Smart suit, smooth talk, and a big risk

THE HIGH Court action which started this week between the 3,095 Lloyd's 'names' and the underwriters of the Gooda Walker syndicate, of which they were members, is the most spectacular manifestation of the civil war taking place in the Lloyd's insurance market. The numbers involved are big even by City standards: the amount of damages the 'names' are seeking in this action is more than pounds 629m, while the overall losses at Lloyd's since 1988 will be about pounds 9bn when the latest figures are revealed next month.

When figures hit the billions they become unreal: these are usually the sorts of losses only governments (or maybe exceptionally stupid banks) incur. Someone has to stump up, but it is not easy to identify precisely who does. In practice we all pay, for if the Government foots the bill, we pay higher taxes; if it is the banks, we pay higher charges and greater interest on loans. But the burden is shared and invisible.

In the case of Lloyd's, the burden is carried by individuals - well-heeled ones, to be sure - who are highly visible, to judge by the number of stories in the national press. Yet despite the volume of words, or maybe because of it, outsiders seem to find it hard to make a sensible judgement about the whole business.

That, I suspect, is because there are at least three different stories tangled together in Lloyd's: the business story, the human story and the morality tale.

The business story can be told in a few sentences. Lloyd's is a market, not a company; but a market whose structure became increasingly inappropriate. Lloyd's reliance on personal wealth to provide its capital and on individuals to make inspired underwriting decisions worked while costs were low and the global environment reasonably stable. But policing of the market was inadequate, costs were poorly controlled, and Lloyd's was wrong-footed by the late-Eighties surge in litigation in the US.

These structural weaknesses were evident even by the end of the Sixties, and there have been no fewer than three major reports on its future. But change was always resisted. People in Lloyd's could get away with this largely because the market continued to be profitable through much of the Seventies and early Eighties - for purely cyclical reasons. When the cycle turned, catastrophe struck. The reforms the market is now trying to put in place should have been carried out years ago.

Still, if people are receiving regular cheques for doing very little, they rarely complain. That leads us to the human story. Most people would start this by talking about greed: the extent to which people who were, by any normal standards, quite rich, were persuaded to take a risk in order to become even richer. The risk was in Lloyd's principle of unlimited liability; the method of becoming richer was to allow their money to work twice, once earning interest, the second time backing a business. But rather than greed it is probably more apt to talk of inexperience. It is quite astounding how casually people who think of themselves as sensible take financial decisions.

We all do this. People who would think twice about having steak at dinner because it seems extravagant will join a company pension fund without knowing the record (or even the name) of the fund manager, or the credentials of the trustees. Lloyd's saw a rapid expansion of its membership during the Seventies and Eighties, with the result that many people joined who were insufficiently experienced in money matters to see the dangers.

They were also subject to those twin talents of charm and flattery at which successful professionals in Britain excel. I was once taken through the formal induction that a new name would receive. This was just an exercise - mercifully, I was too poor to qualify - but it was revealing. The person who took me through it was wholly honourable. He thoroughly explained the risks and the rewards, the need to use steady syndicates to build up reserves before joining more risky ones, the tax advantages, the reporting proceedure, what would be expected of me . . . and then we went to have a jolly good lunch.

This is a very seductive process, the initiation into an elite - an elite that was self- confident enough to create that cathedral of money, the new Lloyd's building. But, of course, one was not really admitted to the elite: one was not a priest, or even an elder, merely a member of the congregation.

Finally, there is the morality tale - but it is not the one normally cited. Many people see what has happened to Lloyd's as an allegory of our times: the way in which the interaction between greed and loose standards during the Eighties has resulted in misery now. There is a superficial attraction to that, for it is a nice simple story and, of course, in some ways is quite true. But there is another and more interesting dimension to the Lloyd's conflict, which runs like this.

The people who were sucked into Lloyd's during the Eighties found it very difficult to believe that the people who were recruiting them were doing so solely because they were paid a fat commission. There were few danger signals. These people were well-spoken and well-dressed, they sent their children to good schools and went to Glyndebourne as much for the music as the champagne. They knew the rules of behaviour; they wore the camouflage of British professional circles. Had they presented themselves as hippies or polytechnic lecturers or 'Essex men', then the potential recruits would have run a mile. You do not, under the English code, entrust your finances to people who have long hair, wear sandals or have gold chains round their necks.

Well, people ain't always what they seem. There is no necessary correlation between pukka appearance and pukka morals. If we could all learn from the Lloyd's experience to be guided a little less by the packaging and to look a little harder at the product, then something useful will come out of what, in any terms, is a sorry story.