Lloyd's to introduce tradeable stakes: Proposals aim to strengthen capital base and rights of names

MEMBERS of the Lloyd's of London insurance market will be able to buy and sell 'stakes' in insurance syndicates once plans announced yesterday are implemented.

Lloyd's also intends to rank syndicates according to the risks they are taking on and to strengthen the rights that Lloyd's members have over their syndicates. The plans won immediate backing from the Association of Lloyd's Members and the London Insurance Market Investment Trust, the largest corporate capital provider.

In a letter to members, David Rowland, chairman, said the proposals addressed 'the critical issue of strengthening the capital base of the society by making it more attractive for existing members . . . and for new sources of capital'. Many of Lloyd's traditional members have been ruined by the huge losses of recent years.

Lloyd's hopes the recommendations from the 'Value Group', headed by its deputy chairman, Robert Hiscox, will improve the transparency of the market, helping investors to keep track of the regard in which syndicates are held.

Mr Rowland said: 'I don't believe we can rid ourselves of the perceived problems of insider trading unless places on syndicates are ultimately transferred for value.'

Members would only be able to sell their participation on a syndicate for the following year if they had met all their cash calls. Lloyd's envisages the market operating between August and November each year via an auction-based tender. It expects that the market will be too small and illiquid to support continuous market-making.

The recognition of value will mean Lloyd's members will have to pay to join a syndicate, as well as the assets they must place at Lloyd's.

Lloyd's believes risk-weighting, to be introduced from 1996, will help investors to assess risk and return. Members backing a syndicate insuring higher-risk business, such as liability risks, will be required to put up more money than if they only back a low-risk syndicate, such as one writing motor insurance.

The Value at Lloyd's report said that in the past some members had looked for higher profits by backing higher-risk syndicates without the financial resources to support the ensuing losses.

Strengthening the rights of names will reduce the control managing agents have over who backs their syndicates.

Members will be given pre-emption rights, allowing them to increase their backing in proportion to the increase in a syndicate's overall capacity. Syndicates will have to seek members' approval before expanding by more than 15 per cent. Lloyd's will review capacity increases of more than 25 per cent.

Lloyd's is seeking initial comments before the end of June.