Names told to dig deeper to back underwriting

Lloyd's of London's individual members, or names, will be asked to stump up greater funds to back their underwriting capacity at the insurance market if far-reaching proposals announced yesterday are finally accepted.

The planned changes are expected to accelerate the market's recent trend away from its traditional backing by individual members with unlimited liability towards a more modern insurance market in the hands of limited- liability corporate members.

Andrew Duguid, the secretary to Lloyd's Council who was responsible for pulling the proposals together, said increasing scrutiny of insurers' security and the need to enhance Lloyd's competitiveness following the disastrous losses of recent years had acted as a catalyst to the review.

He admitted that an imminent credit rating for the whole Lloyd's market from credit rating agency S&P had also been a stimulus for the changes.

"The achievement of Lloyd's reconstruction and renewal plan has undoubtedly improved the perception of Lloyd's security, but Lloyd's cannot expect exemption from the increasing trend towards thorough scrutiny of all insurers and reinsurers," Mr Duguid said.

He admitted that the measures might lead to some of Lloyd's 10,000 individual members reducing their exposure or even quitting the market altogether

But he denied that the more stringent requirements represented a deliberate attempt to discriminate against individual members.

He said that they would make the market more transparent and level the playing field between individual and corporate members.

The changes will ultimately see individual members being treated more or less the same as their corporate counterparts. They will have to lodge progressively greater funds in trust with Lloyd's, headed by David Rowland, to back their underwriting until their collateral matches the proportion put up by corporates and they will have to show greater total means to provide security for their activities at Lloyd's.

Currently, individual members can underwrite premiums with as little as 20 per cent of their exposure held at Lloyd's in trust, while corporates put up at least 50 per cent and more in cases where they are perceived to have a narrow exposure to a small number of underwriting syndicates.

From next year individuals must lodge 40 per cent of their proposed exposure, rising to 50 per cent by 1999, three-quarters of which must be in the form of funds held in trust at Lloyd's.

If they choose to provide some collateral in the form of other personal wealth, held outside Lloyd's, they will be expected to provide evidence of greater assets than if all their collateral is lodged with the market, to compensate for the greater perceived risk that those assets will not be available to pay for underwriting losses.

By 1999, the minimum total means requirement, which includes funds held at Lloyd's and other personal wealth, will have risen from pounds 250,000 to pounds 350,000.

Also by that year, personal homes will no longer be acceptable as collateral for the letters of credit that names have traditionally used as part of their funds held at Lloyd's.

The changes are part of a review of all aspects of security at Lloyd's including the adequacy of criteria used to regulate policyholders' premium and the ability of Lloyd's central fund to act as a financial pool of last resort in the event that premiums and members' assets failed to match catastrophic liabilities.

Lloyd's has invited comments on its proposals to be submitted by 16 May, but it warned that its suggestions represented a package.

Calls from names to weaken any one aspect might point to a need to tighten other points, Mr Duguid threatened.