From 1 January 1987, new audit codes were introduced in respect of Non-Marine All Other Business.

Early in 1987, the Council authorised discussions to proceed with the Securities and Exchange Commission in the USA with the aim of establishing the criteria for the admission of US members. These discussions have not vet been finalised: it has been decided, however, that Lloyd's best interests would be served by applying the accredited investor status test for all US candidates. Consequently, agents have been advised that with immediate effect all US candidates must satisfy this test. (LeBoeuf)

GAF became a member of the Asbestos Claims Facility as a late joiner. GAF were regarded as a significant defendant in asbestos litigation and it was therefore reasonable to anticipate that settlement levels within the Facility would increase.

The Report by Sir Patrick Neill QC into Regulatory Arrangements at Lloyd's, published. The Neill Report, appendix 8, refers to the undertaking given to Parliament by the Committee of Lloyd's, by their counsel Mr Boydell, on 20 July 1981 that it would "take all (reasonable) (proper) steps to ensure that the recommendations in paragraph 9.15 and 23.22 of the Fisher Report as to the availability of information are implemented by the Council whether through the making of byelaws or otherwise, as soon as possible and in any event within two years of Royal Assent" (day 7 page 7). At the request of the Chairman of the Parliamentary Committee, Mr Michael Meacher, that undertaking was extended to the recommendations contained in paragraphs 10.29 to 10.31 of the Fisher Report (day 7 page 9). Paragraph 9.15 and 23.22 of the Fisher Report dealt respectively with the disclosure of information to prospective Names and with the formulation and promulgation of Rules in respect of the maintenance of syndicate accounting records, the content and standard of syndicate accounts and their audit.

(A letter from attorneys to the Environmental Claims Reinsurance Group (ECRG) enclosed an updated Priority List, identifying some 90 assureds in respect of pollution claims).

The letter encloses an updated Priority List identifying some 90 assureds.

I attach a copy of a letter from the managers of the above syndicate. They have made an arrangement with the Bellew Parry & Raven Group which manages Syndicate 691 whereby John Macmillan will in future employ the 69l underwriter as a deputy to accept Yacht class business for syndicates 80, 843 and 691 whilst Syndicate 80 underwriters will write general Marine business on behalf of all three syndicates. The management of Syndicate 691 will remain smith Bellew, Parry & Raven.

The 691 experience was poor in 1982 and 1983 but is now on an improving trend and Mr Macmillan feels this is an opportune time to move into the class with an experienced underwriter under his control. The volume of Yacht business is expected to be about 5% of the total syndicate 80 premium income and we recommend members to support the venture.

Ernst & Whinney meeting designed for all UK partners, managers and assignment leaders with insurance clients. Chairman, Nigel Holland. Agenda: "the market" (John Philpott); asbestosis and other latent diseases (Stephen Hill).

Clemtex, Inc. -v- Southeastern Fidelity Insurance Co., 807 F.2d 1271, 5th Circuit. Court applied exposure trigger to case involving silicosis arising under Texas law.

Letter from the Chairman of Lloyd's to syndicate partners, managers and assignment leaders. The Accounting and Auditing Standard Committee (AASC) has formulated the attached guidance on time and distance policies. Further consideration is being given to additional disclosures relating to the reinsurance to close in particular where the run-off of prior years of account of the syndicate has been reinsured. The guidance is attached.

Annual General Meeting of the Institute of London Underwriters: Statement by the Chairman, Mr. D D Lowen.

1986 was a most spectacular year in the history of the Institute of London Underwriters. The painstaking work carried out over a long period by chairmen, committees, Institute management and staff, together with planners builders and contractors, culminated in the successful opening of our new headquarters and marine trading market in Leadenhall in March on schedule. The official opening of the building at the end of April by Her Royal Highness The Princess Anne, Mrs Mark Phillips, set the seal on the determination of all ILU member companies to provide a pleasant and efficient market environment for the benefit of brokers. It is only too apparent that it has been a great success, and the Institute is now poised to expand steadily in world marine insurance affairs and to provide a service second to none.

Coupled with the new market environment a new sense of fraternity and discipline is emerging, with greater emphasis being placed on more efficient organisation within the individual underwriting units. Competent underwriters and their staffs are now highly valued and companies realise they are the key to future profits in what continues to be a difficult trading period.

As we are all to painfully aware, the marine insurance market suffered badly from the poor or mediocre years from 1979 to 1984. For a variety of reasons, however, and despite the continuing world-wide shipping slump, results from the years 1985 are encouraging. All responsible underwriters hope that these improved years will not provoke mindless expansion in the London marine market. Alas, already there are distinct signs of unwarranted rate cutting in other markets, accompanied by the frank admission of those local underwriters that they have to run for international expansion at any cost to survive the contraction in their own domestic business.

The cloud of gloom hanging over shipping poses the greatest challenge to insurers and no one can expect growth in pure marine direct business in the foreseeable future. The prolonged recession means that old tonnage is not being replaced by new, and the average age of fleets is rising steadily. As always happens when the shipping industry is depressed, standards are eroded. The "Flagging out" of major shipping nations into what are often inferior flags is being felt - resulting in the inevitable lowering of crewing and maintenance criteria. Thus, an even greater responsibility is placed on underwriters to help ensure that standards are maintained - for instance, in classification warranties.

One regrettable result of the contraction of direct marine business has been the movement towards extraneous or "grey area" non-marine writing by some marine underwriters, encouraged by many brokers who find their brokerage declining because of diminishing capacity for certain business in traditional non-marine markets. For some time the concept of package business, mainly of an offshore or energy related nature, has been accepted in the marine market but normally restricted to oil and gas exploration and production. There is nothing unusual in that: the London marine market has always offered the finest service and adequate capacity in this area. However, there are problems in the oil and gas industries, aggravated by the fall in world oil prices, and offshore insurance business is now showing a sharp downturn. In this climate, therefore, it is understandable that attempt are being made to include difficult non marine business in these packages as brokers find it increasingly frustrating to market their risks, especially in the USA.

A further development arising from this practice has been the reaction of the London excess loss market in opposition to his trend, and attempts have been made to draft exclusion clauses for excess loss contracts in the areas of land pollution and non-marine casualty liability business.

Many direct marine underwriters of what I might call the old school feel that too much power and resources are flowing into the London excess loss market. Certainly, I agree, too high a velocity of recycling of the market's premium, together with the market's absorption of its own catastrophe cover, is not healthy. Excess loss business utilised sensibly is an idea way to spread risk; but when underwriters rely on it to the event that it dictates their original direct underwriting, then obviously the effect could be serious for London as the major marine offshore market.

In view of the state of the shipping industry, the only viable solution available to the marine insurance market is to continue to improve its underwriting expertise and service. Technical ability and underwriting flair must be recognised and adequately rewarded. We are seeing the same qualities being handsomely rewarded in the City of London's financial services sector, and there is no reason why the insurance industry should lag behind. Every encouragement must be given to the people in our business to train for and achieve recognised qualifications so that underwriting, claims and back-up services are the best we can make them.

The work of the Institute in the year under review encompassed a wide range of subjects. We have continued to impress upon al sectors of the shipping, trading and commercial world the value of the security offered by the Institute policy. We have gone further in making our case to government and other regulatory bodies. The annual visit of an ILU delegation to attend meetings of the National Association of Insurance Commissioners in the United States has become a regular date in our calendar, and I fee! that great progress has been made in making them aware of the of the firm basis of the ILU and its member companies.

We have discussed matters of mutual interest with other market bodies and, in particular, with representatives of the broking houses. These discussions were all aimed at furthering the effective operation of the London insurance market, especially, of course, the marine and aviation sectors. In all these activities the executives and staff of the Institute have played an invaluable part, and I would like to place on record our appreciation and gratitude for the support we have received from them.

i ) the failure to regulate aspects of Agents' charges and to publish a register of such charges as agreed in Parliament during the passage of the 1982 Lloyd's Act;

ii ) defects in the method of dealing with parallel syndicates; and

iii) deficiencies within the standard Agency Agreement.

The identified shortcomings moreover fall within specific areas with which Neill otherwise expresses some satisfaction. On the subject of Agents' charges, Neill comments on the other measures which have been introduced by which the Names are "much better informed than hitherto", such as "greatly improved accounting and auditing arrangements" and "a central register of syndicate results."

In this matter, Lloyd's has proceeded step-by-step by a combination of rules on disclosure supported by auditors verification, prohibition of very small syndicates (under 50 members), and a code of practice to deal with possible abuses. (It should be remembered that it is not the trading of syndicates in parallel that is in itself an abuse, but the misuse of the situation so created to "prefer" one to another by allocation of risk, expenses or reinsurance). In its approach to this problem, the Council was particularly advised by its Rules Committee, chaired by the then Chief Executive and the Council very carefully examined the suggested cure before adopting it. The suggestion by Neill that the adopted method is not "sufficient as a regulatory control" and therefore not effective to cure the possible abuse of the situation created by parallel syndicates, must and will be taken very seriously by the Council. We must test again the claim that there is a commercial need for parallel syndicates.

In all, the Committee put forward some seventy recommendations for further action in the regulatory field at Lloyd's, to put Names who transact business at Lloyd's on a par with the protection which will (at a future date not yet certain) be available to City investors.

It seems to me however that we must not lose sight of one thing - trust. The relationship between a Name, his active underwriter and his underwriting agent must be based on complete trust, before it is even worth protecting by a legal framework.

Victor B Levitt, for the fifth time in recent years, delivers a paper entitled "Pollution, Clean Up Costs And Insurance Exposure" to the Under 30's Lloyd's Non-Marine Claims Committee.

Recognised auditors meeting held at Lloyds.

It was stated that environmental pollution will account for increases in some reserves. The market will end up paying a lot on pollution but policy wordings may give us better defences than on asbestos. It appears inevitable that we are likely to see a continued growth in the involvement of the London market as new losses are reported. There appears to be a trend developing in the court findings arising out of various EPA coverage litigation which demonstrates more respect for the intent of insurers - namely that the seepage and pollution exclusion means what it says and that the date of damage cannot reasonably pre-date the time of discovery).

(iii) Audit opinions regarding run-off accounts: There are noticeable differences of opinion within the profession as to the most appropriate method of report on run-off accounts. For example, two firms dealt with the uncertainty by emphasis of matter to the effect that names' net results as shown in the personal accounts were true and fair subject to any material adjustments which may be necessary if the amount retained is understated. One firm felt that the uncertainties necessitated a qualification and two firms gave no opinion on the personal accounts. All other firms reported in accordance with bye-law provisions. Lloyd's view remains that auditors should report in true and fair terms. In certain circumstances, an emphasis may be appropriate but should not be included as a matter of course.

Recognised auditors meeting held at Lloyds on 4 February.

4. Market issues:

The meeting was addressed by representatives of the four principal markets. Points to be watched include the following:...

Non-Marine:

The Johns-Manville facility is earning interest and payment is likely to be made when Johns-Manville is out of chapter 11 in 1987. However, if an early settlement is not reached, an extra call from syndicates may be necessary. A market letter advising the interest and appreciation figures will be circulated in good time. Reserves for Shell have increased and further pollution losses have been incurred. 1984 was likely to be a poor result but there is some hope that the open years will be better with the shortening of accounts and the move to claims made settlements. [The proposed time-table (page 336) reveals that the author of these words is R Jackson.] Main concern is still asbestos. It had been hoped that there would be a drop in claims in 1986 but this has not been evident, 900 new cases per month were reported in 1985, while 1,500 new cases were reported in November and December 1986....

The Asbestos Claims Facility settled claims at a higher rate than was expected. During the course of 1986, the London Market expended approximately $70,000,000 in Facility Billings and to some extent, this figure was affected by accelerated cash- flow. It must be emphasised that even though there can be acceleration on a temporary basis, reserves established in underwriters' books would always be well in excess of payments made no matter how accelerated they were. Expressed another way, the payment is easily contained with incurred reserves, even though there is a speed up in the cash going out beyond that which was originally foreseen.. Known claims will account for 25-30% increases in asbestos reserves at year end 31 December 1986. Much of this increase will come from reinsurance and retrocessional contracts....

Environmental pollution:

Environmental pollution will account for increases in some reserves.... In respect of Shell-Rocky Mountain, reserves will increase by $100 million. The Shell-Rocky Mountain case should come to trial in 1987. The market will end up paying a lot on pollution but policy wordings may give us better defences than on asbestos. It appears inevitable that we are likely to see a continued growth in the involvement of the London Market as new losses are reported. However , on a more encouraging note, it is worth observing that there appears to be a trend developing in the Count findings arising out of various E.P.A. coverage litigation which demonstrates more respect for the intent of insurers - namely that the seepage and pollution exclusion means what it says and that the date of damage cannot reasonably pre-date the time of discovery.

DES:

Ely Lilly obtained a "Keene" ruling which has been upheld. A settlement of $80 million plus for London's share, will be forthcoming soon.

Summary:

1984 account will show desultory results. For 1985, 1986 and 1987 accounts the tail of liability business is shortening ... it is therefore anticipated that these accounts will show significantly better results than earlier years.

The Environmental Claims Reinsurance Group (ECRG) held its first meeting. Mr. Ayliffe was a member.

(The letter stated the following. There had been a substantial increase in the number of new law suits which arise from asbestos related causes. During the course of the first half of 1986 new cases were arising at the rate of approximately 900 new cases per month but as the end of the year approached a significant increase in new filings became apparent reaching a level of approximately 1,500 new cases for both November and December. The average cost of settlement per claim being achieved by the ACF has yet to reduce to the level which was the basis of the claimant reserve used in the calculations for year end reserves. There are a number of reasons why indemnity levels have not been capable of being reduced, the most significant being the aggressive attitude adopted by the Courts in the Texas class action and the material effect this has had upon the overall average settlement costs. Once again it has not to date proved possible to reduce the substantial outlay in regard to costs which are being incurred through the liaison counsel acting on behalf of the ACF. There are a number of reasons that bear upon this issue, the most significant of which is the pressure being exerted by various courts to speed up the number of cases which are addressed during the coming months. With this increased activity it appears unlikely that we shall see any meaningful reduction of legal costs during the present year. The main area of concern is the substantial increase that has developed in new filings which are clearly arising as a result of an all out effort by the plaintiff Bar in conjunction with the unions to canvas claimants from industries with only a remote asbestos involvement. Mass screening is developing in the tyre industry where pulmonary problems are said to exist due to an exposure to talc which may contain minimal quantities of asbestos and which is used in the moulding process. Similar screening activities are now being reported from the steel industry. The letter quoted an extract from a recent Wall Street Journal article which summed up this new form of ambulance chasing. It is significant that claims that are generated in this fashion arise from individuals who have little or no disability and even assuming that liability was to fall upon asbestos producers - which is questionable - the measure of damages should be minimal. For some time it has been the perception of the Facility that the quality of more recent filings was less serious than formerly. The average indemnity levels which we are experiencing in the Facility reflect the severity of claims arising some 5 years ago and it would be reasonable to anticipate some reduction to develop as we start to address more recent cases. I emphasised this point at a recent meeting of Panel Auditors as a consideration that needs to be kept in mind in endeavouring to address future loss development. The problems arising out of asbestos related claims continue to become more serious with the passage of time. Indeed many producers are now being forced to recognise the present trends are such that they must now contemplate that there will be a future point in time at which they exhaust all insurance coverage. The majority of claims arise from asbestos exposure in an occupational environment and for employees in certain occupations such as shipyards and railroads they already have protection afforded for occupation disease under existing Federal legislation. In the event that a Bill were to be passed by the House supporting this objective it would greatly ease the burdens being imposed upon asbestos producers under the strict product liability theories).

I have advised you in earlier letters of the concern expressed by the Facility at the substantial increase in the number of new law suits which arise from Asbestos related causes. During the course of the first half of 1986 new cases were arising at the rate of approximately 900 new cases per month but as we approached the end of the year a significant increase in new filings became apparent reaching a level of approximately 1500 new cases for both November and December. The reserve projection contained in year end reports circulated to the Market were based upon the lower level of new losses then being experienced and assuming that the substantial increase which we are now seeing continues during the course of 1987 it will be apparent to you that this will have a material impact upon the reserves that will be reflected in the year end 1987 reports. Two other significant aspects which bear upon the potential for reserve increases are that the average cost of settlement per claim being achieved by the Facility has yet to reduce to the level which was the basis of the per claimant reserve used in the calculations for year end reserves. There are a number of reasons why indemnity levels have not been capable of being reduced, the most significant being the aggressive attitude adopted by the Courts in the Texas Class action and the material effect this has had upon the overall average settlement costs which we have achieved...

An additional consideration that enters into the reserving philosophy relates to the defence cost being incurred by the Facility. Once again it has not to date proved possible to reduce the substantial outlay in regard to costs which are being incurred through the Liaison Counsel acting on behalf of the Facility. There are a number of reasons that bear upon this issue, the most significant of which is the pressure being exerted by various Courts to speed up the number of cases which are addressed during the coming months. With this increased activity it appears unlikely that we shall see any meaningful reduction of legal costs during the present year. The Board have devoted considerable efforts in this area and a budgeting business plan has now been produced setting out revised control procedures which should contain further increases. The tentative goal for 1987 has been set at $89.75m although whether this proves to be attainable must depend upon future litigation activity. One favourable feature arising from the entry of GAF is that with our ability to provide a common defence for all producer members no increased costs will arise and those costs which are incurred will now be allocated over a larger base.

The experience achieved to date within the Facility and the pressures that are now developing will be a major consideration to be taken into account by the representatives of the Working Party when we come to address the basis upon which the 1987 year end reserve projections will be based. The main area of concern is the substantial increase that has developed in new filings which are clearly arising as a result of an all out effort by the plaintiff bar in conjunction with the Unions to canvass claimants from industries with only a remote asbestos involvement. Mass screening is developing in the tyre industry where pulmonary problems are said to exist due to exposure to talc which may contain minimal quantities of asbestos and which is used in the moulding process. Similar screening activities are now being reported from the Steel industry and the following extract from a recent Wall Street Journal article sums up this new form of ambulance chasing...

It is significant that claims that are generated in this fashion arise from individuals who have little or no disability and even assuming that liability was to fall upon asbestos producers - which is questionable - the measure of damages should be minimal. For some time it has been the perception of the Facility that the quality of more recent filings was less serious than formerly. The average indemnity levels which we are experiencing in the Facility reflect the severity of claims arising some five years ago and it would be reasonable to anticipate some reduction to develop as we start to address more recent cases. I emphasised this point at a recent meeting of Panel Auditors as a consideration that needs to be kept in mind in endeavouring to address future loss development...

The result of the re-evaluation of reserves will effectively reduce those reserves presently carried on post coverage block years based upon the current volume of outstanding claims. As the coverage limits in the Initial Coverall Block became depleted by future settlements GAF will add, on a sequential basis, subsequent years of coverage to expand the insurance available. When these future developments take place and assuming that there is no substantial reduction in the rate of new filings it must follow that there continues to be a potential IBNR exposure to all post Coverage Block years. From the above comments it will be apparent to you that the problems arising out of asbestos related claims continue to become more serious with the passage of time. Indeed many producers are now being forced to recognise the present trends are such that they must now contemplate that there will be a future point in time at which they exhaust all insurance coverage. This serious position has caused producers to renew their efforts in seeking to obtain Federal Government recognition of the dilemma which they face and more particularly to provide some relief to the liabilities which they are now required to address. There are presently pending before the Senate draft bills which provide that where a claimant has a right of action under a Federal statute this will be an exclusive remedy.

The majority of claims arise from asbestos exposure in an occupational environment and for employees in certain occupations such as Shipyards and Railroads they already have protection afforded for occupation disease under existing Federal legislation. In the event that a Bill were to be passed by the House supporting this objective it would greatly ease the burdens being imposed upon asbestos producers under the strict product liability theories...

The Neill recommendations (Nos. 42-45, 47-50) relating to this committee and its functions are contained in Chapter 9 of the Neill Report. An additional recommendation (No 40) on parallel syndicates is included in chapter 5 and this will be considered by
a sub-committee of the new UARC. The existing UARC will continue until 22 July 1987 to complete the present registration function as a committee of the Committee of Lloyd's

The new UARC's broad terms of reference are to propose to the Council of Lloyd's arrangements for implementation of Neill's proposals covering the registration and continuing approval of underwriting agents at Lloyd's and therefore to assume the powers of the UARC conferred by Underwriting Agents (Interim Provisions) Byelaw (No 8 of 1984, 8 October 1984).

The UAR Committee:-

The Sub-Committee's terms of reference cover Neill's recommendations (No 40 and 41) that the present Code of Practice on multiple syndicates should be replace by a more specific Byelaw covering the whole area of parallel syndicates.

The relevant recommendations (Nos. 2-7 and 39) are contained in Chapters 1 and 8 of the Neill report. The Working Group's terms of reference cover the provision of information to applicant an existing Names which enable them to evaluate the risks and merits of membership.

As recommended by Sir Patrick Neill's Committee of Inquiry, a new Names Interests Committee was established in March 1987, chaired by Sir Kenneth Berrill KCB. During the year, the Committee formulated the byelaws enacted by the Council in December setting up the office of the Lloyd's Members' Ombudsman and putting in place a modified arbitration procedure in relation to certain disputes between members and agents. The Committee also took over responsibility, in June, from the former Names' Advisory Committee for giving advice or assistance to individual members; over the year some 15 such requests were considered.

The recommendations Nos. 29-38 relating to this committee and its functions are contained in chapter 7. Its terms of reference cover arrangements for the effective investigation and resolution of complaints by Names against underwriting agents and the Corporation of Lloyd's.

The Council and Committee Byelaw (No. 1 of 1987, 4 March 1987).

Quorums and Appointments of Committees and Sub-Committees (Amendment) Byelaw (No. 2 of 1987, 4 March 1987).

Ordinary and Extraordinary General Meetings (Amendment) Byelaw (No. 3 of 1987, 4 March 1987).

The Membership (Amendment No. 2) Byelaw (No. 4 of 1987, 4 March 1987).

Likewise, the disclosure of any commission, remuneration or benefit given or received in connection with a candidate's membership of Lloyd's. The Rota interviews during 1987 required the prospective members to state whether any such payment has been given. The year also saw the implementation of the Neill Committee's recommendation that the agent should leave the Rota interview for a period to enable the candidate to be questioned alone.

The Underwriting Agency Agreements Working Group

1. the introduction of a direct contractual nexus between indirect Names and their managing agents;
2. the defining of the different functions and duties of a members agent and of a managing agent
3. the introduction of a fair and efficient deficit clause and a standard basis for calculating the agents' charges;
4. the tempering of the "pay now, sue later" clause.

Ernst & Whinney internal memo from Stephen Hill to syndicate audit executives and assignment leaders. Professional standards panel (PSP). The firm's rules relating to qualified or non-standard audit reports reply equally to syndicates as to any other clients. Any qualified or non-standard report relating to a syndicate for which an independent partner review is required would require the approval of the PSP.

Managing agents and underwriters reports: The auditors responsibility is to report on these documents on an exception basis only, that is, where he considers them to be inconsistent with the content of the syndicate annual reports. However, we owe a duty to our clients to review these reports for compliance with the bye-law and to advise accordingly....

Asbestosis: the treatment of interest on Johns- Manville payment into Court has been raised with insurance technical sections. It is apparent that a number of different treatments have been operated in the market. I draw your attention to my memo dated 12 April 1985 on this matter a copy of which can be obtained from my secretary. I stress the point made in that memorandum that the treatment set out is a preferred and not a prescribed basis. I am in possession of a letter from Toplis & Harding (Asbestosis Services) Limited dated 6th November 1986 regarding accelerated cash-flow payments on the asbestos claims facility. This does not add any new light on the matter, I have already disclosed to executives and staff but gives a general review of the subject together with some figures at 31 July 1986. If anyone would like a copy of this letter please let my secretary know.

Additional Underwriting Agencies (No. 3) Ltd (AUA (3)) was appointed by Lloyd s on 5 August 1985 to act as the managing agent of the PCW syndicates in place of Richard Beckett Underwriting Agencies Ltd (previously PCW (Underwriting Agencies) Ltd. The report and accounts made up to 31 December 1985 are dated 31 March 1987, a delay of only some 12 months. Spicer & Pegler state:

2. We have received full co-operation from Additional Underwriting Agencies (No. 3) Limited (A.U.A.3) but the scope of our audit has been limited by the following matters:

Apart from the limitations in the scope of our audit necessitated by the matters described in paragraph 2 above, there are various other material and inherent uncertainties which affect our audit opinion. These are referred to in note 1 to the aggregate balance sheet which note explains the basis of preparation.

Note 1. Basis Of Preparation:

The aggregate balance sheet at 31 December 1985 has been prepared to show the aggregate state of affairs of all the syndicates listed in note 7(i) and having regard to the matters explained below.

Since its appointment as substitute managing agent, A.U.A.3 has made extensive efforts to produce reliable accounts for the syndicates. In particular, it has re-assessed the basis on which the reserves for outstanding liabilities should be determined, and has examined in detail the accounting principles and assumptions to be adopted in the syndicate accounts.

A.U.A.3 have found that, to a great extent, the principal syndicates were managed by the previous managers as a group without always recognising the interests of individual syndicates. Many problems arose from this method of management, in particular relating to the transfer of business between syndicates, the use of group reinsurance programmes and the pooling of assets in cash groups. A.U.A.3's investigations indicate significant accounting irregularities under previous managers which call into question many of the accounting decisions made by them and the reliability of the accounting records inherited.

All of these problems have a material effect on the individual syndicates and as a result it has not proved possible to prepare syndicate accounts in accordance with the Lloyd's Syndicate Accounting Byelaw (No. 7 of 1984).

The open year of account balances for all open years less than three years old reflect underwriting transactions up to 31 December 1985 but do not include subsequent premiums and claims which may arise before the accounts reach the end of their third year and no provisions have been made for any additional underwriting losses which might arise.

(The accounts as at 31 December 1985 were signed off on 31 March 1987, and not in 1986.)

The Council agreed with the Government in April 1987 that they would aim to deal with the remaining 32 Neill recommendations within two years.

Offers were made by the Society of Lloyd's to the members of the syndicates managed by AUA3 (with the exception of eight names)v with a view to ending the involvement of those members in the PCW affair. The offers were declared unconditional on 19 June 1987 and were accepted by 98.4 per cent of the members to whom they were made. Under the terms of the ensuing settlement a reinsurance to close policy was effected with Lloyd's syndicate 9001 in respect of all members who assented to the offers thus terminating their involvement in the PCW syndicates. Syndicate 9001 was specially constituted for this purpose and has been 100 per cent reinsured by Lioncover Insurance Company Ltd, a UK authorised insurance company, which is a wholly owned subsidiary of Lloyd's. The reinsurance to close transactions arising from the settlement will be accounted for in the 1987 global accounts.

(a) Syndicate 9001 and Lioncover Insurance Company Limited

1. Contributions by other potential Defendants and the Errors and Omissions market

The Alexander & Alexander Group	Broker
Black Geoghegan and Till	Accountant
Josolyne, Layton-Bennett & Co.	Panel Auditor
The Minet Group	Broker
Needler Heath Ltd.	Broker
PCW / RBUA	Managing Agent
P.W. Kininmonth & Co. Ltd	Broker
The Sedgwick Group	Broker
Steel Burrill Jones plc	Broker
Waltons & Morse	Solicitor
W.M.D. Underwriting Agencies Ltd	Managing Agent
CONTRIBUTING MEMBERS' AGENTS
Bankside Members Agency Ltd.	Members' Agent
Bradley Gascoigne Underwriting Agencies Ltd.	Members' Agent
Bradstock & Barker (Underwriting Agencies) Ltd.	Members' Agent
Gordon Brighton (Underwriting Agencies) Ltd.	Members' Agent
CSB Underwriting Agencies Ltd. (incorporating Tennant Budd (Underwriting) Ltd.)	Members' Agent
Christand Underwriting Agencies Ltd.	Members' Agent
Cox Tudsbery & Wills Ltd.	Members' Agent
Craven Farmer Underwriting Agents Ltd.	Members' Agent
David Evers Ltd.	Members' Agent
G. P. Eliot & Co. Ltd.	Members' Agent
Fenchurch Underwriting Agencies Ltd.	Members' Agent
Glanville Enthoven & Co. (Underwriting) Ltd.	Members' Agent
Greenly Underwriting Agencies Ltd. (formerly Seascope Underwriting Agencies Ltd)	Members' Agent
Charles Howard Agencies Ltd	Members' Agent
Jardine Matheson Underwriting Agencies Ltd.	Members' Agent
John Townsend Underwriting Agencies Ltd.	Members' Agent
Laurence Philipps (Agencies) Ltd.	Members' Agent
London Wall Members Agency Limited (formerly Bain Dawes (Underwriting Agency) Ltd)	Members' Agent
Oakeley Vaughan (Underwriting) Ltd.	Members' Agent
H. L. Puckle (Underwriting ) Ltd.	Members' Agent
R. K. Harrison Underwriting Agencies Ltd.	Members' Agent
Stancomb & Kenington Agencies Ltd.	Members' Agent
Thos. R. Miller & Son (Underwriting Agencies) Ltd.	Members' Agent
Upton Underwriting Agencies Ltd.	Members' Agent
Duncan Wauchope & Co. Ltd.	Members' Agent
Wendover Underwriting Agency Ltd. (incorporating Hine & Butcher Ltd.)	Members' Agent

(b) Contribution from Lloyd's

6. Taxation

Since our appointment we have devoted substantial resources to formulating claims which might be brought on behalf of Names to recompense them for the wrongs they have suffered. We have prepared draft writs against more than 70 potential defendants including the former syndicate managers, their controlling shareholders, the sponsors of the offer made to Names in 1984, the brokers responsible for placing a number of the policies, the former syndicate auditors, Members' Agents, and Lloyd's itself. We have also prepared draft points of claim against the principal potential defendants and a copy of this (which exceeds 150 pages in length) is available to any Name or Members' Agent who requests it. The issues arising are complex.

A number of factors make it impossible, at this stage, to give advice as to the amount which may be recovered in these proceedings. Our prime difficulty is lack of evidence. Many of those who could provide us with evidence are potential defendants or unwilling for other reasons to provide us with the necessary information. The records of the syndicates are in many cases inadequate or missing altogether. Lloyd's has advised us that it is unwilling to make disclosure of the information in its possession because, it maintains, it would be unusual to disclose information which might count against it in the course of settling litigation which has not yet been commenced. Lloyd's is bound by its own byelaws and by undertakings of confidentiality, which have been given in investigations and disciplinary proceedings, not to disclose to anyone any evidence given in those investigations and proceedings. Such evidence might well have assisted us in assessing the value of your claims.

I must emphasise that you are giving up all your rights except rights to claim under personal stop loss policies. The rights you will give up will include any special rights which individual Names may have against, for example, their Members' Agents, or their personal professional advisers and attorneys and also any rights which you may have to sue AUA3 for anything it may have done or omitted while it has been your agent (and will include advice concerning the offer given by AUA3 or your other advisers). This is to achieve finality. Similarly, in the interests of finality, Lloyd's insist that you agree that you will make no claim against it for misrepresentation or non-disclosure in relation to the settlement. This is intended to ensure that if facts come to light which you ought to have been told in connection with the settlement, or if anything you have been told is wrong, you will have no legal claim.

Since our appointment we have made extensive efforts to produce reliable accounts for the syndicates. In particular, we have re-assessed the basis on which the reserves for outstanding liabilities should be determined, and examined in detail the accounting principles and assumptions to be adopted in the syndicate accounts. Both the syndicate auditors, Spicer and Pegler, and our consulting accountants, Price Waterhouse, have carried out a great deal of work to assist us in these investigations.

In spite of all these efforts, it has not proved possible to prepare normal syndicate accounts, but we have prepared pro forma statements. In doing so, we had to make a number of assumptions, notably in relation to the allocation of risks, reinsurance recoveries, assets and liabilities. Substantial credit has been taken in respect of reinsurance recoveries, some of which may be disputed. Spicer and Pegler have audited the books and records of the syndicates, but they have informed AUA3 that they are unable to give any opinion on these pro forma statements.

The pro forma statements have been prepared to enable the Names to make a rough and ready comparison of the required contribution with the estimated losses. Because of the unavoidable inaccuracies in the figures, which further work will not necessarily improve, such comparisons must be approximate. However, the global deficiency can be ascertained with reasonable certainty, and for all their uncertainty, the individual figures are the best that are available.

AUA 3 have found that, to a great extent, the principal syndicates were managed by the previous managers as a group without always recognising the interests of individual syndicates. Many problems arose from this method of management, in particular relating to the transfer of business between syndicates, the use of group reinsurance programmes and the pooling of assets in cash groups. AUA 3 s investigations indicate significant accounting irregularities under previous managers which call into question many of the accounting decisions made by them and the reliability of the accounting records inherited.

A letter from attorneys to the Environmental Claims Reinsurance Group (ECRG) stated the following.

We have proposed, and the ECG has approved, the creation of a Priority List of assureds with pollution claims. The Priority List will include assureds whose pollution claims pose an imminent potential exposure to underwriters, involve a declaratory judgement action against underwriters, or require an indemnity or expense reserve. Because of the significant potential exposure of the pollution claims included on the Priority List, it is imperative that the Market be kept fully informed. The London market faces an enormous problem with the presentation of pollution claims. There are already many more assureds concerned with pollution than were concerned with asbestos. The number of pollution coverage lawsuits involving underwriters already exceeds the number brought during the whole of the asbestos problem.

Seminar held in London entitled: Insurance and Reinsurance Insolvency.

In a report published in April 1987, the EPA are said to have examined 44,000 schools and established that they contained 213,000,000 square feet of asbestos containing material. There are 107,550 schools potentially affected which according to the EPA produces 510,203,786 square feet of asbestos containing material. The cost of ripping out asbestos tends to vary from a low of $4.50 per square foot in Texas to a high of $30 per square foot in New York. Overall, the EPA has estimated a cost of $12.50 per square foot for removal from public schools In August 1987, Mendes & Mount and Lord, Bissell & Brook advised that:-

"As the public schools represent 69% of suits filed to date, we can extrapolate these figures to produce a total of 739,425,777 square feet for all claims filed to date. Due to the great variance in removal cost, we have utilised the EPA projection