A GROWING number of Lloyd's syndicates are writing risks they may not be able to pay out for, warns Lloyd's regulatory body, which is threatening to impose sanctions.

A “handful” of syndicates could now face penalties or be prevented from writing business for the rest of the relevant year of account.

Overwriting in the market is when a syndicate writes business which exceeds the amount of capacity it actually has. If a claim is then made for the risk, the syndicate may not have sufficient funds to pay out for it.

The Lloyd's central fund will compensate policyholders in the event of a syndicate failing due to bad risks. But syndicate members will have to pay out to provide the funds if the syndicate has overwritten.

David Gittings, director of regulation at Lloyd's, said syndicates often lost track of the amount of risks they were writing, as people conducted business on their behalf. And he predicted this could be a greater area of concern as improving market conditions were a temptation to write more business.

He said: “Overwriting will become more of an issue as rates harden and there is more premium income. We are trying to make sure we do not have a problem.”

Lloyd's has now written to all active underwriters, managing agents, members' agents, Lloyd's advisers, market associations and corporate members warning against overwriting.

The statement said: “The monitoring department is aware of an increasing number of instances of overwriting in the market. However, overwriting is unacceptable due to the risk which it poses both to policyholders and capital providers alike.”

The report said managing agents should ensure “the amount of insurance business underwritten in any year of account would not cause the syndicate premium income to exceed the syndicate allocated capacity for that year of account”.

But it also said: “The department has noticed, with some concern, that the quality of the information contained within the syndicate quarterly returns and premium income monitoring returns is variable”.

All cases of overwriting will be passed to the investigations department, which will determine whether disciplinary action should be taken. It can resort to a series of measures, including ordering capital providers to put up additional finance or preventing syndicates from underwriting for the relevant year of account.