Lloyd's Proposes Radical Modernization

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By Lisa S. Howard, London Editor

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NU Online News Service, Jan. 17, 12:30 p.m. EST,London--Lloyd's of London today unveiled radicalmodernization proposals that would change structures that haveexisted for much of the market's 314-year history, including an endto unlimited liability capital and its support structure--theannual venture--as well as a move to GAAP accounting.

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Due to be implemented by January 2005, Lloyd's, in a statement,said key reform proposals are:

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? Modernization of the structure.

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Lloyd's existing regulatory and market boards and committeeswill be replaced by a single "franchise" board. Lloyd's will act asa franchiser in the management of the marketplace, with themanaging agents as franchisees.

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The idea is to create a board similar to that of a publiclytraded insurer, which would have strategic oversight, outsidedirectors, and less representation from vested interests, saidCaroline Wagstaff, a Lloyd's representative.

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Lloyd's would become an active franchise manager, which wouldallow it to be involved earlier in the business planning process ofindividual managing agencies, she said. This would permit earlyintervention if someone comes up with a business plan that is notgoing to deliver the returns that the Lloyd's market wants to see,"or is business that isn't core to our franchise," said Ms.Wagstaff.

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? A change in the way the market reports itsresults.

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Lloyd's current three-year accounting system will be replaced byconventional GAAP accounting.

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? An end to unlimited liability and the annualventure.

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No new unlimited liability members, known as "Names," will beaccepted starting in January 2003, and existing unlimited liabilityNames who wish to continue underwriting will convert to limitedliability status by January 2005.

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Unlimited liability members provided the traditional capitalbase of the market, but they have seen their numbers drop from34,000 at the end of the 1980s to 2,490 today.

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The annual venture, which is the historic support structure forunlimited liability members, requires a syndicate to start anewevery year. In theory, it protects new members from paying for theliabilities of members from previous years. Many corporate-capitalmembers, which now provide the bulk of Lloyd's capacity, havecomplained that the annual venture is expensive to administer.

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? A new vehicle for Names.

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A new vehicle will be set up for Names to participate in themarket after January 2005, so that Names will be able to supportLloyd's businesses in the market on a limited liability basis.Numerous options for this vehicle are still being considered, saidMs. Wagstaff.

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? A transition mechanism will be set up to support thischange.

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The franchiser will explore avenues for the cash buyout of allunlimited liability, third-party capital. Meanwhile, the proposalsstipulate that Names will be able to participate on syndicates inthe same way as they do currently until January 2005.

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"This is not an argument about Names versus corporate members,"said Lloyd's Chairman Sax Riley, in a statement. "Our aims areprofitability, modernity and transparency. Investors andpolicyholders have a choice of where they go, and we want them tobe able to compare us easily, and favorably, with ourcompetitors."

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These proposals were developed by the Chairman's Strategy Group,which was formed in March 2001. Lloyd's said that informal marketconsultation will take place over the next few months. Themembership of the Society of Lloyd's will vote on the reforms laterthis year.

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