SUMMARY:

From the 1930s through to the 1950s, Lloyd's, a British insurance market,
attempted to establish a strong foothold in the U.S market. It did so by using
broadly-worded policies without monetary limits that gave it a competitive
advantage.

Unfortunately, during this time period, exposure to asbestos and other

pollutants and health hazards was causing health problems that would later
lead to an avalanche of claims and lawsuits. The losses began to surface in
1991. The losses announced in 1991 for the 1988 syndicates were 509 million
pounds sterling, the largest single-year loss in Lloyd's history. Once the
premium reserves were paid out, Lloyd's began demanding cash from Names in
the affected syndicates. Some of the Names objected to this and began filing
lawsuits against Lloyd's, and, in some cases, against their members' agents.

To escape from being hounded for further payments, 94% of Lloyd's 34,000
Names accepted a 1995 settlement that put their liabilities into a new re-
insurance plan called Equitas and bound them to abstain from any legal action
against Lloyd's. The dissenting Names are still being pursued for payment by
Lloyd's.

OVERVIEW
The story of Lloyd's is a tale in which a misunderstanding of the relevant
business resulted in the near-downfall of an old and venerable institution -
Lloyd's had been in business for 300 years before scandal hit - as well as
immeasurable personal heartache.

The market's general business strategy was to sell insurance policies backed by
the personal wealth of investors, known as "Names", since their signatures
once appeared on the face of each of Lloyd's insurance policies. Names signed
up through managers of syndicates, known as "working Names," and pledged
their entire personal wealth, to cover any insurance losses the syndicate must
pay out.

In exchange, the Names could expect to share in any profits the syndicate
made. The Names signed on to a one-year syndicate to insure risks; two
additional years were allotted for settling claims. If all claims were not settled
at that point, the remaining risks (incurred but not reported "IBNR" liabilities)
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were insured with a syndicate from the next year, so that the Names from the
prior syndicate could receive their share of the profits (or pay their share of the
losses).

Of course, this practice required that the risks associated with future claims be
calculated accurately, so that the new syndicate could be paid a fair premium
for taking on the risks of the old one. At the time that this practice was
developed, only about 100 of the Names (the working Names) were actually
involved in the Lloyd's business. The other Names, known as "external Names",
relied on their syndicate managing agents to protect their interests by ensuring
that the IBNR liabilities were accurately calculated.

Companies who wished to purchase insurance policies from Lloyd's went to

brokers who handled Lloyd's business exclusively. Lloyd's was able to write
many large policies, some of an innovative nature, because the risks of the
policies could then be divided among many different syndicates.

During the 1930's-1950's, Lloyd's attempted to establish a strong foothold in

the U.S. insurance market. However, a "buy-American" attitude prevailed, so
Lloyd's used broadly-worded policies without monetary limits to gain a
competitive advantage. Unfortunately, during this time period, exposure to
asbestos and other pollutants and health hazards was causing health problems
that would later lead to an avalanche of claims and lawsuits.

Lloyd's membership was greatly increased (and modernised) during the 1970s
and 1980s. The minimum wealth requirement for membership was reduced to
150,000, and women and foreigners were allowed to become Names for the
first time. The number of Names grew from 6,000 in 1970 to 33,000 in 1990.
External Names became further removed from the day-to-day business since
their agreement with Lloyd's now specified that they transferred all authority to
conduct insurance business to their new "members' agents" and managing
agents.

During the 1980s, Lloyd's took steps to shore up its legal position. In 1982, the
UK Parliament passed the Lloyd's act, granting Lloyd's immunity from most
lawsuits and giving the Council of Lloyd's the authority to unilaterally and
retroactively change Lloyd's by-laws, which had previously required a majority
vote of Names at a General Meeting. In 1986, for the 1987 year of account,
Lloyd's required members to sign a new General Undertaking in which Names
agreed that any legal disputes with Lloyd's would be brought in English courts
and under English law.

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Major losses began to surface in 1991. The losses announced that year, for the
1988 syndicate, were 509 million pounds sterling, the largest single-year loss in
Lloyd's history. Once the premium reserves were paid out, Lloyd's began
demanding cash from Names in the affected syndicates, both to cover
outstanding claims and to amass reserves against future IBNR claims.

Some of the Names objected to this, and began filing lawsuits against Lloyd's,
and, in some cases, against their members' agents. The 1982 Lloyd's Act,
however, has been highly useful to Lloyd's in staving off these claims. Courts in
Texas and Colorado have both upheld the statute and refused jurisdiction. In
1995, 94% of the Lloyd's 34,000 Names accepted a settlement that put their
liabilities into a new re-insurance plan called Equitas and that bound them to
abstain from any legal action against Lloyd's. It is unclear whether the
dissenting Names, still being pursued by Lloyd's, will have any legal recourse.

Meanwhile, Lloyd's has returned to profit: in 1998, the company reported a

record profit of 1.149 billion pounds sterling for the 1995 calendar year. Its
unique and historic structure, however, has changed significantly. It has been
forced to allow corporations in as investors, so that the Names are now a
minority. The market also suffered substantial reputational damage - the fact
that Names refused to pay up was especially damaging, since Lloyd's was
structured on the guarantee that these investors gave to pay all claims. Since
the scandal, Lloyd's has lost considerable amounts of business to U.S. insurers
and insurers in new markets such as Bermuda. These competitors have stolen a
large share of segments such as property reinsurance that were once
dominated by Lloyd's.

As in the case of many fiascos, Lloyd's woes arose from an intermingling of two
factors. First, there was the imprudence of writing of broadly-worded policies,
which opened Lloyd's up to the vagaries of unknown risks such as asbestos as
well as to American litigiousness. The second component of the problem
stemmed from the poor relationship between the external Names and the
working Names. Many of the working Names knew nothing about insurance
and were relying on the working Names to inform them of the risks. It was
when the working Names felt that this relationship of trust had been violated
that they refused to pay up, compounding the reputational damage to Lloyd's.

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EVENTS

Early 1970s: The wealth requirement to become a Name is reduced to

$150,000, and foreign Names are allowed to join. Women are admitted
beginning in 1973. "Members' agents" are established to represent the external
Names.

August 1980: Lloyd's establishes the "Asbestos Working Party" to deal with the
growing asbestos claims.

October 1980: U.S. Court of Appeals for the Sixth Circuit announces in INA vs.
Forty-Eight Insulations, Inc. that every exposure to asbestos counted as a
separate harm and insurers would be held fully responsible for these.

1982: Lloyd's Act confers wide immunity on Lloyd's from English lawsuits and
gives the Council of Lloyd's increased power.

1987: Starting in this year, all foreign Names must sign a declaration agreeing
that any disputes must be settled in England under English law.

March 1991: The U.K. Serious Fraud Office initiates an investigation into Lloyd's
after a complaint is filed by some Names.

June 1991: The U.K. Serious Fraud Office drops its investigation of Lloyd's,
stating that no further investigation is warranted.

26 June 1991: Lloyd's chairman David Coleridge announces a loss for 1988 of
509 million pounds sterling ($825 million). It is predicted that losses for 1989
and 1990 may total more than 2 billion pounds. The average loss per Name for
these three years would be 75,000 pounds.

7 October 1991: The Outhwaite case opens: the first case in which a judge will
rule on the negligence of an underwriter. Names are suing their members'
agents. Almost 1000 of the 1600 Outhwaite Names are participating in the
lawsuit.

1995: 94% of Lloyd's 34,000 Names around the world agree to a 3.2 billion
pound settlement plan, which involves their liabilities being transferred to a
reinsurance vehicle named Equitas. The terms of the agreement are
economically favourable, saving some individuals up to 1 million pounds.
However, signing the agreement requires the Names to drop all lawsuits

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against Lloyd's and prevents the Names from assisting others in lawsuits
against Lloyd's.

May 1998: Lloyd's announces a record profit of 1.149 billion pounds for 1995.

31 July 1998: The Court of Appeals in England rules that Lloyd's is allowed to
begin physically reclaiming 130 million pounds owed to it by 600 Names, many
of whom have at least part of the money they owe, but refuse to hand it over,
alleging that Lloyd's defrauded them. Lloyd's plans to reclaim money from 110
Names who won cash in legal battles.

http://www.erisk.com/Learning/CaseStudies/Lloyds.asp

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Lessons to be learned from Lloyd's point of view:

Don't let a business strategy's large upside blind you to its downside

When Lloyd's began issuing the broadly-worded insurance policies, the resulting
gain in market share apparently overshadowed the grim possibility of being
held liable for immense losses.

Expect the unexpected

Although there is no way that Lloyd's could have specifically predicted the
massive losses from asbestos-related claims, the very fact that insurance claims
are unpredictable should have dictated caution in issuing broadly-worded
policies.

Practice good stakeholder management

Because the entire Lloyd's structure was predicated upon the Names, it was
essential that they should feel completely informed. While it can not be known
exactly what the working Names told external Names, they should have been
sure to explicitly warn the Names, many of whom likely knew little about
insurance, of the possibility of large losses, and of the existence of broadly-
worded policies that could incur losses at any time. If the external Names had
felt more involved and informed, it is possible that fewer of them would have
refused to pay up and/or filed lawsuits, resulting a less damaging scandal.

Lessons to be learned, from the Names' point of view:

Know your investment

Even if Lloyd's did not inform investors of the existence of the broadly-worded
policies, savvy investors might have been able to unearth these facts. Likewise,
if investors had made themselves aware of the Lloyd's Act of 1982, they might
have realised that they might have little recourse in court.

Beware of excessive growth or profitability:

Risk managers and auditors tend to focus on the business activities associated
with high losses. However, business activities that generate high growth or
profitability should also be scrutinized. In Lloyd's case, success in gaining
market share through lenient policy terms created significant "tail risk" in the
insurance portfolio.

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