911 reinsurance

2001 RAND Institute for Civil Justice published its asbestos litigation study labeled “Asbestos Litigation in the US: A New Look at an Old Issue.”

- Over 500,000 claimants have filed suit to date;

- At least 5 firms have had 300,000–500,000 claims each;

- The number of mesothelioma claims began to increase in the mid-1990s;

- US Insurers have to date paid $21.6 billion for asbestos personal injury claims;

- 27 million people in the US were exposed to asbestos occupationally from 1940–1979.

September 11, 2001 The WTC Towers were built between 1968 to 1972.

A slurry mixture of asbestos and cement was sprayed on as fireproofing material.

This practice was banned by the New York City Council in 1971.

The collapse of the twin towers releases a plume containing 400 tons of pulverized asbestos and other hazardous materials across lower Manhattan.

The Twin Towers had large amounts of asbestos fireproofing which would have necessitated costly removal had they remained standing.

Some sense of the cost of removing the asbestos from the Twin Towers can be obtained by the example of 55 Broad Street.

The removal of asbestos in that building cost $70 million when it was empty, five times the cost of the building’s construction 15 years before.

An estimated 410,000 to 525,000 people, including more than 90,000 workers, were exposed to the toxic dust during the rescue, recovery and cleanup efforts that followed the attack.

A region of several square miles was blanketed by a fine powder.

This powder, consisting of the pulverized remains of non-metallic components and contents of the Towers, contained significant percentages of asbestos.

The World Trade Center dust consisted of approximately:

50% nonfibrous construction materials;

40% glass and other fibers;

9.2% cellulose from disintegrated paper;

4% asbestos.

For nearly three hundred years, Lloyd’s of London insurance policies were backed by wealthy British investors, who came to be known as “Names” because, in the early days, their signatures were written on the face of each Lloyd’s policy.

The Names participated in one-year venture syndicates, to insure risks, chiefly in maritime insurance.

Each Name pledged his entire personal wealth to back up his share in the syndicate’s policies.

The syndicates accepted business for one year, then allowed two more years for claims to come in and be settled.

Each syndicate closed its “year of account” and wound up its affairs after the end of the third year.

The Names received their share of the profits, or paid their share of the losses, and their liability ended.

If, however, all claims could not be settled by the end of the third year, the syndicate had to remain “open” and the profits or losses could not be shared among the Names until all claims were finally settled.

This system was efficient and profitable in maritime business; the outcome of any given voyage was almost always known within the year of account, and settled within three.

As both commerce and insurance grew more complex, and especially as Lloyd’s expanded into non-maritime business, syndicates found they could no longer close their affairs after only three years.

Staying open longer, however, and thus delaying the distribution of profits, would threaten their financial base: Names might well look elsewhere for more reliable investments with more rapid returns.

Lloyd’s solution was to have each closing syndicate reinsure its remaining risks with a syndicate from the next year of account.

For a premium paid, a still-open syndicate, during its third year, would assume any remaining Incurred But Not yet Reported (“IBNR”) liabilities of the closing syndicate from the prior year by issuing it a specialized policy of Re-Insurance To Close (“RITC”).

Lloyd’s syndicates could thus continue distributing profits after three years, instead of having to radically alter their long-established and familiar business procedure.

When this RITC developed, there were only a few thousand members of Lloyd’s, of whom perhaps a thousand, known as “working Names”, actually conducted the business of Lloyd’s insurance market.

The rest (“external” Names) relied on their syndicate managing agents to protect their interests, by carefully evaluating each risk accepted, and by calculating the RITC in such a way that neither excessive profit nor loss was realized by the Names on the old syndicate or the new syndicate.

It was extremely important that RITC be calculated fairly, because the individual Names who made up those syndicates were not necessarily the same people.

In order to carve out a share of the U.S. insurance market while a “buy-American” attitude prevailed in the 1930’s, 1940’s and 1950’s, syndicates at Lloyd’s issued many broadly worded policies, without monetary limits, insuring and reinsuring risks in the United States.

The loose language of these policies gave Lloyd’s a temporary competitive advantage over many U.S, carriers; however, these overly generous policies eventually came back to haunt them.

By the 1960’s and 1970’s it was clear to a handful of the highly placed working Names that claims due to asbestosis, pollution and other health hazards (so-called “APH” losses) were ripening into lawsuits in which unanticipatedly large damages were being awarded by American courts.

American companies turned to their insurers, and their insurers turned to their reinsurers, who in very many cases were syndicates at Lloyd’s.

An avalanche of claims was thus working its way through the courts and down the chain of reinsurance obligations, toward the Lloyd’s syndicates that held the RITC policies issued to the syndicates who, in prior years, had written the original, broadly worded policies.

The avalanche was moreover apparently going to continue well past the year 2000.

Since the original policies were written without monetary limits, the Names backing the syndicates that had assumed liability for these policies through the annual RITC process were facing financial ruin, and Lloyd’s ability to “pay all claims” was in jeopardy.

The Names would soon be personally liable for coming claims far in excess of their original investments in Lloyd’s syndicates, and apparently in excess of their combined wealth besides.

If word got out about the magnitude of the undisclosed liabilities latent within numerous syndicates at Lloyd’s, incoming investment would cease, and Lloyd’s would become extinct.

In the early 1970’s the ruling Committee of Lloyd’s lowered the minimum net worth requirement for Names to $150,000 in assets, and opened membership at Lloyd’s to the British upper-middle class, and foreigners, especially American, Canadian, Australian, and South African citizens, in which countries Lloyd’s had an excellent reputation.

Lloyd’s began recruiting large numbers of new Names, and in 1973 even allowed women to join.

Lloyd’s also placed a new layer of bureaucracy, known as “members’ agents”, between the external Names and the syndicate managing agents.

By their Agreement with Lloyd’s, the external Names were strictly passive investors who delegated all authority to conduct insurance business to their member’s and managing agents, who placed the Names on syndicates and otherwise handled all their business at Lloyd’s.

The formerly close and trusting relationship between Names and their managing agents disappeared.

Many of the aristocrats who had been Names on the threatened syndicates before 1970 also quietly “disappeared” as soon as RITC had been contracted for them, either resigning from Lloyd’s altogether or moving to “safe” syndicates.

There were about 6,000 Names in 1970.

None of the new Names were told of the billions in losses sliding inexorably down the chain of reinsurances toward them.

[By 1990, although nearly 31,000 new Names had been recruited, the total number had only risen to about 33,000. Two thirds (over four thousand) of the “old” Names had quietly got out of harm’s way.]

The members’ agents for the new external Names (and some unwitting old Names) placed them on the endangered syndicates’ next year(s) of account by the hundreds.

The managing agents passed the old syndicates’ massive undisclosed liabilities to select syndicates populated by “new” Names via inadequate RITC, distributed money that was deemed to be “profits” to the Names on the closing syndicates, and paid themselves handsomely.

In August 1980, a formal study group of insiders, called the “Asbestos Working Party,” was established at Lloyd’s to formulate a strategy to deal with the ever-growing and ever-more-difficult to conceal problem of asbestos claims.

In October 1980, the United States Court of Appeals for the Sixth circuit announced its decision in INA v. Forty-Eight Insulations, Inc. holding that every exposure to asbestos fibers was a separate harm, and that every insurer along the way during the entire period of exposure, which might be twenty years or more, had a duty to defend and indemnify.

In response, Lloyd’s inner circle continued to conceal their knowledge of the massive impending losses, and intensified the aggressive recruitment of more and more external Names, which was being conducted at their direction by members’ and managing agents, in what became known as the “recruit to dilute” campaign.

Syndicates continued to under-reserve and/or inadequately reinsure for incurred but not reported losses, thus hiding the coming losses and maintaining an illusion of profitability.

In 1982, Lloyd’s persuaded Parliament to pass a Private Act, the Lloyd’s Act of 1982, granting Lloyd’s immunity from most lawsuits (much like government agencies have).

The Lloyd’s Act of 1982 also gave the Council of Lloyd’s the power to unilaterally and even retroactively change Lloyd’s by-laws, which formerly could only be done by majority vote of the Names at a General Meeting.

The extent and implications of Lloyd’s (effectively complete) legal immunity, and the Council’s by-law-changing powers were kept secret from the Names for another nine years, until 1991 (the year that losses for the 1988 year of account first became public knowledge).

In late 1986, for the upcoming 1987 year of account, Lloyd’s required all Names to sign a new General Undertaking, that included “choice of forum” and “choice of law” clauses in which the Names unwittingly agreed that any legal disputes with Lloyd’s would be brought in English courts under English law.

Lloyd’s explained the new Undertaking as a procedural technicality, and did not tell the Names that Lloyd’s was by fiat of Parliament effectively immune from suit in England.

In 1986, Lloyd’s also required that all Names sign a new Members Agency Agreement.

In stark contrast to the minimal disclosures Lloyd’s made concerning the General Undertaking, extensive, detailed explanations of the implications of the new agency agreement were given to Names prior to the deadline to sign it.

Lloyd’s premium capacity increased dramatically as a result of the exponential growth in the number of Names, but Lloyd’s brokers and managing agents were not generating that much new business.

To keep all the Names’ capital “in play”, and thus keep the 30% deposits required for underwriting in place, the syndicate managers cleverly absorbed the excess capacity in a “reinsurance spiral” (properly, “retrocessional spiral”): syndicates reinsured other syndicates, then sought reinsurance on that reinsurance from other syndicates, who then did the same with still others, taking fees and commissions “off the top” each step of the way, in what became known as the “LMX” spiral.

(Although “LMX” is an acronym for “London excess of loss market”, it has in hindsight been euphemistically referred to as the “London excess of capacity market.)

The limited information in the Names’ financial statements made it appear that their investments were doing very well.

In actuality, since each Name’s risk was spread across multiple syndicates, the “turns” of the spiral tended to re-focus their risk back on themselves.

The members’ agents and managing agents on the various syndicates had in fact put many of the Names in the position of repeatedly reinsuring themselves.

The illusion of Lloyd’s as a sound investment could thus be, and was, maintained for several years.

Lloyd’s syndicates wrote their usual “book” of business, capable of maintaining the appearance of stability as long as all was calm; but when (not “if”) major catastrophic losses occurred, those affected syndicates and their Names were doomed.

The commissions taken “off the top” by all the brokers in the spiral had eaten away the premium reserves.

The reserves that remained were dangerously low — as low as 35% of premium in many instances.

That is why “typical” disasters such as hurricanes and oil rig fires resulted in “atypical” and exponential losses in the late 1980’s and early 1990's.

The unwitting new Names, who believed they were investing in one of the world’s oldest and safest institutions, were left to bear the losses when they hit, and hit they did, with a vengeance.

In 1991, Lloyd’s announced losses of 500 million pounds ($800 million), at the time, this was the largest single-year loss in its history (by 1995 the cumulative loss had grown to $15 billion even by Lloyd’s unaudited accounting figures).

Lloyd’s paid out premium reserves at first, and then began making cash calls on the Names on the affected syndicates, not only to cover the outstanding claims, but to amass reserves to pay the IBNR claims that would come due against syndicates in the future.

It was generally agreed that any Names on a syndicate insuring or reinsuring APH risks was financially ruined the day they were placed on it by their agents.

The premium reserves of hundreds of syndicates were exhausted by the end of the traditional three-year accounting cycle.

The syndicates could not close, and the Names bore unlimited personal responsibility for all the future (and still unquantifiable) claims.

APH claims are expected to continue to flow into Lloyd’s until the year 2030 and possibly beyond.

Since 1991, thousands of Names have been bankrupted, and more than 30 have committed suicide.

Lloyd’s has continued to make cash calls, and English courts have continued to issue rulings in Lloyd’s favor, making it easier for Lloyd’s to collect more and more money from the remaining Names and/or their estates.

BASICS OF FRAUD:

In legal terms, there are five elements to a fraud:

“Scienter”, or knowledge of facts, events, or circumstances by one party;

Misrepresentations (including non-disclosure) of that knowledge by that party in dealings with another;

Reliance on those misrepresentations by the second party;

An agreement, contract, or transaction between the parties which a reasonable person would not have entered into if privy to the first party’s knowledge;

Harm or damage to the second party as a result.

English Justices, even at the appeals level, have acknowledged on the record that there was ongoing fraud at Lloyd’s, but they nonetheless have thus far decided every case and every point of law in Lloyd’s favor.

The U.K. courts have even gone so far as to rule that Names cannot use fraudulent non-disclosure and/or fraudulent misrepresentation as a defense or counter-claim to offset Lloyd’s collection efforts.