Once the prospective Member has set up their limited liability vehicle, they must decide whether they wish to underwrite in a MAPA fund or as a bespoke Member.
Both MAPA and bespoke Members have to purchase their syndicate capacity at the annual Lloyd’s Capacity Auctions, which will be held in September and October this year. If a new Member elects to join the new HAL MAPA then all of the auction decisions are undertaken by the MAPA manager. When a Member purchases a portfolio of syndicate capacity they are effectively buying an asset, which may either increase or decrease in value over the passage of time. The Member owns this capacity until such time as he or she decides to dispose of it, either using the auction system, or by selling their limited liability underwriting vehicle in its entirety. The sale of syndicate capacity may incur a capital gains tax liability.
The cost of acquiring capacity though the Auction process is the major up-front cost associated with new membership of Lloyd’s. Members should be aware that the cost of acquiring capacity through the auction process has varied from year to year, but in recent years there has been an increase in the overall price. The main reason for this increase has been the fact that the amount of capacity put up for sale in the auctions has reduced considerably in recent years. 2005 saw £263 million of syndicate capacity traded through the Lloyd’s Auctions, but the volume of capacity traded had reduced to only £161 million in the 2010 auctions. In 2011, the average cost of acquiring capacity in the Auctions had risen to over 30p per pound of capacity. However, the HAL new Members’ MAPA managed to acquire its portfolio for a lesser amount. HAL still maintains that the best way for new members to enter the Lloyds market, in the first instance, is by means of joining the HAL new members MAPA.
HAL requires all new Members to pre-fund the purchase of their capacity prior to the auctions.