KPMG calls for end of Lloyd's annual venture

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Far-reaching changes to the capital structure of Lloyd's of London were recommended yesterday in a report by KPMG, the accounting and consultancy firm.

The study, commissioned by an association of the insurance market's corporate investors, recommended abandoning the traditional annual venture system. Abolishing the system, which forces syndicates to raise fresh capital each year to support underwriting, could save pounds 117m a year - a tenth of last year's profits at Lloyd's.

Commenting on the KPMG report, Antony Haynes, chairman of the Lloyd's Corporate Capital Association, said: "The evidence contained within KPMG's independent report clearly speaks for itself. Both traditional names and corporate capital providers are seeing a substantial part of their underwriting returns being eroded by a market practice of the annual venture which is not only costly, but is also increasingly inhibiting the international competitiveness of Lloyd's."

KPMG's conclusions focus on the debate about the desirability of new- style corporate investors who have flooded the market since they were admitted in 1994 and now represent 44 per cent of the market's underwriting capacity. That share is expected to rise above half this year as traditional names are squeezed out.

According to KPMG, the direct costs of the so-called annual venture represent a significant proportion of a member of Lloyd's likely underwriting return, especially for traditional names. Corporate investors are in favour of moving to a permanent capital structure at Lloyd's rather than the current annual system.

The annual venture has been preferred by traditional names in the past because it allows individual investors to move funds around Lloyd's, changing syndicates as and when they wished. It has also been claimed that the traditional annual system puts pressure on underwriters to perform.

As well as the direct costs incurred by the annual venture system, the KPMG report pointed to several indirect, opportunity costs which were damaging the competitiveness of the market. Permanent capital, the report said, would make Lloyd's a better match for conventional insurance companies by offering clients multi-year contracts and greater flexibility in meeting the requirements of overseas regulators.

The KPMG report comes shortly before Lloyd's publishes the conclusions of a number of working parties set up to discuss its future. The results of those working parties are expected within the next fortnight.