In return for the settlement, Lloyd's is to drop a disciplinary inquiry into the conduct of Mr Merrett and his agencies.
The deal, which includes a personal payment of pounds 1m from Mr Merrett to names on his syndicates, ends one of the most acrimonious disputes surrounding the losses at Lloyd's.
The Merrett names won a High Court judgment in October 1995 that implied he had acted dishonestly as their underwriter. The judgment prompted Lloyd's to start the disciplinary inquiry, which will now be terminated.
Lloyd's sources suggested that the combination of the pounds 1m personal payment and voluntary exile from the market was probably a harsher penalty than anything that would have come out of the formal disciplinary hearings. The pounds 1m will be paid to the Merrett Syndicate 418 Names' Association and distributed directly to the aggrieved names.