Fundamental Changes Proposed for London Market

The news burst suddenly, but not entirely unexpectedly, on the insurance industry.

Confirming earlier reports, the 18-member Council of Lloyd’s issued a series of proposals to drastically restructure the way the 300-year-old market does business. If adopted, unlimited liability would disappear, as would the three-year accounting procedures and the annualized syndicate renewals; in its place would be a “franchise” system.

Lloyd’s spokesman Adrian Beeby explained that the franchise concept wasn’t hastily conceived following Sept. 11. “It’s been under consideration as a working model since March of 2001,” said Beeby. It simply means that “Managing General Agents [who operate and control Lloyd’s Syndicates] will become franchisees under a contract that will allow them a certain degree of autonomy, but will also permit even closer regulation of their activities.” He stressed that capital and underwriting requirements wouldn’t be loosened but could, in fact, be more strictly enforced.

Lloyd’s announcement described the “key reforms” as follows:

Modernization of the structure. Lloyd’s existing regulatory and market boards and committees will be replaced by a single franchise board. Lloyd’s will act as a franchisor in the management of the marketplace, with the managing agents as franchisees.

A change to the way the market reports its results. Lloyd’s current three-year accounting system will be replaced by more conventional GAAP accounting.

A new vehicle for Names to participate in the market post January 2005. Names will continue to have the opportunity to support businesses in the market on a contractual basis. A number of options will be looked at with the objective of retaining key features of Names current trading status.

A transition mechanism to support this change. The franchisor will explore avenues for the possible buy-out of all third party capital’s security of tenure. It is intended that Names will be able to participate on syndicates in the same way as they do today, up until January 2005, and that they will receive a cash sum.

An end to unlimited liability and the annual venture. No new unlimited liability Names will be accepted, and existing Names who wish to continue underwriting will convert to limited liability by January 2005.

While the proposals, if adopted, would radically change part of Lloyd’s structure, they will have little effect on brokers or the chain of security.

Over the next few months Lloyd’s members, and the rest of the insurance community, will be debating the proposals. The Council will then formalize specific amendments to Lloyd’s charter. Eventually these will be put to a vote of Lloyd’s approximately 14,000 members.

As Lloyd’s Chairman Sax Riley pointed out, the reforms would bring the Lloyd’s market into line with how the rest of the insurance industry operates. Corporate investors, which now provide more than 80 percent of Lloyd’s capitalization, have been insisting on changes for some time, but, as they have only around 900 votes, they will need support from other members, many of whom are inactive.

Representatives of the individual Names, who remain Lloyd’s investors, have voiced opposition to the initiatives. Although their numbers have dramatically decreased, from more than 34,000 in the 1990’s to approximately 2,490 today, they remain a force at Lloyd’s. Beeby indicated that a vote on the proposals is planned for the third quarter of this year.

The major changes will do away with the cumbersome procedure of operating a syndicate for a year only (which requires that future losses be reinsured each year as capital is withdrawn and then reinvested in next year’s syndicate).

David Haggie, head of London-based consultants Haggie Financial, sees the picture somewhat differently. “Essentially the private capital providers don’t have the same agenda as the corporate ones; they’re playing on a different field,” he said.

Haggie indicated that Lloyd’s should “invest in its brand rather than in financial controls,” and that if it did so, it could build up its name—a major asset—and realize its full potential.

By doing away with an outdated system, which has impeded, or at least reduced, access to capital, Lloyd’s intends to make it easier and more transparent for corporate investors.

By the beginning of December, Bermudabased companies had pulled in almost $10 billion in new capital following Sept. 11, while Lloyd’s received around $1 billion. Although substantial, that’s not enough to adequately compete in today’s market, as Lloyd’s management realizes.

Riley made the point clearly in explaining the goal of the Council’s proposals: “Our aims are profitability, modernity and transparency. Investors and policyholders have a choice of where they go, and we want them to be able to compare us easily, and favourably, with our competitors.

“This package of measures… will help to reshape Lloyd’s of London into a business that will remain a force in international insurance markets throughout the 21st century.”