Testing Times for Lloyd's Auditors: Expert Accountants Step in

Publication Date01 Mar 1996
AuthorGeorge Sim
SubjectAccounting & finance
Journal of Financial Crime Vol. 4 No. 1 Accountancy
Testing Times for Lloyd's Auditors: Expert
Accountants Step in
George Sim
In recent years, claims resulting from asbestosis
and pollution have resulted in enormous losses by
many Lloyd's syndicates. Actions by groups of
Lloyd's Names alleging negligence against under-
writing agents and syndicate auditors have been
launched and last year the courts awarded damages
against Ernst & Young in relation to their work on
the Merrett syndicate in the 1980s. Expert
accountants instructed by solicitors acting for
Names are involved in the formulation of claims
and in the investigative work required to support
such claims.
Until recently, Lloyd's has been funded entirely by
the wealth of private individuals who are prepared
to take on unlimited liability. Insurance business at
Lloyd's is transacted by 'Names', ie individual
underwriting members. Names are grouped into
underwriting syndicates and may participate in
more than one syndicate in each year of account
(ie a calendar year). A professional underwriter
accepts risks on the syndicate's
member taking an agreed share of all transactions.
Each Name is personally and separately liable to
the full extent of his or her wealth for that share of
any losses.
A unique feature of Lloyd's syndicate accounts is
that the accounts for a specific calendar year are
not closed off until two years after the end of that
year. A syndicate's membership may change each
year so that a syndicate may be composed of
ferent Names for different years of account.
Three-year accounting is intended to reflect the
period of time over which premiums and claims
relating to insurance business written in the first
year are notified.
Normally, enough information is available by
the end of the third year to determine the syndi-
cate's underwriting result for that year of account,
so that the year of account can be closed and the
profit or loss apportioned between the Names in
the syndicate. In order to do this, the syndicate
reinsures its outstanding risks, often with the same
syndicate in the next year of account, by means of
a type of reinsurance premium, known as 'reinsur-
ance to close'. But in some cases it may be impos-
sible to assess the outstanding risk and hence the
reinsurance to close. The account will then be left
open and will be known as a 'run-off account'.
When open accounts are closed through reinsur-
managing agents and underwriters of syndi-
cates must have regard to equity between the
syndicate members in each successive year. If the
premium for the reinsurance to close does not
accurately reflect the likely pattern of future claims
or if the level of future claims is impossible to
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