Insurance One Disaster After Another

By Barbara Rudolph

Lloyd's of London has always been synonymous with insurance-underwriting expertise and the sober assessment of risk. When film star Betty Grable sought to insure her famous legs, Lloyd's came up with a policy and calculated the appropriate premium. But disasters have a way of defying the laws of probability. Recent years have witnessed an extraordinary string: the Piper Alpha oil-rig blowout in the North Sea, the explosion of Pan Am Flight 103 over Scotland, the Exxon Valdez oil spill and America's Hurricane Hugo. Last week Lloyd's announced that it would post a $980 million deficit for 1988 -- the most recent year on which books can be closed, since they are kept open for three years to allow for claims to be filed. And worse is to come. Analysts anticipate deficits of $1.6 billion for 1989 and even more for 1990.

The mounting losses are shaking the foundations of the venerable institution, which started life in 1688 in Edward Lloyd's coffeehouse, where shipowners and merchants gathered to buy and sell insurance for their vessels and cargoes. Down the years, Lloyd's became pre-eminent in the field of marine insurance and helped establish the City of London as a global financial- services center.

These days, the entire insurance industry is struggling. But Lloyd's, which writes $9.6 billion worth of policies each year, finds itself in a particularly vulnerable position, since it specializes in the riskiest end of the market, such as oil-rig activity and communications satellites. Lloyd's structure also sets it apart. It is like a club, a society of underwriters who write policies in various specialized fields. If Lloyd's were a company, it & could go bankrupt, and stockholders would lose only their investment. Instead, Lloyd's gets its funds from investors known as names, who must show assets worth at least $410,000 to join in underwriting syndicates. In good times the names share their syndicate's profits; in bad times they are liable for all its losses and must be prepared to hand over their personal assets to cover that liability -- down to the last cuff link, as the City saying goes.

Many of Lloyd's 26,500 names now face hefty losses, some in six figures. Among the more illustrious names are Prince Michael of Kent, actress Susan Hampshire, former Prime Minister Edward Heath and publisher Robert Maxwell. Many of the wealthy investors were attracted to the deals as tax shelters. Such benefits also attracted some middle-class men and women, who now face bills they can pay only with great hardship.

As its losses mount, one of Lloyd's biggest problems -- the desertion of its names -- will undoubtedly grow. Lloyd's could then face a capital crunch that would diminish its capacity to take on new business. The number of names providing capital to the syndicates jumped from 7,000 in 1973 to 32,500 in 1988, but has fallen to 26,500 since then, largely because Lloyd's suddenly looks like a risky proposition.

Lloyd's may yet be forced to abandon its unique principle of unlimited liability. That would immediately attract companies as investors, since firms are prohibited from investing in anything where liability is not defined. A Lloyd's task force is preparing a year-end report that will address this subject. The committee may conclude that unlimited liability is akin to a black hole -- something that no underwriter, not even one from Lloyd's, can contemplate covering.

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CREDIT: TIME Chart by Steve Hart

CAPTION: ASSESSING THE DAMAGE

A string of disasters has helped put Lloyd's into the red

With reporting by Helen Gibson/London