LLM6020 - Conversion: ‘interavailability’

The 1996 conversion byelaw envisaged two types of arrangement under which existing Names were allowed to enter into ‘approved arrangements’ for transferring their underwriting to limited liability members

• ‘transition’, which aimed to achieve a clean break for the individual Name by transferring the business to a corporate member, which reinsured the open years of the converting Name
• ‘interavailability’, under which a Name’s Funds at Lloyd’s would support both the new underwriting business of the successor member, and the continuing obligations relating to business carried on as a traditional Name.

In the event, because of commercial and tax difficulties, ‘transition’ arrangements were not pursued, and only ‘interavailability’ has been used by converting Names.

Lloyd’s also recognises reverse interavailability, which involves the same gradual hand-over, but where the corporate successor establishes its own capital from the start of its underwriting. This capital is also available to support the declining business of the individual Name.

Under the transfer arrangements, the Name’s ‘syndicate capacity’ for forthcoming underwriting years is transferred to the new vehicle. The Name is required to maintain sufficient Funds at Lloyd’s to support the liabilities of open or run-off years entered into as a traditional Name, and those of the new vehicle. It thus takes an individual Name three years (more if run-off is involved) to withdraw from traditional unlimited liability underwriting. A member can continue to underwrite as a traditional Name as well as via the conversion vehicle. But in practice where Names have converted they have usually transferred all new underwriting to the new vehicle and have continued as traditional Names only in respect of their membership of syndicates in run-off.

At the end of the interavailability period, it was envisaged that the Funds at Lloyd’s (FAL) would be released back to the member and transferred into the ownership of the new vehicle. In fact, many members found it difficult to provide substitute security for the successor, even when every year of every syndicate of which the Name was a member had been closed by reinsurance to close ( LLM2060). Technically, Lloyd’s rules requiring each member to put up FAL were breached when the Name’s FAL was released prior to transfer to the successor vehicle. In many cases a Name’s FAL was being used solely to support the new vehicle, and Names were unable to complete the process of conversion by resigning as a traditional member.

In December 2004, Lloyd’s devised arrangements under which FAL could be transferred in a satisfactory manner – described in the Lloyd’s Market Bulletin Y3455 of 13 December 2004. These arrangements are compatible with the conversion reliefs brought in by FA 2004 ( LLM6160).