Inside view - Why Lloyd's should be encouraging new Names, not abolishing them!

(From Reinsurance)

In Lloyd's' recent strategic plan, 'Building the Optimal Platform', there is a proposal to review continuing the annual venture on the grounds of inefficiency and expense. Although the annual venture scarcely affects most corporate capital, it is vital for the continuation of private capital at Lloyd's. The abolition of the annual venture would mean the rapid extinction of private capital and a totally corporate Lloyd's, which would be a fatal error. Contrary to popular understanding, Names, trading with both limited and unlimited liability, are a continuing and important part of Lloyd's capital base.

It is puzzling that Lloyd's has raised the issue of the annual venture and by implication the continuation of private capital at just the time when Limited Liability Partnerships (LLPs) were about to be introduced. LLPs correct the defects in Scottish Limited Partnerships and NameCos, and would provide an ideal vehicle for individuals to use for limited liability underwriting. They would allow members' agents to begin recruiting new private capital for the first time for over a decade.

The cynical may argue that the proposal is the result of pressure from managing agents who are unwilling or unable to pay the full price for the capacity of Names on their syndicates, and wish to acquire the capacity on the cheap.

The reforming of each private capital syndicate every year makes possible a unique investment for wealthy individuals and small funds where the returns can be substantial. For the 2003 account alone, Names may have return on capital of well over 40%. It can be argued that these advantages are real enough but they are out weighed by the expense and inconvenience of the traditional structure. But with Lloyd's' institution of the 'user pays' principle, Names pay for any extra expense willingly enough.

The advantages of private capital

But what advantages do private capital and the annual venture bring to Lloyd's as a whole? The most important reason for Lloyd's to maintain the annual venture and private capital is that it guarantees the continuation of the Central Fund. The complete separation of ownership from management required by the annual marshalling of capital for the annual venture means that the Central Fund is necessary to pay the losses of defaulting individuals. The proposal to abolish the annual venture has coincided with the reluctance of some corporates to contribute to the Central Fund, which many see as a subsidy to their less-successful competitors. Indeed, one suggestion is that Central Fund contributions should be linked to the perceived quality of the business.