News Analysis - Testing times for the franchise.

(From Reinsurance)

By Robert CB Miller.

The creation of the Lloyd's franchise at the beginning of 2003 can be seen as the last piece in the jigsaw of reform that began with R&R in 1996. Lloyd's response to the phenomenal losses of the 1998-2001 years of account was to establish the Franchise Board with a supporting franchise performance directorate and staff. Rolf Tolle was appointed franchise performance director. Mr Tolle has had a distinguished insurance industry career and prior to joining Lloyd's had been employed by Berkshire Hathaway to sort out Faraday (formerly DP Mann), its troubled Lloyd's subsidiary.

The main thrust of the Franchise Board is in the examination and approval of syndicate business plans in detail before syndicates are allowed to start underwriting for a particular year. In addition to a syndicate's underwriting plans, the Franchise Board focuses on its capital support.

Syndicates must be able to show that they have a business plan likely to produce consistent profits, but also that they can command the support of capital which is unlikely to evaporate leaving the syndicate in run-off.

Showing its teeth

So far there have been two well-publicised examples of the sort of drastic action the Franchise Board has been prepared to take. The troubles of the quoted Goshawk Group resulted from serious losses following a series of disastrous underwriting decisions involving the collapse of The Accident Group, its US viaticals account and the insurance of the cargo of the space shuttle Columbia. The group's wholly owned syndicate 102 is forecast to lose 58% in 2001 and a further 5% in 2002 and Lloyd's - supported by the Financial Services Authority - stepped in to close the syndicate when it became clear that Goshawk was unwilling, or more likely unable, to recapitalise it.