The Chairman's Strategy Group has proposed a franchise structure which is welcomed by corporate capital providers, but rejected by Names as failing to protect private investors. Dermott White examines both sides of the argument
The latest proposals to modernise Lloyd's from the Chairman's Strategy Group held few surprises for the market, when they were published for consultation last week. The responses were predictable too: the corporate capital providers quickly showed their approval, while Names, the private investors, were anxious to point out that Lloyd's had again overlooked their interests and their value to the market.
While there is broad agreement about most of the proposals, there are two major sticking points for Names. The first is the question of private investor protection, and the second is the Lloyd's push for syndicates to move from a variety of different investor types to Integrated Lloyd's Vehicle (ILV) status. This is a limited liability entity with a single corporate provider.
Lloyd's wants to introduce a franchise structure as soon as possible. It envisages a partnership between itself, as franchisor, and the businesses in the market, as franchisees: Lloyd's will be obliged to monitor, guide and promote the market while the companies within the market will compete for business under certain minimum operational and structural requirement.
The existing market and regulatory boards are to be merged into a franchise board under a new franchise performance director, who will monitor each franchisee's underwriting performance. He will also be able to take action against poor performers, for the sake of the other members.
However, Names are concerned that this board and its director will have too much power and that there will be a conflict of interest because it will make the rules as well as enforce them.
The head of Lloyd's Information Service for Australian Names (Lisan), Patrick Moore, who is also a committee member of the high premium group, says: "As far as the operation of the market goes, everything is being put under the franchise board... So if something goes to the franchise board, it is rule-maker, policeman, judge, jury and prosecutor, all wrapped into one. That'll be like complaining to your mother-in-law about your wife - you're not going to get very far."
He adds: "So there's a significant problem that Lloyd's is going to have in raising capital from me, pension funds or anyone else when, in effect, the ILVs will be going around totally unregulated in their behaviour [towards private investors]."
The Financial Services Authority (FSA) is taking over regulatory responsibility for Lloyd's. But, that is not enough for Moore.
"The FSA has made it abundantly clear to Lloyd's that it is not going to regulate the rights of capital providers as it does on the stock exchange."
Lloyd's corporate capital providers have little time for this argument. At present, with Lloyd's operating as a mutual organisation, one syndicate's performance could affect the profitability of another
Hiscox chairman Robert Hiscox, a former Lloyd's deputy chairman, says: "One of the extra costs we've carried at Lloyd's is that we have to protect investors from each other, which no other company in the world does."
For him, there will be no conflict of interest and the franchise board will add a layer of regulatory protection for the benefit of every capital provider.
"I think it's very sensible to put the extra level of regulation in the same board that imposes how we run the business. Running the franchise has to be imposed on us as well as higher standards," he says.
Amlin chief executive Charles Philipps says: "I think a lot of what the franchise proposals are about are minimising risk... The proposals have to make sense of reducing the risk of mutuality," he says.
Names consider this important too. But some are dismayed at the emphasis placed on ILVs as the preferred investment vehicles for the market.
Single-source capital provision excludes participation in syndicates by Names. Also, it means that if a syndicate's money runs out, there are no other sources of funding to replenish the syndicate's capital base. Where Names have assets outside Lloyd's that they are prepared to commit to the market, the corporates will limit their losses.
A third complaint about ILVs is that their corporate backers use them to underwrite their most risky business, while cherry-picking the most profitable business for their other insurance companies that operate outside Lloyd's. Names say the corporates do this because the central fund provides the cheapest reinsurance for unattractive risks.
Moore says that ILVs were responsible for most of the market's losses in 2001: "Lloyd's is encouraging the very group of people who have made a mess of the central fund."
These and several other bones of contention, including the switch to annual accounting, will be debated until Friday, 16 August 2002 - the closing date for consultation. The Society of Lloyd's will then vote on the proposals at an extraordinary general meeting on 12 September.