Lloyd's is on the brink of a capacity crisis because underwriters are unable to accept new business, writes Yvette Essen. FOUR syndicates have been ordered by Lloyd's Regulatory Board to provide 20% more funds to write the same amount of business next year, writes Yvette Essen.
The “capital loading” requirement has been imposed on four syndicates that have caused concern through poor management of either syndicate or managing agency, excessive losses or poor forecasting authority.
This means if a syndicate wrote £100m of business last year and put up £50m of capital, it will now be required to provide £60m to carry out the same amount of underwriting.
Last year, eight syndicates were affected – the highest number of organisations to receive the penalty.
Insurance Times worked with Lloyd's regulation to name and shame eight affected syndicates.
This year, the number of poorly performing players has halved.
Last month, Insurance Times revealed syndicates were rapidly running out of capacity as rates soared by up to 400% on certain lines of business. Now a handful of syndicates are turning away risks or issuing warnings that capacity is drying up.
One market source said: “Lloyd's is on the brink of a capacity crisis. For a lot of people, the situation is absolutely desperate. People cannot find the business or the reinsurance”.
The number of risks which may be accepted by a syndicate is now reaching its limit as many underwriters accepted large amounts of business following the collapse of Independent Insurance.
A director of Lloyd's broker PYV, Michael Rendell, said: “Some syndicates have reached premium income capacity for the year and a couple have had to stop writing business.
“Other syndicates have put brokers on warning that capacity is limited, especially for solicitors' professional indemnity insurance. Prices have seen an increase of about 15% on last year's prices in that sector due to a lack of hunger for the business”.
HIH Cotesworth's two syndicates 535 and 1688 have also been struck by funding problems after HIH Australia, which provides 85% of its revenue, went into liquidation. Last week, they closed their books as a new financial backer failed to emerge.
Syndicates have now requested more capacity for the 2002 year of account. If all pre-emption is approved by Lloyd's, next year's capacity will reach a peak of £13bn, compared to £11bn in 1991.
Other syndicates are making moves to cope with the crisis. In July, Wellington Underwriting placed 11.4 million shares on the stock market to raise approximately £15.6m to help fund syndicate 2020.
Earlier this month, Markel also announced it would be merging into one syndicate. This allows capacity to be spread among a variety of risks, instead of a set amount being allocated to certain lines. But some market sources have reported syndicates fear they will not be granted sufficient capacity for next year.
Association of Lloyd's Members (ALM) chairman Michael Deeny said: “It is clear that capacity will rise substantially, possibly by 25% to 30% for Names in 2001.
“Premium per transaction is an indicator and in the first quarter of this year it was 42% higher. The underwriting cycle has always moved in a classic wave so it is a very reasonable assumption that rates will be higher next year”.
Lloyd's spokesman Adrian Beeby said: “Capacity will clearly increase significantly. It is simply a question of how much it is going up by.”
Head of regulation at Lloyd's, David Gittings, said: “We have completed our capital loading exercise for this year and four syndicates have received it.
“In each case, we felt the syndicate concerned had taken steps to remedy any management shortcomings, but they were not able to convince us they had yet been remedied satisfactorily. We will not be naming the syndicates concerned, because we think they have endeavoured to correct the situation.”
Some of the syndicates receive their funding from a third party and have been directed to inform their financial backer. They will now have a year to improve.
Gittings said: “We will not review these syndicates later this year to determine whether or not loadings should be lifted for 2002. We will apply them for next year, subject to any appeals.
“Last year, the naming and shaming of syndicates did play a significant part in pulling up socks and this is evidenced by fewer syndicates with loadings this year.
“We feel the capital loading exercise has been effective in having firms make improvements.”