LLM1140 - Introduction to Lloyd's: syndicate capacity: acquisition and disposal

Syndicate capacity first became a tradable asset in 1995. Before then members were placed on syndicates by members' agents and moved between syndicates by mutual consent: there was rarely any cash involved.

Names already in possession of capacity on a syndicate for the 1996 year of account retained their right to underwrite on those syndicates at no cost.

These days, for syndicates newly set up, capacity is acquired from the managing agent of the syndicate, usually at no cost to the member. But for ongoing syndicates, capacity acquired for the first time or increased capacity in a syndicate must be bought from other members through capacity auctions, or by bilateral arrangements (including offers by the managing agent’s group to ‘buy out’ members’ capacity).

Capacity Auctions

Lloyd's control transactions of capacity between members through a series of capacity auctions held each year in September to November at which members can buy and sell capacity for the following underwriting account.

Members who wish to sell can "tender" capacity and members who wish to buy can make "bids". Lloyd's match tenders with bids. The auction rules prevent members from “dealing” - that is, a member may not sell in one year’s auctions capacity which was bought in the same year’s auctions.

The price achieved for capacity at the auctions is available on Lloyd's website.

Personal representatives of Names who died after the last auction in the year have the opportunity to sell the deceased Name’s capacity at a December auction. If a member dies too late in the year for his capacity to be included in the Deceased Names Auction, the capacity can be transferred on behalf of the estate to another member, or members, provided that they have the necessary Funds at Lloyd’s in place.

Bilateral arrangements

Since 1998 members have also been allowed to enter into bilateral agreements to transfer syndicate capacity, but only where the auction process has failed to match tenders and bids. Where a higher auction bid, or a lower auction tender, remains unsatisfied that must be satisfied in priority to the bilateral agreement, and dealing is not allowed.

Other disposals

If a member does not wish to underwrite on a syndicate in its successor year and cannot sell the capacity, they may ‘drop’ their participation in the syndicate by handing it back to the managing agent. They do not receive any compensation should they do so.

Managing agents may offer to buy out a member’s capacity in certain circumstances, for example if they are connected with a large corporate member that wants to control the entire syndicate.

Large company members may also transfer capacity intra-group.

The effect of acquiring or disposing of capacity

Capacity acquired, for example, to participate on the 2007 year of account at auction in (say) September 2006, could not be exploited (i.e. the member would not actually join the syndicate and begin to trade) until 1 January 2007.

The member that sold their capacity in September 2006 would continue to exploit it and be liable for any claims arising for business written after September 2006 until 31 December 2006.

What is actually being bought or sold therefore is the right to participate in the following year’s syndicate. This is consistent with the principle that syndicates are “an annual venture” and that there is no common legal identity between a particular syndicate and its successor.

The tax consequences of disposals of syndicate capacity are discussed at LLM8020+ (individual members) and LLM4200+ (corporate members).