The cost of peace at Lloyd's - but the news may not bring peace of mind for investors facing ruin

Names will learn today how much they are being asked to contribute to the insurance market's pounds 9bn losses. John Eisenhammer, Financial Editor , reports.
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The Independent Online
Lloyd's names, theinvestors who put up the cash for the London insurance market, will find on their doormats today the first estimate of the final cost of buying peace at Lloyd's, although it may not buy them peace of mind. Many risk losing their homes and large amounts of money .

There were 34,000 names underwriting at Lloyd's in 1988, but today the number of active names is just over 12,000 - an unparalleled statement of flight and dispossession. Since 1988, Lloyd's of London has racked up losses over pounds 9bn - a devastating turnaround in the fortunes of many names, by definition people of above-average means, who pledged every bit of their wealth to cover eventual liabilities.

Traditionally Lloyd's had been regarded as a safe investment - securities lodged with Lloyd's earned interest, the insurances business made a profit and the cheques rolled in regularly each year. Unlimited liability was merely a theoretical risk.

Instead Lloyd's provided a stark lesson in the potential risk of financial market involvement. A combination of natural disasters and poor management led to many syndicates of insurers making massive losses. Litigation followed, and angry names refused to pay for what they think was at best irresponsible behaviour by professional managers, who actually decided what risks to underwrite and what premiums to charge.

To avoid the real risk of Lloyd's itself going bust, the insurance society has devised an unprecedented rescue plan. It is hiving off all its pre- 1993 policies - notably the ruinous asbestos and pollution liabilities in the US - into a separate re-insurance company called Equitas.

Names are being asked to pay a final, individual premium into Equitas, to cover all the potential liabilities from their old policies. It means that for a price, they can do what has not been possible before - sign a cheque and walk away.

For many names, this means finding more money. To help the settlement, Lloyd's is offering at least pounds 2.8bn in credits and debt forgiveness to names, reducing Equitas bills and buying off litigants. Many thousands of people are facing one of the most difficult financial decisions of their lives. To help, the Independent answers the key questions.

Who is affected?

Every one of the 34,000 names. Even if you stopped underwriting some time ago, names remain liable to the end of their days for claims on policies written during the years they were active in the market.

Which is the key figure?

The figure on page one, Summary Data of the Indicative Finality Statement. This shows an estimate of what, if anything, you will have to pay Equitas to reinsure all your old policy liabilities and draw a line under your affairs at Lloyd's. For some names, their investments already pledged to Lloyd's will be more than enough to cover the cost of Equitas, and they get some money back. The less fortunate will still need to find more cash.

What do I do?

Don't panic even if the bill looks more than you can afford. Special extra funds are there for the hardest hit. Moreover, these are estimated bills, and final premiums are likely to be lower for most people, because Lloyd's is privately confident it will raise more money to offset names' payments between now and when final statements are dispatched in May.

What do I do next?

Consult your financial adviser and banker. These are highly important decisions with considerable tax implications for some, and time is short. Planning is essential, and Lloyd's requires early notice if you want to take advantage of special schemes and assistance. The deadline for payment of the finality bills is late July.

What if I think it will be hard or impossible to pay my bill?

Inform Lloyd's promptly on the appropriate form. Anyone with an estimated finality bill in excess of their funds at Lloyd's should consider applying for additional credits from the settlement fund. These will be allocated on the basis of need. To assess this, names must submit to rigorous means testing by Lloyd's financial recovery department, declare they have not dissipated assets, and have everything signed off by an accountant.

What are the special schemes?

Lloyd's is planning a special mortgage or loan facility, to help hard- hit names get around the difficulties of age, the complexity of their affairs and the need to raise up to 100 per cent loans against their homes. This could also help names whose funds at Lloyd's are secured by their homes. Repayment could be over 25 years, with no new insurance required. The project depends on enough Names taking it up to make it worthwhile for the lenders. There will also be a structured payment facility, spreading the cost of finality over five years.

Do I have a say in all this?

Yes. The entire Lloyd's settlement plan depends on the outcome of a vote by all names in July, after they have received the final Equitas bills. It will be a choice between finality, at a price, and uncertainty, which could prove more or less expensive in the years to come, as Lloyd's as we know it is wound up, and the lawyers and debt collectors take over.

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