Lloyd's of London recruited Names into unlimited liability — the bill arrived

Lloyd's of London was not an insurance company but a market: syndicates of wealthy individuals, called Names, put their personal fortunes behind the policies they underwrote, in exchange for a share of the premiums. Liability was unlimited — a Name could lose everything they owned, down to the family home. For nearly three centuries that structure worked because membership was small, vetted, and rich enough to absorb the occasional bad year.

From 1970 Lloyd's cut the net-worth bar for joining and went looking for capital. Membership grew from around 6,000 in the mid-1960s to over 32,000 by 1988, many of the new Names comfortably-off professionals rather than the old landed rich, drawn by double-digit historical returns and tax breaks, and largely unable to judge the risk they were underwriting. Litigants later called this recruitment drive, run while some officials reportedly knew a wave of long-tail claims was coming, 'recruit to dilute' — spread the losses over more people before they landed.

Two shocks then landed on the same members. First, the LMX spiral: excess-of-loss syndicates spent the 1980s reinsuring each other's excess-of-loss books, so a loss circulated and compounded instead of dispersing. The 1988 Piper Alpha rig explosion triggered a $1.4bn loss that some syndicates saw arrive as a 500-650% loss on capacity once it had cycled the spiral. Second, decades-old US asbestos and pollution policies, some from the 1930s-40s, produced huge punitive-damage claims Lloyd's had never reserved for.

Lloyd's posted five straight years of record losses, 1988-1992, totalling roughly £8 billion. About 1,500 of 34,000 Names were driven into bankruptcy. Litigation ran a decade; the 2000 case Society of Lloyd's v Jaffray rejected the 'recruit to dilute' fraud claim but the judge still called the ruined Names 'the innocent victims of staggering incompetence'. Lloyd's survived by admitting limited-liability corporate capital from 1993 and, in 1996, forcing through Reconstruction and Renewal — Equitas absorbed all pre-1993 liabilities at a cost of roughly $21 billion, funded by the members.