Lloyd's bids farewell to unlimited liability

Names react angrily to sweeping reforms planned for world's oldest underwriting market
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The Independent Online

Lloyd's of London yesterday shocked the City with a sweeping plan to do away with its unique structure in a bid to haul the 314-year-old society into the 21st century and enable it to compete with the modern goliaths of the insurance world.

If Lloyd's manages to push through its proposals with members it will mark an end to its system of reporting profit and loss three years in arrears, and will also halt the practice whereby Lloyd's in effect disbands itself and reforms every year.

But the most radical of the suggested changes in this self-gutting exercise is to bring an end to the practice of allowing names to risk all of their assets by underwriting insurance policies on an unlimited liability basis. This group of names benefit from all of the upside in a good year, but are liable for the full amount of their share of all of the loss in a bad year.

From 2005, Lloyd's said in a consultation document, it wants all names to participate in the market on a limited liability basis ­ which means they will not lose everything if the market does very badly but will also only receive part of any profits in good years.

Unlimited liability names were the founding members of Lloyd's in the 17th century and have participated in the market ever since. Now the group actively writing business numbers is only 2,490 ­ compared to a high of 34,000 20 years ago ­ and provides just 20 per cent of the underwriting capital, with companies and limited liability names providing the rest.

Unlimited liability names have been an unpopular anachronism among some companies in the market for some time. These names have propped up the system of breaking up and reforming Lloyd's every year. They like it because it gives them investment freedom and one of the reasons Lloyd's has historically favoured the yearly cycle ­ called the Annual Venture ­ is because it can monitor the financial strength of names on a fairly regular basis.

But companies do not like the extra work involved in having to reapply to operate through Lloyd's every year and the difficulty it presents for planning the development of their businesses in the longer term.

Until now, Lloyd's governing body ­ known as the Council ­ has resisted change, promoting a dual capital structure made up of names and companies.

But a group led by Sax Riley, the chairman of Lloyd's, is now calling for wide-ranging changes. Mr Riley has just completed a review of Lloyd's with the management consultants Bain & Co and yesterday put the group's recommendations to the rest of the governing Council of Lloyd's in a three-hour meeting.

Mr Riley and Nick Prettejohn, the chief executive of Lloyd's, have been pushing for change for the past couple of years. But it was the events of 11 September, which left Lloyd's with its largest-ever one-off hit of £1.9bn net, which appear to have made the rest of the Council accept the need to transform Lloyd's to try to reduce risk. The Council also wants to make it an attractive place for companies to do business compared with the rival Bermuda market, or through giant insurance companies such as Swiss Re or America's AIG.

But it is far from certain that Mr Riley's plans will succeed, especially the move to bring an end to unlimited liability names. Individual names make up more than half of the 12,000 voting members of Lloyd's and so will be able to block the final proposals when asked to vote on them probably at an extraordinary general meeting in late spring.

A number of names' representatives reacted angrily to the idea of ending unlimited liability and accused Lloyd's of pandering to companies which want to get rid of them.

Christopher Stockwell, the chairman of the Lloyd's Names Association, said: "These proposals seem to be aimed at soothing the ruffled feathers of corporate capital providers rather than dealing with Lloyd's fundamental problems. What makes Lloyd's special is that it allows individuals to trade in world insurance markets."

Michael Deeny, the chairman of the Association of Lloyd's Members, welcomed some of the proposals but said names forced to transfer to limited liability would not be able to recoup losses incurred from the terrorists attacks on America.

There will be incentives offered to unlimited liability names to give up their rights to this status. Lloyd's said it would offer them a "cash sum" and is trying to find ways to enable them to continue to benefit from tax incentives which allow them to offset tax on profits against past losses.

Lloyd's argues that ending the Annual Venture and forcing those who want to do business through it to enter into a formal franchise agreement will raise the standard of underwriting ­ another crusade of Mr Prettejohn's. But there were concerns that the outcome would be the opposite, with famous entrepreneurialism of Lloyd's destroyed. One broker who has been using Lloyd's for years said: "These changes would destroy Lloyd's as a marketplace and make it a plc. But there will be those who will stand up and be counted and fight very hard to stop some of these changes."