2 September 2002
Lloyd's of London Names are a dying breed at the oldest insurance market in the world. Down from 35,000 to just 2,490 unlimited liability Names today, individual investors are regarded as an anachronistic throwback needing to be helped into extinction by reform-hungry corporate investors.
Sax Riley, the chairman of Lloyd's, has called for members to vote in favour of seeking to update the 1982 act of Parliament that governs the insurance market. An extraordinary meeting to vote on the proposals is set for 12 September, and while corporate investors welcome what they regard as an overdue shake-up of the market, Names fear that a new act would reduce their status as co-owners of Lloyd's.
Riley has in the past mooted the possibility of buying out Names and removing them from the equation. According to the powers that be, in conjunction with franchising the Lloyd's business model this is key to the modernisation programme. Under the reforms - suggested following a report by management consultant Bain & Co - a franchise board would replace the regulatory and market boards, creating a contractual relationship between syndicates and Lloyd's.
Corporate investors provide 80 per cent of Lloyd's underwriting capability. They regard themselves as the saviours of a market that just a decade ago was teetering on the brink of collapse. Heavy losses on asbestos and pollution claims sent many Names to the wall. Unlimited liability on losses of about £8bn was a heavy price to pay for the odd tax break here and there.
There is no denying that Lloyd's has to modernise. What organisation doesn't? But should it do so at the expense of those people whose continued loyalty (although obviously offered in exchange for financial advantage) has made Lloyd's the vibrant market that it is today? Let's face it, as a mutual, Lloyd's could never have existed without investment from individual Names.
The incentive for Names to remain active in Lloyd's is another question in need of investigation. Since the entry of corporate capital, which gave Lloyd's the fresh impetus it desperately needed in the mid-1990s, the market has made scant profit. The market lost half of its capital in the three years after 1998 and again faces huge losses, particularly in the wake of 11 September. The advantages that came with the inflow of capital were soon negated as those corporate investors fought for market share, thereby lowering rates.
Profitability, though, could be lurking just around the corner. Lloyd's has experienced a lower level of claims during the first half of 2002. Rates have risen and capacity has increased at many of its syndicates. Some of the more optimistic projections have since been tempered by the flooding across Europe.
The Names refuse to be browbeaten into submission and, seemingly ignoring the lack of short-term profit, are fighting back. If the forthcoming vote does not find in their favour, there are plans afoot to take the matter to court. Their argument is that corporate investors have benefited from the Lloyd's brand and international licences that they say they own and should pay for the privilege. They have taken legal opinions stating that the Lloyd's Acts enshrine ownership in the membership.
If the Names are a tenacious bunch, their corporate opponents are equally dogged. One particularly potent threat is for a corporate investor to say it will remove its capital from the Lloyd's market. The rival Bermudian market is fast becoming a tasty proposition for investors, with about $11bn (£7.2bn) of new capital heading to Bermuda in comparison with just $1bn (£654.3m) extra in London.
Ace, the market's largest syndicate operator, has said it will reduce the amount of business underwritten at Lloyd's by a third next year. Lloyd's syndicate Amlin has put forward an offer to buy out the private investors, who have provided around 28 per cent of its capital. This simultaneous stick and carrot incentive to push reform through, and the fact that size does count, will probably see corporate investors win out in the end. Lloyd's Names, it seems, could soon be consigned to history's forgotten cupboard.