The proposed reforms of the U.K.-based Lloyd’s insurance market will address many of the structural weaknesses, which — if left unresolved — would make it increasingly difficult for Lloyd’s to sustain its franchise in the global insurance market, according to a report from Standard & Poor’s.

The credit rater says it believes that the importance of the reforms lies mainly in the retention and future growth of corporate capital. Although it believes that advantages and disadvantages are offered by both corporate capital and third-party capital, it is not efficient for both types of capital to coexist. The influence of, and costs associated with, unaligned capital in Lloyd’s businesses will be reduced if these proposals are successfully implemented.

The central tenet of the reforms is the creation of a franchisor/franchisee relationship. S&P says this will be good in providing clarity to the market, but it worries that it could stifle underwriter innovation. “The challenge will therefore be to strike the right balance between underwriting freedom and regulation of the franchisees.”

Given the significance of the reforms, they will be challenging to implement, S&P says. “This is already evidenced by the reaction of various representatives of individual capital providers who, on the current one-member-one-vote basis, have a significant influence on the ultimate approval of the proposed reforms. The planned reforms could be watered down as they are ‘negotiated’ with interested parties (capital providers, brokers, regulators, the U.K. government, the EU) during the consultation process.”