The Lloyd’s of London insurance market is insolvent again. Underneath its impenetrable jargon and complexities, the regulators are having to allow members and former members’ funds, held in trust for the claims of specific policy holders, to be used to pay other policyholders’ claims.
You may remember how in the 1980s and 1990s huge losses struck Lloyd’s members (known as Names). They had joined, convinced that the structure of the three hundred year old institution with its state-of-the-art building and underwriting skills would allow them to make a very comfortable income by a nominal commitment of assets — property and shares — which were already earning for them.
But it wasn’t comfortable.
Asbestos losses on apparently long expired Lloyd’s insurance policies multiplied as the disease developed in contaminated lungs many years after ingestion. And then there was the cost of the Piper Alpha fire and the European Storms and other disasters, leaving the new members of Lloyd’s with devastating debts.
The thirty thousand members at that time were a broad cross-section of old and new money, some well-informed, some dependent on advice from family, friend or professional, as to what constituted a safe or low risk investment.
Very few people even in the City and Westminster understood how Lloyd’s worked. What seemed important was that it provided the headstone of the insurance business of the country, with consistent and substantial profits and foreign currency earnings of insurers, brokers, and the associated legal and accounting systems.
When the Government presided over the reorganisation of the Lloyd’s insurance market from 1993 to 1996, the threat to Members, Policyholders and the economy that was being addressed was immediate. Facing sudden inexplicable losses, members had lost confidence, and the Commercial Court could not cope with all their litigation against the Lloyd’s insiders. The exposure of the banks directly to the Lloyd’s market was billions of pounds in loans to members and to Lloyd’s businesses, provided as trade or bridging finance but now looking unrecoverable.
A solution was cobbled together; the Treasury and the Department of Trade set an affordable target to fund a reinsurance company, Equitas, to act as a “bad bank” to take all the Old Year business. The Government gave its blessing to the introduction of limited liability investors to replace most of the individual members who had unlimited liability, and the Judges undertook the task of clearing the litigation away by judicial management. Equitas is the group formed to manage and take on the reinsurance from Lloyd’s members of all the business containing the asbestos and other liabilities that had brought insolvency to Lloyd’s.
No solution could be fair to all parties, because of the size and complexity of the disputes, and the lack of an adequate kitty of resources to meet the proven or deemed obligations of the guilty insiders. Nor could the solution be transparent because the object was to keep Lloyd’s trading, not to establish guilt or responsibility.
Indeed the size of the totality of the losses required contribution by solvent members substantially in excess of their legal obligations to provide sufficient capital for Equitas. Without that, the losses could not be hived off, and the Reorganisation would fail.
They paid, Equitas was approved, and members and former members could be told they were in effect free of liabilities, could resign their memberships and forget Lloyd’s.
It is now clear to the Treasury and the Financial Services Authority that the reorganisation was entirely mishandled. By whom? By whoever managed such a covert coming together of Government, Judiciary and City of London for which there is no apparent constitutional authority. Nobody has assumed responsibility.
Action is urgently required. The Treasury, the Financial Services Authority, Lloyd’s and Equitas know that in solving the crisis in the 1990s, changes were made which were bound to result in the recurrence of market insolvency, and which have fundamentally undermined the attempt to transfer the asbestos and other long-tail liabilities of the pre-1993 underwriting.
Equitas found a willing buyer, Warren Buffett, whose Berkshire Hathaway subsidiary insurance company, National Indemnity, quoted a price to take on the vast bulk of the Equitas liability, and was paid the premium it demanded, Equitas relied on two Statutory Instruments drafted by the Treasury as a basis for making a permanent disposal of the liabilities, but the legislation fails in its purpose. National Indemnity now has the money but not the pain.
The failure of the cabal headed by the Treasury to admit, or deny, what it has done has delayed action that might have salvaged something from the wreckage. The substitution of a new Statutory Instrument for the flawed one could have solved the ‘Old Year’ problem, ensuring that Mr. Buffett received that for which he bargained, and no more and no less.
There is certainly a complication. Admission of the error which led to the failure of the transfer, will focus attention on how Lloyd’s, with the knowledge of the Treasury and the Financial Services Authority (FSA), has over several years, by means of false evidence, led the Courts to adopt and then enthusiastically defend a series of wrong judgments. which have enhanced the problem.
The reason for that is the UK government in the persons of the Treasury, the Bank of England, the DTI, the Chancellors through their regulatory deligatees, first the Securities and Investments Board now the FSA, have known of, and presided over, the problems at Lloyd’s since their first manifestation forty years ago, and concealed it in the denial that since 1909 liabilities and assets have been transferred forward each year to keep them with members who were regulated and solvent.
Until now the Government has had a clear choice, admit the mistake and work speedily to limit the damage, or allow matters to drift until the hidden solvency problem becomes a liquidity crisis on a global scale, with the international destruction of the value of any Lloyd’s policy and the magnificent ‘Lloyd’s brand’.
Instead it has through its generally despised regulator, the FSA, assured the police that they need not tackle the misuse of funds held in trust by the payment of other claims, or the criminal concealment of the facts from policyholders, members and former members of the Society of Lloyd’s. The Economic Crimes Unit of the City of London Police are obliged to check allegations of this nature with the Regulator, and they have referred them to both the FSA and the Treasury. No doubt Lloyd’s has assured them that there is no substance behind the suggestions, but that as a complex matter it is impossible to deny any part of the factual matrix that supports the allegations.
Particular embarrassment for the Government, and damage to the economy, is guaranteed by the demonstration that the UK has deliberately misled the European Commission in its response to the Solvency Directives protecting policyholders. Since the 1970s, European regulation of insurance has characterised Lloyd’s as an “association of members”, an unjustified inference of mutuality.
But it is a fundamental of Lloyd’s, reasserted in each Lloyd’s Act and each Lloyd’s Policy, that members do business “each for his own, not one for another”. The support for policyholders of insolvent members is limited to the relatively small sums set aside by Resolutions of the Council of Lloyd’s valid only for the terms set by the Resolutions, not exceeding twelve months. The remainder of the Chain of Security is nothing but spun words.
That unfortunate history of misleading the Europeans as to the value and effect of UK regulation was compounded in 2005 by the Statutory Instrument required for the protection of policyholders in the event of a solvency failure.
The 2005 Statutory Instrument establishes a framework for protecting policyholders in a solvency failure at Lloyd's, or the likelihood of one, of either syndicates or the Society itself. It provides for contributions from not only all members of Lloyd's, but also former members of the Society.
But there is no legal basis for this at all.
Not a word of this wholly unjustified assertion has been released to former members.
Only the apparent compliance with European Solvency Directives permits Lloyd’s members to act as insurers in the European Community. Without the charade of the pretence of mutual guarantees, Lloyd’s would not have been permitted to continue to trade in Europe, and consequently, in the United States.
I first came across the mishandling of the reorganisation of the Lloyd’s market in May 2004, and wrote to Lord Levene, the Chairman, to point out a serious mistake in Equitas’s handling of its project. I could obtain no proper response from Lord Levene, nor from the FSA. The Treasury’s expressed conclusion was that since the courts appeared to be taking the opposite view to mine, it would await a reversal there.
I tried to explain the serious problem to Lloyd’s and Equitas, but was ignored or abused. The members themselves relied on Lloyd’s assurances. I looked at the litigation that Lloyd’s was still pursuing against a small number of members, at least some of whom had been extremely badly treated. I attempted to use the knowledge and documents that I had acquired in a long career at Lloyd’s to secure the reversal that the Treasury had required.
It was clear that the litigation was distorted by Lloyd’s deliberate distortion of the facts, but contrary evidence was inconvenient to Judges, who had an understandable preference to believe Leading Counsel and leading solicitors, and wished to finally dispose of all argument.
Equitas, on behalf of Lloyd’s, in 2009 commenced the process for the final transfer that would finally transfer the insurance business carried on from before 1993 by all Lloyd’s Names to a limited liability company. The main asset of that company would be the very substantial National Indemnity reinsurance. I believed that because the transaction concealed important material information from National Indemnity, and from the policyholders it was designed to protect, with unforeseeable consequences particularly in the United States, the issues should be ventilated.
Some time later, investigating how and why Lloyd’s had been misleading the courts, I realised that the language that the Treasury had used to enable the transfer failed to transfer the most of the old liabilities. I wrote to the FSA and to Equitas to point out the hidden error, but neither was prepared to acknowledge a mistake, or to explain how the language used could be effective.
From there I undertook a very careful scrutiny of the published accounts of the current Lloyd’s market, and concluded that the new solvency regime set up between Lloyd’s and the FSA did not and could not work; nor was there any relevant audit to suggest that it did. All of this has been reported to the proper authorities. The underlying issue is simple; when members die, and their estates are wound up, their liabilities to policyholders die with them unless they have previously been transferred, not merely reinsured. So policyholders lose their cover and any claims met must be paid by Lloyd’s centrally
So there are two large holes in Lloyd’s solvency; the first caused by the Treasury’s error, discussion of which is bound to underline that the Treasury and the DTI deliberately allowed Lloyd’s to falsify its accounts from the time the asbestos losses first became apparent to the insiders and their auditors. The second is caused by the pretence that dead Names can remain as links in a chain of solvency.
Those solvency holes imperil both policyholders, and the resigned members against whom there is purported to be a claim under the 2005 legislation.
Lloyd’s will say that I was one of the original miscreants, condemned by Mr Justice Cresswell for deliberately misleading both the members of the syndicate and my colleagues, and apparently the rest of Lloyd’s. I am confident that my thirty-eight page report sitting in the Treasury, the FSA and at Lloyd’s adequately rebuts that charge, and shows that the issue that I have been raising since 2004 is devastatingly endorsed by the current predicament.