Best's Review


At Large
Rescued by Runoff

The formation of Equitas almost 25 years ago ultimately saved Lloyd’s.
  • Stephen Catlin
  • May 2020
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It's been nearly a quarter-century since the creation of Equitas, the most important property/casualty run-off vehicle ever. Equitas is one of the greatest success stories of the past 50 years, even if few in the industry today talk about it.

In the mid-1990s, Lloyd's of London was near collapse. Lloyd's underwriters had lost what was then an astounding £9 billion ($26 billion in today's money) between 1988 and 1992. Lloyd's 34,000 Names, the wealthy individuals who at the time supplied 100% of Lloyd's capital base, were caught up in the crisis. As Names, they had assumed unlimited liability for claims against the syndicates they had funded, and therefore they could be held responsible for unpaid claims ... even after they died. Many Names went bankrupt, and at least 15 committed suicide.

Why did Lloyd's lose so much money? An avalanche of asbestos and pollution claims against liability policies, some with no aggregate limits, written by Lloyd's syndicates was the major reason. Another factor was the LMX (London Market Excess of Loss) spiral, through which the cost of catastrophe claims was inflated as they were reinsured dozens of times among Lloyd's syndicates. Exacerbating matters, some Lloyd's underwriters had made what can only be described as bone-headed decisions.

In a fight for survival, Lloyd's embarked on its Reconstruction and Renewal Program. The program introduced numerous reforms, including an overhaul of Lloyd's antiquated capital base. However, the most important work was the creation of a new company, Equitas, to serve as a lifeboat (some called it a “bad bank”) to reinsure all of Lloyd's liabilities prior to 1993. Once freed of its crippling past, Lloyd's could concentrate on rebuilding its business.

It took three years for a team of actuarial experts to calculate how much money Equitas would need to be solvent. The original £11.2 billion premium (approximately $31.8 billion today) paid to Equitas in September 1996 was the largest reinsurance premium ever paid. At the time, Equitas was the largest corporate start-up in history with total assets of £16 billion at inception (about $30.2 billion today).

Once established, Equitas acted independently of Lloyd's, with its own management and board of directors. The only formal link between the two was that Lloyd's was entitled to appoint one person to the Equitas board. That person was me.

One of the biggest problems Equitas inherited from Lloyd's was a seriously flawed claims adjusting structure. There was little uniform strategy among syndicates for managing complex and contentious claims; that increased costs and complicated settlements. Equitas quickly changed that.

Equitas' strategy was to settle liabilities as quickly as possible. It believed, as I still do, that a disputed claim is likely to become more costly if it is left to mature. However, Equitas' management also understood that individual settlements rarely stood alone; a settlement could influence related claims for years to come, so decisions had to be made carefully. Management also knew the more settlements it could make, the deeper the discount it could negotiate with future claimants who would worry that Equitas could run out of money. Finally, Equitas pioneered sophisticated techniques for settling asbestos and pollution claims that allowed these liabilities to be settled for significantly less than had been reserved.

While critics alleged Equitas would go broke, it did not. Ten years after it was formed, Equitas was in a sufficiently strong position to negotiate whole-account reinsurance transactions with Berkshire Hathaway that provided $7 billion of reinsurance coverage above Equitas' existing reserves. That protection finally put a cap on the Names' unlimited liability, and they even shared a £50 million payment.

Equitas still exists as a legal entity, although the runoff is now managed by Berkshire Hathaway. Lloyd's still has its share of problems, but one thing is clear: Lloyd's would probably not be around today if Equitas had never been created.

Best’s Review contributor Stephen Catlin is the founder of Convex Group and Catlin Group and former executive deputy chairman of XL Catlin. He is a member of the International Insurance Society’s Insurance Hall of Fame. He can be reached at

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