City: Of fear and loathing in Lime Street

HERE ARE two very different stories about being a Lloyd's name on the loss-making Gooda Walker syndicates. The first concerns a woman I met at a party last month. Recently separated and going through a messy divorce, she had been put into some of the worst-hit syndicates by her husband in the late 1980s. When she signed the documents, she had little or no idea what she was letting herself in for. With the benefit of hindsight she suspects that her husband was trying to set her up with an income for life so he wouldn't have to worry about her livelihood after he ran off with his secretary.

His motives are irrelevant now. In effect, he has bankrupted her. She faces losses of more than pounds 600,000, will have to sell the family home and live out the rest of her life in relative hardship. Her husband, meanwhile, appears to have escaped almost entirely unscathed. He had made sure that it was his wife signing up for unlimited liability, not himself.

The second concerns a stockbroker I came across in the City recently. Tempted by the huge profits made for 20 years or more from excess loss catastrophe reinsurance, he insisted that his managing agent sign him up for a disproportionate number of high-risk LMX syndicates. He compounded the problem by signing up for a number of stop-loss syndicates - once highly profitable syndicates that insure members against loss. He thus became a classic victim of 'the LMX spiral' - a process by which reinsurance was allowed to spiral around the market so that already gross over-exposure to catastrophe losses became multiplied in the members' hands. You could argue that, unlike the woman in the first story, he had only himself to blame. Unlike her, his own greed led him into deep water. There are plenty like him.

At one time, names clamoured to join these higher-risk syndicates where they made a lot more money than on run-of-the-mill stuff. But most of those badly hit by losses at Lloyd's are more akin to the woman than the man - whether you have made or lost money at Lloyd's largely depends on who your managing agent was. If you were unlucky enough to run into Tony Gooda on the golf course, Charles St George at the race track, or Robin Kingsley at Wimbledon, as likely as not by now you would have been stuffed, a victim of, at best, gross incompetence.

It will be years before the courts finally begin to sort out who was to blame for this monumental debacle. As David Rowland, chairman of Lloyd's, puts it with masterly understatement: 'Any organisation which manages to lose pounds 6bn over four years clearly has a lot to answer for.'

If a good relationship ever existed between market and investors (the names) it has now broken down on a colossal scale - possibly beyond repair. How on earth was it possible for Lloyd's to have allowed a man like Derek Walker, charged and acquitted of fraud in the early 1980s alongside Christopher Moran, (see profile, page 13), to have continued practising? Where there are allegations of fraud there is nearly always management incompetence on a grand scale. But then this is a market whose ways and practices seem more suited to the last century than the 1990s - a market, moreover, which even after the reforms of the 1982 Lloyd's act continues to regulate itself in a woefully inadequate fashion.

Can Lloyd's survive - and does it in any case really matter any longer? With only 1.5 per cent of the world insurance market, Lloyd's is no longer the force it once was. Its contribution to the balance of payments is significant, but the giant Lloyd's broking houses that bring most of this business to London would carry on regardless of what happened to Lime Street's underwriting capacity. Nevertheless, it seems scarcely credible that the Government or the City would allow Lloyd's to go to the wall, with all that would do to London's reputation as a financial centre.

Already the damage is considerable. The chairman of one leading investment bank told me the Lloyd's debacle was colouring the attitude of many potential overseas clients to the City as a whole - that such gross incompetence at Lloyd's had led them to wonder about other, wholly unrelated London markets too.

Mr Rowland can hardly pretend that things are not as bad as they seem, and indeed he doesn't. But the paradox of the present hiatus is that it disguises an improving trend for the market. Premium rates are rising, the claims rate is falling and - astonishingly for a market that has suffered so much adverse publicity - business is on the up. Losses ought to be reduced to about pounds 1bn for 1991 (Lloyd's accounts three years in arrears) according to Mr Rowland. By next year, the market will be back in profit to the tune of pounds 900m if cost cuts come through in the way foreseen in the Lloyd's business plan.

Whether this is enough to rescue the market is anyone's guess. With half the names saying they can't, or won't, pay up and large numbers of them suing for negligence and worse, the upswing may have come too late. Mr Rowland believes there will be no need to repeat last year's general levy on the membership; he is praying that the central compensation fund, which stands at pounds 1.1bn, is enough to meet the liabilities of names who can't pay their losses. But the truth is that nobody knows. Lloyd's seems to think the woman cited in the opening to this piece is in a position to pay, but I can assure the debt collectors that she's not. If she is in any way typical, Lloyd's has a much more serious problem than it cares to admit.

All of which makes Mr Rowland's plan to bring corporate capital into the market on a limited liability basis, a matter of urgency. No details have been released on how Lloyd's proposes to do this - a green paper will be published next month - but it is already clear that nobody in his right mind will invest without a line being drawn in the sand to give newcomers immunity against all past losses; nobody is in the business of charity. Some names still seem to believe their plight could be eased by charging newcomers a substantial entry fee. I would have thought that about as likely as a month of Sundays; the returns have never been good enough to justify that sort of premium. On balance, it seems more likely that Lloyd's will survive than fail, but it will remain a tightrope act for a long time yet.