Journal of Products Liability: Article by Gerald Oshinsky Insurance coverage for asbestos tort liability litigation.

Minutes of DirectorsÆ meeting of Pulbrook Underwriting Management Ltd 1979 Account Pulbrook Non-Marine Syndicate 90:-:

2. The overall strain on old years of account during October amounted to ú465,852 net after ú530,753 in respect of asbestosis claims. The lower net overall figure stemmed from credit items received during the month;
1. The aggregate strain for the ten months to October 1981 amounted to ú1,042,071 (1980 - ú711,950; 1979 - ú940,612).
2. Additional Asbestos claims totalling approximately US $4.5m were expected during the months of November and December 1981.
3. The adjusted combined 1979 account incurred loss ratio at the end of the thirty-fourth month was 86.72%, an increase of 0.05% during the month;
4. The 1980 account experienced a disappointing month in October with an increase in the incurred loss ratio of 3.24%. This was due more to an increase ion the numbers of losses rather than to any one exceptional loss;
5. The 1981 account loss ratio was 9% better than in the corresponding period for the 1980 account. The expected additional asbestos claims totalling US $4.5m for December, was in addition to the US $1.3m increase for the month of October. The rate of claims reported had doubled to over US $2m per month.

telex to Paul Schooling, Deputy Secretary of the LloydÆs Non-Marine UnderwritersÆ Association (LUNMA), which states:- "Re Asbestos - Second Report

First: Our teamÆs continued inquiries have revealed general acceptance that asbestos related insurance and reinsurance issues are or at least will be in the near future major problems. Many major insurers, however, still proclaim that the problem is not theirs but æother companiesÆ.

Second: Recent exposure of unreleased study of Labor Department with its conclusions paralleling Commercial UnionÆs strong warnings of 20,000 Asbestos-related deaths annually in late 80Æs will undoubtedly increase awareness and possibly interest in confronting insurance impact. We are obtaining full copy of study and will transmit to you.

Third: Commercial Union has apparently accepted recent advice of Washington Counsel that Federal Asbestosis Fund or Bailout is not feasible at present time. Current emphasis by Commercial Union will turn to support of Tort reform in product liability field now identified with Sen. KastenÆs exposure draft previously sent to LloydÆs. We are close to, but not identified as special interest, this and other legislative efforts.

Fourth: Federal Consumer Product Safety Commission may soon propose creation of a æChronic Hazardous Advisory Panel on AsbestosisÆ in recognition of massive problems.

Fifth: Initial sentiment in Congress does no suggest that any Asbestosis Bills will move quickly.

Winchester Bowring approached M J Meacock, Underwriter, of Non-Marine Syndicate 727 to participate on the unlimited run-off reinsurance of the Pulbrook Non-Marine Syndicate 90, that they were trying to place. M J Meacock considered the risk for about ten days and wrote a line in pencil on the placing slip on 19 January æsubject to acceptanceÆ.

Meeting of the Asbestos Working Party. Notes of comments made:-(The notes of comments made at a meeting of the AWP recorded that no one knows what the real reserve situation is).

Charles W Havens 111 of LeBoeuf, Lamb, Leiby & MacRae, LloydÆs U.S. Counsel, letter to Paul Schooling, Deputy Secretary of the LloydÆs Non-Marine UnderwritersÆ Association (LUNMA), stating:-

In accordance with my telex of 8 January 1981, enclosed please find two copies of the study entitled æDisability Compensation for Asbestos-related Diseases in the United StatesÆ, for your use and for forwarding to Mr Don Tayler. [The 650 page report for the period October 1978 to June 1981 was published in June 1981, the final report of 691 pages for the period October 1978 to June 1982 was published in June 1982].

Asbestos-Associated Diseases:

4. Asbestos is a virtually indestructible fibre which, when inhaled into the lungs, tends to persist indefinitely. The major health effects now linked to asbestos exposure include asbestosis, a chronic lung disease, and various types of cancer. Once established, asbestos disease may progress even after exposure is terminated and no specific treatment exists. The latency period before initial clinical problems averages 10 - 20 years.

The two major asbestos-related cancers are lung cancer and mesothelioma. Lung cancer resulting from asbestos exposure has a latency period of 15 to 40 or more years and may result from relatively low-dose exposure. Mesothelioma is an otherwise rare form of cancer of the lining of the lung and abdominal cavity and has no known cause other than exposure to asbestos. In many cases, it appears that very little asbestos can produce the disease. Asbestos exposure is also associated with increased risk of cancer of the oesophagus, larynx, oropharynx, stomach, colon, rectum and with kidney cancer.

4. Estimates of dose-response relationships and mortality and morbidity projections from exposure to asbestos are primarily derived from studies of workers occupationally exposed to asbestos. We estimate that there are presently more than nine million American workers, survivors of over thirteen million workers in primary and secondary manufacturing industries, shipyards, construction work and a number of other industries and occupations who, in the past forty years, were significantly exposed to asbestos. Among those workers, we estimate that 8,500 to 12,000 excess deaths from asbestos-associated cancer will occur for each of the next twenty years, aggregating over 200,000 deaths by the end of the century, due to asbestos exposure from the 1940Æs to the present. Still other cancer deaths will occur from family contacts of asbestos workers and as a result of exposure in consumer use of asbestos products, from environmental exposure, and from exposure in the armed forces. They have not been included in these projections nor have anticipated deaths of asbestosis. Due to the long period during which asbestos ingestion remains latent before symptoms are detected, the Report states that

(5) asbestos exposures beginning in the 1960Æs/1970Æs will be reflected in diseases associated with asbestos first becoming apparent in the decades from 1980 through to 2010. The industries manufacturing and using asbestos expanded massively during the late 1950Æs, 1960Æs and through to the 1970Æs.

9. The Report states that nearly all the survivors of asbestos insulators who filed workerÆs compensation death claims ultimately received benefits.

(10) The Report concludes that the majority of product liability law suits commenced by third parties most commonly ended in out of court settlements. Settlements for deaths occurring from 1967 to 1976 ranged from $1,000 to $300,000 with an average settlement of $72,000. The average legal fee in these settlements was $28,500; the average ratio of legal costs to total recovery was 37%.

20. The Report states that in one prospective study of 17,800 asbestos insulation workers , asbestosis was the cause of death in approximately 7%. In contrast, in the same group, 20% died of lung cancer.

(29) Starting in 1964 there has been extension of concerns about disease hazards associated with asbestos exposure, in that there has been increasing attention to risks among individuals not classified as asbestos workers (mining, milling, asbestos product manufacturing) but rather those who could inhale dust in the course of other work "asbestos breathers" rather than "asbestos workers".

(29) In 1968, the possibility that asbestos-associated disease might be an important problem in shipyard workers was suggested. P B Harries, in his 1968 publication "Asbestos hazards in naval dockyards", reported five cases of pleural mesothelioma among civilian employees of the Royal Navy Dockyard in Devonport. Although isolated cases of shipyard asbestos disease had previously been described, his information was disturbing in that none of the patients was an "asbestos worker". Rather, they were people in other trades (boilermakers, shipwrights, labourers, welders, etc.) who worked in shipyards together with asbestos workers but did not themselves often use asbestos. In the same year, Stumphius described similar findings at the Royal Schelde yard in the Netherlands. Again, the mesotheliomas were among workers other than those in the usual asbestos trades. By 1973, Harris had seen 55 cases of mesothelioma at Devonport, 2 in asbestos

workers, 53 among men in other trades, and by 1979 the number had reached 115.

31. From 1890 to 1970 some 25,000,000 tons of asbestos were used in the United States,

approximately two-thirds in the construction industry. From 10,000 to 20,000 tons of asbestos were applied annually as thermal insulation to pipes, boilers and other high temperature equipment in factories, refineries, power plants and even homes. Much of this material is still in place. Additionally, more than 40,000 tons of fireproofing material, containing from 10-20% asbestos, were sprayed annually in high rise buildings in the decade 1960-1969. Somewhat less had been used for decorative purposes over a longer period of time. Thus, perhaps 1,000,000 tons of friable asbestos material is in place aboard ships and in buildings and industries across the United States. The maintenance, repair and removal of this material pose enormous control problems for the future, especially since proper procedures and precautions have yet to be fully

developed for these activities.

32. Growth in the use of -passenger cars and trucks in the United States from approximately 30,000,000 to 130,000,000 in the last 40 years has carried with it increased frequency of asbestos exposure associated with brake repair and maintenance, since most brakes contain considerable amounts of asbestos, often 50% or even more. Replacing and repairing such brake linings has been a matter of increasing concern. There is little substantial information concerning the total number of workers in these trades over the years, in view of variable turnover rates, intermittent brake maintenance and part-time employment. In the 1970Æs somewhat more than 1,000,000 men were engaged in regular or intermittent brake maintenance work at any one time. Initial clinical surveys indicate that x-ray changes of asbestosis are not uncommon . Instances of mesothelioma have been reported, but there are as yet no useful data concerning overall mortality experience.

32. In 1965, Newhouse reported eleven cases of mesothelioma whose only known asbestos exposure was apparently associated with previous residence in households of asbestos workers . Additional cases have been reported since . Recognition of the mesothelioma "signal" has alerted us to the important problem of family contact disease. Its full extent is not yet known, since the mortality experience of groups of family contacts is only now being studied as commented on above. Similar concepts attend upon considerations of asbestos exposure with consumer products or other environmental circumstances, as with friable asbestos surfaces in schools and public buildings .

33. Disease with indirect-occupational exposure has been well recognised in recent years (see "shipyards" for example). It has also been recognised that some instances of asbestos disease (signalled as mesothelioma) have occurred among individuals who had lesser exposure, as with neighbourhood exposure or by exposure presumed to have occurred in some way while employed in facilities where asbestos was used, albeit at some distance (office workers) . New data have now appeared raising the question whether this last type of exposure might be more important than hitherto believed. Should this prove to be so, it might significantly increase the number of workers who will be eligible for disability compensation.

(52) The Asbestos Information Association has estimated that there are upwards of 3,000 discrete uses of asbestos. A selection of major asbestos products and their uses is presented in Table 2-1.

(57) Thirty percent of the water distribution pipe sold in the United States in 1974 was asbestos-cement.

Stationary engineers, stationary fireman, and power station operators

(69) The results of the estimation of employment and new-hires at risk are shown in Table 2-12, indicating that approximately 13,207,000 individuals were potentially exposed to asbestos from 1940 through 1979 in the occupations analysed to include asbestos and insulation workers, stationary engineers, stationary firemen and power station operators and automobile body repairers and mechanics. The uncertainties in estimating this number have been described previously, but they cannot be over-stressed. The number is an uncertain one. Further it includes a large number of individuals whose potential exposure to asbestos would have been of low intensity or of short duration because of high Labor turnover (see section on lower risk population). Finally the term potential should be emphasised. In categorising a segment of a workforce (such as all production shipyard workers) as being potentially exposed to asbestos, some individuals will be included with no actual exposure. On the other hand, individuals in other jobs (such as management) who do have exposure were not counted. The numbers may or may not balance. These uncertainties will be compensated for ion the estimates of mortality by using data on the mortality or morbidity of representative workforce segments which will also include the full spectrum of exposure circumstances.

It should also be noted that a large number of asbestos exposed individuals are not included in the estimates of Table 2-12. Important groups with identified risks include family contacts of asbestos exposed workers, engine room personnel aboard U.S. Navy ships in World War 11, and individuals exposed environmentally to asbestos by virtue of residence or work near the use of asbestos.

Of those exposed, 18,800,000 of the total and 14,100,000 of those alive on 1 January 1980 were estimated to have had an exposure greater than 2-3 f-yr/rml. Such exposures carry significant risk of asbestos disease. Further, some risks of asbestos disease exists for the 6,900,000 alive on 1 January 1980, estimated to have experienced lesser exposure.

(125) Estimates have been made of the number of cancers that are projected to result from past exposure to asbestos in a number of occupations and industries. Only those potentially exposed by virtue of their employment have been considered. Additional deaths will result from exposure among family contact (household contamination), from environmental exposure, from exposure during consumer use of asbestos products, and from exposure while in the armed forces, particularly in engine rooms of naval ships. No estimates have been made of deaths resulting from asbestosis. These estimates indicate that:-

1. From 1940 through 1979, 13,200,000 individuals had significant potential asbestos exposure at work. 9,200,000 are estimated to have been alive on 1 January 1980.

2. Approximately 8,500 asbestos-related excess cancer deaths are currently occurring annually. This will rise to about 10,000 annually by the year 1990.

3. Thereafter, the mortality rate from past exposures will decrease, but still remain significant for another three decades.

These projections are from past exposures to asbestos. Over 1,000,000 tons of friable asbestos material is in place in buildings, ships, factories, refineries, power plants, and other facilities. The maintenance, repair and eventual demolition of these facilities provide opportunities for continued significant exposure. If such work is not properly done, or if asbestos is otherwise used with inadequate controls, the burden of disease and death from past exposure will be increased by the environmental exposures of the future.

(512) This awareness has greatly increased in the past decade among many groups - physicians, attorneys, Labor unions, scientists, industrial management, the mass media, law schools, science institutions and others. For example, the U.S. Social Security Administration mailed information notices about asbestos disease to approximately 30,000,000 recipients of Social Security checks in 1978, and the Surgeon General sent a detailed descriptive letter about asbestos effects to the countryÆs more than 350,000 physicians in the same year. The U.S. Department of Health, Education and Welfare, HEW Publication No. 78-10320 dated September 1978 "About Asbestos".

(515) Our survey studied asbestos-related deaths in insulators who died between 1967 and 1976. Ninety percent of the suits for these deaths were filed before 1978; thus, the data collected represent the outcomes among a pioneer group involved in asbestos tort litigation. The results of 107 suits whose status was known in 1980 are summarised in Table 7-3. Virtually everyone whose suit was resolved received some money. The average award or settlement in the 60 cases for which we had data was $72,000; the average lawyerÆs fee was $26,900, leaving the plaintiffs an average of $44,100. Only one case was denied in court. The case was dismissed along with many others in the New York courts but was still active pending an appeal of the StateÆs statute of limitations rule.

(518) Our study of insulation workers found that the cause of death influenced whether a tort suit was filed. Survivors of those who died from mesothelioma initiated the highest proportion of suits (22%). Survivors of lung cancer victims filed in only a slightly smaller proportion (17%). The smoking issue did not seem to drastically influence the likelihood of filing. Asbestosis and gastro-intestinal cancer patients filed somewhat fewer claims. For other diseases less commonly associated with asbestos, no suits at all were filed (Table 7-4 ).

(519) In spring 1981, plaintiffs were awarded punitive damages for the first time, particularly ominous decisions for the asbestos industry. Punitive damages, unlike compensatory damages, are not usually covered by product liability insurance policies but must be paid directly by the asbestos manufacturer. Previously, judges had not allowed juries to consider punitive damages. However, in March and April 1981, punitive damages were awarded in Illinois, Pennsylvania, and Ohio. An award of punitive damages indicates the judge and jury have been persuaded of culpability beyond that needed for awarding compensatory damages under strict liability. Punitive damages involve charges such as callousness, wilfulness and reckless indifference. Punitive damages are often awarded in proportion to the financial resources of the company; large companies are assessed higher amounts to inflict the same degree of punishment.

(521) The insurance industry has claimed that the proliferation of asbestos litigation and the money that must be expended for legal costs and damages threaten the financial stability of many of the carriers. While it is impossible to assess exactly the total liability that the insurance industry will be forced to bear, data have been compiled as to past actions and estimates have been made as to future claims. The Insurance Services Office has stated that, for the period between July 1976 and 15 March 1977, the average payment in an asbestos case (for settlement and jury awards) was approximately US $170,000. It was then extrapolated that if one million asbestos claims would to be resolved at that average value, the insurance industry liability would be $170 billion.

(522) Further, it has been asserted that asbestos tort litigation is an inefficient manner to use funds for compensation. A substantial portion of the amount recovered by claimants-traditionally, as much as 33 or 40% goes for legal fees and related costs. Medical and other expenses are paid out of the same source. For the defence, an average of one-third of what is expanded is paid for defence costs, including attorneysÆ fees. When the case is decided by a court verdict, the costs are much higher an average of ninety-five cents is expended in defence costs for every dollar paid for the bodily injury claim. In addition to these legal expenses, there are the normal administrative expenses of the insurer.

Table 7-1 of the Report, lists the companies involved in asbestos litigation;

Table 7-2 of the Report, lists the Asbestos Litigation involving UNARCO up to 1 November 1979.

Table 7-6 of the Report, lists the Asbestos companies and insurance firms involved in cases with "manifestation theory" versus "exposure theory".

A $5m run-off reinsurance xs $800,000 placed for N P Compton, Underwriter of the Philip N Christie Marine syndicate (764) Incidental Non-Marine Syndicate 763 to incept at 12 January 1982 covering 1979 and prior years. Outhwaite wrote 50%.

The LloydÆs market was notified of the Rocky Mountain Arsenal (RMA) claim. RMA is a 180 acre site, located outside Denver, Colorado. The site is owned by the U.S. Army and was leased to the Shell Oil Company. Chemicals were dumped in unlined pool and subsequently seeped into the area surrounding the RMA. On 25 April 1984, Ralph Rokeby-Johnson (Sturge) wrote to Winchester Bowring Ltd. with statistical data for reinsurers, identified various areas of concern, and stated that "One case that has received certain publicity is U.S. Army -v- Shell at Rocky Mountain Arsenal claiming $-8bn .... but again evaluation of this problem will take time".

Financial Times: Controversial LloydÆs man wins

Mr Ian Posgate, one of the most controversial underwriters in the Lloyds of London insurance market, was elected to the ruling committee of LloydÆs yesterday after stiff opposition.

In a rare by-election to fill a place on the committee created by the surprise resignation of Mr Robert Kiln at the end of last year, Mr Posgate polled 1,264 votes. His challenger for the committee place, Mr Peter Daniels, of Lambert Brothers. the underwriting agents, polled 1,237 in a near record poll.

Mr Posgate has angered the LloydÆs -insurance broking community by financing a parliamentary petition which caused Parliament to insist that brokers should sell off their shareholding links with underwriting syndicates because of conflicts of interest.

In evidence before a Commons committee, chaired by Mr Michael Meacher, Labour MP for Oldham W. Mr Posgate detailed a series of abuses which he claimed arose in the close relationships of brokers and underwriters.

Underwriters are critical of Mr PosgateÆs business methods and claim that he undercuts prices established within LloydÆs through informal market agreements. His syndicates are among the most profitable at LloydÆs.

Most of those voting in yesterdayÆs election work in the market. Only a few of the 16,000 or so members who put up the capital to allow the market to function attended. Those that did were entertained by their underwriting agents.

• There is no specific instruction on this in the LloydÆs Audit Instructions for 1981 (other than reference along the lines of "attention is drawn to the incidence of late claims arising from product and disease insurances");
• Asbestosis will almost invariably arise in Syndicates which have reinsured other Syndicates (with specific reference to reinsurance protection effected to cover running off Syndicates);

It was suggested that, on the basis of available statistics, loss reserves on an average claim should be U.S.$125,000 (plus $10,000 expenses per claimant) which means anticipated claims of some U.S. $2-025bn (15,000 notified claims at $135,000 = $2,025,000,000: an IBNR of only 25,000 future claims expected by the mid to end 1980s = $3,375,000,000; Probable loss = $5,400,000,000. London Market share nearer 40%). About 40% is thought to fall on the London Market on an exposure basis whereas on a manifestation basis it is thought to be 10%; and attention was drawn to three other cases requiring attention:

[This case concerned the leakage of toxic industrial chemicals from an old landfill site in the Love Canal section of Niagara Falls. The leakage caused chromosome damage, requiring the whole area to be evacuated. The early estimates of loss increased rapidly: an estimate in Business Insurance of 14 January 1980 estimated a potential liability to Hooker Chemical and Plastics Corporation of $10 billion.]

[Diethylstilbestrol was a drug given to pregnant women and, in 1977, it was being blamed for cancer problems in the womensÆ daughters.]

(At 31 December 1980, Johns-Manville, just one of the 40 known major US asbestos producers, had approximately 14,900 aggregate plaintiffs; by 31 December 1981 the aggregate number of plaintiffs had increased to 27,700 with Johns-Manville being a named defendant in an average of 400 cases per month).The Committee members and Auditors who attended:-

Notes of a Panel AuditorsÆ Meeting on 15 January 1982, prepared by A M Blake of Neville Russell for the benefit of LloydÆs auditors to explain the likely effect of latent disease claims, in particular Asbestosis.

1. Agent Orange: Relating to a defoliant used in the Vietnam War that was affecting war veterans and was a dioxin manufactured by five or six chemical companies.
2. Love Canal: A claim on Hooker Chemical (a subsidiary of Occidental) relating to the dumping of chemicals causing contamination over a large area.

3. DES: A drug causing cancer in female children at the age of puberty.

4. Asbestosis: Claims on 200 companies involving asbestos. 40 of these companies were principally involved in using asbestos in manufacture. The remainder were involved in distributing.

Of the 40 companies principally involved in the claims, 19 were directly insured in the London Market. In respect of 15 of these 19 companies, details of the insurers have been established.

The basis of claim is that of products and legal liability where it was established many years ago that a manufacturer is liable for failure to warn users of a dangerous substance. It is likely that they were aware of the dangers in the war, but suppressed this information due to the war effort. They were undoubtedly aware in the late 1940s of the dangers but took no action. Safety precautions were only introduced in the 1950s and 1960s.

The total period concerned with these claims is 1945 to 1975. The policy form changed during the middle 1960Æs so that instead of covering any one occurrence, aggregate limits were covered.

It was agreed that the normal methods of resolving claims by LloydÆs could not cope with the enormity of this particular problem, and a Working Party was formed with Ted Nelson as Chairman up to December 1981. The Working Party set up a data base using input from adjusters and attorneys calculating losses on both an exposure and manifestation basis. An office in the LUNCO complex is being used for this purpose. This produces details in respect of the 15 major insureds and also includes details of facultative insurers of which there are a great number, and also the underwritersÆ line and reference. During 1982 it will be possible to establish the reinsurers of the direct and facultative insurers and it is possible at the moment to roughly establish the net loss.

So far 15,000 cases have been notified with an average loss of $125,000 plus $10,000 in expenses. The exposure in the London Market is estimated as 30% to 40% on an exposure basis, and under 10% on a manifestation basis. Ted Nelson said that claims were increasing by 400 per month at present with the peak likely during the late 1980Æs. He also stated that 25,000 extra claims were expected by the end of the decade. His arithmetic was not queried at the meeting.

The basis on which reinsurers pick up the liability is not yet clear. Where it has been established that reinsured companies will have a retention of 1 insurer per year it is likely that reinsurers will operate in the same way, but this has not yet been agreed.

The meeting was told that Underwriters have different views on to what extent and whether claims should be reserved for in the future. The matter was not pursued any further at the meeting.

M J M Meacock, Underwriter, of Non-Marine Syndicate 727 wrote a line in pencil æsubject to acceptanceÆ on the unlimited run-off reinsurance of Pulbrook Wrightson Non-Marine Syndicate 90, being placed by Winchester Bowring.

19 Jan 82

Asbestos Working Party letter.

The chairman has asked us to inform you that, in view of the absence of members abroad, there will be no Working Party meeting on Monday 25 January.

In these circumstances, the next meeting will be on Monday 8 February, unless there are developments which necessitate an earlier meeting.

We enclose a copy of the telex message of Mr. Don Greene which is his second report on the subject of political involvement.

D P Taylor (Chairman)	Pulbrook Wrightson
H R Rokeby-Johnson - Deputy Chairman	Sturge
C J Ayliffe	Claims director, Merrett
P A Froude	Janson Green
J R Heath	Weavers/PCW
L E Kemp	Claims director, Lambert Bros
W W Maitland	Janson Green
E E Nelson	BPR/Alder
C H A Skey	Edwards & Payne
A Taylor	Turegum Insurance Company

Note of a Panel Auditors Meeting on 15 January 1982. Memorandum to LloydÆs audit partners and staff from PB Milne of Littlejohn & Co.

1. No special instruction ... ... than a reference along the lines of "attention is drawn to the incidence of late claims arising from product and disease insurances".
2. Asbestosis arises from Direct but more predominantly from Facultative Reinsurance business. (Excess loss of Syndicates and companies). In addition it will almost inevitably arise in Syndicates which have been reinsured by other syndicates. Care must, therefore, be taken to enquire from Syndicate clients the details of all syndicates reinsured by them and in turn, where RI protection has been effected specifically to cover the running off syndicate, the specific RI protection acquired....
3. Asbestosis is a latent risk, but has spilled over into both the Marine and Aviation market. It is predominantly a US liability, but it is in other countries. So far as is known, the ... liability is not very great and probably can be ignored for the time being.
4. Liability arises under Products Legal Liability policies and claims arise through the failure of warnings to consumers of the latent danger. Policies giving rise to claims were issued between 1945 and 1975, with a certain number going back prior to 1945. Up to the mid 1960Æs policies were issued on an "any one incidence basis" but after that date on an "aggregate basis" within a policy year.
5. There has been some 15,000 claims notified, but they are increasing at the rate of 400 per month. It is difficult to guess what the final number will amount to, but it was suggested by the mid to end 1980Æs we should expect some 25,000 in total. (An aside by someone stated that the Prudential were guessing at a figure of 2,000,000. Nelson said he considered this figure to be well wide of the mark.)
6. To date there are some 200 court actions against dealers, but more importantly, there are 60 actions against manufacturers. From researches it has been ascertained that 19 risks were insured in the London Market of which 15 placing slips have been located with high hopes that the remaining 4 slips will be located shortly.

1. Court actions to date have taken the form of 15 Declaratory Actions to determine whether insurers are liable to assureds. Courts have ruled in three actions:-

Firstly the foregoing decisions are a bit of a nonsense and the London Market is currently in the process of appealing to the U.S. Supreme Court to obtain a sensible ruling.

There is also a move in California to make a Consolidated Declaratory Action in four major cases

2. Love Canal - Bodily and Property damage from waste. Hooker Chemical Co.
3. Des - Bodily injury - 12 US chemical manufacturers involved but principally Upjohn.

Mr J C Nevitt, underwriter of the BPR/Alder Aviation Syndicate 950, purchased a "Time & Distance" policy protecting the syndicate in respect of the run-off of the 1979 year of account of J P Tilling Aviation Syndicate 340, jointly managed by Fenchurch and McClelland & Tilling Underwriting Agencies.

By way of background, Mr Nevitt had by 1982 become concerned at the deterioration of this run-off contract and John Tilling recognising the problem agreed to purchase a "Time & Distance" policy and assign the proceeds over to syndicate 950. He was prepared to pay a premium of up to $200,000 and obtained a quotation from First State of Boston, Massachusetts, via LloydÆs brokers Bradstock Blunt & Crawley. The initial negotiations were carried out by him but I ultimately felt that the limit offered was insufficient and agreed to pay a further $115,000 on top of the amount paid by J P Tilling.

By letter of 9 August 1985, Bradstock Blunt & Crawley set out the investment policy of First State of Boston from which it can be calculated that the syndicate was credited with about 61.50% of the investment income, after deduction of costs. Mr Nevitt purchased a further policy in excess of the above which was on similar terms.

Unlimited run-off reinsurance xs $26,969,321 placed for D P Tayler Underwriter of Non-Marine Syndicate 90 managed by Pulbrook Underwriting Management to incept at 1 October 1981 covering 1974 and prior years. Outhwaite wrote 50%, Meacock Syndicate 727 also participated, based on placing information prepared prior to the first approach to Outhwaite in June 1981. Winchester Bowring never informed either Mr Outhwaite or Mr Meacock that the provisions in respect of asbestosis-related claims had increased recently by some US $5.8m. The run-off policy was disputed, referred to Arbitration, and subsequently compromised. R H M Outhwaite put his stamp on the Winchester Bowring placing slip on 28 January 1981; the Meacock Syndicate 727 put their stamp on the placing slip on 29 January 1981 in the absence of M J Meacock who was away on holiday. D P Tayler was the Chairman of the Asbestos Working Party, and had visited New York in September 1981.

LloydÆs issues the "Instructions for the Guidance of Auditors", covering the audit of the 1981 year. A prime responsibility of the syndicate auditor was to "satisfy himself that all investments and cash taken into account in arriving at the MemberÆs Syndicate result are held in trust in accordance with the provisions of a Deed of trust approved by the Secretary of State" Until the post-1982 reforms no standard accounting or audit practices or rules in relation to disclosures have applied. LloydÆs has tended to encourage agents and underwriters to consult Auditors on matters where advice is required rather than giving that guidance themselves. Prior to 1982, the LloydÆs Market had few rules which impinged significantly on its insurance activity or on accounting for it, and such control that was exercised was often informal rather than mandatory.

The solvency audit is a requirement of the Insurance Companies Acts and also of LloydÆs Under Section 83 (4) of the Insurance Companies Act 1982 the auditor "shall furnish a certificate in the prescribed form to the Committee and the Secretary of State". Prior to the 1982 Act, there were similar requirements laid down by the Insurance Companies Act 1974, and before that by the Insurance Companies Act 1958.

The prescribed form of the certificate for the audits up to 31 December 1980 was given in the Assurance Companies Rules 1950, S.I. 1950 No. 533, under which the auditors were required to report inter alia that:-

For the audit as at 31 December 1981, the form of certificate was different and was given in LloydÆs (Audit Certificate) Regulations 1982, S.I. 1982 No. 136.

The Instructions for the Guidance of LloydÆs Auditors have statutory force in view of the wording of the certificate required by the Insurance Companies Acts. The Instructions have remained largely unchanged for each audit from 31 December 1970 to 1980. The Instructions included among their requirements that the auditors shall:-

For the audit as at 31 December 1981, these requirements all remained in force or became more stringent. One new requirement was that the auditor must satisfy himself that the underwriting records appear to have been properly kept. For the distinction between books and records see under "The Requirement for Books to be Properly Kept". The DTI Inspectors appointed to investigate the PCW affair define in their report to the Department of Trade & Industry the meaning of certain of the requirements listed above. They did this at some length, as differing views have been expressed to them.

In many instances the documents described in respect of the syndicate accounts and syndicate solvency audits refer to "Auditors" or "Audit". Furthermore, the reports by the auditors in respect of the syndicate accounts audit were headed "Auditors Report". It is thus in our view clear that the auditors were expected to carry out an audit. This was not however what is sometimes called a full scope audit. Such an audit involves an expression of an opinion on the financial statements of the business, including the balance sheet and profit and loss account or other form of income statement. In the case of the syndicate accounts audit, the auditors were not required to express an opinion on the financial statements of the syndicates, but only on the specific matters described under "the Syndicate Accounts Audit". While not required to carry out a full scope audit, they were in our view required to carry out an audit in respect of these matters. Likewise, for the Syndicate Solvency Audit, the auditors were required to carry out an audit in respect of the specific matters they reported on under the prescribed form of the Certificate for audits up to 31 December 1980 , which was given in the Assurance Companies Rules 1950, Statutory Instrument 1950 No. 533. For the audit as at 31 December 1981, the form of Certificate was different and was given in LloydÆs (Audit Certificate) Regulations 1982, Statutory Instrument 1982 No. 136. We consider that any exercise constituting an audit should involve some scrutiny of at least three more material underlying transactions and balances. An auditorÆs duty goes beyond checking just the arithmetic. The auditor should examine the underlying documentary evidence, and obtain independent corroboration.

1. The Certificate required for the solvency audit states that "the books appear to us to have been properly kept".
2. The Instructions for the Guidance of LloydÆs Auditors for the audit as at 31 December 1981 require the auditor to satisfy himself that the accounting records appear to have been properly kept. For previous years, there was no such requirement, but the auditor was required to report to the Committee of LloydÆs if in his opinion the underwriting books have been badly kept.
3. The PCW agency agreements for the underwriting years onwards contain a provision that the agent shall keep such usual and proper underwriting books, accounts and memoranda as are kept by underwriting agents at LloydÆs. These requirements raise the question of what is meant by properly kept books, by properly kept records, and by proper books.

1. Examine the books in accordance with the current Instructions for the Guidance of LloydÆs Auditors, see item 1 under the Syndicate Solvency Audit.
2. Examine premiums, returns, claims, recoveries and reinsurances in order to agree the totals see item 1 under the Instructions for the Guidance of LloydÆs Auditors.
3. Examine the settlements in relation to the reserves created at previous audits to wind up the underwriting accounts, see item 3 under the Instructions for the Guidance of LloydÆs Auditors.
4. Examine the balance sheet and underwriting accounts with the books see item 2 under the Syndicate Account Audit.

1. The aggregate of the reserves based on specified percentages of net premium income. The Instructions set out different percentages for different years and categories of business.
2. The total of estimated outstanding liabilities as at the audit date, which must include an element to take care of unnoted and unknown liabilities.
3. The amount of the reinsurance premium charged to close the account, including any previous years reinsured into that account.

Particularly in the earlier years, very little audit work was carried out on the reconciliation between the figures shown in the books of the syndicates for the balances with brokers, and the figures shown by the LloydÆs Central Accounting system. Yet this is one of the items which the auditors are required to check, see item 5 under the Syndicate Solvency Audit and item 5 under the Instructions for the Guidance of LloydÆs Auditors. The PCW Auditors have expressed the view to us that they were required to check that reconciliations had been carried out, but in the absence of anything untoward they were not required to carry out any work on the reconciling items. Furthermore they have taken the view that they were under no duty to make any inquiries as to the security of the reinsurers of the syndicates, even though the amounts owing by reinsurers formed part of brokersÆ balances. In our view this is too narrow an interpretation of their responsibilities. The wording of the audit certificate, see item 5 of the Syndicate Solvency Audit, is not consistent with such an approach, particularly in view of the need for provision against doubtful debts. Also our interpretation of an audit , see above, means that some scrutiny of the underlying documentary evidence was required. Furthermore the requirement for assets to be correctly valued, see above, means that work should be carried out to ensure that amounts owing from brokers are not materially misstated.

We have described in chapter 15 a number of ways in which the affairs of the agency companies were improperly conducted. These ways are summarised :-

1. Excessive benefits to participants in the schemes involving "agency companies".
2. The relationship between the companies and the syndicates involving interest free financing provided to the companies and improper charges made by the agency companies to the syndicates.
3. The relationship between the companies and other parties and organisations outside the LloydÆs market, involving transactions between these related organisations, frequently not on armÆs length basis.
4. These matters constituted improper conduct of the affairs of the "agency companies". Ultimately it was the Names on the syndicates who bore the cost of these matters. We criticise the PCW Auditors for their conduct of the audits of these companies. However we consider that they also failed in their responsibility as syndicate auditors. There is little evidence that they ever considered the reasonableness of charges between the syndicates and agency companies. They did consider the equity of some charges between one syndicate and another, but having identified a problem, did nothing effective about it.

We have described a number of ways in which in our view the PCW Auditors failed to carry out their responsibilities as syndicate auditors. Some of these matters were of major importance. If the PCW Auditors had carried out their responsibilities, it is likely that it would have been more difficult, and perhaps impossible, for the quota share schemes and most of the other matters described in our report to have operated. It has been said to us that there were other firms of LloydÆs syndicate auditors at the time who took a similar approach to the PCW Auditors. Also, as we say in the next heading, the rules and regulations of LloydÆs were unclear and fell well below what was required. Nevertheless, we consider that there was a serious failure by the PCW Auditors to carry out their duties.

A LloydÆs public information film made prior to November 1982 stated that:

Probably this corresponded to the general public perception of a LloydÆs syndicate audit at that time. In fact the situation was quite different. As we have stated, it was in many respects unclear what was required of a LloydÆs syndicate auditor. We have criticised the PCW Auditors. Moreover, we also criticise LloydÆs: their rules and regulations were unclear and fell well below what was required to ensure that the Names on the syndicates received adequate assurance from the audit that all was well.

Instructions for the Guidance of LloydÆs Auditors: audit of the 1981 year

Some understanding of the æthree yearÆ basis of accounting, of open years and of the procedures for reserving for outstanding claims is necessary. Traditionally, insurance companies writing a marine account follow the same three year approach for that class of business. In addition, many writing a LloydÆs-style non-marine account have also followed this approach. Sphere and Drakes the two principal UK insurance company subsidiaries of Howden, adopted a four year basis but in other respects the system was similar to that of the three year basis.

In essence the three year accounting rule means that each calendar year of account is treated as a single entity, and the results relating to that yearÆs underwriting are identified separately. Because the composition of a syndicate changes from year to year (some Names leave and others join) each year has to be viewed as a discrete unit. However no profit (or loss) is struck until 24 months after the end of the relevant underwriting year of account.

The basic reason for the tradition of the three year account is that insurance claims are often not reported until well after the end of the year of account to which they relate. In some cases it may be ten years or more before major cases are settled, particularly in respect of long-tail business, when it may take some considerable time for the loss to be advised to insurers - even longer before it is advised to all the reinsurers - and longer still to settle. In some extreme cases it may be much longer before claims are reported: one particular type of risk where this has occurred recently, particularly in the LloydÆs market is in respect of latent diseases such as asbestosis, where claims are only now being made on policies written between the wars. Even when a loss or provisional loss is reported, a further period of time may elapse before the loss crystallises as a final amount. The three year accounting convention recognises this difficulty in that it allows LloydÆs underwriters to await the development of their account before they have to assess losses not yet reported (known as æincurred but not reportedÆ - æIBNRÆ). By the end of the third year it is assumed that there will be a sufficient claims experience, and knowledge of the particular pattern of claims in any line of business within the market, to be able to estimate reasonably what provisions for remaining unreported claims ought to be made. At the end of the three years, therefore, a profit or loss is struck. Insurance companies writing a LloydÆs-type account will adopt the three year basis broadly following many of these principles suitably adapted for a company (rather than a syndicate) environment. The only difference of substance is that companies, because they account annually, can - and should - recognise losses on open years when these are foreseen.

LloydÆs, through the accounting and auditing rules æInstructions for the guidance of LloydÆs auditorsÆ, regulates this procedure by requiring a minimum provision to be applied to each class of business for both open and closed years. At the end of the three year period the balance is struck by way of the æreinsurance to closeÆ whereby estimated outstanding liabilities of the closing year of account are reinsured (usually) into the next oldest year, a substantial premium passing to pay for the claims and potential claims as assessed relating to the closing and earlier years of account. The calculation of the reinsurance to close is complex but relies principally on the judgement of the underwriters concerned. In the LloydÆs market this has traditionally been agreed with the auditors, the only benchmark being the audit guidance notes which provide set minimum percentages, to which are normally added further provisions necessary in the context of the underwriting pattern of the particular syndicate. The reinsurance to close has been said to be the ultimate underwriting judgement. Included in the reinsurance to close, since the operation is repeated each year, are outstanding premium income and claims (reported or just estimated) theoretically from every year from the inception of the syndicate. The reinsurance to close includes not only claims notified but a provision for IBNR - which is where a greater element of judgement arises. With a syndicate writing traditional business, where the nature of the account changes little over a period, it is not normally difficult to establish a pattern of settlement which will assist in the formulation of the reserves necessary for IBNR. In some of the newer- and more unusual risks, such as computer leasing where the estimates of overall losses were subject to considerable speculation, estimates of future claims arising can vary considerably from one year to the next. The reinsurance to close will also have regard to the availability of reinsurance protection covering that year of account and may also take some account of any rollover funds.

The financial statements of the various syndicates have taken a number of different forms, since until recently there have been no generally accepted standards for presentation of these statements or for the level of disclosure which is appropriate. Accordingly, agencies have tended to disclose little in the syndicate accounts which they present to members and, the three year rule and associated provisions apart, accounting conventions have varied widely. In part, this may have resulted from the lack of interest shown by most of the users - the Names - whose main interest not unnaturally has been in the size of their annual cheque. When this is satisfactory - and by and large Names seem to have been content with the return on their risk capital - there has been little need to examine accounts in detail. The accounts themselves have often been difficult to understand except by LloydÆs professionals; reliance on membersÆ agents in this and similar matters has tended to be encouraged by the working community of LloydÆs as a whole.

A LloydÆs public information film made prior to November 1982 stated:

Probably this corresponded to the general public perception of a LloydÆs syndicate audit at the time. In fact the security of the insured. A prime responsibility of the syndicate auditor as set out in the audit guidance dated 1 February 1982 (covering the audit of the 1981 year) was to "satisfy himself that all investments and cash taken into account in arriving at the Member's Syndicate result are held in trust in accordance with the provision of a Deed of Trust approved by the Secretary of State". A number of additional requirements are stated, the majority relating to verification of assets, although the auditor must also "satisfy himself that the accounting records appear to have been properly kept."

In addition, the auditors have important responsibilities for agreeing the reinsurance to close, checking to see that the provisions made at the end of 36 months are at least in line with the minimum reserves required by Lloyd's. In practice considerable judgement and detailed knowledge of the underwriter's account is necessary to form any view as to the adequacy of, in the words of the audit instructions, "outstanding liabilities as at 31 December l9xx (which must include an element to take care of unnoted and unknown liabilities) ..."

However, the auditors' responsibility in relation to the assessment of the reinsurance to close was not fully defined until February 1983.

LloydÆs Log: A View of the Non-Marine Market. Speaking at a recent meeting of the Insurance Institute of London, Mr. Lawrence, a Deputy Chairman of LloydÆs, sought a consensus view of prospects for the coming year.

In adopting a new approach to the popular meetings of the Insurance Institute of London, Mr. Murray Lawrence, a Deputy Chairman of LloydÆs, sought the participation of his audience in analysing the state of the Non-Marine Market.

His audience, which included a large number of senior London underwriters and brokers gave their views on a number of leading issues, the object of the exercise being to identify a common or majority reaction to topics ranging from the state of the 1981 underwriting year to prospects and growth in 1982.

1. What do you think will be the outcome of 1981 year/year of account after taking into account expenses, but before investment income/capital appreciation? (up to 10% loss net).
2. What do you think investment income/capital appreciation for 1981 underwriting year will be as a percentage of net PI? (10% -20%).
3. Combining everything, what do you think the outcome of the 1981 underwriting year will be? (up to a 10% profit with a substantial number expecting a break-even result).
4. With regard to the renewal season just ending, how do you think in broad measure the terms for 1982 will compare with 1981 terms?

1) For direct insurance rates? (up to 10% reduction).

2) For reinsurance terms and conditions? (up to 10% reduction).

5. Given level rates of exchange in major currencies between 31.12.81 - 82, what growth, if any, in gross P.I. do you expect 1982 to show over 1981? (There was a diversity of opinion with some expecting a reduction, some a growth of up to 10% with the majority expecting no change).
1. What percentage growth do you expect 1982 to show over 1981 expenses? (up to 10% increase).
2. What percentage of gross Pl do you reinsure at the moment? (25% - 50%).
3. What percentage of gross Pl do you expect to pay in 1982 by way of reinsurance compared with 1981? (slightly more say + 5%).
4. How do you think that interest capital appreciation earnings in 1982 will compare to 1981? (slightly higher).
5. What do you feel is the likelihood (0-100) of existing loss reserves having to be added to during the next three years in respect of what are today closed underwriting years? LloydÆs 1978 and prior; companies 1980 and prior. ( 50 - 95)

"The market has tremendous advantages but it also has some disadvantages. One of the latter is that it tends to develop a momentum or a common appreciation of things that takes an awful lot to alter. For the last several years on property business and the last few years on casualty business, the market has been faced with requests for improvements in terms that have stemmed from the basically profitable accounts that we enjoyed for a lot of the 1970s, although you wouldnÆt think it looking at the non-marine market results in the LloydÆs global returns. The market has gone into a defensive frame of mind used to being asked to give, and agreeing to give, concessions but this attitude has gone on now for so long that, although I believe on the whole we have fought a good defensive battle or rearguard action, the concessions we have already given have taken us past the start line or break even point in pure underwriting and, yet, as a market we donÆt appear to have realised it as we continue to give further concessions. This leads on to a second point.

Such has been the growth in the market over the last 10 years that today there are many, often in positions of considerable responsibility, who have never been through really traumatic times such as the middle and late 1960s and there appears among some people an almost blind belief that our business is cyclical and all we have to do is hang on and be around long enough and it will all somehow come right in the end. This to my mind is just not so. To change things I believe needs a conscious effort from everybody in the market - obviously the main responsibility will fall on the leaders in the market but it also needs a proper appreciation by all the market or business will continue to be placed in fragmented pieces, in spite of any stand the leaders may have taken in an effort to halt and reverse the remorseless slide.

We have to get back to some first principles. What are they? Remember we are a service industry. No one owes us a living. No one sends us business so we can make a quick killing. They come because we have ALWAYS offered a service: Flexibility; initiative; speed of decision; security. If ever we forget this, our days are numbered as the leading market of the world. Let us just look at those points again:

Service does not mean quibbling over every claim or even refusing to pay an original assured his just claim because you cannot collect from your own reinsurers.

Flexibility and Initiative do not mean doubling the cover, cutting the premium and widening the perils. It may make you an instant hero with some brokers but who are you kidding in the long run? Innovative underwriting it may be - but it only has one end - tears! Speed of decision does not mean giving a reply in two minutes flat without proper underwriting information either because its 10 to one and you want to go to lunch or because the broker is in a hurry or because you think by doing so you will show what a gifted underwriter you are. Security certainly does not mean backing up a LloydÆs policy carrying with it unlimited liability with 100% reinsurance with a 7+% O/R, with that well-known company from Alaska.

Integrity in our underwriting and in particular the proper use of reinsurance. Obviously reinsurance used responsibly and backed up with proper underwriting information and based on mutual confidence is a vital and perfectly proper way of spreading the risk, or laying off excessive liability of one sort or another. However, undoubtedly some reinsurance today goes a lot further than that. I regret that all too often original underwriting seems to be done flagrantly and blatantly on the back of and at the expense of reinsurers and, to my mind, this behaviour can only have one inevitable result. Reinsurance generally will become a dirty word and good reassureds will suffer with the bad but the real long-term damage will be to the market-place itself. We have already seen instances where brokers and underwriters alike have been too ready to take massive and ruthless advantage of soft markets with deep pockets. Remember that the inadequacy of original terms and conditions compounds the further you get away from the original business. If we here believe our present terms and conditions are so many per cent below what they ought to be, just think for a moment what the inadequacy of the terms and conditions are of the reinsurers of the reinsurers of those who reinsure us. Fair game some of you may say - but is it? Such action is certain to, and already has, rebounded on the reputation of this market and makes some clients, and long-term ones, think twice whether they wish to continue to send their business here.

What is the dividing line between the acceptable and unacceptable use of reinsurance? Difficult question with no easy and certainly no one correct answer but I offer you this as a possible cock shy. When original gross underwriting standards are thrown overboard or seriously compromised because of the availability of stupid reinsurance. Once we lose sight of and discard gross line underwriting integrity, I believe we are lost. What grounds have we for holding ourselves up to being an underwriting, risk taking market offering continuity? If we ever lose our gross underwriting integrity, we will simply become another wheeling and dealing market which will never know what continuity it can offer because it will be totally dependent on the availability of reinsurance, and remember, this works both ways.

OK when reinsurance is ridiculously cheap and you are a hero offering gross lines at cheap gross rates on the back of that reinsurance, but have you stopped to consider what happens when cheap reinsurance markets dry up and, to try to recoup their losses, they charge too much for the reinsurance. The only way you can then react is by in turn either charging too high original rates in order to continue to make your margin and thereby probably losing the business or writing that business at a negative margin until reinsurers, having recouped their losses, bring their prices down to a more reasonable level.

Another facet of reinsurance that concerns me is that we are at the moment very often selling our security - one of our greatest assets - on the back of what may turn out to be a fragile pack of cards. We may today be heroes accepting millions on an individual risk or writing catastrophe accumulations of tens of millions but what happens if one day, say, one third of the security on which those gross lines are based refuses to renew - what sort of hero do we then look to our clients - what price then continuity?

I have believed for some time now that the future prestige of the London market will depend on how it reacts after the next big bang, whenever and however it occurs, on two points: First, the speed with which our clients are funded their claims by us, regardless of whether we have been reimbursed by our reinsurers, and, second, the degree to which we stand up and are counted for our same gross lines when we may have lost a considerable percentage of our own reinsurances. So then, let us concentrate on and, where necessary, get back to gross line underwriting - other competitors do this and they will leave us far behind in the future if we fail to do so.

Improving and giving more thought and time to the education of the young - not only in matters of detail but also in matters of standards of behaviour. Example is one of the best ways to influence people.

Modernisation of our business - whichever way you like to look at it, we are either dragging ourselves into the 20th century or preparing ourselves for life in the 21st century. Learning to live with the micro chip and understanding how to turn it to our use. A complete overhaul of the traditional horse and cart ways in which we conduct our business after we have underwritten it from the point of view of speed of flow of premiums to the market, and claims to assureds and reassureds. Preparation of and the speed with which assureds receive their policies and other evidence of insurance. I venture to suggest that by the end of the 1980s we will look back with disbelief at the way we used to do things. If I turn out to be wrong in this assumption, I have considerable fears for the standing of the London market at that time because I do not see how we can continue as we are and still retain the pre-eminent position we do in the world today. An overhaul and updating by the City in general, and LloydÆs in particular, of the self regulation process. We have seen the Wilson and Fisher reports which have added impetus to this movement. Whatever private or public views may be held about certain aspects of, and recommendations of, the Fisher Report, there is I believe general agreement that the disciplinary procedures in the LloydÆs market are totally out of date and inadequate to deal with present-day situations and problems though this should be corrected when the LloydÆs Bill becomes law. So far as the companies are concerned, I do not believe that, following the prolonged publicity that has surrounded the LloydÆs Bill, the Department of Trade will not be looking before too long at some increased regulation of insurance companies in the London market.

But the point I want to finish on is to go back to what we met here to discuss, the state of the non-marine market, and I want to make as forcibly as I can the point that, forget cycles, forget Fisher and self regulation; for the market to change course it needs, first, a realisation by all of us in the market that it needs to do so and, second, a determined conscious effort by all of us to see that it does. Sitting back, doing nothing, waiting for it to happen on its own or for somebody else to do something about it, turning bad business into something vaguely liveable with by the ruthless exploitation of naive reinsurance markets, will not do - the position is too serious and all of us I presume do wish to hand on to our successors at least as healthy and thriving an inheritance as we received from our predecessors - well if so, we had all better do something about the present situation and quickly".

Mr Randall discussed the auditors warning privately with Peter Green, the Chairman of LloydÆs, and Murray Lawrence, a Deputy Chairman of LloydÆs. There was great anxiety that the LloydÆs market should not appear incapable of paying claims and that auditors should not be given directions which would prevent them from signing solvency reports for syndicates.

Mr Outhwaite wrote 51 run-off policies which fall into the 1982 year of account. Of those 51 policies, 19 were written in earlier years (that is, 1974 to 1981) and have been reinsured into the 1982 year of account as a result of the RITC. The remaining 32 were signed into the 1982 year of account although 11 were actually written in 1981 or December 1980. Of the total of 51 policies, Mr Outhwaite led 47 and took a 100% line on 20. Not all the policies upon which a less than 100% line was taken were fully placed in the LloydÆs Market so that Mr Outhwaite may have been the only Underwriter signing. It has not been possible to determine exactly how many run-off policies were placed in the LloydÆs market generally in 1981/2. Certainly there were some run-off policies placed that did not involve OuthwaiteÆs syndicates. However, those syndicates which have also been underwriting such policies do not appear to have very many on their books and it is clear that Outhwaite took lines on a sizeable majority (perhaps in excess of 80%) of all run-off policies annually placed in that period.

1. That the absence of a "true and fair" requirement, inevitably took away some of the pressures (especially for agents and auditors), to research syndicate exposures;
2. That many syndicates had "rollover" funds offshore and "off balance sheet". Doubtless, there was some (at least notional), netting off of potential deterioration against the undisclosed offshore funds. If, in such cases, the RITC figures were used also for placing a run-off, the reinsurers

(i) were not advised of the true exposures at the time and

(ii) did not get the benefit of the rollover funds when they came back onshore (or, at least, I have seen no evidence to suggest that they did).

3. That there was no doubt about the developing problem of Asbestos, not least because of market meetings sponsored by the Audit Committee, chaired by Mr Murray Lawrence. Run-off reinsurers should have been able to assume that LloydÆs instructions had been followed. Finally,
4. My real concern about standards of disclosure and trust (see end of your minutes) is that LloydÆs operates in a market of high volumes where professionals, working together, take short cuts. In such an environment, the most strict standards must be applied or the market will cease to function.

Daily Telegraph: LloydÆs group in split over reform Bill

A DEEP division split LloydÆs apart over the weekend with the formation of a committee comprising top underwriters and brokers to co-ordinate opposition to the LloydÆs Bill due for its third Parliamentary reading on Wednesday.

Following the backing for the Bill by the market associations on Friday, a group of senior LloydÆs people have formed a group to ensure the measure is amended. They are so strongly opposed to the legal immunity demanded by LloydÆs that they are prepared to sacrifice some of the gains they have already made through changes In the draft Bill.

The threat is that these top market men will make it clear to Parliament they would rather lose the Bill than have one which deprived so many people of their legal rights. The Bill might then be talked out by a group of Conservative MPs who already oppose the legal immunity provision.

Richard Needham, one of the M Ps who have criticised the measure, last night attacked the chairman of LloydÆs for his handling of the Bill. "I do not believe that the genuine objections of those opposed to various measures in the Bill have been handled by some of the present leadership as sensitively as they might have been." he said.

He added that "the deep divisions" within LloydÆs should not "provoke a fillibuster which might destroy the Bill."

He also said he respected the view that the "Bill lacks the correct framework for successful self-regulation within the market." With opposition to immunity growing, it is thought that even if the Conservative MPs do not talk it out, the fight over the Bill will continue in the Lords.

1. Mr. KilnÆs resignation from the Committee of LloydÆs has profoundly shocked the market, and, together with the airing of many opposing viewpoints in front of the Parliamentary Committee, has finally served to concentrate the marketÆs mind on the form of Bill that it does in fact need. The overwhelming consensus is now in favour of Mr. KilnÆs Bill, not Sir Henry FisherÆs straightjacket.
2. Mr. Ian Posgate, whose evidence alone convinced Parliament that it must insist on full divestment, now accepts that FisherÆs "Measures short of compulsory divestment", backed by reserve powers with the Secretary of State, would be adequate to deal with the conflicts of interest in question. It is this statesmanlike gesture which makes the present consensus possible.
3. During at least the past year the Chairman of LloydÆs and Mr. Peter Miller have not been keeping the Committee of LloydÆs informed of important documents put forward by those objecting to the Bill in its present form. Examples of these are:

1. A letter written by us to the Chairman on 15th January 1981 offering to bring critical Members of Parliament and External Names to a meeting at LloydÆs to compromise on the Bill and thus avoid the Petition to Parliament which, in the absence of such meeting or compromise, was subsequently laid. The compromises suggested in that letter reflect the consensus in the market today, and all the intervening disagreement has therefore been an expensive waste of time.
2. The legal opinions put forward by our side three weeks ago suggesting compromises on Clause l4 (Immunities), which has always been the BillÆs main stumbling-block.

1. Either the Chairman of LloydÆs and Mr. Peter Miller are not telling the truth when they inform the press that the Chairmen of all the Market Associations gave full support to the Bill last Friday and Saturday, or some of the latter are not telling the truth when they tell us that they have done no such thing.
2. The only two people in the LloydÆs community who still passionately want the Bill to succeed in its present form are the Chairman and Mr. Peter Miller.
3. The Chairman is mistaken when he opines that this Government will not give the Bill time in the next session of Parliament if it fails in debate or is withdrawn.
4. If it is true that the majority of the Committee and community of LloydÆs would be relieved to see this Bill fail or be withdrawn, then it is wrong and dangerous to waste more of ParliamentÆs time with it until it has been appropriately amended.

Paul W. McAvoy: The Economic Consequences of Asbestos Related Disease.

By 2015 would be between 154,000 and 450,000 excess deaths from asbestos. Future compensation would be between $8 billion and $87 billion, with most likely estimate being $38 billion.

advises that he has visited the Elborne Mitchell office utilised by the AWP as a central data base and the focal point to provide the necessary information to the LloydÆs market and that it was to quote his own words "A little chaotic in that a lot of the data sheets were not stored properly and there were not enough filing cabinets, etc., and that the woman seemed a little disorganised".

Meeting of the Asbestosis Working Party attended by Elborne Mitchell

1. Auditors would only be given access to the information if accompanied by syndicate representatives;
2. The information at the office was merely support for the reports already sent to the Market.

9. Other Assureds. Mr Ayliffe reported that the accounts of Eagle-Pitcher had been qualified by their auditors.

The LloydÆs (Audit Certificate) Regulations 1982, Statutory Instrument 1982 No. 136 issued by the Secretary of State in exercise of his powers under Section 73 (4), 85 (1) and 86 (1) of the Insurance Companies Act 1974

(a). It specified in considerable detail the steps to be taken by Underwriting agents in calculating reserves to be carried by syndicates in respect of asbestos related claims at 31 December 1981 for the closing of the 1979 year of account. The previous requirements remained in force or became more stringent. Among the changes, was a new requirement that the auditor must satisfy himself that the underwriting records appear top have been properly kept; and an increase in the number of classes for which an individual account is rendered. In the past, there were only five such categories whereas now there are nine. In addition a five year summary of the main operating highlights is given and for the first time a full description of the accounting policies used at LloydÆs. Another important innovation is the inclusion in the underwriting accounts of separate figures for the reinsurance provision made to close the 1980 and previous accounts.

Leeds Castle meeting: Lloyd's Underwriters' Non-Marine Association - The Leeds Castle meeting dealing with asbestosis

A San Francisco Attorney, Peter Keane, had already expounded on the subject of asbestos by stating "you guys had better wake up, asbestosis is going to be the most diabolical thing that has ever hit the insurance industry." Keane reported to Lloyd's that asbestosis claims were running at 400 a month and could reach 50,000 by the end of the decade.

A new U.S. arrangement, the Wellington Agreement, was formulated to settle these claims on a less complicated basis. This and the change in U.S. Tort Law meant that henceforth they would be settled more quickly and on a big scale; a piece of information of burning importance to any Underwriter of U.S. Liability business.

New York Times: You too will pay for asbestos

A letter from the AWP to all interested underwriters stated that in view of the uncertainties of the future, it is difficult to provide any meaningful projection of the developments that are likely to take place over the coming years in regard to this problem and added that the number of claims is likely to escalate and future deterioration is inevitable.

Letter from D P Tayler, Chairman of the Asbestos Working Party to all interested underwriters (informing them that an office had been established to hold centrally details of asbestos claims and AttorneysÆ advices, which were available for inspection by interested parties, at the office of Elborne Mitchell).

The arrangements are complete for the establishment of an office at LUNCO where documents and computer print outs can be inspected by underwriters.... Your auditors may also want to see the information, however, in view of the need for confidentiality it will be necessary for them to be accompanied by your own representative. It was emphasised to you in the circulation of year end reserves that, in view of the uncertainties of the future, it is difficult at this stage to provide the market with any meaningful projection of the developments that are likely to take place over the coming years in regard to this problem. However, the number of claims is likely to escalate and for this reason I must emphasis that future deterioration is inevitable.

An Unlimited run-off reinsurance xs $1,500,000 placed for J A Oliver, Underwriter of Marine Syndicate 17 Incidental Non-Marine 16 managed by Stewart & Hughman to incept at 1 January 1982 covering 1978 and prior years. Outhwaite Non-Marine Syndicate 317/661 wrote 100%. The premium was $575,000, Marine Syndicate 17 carried a reserve of $1,437,736.

Financial Times: LloydÆs Chairman closes Reinsurance Investigation

Mr Peter Green, the Chairman of LloydÆs of London, the insurance market, has completed a rare personal investigation into a reinsurance contract arranged by one of the largest underwriting groupÆs at LloydÆs. He concluded that no further action is necessary. More than 1,000 Underwriting Members who participate on underwriting syndicate numbers 810 and 869 have been told by PCW

Underwriting Agencies, the group looking after their affairs, that the contract "contained errors which most regrettably were perpetuated throughout the lifetime of the contract". Substantial refunds are being made to the syndicates and the amount involved could be more than ú400,000. Mr Green carried out his investigation following rumours within the LloydÆs market about the contract. He studied a Quota Share Reinsurance Treaty arranged for the underwriting syndicates by Unimar, a Monte Carlo firm of brokers and Seascope, a firm of LloydÆs brokers. Seascope held a 10% shareholding in Unimar. Unimar stood to earn ú130,000 per annum for producing substantial premium income to the syndicates. In the event, according to PCW Underwriting Agencies, Unimar will get ú20,000 per annum from 1978 when it first started arranging reinsurances for the syndicates. The reinsurance scheme with Unimar was not renewed for the 1982 account.

Feb 82

The Committee of LloydÆs established a Committee of Enquiry under the chairmanship of Mr Anthony Coleman QC and Mr Stephen Hailey FCA, of Arthur Andersen & Co, to investigate the relationship of Mr Raymond Brooks and Mr Terence Dooley with the Fidentia. Refunds are being made to the syndicate.

Matthew Leng Jnr, of the U.S. College of Insurance, published a booklet entitled "Environmental Pollution: Liability and Insurance". The purpose of the 60 page publication was to discuss "the major law, regulations and international conventions in the area of environmental pollution and outlines the major forms of insurance coverage available". The booklet included the following comments:

• "No insurance problem existed regarding pollution prior to 1966, because there was no pollution exclusion in any liability policy. Coverage was on an "accident" basis, and therefore somewhat restricted since it provided no protection against gradual pollution. "Occurrence" coverage was available at a modest additional premium, but relatively few insureds purchased it.
• In view of ... increasingly serious and unpredictable environmental problems, the insurance industry developed a contamination or pollution exclusion which became part of the standard language in the 1973 revision of the Comprehensive General Liability policy. That policy says it does not apply:

• The ACT (RCRA) and its amendments were not passed without reason. The EPA estimates that there are 30,000 to 50,000 hazardous waste dump sites, with 2,000 of them constituting imminent hazards to public health. There are estimated to be 1,200 abandoned hazardous chemical dumps, with those in Love Canal, N.Y. and the "Valley of the Drums" in Kentucky being the most well known."

Under the heading of "Problems created by Superfund", the article went on to state:-

• There are a number of serious problems which Superfund creates for insurers. Reference was made earlier in a letter from Dennis R Connolly, Senior Counsel of the American Insurance Association, to the Treasury Department in which he said that Superfund represents an unreasonable restriction on the market.. In the letter, he points out a number of problems:
• The provision that a claimant has a right of direct action against insurers;
• The imposition of retroactive liability on both the insurer and insured;
• The use of strict liability instead of the normal rules of negligence;
• The fact that the strict, retroactive liability is joint and several, making any one insured or insurer responsible for the acts of all who might have contributed to whatever damage or injury occurred;
• The fact that once an insurance company becomes a guarantor, it is limited to the few defences available to an owner or operator; acts of God, acts of war and unrelated third party acts or omissions under certain limited circumstances, and the additional defence of wilful misconduct by the insured. This may be interpreted to negate all the exclusions of the policy, leaving the insurer subject to unlimited liability for all claims authorised by the Act;
• The ambiguity of the language, which creates uncertainty as to the actual extent of the liability it imposes."

"Environmental pollution and liability will be major issues of this decade. Sins of the past are now coming home to roost as old landfills and dumps are impairing water supplies and otherwise affecting the health of entire communities. This is happening in an era of liberal judicial interpretation, with Judges creating new legal theories to hold defendants responsible. It is happening in an era when the theory of entitlement is accepted by many courts. It is happening when many courts are awarding large punitive damages to plaintiffs. In addition, legislators are defying the tradition of the common law and are passing statues imposing strict liability on a retroactive basis, thus completely changing the rules after the game has been played. All this poses severe liabilities which did not exist when they collected their premium dollars in earlier periods. The result will be increased loss ratios, lowered surplus and reduced capacity."

Financial Times: LloydÆs chairman closes reinsurance investigation

Mr Peter Green, the chairman of LloydÆs of London, the insurance market, has completed a rare personal investigation into a reinsurance contract arranged by one of the largest underwriting groupÆs at LloydÆs. He concluded that no further action is necessary.

More than 1,000 underwriting members who participate on underwriting syndicates 810 and 869 have been told by PCW Underwriting Agencies, the group looking after their affairs, that the contract "contained errors which most regrettably were perpetuated throughout the lifetime of the contract."

Substantial refunds are being made to the syndicates and the amount involved could be more than ú400,000.

Mr Green carried out his investigation following rumours within the LloydÆs market about the contract. He studied a quota share reinsurance treaty arranged for the underwriting syndicate by Unimar, a Monte Carlo firm of brokers, and Seascope, a firm of LloydÆs brokers. Seascope held a 10 per cent shareholding in Unimar.

The reinsurance was requested by Mr Cameron-Webb, the active underwriter concerned with syndicate 810. Under the planned arrangement Unimar would participate in arranging reinsurances for the two syndicates and in return Unimar would provide other business for the syndicates to reinsure. In LloydÆs this is known as a "reciprocal arrangement."

Moreover problems arose over the wording of the contract. The terms describing the commission agreements between the syndicate and Unimar were open to different interpretations; and questions arose over whether the syndicates could be entitled to a return of any of the brokerage from Unimar if the scheme was unsuccessful.

Unimar stood to earn ú130,000 per annum for producing substantial premium income to the syndicates. In the event, according to PCW Underwriting Agencies, Unimar will get ú20,000 per annum from 1978 when it first started arranging reinsurances for the syndicates.

Refunds are being made to the syndicate. The reinsurance scheme with Unimar was not renewed for the 1982 account.

Although Mr Cameron-Webb requested that the errors in the documentation should be corrected in 1979, it was only recently that the corrections were made. As a result of the misunderstanding over the wording of the commission terms "a plan of business development which was original in its conception was made to look unnatural in its implementation," Seascope has told Mr Cameron-Webb.

Neville Russell: Letter addressed to LloydÆs Audit Dept

• Arthur Young McCelland Moores & Co.;
• de Paula, Turner Lake & Co.;
• Ernst & Whinney;
• Futcher Head & Gilbert; and
• Littlejohn & Co.

A substantial proportion of our syndicate clients have losses, or potential losses, arising from asbestosis and related diseases.

We consider that the impossibility of determining the liability in respect of asbestosis falls into this category and we accordingly ask for your instructions in this respect".

"Representatives of the Panel Auditors referred to in the Neville Russell letter met on 24th February 1982. It was agreed at that meeting that, in the light of the information provided by LloydÆs on 15th January 1982, LloydÆs needed to take action to ensure that managing agents were in a position to determine their syndicatesÆ reserves in time for the syndicate auditors to report, in approximately two monthsÆ time, on the syndicatesÆ solvency. It was decided that the best way of provoking such action on the part of LloydÆs was to ask the Committee for instructions pursuant to clause 3 of the 1981 Instructions, using the information provided by LloydÆs as the justification. It was agreed that Neville Russell would write to LloydÆs seeking general instructions pursuant to clause 3, on behalf of all the auditors at the meeting. Neville Russell wrote to LloydÆs later the same day.

Mr Brian T G Nicholson, joint Managing Director of the Observer, has joined the Board of LloydÆs of London Press Ltd.

An Unlimited run-off reinsurance xs $55,000,000 placed for Murray Lawrence, Underwriter of Non-Marine Syndicate 362 jointly managed by C T Bowring Underwriting Agencies and Fairway Underwriting Agencies to incept at 1 January 1982 covering 1978 and all prior years. Outhwaite Non-Marine Syndicate 317/661 wrote 66.67%. In 1985, the following bureau signing numbers 362, 3460, 361, 610, 823, 854 & 910 were party to the Wellington Agreement, indicating that the Bowring Lawrence Non-Marine Syndicate had a long tail asbestosis involvement. Murray Lawrence was a Deputy Chairman of LloydÆs

2 Mar 82

Apologies for absence were received from Mr R J Kiln and Mr E E Nelson. Seeking instructions under the provisions of Clause 3 of the Audit Instructions with regard to the reserves to be created by those syndicates which had a liability for asbestosis and other latent diseases. (Clause 3 of the instructions requires that if there are any factors which may affect the adequacy of the reserves, then the auditor must report to the Committee and obtain instructions before issuing their syndicate Solvency Reports).

Mr Chester said that he had spoken to Mr Nelson with regard to this matter who had put forward the following suggestions:-

1. With regard to direct business, underwriters should reserve their known claims plus a margin of 30% and their expenses.
2. With regard to reinsurance assumed they should allow for one loss per assured per each year of account.
3. On underwriters own reinsurances it was suggested that they approach the matter on the same basis as (b) above; Mr Nelson thought that this would be the basis on which the excess of loss market would settle any claims. With regard to the question of whether claims should be reserved on an exposure or manifestation basis it was considered that whichever basis produced the worst result would be adopted.
4. The letter from the auditors also stated that the losses were being apportioned over carriers on an "industry basis", if one of the carriers had losses in excess of its insurance cover then it could go bankrupt. It appeared to auditors that its share of the industry loss might then be apportioned over the remaining companies.
5. The auditorsÆ letter also stated that many syndicates lacked information regarding their reinsurance recoveries. Mr Nelson considered that recoveries might be determined on the formula for reinsurance assumed business as set out above.

Mr Chester then raised the question of the reinsurance of underwritersÆ asbestosis liability in the LloydÆs Market (i.e.) effectively amounting to reinsurance of the asbestosis "tail" and expressed concern that such liabilities could fall on comparatively few syndicates. Mr Merrett considered that it would be inappropriate for such reinsurances to go unnoted and unreserved by Panel Auditors and that it would be improper for a syndicate taking such reinsurances without telling its own Names. It was stressed that Auditors should make any enquiries they deemed necessary with regard to the open years and that they should ensure that what ever position they consider is necessary should be created over and above the minimum percentage reserves.

House of Commons: Letter from Sir Nicholas Bonsor, Bt., MP to Lady Middleton

Lloyds is a great financial institution. It has come to Parliament with a request for support in giving it statutory powers of self-regulation; no-one is keener that it should obtain that support than I am.

However, there is a fundamental issue arising from the Bill which causes me great concern, both as a member of Lloyds and as a barrister. If the Bill were to be passed in its present form, the Council and Committee of Lloyds would be given immunity from suits of negligence and tort (including libel and slander) by any member of the Lloyds community. This community includes not only working and external members of Lloyds, but also a large proportion of the 72,000 employees within the organisation.

The immunity to which I refer is contained in Clause l4 of the draft Bill. I would invite you to consider the merits of the argument by reference to the debate in the Lower House, which took place on Monday, 22nd February; further, Michael Mann QC and Stephen Ruttle have given joint Opinions in which they establish and explain why the Lloyds council should not be given the immunities it requested. I will willingly provide you with a copy of these Opinions if you would like to see them.

In Michael MannÆs words: "we are of the Opinion that great personal hardship (my emphasis) could be caused by denying the right of suit. Only in the event that the disadvantages to LloydÆs of permitting such suits were overwhelming, should such potential hardship be permitted. Th our view these (hardships) are only apparent. They cannot justify the immunities sought."

I would be most grateful if you felt able to attend the debate in your House to ensure the safe passage of the Bill but with this Clause deleted. Whether you consider an amendment such as that which I proposed on the 22nd February is appropriate, or whether you feel that no special protection should be given, thus keeping the Lloyds council in line with other regulatory bodies, I hope you will agree that Clause l4 as it stands is not acceptable.

Porter -v- American Optical Corp., rehearing denied, 455 U.S., 1009, Court of Appeals for the Fifth Circuit reversed District CourtÆs application of the manifestation trigger of coverage and applied the exposure trigger for asbestos bodily injury claims. Court expressly concurred with the 6th Circuit Forty-Eight Insulations decision and held that insurance liability would be prorated among all insurers on risk during exposure period. The insured was held strictly liable under Louisiana products liability law for the manufacture of a respirator that did not protect worker from asbestos. The manufacturer had supplied such respirators to the company since 1953.

Keene Corp. - v- I.N.A, 513 F. Supp. 47, District of Columbia Circuit Court , 30 January 1981. Revised 667 F.2d 1034, District of Columbia Circuit Court, 1 October 1981. Cert. denied, 455 U.S. 1007, 8 March 1982. Rehearing denied, 456 U.S. 951, 26 April 1982. District Court applied exposure theory to trigger coverage. District of Columbia Circuit Court of Appeals applied the triple/continuous trigger of coverage and found a duty to defend and coverage for the over 6000 asbestos bodily injury suits against the insured. Court held that "INAÆs duty to defend Keene in underlying asbestos cases ceases upon the exhaustion of indemnity limits under the pre-1966 policies in question". Court found unambiguous policy language specifically limiting KeeneÆs duty to defend any suit "with respect to such insurance as is provided by the policy".

• The auditorsÆ main concern was for a consistent approach throughout the LloydÆs market;
• Mr. Nelson told the meeting that at present 400 new claims per month were being advised and that if this were projected over a 10 year basis would lead to approximately 50,000 claims.

Mr Chester then asked auditors for their comments. The main worry raised by auditors was the widely differing views taken by syndicates and that the real purpose of their letter was an attempt to seek some uniformity in the LloydÆs market for dealing with this matter. They considered that it would be grossly unfair for syndicates on basically the same risk to treat their reserves on an entirely different basis. Auditors were also concerned that not only may they reserve too little but that they may ask the closing year to carry too great a reserve. Part of the auditorÆs job was to ensure that there was equity between the account accepting the reinsurance and the closing account.

• Henry Chester agreed to discuss the question of guidelines with the Deputy Chairman of LloydÆs, Murray Lawrence, and report back to auditors in due course;
• Henry Chester asked auditors for their opinion on leaving the 1979 account open. Auditors thought that, although this would solve the problem of equity between years of account, it would still leave the problem of quantification in that Names could still be asked to put up substantial sums of money;
• Mr. Nelson added that in his view a figure of 50,000 new claims over the next 10 years would seem to be realistic and that reports of up to 2 million new claims could well be an exaggeration.
• Ken Randall then suggested that LloydÆs could consider issuing guidelines on the basis of the 50,000 figure and that, where asbestosis formed a material part of the syndicateÆs account (say 10%), consideration should be given to leaving the account open. Auditors said that they would be reassured with guidance of this sort. It was, however, suggested that in those cases where consideration was being given to leaving the account open applications should in any case be made to the Committee for instructions....
• Henry Chester then raised an ancillary matter which was the writing by certain LloydÆs Syndicates of the reinsurance of other SyndicatesÆ asbestosis liability. He said that this could lead to the funnelling of a large amount of liability into a small number of Names. He went on to say that consideration was being given to asking the market to stop writing such reinsurances in the open years.

( referred to the fact that in the White Letter accompanying this yearÆs LloydÆs audit instructions the attention of auditors is drawn to risks which include liability for latent diseases and products liability when assessing the adequacy of reserves. Major losses under these categories have been known in the LloydÆs market for some time. The letter also stated the following. It is understood that there are 40 insureds of which 19 are direct in the London market. In respect of 15 of these, all the slips placed in the London market have been found. The total number of cases in litigation is in the region of 15,000 and this number is growing by approximately 400 per month. The product was readily available between 1945 and 1975. The pattern in LloydÆs is that up to 1962 syndicates have insured American carriers direct, and thereafter they have covered American companies by reinsurance in the London market. The size of the asbestosis problem became apparent some two years ago when it was agreed that normal assessments of settlements were not suitable. Estimates have been made on the basis of an average cost per claim together with an estimate of expenses. The average was said to be $125,000 plus $10,000 for expenses).

In the white letter accompanying this years LloydÆs audit instructions the attention of auditors is drawn to risks which include liability for latent diseases and products liability when assessing the adequacy of reserves. The fact that there are major losses under these categories has been known in the LloydÆs market for some time and syndicates have created reserves in respect thereof. The subject was raised at a meeting of advisory panel of auditors in November 1981 at which it was decided to hold a special meeting to provide further information for auditors. The special meeting was held in January under the chairmanship of R J Kiln and auditors were addressed by Mr Ted Nelson, the immediate past chairman of a LloydÆs committee set up to investigation asbestosis losses. The meeting was told that asbestosis was one of a group of diseases which are referred to as latent diseases. These comprise Agent Orange, Love Canal, Des and asbestosis. These losses are principally in US $ and can mainly be classed as products liability claims. The LloydÆs market is meeting claims in non-marine syndicates, in marine-syndicates writing non-marine business and also in aviation syndicates. The losses can arise from direct writings, from the reinsurance of particular US companies, from other reinsurance contracts and in some cases by the acceptance of running-off accounts... It is understood there are 40 insureds of which 19 are direct in the London Market. In respect of 15 of these, all the slips placed in the London Market have been found. The total number of cases in litigation is in the region of 15,000 and this number is growing by approximately 400 per month. The product was readily available between 1945 and 1975. The pattern in LloydÆs is that up to 1962 syndicates have insured American carriers direct, and thereafter they have covered American companies by reinsurance in the London Market. The current state of litigation suggests some uncertainty as to who is liable, Courts in the USA having settled cases on both an "exposure" and a "manifestation" basis. There is apparently the possibility of an appeal being made to the Supreme Court but this has, so far, been turned down. The size of the asbestosis problem became apparent some 2 years ago when it was agreed that normal assessments of settlements were not suitable. A committee was set up and in April 1981 a data base was established on computer.. Estimates have been made on the basis of an average Cost per claim together with an estimate of expenses. The average was said to be $125,000 plus $10,000 for expenses.. an office has now been established within LUNCO and the records can be examined by auditors provided they are accompanied by an underwriter... In compiling reserves for asbestosis reports have been made available to underwriters by brokers in the usual way setting out policies which have covered the various asbestos insureds... this information has enabled underwriters to calculate their maximum exposure on direct writings. The data base which is also limited to direct writings is available as a back-up to records compiled by individual underwriters. Syndicates will have to assess liability on facultative and treaty reinsurance and on any run-off business accepted, and then see what reinsurance protection they have available. In the office, a questionnaire has been prepared which has been sent to clients inviting a representation to us on how reserves have been established for latent disease liability. The questionnaire is similar to one which certain other firms of panel auditors have sent to their clients, there having been some liaison between firms following the panel auditors meeting. As a result of problems that have arisen in quantifying reserves for asbestosis, further meetings between panel auditors and the audit committee at LloydÆs have taken place.

Colin Murray, a leading LloydÆs underwriter, wrote to Murray Lawrence, as Chairman of the Audit Committee of LloydÆs, in respect of the 1979 RITC. The letter, which was headed " 1979 Reinsurance to Close" read as follows:

The reinsurance to close has surely two basic constituent elements:

In that the second figure is based mainly upon subjective judgement of many variable factors, it is not only difficult but actually impossible to set this figure with the expectancy that it will prove ultimately to be very accurate. This second figure must obviously take account of the classes of business written, the size and age of the account, the size of lines, the nature of the reinsurance programme and possibly other factors. Underwriters, Managing Agents and Panel Auditors must obviously work with integrity and diligence so that the final figure agreed appears likely to have adequate margins. It is after all part of the total reinsurance premium which at this year-end the 1980 Names will in most cases be charging the 1979 Names for taking over liability from them. Ultimately the Underwriter is surely the best judge through his knowledge and experience, but regardless of this all of us should surely acknowledge that even our best endeavours may be found to be far too much or far too little at some later date."

Mr Hutton was a former Member of the Fisher Working Party.

Murray Lawrence letter, LloydÆs Deputy Chairman, to all Underwriting Agents and active Underwriters, with copies for information to Panel auditors. These letters are quoted in full supra in Appendix 2.

Potential claims arising in connection with Asbestosis represent a major problem for insurers and reinsurers. It is therefore all the more important that the reserves created in the LloydÆs Audit at the December 1981, fairly reflect the current and foreseeable liabilities of all syndicates.

I would urge you to discuss the contents of this letter with your Auditor before deciding what further action, if any, is necessary for you to take.

If you should have any inquiries with regard to this matter would you please contact Mr. M Bowmer or Mr. K E Randall.

Several Panel Auditors have approached the Committee for instructions under Clause 3 of the Instructions for the Guidance of LloydÆs Auditors regarding the basis on which syndicates should provide for Asbestosis liabilities in their accounts at 31st December 1981.

I attach a copy of a letter [the Murray Lawrence letter of 18 March 1982] which is being circulated to all Active Underwriters and Underwriting Agents setting out broad guidelines which should be followed in this regard.

The Committee has decided that it is inappropriate to specify a minimum IBNR loading to apply across the Market; the IBNR loading is regarded as a matter for Managing Agents to resolve depending upon the particular circumstances of each syndicate. Nevertheless the Committee wishes me to stress that, unless there are sound reasons to the contrary regarding any specific case, the loading should be very substantial to reflect unreported cases on the direct account and, possibly, incomplete information on the reinsurance account. The Committee also believes that the reserve (including the IBNR loading) should be maintained in full and not discounted to reflect possible future investment earnings.

Auditors will no doubt give special attention to the question of whether or not the Agent has decided to leave an account open in cases where the reserve for Asbestosis represents a material proportion of the total reserves of the syndicate or where there is a wide margin for error in the basis of calculation of the closing reserves due to a lack of current information.

If you should have any queries with regard to this matter would you please contact Mr. M Bowmer or myself."

Ernst & Whinney internal memo from N F Holland to insurance partners and managers underwriting department. Herewith the latest epistle on asbestosis. I cannot believe that at some stage we are not going to find a syndicate where there is a major problem. If any partner is unhappy about a particular situation I suggest he lets me know and we will try and organise a PSP type meeting so that a view can be formed and the partner can then talk to his clients knowing he has the full backing of his colleagues.

A stop loss $1m xs $1m reinsurance placed for E Ryan, Underwriter of Non-Marine Syndicate 164 managed by Gooda Walker Ltd to incept at 1 December 1978 covering 1977 and prior years. Outhwaite 317/661 wrote 20%.

An Unlimited run-off reinsurance xs $7,500,000 placed for I N Thomson, Underwriter of Non-Marine Syndicate 33 managed by Roberts & Hiscox to incept at 1 January 1982 covering 1974 and prior years. Outhwaite Non-Marine Syndicate 317/661 wrote 100%.

Johns Manville filed their accounts for the year ended December 1981 with the Securities and Exchange Commission. Whilst repeating much of what was stated in the note on the accounts to 31 December 1980 the essential message is one of continuing, significant deterioration. The following is an extract from Note 5 to the accounts:

"... As of 31 December 1981, J-M was a defendant or co-defendant in approximately 9,300 asbestos-health suits brought by approximately 12,800 individual plaintiffs. This represents an increase over the 31 December 1980 level of 5,087 cases (brought by approximately 9,300 plaintiffs) and a substantial increase over the 31 December 1979 level of 2,707 cases (brought by approximately 4,100 plaintiffs) and the 31 December 1978 level of 1,181 cases (brought by approximately 1,500 plaintiffs). During 1979, J-M was named as a defendant in an average of 141 cases per month (brought by an average of 196 plaintiffs) as compared with an average of 65 cases per month (brought by an average of 83 plaintiffs) in 1978. During the first three quarters of 1980, J-M was named as a defendant in an average of 194 cases per month (brought by an average of 382 plaintiffs); this rate increased to an average of 304 cases per month (brought by an average of 403 plaintiffs) in the fourth quarter of 1980 and to an average of 400 cases per month (brought by an average of 525 plaintiffs) during 1981. During 1980, J-M disposed of 401 claims at an average disposition cost of $22,600, and during 1981, a total of 802 claims were disposed of, with J-MÆs share of disposition costs being an average of $15,430 per claim. All disposition cost references exclude legal expenses, and the verdicts in approximately 20 cases which are presently on appeal (where the average judgement against J-M is approximately $223,360). Substantially all of these disposition costs have been charged to applicable insurance. The 1980 and 1981 level of disposition costs represents a significant growth from the pre-1980 level of approximately $13,000 per claim and results in an increase in the overall disposition cost per plaintiff through 31 December 1981 to approximately $15,640. The growth in these two areas (volume and costs) has significantly increased the uncertainties as to the future number of similar claims which J-M may receive, and the future disposition costs of the pending and future claims. During 1980, to resolve uncertainties as to the correct interpretation of a number of provisions in the various policies of insurance maintained by J-M and applicable to these claims, it was necessary for J-M and to bring declaratory judgement action to have such issues resolved by a court of law. While it continues to be J-MÆs opinion that its position with respect to these issues is sound and in accord with the weight of judicial precedent, any litigation involves uncertainties to some degree.

Because of the uncertainties associated with the asbestos-health litigation, and in spite of the substantial defences J-M believes it has with respect to these claims, the eventual outcome of the asbestos-health litigation cannot be predicted at this time and the ultimate liability of J- M after application of available insurance cannot be reasonably determined in accordance with Financial Accounting Standards Board Statement No. 5, "Accounting for Contingencies". No reasonable determination of loss can be made and no liability has been recorded in the financial statements. Liabilities relating to asbestos-health litigation will be recorded in accordance with generally accepted accounting principles when such amounts can be determined. Depending on how and when these uncertainties with respect to J-M are resolved, the cost to J-M and thus to Manville Corporation could be substantial.

Costs associated with asbestos-health claims are presented separately in the 1981 financial statements because of the increased activity related to such claims. The 1980 financial statements, which have not been reclassified to conform to the 1981 presentation, include approximately $8.5 million of similar costs that is reflected in cost of sales and selling, general and administrative expenses. Amounts relating to 1979 were not material.

The auditors of Johns Manville, as for 1980, qualified their opinion on the companyÆs accounts for 1981. The audit report. stated inter alia:

As a result of the claims which it had received, in common with other manufacturers of asbestos products, from asbestosis related deaths and injuries, Johns Manville filed for a technical bankruptcy order in the US Courts on 26 August 1982 and this fact was widely publicised at the time; two other US asbestos producers, UNR Industries and Amatex Corp., subsequently filed for technical bankruptcy orders in 1982.

A summary of the asbestosis litigation involving Johns-Manville