Business Insurance: LONDON -- Trouble always seems to be just around the corner for Lloyd's of London.

The latest has manifested itself in the form of more than 600 names who have decided to call an extraordinary general meeting in protest against two proposed bylaw amendments that they assert will compromise the position of traditional names in the market and hand over control to dedicated corporate investors.

The group of names, led by Sir Richard Cooper, is proposing four resolutions it says are aimed at protecting the interests of individual names in a market becoming more and more corporate.

The first resolution requests that two proposed bylaw amendments not be added to the Lloyd's regulations. According to the EGM Initiative, a group put together to fight the bylaw changes, the proposed amendments would have the effect of shifting control of Lloyd's to Integrated Lloyd's Vehicles, which are organizations that own agencies and also provide capacity to their agencies' syndicates. Recent figures suggest that about 60% of Lloyd's capacity for the 1999 year of account will be controlled by ILVs, though the EGM Initiative suggests it is closer to 80%.

If the proposed bylaw amendments are passed, ILVs will have a greater representation on the Council of Lloyd's, taking the place of traditional names as their capacity dwindles, according to the EGM Initiative. In addition, non-underwriting employees of Lloyd's-associated companies will be allowed to become members of Lloyd's, giving them voting rights for electing future Council members. ``Effective control of the Lloyd's Council would pass to the ILVs,'' the EGM Initiative asserted in a statement.

``By giving limited liability capital control of Lloyd's, the Council is presiding over the demise of the mutual society,'' contends Sir Richard, a trustee of the Lloyd's Defence Shield, former chairman of the Bradley Gascoigne Action Group and a member of the Writs Response Group.

Although Sir Richard is no longer an underwriting member of Lloyd's, having reinsured his pre-1993 liabilities into Equitas Ltd., he still is on the society's books as a member. Lloyd's has only 5,825 actively underwriting individual members for 1998, but its total membership is about 20,100, generally because names still are within the usual three-year resignation period or have old open years.

However, Christopher Stockwell, one of the individuals behind the EGM Initiative, said that between 4,500 and 5,000 names remain members because Lloyd's has failed to remove them from the register of members even though their membership is terminated. Nevertheless, of the more than 600 people who called the EGM, only 540 have been recognized by Lloyd's as being members of the society.

What concerns many of the resigned names who have signed on to the EGM Initiative is the question of the future solvency of Equitas, the run-off reinsurer of Lloyd's pre-1993 liabilities.

``Measures should be taken to guarantee the future mutual status of the society and the promises made to current and ceased names,'' said Sir Richard.

He questioned the loyalty of ILVs to the current regime, in which the Central Fund provides a safety net to ensure that policyholders' valid claims are paid even if members responsible for paying their losses have gone bust.

``If a corporate Lloyd's refuses to maintain the Lloyd's Central Fund and its other mutual arrangements, not only will regulators refuse to allow it to trade as Lloyd's but also the guarantees of finality given to ceased names in Lloyd's reconstruction and renewal deal in 1996 would become worthless,'' alleged the EGM Initiative.

As part of the R&R settlement, Lloyd's agreed that, should Equitas start to pay claims on a proportional basis because its solvency was inadequate, U.S. insurance regulators would be able to seize assets from the two Joint Asset Trust Funds supporting Lloyd's U.S. business to make up any Equitas shortfall. What's more, Lloyd's could use the Central Fund to cover the seized deposits as long as members of Lloyd's approved the move. Under that scenario, the liability for an Equitas deficiency would fall onto the ongoing market, said Mr. Stockwell.

He questioned, however, whether ``corporate Lloyd's'' would be prepared to take on failed competitors' liabilities through levies by the Central Fund.

Mr. Stockwell said he anticipates losses reinsured by Equitas will start hitting Lloyd's members in three or four years. At that point, he predicted, ILVs will write off their funds at Lloyd's and exit the market – taking their books of business with them.

``I do not envisage the continuing mutual basis of Lloyd's beyond 2002,'' Mr. Stockwell said. There is no doubting the ``fundamental game plan'' of the ILVs, said Mr. Stockwell, which he alleges is to take over Lloyd's capacity and leave the market.

At that point, ``anybody still with funds at Lloyd's will have them frozen by regulators,'' predicted Mr. Stockwell. ``The people who will be left high and dry are the names.'' About that time, Equitas will start paying claims on a proportional basis, he alleges.

``Nothing in the (Equitas) figures indicates it has a long-term future,'' he said. This would then affect the so-called finality of the members of Lloyd's reinsured into Equitas; they could find themselves funding the shortfalls in the Equitas payments to claimants.

Others, however, disagree with that view of Equitas' future (see related story, below).

``It is illogical that Lloyd's should continue,'' said Sir Richard, noting that the shift to ILVs has changed the nature of the market. ILVs concentrate risk into their own syndicates, greatly increasing the chances of Central Fund default, whereas the traditional trading environment where capital backers placed small pockets of capacity with a wide number of syndicates spread the risk, lowering Central Fund exposure.

Reflecting this, the EGM Initiative has proposed a second resolution asmpart of the EGM requisition: that no single underwriting group be allowed to control more than 10% of Lloyd's capacity, and that ILVs make a 10-year commitment to supporting the Central Fund.

However, under Lloyd's regulations, if members are calling an EGM for purposes other than challenging a bylaw, 1,500 names are required to sign the requisition form. At the moment, the EGM Initiative is several hundred signatures short, and Lloyd's has refused to allow this or the two other proposed resolutions to be dealt with at the EGM.

``It may be that they are actually perfectly correct'' in throwing out the three resolutions, said Sir Richard, ``or it may be that we have a legal argument against it. It doesn't worry me very much because if it goes through on (the first resolution) it might be easier.''

Under Lloyd's bylaws, the EGM Initiative needs the support of at least one-third of the current membership -- almost 7,000 names -- for the bylaw amendments to be overturned. Market commentators do not anticipate this number will be reached.

The third resolution calls for ILVs to be limited to no more than half of Lloyd's overall capacity. In addition, it would require that if ILVs have a particular concentration of risk in one class of business, they should be subject to more onerous capital requirements, and they should not be allowed to merge or integrate syndicates if that would give the ILV a monopoly position in any one class of business.

The fourth and final resolution asks the Council to put forward proposals to help members who have sustained heavy losses in the past.

Earlier this year, the Assn. of Lloyd's Members was threatening similar action to limit the power of corporate capital providers on the Council of Lloyd's. In a statement to all ALM members, ALM Chairman Michael Deeny said the ALM has ``obtained explicit commitments from Sir David Rowland and the Council in the past as to the protection of names' rights. However, we believed that it was important that Max Taylor, as the new chairman of Lloyd's, clearly affirmed these again.''

Those commitments include a significant representation on the Council, with unlimited liability names taking half the seats available for capital providers until their capacity contribution falls to less than 36%. At that point, and until it drops to less than 10%, names will be entitled to two of the six Council places reserved for external members.

A spokesman for the ALM said the organization was satisfied with the assurances it had received from Lloyd's and currently was not considering joining forces with the EGM Initiative.

The EGM will take place on Dec. 2, and is likely to be held in one of Lloyd's buildings.

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