Ultimate Risk

Raphael, a British journalist who was himself a Lloyd's Name and lost money, investigated the crisis that nearly destroyed the Lloyd's insurance market in the late 1980s and early 1990s.

The crisis had two components. Asbestos and pollution claims from policies written decades earlier arrived in amounts nobody had reserved for, and the long-tail nature of the exposure meant liabilities kept growing as American courts extended coverage. Separately, and more damagingly for the individuals involved, Raphael documents that agents and market insiders directed the worst of these exposures toward Names who had recently joined, particularly through the London Market Excess of Loss spiral, in which the same underlying losses were reinsured repeatedly around a small circle of syndicates, multiplying the total exposure far beyond the original claims.

His argument is that this was not merely bad luck. Recruitment of new Names accelerated at exactly the point when the insiders understood the scale of the asbestos problem, and the reinsurance-to-close mechanism transferred liabilities onto people who had not underwritten them. Thousands of Names were bankrupted, some took their own lives, and the litigation ran for years.

Raphael is a participant and the book is angry, which readers should factor in. He was also right about the substance, and subsequent inquiries and settlements supported much of what he alleged. The book documents the failure of a self-regulating market to protect the people whose capital it depended on, and the eventual resolution through Equitas and the introduction of corporate capital ended the model he describes.