To say that in 10 years Lloyd's will be an exchange of insurance companies is probably an over-simplification, says Lee Coppack.
Certainly, Lloyd's itself expects that by that time the bulk of the market will be made up of large syndicates whose capital comes exclusively from a single corporate investor which may also own the agency that manages them.
At the same time, there should still be room for both individual members, even if they do eventually all underwrite through some form of limited liability vehicle, and for niche or start up operations, because the barriers to entry will be significantly lower under the umbrella of the Lloyd's market than outside that framework.
Clearly, Lloyd's is in the middle of a momentous period of change, which began with the changes in rules and structures needed for the introduction of limited liability members and corporate capital in 1994 and the development - still underway - of forms of capital provision for the market.
For the first time in 1998, corporate capital makes up more than half the capacity in Lloyd's (see table), and few doubt that this share will continue to grow. The clear preference of corporate investors today is for greater control through closer links with managing agencies.
Capacity has grown nearly six times faster in dedicated vehicles, where the corporate member supplies capital for use by a single managing agency, than in spread vehicles, which participate in a range of syndicates managed by various agencies in the way that individual Names do.
Revision of the rules by the Council of Lloyd's during 1995 allowed outside insurance interests to acquire control of a managing agency. This brought into the market as major players Bermuda and US insurers and reinsurers, such as Mid Ocean, Ace, The St Paul Companies and the US accident and disability insurer UNUM. Clear progress and eventually settlement of the problem of old year losses through reconstruction & renewal (R&R) confirmed the attraction of Lloyd's to professional insurers and reinsurers.
Brian Dupperreault, president, chairman and ceo of Ace Ltd, says: "The Bermuda insurance market came of age as reconstruction and renewal (R&R) was being implemented, offering a change for Bermuda based insurers and reinsurers to use their accumulating capacity to diversify by acquisition."
These investors also supplied capital for syndicates managed by their new associates and subsidiaries. Participation in Lloyd's offers them a number of benefits. One is immediate access to over 60 countries and two US states (Illinois and Kentucky) where Lloyd's is licensed to do business. Another is the sophisticated network of distribution through Lloyd's brokers who bring business to the London market which overseas insurers would not otherwise see.
The logical development of insurance or reinsurance company ownership of a managing agency and a corporate member, even if the two remain separate incorporations under a holding company, is the integrated Lloyd's vehicle (ILV) in which the parent provides all the capital for a syndicate managed by the managing agency which it owns. Only a few ILVs have actually been set up so far; one problem according to Andrew Green of accountants Neville Russell is that there is at present no way of getting profit out of them.
An ILV, even if it continues as a corporate member and a managing agency separately incorporated under a holding company, starts to look more like an insurance company, particularly if the syndicates are composite ones. Composite syndicates bring together specialist underwriters from different classes of business into one large syndicate, instead of separate syndicates for marine, non-marine, aviation and motor.
The capacity of composite syndicates nearly doubled between 1995 and 1997 to 15% of the market, while that of individual classes, except life, have all reduced, according to market analysts Chatset who predict that by 2000 composite syndicates will make up 30% of Lloyd's capacity.
In its Lloyd's League Tables Review published in January, Chatset comments: "Efficient though composites are, they are reducing the choice of syndicates available to investors in Lloyd's and are a clear indication that Lloyd's is moving towards an exchange for insurance companies, which will be a natural development from the composite syndicate."
Market structures mirror this development; there is growing support for a single association to represent the interests of Lloyd's underwriters instead of a separate one for each market.
Finally, the spread vehicles, such as LIMIT, which were initially passive investors, have been acquiring control of managing agencies and/or setting up their own syndicates. Euclidian, for example, has received authorisation to run its own managing agency, which it says it describes as the first one to be started from scratch by a spread vehicle.
Lloyd's itself does expect consolidation among groups of corporate investors and the building of bigger units through further purchases of syndicate participations from individual Names and eventually through matched bargains between investors and the establishment of new capacity when there are opportunities.
The Council of Lloyd's believes that the eventual structure of Lloyd's will be set largely by market forces, according to Andrew Duguid, director of strategic planning. The council sees as its primary role the protection of the interests of policyholders and all investors, including individual members so long as they care to continue.
Many of the rules governing the conduct of managing agencies, particularly where the ultimate owner is an insurance or reinsurance company, are designed for this purpose - to protect the interest of outside investors - individual names or other corporate investors - who provide capacity on the managed syndicates.
Some of these rules will seem irrelevant where there is a complete continuity of interest between the ultimate owner of the managing agency, the agency itself and the syndicate. One of these rules, for example, places tight restrictions on the inward reinsurance a syndicate can accept from the parent of its managing agency - essential protection for an outside investor but much less important in an integrated vehicle.
Lloyd's does not deny that the integrated structure effectively makes the syndicate a subsidiary of the holding company. The council's view is that the essential element of protection for the market is one of "diversity", but that diversity can come from the number of units rather than capital structure. It believes the best protection is not allowing any group to get too large.
Charles Graham, research director of Richmond Underwriting Ltd, argues that the problem with the introduction of dedicated or integrated vehicles which have no third party investors is the lower level of disclosure. Transparency of information, he believes, is an important safeguard for the market's future.
Andrew Duguid admits that once a syndicate is under effective control of the parent, its approach may change. This does not worry him, "provided we can maintain a structure in which there are many units and no one is excessively dominant."
At the moment, Lloyd's would regard any group controlling 15% of the capacity of the market as a point at which it would want to examine the situation, but no group currently comes near that level.
After the scandals of the 1980s and losses of the 1990s, Lloyd's welcomed the arrival of outside investors, particularly quoted companies, who were expected to apply a degree of management rigour and outside control that had been unusual previously.
We do not yet know whether their presence will mean better results long term. It is not necessarily the case, at least across the board.
Analyst Chris Hitchings at UBS Ltd argues: "Lloyd's has consistently outperformed its permanently capitalised competitors and built a valuable franchise based on expertise and service."
Large dedicated corporate investors can provide a comparatively stable capital base for managing agencies and allow them to develop longer term plans and strategies, even if they still have to reconstitute syndicates every year under the system of the annual venture.
But, says Charles Graham, they do present a potential threat to the future of Lloyd's as a market place. "I do not see the main conflict as being between limited and unlimited capital; the key issue is whether the market should be supported by large blocks of dedicated capacity or by smaller capital providers supporting a spread of businesses.
"Diversity of capital is critical to the survival of the subscription market and to the market's ability to rejuvenate itself by setting up new syndicates and new agencies. The size of some of the new Lloyd's players is also a threat. If ACE suddenly withdrew, it would have a big effect on confidence in the market as a whole."
Two factors unique to Lloyd's seem to offset this concern about concentration. One is the tenacity of the remaining individual Names. The other is the advantage which Lloyd's offers niche and start up operations.
Although the number of individual Names has fallen below 7,000 from the peak of 34,218 in 1989, those who remain are far from packing their tents and leaving it to the big corporates to fight out. In 1996, one Name bought a £1.9 million line of capacity on a single syndicate.
The wave of takeovers and mergers among international reinsurers is sometimes expected to result in breakaway ventures, but the barriers to entry for new entrants are high - except in Lloyd's. Though investors hoping to become serious players in the market are unlikely to opt for the absolute basic £500,000 minimum capital, it would still be possible to start respectably with less than the £50 to £100 million generally regarded as essential in the London company market and significantly more in the international market.
Provided the people and companies involved are found suitable by Lloyd's, they can take immediate advantage of Lloyd's worldwide licences, sophisticated distribution network, a strong brand name and an "A" rating from Best's.
This diversity is important. Chris Hitchings argues that if Lloyd's abandons the annual venture and becomes a "bourse" of a few large insurance company controlled underwriting businesses, it would be modelling the Lloyd's of the future on the failed New York insurance exchange.
"If Lloyd's goes down that road," he says, "historians will one day wonder why the only insurance exchange to have survived the great insurance crisis of the late 1980s promptly modelled its financial structure precisely on one of the ones that did not."
Lee Coppack is co-editor of Global Reinsurance. She has been an insurance writer and analyst for nearly 20 years.