Leading Article: Lloyd's rude awakening

LEAFING through the lavishly printed business plan published by the new management of Lloyd's of London yesterday, it is hard not to think of Rip Van Winkle. That the plan needed to be written at all proves that Lloyd's still lacks the basic financial and managerial disciplines that would be taken for granted in any conventional insurance company of its size - even after pounds 6bn of losses and the piling of scandal upon scandal. The task of David Rowland and Peter Middleton, Lloyd's chairman and chief executive, is to bring the market's investors and agents up to date.

The document, whose title is Planning for Profit, will leave Lloyd's looking less like a market full of small entrepreneurial businesses than like a single organisation led from the top. This is a consequence of the reforms needed to give Lloyd's a central management and regulatory structure that look much more like those of other businesses. Even the way in which those reforms will be brought in is a break with tradition; although members will be invited to a big meeting at the Royal Albert Hall next month to discuss the plan, they will have little choice but to accept it.

Much of the contents makes sense. As well as the tighter management implied by better professional standards, new technology, lower costs, cuts in agents' fees, and the slimming of the bloated Lloyd's workforce, the paper also sets forth a way of isolating the financial problems that occurred before 1985 into a new company to prevent them from infecting existing business. It throws a sop to Names who face bankruptcy because of the pounds 3bn lost in the disastrous 1990 year. Most revolutionary, for the first time in three centuries of business it seeks to change Lloyd's rules to allow companies to underwrite risks with only limited liability - instead of restricting the game, as at present, to individuals willing to risk everything down to their last pair of cufflinks.

Yet much is missing from the business plan. The arrangements for 1990 will not be enough to save some Lloyd's Names from the Official Receiver - though some of them have only themselves to blame, having for years reaped a generous income in return for little risk and no effort. Nor will it put in place a fully independent regulatory structure to guarantee Lloyd's investors the same fair treatment as private investors in the stock market.

More importantly still, Mr Rowland and Mr Middleton have done nothing for the present and past Lloyd's investors who have lost money and believe that they are the victims of fraud or negligence rather than merely bad luck. To the fury of these litigants, the new management insists that it will contemplate only 'a modest contribution', and even that only 'if it was demonstrably to the net benefit of the Society as a whole'. In short, the malcontents are being told that Lloyd's will only pay out enough to save its own skin; beyond that, they must take their chances in the courts.

This is ruthless, but understandable. Lloyd's management recognises that what is at stake is more than just a few lawsuits; rather, it is the future of the entire market. Without yesterday's plan, Lloyd's would have suffered a vicious spiral of retiring Names and customers taking their insurance elsewhere. Even with it, Lloyd's faces a dilemma. In the past, its competitive advantage has consisted in being more agile, and more willing to take on new kinds of risks, than other insurers. Whether that is a formula for survival in an age without unlimited liability, and with an explosion of environmental litigation in the United States, remains to be seen.