The threat comes as the latest figures from Lloyd's show that more than 5,000 Names have failed to meet their debts to policy-holders. There are also suggestions that Lloyd's itself may shortly have difficulty meeting the Department of Trade and Industry's statutory solvency requirements for insurance businesses.
The letters appear to be an attempt by Lloyd's to pressure Names into settling their debts following last month's rejection of the market-wide settlement by Names. Lloyd's had offered hard-hit Names pounds 900m in return for Names' agreement to stop suing Lloyd's managing and members' agents over the pounds 5bn of losses that have hit the market in recent years.
The letter demanded that Names either apply to the Members' Hardship Committee, run by Lady Archer, or contact Lloyd's Financial Review Department.
Both alternatives offer a bleak prospect for Names. Participation in Lady Archer's hardship scheme is an insolvency arrangement by another name. The Financial Review Department is Lloyd's in-house debt collection agency.
The letter says: 'Lloyd's can and does take legal action to secure Names' indebtedness to policy-holders. Where Names do not respond to our letters there would be no alternative but to issue writs in order to obtain payment, with the result that bankruptcy proceedings might ensue.'
That the letter has been sent to so many people can be seen as an alarming indication of the extent to which Lloyd's Names are suffering financially. The market has seen losses averaging pounds 200,000 per existing Name over the last three years. Things are set to get worse in May, with an expected loss of pounds 2bn adding more than pounds 75,000 to the average loss per Name.
The latest Lloyd's figures show that 5,212 Names have not met all their liabilities to policy- holders. Of these, 1,540 have applied to the Hardship Committee in an attempt to resolve their indebtedness. This leaves 3,672 Names who have yet to explain to Lloyd's how they intend to pay their debts. There are currently 160 writs issued against Names that are still pending. The total number of Names in the hardship scheme (not all Names in the scheme have fallen behind with their debts) is 2,617, which compares with 863 this time last year.
Whenever a Name fails to meet a claim by a policy-holder, money from Lloyd's central fund is allocated to meet that claim. The central fund is equivalent to the policy-holders' protection fund, to which insurance companies are required to contribute. If the central fund becomes unable to meet claims, Lloyd's will have a lot of explaining at the DTI.
According to the latest Lloyd's figures, pounds 589m of the central fund's pounds 928m has been earmarked to meet unpaid losses. Of this, pounds 300m has resulted from last May's pounds 2.9bn market loss. Given that Lloyd's analysts are predicting losses of pounds 2bn this year, a further large deterioration in Lloyd's central fund can be expected in the latter part of the year. This might well push the Lloyd's central fund close to the brink of its solvency limits.
Christopher Stockwell, chairman of the Lloyd's Names Association's Working Party, said: 'The letter shows that Lloyd's is clearly getting nervous about its solvency position for later this year.'
Mr Stockwell's views on Lloyd's solvency are supported by John Rew, a Lloyd's market analyst and a publisher of Lloyd's syndicate performance league tables. Mr Rew said: 'This cannot go on for very much longer. The temperature has been raised quite dramatically by Lloyd's with demands for a level of cash payment we have not seen before.
'This might mean they have a problem with cash to a certain extent. If so, the problem has been caused by selling the insurance product too cheaply, causing the solvency problem. Part of the drive behind the demands for cash is to paper over the solvency problem. It's inevitably a short-term solution.'
But where does this leave the 2,500 Names facing demands to apply to the Hardship Committee? Mr Stockwell advises: 'No Name should go to the Hardship Committee before taking legal advice. The Hardship Committee is not a charity; it is a debt collection agency for Lloyd's'
If Names do not apply to the Hardship Committee the choices are stark. Last week, Graeme King, senior manager of Lloyd's Financial Review Department and author of the letter sent to the Names, told a conference of Lloyd's Names that if a Name does not apply to the committee he or she faces the option of paying up in full, entering an individual voluntary arrangement which Lloyd's will vote against, going bankrupt or litigating against Lloyd's.
Many names are still pinning their hopes on the possibility that Lloyd's will make a new settlement offer later this year.
However, Lloyd's chief executive, Peter Middleton, has denied press reports that he told participants in last week's conference that Lloyd's was considering a new offer.
'I don't detect any appetite among action groups for a three- or four-year period of litigation. But any future settlement will have to be between the action groups and the underwriters. I don't foresee that Lloyd's centrally would construct a new offer. There would be no point to it. We've done it once and it was rejected. Nobody should assume that any future exercise will involve any central money at all,' Mr Middleton said.
Gordon Apsion, a barrister representing Names, claims that litigation is the only realistic option for Names.
However, the Lloyd's litigation quagmire is deep and very messy. Those who opt for it will be caught up in it for a long time, and considerable uncertainty will hang over Names' affairs for the duration.
The legal issues are complex. Lloyd's Names are trying several tactics to prevent their wealth being taken from them.
One case, known as the portfolio selection case, was heard by the Court of Appeal last week. Names are claiming that Lloyd's advisers have a responsibility to follow Names' instructions to put them on certain sorts of syndicates. Judgment has been reserved.
Another case, starting in the House of Lords next week, involves Names trying to show that they are owed a tortuous duty of care by their Lloyd's advisers. Another group of Lloyd's Names, calling itself the writs response group, is trying to claim that Names' contractual obligations to pay debts to Lloyd's is void under European law. The group plans to take the case to the European Court of Justice - a process they estimate will take four years.
In a separate development, Mr Apsion is planning to launch an appeal against a recent judgment in Lloyd's favour, striking out a case he hopes to bring on behalf of a Lloyd's Name.
Perhaps the deciding factor in the litigation will turn out to be the extent to which the two sides can stand the process of financial attrition. What will be exhausted first? Lloyd's central fund, or the Names' ever-diminishing assets?
(Photograph omitted)Reuse content