Lloyd's prepares rescue plan

BY WILLIAM GLEESON

Lloyd's of London, the loss-hit insurance market, is set to announce a new rescue planin the face ofdeteriorating bad debts and mounting losses.

The corporation has been forced to act earlier than expected by the pressure on its cash reserves, which Lloyd's believes means it may be unable to pass next year's solvency test.

Details of the plan are still being finalised, but it is expected to include a cash levy on names and corporate members writing insurance business in the 1993 and 1994 years of account. The levy will need the support of names, who will be asked to vote on whether they will pay it.

At the same time Lloyd's is working on a plan to put all its liabilities from business written in 1992 and previous years into a separate insurance entity in the summer. This is designed as an interim measure on the way towards implementing the reforms in the business plan adopted in April 1993. That plan envisaged the setting up of a new entity called Equitas to take on all the prior-year business whose losses have plunged the market into its present financial crisis.

The latest move, which will be announced within weeks, is the result of growing cash flow problems, brought on by the continuing refusal of names to pay their underwriting losses. About 7,000 of the 33,000 names at Lloyd's are insolvent and many have resorted to the courts to prevent them having to meet the cash calls issued by theirsyndicates.

A name is insolvent at Lloyd's when his underwriting losses exceed his known assets. At the time of the last solvency test in September last year, the liabilities of these 7,000 names exceeeded their assets by £1.35bn.

Their losses declared over the last four years amount to some £8bn. This figure is expected to increase to more than £9bn after Lloyd's announces its next set of results at the end of May.

Under the latest plan, those names refusing or unable to meet their underwriting losses are to be offered a chance to negotiate a way out of their obligations to Lloyd's. In return for settling at least part of their debts, loss- hit names will be offered the chance to walk away from Lloyd's.

If the names refuse the market will collapse.

European insurance law requires that Lloyd's market maintains sufficient funds to cover the shortfall. Peter Middleton, Lloyd's chief executive, insisted Lloyd's had no solvency problem this year. On the following year's test he said: "That's a long way off."

However Lloyd's sources say that Lloyd's has projected the solvency figures forward into next year, and concluded there is a need for action now.

The chairman of Lloyd's, David Rowland, admitted that solvency was becoming a problem when he appeared before a recent Treasury select committee inquiring into self-regulation in the City.

A member of the Lloyd's council said the problem had been exacerbated by the need to start paying cash calls that have been deferred from previous years.

He said a new realism had persuaded the market's bosses that they were unlikely to recoup all that is owed from names.

Although the market's authorities are confident of passing this year's solvency test they are not sure about the following year.

Peter Middleton said: "We at the centre are definitely reviewing what was said in the business plan, but no decisions have been taken yet."