George Staple, director of the SFO, wrote to Lloyd's chairman, David Rowland, advising him that a full- scale formal investigation was necessary into the affairs of the Gooda Walker underwriting agency.
His decision came after his office had carried out a preliminary investigation, first revealed by the Independent in April.
However, the market had itself looked at Gooda Walker almost two years ago. In 1991 Lloyd's asked Kieran Poynter, a partner in Price Waterhouse, to investigate the circumstances surrounding the record losses on a group of insurance syndicates, formed of 3,000 underwriting members.
In his 1,494-page report sent to underwriting members last October, Mr Poynter and his committee said they 'did not encounter any evidence of impropriety of a dishonest nature'. However, the committee was critical of the standards of professionalism and disclosure within Lloyd's.
On the basis of Mr Poynter's conclusions, Lloyd's did not send its report to the Serious Fraud Office.
It was a subsequent investigation by Ken Randall, a former head of regulation at Lloyd's, that triggered the current inquiries by the SFO. Mr Randall, who now works as an insurance investigator helping a team of professional underwriters to uncover the background to the pounds 925m losses, passed a 187-page report to the SFO in April.
The report suggested that Gooda Walker managers had carried out transactions - in the form of so- called 'time and distance' policies - using offshore transactions. These policies, he said, 'significantly enhanced' past profits of the syndicates.
Mr Randall's team feared that the transactions helped to give this boost to the syndicates in a misleading way. Underwriting members were encouraged to join the syndicates because they appeared to be outperforming the market. Lloyd's investigation department has reopened the case and officials said yesterday that they were co-operating with the SFO.
Michael Deeny, leader of an action group representing 2,145 Gooda Walker members, called on Lloyd's for compensation. 'It is absurd that time and distance policies have not been banned,' he said. 'If Lloyd's ruling council has a shred of conscience it should compensate us.
'We have already been asked to pay pounds 400m to meet losses, and I am going to ask the chairman to halt any further demands for cash.' Mr Deeny's group is suing 67 companies at Lloyd's over the losses.