Principals and agents in crisis: reforms of accounting and audit at Lloyd’s,1982-1986

Abstract

The 1970s and early 1980s saw significant structural change in the insurance market at Lloyd’s of London and it became increasingly difficult for providers of the collateral against which insurance was written to monitor the activities of those responsible for writing the insurance risks and determining the distribution of returns. Agency theory analyses the incentives for principals and agents to develop more formal and rigorous arrangements for accounting and audit when agents become more remote from principals. However, when we examine the historical evidence, we find little sign of such development at Lloyd’s during this period. We explore a number of institutional characteristics of the Lloyd’s market which acted to constrain adaptation until external regulatory pressure was brought to bear. Conclusions are drawn on the limited role of agency theory in guiding policymakers and regulators in financial markets.