Central Fund levy could be cut to below 1% of capacity in 2008, says Lloyd's

Lloyd's plans to cut the central fund levy one year earlier than planned could be foiled by another damaging hurricane season, experts have warned.

In an apparent move to increase the attractiveness of the market to capital providers, the corporation this week announced its intention to cut the levy to below 1% of capacity in 2008, one year earlier than planned.

The levy was doubled last year from 0.5%, owing to the fall in funds caused by the dispute between Lloyd's and the six reinsurers of the Central Fund.

In a letter to all market chief executives, Luke Savage, Lloyd's director, finance and risk management, said: "If events over the next 12 to 15 months pan out in line with our latest assumptions,

I believe we will be able to cut the contribution rate in 2008, a year earlier than originally anticipated."

Lloyd's would not be drawn on how much any cut in the levy would be.

Savage cautioned that such a reduction would "be dependent upon factors such as future market capacity, investment returns and any change in capital require-ments arising from the current focus of modelling and rating agencies on the capital needed to support catastrophe classes".

For 2007, Savage said the contribution rates would be maintained at 1% and subscription charges would also stay at their current level of 0.5% to "provide a modest surplus, allowing for a degree of planning flexibility".

Andrew Hubbard, partner at finance adviser Mazars, said that Lloyd's solvency position had "considerably improved", partly because of the 1% levy and also because of syndicate loans introduced last year.

"I see [reducing the central fund contribution] as a very sensible, prudent and cautious approach.

"What Lloyd's is saying is that it is reaping the rewards of its good stewardship and if market expectation is correct that will be passed back to the market in lower levels of cost," Hubbard told Insurance Times.

He added: "The big catch will be what happens during the hurricane season and how syndicates perform."

Richard Tolliday, chief executive of Lloyd's managing agent, Omega, said the challenge for Lloyd's in its efforts to improve the attractiveness of the market was to make real progress on the issues raised in its Optimal Platform document.

"There is an awful lot of stuff in the Optimal Platform strategic document. The real test is how issues that are listed in that document are prioritised and progress made on them."