Nothing ventured nothing gained

A storm is brewing between insurance heavyweight, QBE, and Lloyd’s of London.

Frustrated at its failed attempt to buy-out the Names that participate on its specialist liability Syndicate 386, the company has withdrawn its offer and with it thrown a series of sharp comments at the corporation.

QBE’s offer price would have been the highest ever offered within a Lloyd's capacity offer, but it was not seen to be “sufficiently valued”.

Under the Lloyd's system, QBE was not allowed to communicate directly with the Names to ascertain their perception of value, nor have the members' agents been required to formally consult their Names before reaching a view on value.

As a result, QBE’s chief, Frank O’Halloran, pulled no punches over his thoughts of the annual venture and agency arrangements at Lloyd’s, branding them as ‘archaic’.

He stated quite clearly: “The Lloyd's agency and annual venture system is archaic and in our view in need of urgent reform. I urge Lloyd's to address this with the same vigour that it has applied to modernisation of the market's business practices.

“There is no other market where the established custom allows intermediaries to exercise such influence, including actual decision making in respect of the pooled capacity, without reference to their principals. The system in our view also lacks proper transparency and contains far too many potential conflicts of interests.”

In defence Lloyd’s has wiped its hands of any responsibility for the failure of QBE to buy out Names, insisting: "The fact that these negotiations have failed is not as a result of the annual venture or the agency agreement. It is due to the failure to agree commercial terms."

O’Halloran’s protestations for “urgent reform” look very unlikely.

“The Lloyd's agency and annual venture system is archaic and in our view in need of urgent reform. I urge Lloyd's to address this with the same vigour that it has applied to modernisation of the market's business practices.

QBE Group chief executive, Frank O’Halloran

A working party was established last year with significant senior input from the market to carry out a full review of the annual venture - a unique feature of Lloyd’s in which a group of underwriting members support a syndicate’s underwriting for a specific year of account.

It was satisfied with its findings and in a letter to market participants, Lloyd’s chairman, Lord Levene, said the review had reaffirmed the consensus that Lloyd’s benefited from a diverse capital base, and the annual venture structure supported that diversity.

However, the proportion of private capital invested in the market by individual members has reduced from 12,901 in 1996 – representing £6.95bn of investment - to 2,097 private capital members providing £2.35bn a decade later.

Managing agents have often accused the current annual venture system of not allowing them the flexibility to move risks to the most cost-effective syndicates and underwriting teams.

In his letter, Levene said: "The current basis on which private capital participates is not a sustainable model for the future.”

So, two new approaches were recommended by the group.

The first is a more flexible agency contract by which members participate directly in a syndicate. Subject to certain Lloyd's prescribed clauses, the terms of the contract would be freely negotiable between a managing agent of the syndicate and the supporting members.

The other is that members would be able to establish special purpose reinsurance syndicates that reinsurance other syndicates within the market. This scheme would provide members with the potential to participate in insurance business written by syndicates to which they do not have direct access.

Clearly the group’s findings have not satisfied the Australian chief executive, but with no plans for the group to reconvene and Lloyd’s standing firm, O’Halloran and company may be forced back to their own drawing board in a bid to oust Names and take greater capital control over their Lloyd’s business.