Lloyd's looks to the small investor: Alison Eadie looks at the prospects and risks involved in the reformed insurance market

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The Independent Online
LLOYD's insurance market, once the preserve of the very wealthy, is about to open its doors to the small investor.

ShareLink, whose dealing service helped to improve private client access to the stock market, has been appointed retail distributor for Syndicate Capital Trust (SCT), one of the new breed of investment trusts raising capital to underwrite at Lloyd's.

Details of the trust are being sent to 150,000 ShareLink clients and to independent financial advisers, accountants and solicitors.

The introduction of corporate capital at Lloyd's from next January has created the opportunity for small investors to share in the thrills and minimised spills of highly cyclical insurance underwriting.

The reduced risks of the new trusts are immediately apparent. Formerly members, or names, had to show wealth of pounds 250,000 for the privilege of signing up for unlimited liability. The new funds are limited liability companies and investors can lose only the money they put in.

They can also invest small amounts. CLM Insurance Fund, run by Sedgwick and sponsored by Barclays de Zoete Wedd, sets a minimum application of pounds 1,000. SCT's minimum is pounds 500.

Investors should get a reasonable spread of syndicates and hence risk. The Johnson Fry trust, which aims to raise pounds 1bn, will invest in other Lloyd's corporate capital funds, giving it access to more than 200 syndicates. SCT has chosen syndicates that have outperformed the market in each of the past five years.

All is not cut and dried. Lloyd's names have yet to approve the admission of corporate capital. The vote is on 20 October. And investment trust capital-gains-free tax status for the funds is not assured.

The new funds are promising high returns. Most aim to achieve or exceed the 20 per cent return on capital (excluding investment income) aimed at in the Council of Lloyd's business plan published in April. The plan targeted a return of 10 per cent on underwriting capacity, representing a 20 per cent return on capital, because pounds 1 of capital will write pounds 2 of insurance business. If the investment trusts are put in a PEP, investors are not liable to income or capital gains tax.

Such returns assume that underwriting will recover from the record losses of recent years. The insurance cycle is certainly on the way up, with rates hardening across nearly all classes of business. Some of the problems of old - notably the notorious catastrophe reinsurance spiral that caused some of the heaviest losses - have been addressed and should not recur.

However, the spectre of large lawsuits hangs over Lloyd's and it is open to question whether the plan to ring-fence future underwriting against pre-1986 losses will work.

Caution is still advisable.

ShareLink is offering a free guide, Investing in the Lloyd's Insurance Market - The New Opportunities and Risks, from Allenbridge Group, publishers of BEST BES Advice. The phone number is 021 200 4610.

(Photograph omitted)

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