On the Brink: How a Crisis Transformed Lloyd's of London

By Andrew Duguid

Huge losses very nearly destroyed Lloyd's, a revered British institution, the world's largest insurance market. Ten thousand people faced big personal bills they thought profoundly unfair. They challenged a complacent institution, forcing it to confront its biggest ever crisis. This book tells what really happened, from the inside.

• Language: English
• Publisher: Palgrave Macmillan
• Release date: Aug 7, 2014
• ISBN: 9781137299307

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ON THE BRINK

HOW A CRISIS TRANSFORMED

LLOYD’S OF LONDON

ANDREW DUGUID

Text © Andrew Duguid 2014

Archive Material © The Society of Lloyd’s 2014

All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission.

No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6-10 Kirby Street, LondonEC1N 8TS.

Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages.

The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988.

First published 2014 by

PALGRAVE MACMILLAN

Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS.

Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY10010.

Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world.

Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries

ISBN: 978–1–137–29929–1

This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin.

A catalogue record for this book is available from the British Library.

A catalog record for this book is available from the Library of Congress.

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

List of Pictures

Preface

List of Abbreviations

1 Inside Out

2 Hidden Trains

3 Alarm Bells

4 Fresh Start

5 The Chasm

6 Last Chance

7 Struggling

8 Tightrope

9 Aftermath

10 Reflections

Appendix 1: Businesses at Lloyd’s

Appendix 2: Names’ Minimum Wealth and Deposit Requirements 1969–2002

Appendix 3: The Evolution of Lloyd’s Governance

Appendix 4: Lloyd’s Global Results for the 1980–97 Years of Account

Appendix 5: Alternative Analyses

Appendix 6: The Changing Capital Structure at Lloyd’s 1994–2013

Key Characters, Firms and Institutions

Chronology of Key Events

Glossary of Terms

Notes

Bibliography

Index

LIST OF FIGURES

1.1 Structure of the Lloyd’s market in 1986

1.2 Number of Names, 1953–95

2.1 Overall capacity and premiums at Lloyd’s, 1980–97

5.1 Overall results at Lloyd’s after personal expenses, 1980–96

6.1 Propensity to litigate

7.1 The NC’s final proposals for the allocation of debt credits

8.1 ‘Members likely to support the plan’

9.1 Individual and corporate market capacity

9.2 Overall results after personal expenses, 1997–2013

9.3 The Equitas solvency ratio, 1996–2006

LIST OF PICTURES

1 The trading floor at Lloyd’s, known as the Room

2 Intended to impress: the Adam Room at Lloyd’s

3 The all-male 1985 Council of Lloyd’s in confident mood

4 Cartoon by Dave Gaskill

5 The 1988 Piper Alpha disaster

6 The 1991 Lloyd’s Task Force

7 Names’ Leaders

8 The Rt Hon Michael Heseltine PC MP and the Houses of Parliament

9 The Law Courts, London and Sir Thomas Bingham, Master of the Rolls

10 David Rowland introducing the reconstruction plan to the Lloyd’s market

11 David Rowland explaining the reconstruction plan to Lloyd’s members

12 Cartoon by Richard Cole

13 The 1995 Lloyd’s Council that adopted the reconstruction plan

14 Three phases of leadership

15 David Rowland and his seven Deputy Chairmen

16 Equitas: key people

17 Recognition

18 The Queen’s visit to mark the 325th anniversary of Lloyd’s

19 Reflections of the Lloyd’s building

20 Women who helped change Lloyd’s

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, overturning centuries of tradition and self-serving conventional wisdom. We see a cultural transformation and discover new ways of running a market and overcoming 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.

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: levels of professional competence, negligence, greed, perverse incentives and responsibilities 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 government. 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 national catharsis as opposed to nationalist pride, deliberate collective self-examination, 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 fortunes, leaving a permanent scar on their lives; for others, it opened up new opportunities. 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 strengthened. 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 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.

AAD

London, 2014

LIST OF ABBREVIATIONS

1

INSIDE OUT

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

At an Extraordinary Meeting of Lloyd’s members held in London’s Royal Albert Hall in May 1993, a retired Englishman moved towards the microphone. 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 gleaming 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 membership was still underway. A new Council was busy making new rules, empowered by its own Act of Parliament. The Chairman, Peter Miller, was articulate, energetic and very bullish.

Coping with disasters is what an insurance marketplace is for: fires, earthquakes, 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 originally listed at the bottom of the insurance policies they supported – ‘under-written’. 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, conformists, 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 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 introduced. 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 TRADERS

Trust – confident belief in or reliance on the character of somebody

Honour – 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 associates 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, especially 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.

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

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 carried 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 client; the underwriter tries to strike a deal that will make a profit for his syndicate. 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 shopping. 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 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.

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 participants and myriad contracts among them. Each of the main types of participant⁴ is described briefly below.

SYNDICATES

In 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 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 driving 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 underwriter 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 trading in the Room.

Brokers and underwriters were often introduced through a family connection, 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 comprehensive, 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 matter.’ 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 formal 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 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 university 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 setting 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 accumulated 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, cultures 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 technology 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 character, 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 underwriter 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 AGENTS

Underwriters are employed by firms called managing agents. Like lawyers, underwriters are notoriously hard to manage; those who have tried it often liken it to herding cats. The job requires an independence of mind that resists interference. Some were dominant personalities within their own firm. Robert Kiln was chairman 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 priority 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 founding 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 dominance 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 controlled 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 BROKERS

Only accredited Lloyd’s brokers can enter the Room. Most did not trade exclusively 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 broking 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 originated 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 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 acquisition 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 colourful; 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 negotiated. 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’.

***

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 underwriters 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 knowledge 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 contest 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 NAMES

Who 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 members in 1986. Generalisations about Names are dangerous: no two person’s 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 supplement 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 useful 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 resignations greatly exceeded the trickle of new entrants.

Figure 1.2   Number of Names, 1953–95¹⁵

MEMBERS’ AGENTS

Each member was looked after by his members’ agent, a little like having a personal 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 stockbroker, 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 tennis, 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 better become a broker myself.’¹⁶ A few years later, after working for two large brokers, 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 membership of Lloyd’s amounted to. This was highly unusual.

JOINING UP

Outside 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 combination 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 connection 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 permission of Lloyd’s

The admission process led to a ‘Rota’ interview with a Lloyd’s elder statesman. 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 differently, 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 seriously 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 – pictures, 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 statesman 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 conveying 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.’

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 placing 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 liabilities 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 drivers 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 SELECTION

It was often said that a Name’s most important decision was his²³ choice of members’ agent. A few Names met several and chose carefully, but many met only one, often through a relative or a personal adviser. They did not realise that commission 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