Neill report details 'incest' at Lloyd's: Angry underwriters say the inquiry into LMX losses is 'a catalogue of errors and incompetence'. John Moore reports

The growing incestuous nature of Lloyd's of London kept a professional underwriter awake at night, according to an internal report commissioned by the authorities of the insurance market.

In a two-volume report, prepared by Sir Patrick Neill, vice chancellor of Oxford University, Patrick Feltrim Fagan, the professional underwriter who plunged 2,000 underwriting members of Lloyd's into pounds 600m losses, admitted to Sir Patrick's team his fears about the incestuous nature of the market.

Sir Patrick's report is the second review of large losses at Lloyd's to appear in the past week. The first reported on how losses of pounds 700m arose on insurance syndicates under the management of the Gooda Walker underwriting agency.

Running to 1,494 pages, the Neill report details the background to the losses that hit insurance syndicates under the management of the Feltrim agency.

Sir Patrick and a three-man investigation team has concluded 'we have found no evidence of dishonest or fraudulent conduct or practices in the affairs of Feltrim', or in the so-called London market excess of loss community, in which insurance risks were swapped between one insurance syndicate at Lloyd's and another and among insurance companies in the notorious LMX 'spiral'.

But, according to Colin Hook, representing 1,500 of the members whose affairs were managed by the Feltrim agency, and who is seeking restitution for the losses that have brought them to the brink of bankruptcy, 'the report is entirely helpful to us. It is a savage indictment of the Lloyd's system at the time. It is an appalling catalogue of errors and incompetence. Few will come out of it well.' Mr Hook's action group is considering legal action and is being advised by Richards Butler, the solicitors.

The attention of the action group will focus on remarks made by Mr Fagan before Sir Patrick's committee. Insurance syndicates under the management of Feltrim had been hit by insurance claims arising from the Piper Alpha disaster in the North Sea and other disasters.

But because the Feltrim agency did not realise that its programme of swapping risks between its own syndicates and other syndicates at Lloyd's would respond in the way that it did in the event of major catastrophes, the losses were much larger than expected. Losses and risks 'spiralled' ever upwards for the members.

'I do not think any of us appreciated the way the spiral would work and how incestuous it had actually become,' Mr Fagan told Sir Patrick. He told the committee that the syndicates had a close relationship with Walsham Brothers, the leading broker that specialised in London market excess of loss business. 'Now, as events have shown, he (William Brown who runs Walsham) has totally destroyed his market because of the incestuous nature; we were always trying to press him to spread his market.'

But, Mr Fagan added, the market 'was getting incestuous. This is one of the worries that kept me awake at night. I could not see a way of breaking out of this.'

The Neill team also notes that although the Feltrim agency was approved by Lloyd's in 1986 as fit to operate in the market, Lloyd's general review department, in a report marked 'Lloyd's Sensitive' in 1990, noted that claims ledgers for 1983 had been destroyed.

They could have been destroyed by 'a senior employee of the agency without regard to its significance and without reference to senior management,' said the review department's report, which noted that the agency 'does not have a system to monitor the managed syndicates exposure'.

Sir Patrick observes: 'Manifestly, there would have been no losses at all if Feltrim had not been registered by Lloyd's . . . and thereafter been given the backing of a large number of members' agents and names (the underwriting members).'

There was widespread enthusiasm about the LMX market 'and confidence in the skills of Mr Fagan and his team to underwrite successfully in that environment,' says the report.

(Photograph omitted)