Risks Associated with Underwriting at Lloyd's

Risks associated with underwriting at Lloyd’s

  • Although everyone’s individual circumstances are different, we believe that an individual’s exposure to the Lloyd’s market should only represent a small part of their overall wealth.
  • Even though underwriting at Lloyd’s is now conducted on a limited liability basis, through limited liability vehicles such as the Limited Liability Partnership (LLP) and the Nameco, it is only suitable for those individuals who are prepared to accept a higher degree of risk, and who have sufficient wealth and liquidity to be able to withstand losses.
  • In the event of a major loss, members of Lloyd’s must also be able to pay all underwriting losses and, if necessary, they may need to be able to recapitalise their underwriting vehicle so as to be able to trade forward.
  • Members must be prepared to deal with any changes in Lloyd’s capital and solvency requirements, which may affect how much money is needed to support their underwriting limit in a given year of account.
  • Owning a limited liability underwriting vehicle needs to be considered as a medium to long-term venture. There are considerable set-up costs and running costs to be considered. 
  • Potential members of Lloyd’s should be aware that their underwriting results may well fluctuate greatly over the course of an insurance cycle. Past performance is no guarantee of future returns.
  • Underwriting on Lloyd’s syndicates exposes members of Lloyd’s to several major risk factors, in particular underwriting risk and reserving risk. Underwriting risk is where a syndicate may make a loss of as a result of its underwriting activities, whereas reserving risk is where a syndicate may find that its reserves are inadequate and may need to be topped-up.  
  • As most business that is underwritten in Lloyd’s is transacted in currencies other than sterling, there is also a currency exchange risk associated with underwriting, as the relative value of other currencies may well fluctuate during a year of account.
  • Members have to purchase their capacity on syndicates at the Lloyd’s auctions. This is a capital investment that the member of Lloyd’s makes when they commence trading. There is no guarantee that the capital value of that capacity will be maintained from year to year. Indeed, the value of some, or all, of that capacity could feasibly fall to nil at some point.
  • UK tax laws are subject to change, and this may affect the future tax treatment of limited liability underwriting vehicles and their profits.
  • We would always recommend that potential investors seek independent advice from their financial advisors prior to setting up, or buying, a limited liability underwriting vehicle and commencing underwriting at Lloyd’s.

 

 

Go to top