The problems at Lloyd's started in the early 1980s with the gradual emergence of latent (dormant) claims mainly related to asbestos bodily injury (arising from the mesothelioma, lung cancer, asbestosis and other illnesses suffered by those exposed to asbestos fibre), but also followed by asbestos premises (known as property damage, and mainly involving the removal of asbestos from buildings) and environmental pollution (usually the clean up and associated costs of polluted sites). Such problems were exacerbated by certain USA court rulings, which determined such claims were not workers' compensation (employer liability) claims - as might certainly be expected for the asbestos bodily injury claims - but rather they were general liability, resulting in a much larger potential insurance pot from which to obtain claims funds. It also meant that much more of these claims would be paid for by Lloyd's and the London market rather than by the US domestic market. There was (and still is) considerable uncertainty as to the final amounts in respect of such claims, that may well last beyond 2050, and this uncertainty, rather than the absolute amount of claims payments, was the main issue for Lloyd's in the early 1990s.
While Lloyd's could probably have dealt with this problem if it had occurred by itself, unfortunately, an unprecedented number of very large catastrophe claims also occurred in the late 1980s and early 1990s, thus compounding the general situation and the poor financial results for many syndicates. Such catastrophes were not only in the non-marine property market, but also in the aviation and marine markets. Again there was uncertainty, but this did not just relate to the absolute total amount of such claims, but rather, to the individual reinsurers or syndicates that would ultimately pay their shares of these losses after they had been through the London Market Excess of Loss (LMX) claims spirals in respect of losses within the non-marine, marine, aviation and/or personal accident markets. While some insurers and brokers within the market fully understood both the indemnity and expense effects of the spirals on specific individual syndicates and reinsurers, many others clearly did not. Indeed, few considered the ultimate effects on the whole market. The first full working model of an actual LMX spiral was produced in the early 1990s by a very small group of us, and others we commissioned a few years later when the serious financial implications of the LMX spirals became far more obvious. In practice, at last, such LMX spirals have now mostly been unwound or otherwise finalised.
The above two issues should also be viewed together with the background of insufficient reserves and significant losses arising from several catastrophes, and very low premium rates and loose terms and conditions from the first half of the 1980s from which losses were still emerging. 1986 was a watershed in the USA insurance market. After the very obvious past problems in property and casualty business, significant changes took place, including the introduction of claims made, absolute asbestos and pollution exclusions and the limiting of losses occurring coverage by sunset clauses and other means. However, the awful results of the early 1980s worsened and forced significant reserve strengthening at the worst possible time, when the business could least afford it.
Clearly, Lloyd's needed top quality leadership, excellent support, a good strategy and considerable luck to survive. The scene was set for the largest, and perhaps the most important, actuarial exercise ever performed. This resulted in the formation of NewCo, later renamed Equitas. UK actuaries had been involved in non-life insurance for many years prior to this, of course. Some were involved with ASTIN, producing papers and making other contributions. ASTIN, the international non-life actuarial organisation was created in 1957 and its first colloquium was held in La Baule, France in 1959. Four of the 40 or so ASTIN colloquia have been held in the UK (at Colchester, Cambridge, Glasgow and Manchester). GIRO, the very successful UK actuarial non-life insurance research organisation, held its first conference much later in 1974, and has been growing significantly in reputation and in strength ever since. The London Market Actuaries Group started in the 1980s, under the leadership of David Craighead. UK non-life actuarial exams had been introduced in the mid 1970s. Hence, the UK actuarial profession was very well equipped to assist in this exercise.
The leadership of David Rowland cannot be underestimated in all of this. I was lucky enough to have had several personal discussions with him during this period, and his vision and determination to introduce the appropriate and necessary changes were crucial to the ultimate success of the exercise. Sir David Rowland was made an honorary actuary in 2001.
Once Equitas was up and running, actuaries became even more involved with syndicates at Lloyd's. The New York Insurance Department then sent two representatives to London to discuss the introduction of actuarial opinions with representatives of the Institute of Actuaries. After detailed negotiation and discussions, we developed procedures and approaches and also produced wordings that were acceptable to all parties. Over the next few years, most Lloyd's syndicates had introduced actuarial input in respect of the quantum of their year-end reserves. This was followed up a couple of years later by other opinions including full actuarial opinions for all liabilities for syndicates at Lloyd's. Such opinions, and others, are still in force today, albeit enhanced and modified.
Is it now time for more detailed and useful opinions to be introduced? These might include opining on alternative amounts of technical provisions with varying levels of confidence.
Lloyd's and those working within the market showed that they were robust and strong enough to survive these unique conditions. However, adverse conditions will arise again at some future time. These must be addressed at that time, but I firmly believe that the use of actuaries within the insurance industry has averted significant problems that have faced other financial institutions. The introduction and implementation of Solvency II is just one more important stage in the process of ensuring that Lloyd's is ready. It is essential that the last message in the January 2015 article of The Actuary by Andrew Duguid is adhered to. We must adapt and stay flexible or we will not survive.