Chapter 7 – webnotes


Webnote 36: National Commission on Superfund: Composition and Influence *

The National Commission on Superfund had a broad set of American stakeholder representation at the highest level. It included the CEOs of the two largest toxic waste handling companies in America, including Bill Ruckelshaus, the former administrator of the US Environmental Protection Agency (EPA). The Commission also included two of the largest domestic insurers, two of the largest chemical companies’ CEOs and the Presidents of two of the largest environmental organisations: the Environmental Defence Fund and the National Wildlife Federation. It also included representatives of groups dealing with specific pollution sites and from areas with a high proportion of sites and poor public facilities.

Don Greene at Le Boeuf’s first proposed that Lloyd’s should seek to become involved in this and made some of the introductions. David Coleridge as Lloyd’s Chairman asked Stephen Merrett to represent Lloyd’s. Charles Landgraf of LeBoeuf’s gave Merrett much valuable support, including the idea of a seminar attended by many of the key players in the political process. Le Boeuf’s also helped secure Merrett a place on the Commission, unofficial at first. Although Lloyd’s, as a foreign insurer, could not lead the charge, Landgraf says Lloyd’s and the Commission managed to exert plenty of influence. A willingness to be very open about the catastrophic costs of the Superfund programme, which would have bankrupted insurers long before a clean-up was achieved, led to a much better understanding of the need for change.

In 1994, there were high hopes of major reform to the Superfund legislation. The Clinton administration proposed reform along the lines of that suggested by this National Commission. Ultimately, there was no major rewrite of the Superfund law because control of the house flipped from the Democrats to the Republicans, with Newt Gingrich’s radical Republicans to the fore. A period of confrontation and dysfunction followed, not unlike the last two years of Obama’s first administration. However, Landgraf thinks the Commission had some impact. As part of the broad strategy, several measures were identified besides just rewriting the law. For example estimates of the ultimate cost of cleaning up the US Superfund sites were being driven by several academic studies that showed geometrically increasing costs. One in particular by the University of Tennessee was very influential.

This study was regarded by leading firms of actuaries as the most credible. The original author, who was running an environmental institute in Knoxville, Tennessee, agreed to update his study to take account of how different methodologies of cleaning up sites had evolved. Lloyd’s and others contributed to the cost of this; so did Tillinghast, a leading actuarial firm. In the light of recent developments the study amended cost curves substantially downward. As a result, a full page entered the President’s economic budget report on how Superfund sites could be cleaned up much more cheaply, but still consistent with the aim of the legislation: “protecting human health in the environment.”

The new awareness of cheaper methods of cleaning up America had a direct effect on the reserves needed by Lloyd’s syndicates to meet pollution liabilities. It also influenced the all-important opinion of leading actuarial firms, who were required to sign off the reserves. The result in London was a significantly reduced bill for Equitas, reflected in the amounts payable by Lloyd’s Names.

Sir Peter Miller, a former Lloyd’s Chairman, succeeded Merrett in 1996.

Webnote 37: DTI’s response to Treasury and Civil Service Committee Report *

In summer 1995, the DTI rejected the Treasury and Civil Service Committee’s recommendation that Lloyd’s should be externally regulated forthwith, saying that it was “aware of the extensive work currently being undertaken by Lloyd’s to tackle the problems that have arisen and to enable Names to cope with the losses that have been sustained.”  It pledged, however, to undertake a longer term review of the statutory framework of Lloyd’s regulation, taking account of the changing nature of capital provision as well as the various concerns identified by the Committee.  “This points to delaying the start of the review for at least two years” it said.  The DTI also welcomed steps being taken by Lloyd’s in connection with disciplinary procedures, errors and omissions insurance cover for members and managing agents and agency management.

In May 1997 the Council of Lloyd’s endorsed and published the report of the Regulatory Review Group.  This report noted that a line of accountability to the DTI was already in place in respect of solvency.  It recommended additional accountability to the Securities and Investments Board (SIB) in respect of the safeguarding of members’ interests and market conduct.  Within days of the release of the Lloyd’s report, the new Labour Government declared its plans for the wide-reaching reform of Financial Services Regulation and further announcements followed over the summer.

By November 1997 the new government had set out its plans for the establishment of a new statutory regulator for the UK’s financial services sector, bringing the supervision of banks, insurers, building societies, unit trust companies and investment advisors under one roof.  This new body was to be known as the Financial Services Authority (FSA), to be chaired by Howard Davies.  The FSA would replace nine individual regulatory bodies and was set to acquire its full range of powers in stages over the next few years.  Lloyd’s welcomed these developments.

David Gittings, Lloyd’s Director of Regulation, said that this provided an opportunity for adopting the recommendation of Lloyd’s Regulatory Review Group, that Lloyd’s should be subject to formal, statutory external oversight on the model of other financial services markets in the City.

Lloyd’s own regulatory review also strongly recommended that Lloyd’s should concern itself in future with the potential threat to security from aggregation of risk.  Experience of spirals suggested that the Lloyd’s system of subscription, re-insurance and retrocession, if not strictly monitored and controlled, could expose the market as a whole, through the Central Fund, to unacceptable systemic risks.  A market risk unit (MRU) was established to address these problems.  Led by Dr Roger Sellek, the unit would:

* Assess the market’s aggregate exposure to different aspects of risk;

* Develop approaches to evaluating the market’s ability to withstand these exposures;

* Model the resultant potential exposures in relation to members’ capital and, ultimately, the Central Fund; and

* Assist in the development of methods of ensuring the Society’s ability to limit systemic risk and manage aggregate exposures.

The MRU would also develop further Lloyd’s risk-based capital system and examine ways of mitigating market level risk through traditional and alternative risk-transfer mechanisms.  Reflecting its central importance to Lloyd’s, the MRU was to be overseen by a six member panel drawn from the Corporation and the Lloyd’s market.

Webnote 38: Rationale for four tranches of debt credits *

Council Proposals for Allocating Debt Credits (February 1996)
SyndicateYear of AccountManaging AgentDate of PublicationLoss Review Chairman
5401987Feltrim Underwriting Agencies LtdSep-92Sir Patrick Neill
2551988Rose Thomson Young (Underwriting) LtdAug-92Timothy Geoffrey Boatman
3451982Rose Thomson Young (Underwriting) LtdJan-93Timothy Geoffrey Boatman
10111988Rose Thomson Young (Underwriting) LtdJan-93Timothy Geoffrey Boatman
1641989Gooda Walker GroupSep-92Kieran Charles Poynter
10841988Cuthbert Heath Underwriting LtdOct-92Peter DuBuisson
134/1841983Mackinnon Hayter & Co LtdMay-92Michael Lickiss
2161989Devonshire Underwriting Agencies LtdJul-93Anthony Martin Blake
2551989Rose Thomson Young (Underwriting) LtdAug-92Timothy Geoffrey Boatman
299/2971989Gooda Walker GroupApr-93Kieran Charles Poynter
3871983Gooda Walker GroupSep-93Kieran Charles Poynter
11371989Devonshire Underwriting Agencies LtdJul-93Edward L.S. Weiss
6661989Brockbank Non-Marine LtdDec-93Jeremy Casson
4211983Merrett Syndicates LtdJul-93Roger Whewell
3191982Hardcastle Underwriting Agencies LtdApr-94Edward L.S. Weiss
6041984Cuthbert Heath Underwriting LtdMar-95James A. Smart
80/5681988RAF Macmillan & Co LtdApr-95Sir Michael Lickiss
4751989RJ Bromley (Underwriting Agencies) PlcFeb-95Jeremy Casson
745/7481990KPH Underwriting Agencies LtdNov-94Roger Whewell
527/3791989Devonshire Underwriting Agencies LtdDec-94Edward L.S. Weiss
10351989NT Evennett & Partners LtdSep-95Sir Michael Lickiss
309/4611989Christopherson Heath Underwriting Agencies LtdSep-95Frank E. Guaschi
321/3561989Gresham Underwriting Agencies LtdAug-95Edward L.S. Weiss
740/7741990Eversure Underwriting Agency LtdNov-96Ian Clark
3841989Aragon Agencies LtdAug-96Ian Clark
4281990Sturge Marine Syndicate Management LtdJun-96Jeremy Casson
2101990Sturge Non-Marine Syndicate Management LtdDec-96Jeremy Casson


Names should refer to Appendix 2 for a fuller explanation of the allocation principles

Source: Table 6, Allocating the Settlement

Webnote 39 – Parliamentary statement (written answer) by Anthony Nelson MP *

I have considered carefully the proposals made by Lloyd’s for the authorisation of Equitas Reinsurance Ltd. and Equitas Ltd. (“Equitas”). Lloyd’s proposes to reinsure the market’s 1992 and prior non-life liabilities into Equitas, and to provide matching assets together with an additional solvency margin of free assets. Equitas would be a pure reinsurer, and Lloyd’s application does not seek authorisation for it to undertake any subsequent business.

Lloyd’s proposals are based on a thorough review of the 1992 and prior liabilities and in particular of exposure to US asbestos and pollution claims. This review has been assisted by work undertaken by a number of leading firms of consulting actuaries and chartered accountants.

I have decided to authorise Equitas on the basis of Lloyd’s proposals, subject to certain conditions which Lloyd’s does not expect to fulfil before August this year. Of these, the most important are, first, that the contracts reinsuring names’ liabilities into Equitas cannot be completed until Lloyd’s can demonstrate that the assets available to Equitas are such as to ensure it has the minimum solvency margin I have required. Lloyd’s statement of assets available to Equitas will be subject to independent review by Coopers and Lybrand, which is to be appointed as Equitas’ auditors once the contracts are completed. Secondly, there are conditions to ensure that if developments between now and August should lead to an increase in the estimate of the overall level of liabilities, then a matching increase in the assets would have to be provided. In addition, there is a condition making any dividend to any shareholders or return premium to reinsured names subject to DTI consent. Any future proposal that Equitas should undertake further business would require DTI consent.

Under section 32 of the Insurance Companies Act 1982, UK insurance companies are required to maintain a minimum margin of free assets, calculated according to a formula. The formula was not devised with circumstances such as the Equitas proposal in mind, and is likely to produce widely fluctuating requirements over the first four years of Equitas’ life. I have therefore decided to exercise the discretion to which I am entitled under the Act to make a direction under section 68 to modify the normal requirements in 1996 and 1998.

In reaching this decision, I have been mindful of my responsibilities under the Insurance Companies Act 1982 in relation to the authorisation of new insurance companies and the protection of policyholders in general. In this case, I have to consider whether policyholders would be better protected if Equitas is authorised than if it is not. I must also be satisfied that all the statutory requirements for authorisation under the Act have been met.

The main reasons for my decision are as follows.

First, policyholders will benefit from substantial additional funds which would not otherwise be likely to be forthcoming. The provisions made for 1992 and prior liabilities have been increased by more than £1.5 billion. Equitas will be funded to meet its estimated liabilities and to provide the additional margin of free assets. Some £1 billion plus of the funding is to be provided from sources which have no obligation to support 1992 and prior losses, together with approaching a further £2.5 billion deriving from new money from Names, the settlement of the current litigation and from 1993–94–95 profits which would not otherwise be necessarily or immediately available to support these losses. The Equitas proposals will also ensure that the assets to cover these provisions will be fully paid, in contrast to the present position in which some £4 billion of Lloyd’s assets is represented by uncalled losses or unpaid cash calls. Furthermore, subject to the division of Equitas’ assets between US, Canadian and UK trust funds, the assets of Equitas will be fully mutualised and all available to support all of Equitas’ liabilities to policyholders.

Secondly, the creation of Equitas offers a strong prospect of lower claims handling costs and higher investment yields than would otherwise be the case, the benefits of which will accrue to policyholders in the first instance.

Overall, I am satisfied that the resources available to support 1992 and prior policyholders through Equitas will be greater and more certain than without its authorisation. The Government Actuary takes the view that there is a reasonable prospect that Equitas will be able to pay off its liabilities in full as they fall due.

Thirdly, if, against expectation, the liabilities of Equitas at some future point should appear to be on the point of exceeding the assets available, arrangements will have been built into the reinsurance contract with names designed to ensure that policyholders would continue to receive an uninterrupted flow of claims payments, albeit at less than 100 per cent., with the residual balance of claims falling back on to the reinsured names. These arrangements would provide a much superior outcome for all policyholders, including reinsured names, than conventional insolvency proceedings for Equitas.

Fourthly, the creation of Equitas as proposed will very significantly improve the security of 1993 and subsequent policyholders at Lloyd’s, by substantially removing the risk that further deterioration in the 1992 and prior liabilities would affect them.

Last, if Equitas does not proceed, Lloyd’s has acknowledged that there is a significant risk that Lloyd’s as a whole would have to cease underwriting. In that event, the subsequent run-off would face an uncertain future. I therefore consider Lloyd’s proposals are a well-judged response to this situation in the interests of existing Lloyd’s policyholders, and of reinsuring names as policyholders.

It is now for the members of Lloyd’s to decide whether to support Lloyd’s proposals as the next step before Equitas can go live later this year.