20 Lloyd's syndicates told to get profitable or close

The European Union’s Emissions Trading System (EU ETS) was extended to cover emissions from shipping as of 1^st January 2024.

The EU ETS is limited by a 'cap' on the number of emission allowances. Within the cap, companies receive or buy emission allowances, which they can trade as needed. The cap decreases every year, ensuring that total emissions fall.

Each allowance gives the holder the right to emit:

One tonne of carbon dioxide (CO2), or;
The equivalent amount of other powerful greenhouse gases, nitrous oxide (N2O) and perfluorocarbons (PFCs).
The price of one ton of CO2 allowance under the EU ETS has fluctuated between EUR 60 and almost EUR 100 in the past two years. The total cost of emissions will vary based on the cost of the allowance at the time of purchase, the vessel’s emissions profile and the total volume of voyages performed within the EU ETS area. The below is for illustration purposes:
~A 30.000 GT passenger ship has total emissions of 20.000 tonnes in a reporting year, of which 9.000 are within the EU, 7.000 at berth within the EU and 4.000 are between the EU and an outside port. The average price of the allowance is EUR 75 per tonne. The total cost would be as follows:
~~9.000 * EUR 75 = EUR 675.000
~~7.000 * EUR 75 = EUR 525.000
~~4.000 * EUR 75 * 50% = EUR 150.000
~~Total = EUR 1.350.000 (of which 40% is payable in 2024)
For 2024, a 60% rebate is admitted to the vessels involved. However, this is reduced to 30% in 2025, before payment is due for 100% with effect from 2026.
Emissions reporting is done for each individual ship, where the ship submits their data to a verifier (such as a class society) which in turns allows the shipowner to issue a verified company emissions report. This report is then submitted to the administering authority, and it is this data that informs what emission allowances need to be surrendered to the authority.
The sanctions for non- compliance are severe, and in the case of a ship that has failed to comply with the monitoring and reporting obligations for two or more consecutive reporting periods, and where other enforcement measures have failed to ensure compliance, the competent authority of an EEA port of entry may issue an expulsion order. Where such a ship flies the flag of an EEA country and enters or is found in one of its ports, the country concerned will, after giving the opportunity to the company concerned to submit its observations, detain the ship until the company fulfils its monitoring and reporting obligations.
Per the EU’s Implementing Regulation, it is the Shipowner who remains ultimately responsible for complying with the EU ETS system.

There are a number of great resources on the regulatory and practical aspects of the system – none better than the EU’s own:

‍https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A02003L0087-20230605

‍https://climate.ec.europa.eu/eu-action/transport/reducing-emissions-shipping-sector_en

‍https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/what-eu-ets_en‍

Lloyd’s has said one of the centrepieces of its drive to address the underperformance of the market will be a focus on improving the results of the syndicates that have consistently posted the worst results.

Sources said that a letter went out to just over 20 syndicates last month threatening them with closure if they don’t put in place strong plans to reach or return to profitability.

On 24 May, Lloyd’s held a presentation to the market’s C-suite on the syndicates’ underperformance in recent years and stressed that the current trends were unsustainable.

The Corporation’s management said it looking to take measures against underperforming syndicates in order to narrow the performance gap.

Performance management director Jon Hancock told the market that syndicates that have been unprofitable in each of the past three years must submit a short-term plan to turn to profitability. The Corporation said that failure to agree on a credible plan would result in the syndicate closing.

The identities of the syndicates that have been issued with letters by Lloyd’s owing to their under-performance over a multi-year period are not known.

However, the results of all of the syndicates are a matter of public record.

Analysis by The Insurance Insider using S&P data showed that there were 16 syndicates which reported an underwriting loss in each of the past three years, excluding syndicates in run-off and special purpose syndicates.

The syndicates listed reported a combined ratio of over 100 percent for the years 2015, 2016 and 2017, according to data from S&P Global.

The syndicates have a strong bias towards less mature syndicates, with the majority formed since 2010 – lending some force to the market’s complaints about the Corporation’s willingness to accept new entrants during a period of over-capacity and falling rates.

Both Probitas and the Standard Syndicate were launched in 2015. New syndicates typically lose money in their first year – placing them in a slightly different category to the other businesses with three years of losses.

The group of syndicates represents around 10 percent of Lloyd’s capacity. The biggest syndicate is 1686 Axis, with £454mn of stamp capacity in 2017. Most of the syndicates’ stamp capacities were in the £2-300mn range last year.

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20 Lloyd's syndicates told to get profitable or close

The European Union’s Emissions Trading System (EU ETS) was extended to cover emissions from shipping as of 1st January 2024.

The European Union’s Emissions Trading System (EU ETS) was extended to cover emissions from shipping as of 1^st January 2024.