expect

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justice from the English courts. In doing so, they took a wider view about com-mercial clauses, despite provisions in many states’ securities laws that did not allow rights to be waived. Those alleging fraud were obliged to join in the Jaffray action (see Chapter 9), which came to a clear conclusion on the subject.

The European Commission and the European Parliament listened care-fully to complaints raised by non-accepting Names. The Petitions Committee showed sympathy. But in the end, they did not seek to unpick the settlement or the reconstruction.

Thus, the institutions within which Lloyd’s operated – the British gov-ernment, Parliament, the Bank of England, American insurance regulators, the English and US courts, the European Commission and the European Parliament – all played a part as the backdrop to the events at Lloyd’s. This framework supported contractual and agency obligations, including duties of care owed by agents to principals. Without this, an orderly settlement of the problems of Lloyd’s would have been impossible. Within that framework, the various constituents found a solution that offered rough justice and brought Lloyd’s back from the brink.

APPENDIX 1 : BUS INESSES AT LLOYD ’S

Top ten syndicates by capacity, 1987 and 1997, with agency rankings

1987 1997

Syndicate number

Stamp capacity

Managing agent

Agent rank1 (1988)

Syndicate number

Stampcapacity

Managing agent

Agent rank1

418 £220 m Merrett 2 2001 £530 m Murray Lawrence

5

206 £200 m Sturge 1 33 £201 m Hiscox 4799 £175 m Merrett 2 488/2488 £330 m Ace2 2210 £167 m Sturge 1 510 £303 m RJ Kiln 9932 £117 m Janson Green 4 672 £263 m Wellington3 3362 £116 m Murray

Lawrence 5 435 £234 m DP Mann 13

190 £113 m Three Quays 16 861 £225 m Brockbank 6367 £113 m Secretan & Co 10 218 £212 m Cox 7317 £111 m Outhwaite 19 51 £187 m Wellington3 3448 £106 m Wellington 3 37 £174 m Ockham2 171 Rank refers to agency groups.2 Including many former Sturge syndicates.3 Merged in 1997 with Catlin Underwriting Ltd.

Source: Lloyd’s

APPENDIX 1 331

Changing fortunes: managing agents at Lloyd’s 1988, 1998 and 2010

Rank 1988 Capacity (£ m) 1998 Capacity

(£ m) 2010 Capacity (£ m)

1 Sturge Group 1,270 Bankside1 755 Kiln 1,562 2 Merrett Group 764 Ace2 692 Catlin3 1,441 3 Wellington

Group420 Hiscox/Venton 606 QBE4 1,365

4 Janson Green 374 Brockbank 552 Beazley Furlonge

1,307

5 Murray Lawrence 331 Wellington 551 Hiscox 1,195 6 Methuen 309 Murray Lawrence 538 Amlin5 1,100 7 Wren 294 Kingsmead,

Beazley, SVB530 Chaucer 986

8 Bankside 277 Cox Group 484 Liberty 910 9 Gooda Walker 272 Octavian 393 Brit 74510 FLP Secretan 260 Kiln 356 Ascot 700

1 Includes Janson Green.2 Includes Methuen.3 Includes Wellington.4 Includes Bankside and Janson Green.5 Includes Murray Lawrence.

Source: Statistics Relating to Lloyd’s

Top ten members’ agents, 1988 and 1998

1988 1998

Agency Group No. of members Agency Group No. of

members

Sturge Group 2,658 Sedgwick Oakwood 684Sedgwick Lloyd’s 1,915 Stace Barr 623Willis Group 1,664 Christie Brockbank Shipton 619Merrett Group 1,256 Aberdeen 612Fenchurch 962 Falcon 595Poland Group 742 Kiln Cotesworth Stewart 566Bowring Members Agency 721 Bridge Underwriting Agents 501Wellington Group 642 Murray Lawrence Members Agency 471Dashwood Outhwaite Group 609 Richmond 432Stewart, Gray’s Inn 596 Greenwich 426

Source: Statistics Relating to Lloyd’s

APPENDIX 1332

Ten largest Lloyd’s brokers, 1986

The larger Lloyd’s brokers belong to groups who conduct much of their business elsewhere. The following ten brokers were ranked by size in the London market in 1986

Sedgwick GroupWillis FaberC.T. Bowring (Marsh Group)MinetStewart WrightsonHogg RobinsonAlexander HowdenC.E. HeathJardine Insurance Brokers GroupBain Clarkson

Source: London Market Newsletter

Ten largest Lloyd’s brokers, 2014

At the time of writing, the two largest broking groups each have worldwide revenues of over $11 billion. There is no official ranking of Lloyd’s brokers. Ranking is not straightforward, as it depends on the criteria chosen and the availability of comparable information; the order shown below is therefore only approximate

Marsh & McLennanAonWillis GroupJardine Lloyd ThompsonArthur J. GallagherMillerNMB & Cooper GayHowden Broking GroupRK Harrison GroupPrice Forbes & Partners

Source: estimate compiled from various sources

Minimum wealth requirements for UK domiciled Names were dropped from £75,000 to £50,000 following the Cromer report. For Names domiciled elsewhere, requirements were higher. For vocational Names they were lower.

In 1978, a category of ‘mini-Names’ was introduced, for which the minimum wealth re-quirement was only £37,500. This was dropped from 1 January 1980.

Each member’s OPL was restricted to twice the amount of wealth shown, until 1988. A min-imum deposit, from 1981 expressed as a percentage of OPL, was also required.

The minimum deposit requirements require too many qualifications to be expressed accu-rately on a chart. Broadly speaking, British-domiciled Names were required to deposit an effective 20 per cent of OPL until 1981, when it was increased to 25 per cent. From 1988, the

APPENDIX 2 : NAMES ’ M IN IMUM

WEALTH AND DEPOSIT REQUIREMENTS 1969–2002

£350,000

£300,000

£250,000

£200,000

£150,000

£100,000

£50,000

£0

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

334 APPENDIX 2

premium income limit control was switched from ‘net’ (after reinsurance) to gross under-writing. To compensate for this, the minimum deposit fell to 20 per cent of OPL from 1988; OPL was 2.5 times the amount of wealth shown.

From 1990, a new requirement of 30 per cent of OPL relating to all Funds at Lloyd’s (FAL) was introduced, including deposits, Personal Reserves and Special Reserves. From 1998, the minimum FAL ratio was 40 per cent, although Individual Names were able to hold FAL of 32.5 per cent of OPL, the balance (7.5 per cent) being covered by ‘other personal wealth’ (OPW), recognising that they had unlimited liability underwriting. The concept of OPW was dropped in 2006. Risk-based capital assessment was introduced for all members from 1998, subject to the minimum FAL ratio of 40 per cent.

Minimum capital requirements for Lloyd’s corporate members were 50 per cent of OPL from 1994, until they were adjusted according to their underwriting risk profile from 1996 onwards.

Source: extracted from various Lloyd’s market bulletins.

APPENDIX 3 : THE EVOLUT ION OF

LLOYD ’S GOVERNANCE

The first Committee of Lloyd’s was formed in 1771. Before long, John Julius Angerstein, an energetic young immigrant born in St Petersburg into a family of German merchants, found new premises for a group who established a new Lloyd’s at the Royal Exchange. He soon became Chairman of Lloyd’s.

The powers of the Committee were strengthened by the Lloyd’s Act of 1871. In 1908, after a fierce debate within the Committee, the principle of an audit of each underwriting account was established. In the wake of the 1923 failure of a Lloyd’s syndicate run by Stanley Harrison, the Chairman, Arthur Sturge per-suaded all underwriters to contribute so that Lloyd’s policies were honoured. Afterwards, financial guarantee business was prohibited and a central fund was set up in 1927 to protect policyholders in future.1

Lord Cromer, a former Barings banker and Governor of the Bank of England, chaired a committee that reported in 1969. Although Lloyd’s accepted many of his proposals for restoring growth, it fatefully decided not to publish his proposals for reform of the agency system.

Several incidents in the late 1970s involved a breach of trust, including the long-running Savonita and Sasse sagas.2 These led the Committee to appoint a working party under the chairmanship of Sir Henry Fisher to consider the whole system of regulation at Lloyd’s. Fisher recommended a new Act of Parliament to give the Lloyd’s authorities much greater powers of supervision.

Fisher also recommended that the constitution should better reflect the now much larger constituency of external Names. Names’ representation on the Council, he said, would assure them that their interests would be prop-erly looked after. He also saw a risk of a conflict of interest in brokers owning

336 APPENDIX 3

managing agents and recommended that brokers should sell them off, known as divestment.

A number of Lloyd’s people – many brokers, Robert Hiscox, Bryan Kellet and others – made strenuous efforts to persuade Parliament that compulsory divestment was a sledgehammer to crack a nut and would have many adverse consequences, but Parliament insisted on it. The intense debate about the provi-sions in the Lloyd’s Act is fully reported in Godfrey Hodgson’s Lloyd’s of London: A Reputation at Risk, first published in 1984. The Bill gave Lloyd’s a new consti-tution and a much stronger ability to regulate the market; more controversially, it also conferred on the Society immunity from suit by its members. The 1982 Lloyd’s Act received Royal Assent in the summer.

Soon after this, a major fraud was discovered, involving the theft of syn-dicate money by Peter Dixon and Peter Cameron Webb, later referred to as the PCW scandal. The Governor of the Bank of England, Gordon Richardson, per-suaded the Lloyd’s Chairman to accept the appointment of Ian Hay Davison as Lloyd’s new Chief Executive and Deputy Chairman.

The new Council set about the process of reform with vigour. Despite much progress, in 1985, when the government decided to introduce a Financial Services Bill to reform the operation of the investment market, there were many calls for its scope to be extended to cover Lloyd’s as well. To resolve this ques-tion, the government appointed a committee of enquiry, headed by Sir Patrick Neill.

The Neill Committee came down in favour of Lloyd’s continuing to be re-sponsible for supervising its own marketplace. However, it set out an ongoing obligation to achieve a level of protection for its Names that was equivalent to the new investor protection regime elsewhere, making 70 recommendations for further reform. In a report entitled ‘Neill Lets Lloyd’s Off the Hook’ published on 24 January 1987, The Economist said that Neill had sidestepped some of the biggest issues that he was asked to address: while some of his recommendations were for sensible and much-needed reforms, he made ‘a powerful case against the self-regulation that he did not seek to change’.

Neill was impressed by the contributions of the independent nominated members, but felt that the ‘balance of initiative rests too much with the working members’. He recommended more of the first at the expense of the second. This was immediately accepted by Lloyd’s: its Chairman, Peter Miller, lost no time in inviting the resignations of four working members. The composition before and after the Neill Report is shown below.

337APPENDIX 3

The Lloyd’s task force recommended the creation of a separate market board, retaining a regulatory Council. The Morse Committee developed this idea into a tripartite structure, with separate market and regulatory boards, overseen by the Council. These new boards were introduced in 1993. The com-position was slightly modified later by the Sheldon report, when the director of regulation ceased to be a Council post.

Solvencyand

security

Accountingand auditingstandards

SeniorAppoint-ments

Training

LIoyd’sDisciplinaryCommitees

Panel

PropertyNames

Advisory

AuditExternalrelations

FinanceInvestigati

ons

Other nationalsupervisorsThe Council Of Lloyd’s

Lloyd’s Supervision and Governance(1983–92)

Nominated members(including the chied Executive)

Elected external members

Departmentof Trade &Industry

(UK supervisor)

Pre-Neill

4 8

8

16

28 28

12

8

Post-Neill

Elected working members

(Comprising the Committee of LIoyd’s)

Total

Main Subcommittees

The Council of Lloyd’s

Six Nominated members(including the Chairman of LRB, ChiefExecutive and Director of Regulation)

Six Elected external members*

Six Elected working members(comprising the Committee of LIoyd’sincluding the Chairman of LIoyd’s and

two Deputies)

LIoyds Market Board• Elected working members of Council

• Elected external members of Council• Nominated members of council• Appointed working members• Corporation executives

• Appointed on recommendations of market associations• Corporation executives• Appointed external members

Remit: to drive forward thebusiness of LIoyd’s

*including corporate members representatives from 1995 onwards

LIoyds Regulatory Board

Remit: to ensure compliance withexternal regulatirs and to protectinterests of members

Other nationalsupervisors

Department oftrade and Industry(UK supervision)

Lloyd’s Governance Structure(1993–2002)

338 APPENDIX 3

The cast of characters at p. 347 below shows the chairmen and deputy chairmen of Lloyd’s and some of those who served on the Council. A fuller list of Council and Board members is given below.

Lloyd’s Council Members (various terms during 1990–6) excluding chairmen, deputy chairmen and chief executives

Nominated (independent) members

Elected external members Elected working members

Patrick EganSir John Fretwell GCMGBrian Garraway (LRB Chairman)Brandon GoughSir Alan Hardcastle (LRB Chairman)Robert HewesSir Maurice HodgsonAnthony IsaacsSir Jeremy Morse KCMGRobert OwenMatthew PatientBrian PomeroyMark SheldonDavid WalkerJohn Young

Jonathon AgnewDr Mary ArcherSir Nicholas BonsorMarie-Louise BurrowsMichael DeenyLady Rona Delves BroughtonGordon Dunlop CBEMark FarrerDavid James CBELord KimballChristopher MesserPeter NuttingNicholas PawsonSir Gerrard Peat KCVOValerie RobinsonSir Peter Viggers MP

Paul ArchardSimon ArnoldMichael CockellHarry DobinsonAnthony HinesBrian KellettRobert KevilleGraham McKeanMichael WadePhilip Wroughton

Other (non-Council) non-executive members of the LMB (1993–6)

Andrew BeazelyMark BrockbankAlan CollsRichard Lewy

Malcolm McKenzieTony MedniukPaul MynersDavid Newbigging OBE

Nicholas PawsonTerry PitronColin SpreckleyColin White

Other (non-Council) non-executive members of the LRB (1993–6)

Julian AveryStephen Burnhope

Anthony Howland-JacksonGeorge Lloyd-Roberts

Ralph SharpJohn Townsend

339

Lloyd’s directors (group heads until 1993) 1990–6

William Beckett CBJoe BradleyAndy CoppellAndrew DuguidJohn GaynorRosalind Gilmore CB

David GittingsStephen HallBob HewesHeidi HutterPeter LaneJohn Mallinson

Geoff MorganBrian NicholsonJo RickardMichael TaylorBob Woodford

APPENDIX 3

APPENDIX 4 : L LOYD ’S GLOBAL RESULTS

FOR THE 1980–97 YEARS OF ACCOUNT

Year of account*

Investments Underwriting Result

Gross investment

income (£ m)

Investment appreciation

(£ m)

Net deterioration

on earlier years (£ m)**

Total underwriting

result less expenses, etc.

(£ m)

Overall result after

personal expenses

(£ m)

1980 133 281 N/A –61 3531981 151 213 N/A –116 2481982 183 314 N/A –335 1621983 168 299 –185 –347 1201984 265 274 –73 –261 2781985 304 155 –178 –264 1951986 429 121 –195 99 6491987 608 188 –425 –287 5091988 615 173 –577 –1,298 –5101989 555 181 –396 –2,799 –2,0631990 591 155 –925 –3,065 –2,3191991 579 136 –961 –2,763 –2,0481992 655 –193 –836 –1,655 –1,1931993 835 110 –859 –720 2251994 515 –16 82 596 1,0951995 593 6 144 550 1,1491996 528 54 247 24 6061997 489 –99 211 –599 –209

341APPENDIX 4

* Result shown at close of year of account, e.g., 1980 year of account at 31 December 1982. Includes impact of prior year movements. Results for 1990–92 are shown net of adjustment for members’ related insurances, e.g., stop loss policies written by other Lloyd’s syndicates.** Net deterioration on earlier years for 1983–6 only reflects movements on run-off years of account. The figures for 1987 and subsequent years include both movements on run-off years of account and reserves in respect of earlier closed years of account, i.e., all prior year movements. A positive figure indicates a net release.

Source: Lloyd’s Global Results/Statistics Relating to Lloyd’s 2013

APPENDIX 5 : ALTERNAT IVE ANALYSES

On the basis of Freshfields’ legal advice, CEO Ron Sandler informed members’ agents in a letter of 28 November 1995 of the Council’s considered position: ‘The Council remains convinced that the alternative of Lloyd’s being put into run-off would inflict severe damage on all categories of members and would not result in members being able to avoid their liabilities.’

A document sent to all Lloyd’s members in January 1996 contained Freshfields’ analysis of the implications of a run-off. It covered the Council’s duties, emphasising duties towards policyholders, the ‘going concern’ assump-tion, the role of the central fund, the effects of ceasing to trade, some commer-cial consequences and the position of American policyholders. Its conclusion was that Names could not evade the duties of Lloyd’s, the DTI and overseas regulators to protect the interests of policyholders. It also said that without the reconstruction, there would be no assistance to Names in meeting their liabili-ties, no fair and speedy settlement of litigation and no exit through an RITC by Equitas.

The document also contained a letter from the DTI explaining its response to the LNAWP alternative view, which is summarised below. It said that in the DTI’s experience, ‘the very act of going into run-off could lead to a rapid crys-tallisation of claims’. This would set in motion a breach of solvency require-ments and a failure of reinsurance, leading to a requirement for a plan to restore a sound financial position. It contained various other criticisms of the LNAWP analysis.

The document also contained a letter from the Janson Green Action Group containing various criticisms, including the statement: ‘Thousands more Names could be faced with bankruptcy if Lloyd’s goes into run-off than if Equitas is established and Lloyd’s remains solvent.’

343APPENDIX 5

THE LNAWP ALTERNATIVELloyd’s: The Alternative to Reconstruction and Renewal was published in December 1995 as a discussion paper by the LNAWP. It was largely written by Christopher Stockwell. Its main points are summarised below.

The document argued that instead of crystallising cash requirements, the existing Society and all its syndicates should be put into an orderly run-off. The ongoing and profitable underwriting business would continue in new entities, which could combine forces with the London company market, achieving big savings in common processing.

Names who wished to continue underwriting would be guaranteed capacity in the new entities. The elaborate process of debt credits could be ditched. The settlement pot should be increased and within it around £300 million should be used as a safety net to ensure that all Names would be left with an acceptable standard of living. The DTI should not need to intervene because an orderly run-off could be achieved within the framework of the Insurance Companies Act 1982; ‘Old Lloyd’s’ would not write any new business.

The LNAWP argued that this alternative solution should allow the London market to become a more competitive provider of insurance. There would be major cost savings, with significant loss of employment; the authors expected this to provoke a chorus of protest, as much of the elaborate structure of mem-bers’ agents, managing agents and the central Corporation would not be needed. The Lloyd’s community would suffer a drastic slimming down, ‘as with the rationalisation of any industry that has become inefficient and obsolete’. The Council and management of Lloyd’s could be reorganised, in keeping with their more limited role. Council members should resign, followed by fresh elections.

The document said that the solvency of individual Names would be im-proved by eliminating double count and by not requiring Equitas premiums in 1996. Cash would only be called when needed to pay claims. Lloyd’s had said that it would be difficult to collect money from Names in the event of Equitas fail-ing; this was equally true in the event of the failure of the Society. Policyholders would have a powerful incentive to agree commuted settlements, intensified by the US requirements for reinsureds to reserve in full for their claims on Lloyd’s if it were in run-off. This could reduce the costs to Names significantly. Existing reserves should last 15 years. By contrast, creating Equitas would send a mes-sage to policyholders that reserves were adequate for all future claims, thereby ending pressure to commute.

The new future businesses, comprising small insurance companies, could be supervised by a completely separate Market Board. Most of the assets of the Society, including the central fund and proceeds from the sale of property,

344 APPENDIX 5

would be used to settle the litigation. Contrasting its proposals with the R&R plan, the LNAWP acknowledged that it was impossible for anyone to say with certainty which was better. The uncertainties would take many years to resolve. Lloyd’s had stated that there would be no further cash calls with Equitas; this was because all the cash would be called up-front. The document said (incor-rectly) that a solvency margin for Equitas of around 16 per cent of assets over liabilities would be needed. There were also major tax inefficiencies involved in crystallising losses through Equitas. Under the alternative, cash would not be called until it was needed to pay claims. Lloyd’s’ proposals for the governance of Equitas gave negligible influence to Names. Under the LNAWP alternative, Names would retain control.

A postscript to the LNAWP paper considered the pros and cons of contin-uing to underwrite in 1996. It suggested that this was unwise: the insurance cycle had turned down; rates were tumbling under strong competitive pres-sures; agents had no professional indemnity cover; the estate protection plan was now expensive with large excesses; PSL policies were inadequate and could not be relied upon; more capital was now needed to underwrite in the US; and until the final cost of Equitas was known, it seemed unwise to increase one’s exposure to further loss.

THE VALIDATION STEERING GROUP (VSG)To meet demands for an independent view on alternative courses, the VSG was established. Sir David Berriman, Chairman of the ALM, chaired the group. Other members were Damon de Laszlo (representing the LNC) and Alan Porter (representing the LNAWP). Slaughter and May was appointed as legal advisers.

VSG terms of reference

I An examination of the Council’s duties and responsibilities in constructing its reconstruction and renewal proposals, including those owed to different categories of members (including contin-uing and the non-underwriting members) and to policyholders.

II An evaluation of the comparative advantages and disadvantages of alternatives to R&R, including those involving the closure/run-off of ‘old Lloyd’s’.

III A review of the Council’s powers to implement R&R, including its ability to make the appropriate byelaws.

345APPENDIX 5

Lloyd’s was to pay 80 per cent of the costs, with the balance being paid by the ALM, the LNC and the LNAWP.

The VSG reportSlaughter and May’s report reviewed the R&R proposal and identified the key issues. It summarised the Council’s powers, duties and responsibilities, and considered issues surrounding finality and Equitas. It then analysed the alter-natives to R&R.

The report made several specific recommendations about the R&R package:

the need for adequate provision for ‘proportionate cover’ (described ●

in Chapter 8);the need for reports from professionals similar to a prospectus about ●

the viability of Equitas;the need for procedures for the election of directors of Equitas to ●

convince Names that the board would be answerable to them;Lioncover’s liabilities should not be reinsured into Equitas while the ●

present legal disputes over reinsurance remain unresolved;the most important issue to Names was an increase in the £2.8 bil- ●

lion settlement fund, as had been recommended by the NC.

The report said that the issue of greatest importance to Names was an increase in the £2.8 billion settlement offer. It reminded readers of the LNC’s detailed proposals about how an increase could be achieved.

The report’s overall view is given on p. 262. Its principal conclusions were that if R&R were to fail, it was unlikely that Lloyd’s would be able to continue as at present no credible alternative was likely to enable it to continue, and that if Lloyd’s ceased to carry on business, it was unlikely that any section of the Lloyd’s community would be better off. It did not recommend that Names should accept the settlement offer, regarding it as a commercial decision for each Name.

APPENDIX 6: THE CHANGING CAPITAL STRUCTURE

AT LLOYD’S 1994–2013

The changing pattern of corporate capacity at Lloyd’s

Note: the total corporate capacity figures reconcile to the figures published in Statistics Relating to Lloyd’s and have been prepared on the following basis:

• capacity is based on No. 12 stamp for each year (excluding deceased, suspended, resigned members);

• the figures are given in £GBP as at each year end; no adjustment has been made for indexation;• ‘Dedicated’ = corporate members with participations on only one syndicate (this defini-

tion of ‘dedicated’ may vary from other definitions given by Lloyd’s);• ‘Spread’ = corporate members with participations on more than one syndicate.

The categories above should not be confused with ‘Aligned’ and ‘Non-Aligned’ corporate vehicles, which are slightly different.

Source: chart and note provided by Lloyd’s

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2014

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Ove

rall

Co

rpo

rate

Ca

pa

city

Dedicated Spread

KEY CHARACTERS , F IRMS AND INST I TUT IONS

Lloyd’s

Chairmen of Lloyd’s 1981–2013Sir Peter Green (1979–83) David Coleridge (1991–2) Sax Riley (2001–2)Sir Peter Miller (1984–7) Sir David Rowland (1993–7) Lord Levene (2003–11)Murray Lawrence (1988–90) Max Taylor (1998–2000) John Nelson (2011–)

Lloyd’s Chief Executives 1983–2013Ian Hay Davison (1983–5)

Peter Middleton (1992–5)

Nick Prettejohn (1999–2006)

Alan Lord CB (1985–92) Ron Sandler (1995–9) Richard Ward (2006 –13)

Deputy Chairmen of Lloyd’s (1993–7)Stephen Merrett (1993) John Stace (1995–6)Robert Hiscox (1993–5) John Charman (1996–7)Richard Keeling (1993–4)

Key members of the Lloyd’s Council*

Nominated (independent) members Elected external members Elected working

members

Brian Garraway (LRB Chairman) Jonathan Agnew Paul ArchardSir Alan Hardcastle (LRB Chairman) Dr Mary Archer Michael Cockell

Sir Jeremy Morse KCMG Lady Rona Delves Broughton Brian KellettSir David Walker David James CBE Michael Wade

Key Lloyd’s Corporation executives Joe Bradley, MD, Central Services Unit

Peter Lane, Director, Marketing

Jo Rickard, Director, Legal Services

*A full list is available in Appendix 3

KEY CHARACTERS , F IRMS AND INST I TUT IONS348

Andrew Duguid, Director, Policy & Planning

Philip Holden, Head, Financial Recovery

Gill Wilson, Lloyd’s Helpline

Bob Hewes, Director, Finance Heidi Hutter, Director, Equitas

Peter Hill, Head of Communications

Rosalind Gilmore, Director, RegulationDavid Gittings, Director, Regulation

Other key market practitionersAndrew BeazleyMark BrockbankTony Jones

Equitas Chairmen Equitas CEOs Equitas Claims Directors

David Newbigging OBE (1996–8) Michael Crall (1996–2003) Glenn Brace Hugh Stevenson (1998–2008) Scott Moser (2003–7) Scott Moser

David Shipley (2009–) Jane Barker (2007–, CFO 1996–2007) Jim Teff

Association of Lloyd’s Members Chairmen and Deputies

Tom Benyon (1983–5) Neil Shaw (1992–3) Peter Morgan (2009–12)Raymond Nottage (Deputy Chairman)

Sir Adam Ridley (Deputy Chairman 1994–)

Anthony Haynes (1986–90) Sir David Berriman (1993–8)Mark Farrer (1991–2) Michael Deeny (1998–2009)

Main Action Group LeadersMarie-Louise Burrows Damon de Laszlo Alan PorterMichael Deeny John Mays Richard Spooner

Alfred Doll-Steinberg Christopher Messer Christopher Stockwell (LNAWP)

Colin Hook Peter Nutting

Key advisers to Lloyd’s

Management Consultants Investment Bankers Actuaries

McKinsey JP Morgan Tillinghast Towers PerrinBronek Masojada Richard Johnston John RyanAlan Morgan Lazards PR ConsultantsCharles Roxburgh David Anderson Maitland ConsultancyPeter Sands David Verey Kekst & CoMercers RothschildsFields Wicker Richard Davy

KEY CHARACTERS , F IRMS AND INST I TUT IONS 349

Key legal advisers

To Lloyd’s To Names To Equitas

Simmons & SimmonsRichards Butler (Outhwaite and Feltrim) Freshfields

Freshfields Graham NicholsonBarry O’Brien Wilde Sapte (Gooda Walker)

Philip RocherLeBoeufsDon Greene (Senior Partner)

Slaughter and May (Validation Steering Group)

Peter DemmerleCharles LandgrafJeff MaceFried FrankHarvey Pitt

Queen’s CounselJonathan Sumption QC Anthony Boswood QC Anthony Grabiner QC

Geoffrey Vos QCBerkshire Hathaway

Warren Buffet (Chairman and CEO) Ajit Jain

KEY CHARACTERS , F IRMS AND INST I TUT IONS350

Regulators

Department of Trade & IndustryRt Hon Michael Heseltine PC MP President of the Board of Trade, Secretary of State for Trade and IndustryAnthony Nelson MP, Minister of StateNeil Hamilton MP, Parliamentary Undersecretary of State Dr Jonathan Spencer CB, Under Secretary, Later Director GeneralRichard Hobbs, Assistant Secretary

Government Actuary’s DepartmentChris Daykin, Government Actuary

Bank of EnglandEddie George, Governor

New York Insurance DepartmentEd Muhl, Superintendent, Vincent Laurenzano, Deputy Superintendent and Chief Examiner

California Insurance DepartmentChuck Quackenbush, Insurance Director

Colorado State Securities DepartmentPhilip Feigin, Commissioner

European CommissionCommissioner Fritz Bolkestein John Mogg, Director-General, DGXV (Internal Market and Financial Services) David Deacon, Head of Insurance Unit, DGXV

KEY CHARACTERS , F IRMS AND INST I TUT IONS 351

Other key institutions

The English judiciary

The High Court Court of Appeal The House of Lords

The American judiciary

State Courts Federal District Courts Federal Appeal Circuits

People’s representatives

Parliament US Congress European Parliament

CHRONOLOGY OF KEY EVENTS

THE EARLIER HISTORY OF LLOYD’S1688 Trading begins in Lloyd’s coffee house1769 Professional underwriters establish new Lloyd’s1771 First Committee of Lloyd’s elected1871 Lloyd’s incorporated by Act of Parliament1906 San Francisco earthquake claims met, establishing the reputation of

Lloyd’s in the US1927 Lloyd’s central guarantee fund established1939 Lloyd’s American Trust Fund established1965 Hurricane Betsy produces first overall losses1968 Non-British members introduced1969 Cromer report received; women members introduced1980 Fisher report published; new Lloyd’s legislation sought1982 Neville Russell letter seeks guidance on treatment of old liabilities1982 Lloyd’s Act 1982 receives Royal Assent1982 PCW scandal uncovered1983 Lloyd’s Council begins; first Chief Executive, Ian Hay Davison,

appointed1986 Queen Elizabeth II opens Lloyd’s new building1987 DTI-appointed Neill Report published; PCW settled

EVENTS LEADING TO THE RECONSTRUCTION OF LLOYD’S1991 Jan Lloyd’s task force appointed Aug Loss reviews begin

CHRONOLOGY 353

1992 Jan Lloyd’s task force report publishedFeb Outhwaite settlement agreedJuly Morse and Walker reports publishedJuly David Rowland accepts Chairmanship for 1993Sept Peter Middleton appointed Lloyd’s CEO

1993 Jan Lloyd’s Market Board and Regulatory Board establishedApr Lloyd’s business plan publishedSept Guide to corporate capital publishedOct Equitas project established

1994 Jan First corporate members join Lloyd’sFeb First settlement offer failsOct Gooda Walker Action Group wins judgment

1995 Mar Feltrim Action Group wins judgmentMay R&R plan published; NYID report publishedJune Parliament’s TSC Committee report publishedJune Names’ Committee established to advise on allocation of

settlement fundsOct Merrett Action Group wins judgment against agents and auditorsNov Peter Middleton resigns; Ron Sandler appointed CEODec US state securities regulators take administrative and/or court

action1996 Feb Sale and leaseback of Lloyd’s 1986 building

Feb Lloyd’s proposals for allocating the settlement funds publishedMar Indicative statements sent to each Lloyd’s member; DTI

conditionally authorises EquitasApr Independent validation steering group report published on

alternatives to R&RMay Clementson judgment in favour of Lloyd’sJune Second indicative statements sent to members; Settlement

Information Document publishedJuly Agreement reached with US state securities regulatorsJuly General meetings overwhelmingly approve R&R proposalsJuly Settlement Offer Document publishedJuly Court of Appeal ruling in favour of Lloyd’s in PTD litigationAug Paying Names Action Group lose judicial reviewAug Fourth Circuit Federal Court of Appeal in Baltimore reverses

injunction to prevent R&RSept Settlement offer declared unconditional; DTI authorises Equitas,

which reinsures all Names

CHRONOLOGY354

AFTERMATHMar 1999 House of Lords holds PTD amendments validNov 2000 Lloyd’s wins Jaffray fraud trialDec 2001 Financial Services Authority starts regulating Lloyd’sJan 2003 Lloyd’s Franchise Board establishedApr 2007 Berkshire Hathaway subsidiary, National Indemnity, reinsures

EquitasJuly 2009 English High Court approves transfer of Names’ liabilities to

Berkshire Hathaway subsidiary, EIL

GLOSSARY OF TERMS

Active underwriter: the person employed by a managing agent with authority to accept risks on behalf of a syndicate.

Agency agreement: the standard form agreement made between a member of a syndicate and the syndicate’s managing agent that confers underwriting and other authorities, powers and discretion on the managing agent.

Bond-washing: a tax avoidance device whereby government bonds were sold just before coupons were due to crystallise, then repurchased at a lower price once the coupon was paid, creating a capital gain that was subject to a lower rate of tax than income.

Byelaw: a byelaw made by the Council under the Lloyd’s Act 1982.

Central fund: the fund maintained pursuant to the central fund byelaw which operates, inter alia, as a fund of last resort for the protection of policyholders in the event of a member being unable to meet his liabilities.

Centrewrite: an insurance company, established as a wholly owned subsidiary of Lloyd’s in 1991, to reinsure run-off years of account and underwrite estate protection policies.

Claims made: a policy wording under which a claim is valid only if made dur-ing the period of the policy, in contrast with an ‘occurrence’ form, which pro-vides cover of losses occurring during the policy period, regardless of when a claim is actually made.

Closed year: a year of account for which the financial outcome has been deter-mined, following reinsurance to close.

Debt credits: credits available to Names as part of the settlement process for use against Lloyd’s liabilities, including ‘finality’ bills.

GLOSSARY OF TERMS356

Discounting: a process that enables an insurer to take into account the time value of money when setting reserves. The insurer estimates the likely payment pattern of claims and then discounts the liabilities to take account of the returns achievable on assets invested to meet those claims. The discount can then be reflected in the value of the assets dedicated to cover the claims.

Errors and omissions (E&O) insurance cover: insurance covering members’ and managing agents’ liabilities for errors and omissions.

Excess of Loss (XL): an insurance policy which provides protection above an agreed limit.

Hardship scheme: a scheme established to help members who demonstrated that they were unable to meet their Lloyd’s losses.

High-Level Stop Loss Fund (HLSL): a discretionary fund established by a byelaw against which eligible members may lodge a claim in respect of losses above a threshold level.

Incurred but not reported losses (IBNR): the reserve set aside for claims which the underwriter expects, but which have not yet been formally reported.

Lioncover: the insurance company formed in 1987 to reinsure the liabilities of certain Lloyd’s syndicates.

Long tail: a term used to describe insurance contracts under the terms of which claims may be made many years after the date on which the contract was writ-ten (e.g., asbestos and environmental pollution claims).

Managing agent: an underwriting agent responsible for managing a syndicate and, amongst other things, employing the active underwriter.

MAPA: an administrative arrangement under which a members’ agent pools underwriting capacity and the participating members share rateably in partici-pations across a spread of syndicates.

Members’ agent: an underwriting agent responsible for advising members on syndicate selection and administering Lloyd’s members’ affairs.

Name: an individual member of Lloyd’s.

Open year: a year of account which has not been reinsured to close. The expres-sion includes a run-off account.

GLOSSARY OF TERMS 357

Personal Stop Loss (PSL): policies purchased by members to protect themselves against losses at Lloyd’s. PSL policies are structured as excess of loss contracts, which cover a layer of losses in excess of a self-insured retention.

Premium: a sum of money paid by the purchaser of insurance to the insurer.

Premium Trust Funds: trust funds into which all premiums received by a member, or by managing agents on behalf of a member, must be placed, and which are available for the payment of reinsurance premiums, claims and syn-dicate and other expenses and, when the year of account has been closed, profits to members. They are governed by Premium Trust Deeds.

Retrocession: the insurance of a reinsurer – a type of policy in which reinsurers lay off all or part of their risk to another reinsurer, known as a retrocessionaire.

Reinsurance to close (RITC): a reinsurance agreement under which under-writing members who are members of a syndicate for a year of account to be closed are reinsured by underwriting members who comprise that or another syndicate for a later year of account, or by an insurance company designated by the Council, against all liabilities arising out of insurance business under-written by the reinsured syndicate.

Rollover: a tax avoidance device for building profits offshore through a con-trived reinsurance policy, often without a genuine transfer of risk. If there were no claims, the premiums, together with interest, were rolled over to the follow-ing year.

The Room: the shorthand description used at Lloyd’s to describe the under-writing floor where trading takes place.

Run-off account: a year of account of a syndicate which was not closed at its usual date for closure by reinsurance to close and which has yet to be so closed.

Slip: the paper prepared by the broker outlining a risk, which the underwriter accepts by marking the percentage share he will accept with his initials.

Solvency test: an annual statutory test as at 31 December in each year in two parts. Under the global test, members of Lloyd’s taken together are required to maintain a minimum margin of solvency, being the excess of the value of assets over the amount of liabilities. Under the individual tests, each member’s assets and liabilities are audited and the audit certificate states whether those assets are adequate to meet the member’s liabilities.

Syndicate: a group of members for whose account an active underwriter accepts insurance business at Lloyd’s.

GLOSSARY OF TERMS358

Three-year accounting cycle: a method of accounting under which the results of underwriting in any year are not determined until a further two years have elapsed, with distribution of profits following reinsurance to close.

Tort law reform: proposed changes in common law civil justice systems that aim to reduce tort litigation and the size of resulting damages. Tort actions are civil common law claims for compensating wrongs and harms done by one party to another. In the US, tort reform is a contentious political issue.

Uberrima fides (utmost good faith): the legal principle whereby both parties to a contract of insurance have a duty to reveal all facts that may have a bearing on the policy.

NOTES

1 INSIDE OUT 1 The last semi-official history of Lloyd’s, by D.E.W. Gibb, first published in 1957, was subtitled A

Study in Individualism. 2 Reinsurance can cover a particular contract or the whole of a syndicate’s business. It can cover a

share of any losses or all losses above a certain level. 3 Source: Statistics Relating to Lloyd’s. 4 Appendix 1 shows the ten largest participants in each category and the changing position among

Lloyd’s syndicates, agents and brokers. 5 In the 1980s, a typical risk was ‘subscribed’ by, say, a dozen following syndicates, and often more.

Lloyd’s (and London) is described as a subscription market because of this practice of sharing risks.

6 The legal principle is known as uberrima fides – utmost good faith. 7 In Britain, private schools are called ‘public schools’ for historical reasons. 8 See Appendix 1. 9 A note on this legislation in available at www.onthebrink.uk.com.10 See Appendix 3, p. 336.11 The top ten brokers are given in Appendix 1.12 See Appendix 2.13 The composition of overseas membership is available at www.onthebrink.uk.com.14 Interview with the author, April 2013. 15 Source: Statistics Relating to Lloyd’s.16 Interview with the author, October 2012. 17 The top ten members’ agents in 1986 are given in Appendix 1.18 An early version of the form is available at www.onthebrink.uk.com.19 A summary is available at www.onthebrink.uk.com.20 Overseas members were always interviewed one at a time. As membership boomed, to save time,

the practice grew of seeing several prospective British members in a small group. By 1987, around half of the new Names were interviewed in this way.

21 This is explained on p. 34. 22 A note with examples of liabilities can be found at www.onthebrink.uk.com. 23 ‘His’ is used here and afterwards for convenience; plenty of Names were women. It is not intended

to be gender-specific.24 Sometimes managing and members agents were part of the same group.25 Membership: The Financial Requirements.26 A brief description of the Sasse affair is available at www.onthebrink.uk.com.27 The author joined Lloyd’s in December 1986, having been headhunted from the DTI.28 Lloyd’s insurance policies were prepared by the broker, because many syndicates were involved.29 The non-marine and aviation markets had similar claims offices that were owned by the syndicates

that used them. Merging all three in 1991 was controversial.

NOTES360

30 Appointed by Lloyd’s, its report was entitled Self-Regulation at Lloyd’s.31 Appointed by the Secretary of State for Trade and Industry, its report was entitled Regulatory

Arrangements at Lloyd’s.32 These sagas are described in detail in Godfrey Hodgson’s excellent book: Lloyd’s of London: A

Reputation at Risk (1984).33 Its full name is LeBoeuf, Leiby Lamb and Macrae.34 See Glossary.35 See Glossary.36 See www.onthebrink.uk.com.37 Kenneth Powell, Lloyd’s Building (1994).

2 HIDDEN TRAINS 1 See p. 336. A further note is available at www.onthebrink.uk.com. 2 See p. 8 and Appendix 3. 3 Paul Brodeur, Outrageous Miscounduct: The Asbestos Industry on Trial (1985). 4 Adam Raphael, Ultimate Risk: The Inside Story of the Lloyd’s Catastrophe (1994). 5 Ibid., p. 101. 6 Newsletter produced by the ALM. 7 Robert Kiln, Predictions on Lloyd’s and Reinsurance 1968–1993 (1997), p. 152. 8 The growth of open years is available at www.onthebrink.uk.com. 9 In the insurance world, this event is called 87J.10 See p. 17.11 IIL speech, delivered at a London insurance seminar, April 1988.12 Chatset, August 1994.13 Interview with the author, May 2013.14 Source: Statistics Relating to Lloyd’s.15 Available at www.onthebrink.uk.com.16 Available at www.onthebrink.uk.com.17 Described at www.onthebrink.uk.com.18 Described on pp. 25 and 335.19 Described on p. 336.20 The top rate of tax on unearned income had fallen from 98 per cent in 1978 to 40 per cent in 1988,

with the abolition of the investment income surcharge in 1984, and the two big cuts in the top rate of income tax from 75 per cent to 60 per cent in 1979, then to 40 per cent in 1988. The incentive to convert gains into capital appreciation had disappeared, as the ‘bond-washing’ loophole had been ended. Furthermore, capital gains were now taxed as the top slice of income, up to 40 per cent, in-stead of a fixed rate of 30 per cent.

21 A reference to the Sasse and PCW cases.22 Available at www.onthebrink.uk.com.23 See p. 37.24 See www.onthebrink.uk.com.25 Council minutes, 1 February 1989. 26 See Figure 1.2 on p. 11.27 Council minutes, 10 May 1989.28 See www.onthebrink.uk.com.29 See p. 336.30 Interview with the author, May 2012. 31 The retired head of the UK subsidiary of Munich Re.32 Witness statement in the subsequent Jaffray fraud trial in 2000.33 See p. 46.34 Lloyd’s Newsletter, June 1990.35 Available at www.onthebrink.uk.com.36 See Appendix 4.

NOTES 361

3 ALARM BELLS 1 See Figure 1.2 on p. 11. 2 The Terms of Reference and membership of the Lloyd’s task force are available at www.onthebrink.

uk.com, together with a fuller account of this sequence of events. 3 Evening Standard, 1 June 1991. 4 Ibid. 5 Ibid. 6 The Guardian, 20 June 1991. 7 Sunday Times, 23 June 1991. 8 A list of them is available at www.onthebrink.uk.com. 9 More material on this and the following year’s meetings is available at www.onthebrink.uk.com.10 See Appendix 4.11 US bankruptcy laws vary from state to state; some exempt the primary residence.12 Proskaur, Rose, Goetz & Mendlesohn.13 Racketeer Influenced and Corrupt Organizations Act.14 See p. 34. 15 For Whom the Bell Tolls, p. 334.16 Predecessor of the FSA.17 Interview with the author, 2012.18 The Independent, 27 May 1992.19 Violet Elizabeth Bott, a character in Richmal Crompton’s Just William books.20 Mantle, For Whom The Bell Tolls, p. 347.21 For Whom the Bell Tolls, p. 330.22 Interview with the author, March 2013.23 A note about this is available at www.onthebrink.uk.com. 24 A fuller note on issues raised at this meeting is available at www.onthebrink.uk.com.25 The new structure is described in Appendix 3.26 FT, 3 July 1992.27 The highlights of the debate and the text of the resolutions are available at www.onthebrink.

uk.com.28 See Appendix 4.29 The Observer, 16 August 1992.30 The Times, 10 September 1992.31 The Times, 15 September 1992.32 The Times, 9 October 1992.33 The Economist, 21 November 1992.

4 FRESH STARTStrictly speaking, those from Tyneside are Geordies. Middleton was from nearby Teeside.1 Although it was widely reported that Middleton had been a monk, and he did not correct this, a 2 former school colleague wrote to The Times in April 2014 to say that Middleton had been ordained as a Catholic priest before spending five years in a Devon monastery.Interview with the author, September 2013.3 The previous publication (the 4 Newsletter) had sometimes displayed insensitivity towards Names, containing much material about sporting and social events of interest to those who worked in the market.See 5 www.onthebrink.uk.com.A note is available on this controversial claim at 6 www.onthebrink.uk.com.See Figure 2.1 on p. 43.7 A list of this first crop of corporate members is available at 8 www.onthebrink.uk.com.A fuller note on his Lloyd’s career is available at 9 www.onthebrink.uk.com.Interview with the author, March 2012.10 New Yorker11 , September 1993.

NOTES362

BCCI collapsed in 1991 and its creditors launched a £1 billion claim against the Bank of England for 12 regulatory failure; it claimed statutory immunity.A note on hardship assistance is available at 13 www.onthebrink.uk.com.Tim Harford,14 Adapt: Why Success Always Starts with Failure (2012).A fuller note on Hiscox’s Lloyd’s career is available at 15 www.onthebrink.uk.com.Interview with the author, July 2012.16 The story behind Hiscox’s association with remarks about ‘sheep being made for f leecing’ is 17 explained at www.onthebrink.uk.com.This cut-off date marked the change in policy wordings at Lloyd’s away from the ‘occurrence’ form 18 to the ‘claims made’ form, described on p. 33.Reinsurance to close, described on p. 34.19 This was because they did not believe they had exposure to pollution claims.20 A note on the project structure is available at 21 www.onthebrink.uk.com.Interview with the author, July 2012.22 More details about this case are available at 23 www.onthebrink.uk.com.A description is available at www.onthebrink.uk.com.24 Lloyd’s List25 , 23 June 1993.Arbuthnott v Fagan; Deeny v Gooda Walker Ltd 26 [1995] CLC 1396.The Lloyd’s Litigation: The Merrett, Gooda Walker and Feltrim Cases 27 [1994] 2 Lloyd’s Rep 193.See p. 119.28 Details of this offer and some reactions to it are available at 29 www.onthebrink.uk.com.The Spectator30 , 1 January 1994.These values are available at www.onthebrink.uk.com. 31 Terms of reference and composition are available at 32 www.onthebrink.uk.com.Interview with the author, January 1997.33 A member’s right to sell or transfer his place on a syndicate.34 Appendix 6 charts the changes in capital structure at Lloyd’s.35 See Appendix 4.36 Evening Standard37 , 11 August 1994.

5 THE CHASMLetter to Peter Middleton in response to consultation on amending the PTDs, October 1995.1 1995 Corporation annual report.2 Letter of 14 November 1994 from the LNC to Names.3 The Economist4 , 10 December 1994.See p. 151.5 OLS6 , June 1994.See p. 33.7 OLS8 , September 1994.Interview with the author, 2012.9 A summary is available at 10 www.onthebrink.uk.com.Interview with William Pitt, January 1997.11 As reported in 12 OLS, November 1994.An explanation is available at 13 www.onthebrink.uk.com.A note on these pressures is available at 14 www.onthebrink.uk.com.Interview with the author, May 2013.15 Michael Heseltine, 16 Life in the Jungle (2000), p. 424.Terms of reference and membership are available at 17 www.onthebrink.uk.com.OLS18 , May 1995.Source: 19 Statistics Relating to Lloyd’s.A fuller note on the range of opinions is available at 20 www.onthebrink.uk.com.Treasury and Civil Service Committee, 21 Fifth Report, HMSO, 1995.Arbuthnott v Feltrim Underwriting Agencies Ltd22 [1995] CLC 437.

NOTES 363

Deeny v Gooda Walker Ltd (No 3) 23 [1995] 1 WLR 1206.Sheldon v RHM Outhwaite (Underwriting Agencies) Ltd 24 [1995] 2 Lloyd’s Rep 197.

25 Cox v Bankside Members Agency Ltd [1995] 2 Lloyd’s Rep 437.

6 LAST CHANCE 1 Interview with the author, August 2013. 2 See Appendix 4. The ‘deterioration’ in previous years, shown in column 3, largely comprised

increased provision for such claims. 3 Interview with the author, August 2013. 4 Interview with the author, August 2013. 5 Interview with the author, August 2013. 6 This list of decisions is based on notes written by Roxburgh. 7 Available at www.onthebrink.uk.com. 8 Interview with William Pitt, January 1997. 9 R&R is explained on p. 197.10 World Insurance Report, 5 May 1995.11 Lloyd’s List, 28 April 1995.12 FT, 29 April 1995.13 A description of these options is available at www.onthebrink.uk.com.14 Available at www.onthebrink.uk.com.15 Sunday Times, 28 May 1995.16 See p. 11.17 A Lloyd’s underwriting agent with dubious reinsurance links to an offshore operation named

Fidentia in Bermuda.18 Angela Gillibrand, Finance Director of the Royal Military College of Science at Shrivenham,

Richard Hartley QC and Desmond Hayward.19 This term was first used as a description of Russians who were refused permission to emigrate by

the Soviet authorities. Over time, it has entered colloquial English as term to describe a person who refuses to do something.

20 Source: NC interim report, November 1995.21 Interview with the author, December 2012.

7 STRUGGLING 1 A note on these efforts is available at www.onthebrink.uk.com. 2 Interview with the author, September 2012. 3 Literally translated, ‘Taipan’ means ‘Big Boss’. Founded in 1832, nine years before Hong Kong itself,

the Jardine Matheson Group had always called its Chairman/CEO the Taipan. 4 See Glossary. 5 Interview with the author, November 2012. 6 A note on the Superfund Commission’s composition and influence is available at www.onthebrink.

uk.com. 7 Terms of reference are available at www.onthebrink.uk.com. 8 Lloyd’s: The Alternative to Reconstruction and Renewal. 9 Ron Sandler had replaced Peter Middleton when this picture was taken later in the year.10 This is described in more detail at www.onthebrink.uk.com.11 Henderson v Merrett Syndicates Ltd (No 2) [1997] LRLR 265.12 Interview with the author, September 2013. 13 The Economist, 18 November 1995.14 Interview with the author, December 2013.15 A fuller note describing the value and purpose of the tranches is available at www.onthebrink.

uk.com.16 Source: Allocating the Settlement, Lloyd’s publication, February 1996.

NOTES364

8 TIGHTROPE 1 See p. 266. 2 Marchant & Eliot Underwriting Ltd v Higgins [1996] 2 Lloyd’s Rep 31. 3 FT, 16 March 1996. 4 The Son, May 1996. 5 Napier and Ettrick and Another v R.F. Kershaw Ltd. Society of Lloyd’s and Others; Society of Lloyd’s

v Woodard and Wilson [1997] LRLR 1. 6 Interview with the author, September 2012. 7 The project structure is explained at www.onthebrink.uk.com. 8 The parliamentary statement is available at www.onthebrink.uk.com. 9 See page 162.10 Damon de Laszlo was leader of the Feltrim Names Association, an important action group, and a

member of both the NC and the LNC.11 This is summarised in Appendix 5.12 See p. 152.13 OLS, July 1996.14 Speaking at the ALM conference, 13 July 1996.15 Ordinary General Meeting, which was followed by an EGM.16 R v Council of Lloyd’s ex parte Susan Rachel Johnson and Others (unreported).17 Interview with the author, August 2013.18 In Rowland’s case, the author.

9 AFTERMATH 1 Interview with the author, April 2013. 2 OLS, August 1997. 3 Society of Lloyd’s v Leighs; Society of Lloyd’s v Lyon; Society of Lloyd’s v Wilkinson [1997] CLC

1398. 4 OLS, March 1998. 5 Interview with the author, November 2012. 6 A description of these events is available at www.onthebrink.uk.com. 7 Interview with the author, March 2013. 8 OLS, January 1997. 9 Interview with the author, July 2012.10 Interview with the author, September 2013.11 This was signed by Rory Carvill, John Stace, Ralph Bailey and Graham McKean.12 Interview with the author, July 2012.13 See p. 87.14 See Appendix 2.15 Source: Statistics Relating to Lloyd’s. Individual members shown on this chart refer to those mem-

bers of Lloyd’s underwriting on an unlimited liability basis only. Individuals underwriting on a limited liability basis, also described as private capital, are included under corporate members.

16 The Independent, 1 December 1998.17 Christopher Stockwell’s witness statement for the Jaffray trial.18 Society of Lloyd’s v Sir William Otho Jaffray BT, Official Transcript QBD (Comm) 2000-11-03/2000

WL 1629463.19 The Guardian, 4 November 2000.20 The Times, 4 November 2000.21 Jaffray and Others v Society of Lloyd’s [2002] EWCA Civ 1101.22 The Independent, 27 July 2002.23 See p. 120.24 Independent on Sunday, 2 October 2005.25 Lloyd’s List, 1 March 2006.

NOTES 365

26 Mail on Sunday, 5 November 2000.27 Mail on Sunday, 19 November 2000.28 Voodoo Histories: How Conspiracy Theory Has Shaped the Modern World (2010).29 Lloyd’s’ current system of market supervision through a Franchise Board is beyond the scope of this

book. It is described in annual reports which are available at www.lloyds.com. 30 Source: Statistics Relating to Lloyd’s.31 Interview with the author, August 2013.32 Interview with the author, August 2013.33 Correpondence with the author, 4 December 2013.34 Interview with the author, October 2013.35 Interview with the author, April 2013.36 Speech delivered on 13 June 2002.37 Available at www.equitas.com.38 For further details of this speech, see www.onthebrink.uk.com.39 Interview with the author, September 2013.40 A transfer of liabilities that can be achieved by agreement or by statute.41 Source: Equitas annual reports.42 Names at Lloyd’s, Re; Equitas Insurance Ltd, Re [2009] EWHC 1595 (Ch).43 Legally there is still a residual liability for Names residing outside Europe, but the cover provided by

Berkshire Hathaway looks strong enough and the risk sufficiently remote, that there has been little call for more legal battles to try and establish finality in these countries.

APPENDICESD.E.W. Gibb, 1 Lloyd’s of London: A Study in Individualism (1957), p. 265.See Godfrey Hodgson, 2 Lloyd’s of London: A Reputation at Risk, pp. 36 and 246, respectively. These are also outlined at www.onthebrink.uk.com.

BIBL IOGRAPHY

A History of Lloyd’sC. Wright and C.E. Fayle, 1928

Lloyd’s of London: A Study in IndividualismD.E.W. Gibb, 1957

Lloyd’s of London: A Reputation at RiskGodfrey Hodgson, 1986

A View of the Room: Lloyd’s Change and DisclosureIan Hay Davison, 1987

Outrageous Misconduct: The Asbestos Industry on TrialPaul Brodeur, 1988

For Whom the Bell Tolls: The Lessons of Lloyd’s of LondonJonathan Mantle, 1992

Ultimate Risk: The Inside Story of the Lloyd’s CatastropheAdam Raphael, 1994

All That Glitters: The Fall of BaringsJohn Gapper and Nicholas Denton, 1997

Predictions on Lloyd’s and Reinsurance 1968–1993Robert Kiln, 1997

Life in the JungleMichael Heseltine, 2000

The Truth about MarketsJohn Kay, 2003

Fool’s Gold: How Unrestrained Greed Corrupted a DreamGillian Tett, 2009

Voodoo Histories: How Conspiracy Theory Has Shaped Modern HistoryDavid Aaronovitch, 2009

WhoopsJon Lanchester, 2010

The Big ShortMichael Lewis, 2010

Adapt: Why Success Always Starts with FailureTim Harford, 2012

INDEX

Aaronovitch, David 302Abbott, Diane 73, 170, 171, 172accounting procedures 58–9, 302–3action groups 23, 86, 88, 91, 124, 137–8,

158, 317–18appointment of Peter Middleton 104contact with members 112–13leadership 317–18league tables 202long-tail Names 174–5main group leaders 348tOuthwaite action group 59–62, 65

actuaries 348tAdam Room 13, 14, 113, 213Adapt (Harford) 130Additional Securities Ltd (ASL) 160Additional Underwriting Agent 9 (AUA9)

276Advertising Standards Authority

(ASA) 158advisers 116, 319–20, 348t, 349tAgnew, Jonathan 124, 141, 166, 291, 347tAIG 311Alaskan Supreme Court 308Alexander & Alexander 9Alexander Howden (broker) 9ALM News 36, 51, 290A.M. Best 292–3American Airlines 191American Names Association

(ANA) 176–7Anderson, David 348tAndrews, Stan 146Angerstein, John Julius 335Angerstein Underwriting Trust 117, 165Annual General Meetings (AGMs) 42, 47,

49, 58, 62, 63, 76, 96–7, 121, 145Anton (members’ agent) 205Appeal Tribunal 58

Aragorn Syndicate (384) 91arbitration and conciliation 22, 53, 63,

74–5Arbuthnot, William 206Archard, Paul 56, 98, 100, 104, 347tArcher, Jeffrey 296Archer, Dr Mary 57, 127, 128–9, 151, 156,

323, 324, 347tasbestos, 113, 132, 133, 156–7, 162, 172–3,

216, 296background 32–3, 35, 36, 43, 49continuing claims 309–11

Asbestos Working Party (UK) 33, 59, 171Ashworth, Jon 104Assistance and Recovery Committee

(ARC) 239–40, 265Association of British Insurers (ABI)

73, 97Association of Lloyd’s Members

(ALM) 16–17, 41, 42, 60, 68, 95, 104, 126, 170, 205, 240, 317

action groups and 88Chairmen and Deputies 348tCouncil of Lloyd’s 103Michael Deeny as Chairman 291‘fi nality’ package 251, 268helpline 92leadership 99, 102Names’ rights 263Reconstruction and Renewal

(R&R) 200Settlement off ers 153, 154Task Force report 81, 83, 84, 85

Atkins, Betty 55Atkins, Geoff 312Atkins, Ralph 195AUA9 see Additional Underwriting

Agent 9aviation insurance 20–1, 46

Note: f = figure; t = table. Page numbers in italic indicate an illustration or photograph

INDEX368

Bagnall, Sarah 114Bailey, Ralph 256Bain (management consultants) 302Baltic Exchange 94–5, 111Bank of England 27, 127–8, 164, 194–5,

218, 248, 326, 350tbanking reforms (‘Big Bang’) 48–9Bankruptcy Code (Section 304) (US) 189, 191Barclays 117Barfield, Dick 306Barker, Jane 215, 275–6, 280, 312, 318, 323,

348tBarnes, Julian 127–9Bartleet, Anthony 157Bass, Gary 156Beale, Inga 323Beaumont-Dark, Anthony 73Beaver, Rosemary 248Beazley, Andrew 10, 21, 143, 193, 302, 348tBell, Griffin 309, 310, 328Bell, Tim 71Benyon, Tom 17, 53, 120, 126, 136, 227, 253,

266, 317action groups 71, 76, 85, 89, 348t

Berkshire Hathaway (BH) 311, 312, 325, 349t

Berriman, Sir David 153, 201, 266action groups 88, 89, 122, 240, 348tSettlement Agreement Review Group 271Validation Steering Group (VSG) 221,

231, 262, 317, 344Bingham, Sir Thomas 137, 151, 177, 178Blackburne, Mr Justice 313Bledisloe, Viscount, QC 281Bliley, Tom 284Bloxham, Edward 58‘Blue Book’ 53, 60‘Blue Sky’ commissioners (US) 245Board of Trade (UK) 26, 161Boateng, Paul 73Bolkestein, Commissioner Fritz 301, 350tBolton, Anthony 124‘bond-washing’ 28Bonsor, Sir Nicholas 74Booz Allen 111Boswood QC, Anthony 60, 61, 65, 86, 349tBrace, Glenn 348tBradford, Bernard 151Bradley, Joe 114–15, 158, 183, 192, 208, 223,

282, 319, 347t

Bragg, Melvyn 71Brebner, Martin 280Breyer, Stephen 296Brockbank, Mark 21, 143, 234, 235, 348tBrockbank/Mid Ocean 235Brocket Hall 44, 45, 50–1Brodeur, Paul 32brokers 4, 6, 20–1, 22, 44, 243–4

American 8–9, 48, 49reinsurance 38relationship with underwriters 9–10, 54top ten Lloyd’s brokers 332tsee also underwriters

Brooke, Lord Justice 272, 298Brooks & Dooley 205Brown, Bill 38Brown, Jim 246Brown, Philip (‘PAR’) 161Buckingham, Lisa 61Buffett, Warren 311–12, 349tBurrows, Marie Louise 91, 118, 323, 324,

348tBurson-Marsteller 142Business in the Community (BiC) 103Business Issues Committee (BIC) 53–4,

55–6, 64Business Week 69Buxton, Lord Justice 298

California Earthquake Authority (CEA) 246–7

California Insurance Code 204California Insurance Department 246,

350tCalleo, Victor 215Cameron, Donald 16, 93Camp, Mark 159, 160Canada 81, 94Canadian Names Association 283capital 78, 129, 166–8, 233–5, 290–1, 292f

capital structure 166, 302–3, 346feffi cient allocation 143fundraising 124, 242–4

Carpenter, Michael 116‘The Case for Liquidation’ (The

Spectator) 140‘cash calls’ 35, 56, 58, 68, 82, 137, 150, 155,

176, 244huge demands for 90, 91, 94unpaid 194, 197

INDEX 369

Cassidy, Tony 157catastrophic events 2, 32, 37, 39, 41–2, 121,

147, 162, 200earthquakes 169, 246–7hurricanes 38, 40, 99

Cater Allen 86Catlin, Stephen 21, 243, 281, 302‘cease and desist’ orders (US) 246central fund 43–4, 64, 139, 141, 155, 160,

225, 269, 293Clementson case 165Equitas and 166, 202, 203incorporated members and 123levy 95, 96, 99, 195protective notifi cation 233‘special contribution’ from members 197withdrawals 56, 57, 100, 105–6

‘central fund 2’ (CF2) 182, 190Central Services Unit (CSU) 114, 158, 183,

208, 347tsee also Members’ Services Unit (MSU)

Centrewrite 72, 106, 131, 183, 231, 285‘Chain of Security’ 225, 288Chairman’s Strategy Group (CSG) 302,

303, 322Chairmen of Lloyd’s 347t, 348tCharman, John 19, 21, 70, 116, 230, 232,

256, 347tChartered Insurance Institute (CII) 6–7Chatset 17, 41, 88, 99, 126, 140, 194, 221

estimates of losses 71, 76, 78Chief Executives (CEOs) 21, 25, 103–4, 108,

226, 227, 294, 302, 323, 347t, 348tChristopherson, William 116Citibank 276Citigate 71Claims Directors (Equitas) 348tclaims-handlers 10, 20, 88, 122, 304, 305, 306Clarke, Giles 262CLM (Corporate Lloyd’s Membership) 117CLM Insurance Fund 166Cockell, Michael 40–1, 46, 58, 268, 347tCohen, Harry 73Cole, Richard 218Coleridge, David 8, 61, 69, 74, 76, 81, 82, 91,

100, 320, 347tcash calls 94central fund levy 96David Rowland and 101, 102Evening Standard article 85–6

Neil Shaw approaches 102, 104governance 84–5Outhwaite syndicate 87Tom Benyon and 126tribute to 112

Colorado State Securities Department 245, 247, 350t

Commercial Court 140–1, 146, 152, 175Committee of Lloyd’s 15, 22, 25–6, 41–2,

56, 111, 170, 296, 297, 335communications department 71, 251, 274,

290, 323compensation see settlement offersComprehensive Environmental Response,

Compensation and Liability Act (CERCLA) see ‘Superfund’

Congdon, Professor Tim 217Conservative Party 73, 74conspiracy theories 302, 320contingency planning 203continuous professional education

(CPE) 142Cooke, Lord Justice 298Coopers & Lybrand 37Coppell, Andy 215corporate capital 129, 130, 263, 291, 318,

322Corporate Membership Unit 115–18increasing role of 193, 197, 198

Corporate Capital Association 292corporate membership 115–18, 123, 124,

145, 235, 287, 291Corporation of Lloyd’s 18, 20, 142, 294,

347t, 348tCouncil of Lloyd’s 2, 7, 9, 17, 54, 70, 74, 188,

192, 224, 319, 337fbudget reforms 56central fund 64–5, 95, 99Committee of Lloyd’s and 25, 26constitution 189‘duty of care’ 91evolution of governance 24–7, 32, 50, 97Fisher Report 48members of 24, 82–3, 124, 222,

338t, 347t, 348tNames’ and 62–3, 210, 263–4Neill reforms 41–2Outhwaite syndicate 59reform measures 44, 47–8, 54–5review of unlimited liability 22, 36–7, 50, 51

INDEX370

County NatWest 117Court of Appeal (UK) 146, 150, 155, 177,

254, 271, 282, 297, 298‘fi rst past the post’ upheld 175, 178Lloyd’s v Clementson 151–2‘pay now, sue later’ 244

Court of Appeals (US) 80, 159, 274Cox Insurance Holdings 235Crall, Michael 158, 215–16, 229, 280,

304–6, 307, 308, 311, 318, 348tCresswell, Mr Justice 140–1, 224, 295,

296–7, 300Cromer, Lord 11, 112, 326, 335Cryer, Bob 73C.T. Bowring (broker) 9, 35Cuthbert Heath 75

Daily Telegraph 108Dandridge, Christine 323Danna, Judge Alden 204Darling, Alistair 231Dashwood, Sir Francis 139Davy, Richard 348tDawson, Michael 235Daykin, Chris 163, 259, 350tDe Laszlo, Damon 221, 262, 344, 348tDeacon, David 301, 350t‘Dead man’s stop’ 262Debt Allocation Matrix (DAM) 286debt credits 181,190, 192, 193, 202, 206,

208, 209, 281–4fairness versus pragmatism 235–6,

237t, 239–40, 250fi nal proposals for allocation of 235–6,

237t, 238–40debt recovery plans 57, 150–2, 154, 176,

181, 194, 252, 281–4, 287–8Deeny, Michael 11, 96, 155, 181, 201, 221

Association of Lloyd’s Members 106, 292, 303, 348t

elected to Council of Lloyd’s 229, 230, 237

Equitas trustees 281Gooda Walker Action Group

(GWAG) 89, 135–6, 137, 138–9, 145, 146, 147, 270, 317

hardest-hit Names 266Litigating Names Committee (LNC) 154,

240Names’ Committee (NC) 205

Settlement Agreement Review Group 271

‘The Deficit Millionaires’ (Barnes) 127–9Delves Broughton, Lady Rona 70, 75, 92,

105, 112, 193, 224, 291, 323, 324, 347tDemmerle, Peter 190, 219, 349tDepartment of Corporations (DoC)

(California) 245–6Department of Trade and Industry

(DTI) 26, 72, 131, 171, 172, 195, 203, 218, 223, 325

Equitas 202, 254, 255, 259, 260, 261, 275, 279

prospect of Lloyd’s insolvency 231, 267regulation of insurance industry 161–4,

350tUS Names 248

Deputy Chairmen 105, 115, 116, 125, 129–30, 130–1, 230, 347t

DGXV (directorate-general for internal market) (EU) 300–1

directors 339tDixon, Peter 336Document Requirements (DRs) 310Doll-Steinberg, Alfred 76, 85, 88, 103, 135,

348tDonner, John 12, 53, 58, 59, 64, 71, 171–2double counting of reserves 256–7, 258–9Drysdale, Andrew 47Duguid, Andrew 54, 79, 83–4, 85, 117, 127,

166, 321, 348tcontingency plans 164Peter Middleton’s resignation 226Reconstruction and Renewal (R&R) 290Ron Sandler 182US investigations 300

Dumas, Raymond 256Durant, David 93, 118, 205, 270

Earl Alexander of Tunis 62earthquake cover 169, 246–7Eastgate 212Economic Insurance Holdings Ltd 235The Economist 106, 154, 227, 336Eichen, Heinz Ulrich Von 61, 146elected external members/

working members (Council of Lloyd’s) 338t, 347t, 348t

Electoral Reform Society 99Ellis, Jack 300

INDEX 371

environmental pollution 81, 113, 122, 125, 156–7, 162, 204, 219, 220, 328

increase in litigation 33–5, 43, 49‘equine’ (‘bloodstock’) insurance 26–7Equitas 150, 165, 166, 172, 173, 180, 217,

314, 318, 325, 328asbestos claims 309, 310authorisation process of 254–61, 271–2,

275, 276, 280, 281authorisation received 279, 280, 281, 288chairmen 214–15, 258, 348tChief Executives (CEOs) 215, 311, 312,

348tClaims Directors 348tcompulsory reinsurance of Names 233development of 158, 181–2, 188, 197,

212–17, 221Exxon Valdez 307–8‘fi nality’ 196, 197, 198, 199, 200key legal advisers 349tLong Term Incentive Plan 312management by Crall 304–9naming of new company 133opening balance sheet 192, 193Personal Stop Loss (PSL) 202–3‘Plan A’ 190pre-1993 liabilities 225run-off as alternative 231settlement off ers 204, 264, 299solvency margins 231, 313ftransfer of liabilities to 250trustees 281see also Newco project

Equitas American Trust Fund (EATF) 271–2, 275, 276

The Equitasian 314Ernst & Whinney 176Ernst & Young 224errors and omissions (E&O) insurance 60,

65, 88, 106, 147, 148, 155, 168, 170, 244court decisions 174–5, 175–6, 183fi nality bills 203liquidation and 252‘Plan A’ 190, 192settlement off ers 136–7, 139

Estate Protection Plan (EPP) 44, 285European Commission 300–1, 329, 350tEuropean Court of Justice 300European Union (EU) 177, 178, 298, 300–2Evans, Alastair 301

Evening Standard 145Exchange Rate Mechanism (ERM) 100Extraordinary General Meetings

(EGMs) 2, 96, 99, 101, 105, 121, 123, 124, 284, 292

Exxon Valdez 40, 122, 202, 219, 307–8

Fagan, Patrick 175Fairness in Asbestos Resolution (FAIR) Bill

(US) 310Fallon, Ivan 74Farrar, Mark 65, 102, 205, 348tFederal Bureau of Investigation (FBI) 80,

81Feigin, Philip 247, 248, 350tFeltrim 41, 49, 75, 100, 175Feltrim Action Group 106, 137Fields Wicker, Jane 105, 348t‘finality’ 206, 207, 221, 238, 239, 250, 264, 268

Berkshire Hathaway (BH) and 311–12, 313f, 314

Equitas 196, 197, 198, 199, 200fi nal off er 271–2, 275–7personal statements 271, 282see also settlement off ers

financial panel 119, 138, 139Financial Recovery Committee (FRC) 151,

239–40Financial Recovery Department (FRD) 150Financial Services Act 71, 173Financial Services Authority (FSA) 174,

293, 294, 295, 301Financial Services and Markets Act (2000)

313Financial Times (FT) 84, 98, 195, 198, 201,

250Fisher Report 48, 335Fisher Working Party (1980) 24, 25Fleming Williams, Andrew 234Forman, Craig 55–6Forster, E.M. 315‘forum selection clause’ 245Franchise Board 302, 303Francis, Clive 125, 128Fraser (test case) 282fraud 52, 220, 272–3, 295–9, 321, 336Freeman, Michael 94, 297, 298Freshfields (legal firm) 37, 53, 59, 187, 189,

224, 253, 295, 319, 342, 349tEquitas 216–17, 233, 258

INDEX372

Freud, Sigmund 241Fried Frank (legal firm) 245, 246, 272–3,

319, 349t‘funds at Lloyd’s’ (FAL) 112, 236Furlonge, Nick 21

Gallwey, Dayrell 133Garraway, Brian 105, 111, 231, 347tGascoigne, Martin 92Gatehouse, Mr Justice 158General Counsel (US) 13, 27General Undertaking 13George, Eddie (‘Steady Eddie’) 164, 248,

277, 326, 350tGilbertson, David 98–9Gilkes, Robin 56Gilmour, Ewen 116–17Gilmour, Rosalind 159, 188, 223, 229Gittings, David 229Gledhill, Gisela 259Global Report 42, 46, 62–3, 267, 288Goddard, Ken 159, 160Goddard, Sarah 111Gonzalez, Judge Irma (US) 176Gooda, Anthony 127Gooda Walker (managing agency) 41, 75,

76, 105, 118, 120, 122litigation and 134–6, 145–6,174, 175, 254,

327Gooda Walker Action Group (GWAG) 135,

136, 137, 138, 139, 147, 148, 176, 270, 318

Gordon, John 12, 56, 68governance 24, 25–7, 77, 83–4, 97, 217–18,

291–2evolution of 335–6, 337f, 338t, 339t

Government Actuaries Department (GAD) 214, 255, 350t

Grabiner, Lord Anthony, QC 217, 349Grange, Jacques 29‘Granita’ 189Green, Sir Peter 12, 29, 42, 45–6, 70, 347tGreenberg, Hank 81, 311Greene, Don 27, 184, 186, 191, 319, 349tGrenside, Sir John 61The Guardian 61, 73, 114, 296A Guide to Corporate Membership

123Gulf War (1991) 70Gurney, Claud 88, 96, 99, 110, 121

Hain, Peter 98Hall, Stephen 143, 181, 339Hambros 204Hamilton, Neil 98, 350tHanbury, Nigel 12, 91–2Hardcastle, Sir Alan 170, 171, 174, 231, 234,

347thardship cases 57, 97, 100, 105, 122–3,

127–9, 231, 284–5, 320centralised administration 150, 151hardest-hit Names 206, 207, 208, 238,

239–40, 250, 252, 265–6, 270, 284–5helpline 92–3High-Level Stop Loss (HLSL)

scheme 95–6, 131–2, 268Members of Parliament 120Reconstruction and Renewal (R&R) 200,

205, 236temporary liquidity diffi culties 106,

112–13US Names 248–9

Hardship Committees 57, 90, 100, 120, 127, 128, 138, 150

Harford, Fernanda 127Harford, Tim 130Harrison case 52Harrison, Stanley 335Hart, Michael 217Hatter, Judge Terry 248Havers, Sir Nigel 58Hay Davison, Ian 21, 25, 86, 105, 297, 298,

336, 347tHaynes, Anthony 17, 68, 102, 348tHazell, Dick 83, 86, 87, 95, 105health claims 156–7Heath, Cuthbert 3Heath, Sir Edward 296‘HELP: Helpful Encouragement for Lloyd’s

People’ 93helpline 92–3, 118, 176, 236, 284–5, 323,

348tThe Herald of Free Enterprise (ship) 48Heseltine, Michael 72, 160, 161, 163, 171,

175, 218, 261, 350tHewes, Bob 159, 162, 181, 184, 190, 192,

193, 289, 318–19, 348tHeywood, Desmond 281Higgins, Dr 244High-Level Stop Loss (HLSL) scheme 95–6,

131–2, 268

INDEX 373

High Premium Group (HPG) 141, 205, 206, 263, 291

Hill, Peter 71, 251, 323, 348tHirsch, J. 80Hiscox Dedicated Insurance Fund 235Hiscox (managing agency) 235Hiscox, Robert 8, 51, 68, 117, 181, 287, 292,

318, 319, 347taccessing value 144capital structure working party 166Centrewrite 72David Rowland and 101–2, 115Deputy Chairman 129–30end of term of offi ce 229–30Lloyd’s Gold Medal 290Newco project 157profi le 129–30, 231

Hitchens, Christopher 96Hoare Govett (investment research) 96Hobbs, Richard 162, 163–4, 171, 195, 261,

280, 307, 350tHodgson, Godfrey 336Hodgson, Sir Maurice 59Hoffmann, Lord Justice 137Holden, Philip 150–1, 155, 176, 240, 243,

244, 247, 282–3, 319, 348tHook, Colin 106, 348tHSBC 116, 117Hughes, Judge Lynn 270Hurst-Bannister, Barnabas 157Hutter, Heidi 114, 191, 229, 257, 318, 323,

324, 348tNewco project 131, 132–4, 157–8, 163,

212departure of 195, 215, 216

Income and Housing Support Scheme 285Independent on Sunday 194, 195The Independent 61, 70, 114, 125, 145, 194Inland Revenue 51, 72–3, 250–1The Insider (The SoN) 76Insurance Companies Act (1982) 161, 172,

175, 203insurance cycle 4–5, 26, 33, 34, 36, 53, 54,

60, 115Insurance Division (Department of Trade

and Industry) 161–4integrated Lloyd’s vehicle (ILV) 235, 291,

294interest groups 141

Internal Revenue Service (IRS) (US) 63, 72introducers 12introductory commissions 55investment bankers 348tIsaacs, Anthony 189

J Walter Thompson (marketing agency) 142

Jackson, Robin 72Jaffray, Sir William 295, 296, 297, 298, 299,

329Jago, Hugh 7Jain, Ajit 311, 312, 349tJames, David 103, 119, 166, 347tJanson Green Action Group 221, 231, 342Jardine, Paul 308Jenkins, Dale 80Jessell, Toby 14Jirinca, Eva 29jobbers 48, 49Johnson & Higgins 56Johnston, Richard 115, 348tJoll, James 217Jones, Tony 132, 229, 318, 348tJP Morgan 115, 319, 348tjudiciary 351t

Kay, John 325Keeling, Richard 41, 165, 212, 213,

223, 231, 318, 347tDeputy Chairman 130–1, 132, 133Lloyd’s Silver Medal 289Reserve Group 254–5, 255–6, 257, 258

Kekst and Co (PR consultancy) 246, 348tKellett, Bryan 7, 10, 77, 318, 347tKent, Pen 291, 292Kerr, Sir Michael, QC 119Keswick, Sir John Chippendale

(‘Chips’) 204Keys, Tony 114Kiln, Robert (managing agent) 6, 7–8,

22–3, 36, 50–1, 234Kimball, Lord 52, 53King, Graeme 57, 141Kingsley, Robin 12, 16, 92‘Kingston’ group 180–1, 183Knight, Angela 233

Lamont, Norman 101Landgraf, Charles 219, 220, 284, 349t

INDEX374

Lane, Peter 141–2, 187, 242, 246, 249, 319, 323, 347t

Lang, Ian 163Lapper, Richard 113–14Lasker, Judge (US) 94Laurenzano, Vincent (Vinny) 159, 183–4,

185, 191, 260, 350tLavery, Ken 81Law Courts (London) 177Lawrence, Murray 28, 40, 45, 49, 50, 57, 58,

61, 62, 63–4, 298, 347tLazards 319, 348tLeBoeuf (law firm) (US) 27, 81, 187, 190,

191, 219, 245, 246, 284, 319, 349tlegal advisers 349tLentaigne, David 59Leslie v Lloyd’s 159Levene, Lord 303, 347tLibicki, Marcin 301Life in the Jungle (Heseltine) 161Lime Street Action Group 91Lime Street (members’ agency) 12, 16, 23,

81, 92‘line-slip’ 44Lioncover 53, 64, 131, 190, 202, 231, 271liquidity 159–60, 171, 252Litigating Names Committee (LNC) 148,

154, 199, 240, 253, 262litigation 63, 80, 95, 136–7, 183, 244–9, 253,

265, 283categories of 141court judgments 174–7, 178, 287–8‘fi rst past the post’ principle 174–5, 178,

238, 327fraud allegations 52–3global settlement 189Gooda Walker (managing agency)

145–6‘indicative’ off ers 222–4,

249–51non-acceptors 282propensity to litigate 209tsee also settlement off ers

litigation panel 119, 139Littman QC, Mark 58, 64Lloyd George, David 179Lloyd’s: A Route Forward 83Lloyd’s: The Alternative to Reconstruction

and Renewal (LNAWP) 88, 342–4Lloyd’s Act (1871) 18, 335

Lloyd’s Acts (1982) 24, 25, 32, 45, 46, 243, 291, 303, 336

regulation of Lloyd’s 171, 172, 173Lloyd’s American Trust Fund (LATF) 81,

95, 152, 160, 184, 246Lloyd’s Charities Trust 100, 121Lloyd’s Corporate Capital Association

(LCCA) 141Lloyd’s Gold Medal 50, 129, 289Lloyd’s Insurance Brokers’ Committee

(LIBC) 9‘Lloyd’s League Tables’ 17, 41Lloyd’s List 102, 104, 114, 136, 242Lloyd’s Log 48, 111Lloyd’s of London: A Reputation at Risk

(Hodgson) 336Lloyd’s of London 3, 15, 20, 21, 47, 90,

285–6aggregate resources 150business plan (1993) 113–14, 115, 116,

119, 228chronology of key events 352–4collective responsibility for negligence

and dishonesty 147core values 142franchise structure 302global results (1980–97) 340t, 341tgrowth in membership 40, 42, 43f, 54,

68, 78institutional resilience 320–3, 325key characters, fi rms and institutions

347t, 348t, 349t, 350t, 351tleadership of 68–70, 101–3, 228, 232, 233,

316–17, 347tphilosophy of non-intervention 42, 43, 44redevelopment of building 2, 3, 4, 19, 28,

29, 30, 242, 315rescue plan (1995) 191–8, 199, 200, 201–4results aft er personal expenses (1997–

2013) 304Lloyd’s and the London Insurance Market:

A Pivotal Year (Salomon Brothers) 140Lloyd’s of London Press (LLP) 242Lloyd’s Market Association (LMA) 294Lloyd’s Market Board (LMB) 26, 83, 97,

103, 124, 214, 290, 291, 303, 337f, 338tmission 111, 113, 115

Lloyd’s Market Certificate (LMC) 112

Lloyd’s Names Association (LNA) 286

INDEX 375

Lloyd’s Names Association Working Party (LNAWP) 88, 91, 120, 146, 147, 154, 172, 221, 262, 269, 285, 348t

alternatives to Reconstruction and Renewal (R&R) 343–4

settlement off ers 138, 139Lloyd’s Regulatory Board (LRB) 98, 105,

106, 111, 124, 170, 171, 229, 290, 291, 303, 337f, 338t

‘Lloyd’s Run-off Board’ 221Lloyd’s Silver Medal 289Lloyd’s Underwriters Association

(LUA) 125Lloyd’s Underwriters Non-Marine

Association (LUNMA) 7Lloyd’s Underwriting Agents Association

(LUAA) 56, 95, 105, 294Lloyd’s v Clementson 150, 151–2, 154, 175,

177, 181Lloyd’s v Mason 150, 181Lockheed 204London Insurance Market Investment

Trust (LIMIT) 117, 124, 166, 319London Insurance and Reinsurance Market

Association (LIRMA) 167London Market Excess of Loss (LMX) 86,

91, 94, 97–8, 128, 134, 146, 171, 173, 321

fraud allegations 220‘spiral’ 32, 37–8, 40, 41, 43

London Stock Exchange 164, 234Long Term Incentive Plan (Equitas) 312‘long-tail’ liability 32–5, 36, 49, 81, 174–5,

224, 309–11Longmore, Lord Justice 313Lord, Alan 25, 59, 64, 65, 71, 75, 80, 84, 85,

347tdeparture 98–9, 103Outhwaite syndicate 60, 61, 62, 63

losses 4–5, 27–8, 35, 56–8, 100, 121, 169f, 170

Chatset analysis of 41, 168global results (1983 onwards) 47independent reviews 75Task Force (1991) report 78, 79

Lufkin, Dan 296Lutine Bell 277, 279, 289Lyons, Leighs and Wilkinson (test case) 282

McClintick, David 296

Macdonald, James 145MacDonald, Roderick 249McKenzie Smith, Catherine 297McKinsey 68, 75, 77, 83, 111, 113, 165, 180,

318, 348tMagnus, Sir Laurie 116, 117, 124, 144Masojada, Bronek 348tMail on Sunday 300, 301Maine Supreme Court 249Maitland, Angus 142, 268Maitland Consultancy 348tMajor, John 72, 261Major, Nicola 111managing agents 6, 7–8, 13, 18, 22, 36–7,

72, 134–6, 203, 321auditors and 45by capacity 331tgrowth and 42litigation 53, 242–3re-registration of 49regulation of 294–5top ten managing agents 331ttop ten syndicates by capacity 330tsee also underwriters

management consultants 348tMance, Jonathan, QC 136mandamus, order of 274, 275Mann, David 72Mantle, Jonathan 85, 86, 90Maples, John 71Marchant and Elliot (managing agent) 155marine insurance 3, 18, 19, 20, 46, 75Market Financial Services (MFS) 159Market Opinion Research International

(MORI) 251, 268marketing and public relations 141–2, 158,

246, 251markets 249, 325

capacity 5, 43f, 68, 291, 292fover-capacity 42, 43f, 53–4structure of Lloyd’s market (1986) 5f

‘Marriage Made in Heaven, A’ (Atkins) 312Marsh & McLennan 9, 82Marsh UK 9Masojada, Bronek 77Matthews Wrightson (broker) 109Maude, Francis 73Mays, John 205, 224–5, 253, 281, 348tMediatrak 142Medniuk, Tony 7

INDEX376

Members Agent Pooling Arrangement (MAPA) 115, 122, 168

members’ agents 27, 36, 38, 42, 113, 193, 196, 321

attitude to losses 90introductory commissions 55‘old boys’ network’ 116Reconstruction and Renewal (R&R) 197,

198, 200, 203, 266regulation of 294–5relations with Names 14, 15–16, 92, 118,

251responsibility for negligence 137, 138,

146top ten members agents 331ttribalism 19, 21, 22Warrilow case 53

members’ services unit (MSU) 282, 290see also Central Services Unit (CSU)

Membership: The Issues (Lloyds) 14Mencken, H.L. 251, 253Mercer Consultants 105, 111, 348tMercury Asset Management 281, 306, 308Merrett 418 Association 81, 158Merrett Group 36, 43, 46, 205, 244, 298Merrett Names Association 176, 224Merrett, Stephen 8, 49, 52, 54, 65, 87, 286,

313, 347tDeputy Chairman 115, 130profi le 124–5, 231‘Superfund’ 156

Messer, Christopher 348tMiddleton, Peter 103–4, 106, 108, 111, 118,

127, 130, 138, 347tasbestos problem 172–3breakdown of marriage 145corporate membership 117–18debt recovery 151, 181, 182Equitas 223key leadership role 316–17profi le 109–10Reconstruction and Renewal (R&R) 192,

193, 195, 196, 200, 205, 218, 228resignation of 225–7review of costs 112, 114

Miller, Peter 2, 9, 25, 29, 42, 45, 46, 48, 49, 50, 70, 336, 347t

Mills, Barbara 93‘misfeasance in public office’ 297–8, 298–9Mogg, John 300, 350t

Moore Bick, Lord Justice 298Moore, John 17, 61, 70Moran, Christopher 25Morgan, Alan 348tMorgan, Peter 348tMorse, Sir Jeremy 119, 189, 347tMorse Report 85, 97–9, 337Moser, Scott 304–5, 306, 307, 309–10, 311,

312, 318, 348tmotor insurance 20–1, 46Mottram, Buster 128Mount Charles, Lord 250‘Mr Senior’ 26Muhl, Ed 27, 185, 186–7, 201, 246, 275, 276,

325–6, 350tMunicipal Mutual (MMI) 162Munn, Mrs Jessie 118Murray, Colin 6, 8, 64, 281Murray Lawrence & Partners 157Myners, Paul 214

Names 2–3, 6–7, 18, 53, 55, 74, 85, 173, 320, 321

admissions process 13, 14–15attitudes of 118–21, 251–4‘Bill of Rights’ 263–4brokers as 19–20centralised administration 114, 122, 208coping with losses 56–7, 90, 91, 92–3,

176, 207decision to sue 52–3, 137, 138, 155external Names 23‘forum shopping’ 242, 309Gooda Walker trial 146indicative statements 201, 222–4, 240,

249–54information received from Council of

Lloyd’s 62–3key leaders 89key legal advisers 349tlegal action and 22, 121, 126letter from Philip Holden 151members of Parliament 160minimum wealth and deposit

requirements (1969–2002) 11, 17, 333f, 334

non-acceptors 282–3, 295, 299, 329numbers (1953–1995) 10, 11f, 12Outhwaite syndicate 87‘passive amateurs’ 52

INDEX 377

Names – continuedPersonal Stop Loss (PSL) insurance 44problem of open years 37public sympathy 128representation of external and working

Names on Council 338t‘sense of honour’ 32, 52suicides 2, 120, 158, 296transfer of liabilities to Equitas 313see also US Names

Names Action for Compensation and Defence in Europe (NACDE) 286

Names’ Committee (NC) 205, 206, 207, 208, 209–10, 221, 223

debt credits 235–6, 237, 238, 239–40Names Defence Association 170Names Rights Group 264Names Settlement Group 297National Association of Insurance

Commissioners (NAIC) (US) 27, 143, 219, 246

National Indemnity Company (NICO) 311, 312, 313

National Underwriter 201Neill Committee (1986) 24, 42, 55, 71, 122,

336, 337f‘Neill Lets Lloyd’s Off the Hook’ (The

Economist) 336Neill, Sir Patrick 75, 100Nelson, Anthony 261, 277, 279, 350tNeville, Sir Roger 217Neville Russell (audit firm) 45New York Insurance Department

(NYID) 27, 95, 246, 260, 271–2, 275, 350t

Lloyd’s American Trust Fund (LATF) 153, 159–60, 183, 184–6, 187, 193–4, 195, 196, 198, 201

New Yorker 127, 196–7Newbigging, David, 318, 348t

Equitas 214, 215, 216, 226, 258, 259, 276, 279, 280, 306–7

Exxon Valdez 308–9Newco Business Strategy 157–8, 163Newco project 113, 114–15, 131, 132, 133,

134, 156, 157–8see also Equitas

Newsletter 63, 95–6, 105, 111Nichols, Alan 116Nicholson, Brian 71, 349t

Nicholson, Graham 217, 319Noel, Sally 120, 270, 298nominated members of Council 336,

338t, 347t, 348tnon-litigating members 177, 206, 209tnon-marine markets 18, 19, 20, 22–3, 35,

37, 46, 83Norgle, Judge (US) 94North American Securities Administrators

Association (NASAA) 247–8, 269Northern Rock 194Nottage, Raymond 42, 348tNovik, Jay 114Nunn, Senator Sam 80, 86Nutting, Peter 55, 59–60, 61–2, 65, 86–7,

88, 89, 264, 317, 348t

Oakeley Vaughan syndicate 80, 91O’Brien, Barry 115, 116, 187, 196, 216, 289,

319, 349tOffice of Fair Trading (OFT) 233Oil Pollution Act (1990) 219Old Years Panel 105, 318One Lime Street (OLS) 111–12, 129, 168,

169–70, 252, 269f, 271, 286‘open years’ 36–7, 47, 63, 64, 78, 105, 106,

119, 131, 157Ordinary General Meeting (OGM) (15

July 1996) 265, 270–1Outhwaite 1982 Names Association 65,

135Outhwaite Action Group 71Outhwaite syndicate 41, 46, 49, 53, 64, 71,

81, 83, 327non-litigating members 177run-off contracts 35, 37, 43, 45, 58–62, 63trial 86–7

Outrageous Misconduct (Brodeur) 32overall premium limit (OPL) 17, 54, 75,

112, 116, 288overseas members 11, 14, 28, 90, 92‘overwriting’ 45

Parker Bowles, Camilla 296parliamentary scrutiny 70, 71–4, 170–4,

231, 233, 322, 326Parliamentary Select Committee 183Pataki, George 185Patient, Matthew 59, 79Pawson, Nicholas 114, 214, 285

INDEX378

‘pay now, sue later’ 55, 137, 155, 244, 287, 327, 328

Paying Names Action Group (PNAG) 272Payne, Judge Robert E. 272, 273, 274, 275performance appraisal system 142Perry, Roy 301Personal Stop Loss (PSL) insurance 44, 45,

54, 78, 145, 193, 202, 236, 268Petitions Committee (European

Parliament) 301, 329Pettitt, Dave 208, 290Peyton, Michael 308–9Philipps, Charlie 117Phillips, Mr Justice 147, 174, 175Ping An (insurance company) (China) 30Piper Alpha disaster 39Pitt, Harvey 245, 247–8, 272, 273, 274, 275,

283, 319, 349tPitt, William 133, 196, 290‘Plan A’ 189–94Planning for Profit 113Pollard, Alan 215Pollock, Gordon, QC 155Pomeroy, Brian 189, 242Porter, Alan 88, 154, 205, 221, 253, 262,

271, 344, 348tPosgate, Ian (‘Goldfinger’) 17, 25, 59Post Magazine 108Postal Service (US) 300potentially responsible parties (PRPs) 34Potter, Graham 91Powell, Kenneth 29Powell, Val 96, 148Poynter, Kieran 75, 135PR Consultants (actuaries) 348t‘pre-answer bonds’ 187premium income limit (PIL) 206Premium Trust Fund 87, 153–4, 175, 183,

253–4, 265, 288, 295premiums (insurance) 5, 17, 28, 42, 43fpress scrutiny 16, 27, 70, 71, 83, 98, 113–14,

158, 320‘fi nality’ package 251Reconstruction and Renewal

(R&R) 194–5, 198Prettejohn, Nick 182, 294, 302, 347tPrice Waterhouse 75, 135Principles for the Future Development of

Lloyd’s 286–7‘proportionate cover’ 260, 281

Proskaur (US law firm) 81Pulbrook Syndicate (334) 81

Quackenbush, Chuck 246, 249,350tQueen’s Counsel 349t

Ramsay, Bill 208, 256Rand Corporation 310Randall, Ken 212, 213Raphael, Adam 33, 88, 156rating agencies 82, 292–3, 300Rauch, Michael 273Raymond, Lee 307RBC systems 234Reconstruction and Renewal (R&R) 212,

225, 227, 229, 231, 263, 267–8, 278, 318Council of Lloyd’s members involved 222David Rowland introduces plan 199, 200development of 189, 191, 192, 195–8reactions to 201–4US Names 249, 272–3

Reconstruction and Renewal: Allocating the Settlement 236, 238

Redevelopment Committee 29Redwood, John 71regulation 20, 64, 159, 254, 279, 287, 293–5,

335, 350tDepartment of Trade and Industry

(DTI) 163fi nancial services review 170–4Fisher Report 48key institutions 350tMorse/Walker Reports 97–8United States 26

reinsurance 4–5, 6, 10, 23, 27, 33, 35, 64, 65, 78, 299

London Market Excess of Loss (LMX) 37–8, 40, 41

Newco/Equitas project 131, 132, 202, 305, 313

Reinsurance Association of America (RAA) 187

‘reinsurance to close’ (RITC) 34, 132, 217Rennison, David 118Reserve Group 212, 223, 229, 254–5, 258,

318Resolution Trust Corporation 195‘retrocessionaire’ 37–8, 121Reuters 83, 84Rew, John 17, 88, 126

INDEX 379

Richards Butler (solicitors) 59, 60, 349tRichardson, Gordon 164, 336Rickard, Jo 165, 245, 246, 319, 323, 324,

347tRICO 300Ridley, Sir Adam 11, 115, 210, 240, 266,

310, 311, 317, 348tChairman of Equitas Trustees 280, 281hardship cases 204–5, 207–8, 284, 285

Riley, Ronald 80Riley, Sax 302, 322, 347trisk-based capital (RBC) 143Robinson, Valerie 83, 92–3, 323, 324Robson, John 205Roby v Lloyd’s 94Rocher, Philip 146, 240, 349tRogers, Richard 3, 28, 29Rokeby-Johnson, Ralph 8, 21, 46, 63, 69,

296Rome, Chris 64Rose Thompson Young (managing

agent) 75, 310Rosenblatt, Richard 220‘Rota’ interview 14–15Rothschilds 319, 348tRowland, David 9, 44, 68, 77, 83, 84–5, 99,

165, 252, 274, 347tallegations of perjury 298appointment as Chairman 101–2, 103–4,

105, 111, 119, 230, 243belief in Lloyd’s recovery 78, 145considers resigning 266core group debate 188–9debt collection 150departure 294Equitas 214, 264–5indicative statements 223key leadership role 316, 317knighthood 279, 289, 290Lloyd’s Gold Medal 288, 289, 290new year message (1994) 140Peter Middleton’s resignation 226–7press scrutiny 251profi le 108–9, 110, 170, 216, 231, 287Reconstruction and Renewal (R&R) 192,

193, 194–5, 196, 199, 200, 218, 224, 228, 274

relationship with Robert Hiscox 129–30Settlement Information Document

(SID) 269, 271

visit to New York 186–7Roxburgh, Charles 77, 113, 274, 318, 348t

development of ‘Plan A’ 165, 180, 182, 183, 189, 192, 193, 195, 196

Royal Albert Hall meeting (May 1993) 119–21

‘run-off ’ policies 43, 45, 46, 53, 58, 72, 131, 203, 212, 342

Equitas 304, 305, 310Outhwaite syndicate 35–7

Ryan, John 348t

Salomon Brothers 140, 225–6Samuel Montagu 319Sandler, Ron 192, 196, 202, 221, 244, 251–2,

263, 272, 317, 342, 347tdeparture 294Deputy Chairman 226, 227, 228, 229Director, Special Projects 182–3fraud allegations 247Lloyd’s Silver Medal 289

Sands, 348tSasse case 52, 59Saville, Mr Justice 87, 94, 136, 137, 150, 153Schacht, Jim 219–20Scheme of Arrangement 162Schreiber, Dale 81Schwab, Charles 296Schwarzer, District Judge William 159Scott, Sir Richard 253Securities Act (1933) (US) 13, 80Securities and Exchange Commission

(SEC) 80, 245, 246, 270Sedgemoor, Brian 72, 170, 171Sedgwick (broker) 9, 12self-regulation 55, 65, 122, 170, 173, 174,

201, 293, 321, 322Sellek, Dr Roger 213, 256, 318Serious Fraud Office (SFO) 71Settlement Agreement Advisory

Group 240Settlement Agreement Review Group 271Settlement Information Document

(SID) 269Settlement Offer Document (SOD) 271settlement offers 30, 145, 148, 158–9, 165,

175, 299, 323, 328business plan 113Gooda Walker 138–9indicative statements 201, 222–4, 240

INDEX380

‘inventory settlements’ 309Names’ Committee (NC) 204–8,

209t, 210, 212Peter Middleton 181–2, 188sale of building 242Settlement Information Document

(SOD) 267–8, 269f, 270–2, 275–7Shapiro, Stacey 85Sharma, Paul 162, 260Shaw, Neil 89, 102–3, 104, 114, 119, 122,

348tShearman and Sterling 191Sheldon, Mark 123, 124, 291, 337Shipley, David 132, 213–14, 256, 257–8,

312, 318, 348tSimmons & Simmons (legal adviser) 349tSinclair, James 86–7Skey, Charles 10, 72Skinner, Dennis 72Slaughter and May 221, 262, 263, 344, 349tSmith, Mr Justice Andrew 297, 298‘Smoke and Mirrors’ (World Insurance

Report) 195Society of Lloyd’s v Robinson 295Society of Names (SoN) 76, 126, 227, 268solvency 26, 30, 36, 56–7, 96, 172, 188, 203,

260continuing 224–5, 267E&O assets 152–6eff ect of letter from Philip Holden 151Equitas 279, 313f

Solvency and Security Committee 56–7, 64, 95

The SoN (The Insider) 76, 126Soros, George 117–18South, Tony 296Southwell QC, Richard 77‘Special Reserve Funds’ 28Specialist Claims Unit (SCU) 156The Spectator 140Spencer, Dr Jonathan 161, 164, 202, 231,

307, 325 350tauthorisation of Equitas 259, 260, 280questioned by Treasury and Civil Service

Committee (House of Commons) 171, 172

Spooner, Richard 11, 96, 134, 205, 208, 239–40, 266, 278, 281, 318, 348t

Spreckley, Colin 121Springett, Pauline 114

Stace Barr (agent) 19Stace, John 12, 41, 117, 165, 222, 229, 232,

251, 253, 319, 347tStandard & Poor’s 82, 292–3, 300statute of limitations 88, 177Steingart, Bonnie 273Stevenson, Hugh 308, 312, 318, 348tStewart Wrightson 9Steyn, Lord Justice 151Stiglitz, Joseph 310Stockwell, Christopher 62, 88, 89, 105, 119,

126, 147, 154, 171, 201, 206, 348talternative to Equitas 221, 225, 262, 310,

313continuing opposition 285–6, 343‘fi nality’ package 250, 253Jaff ray trial 296US Names 248

Stockwell, Philadelphia 62‘strengthening reserves’ 35Struggle Against Financial Exploitation

(SAFE) 298Sturge, Arthur 335Sturge, Charles 17, 168, 195Sturge (managing agency) 8, 16, 59, 101,

132, 145, 194Sumption QC, Jonathan 77, 261, 349tSunday Times 74, 86, 114, 201‘Superfund’ 34, 81, 156, 157, 218, 219, 328Supreme Court (US) 33, 159, 309syndicates 3, 4, 5f, 6–7, 8, 20, 34, 95, 96

administration 133–4independent loss review 75outstanding liabilities 255–6, 258–9performance data 41premium-income limits 45procedures 23reserves 27–8, 35, 49, 59, 91, 112, 131,

132, 134‘run-off ’ policies 35–7, 43, 45, 46, 53selection of 15–16spiral losses 41top ten by capacity 330tvalue 143–5year of account 15

Task Force (1991) 77–8, 83–4, 85, 95, 97, 108, 111, 113, 115,

taxation 27–8, 51, 53, 63, 70, 72–3, 74, 170, 250, 326–7

INDEX 381

Taylor, Ian 73Taylor, Max 292, 294, 300, 347tTaylor, Tony 256Teff, Jim 10, 156, 215, 348tTemporary Restraining Order (TRO)

(US) 247, 272terrorism 162, 300, 302Texas Federal Court 159Thatcher, Margaret 72Thomas-Everard, Christopher 41, 85Thompson, John 129Tilling, John 21Tillinghast Towers Perrin (actuaries) 4,

203, 214, 234, 256, 257, 258, 348tTime magazine 295, 296The Times 69, 76, 104, 105, 114, 121, 137,

297Today programme (BBC Radio 4) 94, 155,

274Tolle, Rolf 303Tomlinson, John 61Torres, Debra 273‘tort law reform’ 218Towards the Settlement 264traders 3, 4, 5f, 32, 121–3

trading fl oor (‘the Room’) 2, 4, 6, 8, 9, 19Treasury and Civil Service Committee,

House of Commons 170–4, 201, 223Treaty of the European Union 177tribalism 18–21, 22, 23, 54Truth About Markets, The (Kay) 325

Ultimate Risk (Raphael) 33, 88, 156underwriters 2, 3, 4, 5, 6, 21, 22, 28, 45, 181

independence 23litigation 86–7redevelopment of building 30reinsurance 34–5, 40relationship with brokers/agents 9–10,

19, 20, 54total capacity 165–6training 6–7, 142tribalism 18–21US liabilities 35–6see also brokers; managing agencies

United Names Organisation 297unlimited liability 13, 15, 22, 36, 76, 91, 117,

167, 213, 291review of 50–1, 78, 303, 318

US 152–3, 204

asbestos 32–3, 152–3banking reforms (‘Big Bang’) 48–9Court of Appeals 80environmental pollution 33–4, 122‘forum selection clause’ 245General Counsel 13, 27growing liabilities 46infl uence of laws and customs 13markets 8–9regulation 26Supreme Court 33, 40, 159, 219, 274, 308,

309US Names, 94, 245–9, 260–1, 269, 272–5,

300fraud investigation 300indicative statements 245–6litigation 80–2, 176–7, 178, 253, 270,

272–3, 274, 283–4, 295, 328–9lobbying 218–20New York Insurance Department

(NYID) 183–7‘state credits’ 284‘Superfund’ 156–9see also Names

Vale, Edward 290Validation Steering Group (VSG) 221, 231,

262, 268, 317, 344–5Valin Pollen (PR company) 71Value at Lloyd’s (Value Group) 143–5, 167,

168Ventiroso, Chris 10, 156Verey, David 348tVictory Insurance Company 171View of the Room, A (Davison) 25‘Viewpoint’ (Newsletter/One Lime

Street) 105Viggers, Sir Peter 83Vos, Geoffrey, QC 146, 349t

Wade, Michael 44–5, 51, 65, 68, 72, 78–9, 101, 117, 318, 347t

Wakefield, Hady 35Walbrook Insurance Company 162Walker, Sir David 59, 79, 86, 101, 347tWalker, Derek 146Walker Report 97–9Wall Street Journal 55–6Wallace, Diana 14Waller, Lord Justice 297

INDEX382

Walsham Brothers 38Ward, Richard 347tWarrilow syndicate 49, 52, 53, 71, 76, 126,

317Webb, Peter Cameron (PCW) 52, 53, 59,

64, 70, 190, 336Webster, John 215Wellington Names Association 158West, Angus 56West, David 296Wheatcroft, Patience 108Wiberforce, Lord 58Wilcox case 52Wilde Sapte (solicitors) 135, 136, 146, 147,

240, 349tWillard, Anthony 146Williams, Carolyn 319

Williams, Michael 55Willis Corroon (broker) 9, 82, 87Willis Faber (broker) 9Wilson, Gillian 93, 127, 176, 284, 323, 324,

348tWilson, Lord Justice 298Wilton, Sarah 208women: contribution of 7, 11, 70, 323, 324‘won’t pays’ 181, 207, 230, 237, 239,

244, 252Workers’ Compensation Act (US) 33World at One (BBC Radio show) 194World Insurance Report 120Writs Response Group (WRG) 177Wroughton, Philip 9, 82–3

Youell, Richard 133