Equitas (Hansard, 29 March 1996)

§ Mr. Nelson

I have considered carefully the proposals made by Lloyd's for the authorisation of Equitas Reinsurance Ltd. and Equitas Ltd. ("Equitas"). Lloyd's proposes to reinsure the market's 1992 and prior non-life liabilities into Equitas, and to provide matching assets together with an additional solvency margin of free assets. Equitas would be a pure reinsurer, and Lloyd's application does not seek authorisation for it to undertake any subsequent business.

Lloyd's proposals are based on a thorough review of the 1992 and prior liabilities and in particular of exposure to US asbestos and pollution claims. This review has been assisted by work undertaken by a number of leading firms of consulting actuaries and chartered accountants.

I have decided to authorise Equitas on the basis of Lloyd's proposals, subject to certain conditions which Lloyd's does not expect to fulfil before August this year. Of these, the most important are, first, that the contracts reinsuring names' liabilities into Equitas cannot be completed until Lloyd's can demonstrate that the assets available to Equitas are such as to ensure it has the minimum solvency margin I have required. Lloyd's statement of assets available to Equitas will be subject to independent review by Coopers and Lybrand, which is to be appointed as Equitas' auditors once the contracts are completed. Secondly, there are conditions to ensure that if developments between now and August should lead to an increase in the estimate of the overall level of liabilities, then a matching increase in the assets would have to be provided. In addition, there is a condition making any dividend to any shareholders or return premium to reinsured names subject to DTI consent. Any future proposal that Equitas should undertake further business would require DTI consent.

Under section 32 of the Insurance Companies Act 1982, UK insurance companies are required to maintain a minimum margin of free assets, calculated according to a formula. The formula was not devised with circumstances such as the Equitas proposal in mind, and is likely to produce widely fluctuating requirements over the first four years of Equitas' life. I have therefore decided to exercise the discretion to which I am entitled under the Act to make a direction under section 68 to modify the normal requirements in 1996 and 1998.

In reaching this decision, I have been mindful of my responsibilities under the Insurance Companies Act 1982 in relation to the authorisation of new insurance companies and the protection of policyholders in general. In this case, I have to consider whether policyholders would be better protected if Equitas is authorised than if it is not. I must also be satisfied that all the statutory requirements for authorisation under the Act have been met.

The main reasons for my decision are as follows.

First, policyholders will benefit from substantial additional funds which would not otherwise be likely to be forthcoming. The provisions made for 1992 and prior liabilities have been increased by more than £1.5 billion. Equitas will be funded to meet its estimated liabilities and to provide the additional margin of free assets. Some £1 billion plus of the funding is to be provided from sources which have no obligation to support 1992 and prior losses, together with approaching a further £2.5 billion deriving from new money from names, the settlement of the current 764W litigation and from 1993–94–95 profits which would not otherwise be necessarily or immediately available to support these losses. The Equitas proposals will also ensure that the assets to cover these provisions will be fully paid, in contrast to the present position in which some £4 billion of Lloyd's assets is represented by uncalled losses or unpaid cash calls. Furthermore, subject to the division of Equitas' assets between US, Canadian and UK trust funds, the assets of Equitas will be fully mutualised and all available to support all of Equitas' liabilities to policyholders.

Secondly, the creation of Equitas offers a strong prospect of lower claims handling costs and higher investment yields than would otherwise be the case, the benefits of which will accrue to policyholders in the first instance.

Overall, I am satisfied that the resources available to support 1992 and prior policyholders through Equitas will be greater and more certain than without its authorisation. The Government Actuary takes the view that there is a reasonable prospect that Equitas will be able to pay off its liabilities in full as they fall due.

Thirdly, if, against expectation, the liabilities of Equitas at some future point should appear to be on the point of exceeding the assets available, arrangements will have been built into the reinsurance contract with names designed to ensure that policyholders would continue to receive an uninterrupted flow of claims payments, albeit at less than 100 per cent., with the residual balance of claims falling back on to the reinsured names. These arrangements would provide a much superior outcome for all policyholders, including reinsured names, than conventional insolvency proceedings for Equitas.

Fourthly, the creation of Equitas as proposed will very significantly improve the security of 1993 and subsequent policyholders at Lloyd's, by substantially removing the risk that further deterioration in the 1992 and prior liabilities would affect them.

Last, if Equitas does not proceed, Lloyd's has acknowledged that there is a significant risk that Lloyd's as a whole would have to cease underwriting. In that event, the subsequent run-off would face an uncertain future. I therefore consider Lloyd's proposals are a well-judged response to this situation in the interests of existing Lloyd's policyholders, and of reinsuring names as policyholders.

It is now for the members of Lloyd's to decide whether to support Lloyd's proposals as the next step before Equitas can go live later this year.