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Syndicate to bridge the capital gap.

Lloyd's is considering the introduction of a new type of syndicate to smooth over the occasionally b...

Lloyd's is considering the introduction of a new type of syndicate to
smooth over the occasionally bitter differences between private and
corporate capital, writes Alex Beatty.


The new proportional reinsurance syndicates (PRS) are designed to provide
a way for private capital to continue to support underwriting at Lloyd's
while at the same time removing obstacles to the formation of integrated
Lloyd's vehicles (ILV).


PROPOSED STRUCTURE


The PRS structure was outlined in a consultation document published in
April by Lloyd's Private Capital Group. It said the PRS would be
established to support the underwriting of a single host syndicate by way
of a single whole-account proportional reinsurance agreement.


Under the proposals, the host syndicate would have to be part of a
ILV.


Therefore, all the private capital providers on the original syndicate
would have to leave. If they wanted to continue supporting the
underwriting of that syndicate they would have to join the PRS.


Peter Ridge, head of the insurance practice at accountant Mazars Neville
Russell - which helped produce the consultation document - said: "The
proposals allow unaligned Names to continue to underwrite through a
reinsurance contract that frees managing agents from their current
fiduciary duties.


"Managing agents and their aligned capital providers would be able to
develop their businesses, without the restrictions of the Lloyd's annual
venture.


"Unaligned Names could continue to share in the results of that
underwriting expertise, with economic and tax benefits similar to those
currently enjoyed."


A spokesman for the Association of Lloyd's Members welcomed the idea, but
added that Names were concerned that the concept might be used to lever
them out of the market.


He pointed out that Names have membership rights on syndicates but would
have no security of tenure on the PRS as the host syndicate might not wish
to renew the proportional reinsurance contract.


FINALITY FOR NAMES


Mr Ridge also warned Names: "Members invited to swap their syndicate
membership for a PRS stake will need to ensure they are offered adequate
compensation for their change in status."


At a meeting of the British Insurance Law Association, Bob Hewes, Lloyd's
director of finance, suggested that Names would benefit by having just one
reinsured (the host syndicate). This would make leaving the market easier
as Names would be able to achieve finality by commuting their liability
with the host.


The consultation document also points out that this will be a more secure
form of finality than the traditional Lloyd's reinsurance to close
(RITC).


BENEFITS TO PROVIDERS


The benefits for corporate capital providers outlined in the document
include the elimination of problems raised by the agency relationship
between managing agents and Names. Managing agents will be able to manage
only aligned capital, but will be able to access private capital through
the reinsurance contract.


According to the Private Capital Group, the attractions of being reinsured
by a PRS include the backing of Lloyd's security, no additional brokerage
or premium levy, the long-term commitment of private capital and the
availability of capital when other sources of capital are difficult to
access.


If the consultation process goes smoothly Lloyd's hopes to have the new
type of syndicate in place for the 2000 year of account.
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