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The Lloyds Market
Lloyds was well known internationally and enjoyed a sound reputation for much of the twentieth century. But, as the world discovered in the 1960s, the Society of Lloyds had problems.
Part of Lloyds historic mystique
involved its unique organizational structure based on its underwriting members, i.e., Names, and the system that had evolved around this distinct class of investors. Every Name enjoyed near anonymity while participating in a traditionally highly profitable enterprise; and every Name accepted unlimited liability
in each syndicate that he or she joined.
Lloyds series of crises actually began in the United States in 1965 with Hurricane Betsy that wreaked havoc on oil rigs and vessels in the Gulf of Mexico. For the first time in decades, the battering caused by Betsy and other hurricanes caused Lloyds underwriters to lose money for those consecutive years, from the year before Betsy through 1966.
Although the average loss was modest, it caused a reduction in the number of members for 1966-67. Shock waves rippled through the market. Simultaneously, the value of oil refineries and oil rigs was skyrocketing. More underwriting capacity, not less, was needed for Lloyds to sustain its competitive position.
Changes in eligibility for Lloyds membership, together with a period of favorable underwriting results, spawned dramatic membership growth during the 1970s. The number of Names almost doubled between 1974 and 1978. When the decade ended, Lloyds had nearly 17,000 members.
Unfortunately, many Names joined just in time for a terrible year in 1978.
The newcomers represented a broad cross section of the population, rather than the traditional moneyed elite.
(Some) had very limited means, and they met the membership test through bank guarantees based on modest homes.
During the 1960s and 1970s, while Lloyds underwriting capacity was expanding rapidly, the U.S. judicial system was undergoing a major transformation. With courts more often rendering idiosyncratic interpretations of tort law, contract principles became less relevant. This resulted in an avalanche of rulings that held insurers responsible for consequences they often had never intended to insure.
Asbestosis, environmental pollution, professional malpractice, and product liability produced billions of dollars of losses.
If there was a single year after which Lloyds would never be the same, it was 1978. From 1978 through 1979, calamitous marine disasters interrupted the underwriting calm.
136 vessels, each with a value exceeding $750,000, were total losses during 1979. Underwriters contended with a rash of losses: scuttlings, marine frauds, piracy in the Mediterranean, and the beginning of the 1990 Iraq-Iran conflict in the Persian Gulf.
Insurance rates should have been rising but were held down by overcapacity and competition.
Simultaneously, two scandals whose origins were public knowledge several years earlier became headline news.
The (SIAT) case dragged on with many twists and turns.
An Italian vessel, Savonita, allegedly sustained a fire shortly after leaving port. Its cargo included
new Fiat automobiles. Approximately 300 were declared a constructive total loss by marine surveyors and sold for a fraction of their new car value.
The insurer (SIAT) then submitted a reinsurance claim to Lloyds through
its Lloyds broker
(who) refused to process the claim, believing it was fraudulent.
(SIAT), unable to collect its reinsurance claim, replaced (the brokers) firm with Willis Faber.
Willis Faber applied pressure on Lloyds underwriters, who finally honored almost the entire SIAT claim. A huge public outcry arose and reached the floor of Parliament.
Lloyds was roundly criticized for denouncing (the original broker) and backing Willis Faber.
The Sasse Affair was even more alarming.
Sasse, a rising Lloyds underwriter, gave his syndicates underwriting authority to an unscrupulous Florida insurance agency. The agency placed a large volume of property insurance on substandard housing in New York Citys South Bronx slums and similar areas elsewhere in the United States and Canada.
A number of the insured properties burned, causing about $40 million in losses. Arson appeared to be a likely cause.
The schemes perpetrators pocketed several million dollars, and Sasses Brazilian reinsurers refused to pay, leaving Sasse holding the bag.
a classic illustration of the dangers in carelessly granting underwriting authority. It became the first of many scandals, leading a number of Names to unite and refuse to pay their calls. Instead, they sued Lloyds, among other parties, alleging that Sasse or his agents had acted fraudulently and that Lloyds had breached its duty to oversee its managing agencies.
The Sasse fraud began in early March 1976, but it was not until late 1977 that Lloyds finally suspended Sasse, and mid-1980 before it reached a compromise settlement with the Names. Lloyds contributed some British Pounds 9 million to the settlement, largely raised by a levy on all 18,000 Names.
Sasse and Savonita hit the headlines in the spring of 1978, but Lloyds soon faced other distractions and again responded inadequately such as its failure to accept the reality that insurance business had become global. British and American brokers would have to develop international combinations to remain competitive and serve their clients.