1996
Folio No. 2032
IN
THE HIGH COURT OF JUSTICE
QUEEN'S
BENCH DIVISION COMMERCIAL COURT
BETWEEN
THE
SOCIETY OF LLOYD'S
Claimant
and Defendant to Counterclaim
-and-
JOHN
TREVOR HOWARD HENDERSON
Defendant
and Counterclaimant
WITNESS STATEMENT OF IAN HAY DAVISON
I,
lan Hay Davison of ____________________, will say as follows:
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CONTENTS |
Page No. |
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Introduction and
Previous Personal History |
2 |
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Reasons for not giving evidence previously |
5 |
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Asbestos |
6 |
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Neville Russell and Murray Lawrence Letters |
6 |
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Quality of Lloyd's Auditors and Lloyd's Accounting Systems People |
9 |
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Committee - General |
11 |
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Peter Green |
14 |
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Murray Lawrence |
15 |
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Stephen Merrett |
16 |
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Peter Miller |
16 |
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Ted Nelson |
16 |
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Passage of Lloyd's Act 1982 |
16 |
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The Brochure |
19 |
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Reserving at Lloyd's |
20 |
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Accounting Changes |
26 |
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Lloyd's Audit Panel |
29 |
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Lloyd's as a Public Regulatory Authority |
33 |
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European Directives |
36 |
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PCW and the New General Undertaking |
43 |
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Rollers and the Revenue Settlement of 1985 |
45 |
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The Rota Process |
47 |
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Duty and Obligations |
48 |
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My Book |
51 |
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Conclusion |
51 |
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I trained as a Chartered Accountant in the 1950s and by 1966 had become
Managing Partner of Arthur Andersen & Co's London Office and from 1973-82 I
was Managing Partner of the UK practice. During the period we expanded Arthur
Andersen from 180 employees in 1966 to about 2000 by 1982.
I was appointed a DTI Inspector, with Michael Sherrard QC, in 1974, to
investigate the ramifications of the disappearance of John Stonehouse MP and
the complex web of fraudulent arrangements surrounding the British Bangladesh
Trust, a secondary bank later to [*3] be called London Capital Group. In March 1978,1 was asked by the
Treasury to investigate a fraud at Grays Building society in which £8m, half
the balance sheet, had been extracted by the secretary over a period of forty
years and spent on women and racing. As a member of the Price Commission from
1977 to 1979. I was involved in reviews of the banking, unit trust and estate
agency businesses.
I was a long-standing member of the Council of the Institute of
Chartered Accountants in England and Wales and from 19811 was Chairman of the
Accounting Standards Committee, a body sponsored by the six accounting
institutes and charged with the task of developing accounting standards for the
UK.
On the 22 December 1982,1 was asked to call on the Governor of the Bank
of England, who asked if I would consider taking on the job of Chief Executive
of Lloyd's. He made it very clear he wanted me to go to Lloyd's for three to
five years. I undertook to do the job for a limited period in order to clean up
the market and to alter the structure of power to prevent a recurrence of the
iniquities of the late 1970s.
I have, since leaving Lloyd's, reformed the Hong Kong Stock Market
(1987-88), done work for the Bank of England (1992-2000), and helped to set up
the Dubai Financial Services Authority. I was Chairman of the Independent
Newspaper until (1993-94), and served on several other Commercial Boards
(Midland Bank, Morgan Grenfell Asset Management, Storehouse, Credit Lyonnais
Capital Markets, Cadbury Schweppes and Chloride) and Voluntary Organisations
(eg Royal Opera House, Victoria and Albert Museum and Sadler's Wells). My most
important contribution at Lloyd's was to establish better disclosure of
financial information. As I said at the time "Sunshine drives away the
mists". [*4]
When I first came to Lloyd's it was an amazingly secret place. Despite
the recommendations of Cromer there was still no regulatory requirement that
agents should send syndicate accounts to their Names. Many did so, but an
important minority did not, and in the overwhelming majority of cases the
figures were not audited. Despite bearing unlimited liability Names were far
less well served in the matter of information than shareholders in limited
liability companies incorporated under the Companies Act. My belief in the
disinfectant value of disclosure has been vindicated by the disappearance of
market practices that would have taken years to eradicate if the problem had
been tackled solely by charging the individuals concerned one by one before the
Disciplinary Committee. Soon after I came to Lloyd's I observed that the Room
was loud with the susurration of collapsing arrangements ' collapsing because
their perpetrators were ashamed to expose them to the gaze of their principals.
It is now clear that the measures introduced failed to force the full
disclosure of all liabilities until several years after they were introduced in
1986, although they had some immediate effect as was seen in the tussle between
the auditors and Outhwaite over the closing of syndicate 317's 1982 year at the
end of 1984. As I deal with in more detail below, we did not tighten up the
rules on reserving in the RITC in the first wave of reform. I must emphasise
the distinction, not understood by Names, between the solvency test,
erroneously described as an audit aimed at protecting policyholders, and the
accounts to Names. I believe that we did ask searching questions to ensure
solvency was adequate to ensure all policyholders were paid. Accounting to
Names was a different story.
I formally took office on Feb 15 1983 as Chief Executive and Deputy
Chairman of Lloyd's. I remained in office until February 1986. [*5]
I have been approached to give evidence by Names at various times since
1987. I felt I had nothing to add to what I had written in my book and said I
stood by it. I did not appreciate that nothing I had written would be taken
account by the Court without a witness statement from me or that accounting
would be a key issue about which I was knowledgeable. I had understood that the
key issues would be asbestos about which I knew nothing. Now largely retired, I
have been asked to comment on matters I know a bit about.
For the purposes of this statement I have been shown a number of
attorney reports and other documents. I have not seen these before.
My memory is that asbestos was not discussed in Council and rarely in
Committee (even more rarely was any discussion minuted). We were told in
Committee that it could not be discussed/minuted for fear of US attorneys'
subpoenas to obtain the minutes for the complex litigation underway in the USA.
I had no idea that asbestos was as serious a problem as computer leasing in my
time at Lloyd's. I never saw the attorney reports giving figures for the number
of claims made or expected or the current value of claims. I have no memory of
having "triple trigger" explained to us. I was unaware that
syndicates would have been unable to tell where the liability for claims would
fall or how much they might be as well as how many there might be. It is quite
clear that there was a huge and unquantifiable liability for asbestos and that
Lloyd's underwriters were being told that they had a major exposure to it.
Underwriters, and members of the Committee and Council who received the reports
must have understood that. Rokeby-Johnson, Nelson, Lawrence, Green, Merrett,
Skey, Barber, amongst others, must have known that the problem was a major one
for Lloyd's. When [*6]
writing my book I was unaware of the extent of the asbestos losses that were
hitting Lloyd's at the time and of the warnings that Lloyd's had been receiving
since the seventies about the scale of future losses. Subsequently I have seen
attorney reports and information that was being received by Sir Peter Green,
Murray Lawrence and others, that was not disclosed to me at the Lloyd's
Committee or to any of the Members of the Lloyd's Council in their capacity as
Council Members. I do not know how many others of the Lloyd's Committee were
privy to the detail of the attorneys' reports but it is clear that a number of
them were leading underwriters (I believe thirteen out of sixteen members of
the Committee were underwriters) and that many of them would have been seeing
the attorney reports, or could have seen them, on a regular basis.
With hindsight it is clear that asbestos was a problem that was serious
enough to merit a great deal of attention from the Council and Committee. I
recall no discussion about the need to collect information, to analyse it and
to publish the information and intelligence thereby gained for the benefit of
Names. The result of the information being concealed from external and
nominated members of Council, is clear in the Appeal Court finding that the
liability was not properly reserved for. Those who knew about the problem were
clearly choosing not to share that knowledge with me and others.
These two letters were written before I joined Lloyd's. I did not see
these letters at the time of joining or subsequently. I believe the first time
they were brought to my attention was in the late 1990s. I am unaware of them
ever having been mentioned in Committee or Council meetings during my time in
office. [*7]
I have looked at the Neville Russell letter and am quite clear, as an
accountant and former auditor, that when such a letter is written by panel
auditors it should have been take extremely seriously. It was not unusual for
the Solvency Committee to receive such requests for guidance on how to deal
with a particularly difficult piece of business, though the serious warning
about the impossibility of quantification is unusual. In my opinion when the
auditors say it is impossible to quantify the liability, they must mean what
they say and from an audit perspective it would be inappropriate to close the
years of account involved. The ramifications for Lloyd's as a whole would have
been extremely serious. However, I think this letter was not about the audit of
the syndicate accounts or the re-insurance to close, it was about the solvency
test. & #151; what were the liabilities of Lloyd's on a calendar date, what
were the assets of Lloyd's on a calendar date, were the assets of Lloyd's in
excess of liabilities? I did not understand the ramifications for Lloyd's at
the time since I had no idea of the scale of the problem. Given the level of
asbestosis claims known about at the time, it would clearly not have been
possible to meet the requirements of the solvency test as set out in the
Insurance Company's Act 1974 (amended in 1982).
I have looked at the suggestions in the Murray Lawrence letter as to the
way in which information should be collected and analysed by syndicates. These
are detailed and care was obviously given to the compilation of the letter. We
received no reports that the Lloyd's Committee could have seen as a
consolidation of syndicate information such as was requested to be maintained
in that letter. However, my assumption was that the Solvency department was
collecting comprehensive returns and was better at calculating or forming a
view as to the adequacy of reserves than the individual underwriters were.
The Insurance Company's Act laid the responsibility for calculating the
adequacy of the [*8] assets to meet the liabilities on the auditors, in
accordance with guidance laid down by the Secretary of State, a task which was
delegated to Lloyd's and the underwriters who formed the Audit Committee. The
Murray Lawrence and Randall letters taken together were clearly interpreted by
the auditors as giving them sufficient instruction to allow them to do what was
suggested, namely to rely on reserves calculated by the underwriters. It was
the practice at Lloyd's to give guidance to the auditors each year as to how to
handle the Solvency Test and in particular how to address difficult classes of
business. Given the warnings contained in the Neville Russell letter and the
fact that the information mentioned in the letter derived from Lloyd's, it must
have been clear to those who received and considered the letter that whatever
the ability of individual underwriters to estimate a particular liability for
reserving purposes, it was incumbent on Lloyd's to ensure that the assumptions
being made by underwriters were consistent as between syndicates and that the
overall picture represented the total exposure of the market. The role of the
independent auditor was to check the calculations and ensure that the necessary
reserving to ultimate required for solvency purposes, has taken place. He was
not concerned with equity between Names because he did not audit the
Reinsurance to close or the syndicate accounts.
To allow the finalisation of Global Accounts for Lloyd's, therefore, the
Committee should have required a detailed compilation of all policies whereby
Lloyd's might acquire an exposure to asbestosis problems, an analysis of which
syndicates had liabilities in which years of account under exposure,
manifestation, or triple trigger assumptions, an analysis of which syndicates
were reinsuring other syndicates, which syndicates had reinsurance exposures
not yet notified at all, and what reserving assumptions had been made by all
syndicates that had already set up asbestos reserves. These needed to be
examined to ensure that they were consistent in relation to claims where all
syndicates, or a selection of them, [*9] were on a slip facing the same problem, and consistent in their
assumptions about future liabilities.
It seems to me that all those who were on the Committee that received
and saw the Neville Russell letter and were aware of the asbestosis exposure
must have been put on notice that the global accounts could not be compiled on
an accurate basis. They must have known that making an accurate estimate of
future liabilities was impossible, particularly in relation to unknown and
unnoted claims. It must follow that they knew that the accounts being shown to
DTI for the market as a whole were inaccurate whether or not any particular
syndicate accounts were inaccurate. They ought to have realised that a great
many syndicate accounts would inevitably be very inaccurate.
The Neville Russell letter was primarily addressed to the solvency test
rather than to accounts for Names. Although I attended some meetings setting
Minimum Reserving Percentages, I did not have the information about asbestos to
understand how inadequate they were. So far as I know the DTI never checked.
In sum, my recollection is that although I knew asbestos was a problem,
I did not think it was as big a problem as computer leasing, or the rollers, or
the problems with the Revenue — all of which were in a pretty strong position
to damage Lloyd's. Now with hindsight I was clearly wrong and it is clearly the
case that I was not being shown all the relevant papers on which to form my
impression.
Serious reservations have been expressed about the quality of Lloyd's
accounting in the late [*10] 70's. Both Cromer and Fisher had had some
reservations about the audit. However, they probably were totally unaware of
some of the abuses that were going on within the Lloyd's accounting systems.
The use of rollers by certain agents and the way in which panel auditors attempted
to get round the prohibition of the Institute of Chartered Accountants on
keeping the books of clients they audited, are both examples of the failures of
the accounting and auditing systems at Lloyd's. When I started to get involved,
the number of firms on the Lloyd's audit panel was very small. None of the
leading members of the accountants' panel were household Names in accounting
terms. Until 1985, any newcomer to the panel was required to serve a period of
probation as a joint auditor with an existing panel member. The result of this
situation was that the small panel firms became increasingly bound up with
Lloyd's and in isolated cases had partners who were not only members of Lloyd's
but members of the syndicates they audited. Because of their significant
involvement in Lloyd's work some of the panel firms drew a substantial
proportion, and in a few cases the majority, of their total fee income from
such work. Many firms also acted as auditor to the agent and auditor to the
syndicate for whom the agent acted. It was a clear conflict of interest.
The fundamental problem was that the Lloyd's audit was not an audit at
all. Lord Cromer described the duty of the "panel auditors":
"the main function of the auditor is to provide a certificate to the Committee
of Lloyd's that the Name has sufficient funds at Lloyd's to meet his
obligations". Agents, Underwriters, Names and the Committee were all under
the misapprehension that the work done by the panel auditors was an audit in
the commonly accepted sense of that word: an independent opinion on the
veracity of a set of accounts. It was not a point which the panel auditors
had occasionally drawn attention to. The accounts of an underwriting syndicate,
and the determination of its profits, depend on how much reserve is necessary
to close the accounts. The minimum such reserve required by the [*11] solvency
test was supposed to be calculated by the auditors on a basis approved by the
Secretary of State, who in practice delegated this role to Lloyd's, who, in
turn, delegated it to the Member's Solvency Committee which used to be called
the Audit Committee. (ICA 1982 Section 83 (5)). The figure was in fact provided
by the underwriter in the form of the reinsurance to close. Panel auditors of
the day were still living in the days which I recall from my apprenticeship as
an accountant thirty years previously when auditors accepted a certificate of
stock "a director's valuation". The Lloyd's panel auditors did not
consider it part of their duty to audit the reinsurance to close, yet the
result of the syndicate for the year of account was wholly dependant on this
one figure.
Names can be forgiven for not knowing that the Lloyd's "audit"
was not in fact an audit because they were never told.
PEOPLE
Committee
& #151; General
I
have been asked to comment on the individuals on the Committee in my time. When
I went to Lloyd's I commented that it was not just a matter of a few rotten
apples but that the whole barrel was tainted. This included members of the
Committee many of whom were involved in rollers which involved questionable tax
practices, and many were members of baby syndicates. My main focus was on the
frauds on the Names — PCW, Brooks & Dooley, Minets, Posgate & Denby et
al.. In all these scandals a common thread emerged. Lloyd's agents had breached
the duty of trust that every agent owes to his Names under the law of agency.
Any agent faced with a conflict between his own interests and those of his
principals, the Names, has a clear legal duty to avoid that conflict if he
possibly can. If he cannot avoid it, he must declare to his principal that
there is a conflict, seek his principal's [*12] express informed permission to
continue to act, and if this is granted he must then, at all times, put the
interests of his principal before his own interests. In each of the scandal
cases, agents had breached the rules of the law of agency: principally
concerning conflicts of interest, the rule against secret profits, and the duty
to account. In each case the arrangements had also secured dubious tax
advantages. When serving as regulators it is necessary for working Names,
already facing conflicts of interest, to take special care not to create
further conflicts of interest and to act in accordance with their duties to all
the Names in the market not just their own Names, or own interests. This was a
novel concept. I was asked where the laws of agency could be found, was it in
the Companies Act? There was negligible understanding of how deeply compromised
most were. We made it our practice to publish the reports of Disciplinary cases
so that the market — and the Committee — would know what was and what was not
allowed.
Members of the Committee of Lloyd's should all have been well aware of
how deeply unsatisfactory the accounting systems at Lloyd's were. The defective
systems were still in place in 1982, and criticised by Fisher who suggested
that syndicate accounts should be produced and audited (para 23,22). Despite
their title, the panel auditors were not in fact charged with carrying out an
audit at all. As I have said their duty was described by Lord Cromer: "the
main functions of the auditor is to provide a certificate to the Committee of
Lloyd's that the Name has sufficient funds to meet his obligations ". It was
not an audit, in the commonly accepted sense of that word: an independent
opinion on the veracity of a set of accounts. All of the Committee would have
known that the accounting system and auditing system would have to change and
they all accepted it. Fisher had highlighted the fact in his report (pages
136-140) and the Committee had given a Parliamentary undertaking to lay down
rules as to the minimum information to be disclosed in syndicate accounts, and
the accounting standards and principles which shall apply. The first draft of
an accounting [*13] manual for the guidance of syndicate agents and auditors
was ready in December 1982. In November 1982 I was appointed to chair a working
party to consider amongst other things, disclosure of interests by underwriting
agents. After I became Deputy Chairman and Chief Executive, lan Plaistowe
became Chairman of the group which released a consultative report in August
1983.1 deal with this in more detail below.
The solvency test may have been conducted rigorously but Committee
members knew there was no system of producing audited accounts for Names that
showed how reserves were being created for outstanding liabilities.
Professor MacVe analysed the Lloyd's syndicate accounts in detail in his
book and all Members of the Committee should have seen his report in 1985.
Despite the introduction of the true and fair requirement, there were still
valuation questions for discussion in connection with the reinsurance to close.
A set of explanatory notes was issued in December 1985 to provide further
guidance on the application of the syndicate accounting byelaw. These notes
considered whether the reinsurance to close should take account of the future
costs of claims settlement, of future inflation in the size of claims, and of
the effect of discounting claims by the time value of money when they are
unlikely to be settled for many years ahead. This was not allowed other than by
Time and Distance insurance. On pages 106 - 108 of my book I reviewed the
progress made in improving accounts and the areas I knew were still requiring
attention. All my comments were made in ignorance at the scale of the asbestos
problem. Committee Members who knew the criticisms being made of the accounting
system and who knew that the asbestos liabilities were unquantifiable and
enormous and not reserved to ultimate in their own accounts and therefore
probably in others, can have had no honest belief in the rigour of the
accounting system and its ability to make reasonable estimates of [*14]
outstanding liabilities. My view is that there was no rigorous syndicate audit.
I think that the brochure representation is probably referring to the solvency
test. The solvency test was in its way a rigorous test but it only went as far
as was necessary to ensure there were enough assets to meet Lloyd's liabilities
It did not concern itself with the truth and fairness of syndicate accounts or
equity between Names. There was no independent audit of the accounts for Names
and the underwriters on the Committee would have known that.
I knew Peter Green from 1982 and worked with him closely until he
retired as Chairman in 1983. I have no doubt that Peter Green knew Lloyd's
inside out. He had worked in it man and boy for a great many years and had a
deep affection for the place. He had been a leading underwriter of Syndicate
932 and shareholder and Chairman of the Janson Green Agency. He was a dominant,
controlling figure, who was widely respected in the market. There can be no
doubt that he dominated the Council in its early days. In the discussions in
the Lloyd's Committee that we both attended, when asbestos was mentioned, he
understood the implications and detail of what was being discussed. My
impression was that this was an area of business that he had not been involved
with professionally as a marine underwriter. I have already dealt with the
general impression that the Committee Members ought to have drawn from the
Neville Russell and Murray Lawrence letters. Peter Green was an agent and
therefore subject to all the conflicts of interest that any other agent
experienced. Peter Green also created conflicts of interest for himself. There
can be no doubt that he entered into arrangements with the Cayman Island
companies that he and his families owned and controlled (Imperial Insurance)
that were a total breach of agency law and of his fiduciary obligations to his
Names. For that he had to resign as Chairman. Later, after disciplinary
proceedings he was censured for behaving "discreditably". [*15]
I don't recall registering any surprise that Sir Peter did not mention
asbestos in the "Globals" AGMs or other public occasions. We were
always told that the matter had to be handled confidentially in order to
preserve privilege and avoid any escalation of claims from US attorneys.
Sir Peter Green recognised that Lloyd's had to change, whereas some
others were hoping that by removing me they could revert to their old ways. He
recognised the extent to which agency law was key and had been ignored. In his
speech at the AGM in 1983 he said: "Our real problems have been due to a
dichotomy. Whilst on the one hand the Society has scrupulously protected the
interests of Lloyd's policyholders, we have failed to ensure that all those who
make up the market fully comprehend the commercial and legal realities of the
1980s, especially in the area of accountability between agent and principal.
The issues are almost all internal in the sense that members of the public are
not involved. The main issues are conflicts of interest, to which Fisher drew
attention, secret profits and failure to disclose...The relationship between
Name and agent is founded on mutual trust and we must ensure that nothing is
done or not done which can undermine that trust. "
Murray Lawrence was the next candidate in line to become chairman when
Green resigned. He told me that he could not take the job because of the doubts
that were being expressed over the way he had purchased protection by way of
Time and Distance and Run-off insurance for his syndicate in the light of the
knowledge he had gained about asbestos while in the job of Deputy Chairman. He
had seen the way that Green had been forced out and felt that he would face
similar treatment if he became Chairman. [*16]
Stephen Merrett was a classic example of the attitudes of Agents serving
on the Committee. He made no secret of the fact that he was on the Committee in
order to get information of use to him in his business - "to find out what
was going on ".
Peter
Miller
Miller became Chairman because he was the only Committee candidate not
being charged with fraud by the Inland Revenue. The Inland Revenue were
accusing all the agents on the Committee of offences in connection with
roll-overs and tax evasion. As a broker and not an underwriter he had escaped
the charge. However, I had reservations about him in the light of the
developing PCW scandal. He had been a reinsurance broker and had been involved
in the placing of some of the reinsurances that had been used by Cameron-Webb and
Dixon to defraud their Names. Although Thomas Miller & Co were well known
for their involvement with PI Clubs, Miller himself was principally a
reinsurance broker. He did not carry the clout in the market that Green had
had. In a Panorama interview in 1985 he tried to suppress revelations about his
involvement with baby syndicates. Baby syndicates did not really get stopped
until Neill identified them as being totally unacceptable, after my
resignation.
Nelson was chairing the Membership Committee in 1983 and was a Committee
member. He was a former chairman of the asbestosis working party. He had to
resign following the Bellew, Parry and Raven enquiry.
The passing of the Lloyd's Act of 1982 was enormously important to
Lloyd's. I deal with it [*17] in my book (Pages 59 and 184-187). I was not at
Lloyd's at the relevant period and therefore have no intimate knowledge of the
discussions that went on and that prompted the undertakings given to Parliament
by Lloyd's QC, Peter Boydell, or the Council Member representing Lloyd's, Peter
Miller. As I state in my book, I have no doubt whatsoever that if Members of
Parliament had been made aware of all the information that was in the
possession of Lloyd's at the time, they would not have passed the Lloyd's Act.
At the time that I made my comments in the book I was referring to the
knowledge of the leaders of Lloyd's of the various scandals associated with
rollers, reinsurances with Imperial, Howdens and Minet scandals (PCW) and the
awareness that grew in 1982/3 that the real problem at Lloyd's had less to do
with divestment than "divorce". In pressing for divestment, in the
name of avoiding conflicts of interest among brokers between their duties to
their customers, the insureds, and the Names for whom they also acted as
underwriting agents. Sir Henry Fisher had overlooked the much more serious
abuses of conflicts of interest involved where agents put their own interests
improperly ahead of their duties to their Names. Those conflicts of interest
were clearly to be seen once Parliament had granted new powers to the Lloyd's
Council and some of the Members of it had been found to have cheated and even
plundered the members of Lloyd's for whom they acted. Green, Posgate, Grob and
Wallrock had been important witnesses before the Select Committee on the Bill.
If Parliament had known of the Howden, PCW and Brooks and Dooley affairs before
July 1982, the new Lloyd's Act would not have been passed and Lloyd's
self-regulatory status would have been in grave doubt.
The revelations of Autumn 1982 disclosed how dishonest agents had milked
their Names and that there were major conflicts of interest between Names and
their agents which were a much more serious problem than those between brokers
and broker-owned agents. As I have [*18] mentioned, some of the leading
witnesses before the Select Committee had themselves been involved in major
improprieties (eg Grob, Wallrock, Green, Posgate). Later there were further
revelations about the size of the PCW losses and the prevalence of baby
syndicates. There is no doubt that Parliament was misled. Had the matters that
became a matter of public knowledge in 1982 been known in 1980 and 1981,
Parliament would undoubtedly have taken a different view. My own appointment as
Chief Executive and Deputy Chairman was in part due to the fact that the
authorities recognised the need for an independent Chief Executive from outside
and that Lloyd's could not be counted on to implement the new Act fully and
fairly without outside intervention.
Since the Committee Members had knowledge of the Neville Russell and
Murray Lawrence letters, the attorney reports would have carried meaning for
them in a way that I or others who had not seen those letters would not have
appreciated. I have no doubt that the failure of Lloyd's to reveal the content
of the Neville Russell and Murray Lawrence letters to Parliament, or to mention
the subject of asbestos to Parliament (I am told there is no reference in
Hansard to asbestos problems in relation to the Lloyd's debate) is indicative
of the culture of secrecy that prevailed at Lloyd's at the time.
I was well aware of this culture of secrecy from the work I had done in
chairing a working party immediately prior to becoming Chief Executive. Its
report was finished under the Chairmanship of my former partner lan Plaistowe.
His report was released as a consultative document in August 1983. It proposed
that Lloyd's agents and those connected with them should disclose any interests
in insurance companies or in companies which provided services to their
syndicates. The need for the report arose directly out of the Imperial scandal
involving Sir Peter Green. The report proposed that Lloyd's Agents and those
connected [*19] with them should disclose any interests in insurance companies
when companies had provided services to syndicates. The disclosures should be
of ownership interests and of transactions. A two-part register was proposed.
It was a complicated document covering eighty pages and was not well received.
However, it led directly to proposals to make Lloyd's syndicate accounts
available to Names. This was partly in response to external pressures from
Names who were increasingly of the view that they were entitled to see
syndicate accounts and to be able to compare them to see the performance of
syndicates one against another.
Although I was Chief Executive and Deputy Chairman, many detailed
matters did not come to my attention. As in any large organisation a Chief
Executive has to reserve his time for matters of reform and policy and tends
not to get involved in the detail of publicity material. Perhaps incorrectly I
did not see the brochure produced for prospective members of Lloyd's as being
an important document that required much of my time and attention. I have no
recollection of its content or of any discussion of its content. If I had read
it properly at the time I would certainly not have allowed it to say that there
was a rigorous system of auditing in place because I knew that that was an
incorrect statement. I believe Members of the Committee who were aware of the
deficiencies in the accounting systems, as highlighted by Fisher, internal
working parties, my own reports, and later DTI inspector reports, etc. and who
were also on the Membership Committee which approved that brochure, must have
been aware that the statement as fundamentally untrue. They knew perfectly well
that they needed a new auditing system and that would be done in the future but
wearing their recruiting hats they continued to say, "we have a rigorous
auditing system." They had been saying that for years and it did not enter
their heads to change it. They should have known [*20] that it wasn't tme.
However, none of them took their public regulatory duties very heavily, and
some of them neglected their duty to their Names
The accurate estimate of this figure (the Reinsurance to Close) is vital
to determining syndicate profit. It is essentially a matter of forecasting, in
which the underwriter must form a view both as to the likely outcome of claims
of which he has been notified and as to the expected development of claims of
which he has not yet been advised & #151; the IBNR or 'incurred but not
reported' claims. This judgement is more likely to be fair if it is arrived at
in a disciplined manner following a regular routine under with all the
available evidence about the trend of claims is carefully sifted. From an
accounting point of view the problem is no different from that which faces a
building contractor estimating the cost of completing a building or an
automobile manufacturer assessing future car warranty claims: in both these
cases an accurate estimate is critical to the determination of annual profit.
If the method is thoroughly and meticulously documented the auditor should be
able to put his name to the result: not in the sense of warranting the accuracy
of the estimate; but, as with the stock of a manufacturing company, in the
sense that the figure for reinsurance to close is a fair estimate which a
reasonable man might be expected to draw from the evidence before him, and that
all the available evidence was considered.
As a result of the introduction of the true and fair requirement, and of
pressure from the Revenue, improvements began to be made in accounting for the
reinsurance to close, a matter in which the Revenue continues to take a close
interest. The old secrecy with which the matter had been surrounded gave way to
a regime of disclosure which no longer gave so much room for nudge and fudge.
And the bias towards prudence which had always been [*21] present was
increasingly overtaken by the concept of equity between Names. Although the
practice of providing more than the circumstances required was admirable from
the point of view of Lloyd's solvency and hence the policy holder, it favoured
tomorrow's Names at the expense of today's and provided the underwriter with
hidden reserves with which to smooth over any future hiccups in his
underwriting results.
In 1985 a set of explanatory notes about the reinsurance to close were
issued. These were intended to provide further guidance on the application of
the Syndicate Accounting Byelaw. These notes deal with whether the reinsurance
to close should take into account the future costs of claims settlement, of
future inflation on the size of claims, and of the effect of discounting claims
by the time value of money when they are unlikely to be settled for many years
ahead. Discounting was not allowed but the practice of discounting was
effectively achieved by underwriters purchasing a Time and & Distance
Reinsurance Policy. That these were essential to the survival of Lloyd's was
clearly understood by Peter Miller (see memo from Barber 19 Jan 1984 (H19 1984
0056-9) though I think it is fair to say that I had no appreciation at the time
of the extent of the need for them, not understanding the importance of the
asbestos issue. The problem of reserving for claims when delays were being
experienced at the Lloyd's Policy Signing Office was not deal with. This
created problems in achieving equity between Names from one year to another.
The problem was particularly acute where brokers delayed the entry of risks in
order to delay handing over premiums to the underwriter perhaps because the underwriter
had exceeded his premium income limit for the year and wished to defer income
to conceal that fact. This issue was only dealt with when inception date
accounting was introduced post R&R. Up until then it would not have been
possible to audit the LPSO and give syndicate auditors any comfort that the
LPSO figures, on [*22] which the syndicate depends for important elements of
its accounting input, were themselves true and fair.
There were four areas of disclosure that proved to be contentious at the
time. Historically, syndicates had prepared accounts with premiums shown net of
reinsurance so that the overall volume of the syndicate's business was not
disclosed. Such a disclosure of the overall volume is important because premium
income limits are set before reinsurance and under Lloyd's Rules, security must
cover the gross business underwritten. No credit is given for reinsurance so
that if the reinsurer fails to pay, the policyholder does not suffer: the loss
is a purely commercial one to be borne by the Names who should have sufficient
means to meet it. There was considerable resistance at Lloyd's to disclosing
gross figures and the figures for outward reinsurance because it made it more
difficult for the underwriter to conceal overwriting by quota share reinsurance
which had been , in the case of PCW for example, associated with
irregularities.
Syndicates also resisted making public details of the syndicate
reinsurance programme as is required in insurance companies. That remained a
commercial secret. This was particularly critical in relation to Lloyd's since
Lloyd's Rules & Byelaws encouraged syndicates to reinsure within the
market. The argument was that only another Lloyd's syndicate could provide
security commensurate with that of a Lloyd's syndicate. This must clearly be
debateable given the size and substance of many continental and American
reinsurers, many of which are substantially bigger than Lloyd's as a whole.
However, the practice poses particular problems for Lloyd's since if the solvency
of Lloyd's is to be assessed "as a whole" then arguably such internal
reinsurances between syndicates are not reinsurance at all but are simply a
form of self-insurance. The emphasis on internal re-insurance within the market
[*23] would have to be regulated. I was concerned about it and I thought it
should have been forbidden. I raised questions about it that in the main were
ignored.
The Lloyd's Global Accounts, which are an aggregation not a
consolidation, conceal this problem. In certain circumstances, this became
clear in the subsequent development of the LMX and PA Spirals, where the
practice gave rise to serious distortions and to concentrating risks within the
market instead of dispersing them. At times of loss there was also the risk of
significant double counting as happened in Lloyd's in the early and mid 90s. So
far as I am aware syndicates still do not publish details of their reinsurance
programme as is required of insurance companies. I have recently been made
aware of the European Directive 73/239 and I find it difficult to see how
Articles 8 & 9 of that Directive can be complied with if the information
about the reinsurance programme and the reinsurers is not made available to the
competent authorities, and arguably to the capital providers.
The third problem area I deal with in my book (Pagel07) is in relation
to the disclosure of pure year results. If Names, and the competent
authorities, were to obtain a full picture of the performance of the syndicates
from year to year, it was necessary to see to which year developing claims
related. If conventional accounting rules were to be applied all that had to be
shown was the total figure for the reinsurance to close covering all claims for
all prior closed years. As the old claims come in they are charged to the
account which has received the reinsurance to close premium regardless of the
year to which the claim relates. There is a strong argument that suggests that
the pattern of claims development should also be disclosed. Doing so would have
aided understanding of the kind of margin or error within which estimates have
to be made. The competent authorities, be it Lloyd's or the DTI, should have
been collecting and analysing the pattern of claims in relation to particular
past [*24] years with great care: information was fundamental to the setting of
minimum reserving percentages.
The last problem I identified in my book was the disclosure of
provisions on open years. Open year accounts were nothing more than a record of
premiums received and claims paid to date. Not until the end of the third year
of account was an attempt made to quantify notified claims and the IBNR and
hence to form a view of the profit. For solvency purposes the open year
liabilities must be estimated following the Lloyd's minimum percentages for
reserving purposes, but the results of the solvency valuation do not appear in
the syndicate accounts. MacVe (A Survey of Lloyd's Syndicate Accounts) and
Neill (Para 5.13 on Page 24, and 5.8 page 23) were of a view that a way forward
towards some more current accounting used by insurance companies would be to
include a note in accounts of the estimated deficiency on the open years and an
explanation of the extent to which risks have been accepted but are not yet
reflected in the accounts.
The fourth area of argument was the Underwriters' Report. The Accounting
Manual had proposed that the report would include a description of the business
written including reinsurance arrangements in force. Schedule 8 of the Byelaw
reflects the market's concern at the liberality of these proposals. It was
finally decided the comments would be more general; no details of the
reinsurance in force were called for nor was analysis of the business required.
The Report therefore did not assist in any understanding of the risks and
returns of the syndicate's business. There was a distinct lack of useful
statistics to provide performance indicators and guides to likely prospects.
Only in cases where losses were anticipated were there quantified forecasts in
the reports in the mid-80's. In my book Pagesl06-108 I have set out more on
this subject drawing on the work ofMacVe who was supported by Neill. There
[*25] is no doubt that in the mid 80's substantial progress was made in
improving the presentation of the accounts. Prior to then they could not
properly have been described as rigorous nor could a statement that they made
reasonable estimates of outstanding liabilities have been properly justified.
After the mid-80's a non-accountant, such as a Name, unaware of all the
history, and unaware of the asbestos problem, could reasonably have believed
that Lloyd's did have an accounting system that was as good as the one
applicable to insurance companies. That view could not have been shared by
anybody who was privy to the information about the developing asbestos crisis.
However, as I have said, that information was not shared with Members of the
Lloyd's Council in their capacity as Council Members.
There were also structural problems in the accounting at Lloyd's. I have
mentioned the problems of internal reinsurances but similar issues arise with
personal stop-loss and errors and omissions insurance. The three taken together
produced substantial double counting of losses in the early nineties. Both
these categories were usually placed within the Lloyd's market. This results in
a security weakness, because stop-loss insurances are using the asset backing
behind a Lloyd's policy twice. The Lloyd's security chain has been pledged once
to back the claims of direct external policyholders. It is then pledged a
second time to cover the risks of stop-loss policies. Although there are rules
to prevent a Name participating on a syndicate which writes his own stop-loss
policy there is a clear element of double counting. There are also regulatory
weaknesses because underwriters of agents' errors and omissions insurance are
not excluded from the regulatory activities of the committee and Council where
deliberations as to an agent's behaviour can affect a claim against him by his
Names. A complete solution would be provided by a rule that personal stop-loss
policies, and agents' errors and omissions insurance, must be placed outside
the Lloyd's market. [*26]
When
I joined Lloyd's at the beginning of 1983 measures to reform the accounts were
well under way. In March 1983 a Consultative Committee of Accountancy Bodies'
reported to the Chairman of Lloyd's on Fisher Task Group 4's proposals.
"We believe that Names should be given the fullest possible information
about abnormal elements of uncertainty and that in the interests of equity
between Names it may be appropriate in exceptional cases to leave the account
open." I subscribed to that view. It is clear now that neither Fisher nor
I fully understood the significance of the issue since I had not seen the
lawyers' reports on the asbestosis problem. We attempted to introduce
replication of company accounting rules, disclosures of related party
transactions (principally reinsurance) with agency-related companies, and the
removal of baby syndicates. A provisional accounting manual for syndicates had
been released for consultation in December 1982. The final version, containing
a number of changes, was issued in November 1983 with a letter from the
Chairman which said that although the document was still provisional pending a
byelaw on the matter, it should be followed by agents as a guide to best
practice in the market. Six items formed the accounts proper and were in future
to be subject to audit.
1. An Underwriting account for the year just closed
2. Underwriting accounts for the open years, normally two
3. A Balance Sheet
4. Notes to the Accounts
5. Disclosure of Interests of Agents in syndicate's transactions
6. A personal account for each member, showing his interest in the
syndicate result and any charges made to him personally. [*27]
Separately,
not subject to audit, there would also be published a Managing Agent's report,
an Underwriter's report, a seven year summary of syndicate results and an audit
report.
This took legislative form in byelaws in 1984 when a February byelaw
gave immediate effect to the accounting manual that required agents to provide
annual reports for syndicates comprising the first eight of the elements I have
just listed. In April there was the passage of the Disclosure of Interests
byelaw which implemented the Plaistowe Report and which required every annual
report in respect of a syndicate to include a fair presentation of all
transactions entered into by the managing agent for the account of the
syndicate in which the agent had, directly or indirectly, a material interest.
If there were no such transactions or arrangements the annual report should
state that fact. This was one of the principle steps taken to avoid a
repetition of the insider dealing associated with the scandals of 1982.
These brief changes held the line until the main byelaw came into effect
with the Syndicate Accounting Byelaw of 1984. This is a large document and one
of the four principal foundation stones of the reform of Lloyd's. The Syndicate
Accounting Byelaw requires the agent to keep proper accounting records; it
establishes the three-year accounts rule; it calls for syndicate reports
containing the three elements described above; and it requires the accounts to
be approved, signed and audited. The accounts have to be circulated to
participating Names and filed at Lloyd's. The schedules cover details about
accounting records, accounting policies, the format and contents of accounts,
including disclosures of interests, the contents of the Managing Agents report,
which is seen as corresponding to the Directors' Report in a set of Company
Accounts, and the contents of the Underwriter's Report, which is to be a
discussion of the business of the syndicate for the year. The whole document is
[*28] redolent of the corresponding sections of the Company's Act. The regime
took immediate effect with the first new style accounts prepared under the
February Byelaw and sent out to Names in the Summer of 1984. A central file of
syndicate accounts was opened to the Public in August 1984. Not until 1986 was
the additional requirement that accounts should show a "true and fair
view" introduced. This was to give auditors and agents time to prepare
syndicate accounts able to match the standards of the company world in showing
a true and fair view of the profit for the closed year. All these changes to
the way in which accounts were being produced were intended to produce
transparency and therefore to cut down on the major abuses that had hit Lloyd's
in the late 70's and early 80's. There is nothing in the Byelaws which goes to
the question of the calculation of the RITC, the valuation of outstanding
liabilities, including IBNR. The RITC is fundamental to determining the
profitability of syndicates and in my time at Lloyd's, we failed to grapple
with the question and we gave no guidance or instructions on how this exercise
should be done. It is essentially a matter of forecasting, in which the
underwriter must form a view both as to the likely outcome of claims of which
he has been notified and as to the expected development of claims of which he
has not yet been advised - the IBNR or 'incurred but not reported' claims. It
is akin to the process of valuing stock and must be meticulously documented if
the auditor is to put his name to the result. A set of explanatory notes on
this was issued in December 1985 to provide further guidance on the application
of the syndicate accounting byelaw. Given the extent of the reforms that took
place 1984-1986, which were the product of work I was doing or initiated in my
time from 1983 to 1986, it is impossible to see how Members of the Committee
could honestly have believed that there was in place at Lloyd's a rigorous
accounting system that made reasonable estimates of outstanding liabilities
including IBNR They knew the accounting system was deficient, hence the need
for reform. They had been told in the Neville Russell letter that the
calculation of liabilities was an "impossibility". [*29]
They knew that they were not following through on the Murray Lawrence
letter and were not assembling, collating and checking information about the
asbestos problem which a great many of them were seeing as an increasing
problem.
I have made detailed comments about the auditors in my book Pages
109-115 and in a lecture that I gave in 1985 to the National Association of
Accountants Conference in Paris on 19 April 1985. In both places it can be seen
clearly that I was very critical of the Lloyd's audit regime. I believe that the
views that I held at that time about the audit regime were ones that I made
clear during my time at Lloyd's from 1983-1986. Anybody on the Committee of
Lloyd's in the 1980's should have been aware that Fisher, I and other
independent observers strongly believed that the audit regime at Lloyd's was
inadequate and widely misunderstood. Any Name recruited on the basis of
believing that there was a rigorous system of auditing which was independent
and objective and made reasonable estimates of outstanding liabilities would
have been acting under a misapprehension. Committee Members who made such
claims could not have made them honestly.
During the 1970's a series of mergers between medium sized accountants
reduced the number of accounting firms. Baker Sutton linked with Ernst &
Whinney, Angus Campbell with Josolyne Leighton Bennett and then with Arthur
Young. Ernst & Whinney and Arthur Young were two of the top eight
international accounting firms. When the 1982 scandals emerged Arthur Young
took steps to apply their high standards to Lloyd's clients who had joined
their list as a result of the Josolyne Leighton Bennett takeover. Ernst &
Whinney who had not been responsible for any of the troubled syndicates were
heavily involved with their partner Nigel Holland in investigating wrongdoings.
The style of professional work at [*30] Lloyd's therefore began to change
before the 1984 reforms. However, all the auditors suffered under the
misapprehension, on the part of the market, that they were responsible for
auditing the syndicates. This was an incorrect view even if widely held by
agents and Names. "Auditors" merely signed annual solvency
certificates confirming that each Name possessed the means to meet his
obligations. The quantum of the obligations was fixed by the Lloyd's minimum
reserving rules plus such extra sums as the underwriter and the agent thought
prudent. The means were measured by the Premiums Trust Funds deposits and
Personal Reserves. In the usual case the Premiums Trust Fund itself was large
enough and once the auditor saw that the obligations were covered he stopped
counting. The market called this an audit and allowed itself to believe that
the fairness and equity of the annual syndicate results had been blessed by the
auditors. This was not correct.
The first step to correct the misapprehension was taken in 1983 when the
name of the Committee responsible for supervising the annual solvency test was
changed from the "Audit Committee" to the "Members Solvency and
Security Committee".
Fisher had called for the new syndicate accounts to be audited and this
was provided for in the Syndicate Accounting Byelaw in 1984. The question of
who should do audits was discussed in a consultative paper issued by the
Council in July 1984. Lloyd's, under my guidance, was quite clear that it did
not wish to take upon itself the task of saying how syndicate audits were to be
conducted. The accountancy profession had that duty and Lloyd's wanted to make
sure that the responsibility for saying how audits should be conducted lay with
the accountancy profession not Lloyd's. The way of achieving this was done by
means of the "True and Fair test" which came into force at Lloyd's in
1986. The Companies Act lays down the duties of auditors who must report if the
accounts show a true [*31] and fair view. The scope and nature of the audit
work necessary to support the opinion is prescribed by the corpus of
professional guidance issued under the aegis of the accountancy profession's
Auditing Practices Committee. Lloyd's itself laid down special rules in
relation to certain matters. The first was as to the qualification of auditors
where the requirement for past Lloyd's knowledge and experience was removed on
the grounds that the independent objectivity of the auditor was more important
than any technical knowledge he might previously have acquired. However in view
of the fact that the Insurance Company's Act provides that the accounts of
every underwriter shall be "audited" by an accountant approved by the
Committee of Lloyd's, (the audit referred to is in fact the solvency test), it
was necessary for Lloyd's to continue to licence a panel of auditors for
solvency purposes. Some firms with past experience were therefore removed from
the panel. Lloyd's wanted well rounded auditors who could stand up to the
agents. Prior to then (1986) too many of them had been "poodles".
The lack of audit independence and the undue cosiness which existed
between agents and panel auditors had been a critical source of weakness in the
old arrangements. In future it was going to be impossible for auditors to be
directors or shareholders or to keep the books. They should not earn more than
15% of their fee income from any one client. The rules were applied to Lloyd's
by requiring that the auditor could not be a director or shareholder of the
agent or member of any syndicate managed by the agent. Auditors were prohibited
from keeping the books of syndicates they were auditing. Auditors were also
prohibited from auditing the agency and the managed syndicates.
Because of the peculiar composition of syndicates, it was not possible
for the Names to be responsible for appointing the auditors. The Council was
also unwilling to accept that [*32] responsibility. It was therefore left that
agents would appoint the auditors but it was clearly stated that the auditors'
responsibility was "to report to Names". This arrangement was
criticised by Neill but he made no recommendation.
The matter of the relationship between Lloyd's and the panel auditors
was a tricky one. Panel auditors are not subject to Lloyd's jurisdiction and
cannot be sanctioned by its byelaws but as a regulatory authority Lloyd's
needed a relationship with each firm. Panel Auditors were therefore asked to
provide a written undertaking to the Council of Lloyd's as a means of defining
the relationship between syndicate auditors and the Council. This allowed the
Council of Lloyd's to appoint and remove auditors from the panel and ensure
that the auditors would comply with Lloyd's Syndicate Accounting Rules. The arrangements
potentially breached the confidentiality that an auditor owed to the Names and
the problem was only solved by the introduction of a new general undertaking in
1987 under which all members of Lloyd's waived in favour of the Society of
Lloyd's any duty of confidentiality owed by a syndicate auditor to its Names.
Although the arrangements increased the size of the panel it had little
effect in practice. 80% of the audits continued to be carried out by four
firms. Again this matter was criticised by Neill. He recommended that if it
remained the case by 1991 then Lloyd's should implement Fisher's proposal and
limit the number of syndicates handled by any one audit firm. So far as I am
aware this proposal remains unimplemented. Within the overall picture there
were important underlying changes resulting from the separation of agency
auditors and syndicate auditors, mergers with larger firms meaning that two
thirds of the syndicates were being audited by firms known outside the Lloyd's
community, and the requirement of registration including monitoring and
recruiting and training having an effect on raising the standards of [*33]
audits substantially. However, the fundamental position remains that the
Lloyd's "audit" is not an audit and I am told this is now
specifically noted in relation to the Lloyd's Global Accounts
I have been asked what consideration was given to the implications of
the particular requirement in the Insurance Companies Acts that require
actuaries to "calculate" the liabilities and adequacy of assets where
long-tail liabilities were concerned. Being totally unaware of the extent to
which old years were being re-activated by asbestos claims, I am afraid I never
realised the significance of this section. I cannot recall there ever being any
discussion of its implications. I can only assume that this is because the
auditors were satisfied that the responsibility had effectively been passed
from them to the Underwriting Agents on whose calculations they had been told
they could rely. I do not recall any instances of actuaries being called in.
Lloyd's as a public regulatory authority I think it is clear from the
letter that Sir Peter Green wrote to Sir Kenneth Ben-ill in August 1983 that we
had a very limited view of our role as regulators and that did not encompass
all the ramifications of the European Directive 73/239 which I have recently
been shown. As I set out in my book (Pages 1-7) I was asked to take the job by
the Governor of the Bank of England and was very much "parachuted in "
from outside Lloyd's. I had some able people helping me. Ken Randall was
already there. Peter Rawlins I recruited as my assistant from Arthur Andersen.
A third adviser was Philip Brown. Philip was a deputy secretary at the DTI, who
had acquired experience of insurance regulation and whose initial brief was
advise on the investigatory and external relations areas. I remember him saying
of Lloyd's "this is a very corrupt place". [*34]
I remained an outsider throughout my time there ("the chap the
Governor found"). The minutes of Committee meetings show that even though
I held the posts of Chief Executive and Deputy Chairman and therefore could
attend the Committee, I was described as being "In attendance". This
is because I was not a working Name and therefore not formally a member of the
Committee. In any event I did not attend every Committee meeting eg Jan 1984,
or Nov 1983 since they often took place on Wednesdays when I had other
commitments at the Accounting Standards Committee. Partly my "distance"
was a question of choice. I felt it was important that whilst I might be on
friendly working terms with colleagues, I must be, and must be seen to be,
independent and objective if I was to achieve the changes that we all agreed
were necessary. I was not a Mason and did not attend any of the Masonic Lodge
meetings. I was not aware that there were any Masonic lodges at Lloyd's. I was
not part of the "club" that reflects part of the culture, traditions
and history of the Lloyd's market and of the old "chib" rules and standards
which had historically been important in making the market work.
In the early eighties the responsibility for investor protection and the
reputation of the City rested with the Governor of the Bank of England. Having
been appointed, as I saw it, by the Governor of the Bank of England, I had no
doubt that my primary duty at Lloyd's was, as in any other public regulatory
function, to ensure that Lloyd's was properly regulated to the high standards
that I believed were appropriate. I believed this was in the interests of
members of the "Society " of Lloyd's of which the overwhelming number
were Names. I did not see myself as being answerable to agents. I kept in close
touch with the Bank of England and also with the DTI. The fact that Lloyd's was
a self-regulating institution became an increasing matter of concern as the
corrupt practices within the market and the inadequate [*35] handling of
conflicts of interest among the working members of the Committee became
apparent.. Looking at the position, with the benefit of hindsight, and informed
by the provisions of the European Directive, it now looks extremely odd for a
regulated body, supposedly regulated by the competent authorities of the Member
State Government, to have self-regulatory powers. I am also very sceptical
about the process of self-regulation (I describe the process and what is
required for it to work in pages 33-35 of my book). It is essential, if the
public interest is to be properly secured by a self-regulatory regime, to be
punctilious in excluding anyone with a vested interest from applying the rules
in the market place. This was to prove extraordinarily difficult at Lloyd's
with its small number of market professionals from which the amateur market
regulators were to be drawn, and with the extensive cross-membership of
syndicates. Furthermore there was an unwillingness to concede that there was a
point at issue. To many at Lloyd's self-regulation meant, then and for many
years thereafter, self-government, in which the legislative, executive and
judicial branches are all in the control of the market professionals. This
meant that repeatedly a blind eye was turned to conflicts of interest and
matters that might properly have been considered together were
compartmentalised. I have been asked whether I felt any particular duty to
report to Names in view of the objects set out in the Lloyd's Act 1911. Whilst
I was clear that I was acting in what I perceived as being the best interests
of the institution my particular focus was on the interests of the Names. The
DTI took care of the policy holders, the Committee took care of the agents, I
felt that I stood, with the external members of the Council, for the Names. As
the regulators of the institution we were undoubtedly performing a function that
would have otherwise have had to be done by the DTI or some other public body
(the FSA does it today). I felt I had been appointed by the Governor of the
Bank of England and I certainly saw my role as one of performing a public
office. [*36]
Whilst I have little doubt that I, and the Council, saw ourselves as
having an important public function as a regulatory body, I am also clear that
we did not see ourselves as having any particular responsibility to apply any
articles of European Directives.
My book makes no mention of European Directives. The reason is very
simple. We were not concerned about their regulation of us. All we were
concerned about were our rights to practice in Europe. The thought of them
regulating us never entered our heads.
I have no memory of ever having referred to a European Directive for
guidance as to what we should do at Lloyd's. I have been shown the provisions
contained in Directive 73/239. I am unaware that it informed any regulatory
activity that we were involved in, though certain arrangements in the Statutory
Instrument 1983 may have been intended to be implementation of some articles.
I have briefly considered whether or not I can recognise any of the
requirements in any statutory provision that I was involved with. I do not
recognise any of the articles in any of the provisions of the Insurance
Company's Act or of the Lloyd's Act that were dealing with. Specifically:
So far as I am aware neither Lloyd's nor the DTI required syndicates or
Lloyd's to produce any scheme of operations. We did not assemble the
information nor pass on information as to the nature of risks which syndicates
were proposing to cover. We did not specifically lay down any guiding
principles as to reinsurance and I do not believe we received any from the
[*37] DTI. I am not sure what items could be said to constitute the minimum
guarantee fund other than the Lloyd's Central Fund.
The Central Fund, although established as a policyholder protection fund
is useable by the Council of Lloyd's to cover the liabilities to policyholders
of defective Names, and latterly for other purposes eg the tax settlement. It
was formally reconstituted in accordance with the Central Fund Byelaw of 1983.
Its existence is used by external regulators in the monitoring of Lloyd's
solvency, even though it has no external statutory basis. I do not believe
Lloyd's or the DTI ever issued any formal guidance on what items could
constitute the minimum guarantee fund of any syndicate but this is possibly
because the view was taken somewhere that this was unnecessary on the grounds
that the Central Fund effectively provided, through earmarking etc., an
equivalent protection to a minimum guarantee fund for each syndicate. During my
time at Lloyd's we were not overly concerned about the adequacy of the Central
Fund although this must clearly have become a matter of some concern later. I
do not believe that we or the DTI asked syndicates to provide estimates of the
costs of setting up administrative services or of securing business. There were
no requirements for training and qualifications prior to the introduction of
the Lloyd's Introductory Test for working Names at the end of 1985.
There was no requirement to take Chartered Insurance Institute exams or other
professional qualifications. Neill rightly points to these defects, commenting
on the absence of any adequate system of examinations. He refers to the Lloyd's
Introductory Test but does not consider that this goes far enough. Neill says:
"We for our part are in favour of mandatory examinations. We find the
arguments against them unconvincing. Active underwriters at Lloyd's assume
considerable responsibilities in conducting insurance business on behalf of
Names. Furthermore, Lloyd's have taken great trouble to introduce a substantial
volume of legislation covering many aspects of the market. It is imperative
that [*38] those who work in the market should be thoroughly familiar with the
body of law, and as we have said elsewhere, a knowledge of the law of agency is
essential to the proper conduct of the business "(Neill, para 9.25, page
57). The weight of this argument is borne out by the findings of the PCW
investigators that many members of the Lloyd's community in senior positions
were not even vaguely aware of their legal obligations as agents".
Financial supervision shall include verification As far as I am aware,
Lloyd's itself never took any steps to verify syndicate accounts, the adequacy
of reserving, the state of solvency either for individual syndicates or from
the market as a whole. The view we took was that it was the responsibility of
the auditors to check on the accuracy of the figures for the solvency test and
that our obligation was to licence auditors who were competent to do so. We
believed the solvency test was tough even though we knew the audit system was
inadequate when reporting to Names. For those Committee Members, who had seen
the Neville Russell letter, and who knew that the reserving in their syndicates
was not to ultimate and would only cover anticipated claims for a short period
ahead, there was clearly knowledge that the nature of the verification process
was totally inadequate both in relation to their own syndicates and therefore
in relation to the market as a whole. I am not aware that there was ever any
discussion of the requirements of Article 13.2. Any thinking we had about
solvency in relation to legislation would have been in relation to the
Insurance Company's Acts requirements. I do not believe the DTI ever took any
specific steps of its own to check on the accuracy of any syndicate accounts or
of the Lloyd's accounts. It did not organise any specific verification process.
As far as I am aware the DTI never took any steps to check on the administrative
and [*39] accounting procedures or on internal control mechanisms. As far as
Lloyd's was concerned in my time, we were well aware of inadequacies in the
administrative and accounting procedures and were taking steps to rectify them
which, as I have explained previously, took effect from 1986. Prior to then the
procedures were certainly inadequate and known to be so. Nothing we did in 1986
looked particularly at the question of internal control mechanisms. I do not
know if anything has been done about that in recent years but certainly during
the 80s I do not believe the matter was given serious consideration either by
Lloyd's or the DTI.
I am not sure what is meant by "adequate technical provisions^. The
DTI delegated its responsibilities under the Insurance Companies Act in this
respect to Lloyd's but these were the absolute minimum requirement for
syndicates to use when calculating their reserves. I emphasise minimum since
they were clearly a totally inadequate basis in relation to a problem like
asbestosis where the level of anticipated claims vastly exceeded a level of
notified claims and of premium income.
I think the syndicate accounts as produced after 1986 do comply with the
requirements for an annual account setting out financial situation, solvency
etc. They were clearly wrong and had been for a number of years in as much as
fundamental liabilities of the reserving process had not been properly audited.
That was made possible by the confusion about the nature of the audit and the
responsibility for the independence of the auditors. I am aware that the
European Commission has suggested in its letters of Formal Notice to the
British Government that it considers the auditors cannot be viewed as
independent when they take any instructions from the Council of Lloyd's. [*40]
I am unaware of the DTI taking any steps to directly supervise the
syndicates or Lloyd's. Their policy was to leave the regulation of the market
to Lloyd's. There were certainly, in my time, never any detailed inquiries
regarding Lloyd's as a whole or particular syndicates or any attempts to gather
information or require submission of documents other than the global solvency
returns, there was no procedure for carrying out on the spot investigations by
the DTI.
I have dealt with the whole question of divestment and re-registration
in my book Pages 116-124. I do not think there is anything I can usefully add
to that at this stage.
I note that Article 19.3 requires competent authorities to take measures
to ensure that an undertaking's business complies with the laws, regulations
and administrative provisions applicable. I am unaware of any intervention by
the DTI aimed at ensuring that. When I took steps to bring specific matters to
the attention of the authorities in the hopes that they would prosecute and
bring criminal proceedings (I refer specifically to the tax avoidance
arrangements set up with rollers etc) no steps were taken. I continue to regard
that as being a major strategic mistake taken at the highest level of
Government. It allowed Lloyd's to believe that it could operate effectively
above and beyond the law. Such a cultural belief, whether true or not, can only
lead to arrogance and a disregard of legal requirements. In my opinion that is
precisely what has happened at Lloyd's since 1986. When evidence of
irregularities came to light it was our practise to inform the Director of
Public Prosecutions. Initially, we were concerned that the process of Lloyd's
investigations and the subsequent hearing of disciplinary charges would be
interrupted by criminal proceedings. Had such proceedings been brought we would
then have had to wait years for these proceedings to be [*41] completed before
taking action. However, the decision was taken to press on hoping that, in the
most serious cases where criminality was alleged, the DPP would follow closely
on our heels. Had this been the case the authorities would have been seen to be
actively supporting the actions of Lloyd's in punishing wrongdoers. It would
have put the official stamp of approval on our new disciplinary powers.
However, as time passed the inaction by the DPP became an increasing source of
embarrassment top Lloyd's. While I have no doubt that the DPP's delays were
caused by serious procedural reasons, there must be something wrong with a
system of criminal justice in which a shoplifter goes to jail for petty theft
and a City fraudster, who may have stolen millions, gets away scot free.
I am interested to see that there is a Directive requirement to prevent
or remedy irregularities prejudicial to the interests of insured persons. So
far as I am aware the Central Fund can be used to protect policyholders and
Names. It has been so used on many occasions. So far as I know policyholders
have always been protected and paid. But it is self evident that Names suffered
huge losses in the 1990s as a result of massive incompetence and major
irregularities at Lloyd's. These were not simply the actions of agents. There
were clearly major regulatory failures on the part of Lloyd's which both had
the responsibility of ensuring that the reserving was adequate and the
accounting systems were adequate A Directive requires proper enforcement
measures to ensure compliance with laws, regulations and administrative provisions,
where appropriate through judicial channels. In my time we did set up a number
of disciplinary investigations and I believe these had a major effect on
raising standards amongst working Names in the Lloyd's market. However,
maintaining standards is an ongoing process. We were laggardly in introducing a
scheme that would require people working in the market to have proper
qualifications and professional experience or to be "fit and proper".
These were reforms which in part were introduced in the mid-1990s though I
[*42] am unaware of measures requiring professional qualifications and
experience through to the present day.
I was very saddened at the time at the failure of other public
authorities to take action in relation to matters that appeared to me to be
criminal. I said then that I felt the government and Director of Public
Prosecutions had let Lloyd's down. The failure to press charges was an
inexcusable lapse by the authorities which did great damage to the City and
great damage to Lloyd's where it clearly induced a culture where the importance
of complying with the letter of the law was not accepted. Neil picked up on
this in 1985 when he quoted the PCW inspectors' conclusion saying "Many
members of the Lloyd's community in senior positions were not even vaguely
aware of the legal obligations as agents to act at all times in the best
interests of their principals and not to make secret profits at the their
principals ' expense and to disclose fully all matters affecting their
relationship with their principals" I have no doubt that in other
situations Sir Peter Green's conduct in relation to Imperial would have been
prosecutable. Quite clearly there was major fraud in relation to PCW and it is
extraordinary to me that more vigorous efforts were not made to bring to book
Peter Cameron Webb, Peter Dixon and possibly others involved in that fraud. The
inspectors we appointed to enquire into the PCW frauds told Lloyd's by letter
(20 Jan 1984) that it was apparent to them that many members of Lloyd's in
senior positions had only the sketchiest notion of their legal obligation to
act at all times in the interests of their Names, and not to make secret
profits at their expense. I concur with their view. Most members of the
Committee understood that their duty was to Names and that they had a duty to
regulate, and enforce regulation, that might conflict with their own financial
interests. But they discharged this duty inadequately and in some cases
incompetently. [*43]
A number of agents were involved with rollers and in baby syndicates.
Those were clearly a breach of their agency duties. The whole business of
rollers and avoidance of tax was a matter that I discussed with the Revenue (as
mentioned above).The DTI Inspectors had identified that 99 out of 360
syndicates had fewer than 50 members and more than half had syndicates being
operated in parallel. Many leading figures in the market were involved.
Sometimes these arrangements were hugely profitable I note that when David
Coleridge, a later Chairman of Lloyd's, was asked about the enquiry into Bellew
and Raven underwriting agencies where syndicate 973 was a baby syndicate with 5
members, one of whom was Coleridge, he said: "I don't think that
underwriters ever understood the law of agency. Not because they were stupid
but because it never came across their desks ". The fact that nearly all
members of the Committee (Posgate said 11 out of 16 in his time on the
Committee) were under investigation for their involvement with offshore funds
meant that no agent was suitable as a candidate to succeed Peter Green as
chairman in 1983. Peter Miller, a broker, therefore took over.
In that connection my attention has been drawn to the findings of the
inspectors published in 1990 into the Howden and Minet affairs with their
criticisms of the audit system.
I dealt with the PCW affair in my book Pages 174-183. So far as I knew
in my time at Lloyd's and when writing the book, the PCW affair was a
straightforward fraud by crooked agents (Cameron Webb and Dixon) which was
complicated to unravel because of the way in which it had operated a group
reinsurance programme covering syndicates with different constitutions. This
arrangement was probably designed to assist the non-marine syndicates which
were probably facing the major asbestos problems. However, we knew nothing
about [*44] that at the time since we did not know the extent to which the PCW
syndicates had brought asbestos problems in to the market. Although the
position was bubbling throughout my time at Lloyd's since the problem at PCW
became clearly evident in December 1982 and the Davis Report was published in
July 1986, we found the necessary evidence of fraud to allow Lloyd's
prosecutions but Dixon and Cameron Webb managed to escape Lloyd's disciplinary
procedures by resigning in 1982. Some recoveries were made from Gibraltar
augmented by contributions from the brokers involved in the original
reinsurance arrangements, Howdens and Minets.
£40 million was obtained in that way. The Names were pressed to accept
an offer and remain liable for future deterioration. However, by the Autumn of
1985 a large number of Names were refusing to pay losses that by then were five
times the premium income they had written on the syndicates. Minets decided to
pull out of the agency business and we reformed the company, AUA3 (Additional
Underwriting Agencies Number 3) chaired by Sir lan Morrow. During 1985, the
losses climbed even higher .
The Council of Lloyd's was adamant that they must be paid by Names,
however they might have arisen. However, at the time I left pressures were
mounting for some sort of settlement to avoid years of litigation between the
Names and agents. I have recently been shown two letters from Sir Peter Miller,
one to the Names on the PCW syndicates and one to the Names in general. It
seems to me to be clear that the first letter acknowledges that the PCW Names
had the ability to bring the legal action in the United States and that they
were doing so. The second letter says that the proposed general undertaking
will have no negative effects on a Name's rights. It does, however, contain a
forum selection clause the effect of which would be to prevent any future
action by Names in general in the United States. They are mutually inconsistent.
I draw attention to the lessons that I believe could be leamt from the
PCW affair on Pages 180 & 181 including the need to have better accounting
and auditing with proper reserving, [*45] Names when agents get into
difficulties and the importance of the role of an independent Deputy Chairman
and Chief Executive in achieving that.
I have dealt with this in my book (pages 49-52) and in a speech that I
gave to the Revenue Law Conference in July 1986. In summary the practice was
that payments described as reinsurances were in fact general reserves. Tax
deductions were obtained. The underwriter had under his hand an additional
secret fund which could be called on to meet later losses and hence to smooth
profits Repatriation of funds in the eighties was often at lower tax rate. Such
arrangements breached two fundamental rules of Lloyd's: the rule of equity
between Names was broken because Names in an earlier syndicate would be paying
for reserves for which they got no value, while Names in a later syndicate
would benefit without paying for the value of the fund through their share of
the premium for the reinsurance to close; the law of agency was broken because
agents failed to account properly to their Names for the funds and in some
cases made secret profits out of them.
The Revenue alleged fraud, wilful default or neglect. A majority of
agent members of the 1982 and 1983 Committees were amongst those accused. In
the course of educating the Revenue about the need for reserves a number of
statements were made by those responsible eg Merrett (who gave evidence for the
Revenue), Barber, and Miller. Having set them in train I was excluded from the
negotiations. In those statements there are a number of statements to the
effect that Lloyd's was under-reserved for long-tail liabilities. In part, this
was a stratagem to persuade the Revenue of the need for reserves. However,
there was a [*46] fundamental truth that can be seen from the steadily
increasing reserves for such business which made it loss making.
My own view was that the potential losses in the United States were
sufficiently serious that Lloyd's should consider withdrawing from the American
market. I did not know how serious the asbestos problem was but I was aware
that long-tail liability losses from a range of causes were very serious. I was
aware that Lloyd's Non-marine dollar business accounted for about 10% of our
premium income but a very large share of Lloyd's losses. It would have been
sensible to have demanded that claimants in the United States pursue us through
the English courts, as the policy wordings largely required, where more
reasonable settlements could have been obtained. This might well have led to
Lloyd's withdrawal from the US market which would in the long run have been
better for the Society
Lloyd's problem was that the calculation of the RITC was, in most cases
not properly evidenced by actuarial, statistical, or accounting data nor was it
supported by an audit opinion. Consequently, individual cases of over-providing
had occurred. The Revenue alleged fraud, willful default or neglect. Lloyd's
case was based on commercial necessity of the arrangements made its pursuit of
miscreants, and the complexity of reopening assessments for up to 35,000 names,
many of whom had died or resigned. The Revenue's case was complicated by two
facts. First, the agents who were alleged to have misled the tax authorities
were not themselves the tax payers, but the agents of the taxpayers; the Names,
in whose alleged interest the arrangements had been made were largely ignorant
of the arrangements. Second, the funds if repatriated would flow into the
Premium Trust Funds which by law could not properly be used for the payment of
tax liabilities. [*47] Clearly several parties at Lloyd's bore some
responsibility as did the Revenue who for many years had either failed to ask
the questions that they should have, or, having asked them, failed to
understand the answers. The figures on which on which the computations were
based were unaudited until 1985.
In the event the Central Fund was used to settle the agents' tax
liabilities. I felt this was quite improper. I raised it but met the argument
that if we don't, Lloyd's would go bust.
I had little to do with the recruitment or vetting of prospective Names.
I understood there was a rota process and I attended one or two rota
committees. I have looked at the Rota Brief again and it is clear to me, on
reflection, that the process was flawed. It is impossible to ascertain what an
individual understood about the process of joining Lloyd's and the adequacy of
his briefing by the agents from the 5/10 minute formal sessions with Council
members following the briefs I have seen (H 24 313-4). Lloyd's accepted a responsibility
to check that the new members were aware of what unlimited liability meant; too
glibly it was laughed off as being liable to your last waistcoat button or
cuff-link. Lloyd's had a duty to do the task effectively and to check what
individuals understood not just ask whether they had been told certain
information. Quite clearly that process could not be conducted effectively in
groups.
Lloyd's rules prohibited the use of a person's house as part of his show
of wealth for underwriting. This was circumvented by the use of bank
guarantees. Unquestionably we should have stopped this practice. Using a bank
guarantee was quite clearly against the rules. [*48]
It
seems to me that the first duty of the Chairman and Chief Executive should be
to Names and that if disputes arise between Names and Agents then Lloyd's
should be seeing to it that the Names are provided with legal and accounting
advice, at the Corporation's expense, and that the Names are facilitated to
organise themselves to take whatever action is deemed necessary against the
agent or the regulatory authorities if appropriate. The Neill Report elaborates
on this in its chapter on Complaints and Disputes. Neill envisages an
investigatory service for Names with a complaint against their agent.
Since Lloyd's has immunity from suit for damages it is vitally important
that it complies with the objects of the Society which are the raison d'etre
for that immunity. The objects of Lloyd's are first and foremost to protect the
trading interests of the Members. To that end they must collect, publish and
diffuse intelligence and information. In support of those objects it has a duty
to regulate the market. It does not owe its first duty to policyholders, that
role is handled by the DTI. It seems to me that Members of the Committee and
Council of Lloyd's have a clear obligation to act in pursuit of the objects of
the Society and no authority to act contrary to them or in a way that prefers
the interests of agents or brokers or a nebulous "market as a whole" to
the interests of Names. Confusion about this is bound to lead to a situation
where there are potentially duplicate regulators of the market (DTI &
Lloyd's or Treasury & Lloyd's) both with ill-defined responsibilities to
policyholders and a failure to recognise other interests in the market. If
there was any justification for the Lloyd's self-regulatory structure it was a
division of responsibility between the DTI and Lloyd's, the DTI being
responsible for the protection of policyholders and Lloyd's the protection of
Names. In recent years it seems to me that Lloyd's has lost sight of its
primary objects. I see no distinction between an obligation to achieve the
objects and the duty to achieve the [*49] objects. There is clearly a statutory
obligation to that end and that must bring with it fiduciary statutory duty.
I drafted a letter, with input from others, for Sir Peter Miller to send
to Members on the 25 May 1984 (H20 1984 0581). That letter says: "Lloyd's
Acts 1871 to 1982 impose upon the Council of Lloyd's the task of managing and
superintending the affairs of the Society and of regulating and directing the
business of insurance at Lloyd's. In other words, the Council has a general
duty to the membership at large to manage the Society and a specific duty to
maintain an orderly market.
It is the role of the Council to ensure that there is a sound and well
regulated framework within which individual underwriters can work and Names can
subscribe to syndicates. From time to time syndicates and the Names on them
can, and do, suffer from the results of poor underwriting judgements. In very
exceptional cases, such losses may have been exacerbated by negligence or, in a
rare case, by improper conduct on the part of the underwriting agents concerned:
in such cases, the Council will act vigorously in the interest Names through
full and expeditious use of its investigatory and disciplinary powers " It
clearly sets out what the Council viewed as duties and obligations to Names in
1985. I see no reason to think that position should have changed though I am
told the courts no longer accept it. I have, therefore, been asked to comment
on whether or not the Lloyd's Committee and Council owed any duty to Names. It
seems to me that the objects of Lloyd's are clearly spelt out in the Lloyd's
Act 1911 (section 4). There can be no doubt that the primary duties are to the
Names. The duty to manage and supervise, to which from 1983 must be added the
duty to regulate the market, are vested in the Council and Committee for the
purposes and [*50] solely for the purposes, of protecting and promoting the
interests of Names. The DTI has wider roles in regulating the whole insurance
industry to protect policyholders. Lloyd's, as a matter of good business, is
obviously keen to ensure that all valid claims are paid but its duties and
obligations are to Names. Any actions not aimed at promoting the interests of
Names and ensuring they are properly informed is potentially ultra vires. It is
this fact that made the concept of self-regulation at Lloyd's so difficult. All
the Committee were working Names whose primary financial interests were centred
on the development of their agencies or brokerage. There was minimal
understanding of agency law or the contractual and fiduciary duties they owed
to their principals. When translated from being agents (or brokers who are
agents for policyholders), to acting as regulators of the Lloyd's market they
found it very difficult to disregard their own interests and to put the
interests of Names first. It was for this reason that I devoted so much time
and gave such priority to creating transparency (See my exchange with PAR Brown
& #151; H 19 1984 0071-3 and 0076). I believed that if the Names had the
information, as I set out above, then they could take independent decisions
and, if need be, take action against rogue or incompetent agents. I have no
doubt that it was correct to create greater transparency, as I set out above,
but we underestimated the extent to which conflicts of interest were entrenched
and the lengths some agents would go to protect their positions regardless of
the consequences upon Names. I have no doubt that Names ought to have known
more about asbestos problems. By letter, rota, reports, and accounts, the
intractability and scale of the problem should have been explained. Clearly the
consequences for Lloyd's could have been dire. Thousands of Names would
probably never have joined. Some form of agreement, like R&R, would have
had to be instituted. Many of the reforms of the last decade would have been
forced on the market sooner. The concealment of the problem was, in my opinion,
a breach of the duties and obligations owed by the Committee and Council to the
Names. To the extent that those of us who were [*51] external or nominated
members of Council were ourselves unaware of the problems, it seems to me to be
clear that the working Names on the Committee, or some of them, must have been
deliberately concealing information (or at the very least, turning a blind eye
to the fact that we were unaware of the scale of the problem) in breach of
their duties and obligations to all Names
In connection with preparing this statement I have reviewed my book
"A View of the Room: Lloyd's, Change and Disclosure" which I wrote in
1987. At that time all the details of my time at Lloyd's from 1983 to 1986 were
very fresh in my mind. Although I have looked at some papers in connection with
the preparation of this statement, I believe that the most accurate summary of
my views about the time is set out in my book and I confirm that I believe that
what I wrote at that time was true to the best of my knowledge and belief. I
must emphasise that knowledge of the asbestos problem, which is not mentioned,
was not shared with me or other Council members or Committee members not
directly involved.
I
understand that copies of the book are being attached to this statement and I
confirm that I am in agreement with that.
Also attached to this statement is the text of a speech I gave in Paris
in 1985. Again I stand by the truth of that to the best of my knowledge and
belief.
Although there was some discussion of asbestos at Committee meetings
Iattended, it was minimal. We were told that the matter was handled by a
special working party in view of the [*52] need to preserve privilege in
relation to the American courts. Nothing said in Council or Committee in my
presence ever led me to believe this was an enormous problem that could swamp
Lloyd's and with which the Lloyd's accounting system was quite unable to cope.
I left Lloyd's in 1986 totally unaware of the seriousness of the asbestos
problem and the extent to which Lloyd's syndicates had not reserved for it. I
entirely agree with the conclusion of the Court of Appeal that the accounting
system at the time was not working and was not making reasonable estimates of
outstanding liabilities including IBNR. In my view it was known at the time
that it was not making such reasonable estimates and it was not possible for
Committee Members who had received the Neville Russell letter, been party to
approving the Murray Lawrence letter, and were seeing attorney reports, to make
a statement that Lloyd's operated a rigorous auditing system with any honesty.
It seems to me that it was well known and understood at the time by
Committee Members who had any involvement with asbestos syndicates that those
syndicates were not reserving to ultimate. It follows that they must have known
and understood that their accounts and hence the Lloyd's Global Accounts were
not accurate and did not contain reasonable estimates of outstanding
liabilities. They must have known and understood that at the time and therefore
those figures and reserves were fraudulently calculated. I do not believe that
this can be attributed to mere negligence. I am quite certain there has been a
great deal of negligence at Lloyd's but the build-up of knowledge on the
asbestos problem during the 1980s was clearly inexorable and in the wake of the
Neville Russell and Murray Lawrence and Randall letters, which required a
detailed and comprehensive regulatory response from Lloyd's that did not
happen, I can only conclude that there was a deliberate agreement amongst
certain key members of Lloyd's, including in particular Sir Peter Green and
Murray Lawrence, to conceal from me and others the seriousness of the asbestos
problem. If it was [*53] not a deliberate decision to exclude nominated and
external members of council from full knowledge of the problem, there was
certainly the turning of a blind eye to what we were not being made aware of
and the inconsistencies between what was
known about the defective/inadequate/non-existent
audit system and the claims in the brochures
sent to Names. The consequence was that the figures shown to joining and renewing
Names from 1983 onwards were basically a fraudulent misrepresentation of the
financial position of the syndicates and of Lloyd's. The dust jacket of my book
says "when I joined Lloyd's I had announced my decision to pick out the
rotten apples....but it was not as simple as that...the barrel itself appeared
to many observers to be infected". That was my view m 1987, formed
principally from my observations in relation to baby syndicates, rollers, and
the appalling lack of understanding of agency obligations. Today I am certain
that it was rotten to the core and that the losses that the Names suffered in
the 1990s, whether from the cumulative build up of under reserving for
asbestos, or through the participation in the Spiral Syndicates which so
focussed Lloyd's losses, were the product of regulatory failure at Lloyd's as
well as of the negligence and incompetence of particular agents. I believe much
of that regulatory failure was due to deliberate concealment of known facts and
information by, among others, Peter Green, Murray Lawrence, David Coleridge and
others.
I believe the facts stated in this statement are true to the best of my
knowledge
and belief
..............................
lan
Hay Davison
Dated:
4 March 2005
IN
THE HIGH COURT OF JUSTICE
1996
Folio No. 2032
QUEEN'S
BENCH DIVISION COMMERCIAL COURT
BETWEEN
THE
SOCIETY OF LLOYD'S
Claimant
and Defendant to Counterclaim
-and-
JOHN
TREVOR HOWARD HENDERSON
Defendant
and Counterclaimant
WITNESS
STATEMENT OF
IAN
HAY DAVISON
Grower
Freeman
Solicitors
________________