Lloyd's Being Realistic With Reform Proposals

Proposals from Lloyds to radically reform its structure might not be welcomed by everyone, but we believe they are an inevitable step in the markets evolution.

The proposals include putting an end to capital provided by unlimited liability members by 2005; abandoning the annual venture, which accommodates unlimited liability membership; and moving from three-year accounting to one-year GAAP accounting.

Lloyd's is now dominated by limited liability corporate members, after being supported entirely by individuals, known as Names, for most of the markets 314-year history.

The numbers speak for themselves. As much as unlimited liability members would like to retain the status quo to make some serious money now that prices are rising, the reality is that the market, sooner or later, will consist entirely of limited liability insurance and reinsurance companies.

The fact is that in todays highly volatile insurance market, very few people want to put their entire personal wealth at risk via unlimited liability membership. That is not likely to change.

Further, many Lloyds corporate members want to see an end to the structures that accommodate unlimited liability capital. With the amount of capacity they control, what corporate members want, corporate members will get.

Once unlimited liability is abandoned, the other structures unique to Lloyds--the annual venture and three-year accounting--will no longer be needed because they were designed to accommodate unlimited liability members. Lloyds will follow the path taken by the international insurance market with GAAP accounting.

Some critics of corporate capital believe that Lloyds could be sowing the seeds of its eventual demise if a future insurance crisis leads to syndicate failures and finally exhausts the Central Fund. Under a fully corporate Lloyds, the Central Fund will continue to be mutualized via contributions from the membership, to pay for the liabilities of corporate members that become insolvent.

However, critics believe that limited liability members will close up shop if the Central Fund is exhausted and they fail to see the benefit in coughing up more money to support their insolvent corporate Lloyd's brethren.

That, indeed, might be a possibility for the distant future. However, another Lloyds reform proposal might prevent such an eventuality.

Lloyds plans to act as a franchise manager, intervening early when losses occur to prevent damage to the Lloyds franchise. It also plans to be active in assuring that managing agencies don't write business that is not core to the Lloyds franchise.

Under such a system, Lloyds, of course, will have to find the balance between over-regulation of the franchise and allowing the age-old entrepreneurial spirit of Lloyds underwriters to flourish.

Whatever the future holds for Lloyds, the indisputable truth is that the market has changed forever--for better or worse. Corporate capital is here to stay and unlimited liability capital is an anachronism in todays insurance market.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, February 4, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

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