A very interesting interview with Andrew Duguid about Lloyd's on the brink in the 1990s appeared in the February issue of The Actuary. I would like to expand upon it. A link to my more detailed article can be found at the end of this letter.
The problems at Lloyd's started in the early 1980s, with the increasing emergence of claims from the USA relating to asbestos and pollution. Following this, an unprecedented number of large catastrophe claims occurred in the late 1980s and early 1990s, thus compounding the general situation and the poor financial results for many syndicates. There was uncertainty, as Andrew suggests, as to the individual reinsurers or syndicates that would ultimately pay their shares of these losses after they had been through the LMX (London market excess of loss) claims spirals.
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.
The scene at Lloyd's 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, and we were well equipped for this exercise. Once Equitas was up and running, actuaries became even more involved with reserve opinions for syndicates at Lloyd's. This involvement has continued ever since. However, is it now time for more useful opinions, including 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 of the early 1990s. However, adverse conditions will arise again at some future time. I firmly believe that the use of actuaries within the insurance industry has averted significant problems that have faced other financial institutions. It is essential that the last message in the article from Andrew is adhered to. We must adapt and stay flexible, or we will not survive.
Colin J W Czapiewski 18 February
See the full article accompanying this letter here.