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LONDON-Putting Lloyd's of London into runoff, an alternative a group of members has proposed, would create greater problems for names than the market's current course, since policyholder interests would take precedent in a liquidation.
So contends the U.K. Department of Trade and Industry and the Janson Green Action Group, both responding to a proposal by the Lloyd's Names Assn. Working Party that the marketplace be liquidated rather than create Equitas Ltd. to segregate and run off old business (, Dec. 11, 1995).
The LNAWP argued that an orderly liquidation of Lloyd's would be of greater benefit to names because they would only be liable to pay claims as they came due, rather than make large, upfront payments into Equitas. In addition, in a runoff, policyholders would not receive full payment of their claims, thereby reducing names' burden.
The LNAWP also suggested that any ongoing and profitable business could be taken over by new insurance companies or syndicates.
However, the DTI questions whether Lloyd's could remain in solvent runoff under such a scenario, warning that it could be placed in involuntary liquidation.
In a paper sent recently to Sir David Berriman, chairman of the Assn. of Lloyd's Members, Jonathan Spencer, head of the DTI's insurance division, pointed out: "The department's responsibilities....are, first, to monitor the solvency of Lloyd's....and, second, to make appropriate use of its powers if any of the statutory requirements are breached, in order to protect policyholders' interests to the maximum extent possible."
An accompanying paper from the DTI commented that if Lloyd's were to stop paying claims in full, as the LNAWP suggested, the market likely would be unable to attract new business, causing it to become insolvent.
What's more, from experience in past cases where insurers have been put into runoff, the DTI has found that "the very act of going into runoff could lead to a rapid crystallization of claims, which would increase the likelihood of the solvency requirements being breached."
The DTI's comments rebut the LNAWP's suggestion that putting the market into runoff would make life easier for names because they would only have to pay claims when they became due.
If Lloyd's stopped paying claims and went into runoff, members would have to provide not just for paid claims but also for incurred-but-not-reported losses, the DTI noted.
Also, it pointed out the LNAWP's proposal that business could be transferred to new insurance companies or syndicates implies that this will happen the next working day. "The reality would be very different," the DTI paper said.
First, the new market participants would have to be independent insurance companies, killing the traditional form of unlimited liability membership and the basis of trading as syndicates.
What's more, the Insurance Companies Act proscribes that only "unimpaired capital" would be allowed to support the new market. Under the circumstances, it would be "problematic" for names to continue underwriting in whatever guise.
And the market likely could not be resurrected immediately. The DTI pointed out it would take some time for the insurance companies to be authorized-typically between six and twelve months. Whether such companies would be located at One Lime Street was also questioned by the DTI. The London Underwriting Centre is an option, although "they might also seek to obtain whatever benefit might be possible from the continued use of the Lloyd's name (assuming that it has not been tarnished by the prior failure of the market)," the paper said.
The Janson Green Action Group also sent a letter to Sir David, pointing out that most names also are policyholders, particularly through personal stop-loss and estate protection plan policies. "Many names would want the names on the syndicates who gave them stop-loss or runoff protection to be actively pursued for what they had," the group noted.
As for other policyholders, in a runoff they could well be able to aggregate several large claims, such as pollution coverage disputes, against a syndicate, as well as combining different claims against the same name. "Some very large liabilities could result for such aggregation," the action group said.
The Janson Green Action Group's letter also pointed out that "for long-tail syndicates, the 1985 and prior liabilities as estimated by Equitas include typically a 50% discount." This discount may not be available to names if Equitas were shelved in favor of liquidation, and syndicates also probably would be forced to reserve at higher levels, the action group said. "Indeed, if the usual pattern of insolvency follows," the group warns that some policyholders could inflate IBNR claims in anticipation of not receiving 100% of the amount, while others would speed up the filing of claims.
"This would inevitably swell the outstanding claims notified to Lloyd's and increase the crystallization of loss," the action group predicted.
Lloyd's Chief Executive Ron Sandler made a similar point about liquidations in a memo he circulated to members agents last November.
"There would be a 'first-past-the-post' rush by policyholders to enforce or secure their claims," he said.
As the market's regulator, the Council of Lloyd's would have a legal duty of care to the policyholders and creditors rather than investors if Lloyd's were put into runoff, Mr. Sandler added.
Under such a scenario, members would forfeit several features of the reconstruction and renewal plan, including: the contribution of 1.1 billion ($1.66 billion) in Central Fund assets to reduce names' debts; the special levy and agents' contributions of 650 million ($981.5 million); and "the society's assets, including the buildings and its subsidiary companies (including Lloyd's of London Press Ltd.), would also need to be preserved and/or realized for the benefit of the society's own creditors and could not be used for the benefit of names."
Lloyd's of London Press was sold to its management in December 1995 (BI, Jan. 1), and the market is looking into the sale and lease-back of its flagship building at 1 Lime St.