However, S&P said that the reforms will be challenging to implement.

One difficulty is that individual capital providers will have a significant influence on the ultimate approval of the proposed reforms because one Lloyd's member, whether a corporate member or an individual, has one vote, S&P noted. (Although corporate members provide nearly 80 percent of the market's capacity, the individual members outnumber the corporate members in terms of numbers.)

"Standard & Poor's believes that the importance of the reforms lies mainly in the retention and future growth of corporate capital," the ratings agency said in a statement.

It is not efficient for both types of capital?corporate capital and third-party capital?to co-exist, S&P said, indicating that unaligned capital adds to the Lloyd's cost base.

S&P pointed to one of the central points of the proposed reforms: the creation of a franchisor/franchisee relationship between Lloyd's and the managing agents that operate in the market.

This will result in "greater clarity and a reinforcement of the business planning and monitoring process at Lloyd's," S&P said. "As the franchisor, Lloyd's will have an explicit interest in the profitability of the franchisees," the rating agency explained.

"Having the direct authority to remove ?loss-making' franchisees should, in the long-term, improve the overall profitability, and therefore the attractiveness of Lloyd's for the long-term, and improve the overall profitability, and therefore the attractiveness of Lloyd's for capital providers," S&P continued.

S&P cautioned that there is a risk that this new arrangement might threaten the level of underwriter innovation if oversight is too heavy-handed. Many corporate capital providers have investments in more lightly regulated jurisdictions and therefore could easily pull their business out of Lloyd's, if the market doesn't "strike the right balance between underwriting freedom and regulation of the franchisees."

S&P said the proposals would remove the current separation of capital provision from underwriting and, consequently, the current managing agency structure would cease to exist.

Another proposal to make the market adopt GAAP accounting "will make the comparison of returns achieved by Lloyd's with the international market easier?," said S&P.

"The move to annual accounting would imply an annual profit payout, and would require the solvency regime to be rewritten," said S&P.

In an interview, Stephen Searby, director of S&P in London, explained that rewriting the solvency regime could lead to problems because it would entail quite a complicated exercise.

"Any change of solvency regime requires regulatory approval in the United Kingdom and possibly in the United States," he said.

S&P also expressed concern that the planned reforms could be watered down as interested parties, such as capital providers, brokers, regulators, the U.K. government and the European Union, provide their input during the consultation process.

"Lloyd's management deserves credit for biting the bullet and deciding to push through these reforms," Mr. Searby said, But he noted the acid test is implementation of the reforms.

The proposals have no immediate impact on the Lloyd's rating of single "A" and remains on CreditWatch negative as a result of Sept. 11.