Lloyd’s of London: cont.
In most cases money to cover the IBNR figures of a year
was transferred to the next underwriting year. The current
members were then responsible to pay all future claims
on the previous year’s book of business, whether they
had been members the previous year or not. This system
of closing a particular syndicate and transferring the
outstanding liabilities to the next year had been going on
for many years. Hence, an accumulation of liabilities for
many past years ended up with the most current syndicate
years.
The issues with the accounting practices of Lloyd’s surfaced
when US courts unexpectedly began handing down large
punitive damage awards on certain kinds of risks. These
court decisions particularly impacted policies covering
such risks as pollution, asbestos and anything that was
considered to be a health hazard.
Many of these policies had been issued as far back as the
1940’s. Many of the employees of the insureds had over the
years fallen ill and were making claims for compensation.
To complicate matters further, the syndicates were also
being hit by large losses on computer leasing policies
they had accepted. Needless to say, the court decisions
and losses combined with the accounting practice
of reinsurance to close created instability within the
organization. Syndicates who originally wrote the business
were not responsible for paying claims. Instead this
BEST
DECISION
EVER.
responsibility had been transferred year after year to the
then current-year syndicates.
Lloyd’s Re-organizes
Many syndicates writing long tail business faced significant
losses and many members were financially ruined. It was
alleged that when they had been originally recruited by
Lloyd’s to become members, they had not been informed
of the possible issued with accounting practices. Thus,
Lloyd’s was accused of misrepresentation, negligence and
fraud.
In order to resolve the issues, Lloyd’s underwent a
restructuring process in 1995. It was a lengthy operation,
but basically a special entity was formed named Equitas.
Around twenty-one billion dollars was raised by taxing
profitable syndicates’ present and future profits. Lloyds
contributed a large amount of their reserves. They even
sold their building at the time and leased it back to raise
cash. Many other fundraising methods were also enacted.
The function of Equitas was to pay a major part of all
losses payable for the years in question. In this way the
syndicates were able to stay in business as they were no
longer responsible for claims on the old years of account.
Equitas also paid out around five billion dollars to settle
legal disputes especially for those members with the highest
losses.
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Many other changes were made at this
time as well. New members who joined
were not subject to unlimited liability
as past members had been. To prevent
excessive underwriting by syndicates,
new financial requirements and oversite
were put in place and the market was
opened up to corporate members. Since
the restructuring process Lloyd’s has
thrived, despite growing competition
from around the world. The new Lloyd’s
building in London along with the
large signs displayed by many syndicates
now run by American corporations
testify to the success. Lloyd’s syndicates
remain well-rated by AM Best and are
arguably the most capitalized insurance
operations in the world.
Colin Davidson is a highly skilled reinsurance
and captive insurance professional with a strong
background in contract negotiation and program
management. You can reach Colin at
[email protected].
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KANSAS INSURANCE AGENT & BROKER |JULY - AUGUST 2016|