Modernise or die out

The proposals have provoked furious debate and are being opposed by unlimited-liability Names, who stand to be pushed out of what is regarded as one of the most profitable periods in the recent history of Lloyd's.

Yet, what will happen if the recommendations do not go through, and can they really work without destroying the tradition and heritage of the market?

Senior London Market reporter Yvette Essen brought together five senior industry figures to thrash out the issues in a roundtable discussion.

Catherine Mackenzie Smith: Lloyd's needs to change; it has just developed in a haphazard way over the years. Everything is so globalised now and capital providers have a free choice. If Lloyd's wants to survive, it will have to change in some of the ways investigated. Otherwise it will get left behind and shrivel and ultimately die.

Ewen Gilmour: Lloyd's lost a huge amount of money in the late 1980s, early 1990s and the past four years. It needs to make some changes.

Mark Huxley: The world is a different place from the way it was 10, 20, 30, or even 100 years ago. So much of the architecture is anachronistic now. It has to change or perish.

David Hough: Even dealing with Bermudan companies on a day-to-day basis is often easier than dealing with the antiquated systems of Lloyd's and its Victorian pipework. Lloyd's must deal with those challenges.

Stephen Searby: But let's not throw the baby out with the bath-water. Lloyd's has several interesting structural advantages, and the trick will be to ensure the historic advantages are maintained. In the global investment market shareholder value is the mantra, and that is what these proposals echo.

Mark Huxley: But the shareholder value idea will make syndicates and managing agencies become more insular, which has always been Lloyd's underlying strength - being in a box and having your competitors as near to you as possible to see what they are up to.

Stephen Searby: I agree with that to an extent, but the problem with Lloyd's is there has been too much internal competition. The brokers have exploited that hothouse of competition.

David Hough: Brokers want security in a marketplace. Lloyd's needs competent, innovative and empowered underwriting, but it has never been efficient and low-cost. That is becoming more and more important.

Catherine Mackenzie Smith: There does not seem to be anything in the proposals for cost-cutting. The way Lloyd's operates is rather top-heavy and expensive compared to other insurance companies.

Stephen Searby: The relative costs of Lloyd's have always been a huge bone of contention. But what's intended to happen is the creation of the franchise arrangement and the greater clarity that will bring. The merging of the underwriting and capital will also reduce the costs of managing agents, so there will in the longer term be cost reductions. There will, of course, be some short-term increases in costs.

These proposals are designed to maximise return to capital providers, whereas the Lloyd's Act 1982 was in the interests of the members. Lloyd's will become more responsible for commercial management, whereas regulatory elements will be done more from outside.

David Hough: One of the central franchise concepts is to raise standards all round, through "if you don't comply with this you are not part of that brand". Within bounds, some greater centralised standard setting and control is desirable.

Mark Huxley: The cost basis and regulation of Lloyd's is so prohibitive. One of the benefits of Lloyd's motor syndicates is they are deregulated. And private motor is probably one of the most profitable elements, as it can trade away from central accounting and regulation. It has created better underwriters, as they have to compete directly with people outside the market.

Should Lloyd's recognise that it needs individual trading platforms, rather than one large stick of regulation trying to take the whole of the business coming in? This does not promote good business, and leads to cliquish types of business that fit the Lloyd's model, but are not the most profitable.

David Hough: Lloyd's has to have a unique selling point. A lot of the capital is provided from all around the world. It has to be valid going forward. Corporate capital is much more fluid than individual Names' capital.

Catherine Mackenzie Smith: Security at Lloyd's will never be the same with corporates as it will be limited liability. Lloyd's will never have the same reputation.

David Hough: But unlimited liability has always been a myth, and the Reconstruction and Renewal plan demonstrated that. It is fine when everything is going well, and it is OK when there are limited losses. But test it to the core and it is not there.

Ewen Gilmour: The liability was not mutual. A Name may have been worth thousands or millions. But he is only liable for his share.

Stephen Searby: If people wish to write on an unlimited liability basis, they shouldn't be prevented.

Catherine Mackenzie Smith: If Lloyd's were to have a fresh start, it would be a good thing if something could be done to put further funds towards Equitas to make sure it continued the way it was planned. It would also be good if something were done to bring the other dissatisfied Names, who were unable to accept Reconstruction and Renewal, under the umbrella of goodwill.

Mark Huxley: If Lloyd's wants to be a commercial entity, it will want to distance itself from the past.

Catherine Mackenzie Smith: The Names won't go away quietly unless they get a good deal. A lot of them want open years closed.

Ewen Gilmour: They certainly have a right to fair treatment. If the market is better off with a single type of capital without the annual venture, which means that Names will be encouraged to participate in a different way, they certainly have the right to a fair deal. They should get a very good run of the market at the moment - 2002 to 2004. Certainly some will say on 1 January 2005: "Thank you very much, but I don't want to go through the down cycle again." Those who want to carry on will get a chance to participate.

Stephen Searby: The fear is that there will be a huge game of brinkmanship going on. The Names are quite rightly entitled to payment for their capacity. At the same time, the continuing Lloyd's capital providers do not want to add further to their costs to reach this settlement. An extended brinkmanship will be damaging to the market. It potentially reduces any payment the Names may get, and the capital providers may get fed up. The events of 11 September will inevitably affect whatever settlement is reached. People's expectations as to potential returns are higher because of the capital that has been burnt up in the market.

Catherine Mackenzie Smith: To achieve some of the suggestions, particularly to change the three-year accounting system to annual accounting, will require an amendment to the Accounting Directive of 1991.

The European Union is going to have a considerable input. Its influence should not be underestimated.

Ewen Gilmour: The vast majority of Lloyd's do some form of annual accounting already. Eleven out of 12 of the listed companies have to do it for the Stock Exchange; plus all those owned by Americans - about 80% - do and will continue to do so.

It will be nice to have just one form of accounting.

Stephen Searby: The move to GAAP will be helpful. It is probably nearer the bottom of the list in terms of importance, but it is also one of the easiest things to do.

David Hough: The key to going forward is we must maintain a genuine marketplace. If Lloyd's were to become an umbrella for half a dozen large insurance companies, then much of what Lloyd's is about will disappear. That is the danger.