Lloyd's Insurance Market

HC Deb 28 July 1998 vol 317 cc280-8

Motion made, and Question proposed, That this House do now adjourn.—[Mr. Jamieson.]

10.31

Mr. Geoffrey Clifton-Brown (Cotswold)

Thank you, Mr. Deputy Speaker, for allowing me this opportunity to raise the important subject of the regulation of Lloyd's insurance market. I welcome the new Economic Secretary, the hon. Member for Leicester, West (Ms Hewitt) to her position. I hope that she will have a successful term of office, and that she has received the information that I gave her predecessor and is therefore aware of the issues that I shall raise, as that will make for a more informed debate.

It is estimated that 30 per cent. of the entire capacity of the Lloyd's insurance market is controlled by offshore-domiciled companies, mostly based in Bermuda. Within a year, that could rise to a staggering figure of more than 50 per cent. I shall explore the far-reaching consequences of that rapid trend for the entire future of Lloyd's.

Mr. Stephen Walton, who was then in the Lloyd's directorate of the Department of Trade and Industry, said in an excellent wide-ranging article on Lloyd's in the spring 1997 edition of the "Financial Stability Review": Regulations need to ensure that the policy holder protection arrangements at Lloyd's are fully effective, that the regulation system of capital provision works effectively and that the market as a whole, is seen to be a fair and a clean place to do business. So perceptive and accurate was Mr. Walton that he was rapidly moved onwards and upwards to a new post in the Treasury.

Between 1988 and 1992, Lloyd's lost a staggering £8 billion. More than 30,000 names were disastrously affected, many being stripped of almost all their financial assets, including their homes. However, the majority were given a liferaft by the huge £11 billion rescue—the 1996 reconstruction and renewal reinsurance policy into Equitas Reinsurance.

However, it is increasingly beginning to emerge that names may have been fraudulently enticed into Lloyd's in the late 1980s, when a handful of senior Lloyd's underwriters certainly already knew of the serious long-tail environmental claims, including asbestosis in America. Problems were later compounded by the LMX spiral of multiple reinsurance of the same business. I pay tribute to my hon. Friends the Members for Runnymede and Weybridge (Mr. Hammond) and for North Shropshire (Mr. Paterson), who have been working on the detail of that problem.

There are also queries about whether the DTI, which was the regulator at that time, and the insurance directorate ever received written confirmation of the relevant Lloyd's resolution relating to the creation of Equitas. If it did not, how could the Government have had sufficient information to be able to say with confidence in the DTI press release on 4 September 1996: adequate provisions have been made against current and possible future claims and that the minimum solvency margin that was required has been met"? How could they have said that when they did not know which names had unconditionally accepted the reconstruction and renewal?

It is against that background that I want to raise the current trends in the Lloyd's insurance market. As a result of the enormous losses to which I have already referred, in 1994 the council of Lloyd's voted to admit corporate capital. That was on the understanding that it would be done on a spread vehicle basis, which means underwriting over a number of syndicates. That was done without consultation with the members of the society.

The Lloyd's council amended the rules again, so that those with corporate capital can now form themselves into integrated Lloyd's vehicles, buying up capacity on individual syndicates, which is then not available to the current annual venture Lloyd's names. That has caused concern in some quarters that the end of the individual annual venture Lloyd's name is in sight. Indeed, that was presaged by Max Taylor, the chairman of Lloyd's, who said in the Financial Times of 20 June: over time the current annual venture form of participation will become a minority part of the whole Lloyds Market…and those must expect to bear the costs associated with that form of trading. The objective of the Lloyd's council, enshrined in successive Lloyd's Acts from 1870 to 1982, is the advancement and protection of the interests of members, who were at all times understood by Parliament to be individuals participating on an annual venture basis in the Lloyd's subscription market. The whole structure of regulation of Lloyd's is on that basis

Charles Sturge, the editor of Lloyd's league table, is quoted in Post Magazine and Insurance Week on 11 June as saying: Lloyd's is the best regulated market in the world but once the Names have gone the structure will disappear and it will be turned into a host of mini insurance companies". That is the fundamental thrust of my speech.

Parliament passed the Lloyd's Acts to allow individual participation in the world's leading insurance market. Now there is a major risk that, next year, 50 per cent. of all Lloyd's capacity will be controlled by overseas-domiciled companies mostly based in Bermuda. A further proportion of the capacity—between 5 and 30 per cent.—will be controlled by UK-integrated Lloyd's vehicles.

If those two predictions are correct, as seems likely, what is to prevent those companies, which will cease to derive any benefit from an overly costly Lloyd's structure, from demanding that Lloyd's council dissolves itself and the society, and redistributes the new Lloyd's central fund, which currently amounts to £144,238,000, to the current underwriting members—or, more likely, ending its support for the central fund altogether?

If that happened, further far-reaching consequences would follow. The joint American trust fund, on which "finality" in the reconstruction and renewal scheme depends, could be withdrawn. That possibility alarms all the 30,000 names who were reinsured into Equitas, and it may well alarm the long-tail policyholders, who may expect to rely on their policies in the United States, and hence the United States insurance regulators.

Importantly, the Treasury, not the Department of Trade and Industry, now has responsibility for regulating Lloyd's under the Lloyd's Act 1982 and the Insurance Companies Act 1982. In the circumstances that I have described, where the control of Lloyd's would pass outside the jurisdiction of this country to a number of large offshore insurance companies, which may be interested not in Lloyd's licences or the mutual society, but only in buying books cheaply, UK plc would lose its balance of payments advantages and, importantly, suffer reductions in receipts from corporate, income and capital gains taxes.

On 22 January 1998, the then Economic Secretary to the Treasury, the hon. Member for Airdrie and Shotts (Mrs. Liddell), in a revealing speech to the Life Insurance Association conference, said on the one hand: These arrangements will continue to allow scope for a major role by the Council of Lloyd's in ensuring that Lloyd's continues to be well-regulated. However, she must have considered that that was improbable, because she continued on the other hand: Policies underwritten at Lloyd's should enjoy the benefits of the same kind of supervisory regime as those with policies issued by other insurers … I intend that the Financial Services Act will have … much more extensive supervisory powers in relation to Lloyd's … enhancing powers of intervention … authorisation of managing agents … direct authorisation and supervision of the Members … capacity auctions will be overseen. In other words, she had in mind a very tough regulatory regime, which she would have had in mind only if she did not believe that the current self-regulation of Lloyd's was working properly.

The comments by the then Economic Secretary sit oddly at variance with today's announcement of the closing of the Insurance Brokers Registration Council, without the announcement of any statutory replacement. That is one of the most important things that I shall say tonight. We have just had the publication of the Financial Services Bill, a huge Bill extending to more than 250 clauses. It is unlikely, therefore, that the Bill will be passed into law for at least a year. By that time, it may well be too late—the Society of Lloyd's, as such, may by then be sliding into oblivion, along with the protection of past and present names and corporate capital. In the regulatory vacuum, many agents will make fortunes at the expense of their principals.

My crucial question to the Minister tonight is: in the vacuum before the Financial Services Act comes into force, should not urgent action be taken to protect the future of the Society of Lloyd's, and to address the balance of advantage between past and present individual names in relation to the dedicated corporate capital increasingly being employed at Lloyd's?

I hope that the Minister will acknowledge that those are serious, profound and far-reaching issues, which will affect not only the regulation of Lloyd's and the Society of Lloyd's but the insurance market in the City of London, and which will have further knock-on effects. I hope that she will be able to give me some interesting answers tonight. I look forward to hearing what she has to say.

10.43 pm

The Economic Secretary to the Treasury (Ms Patricia Hewitt)

1 thank the hon. Member for Cotswold (Mr. Clifton-Brown) for his kind remarks and his welcome to me at the Dispatch Box. I also thank him for raising this extremely important issue in the House tonight, and I congratulate him on his success in obtaining the debate. I am especially grateful to him for giving me notice of the points that he wished to raise; that is especially helpful to a new Minister. I appear to be the first new Minister in the current round of Government changes to speak in an Adjournment debate.

I also take this opportunity to pay a very warm tribute to my predecessor, my hon. Friend the Member for Airdrie and Shotts (Mrs. Liddell). She was, if I may coin a phrase, tough on pension mis-selling and tough on the causes of pension mis-selling. I shall follow her excellent example. I wish her well—as do all my hon. Friends—in her new portfolio.

I turn to the extremely important issues that the hon. Gentleman has raised. Reform of the regulation of Lloyd's is long overdue. Lloyd's itself has recognised the need for stronger independent oversight, and the Government announced in January their proposals to provide that oversight through the new Financial Services Authority. Those proposals, like the rest of our reforms, will create a modern and flexible system of independent statutory regulation, capable of coping with the radical changes that will affect all financial markets. We will publish the financial services legislation, in draft, later this week and consult extensively on that draft legislation. I have no doubt that the hon. Gentleman and his colleagues will wish to comment during that consultation period. The hon. Gentleman referred to Stephen Walton, who is now a member of the team that has been preparing that legislation.

As hon. Members will know, for most of its long history, Lloyd's has been a successful part of this country's financial services industry, making an important contribution to the economy and the balance of payments. Indeed, only a few weeks ago, I had the pleasure of meeting Eric Harnmouthe and his colleagues at a very helpful briefing that was arranged for relatively new Members of Parliament to inform us about the Lloyd's position. I was obviously not aware then that I would be rising to respond to this Adjournment debate so soon after that briefing.

As the hon. Gentleman said, in the late 1980s and early 1990s, Lloyd's was hit by an unprecedented financial crisis, suffering losses of £8 billion between 1988 and 1992. The causes of that crisis have been well analysed. They were primarily a combination of both natural and man-made disasters, but they were certainly exacerbated by some bad underwriting decisions and practices. I am aware that some names have made allegations of fraud. The Serious Fraud Office has reviewed very substantial amounts of material put forward by those names, and has found no evidence to support their allegations. If the hon. Gentleman or other hon. Members have any new evidence, I shall of course be happy to pass it on. I am conscious of the fact that many names were hit very hard. The vast majority shouldered their losses honourably, and I am pleased to say that the legitimate claims of policyholders have continued to be met in full.

Lloyd's responded to the disastrous losses with its reconstruction and renewal plan, which involved the creation of a new insurer, Equitas, to reinsure the old liabilities. Equitas's provisions for future claims were set after a massive exercise by consulting actuaries, and this was reviewed in detail by the Government Actuary's Department before Equitas was authorised to begin operations. Nothing has happened since then to suggest that the provisions were inadequate; nor does the funding of Equitas depend on any annual contribution from Lloyd's. In the almost two years since it began operations, Equitas has made extremely encouraging progress—although of course there is still a long way to go.

Since reconstruction and renewal, Lloyd's has shown considerable vigour in returning to profitability and renewed financial strength, as shown by the ratings that it has received from major independent agencies. As the hon. Gentleman has pointed out, that has been accompanied by some quite profound changes at Lloyd's. Corporate capital has been admitted, and now accounts for 60 per cent. of Lloyd's capacity. Some of that represents names converting to trade with limited liability, but some is from overseas, including the major insurance centres of the United States of America and Bermuda.

The involvement of overseas capital providers with Lloyd's is testimony to the continued strengths of the market and there is every sign that they wish to maintain and develop those strengths. One strength of the Lloyd's market is the common security for all Lloyd's policies that is underpinned by the central fund. The council of Lloyd's has reaffirmed its commitment to common security, which is the basis for the system of licences that Lloyd's holds to trade in world markets.

As hon. Members will know, Lloyd's has been largely self-regulating under the Lloyd's Acts. As the hon. Gentleman rightly said, the Treasury supervises its solvency under the Insurance Companies Act 1982, but less extensively than for insurance companies. Nevertheless, one requirement of that Act is that all premiums have to be paid into trust funds, with deeds approved by the Treasury. There is no question of the joint asset trust fund, or any other trust fund, being wound up without the Treasury's approval, and I can confirm that no such proposal has been made to us.

Since the crisis, Lloyd's has greatly improved its own regulation, which today is generally acknowledged to be in good shape, but we need to ensure that that standard is maintained. More fundamentally, we need to build a modern system of regulation, with proper statutory oversight, capable of responding to whatever future lies ahead. Regulation must be one step ahead of change, not one step behind, and Lloyd's, like the Government, believes that businesses that are well regulated, and seen to be so, will be in a better position to compete in global markets.

The first priority of all insurance regulation is the protection of policyholders. As the Government announced in January, we believe that holders of policies written at Lloyd's should enjoy the benefits of the same kind of supervisory regime as those with policies issued by other insurers. That is why we intend to give the FSA much more extensive prudential supervision powers over Lloyd's. Those will be more like the powers that it will have for insurance companies, including checks on key individuals and comparable powers of intervention and discipline. They will also include a requirement for FSA authorisation of managing agents, the people who are responsible for running underwriting syndicates. We also intend that the FSA should be able to authorise and regulate Lloyd's members direct, if it considers that necessary in the future.

Those powers are intended to give the FSA flexibility to cope with whatever may be the future shape of Lloyd's in a rapidly changing global financial services marketplace. If Lloyd's were ever to become simply a group of insurance companies, with no common security, each one could be regulated like a normal insurance company—something with which all insurance regulators are familiar. If a diverse market continues, with common security, that will be reflected in its regulation. Whatever happens, we are determined that the security of policyholders should not be compromised.

I come now to capital providers. Members' agents advise members of Lloyd's in which syndicates they should participate. Their activity—advising names and potential names—is very like that of financial advisers, and we therefore propose that they should be authorised and regulated by the FSA. That will give increased protection to members of Lloyd's, some of whom have suffered from bad advice in the past.

Of course, the main risk to members is the risk to which they are exposed through the contracts of insurance which they underwrite. The enhanced prudential supervision arrangements which I mentioned should help to reduce those risks, but insurance is inherently about risk, and those who choose to trade in it must accept that. We do not intend to provide protection against underwriting losses, over and above that needed to give security to policyholders.

r. Clifton-Brown

The thrust of my whole speech was that the time lapse between now and when the FSA comes into operation could be a year or more. Meanwhile, matters need to be investigated under the present regulatory regime. Will the Minister undertake to have a thorough look at all the issues that I have raised this evening? Will she assure us, in particular, that if an application is made to wind up the society of Lloyd's, the Government will not allow the joint American trust fund to be wound up until the names under reconstruction and renewal have been properly and adequately considered?

s Hewitt

I thank the hon. Gentleman for that intervention. I was about to deal with his point about the transition period before the new Act comes into effect. My officials and the FSA are already in active discussion with Lloyd's about how the new regime will work and how the transition should be managed. All those concerned are aware of the danger that regulatory attention might slip in the transition period, and will work closely together to ensure that that does not happen. I shall happily undertake to write to the hon. Gentleman in more detail on the points that he raised. Clearly, if a proposal were made to wind up the joint trust fund, we would have to look at it, but, as I said, no such proposal has been made.

I should like to say something about capacity auctions, in which the hon. Gentleman is interested. Participation in a syndicate recently moved from being a privilege to a right, with the result that a market has developed in trading capacity on different syndicates. That market currently operates through a series of auctions run by the corporation of Lloyd's. In some ways, that market is similar to markets regulated under the Financial Services Act 1986, and I propose that the FSA should have new powers Over Lloyd's.

Questions have been raised recently about whether advice given to names wishing to sell their capacity in the auctions has been wholly impartial and in the best interests of names. I am reassured to see that Lloyd's own regulatory division has taken up the issue and reminded agents of their duties and obligations in giving best advice and avoiding conflicts of interest.

An important feature of the Lloyd's market is the part played by the Lloyd's broker, who acts on behalf of a client in helping to obtain insurance. I should like to touch briefly on insurance broker regulation. The hon. Gentleman mentioned today's decision on the Insurance Brokers Registration Council, which was set up by the Insurance Brokers (Registration) Act 1977. As he knows, we have consulted the industry, Lloyd's and the IBRC on whether there is a continuing need for that form of regulation. He will see from the draft Bill that we are building on the consensus that has been arrived at that, although the IBRC has provided a valuable service in the past, circumstances have changed and regulation needs to change to reflect that and to build on the IBRC's work.

The arrangements that I have described, which will be set out in detail in the draft Bill, will continue to allow scope for a major role for the council of Lloyd's in ensuring that Lloyd's continues to be a well-regulated, successful and important part of the UK's financial services industry. That industry is an important part of wealth creation, and we are determined, through effective, flexible and modern regulation, to ensure that Britain's financial services industry, particularly the City of London, remains pre-eminent within the rapidly changing global market.

Mr. Clifton-Brown

If more than 50 per cent. of underwriting capacity is controlled by offshore, Bermuda-based companies, how can the Minister be so confident that she will be able to regulate and maintain the Lloyd's market in London?

Ms Hewitt

It is not for the Government to tell Lloyd's, or any other business, how it should raise capital. Our responsibility, which we take extremely seriously, is to ensure that there is good regulation which provides proper security for policyholders and advice of an appropriate quality for capital providers.

As the hon. Gentleman said, the financial services marketplace is global and changing rapidly. I hope that it is not the policy of the official Opposition that we should venture into some kind of protectionism in financial services or any other industry.

Mr. John Burnett (Torridge and West Devon)

On behalf of Liberal Democrat Members, I congratulate the Minister on her appointment. I am diverting the question slightly, but, in hindsight, would the hon. Member for Cotswold (Mr. Clifton-Brown) have chosen to be a Lloyd's name with limited or unlimited liability?

Ms Hewitt

I thank the hon. Gentleman for his kind remarks, but his question should be addressed to the hon. Member for Cotswold. Happily, it is not an issue on which the Government have to advise him.

The arrangements that I have set out, which we shall implement through the Act after consultation with Lloyd's, will ensure the strong and successful regulation of Lloyd's. In that regulation, we shall reflect the special role of the council of Lloyd's in controlling the affairs of the society and the powers available to it in doing so.

My officials, and their colleagues in the FSA, are in active discussion with Lloyd's about how those arrangements will be operated in practice to deliver strong and cost-effective regulation. As a Government, we are committed to reform—

The motion having been made after Ten o'clock, and the debate having continued for half an hour, MR. DEPUTY SPEAKER adjourned the House without Question put, pursuant to the Standing Order.

Adjourned at one minute past Eleven 0'clock.