Corporate capital at Lloyd's

Practical Law UK Articles 2-100-3860 (Approx. 4 pages)

Corporate capital at Lloyd's

The proposal

The proposal is one of the core recommendations in the businessplan ("Planning for profit: a business plan for Lloyd's of London")issued in April 1993. The proposals are still in summary form butthey do give an outline of the capital and business requirementsthat corporate members will have to meet (see inset box entitled"Corporate members").

The plan proposes that corporate capital be introduced for the1994 underwriting year. This greatly accelerates the previousproposals - a 1991 task force (led by David Rowland) fell short ofrecommending the immediate introduction of corporate capitalbecause it considered that the Lloyd's Act 1982 would need to beamended to do so.

The acceleration can be put down to the urgency of the hour atLloyd's but it is surprising that the business plan can dismiss soeasily (on the grounds of "new legal advice") the hurdle of a newAct of Parliament.

The timetable

Because of the ambitious timetable, the many further detailsneeded to make corporate membership a reality will be drip fed intothe market:

Potential investors will first be given some indication of thelevel of reporting information (such as lines of business, assetsand cashflows) that they will have to give to Lloyd's.
There is then likely to be an indicative statement of the rulesrelating to corporate capital, including details of how thedeposits and trust fund accounts are to be handled, the sharecapital restrictions and the form of their Memorandum and Articlesof Association.
A booklet is to be produced for issue to would-be capitalproviders outlining the special features of the Lloyd'smarket.
This will be followed by a rulebook codifying the variousproposals, including a model Memorandum and Articles of Associationfor UK companies.
Finally, the relevant bye-law(s) will be passed, although it isunderstood that Lloyd's does not perceive the need for this beforethe date that corporate members are first admitted into themarket.

Problems ahead?

The Business Plan seeks to achieve a fair balance between theneed to attract corporate capital to Lloyd's, and the need topreserve the position of individual Names who elect to underwriteotherwise than through a corporate vehicle.

But it is questionable whether the balance has been struckcorrectly:

A "ring fence" is to be created for all Names aroundliabilities arising from 1985 and prior years of account but thewould-be corporate investor will nevertheless be exposed toliabilities arising from the 1986 and subsequent years (includingthe much-publicized losses on the 1989 and 1990 underwriting years)since these years are to be reinsured into the 1994 underwritingyear.
Although corporate Names are to pay much higher contributionsto the Central Fund than individual Names to reflect the benefit oftheir limited liability, corporate capital is to be limited in theamount of its participation on any individual syndicate; corporateNames will be limited to acting as supplementary capital providers,and will have to "bid" for the privilege.
All Names are to have equal access to information but the sheereconomic strength andcommercial sophistication of corporate Namesis likely to render this equality illusory. Can ahighly-capitalized financial institution, perhaps with its ownin-house licensed Lloyd's advisers and with the resources to callon the best professional analysis and advice, really be treated byLloyd's and by Underwriting Agents as on a par with the proverbial"Name from the Shires"? And will corporate investors welcome the(perhaps costly) fruits of their due diligence labours beingprovided freely to corporate competitors and individual Names?

There are many aspects of corporate membership which remain tobe settled:

As the Business Plan admits, the tax position of the corporateName is uncertain.
The underwriting capacity available to corporate Names in 1994has yet to be fixed.
The "drip feeding" of the rules on corporate membership, andthe absence of a clear timetable will make it difficult forcorporate investors to make an early commitment to underwriting in1994.
The "due diligence" exercises envisaged by the Business Planwill need careful preparation and it is questionable whether theycan be undertaken in the time available; in any event, willmanaging agents accept any liability for the contents of their duediligence disclosures?
Even if Lloyd's produces very soon the model corporateregulations and "off the shelf" corporate entities it has promised,negotiating a set of corporate regulations to meet the individualrequirements of a corporate Name may be time-consuming; it remainsto be seen whether Lloyd's will wish to involve itself, forexample, in the terms of any Shareholders Agreements and similarcontractual mechanisms which the shareholders of corporate Namesmay require.

The effect on Lloyd's

In the long term, introducing corporate members is likely tobring about a great change in the efficiency and operation of themarket. The economic strength and sophistication of corporateinvestors means that managing agents, and indeed the Market Boardand Regulatory Council, are surely going to find their activitiesmonitored more rigorously than has been the case to date; acorporate investor with experience of regulation under theFinancial Services Act or the Banking Act may not be satisfied withself-regulation and business practices at Lloyd's. A corporateinvestor equipped with, or able to obtain the services of,analysts, licensed Lloyd's advisers and other professionals islikely to put underwriting results and forecasts, as well as theunderwriting itself, under a microscope and present a formidableforce at syndicate meetings.

Corporate investors will no doubt have a very clear businessplan for their membership of Lloyd's and firm expectations ofinvestment returns; managing agents will have to demonstrate thatthey are working to satisfy those expectations. It may be thatcorporate Names will seek to have Board representation to monitorthe activities of their managing agents and so oversee theirinvestment in Lloyd's.

Looking further ahead to a future Lloyd's market in whichcorporate capital has a significant role, the distinctions betweenthe Lloyd's market and the company market in London may blur;indeed, the authors of the Business Plan may be signalling this intheir stated long term goal of creating a unified processingstructure for the London market.

All this, of course, depends upon whether corporate members willfind Lloyd's a sufficiently attractive investment. The BusinessPlan recognizes that this will mean meeting demanding profitabilitytargets but its authors appear to believe that these can beachieved.

Jeremy G Hill and Jeremy A Thomas, Ashurst MorrisCrisp

Corporate members

The Business Plan Proposals

Corporate entities to be limited liability companies (that is,limited by share capital, not by guarantee) incorporated within theEuropean Community. Lloyd's may consider on an individual basis theadmission of entities incorporated elsewhere.
Minimum fully paid share capital is expected to be at least£1.5 million.
Corporate members must have funds at Lloyd's equal to 50 percent. of anticipated overall premium limits.
Corporate members to be wholly dedicated to underwriting atLloyd's (probably to avoid the need for authorisation under theInsurance Companies Act 1982).
Underwriting must be diversified across several syndicates(more than 5 per cent. participation in a syndicate needs to bedisclosed and Lloyd's can intervene).
Corporate members do not need a members' agent but must have a"licensed Lloyd's adviser".
Leaving Lloyd's requires a complete reinsurance to close ofunderwriting liabilities.
Unmet claims against a corporate member in liquidation fall onthe Central Fund.
Each corporate entity will need approval by Lloyd's.
No residence requirement on shareholders but details must bemade available to Lloyd's and all directors and controllers of thecompany subject to annual approval under "fit and proper"requirements.
Corporate members cannot own shares in managing agents but(subject presumably to current Lloyd's rules) shareholders incorporate members will be able to do so.
Corporate members' shares can be sold privately or possiblythrough flotation.

Further Diagram

The following diagram is also available in the of this article:

PDF versionContractural relationships after the "Business Plan"

View PDF

End of Document

Resource ID 2-100-3860

Published on 01-Jun-1993

Resource Type Articles

Jurisdiction

England