Until 1994, i.e. for over 300 years, “Names,” or individual wealthy investors were Lloyd’s source of capital to back its underwriting syndicates. The introduction of corporate capital changed that dramatically – so dramatically that Lloyd’s has become concerned that the individual Names may completely disappear.
So, under the direction of its Chairman, Lord Peter Levene, Lloyd’s has proposed several changes in the way individual Names invest in its syndicates. Since 1994 the remaining Names have had an option to reinvest their capital in the “annual venture,” the one year opening and closing of syndicate accounts. Now that Lloyd’s has gone to annual accounting and almost all of the Syndicates are managed and backed by insurance companies, this has become somewhat outdated.
According to a Lloyd’s bulletin the “managing agents have said in the past that the current annual venture system did not allow them the flexibility to move risks to the most cost-effective syndicates and underwriting teams.”
Lloyd’s launched a review of the situation, which “included senior figures from both underwriters and members agents Argenta and Hampden, companies which represent individual names in the market.” In his letter to market participants, Lord Levene said the review “had reaffirmed the consensus that Lloyd’s benefited from a diverse capital base, and the annual venture structure supported that diversity.”
He also noted that “the proportion of private capital invested in the market by individual members has reduced over the past decade. In 1996, 12,901 individual Names invested £6.95 billion [$13.1 billion], while ten years later the figure fell to 2,097 private capital members providing £2.35 billion [$4.43 billion].” The latter figure represents approximately 16.8 percent of Lloyd’s current capacity. In those 10 years “managing agents have bought out capacity on 32 syndicates and realized their objective of becoming integrated Lloyd’s vehicles (ILVs),” Levene wrote. He also added that for ILV’s the concept of the “annual venture” is largely irrelevant.
He concluded that “the current basis on which private capital participates is not a sustainable model for the future,” adding that if “private capital is to maintain or grow its share of the market’s capacity in the future, the basis of that participation must change to become more attractive to a wider group of managing agents.” However, any solution requires flexibility.
Concerning the managing agents who “would like to become an ILV,” Levene noted that “a mechanism already exists whereby they can effect a buy-out of capacity.” That will remain in place.
The committee that worked on the problem also came up with two “new approaches to the way in which individual capital can be invested in the market. The first is a more flexible contract in which individuals invest directly in a syndicate. The contract however, may not give them as many rights or may terminate at the end of a fixed period.
“The other proposal is that individuals would be able to establish syndicates of their own that reinsure other syndicates within the market. This scheme would enable the individuals to participate in the market, thereby allowing them to invest in the market but in limited circumstances and time periods.”
Levene concluded his letter as follows: “These alternatives are described more fully in the report and seek to provide a framework within which, I believe, the market can adapt. I would encourage managing agents and those representing private capital at Lloyd’s to explore these and other possibilities. Our review of the issues associated with the annual venture has been thorough and objective. I am pleased that we have been able to reach a consensus and agree a way forward.”
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