First scheme of arrangement pilot seen as 'dangerous' to the Central Fund

Lloyd's has rejected the market's first scheme of arrangement pilot due to concerns over reputational risk to the Central Fund.

It is understood the scheme facility, headed by Spectrum Syndicate Manage-ment in conjunction with Pricewater-houseCoopers (PWC) and legal firm Clyde & Co, was deemed "too dangerous" because claimants would be drawing payments from the Central Fund.

The pilot was with Syndicate 1121, which is in run-off for open years 1998,1999 and 2000, though Spectrum had plans to roll out the schemes facility across Lloyd's.

Schemes of arrangement, or schemes, have been used more extensively in recent years to deal with the unique issues arising in connection with insolvent insurance or reinsurance companies. They are effectively a 'deal' between a company and its creditors that is sanctioned by the High Court. Spectrum wrote to the Names on Syndicate 1121 who were supportive of the idea.

A source close to the deal said: "Lloyd's wasn't going to progress with the scheme because it was worried that claimants on 1121 would be reliant on the Central Fund for repayments. If payments weren't made then this would be a reputational risk.

"It is unlikely that Lloyd's will accept any scheme that is not brought by a capital provider who will bankroll the scheme."

A Lloyd's spokeswoman said: "Lloyd's feels at this moment that schemes of arrangement are not suitable for the closure of Lloyd's syndicates."

Spectrum declined to comment on the failure of the pilot.