HL Deb 09 May 1995 vol 564 cc5-6WA
Lord Astor of Hever

asked Her Majesty's Government:

On what legal advice Mr. R H Hobbs, the Head of the Branch responsible for the supervision of Lloyd's within the Insurance Division of the Department of Trade and Industry, said in a letter dated 16th March that a consequence of taking Lloyd's underwriters together for the purpose of the solvency test means that losses have to be mutualised via the Central Fund if a Name defaults and that notwithstanding what the face of a Lloyd's policy may say, mutualisation via the Central Fund is effectively the price Names must pay to get into the business of insurance at all; and whether this view represents government policy.

Lord Inglewood

It is not the practice to comment on the nature of advice received by officials.

The letter referred to included a description of the interaction between statutes in force so far as the extent of mutualisation of underwriting losses between members of Lloyd's is concerned. It appears not to have been understood by those who have seen it besides the intended recipient. The letter was not intended to mean that there is a legal requirement for Names' losses to be mutualised through the Central Fund. However, the Central Fund (which was initially established in the 1920s under an agreement between Lloyd's and its members, and now operates under a bye-law made under the Lloyd's Acts (1871–1982)) has as one of its main purposes the meeting of losses of members who may be unable to meet their underwriting obligations. This is made clear to prospective members through Membership: The Issues, published by Lloyd's. To this extent there is mutualisation of some losses via the Central Fund. The use of the Central Fund to meet defaulting members' losses to ensure that a member's assets are sufficient to meet his underwriting liabilities is a discretionary decision in each instance by the Council of Lloyd's under the bye-law.

The members of Lloyd's are also subject to the solvency requirements laid down in the Insurance Companies Act 1982, which requires that each individual must satisfy the solvency test prescribed by Section 83(5) and that the members of Lloyd's taken together must meet the margin of solvency established pursuant to Section 84. If either individual members might be unable to meet the solvency test without being covered where necessary by the Central Fund and other assets held centrally, or the members of Lloyd's taken together were unable to demonstrate the margin of solvency because the total assets, including where necessary the Central Fund, were insufficient, the regulatory powers of the Secretary of State contained in Part II of the Insurance Companies Act would become exercisable in relation to individual members, or the members taken together, as the case may be. It would be a matter for decision at that time how those powers might be exercised.