Insurance Covered

Welcome to Insurance Covered. In this episode we revisit the 1980s crisis in the Lloyds market, examining the factors that led up to it and how it was ultimately resolved with the help of Lloyd's veteran Reg Brown. 

We start by briefly discussing the Insurance Museum initiative, which was our topic last time Reg joined us on the podcast. Reg explains that the pandemic has impacted their initial plans of having a physical premises, with tourists not expected back into London in their masses for a number of years. Instead they are pushing ahead with plans for an interim virtual museum, designed to explain different classes of business and examine some of the key cases for each class.

We then move on to our focus for the episode, the crisis at Lloyd's in the 1980s and 1990s. We start by discussing the different 'building blocks' that provide context for the crisis that was to come. These were:

• The structure and hierarchy: "At the top of the pile you have the underwriters and at its simplest, those underwriters would bring in premium and would pay out claims and that either resulted in a profit or a loss. The underwriters did this underwriting on behalf of a syndicate of investors who were known as Names with a capital N, and if there was a profit, it was distributed amongst the Names and if there was a loss then obviously it had to be paid by the Names".
• Accounting practices: Reg explains that the used a 3 year accounting period to attempt to be accurate, sometimes claims would take time to develop. Even with this 3 year period some claims would still be outstanding so there was still a need for estimating, which runs the risk of syndicates over or under estimating and being inaccurate. Reg goes on to explain that there was also a buffer known as IBNR (Incurred But Not Reported claims). These outstanding claims were then reinsured (RITC – reinsured to close). The problems with this system came when over optimistic reserves were in place.
• Baby syndicates: Reg explains " Baby syndicates came about because of the complete understanding at Lloyd's of the law of agency. Underwriters at Lloyd's did not see themselves as agents of the Names, and they saw nothing wrong in creating a baby syndicate that would cream off in their mind the best risks. For the benefit of themselves and favour brokers and people like that. The practice was so widespread that even the committee, the members of the committee at Lloyd's, and even the chairman of Lloyd's had his own baby syndicate".
• LMX spiral:  A number of syndicates had no real product lines to sell so began to reinsure other syndicates in order to get some income. As a result, there was a lot of double counting there. So, when a loss came in, it was a game of pass the parcel. So, for example if syndicate one passes some of its loss to syndicate two, syndicate two then passes some of its loss to syndicate three, onto syndicate four, five, six and when it gets to syndicate ten, it comes back to one again. Because syndicate one is reinsuring syndicate ten. So, the loss was magnified.

With the building blocks covered we then go to the crisis, summed up in one word 'asbestosis'. Claims coming in as a result of asbestos damage came in from as early as the 1920s. The courts held that every insurer throughout that period, every single exposure of asbestos had a duty to defend and to indemnify, meaning that the number of claims were in the tens of thousands all funnelling into Lloyd's, through direct insurance or reinsurance. The courts also ruled that compensation was due for every year a victim had suffered exposure to the disease, so the aggregation of the claims made them even bigger. With the approach to accounting a Lloyd's the risks rolled to the current year and the 'Names' took the risk.  On top of this the 80's also saw a series of disasters, which added to the strain on Lloyd's. You had the Piper Alpha disaster, the Exxon Valdez oil spill, and two huge hurricanes. The amalgamation of the disasters and the building blocks in place at Lloyd's resulted in huge losses, between 1989 and 1991 Lloyd's suffered losses of over £8 billion and in 1991 almost 100 syndicates closed.  

 Finally we discuss how Lloyd's were able to rebuild from this, with the work of new chairman David Rowland and the process known as 'the reconstruction and renewal of Lloyd's which looked to correct the systemic issues that led to the initial crisis, including ways of increasing capital in the market, more structured annual accounting requirements.

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