Ariel Re led ‘Lutine alternative’ to collateralized markets expands

The Ariel Re led property catastrophe reinsurance consortium at Lloyd’s, which is billed as an alternative to collateralized reinsurance markets, is set to expand its capacity to lines of up to $100m, while also expanding to include international business.

Known as ‘The Lutine Alternative’ (TLA), the consortium includes a number of Lloyd’s syndicates offering capacity to quote and write property catastrophe reinsurance. The consortium, which is led and bound on behalf of TLA members by Ariel Re, launched in January 2014 with a focus on U.S. risks and a maximum line size of $75m.

Now, Ariel Re is expanding the facility, offering a maximum line size of $100m, with an increased geographic scope to include both U.S. only Worldwide non-U.S. options for those looking for cover. Coverage options from the facility include; one shot, top and drop, aggregate, top and aggregate, as well as second and subsequent loss covers and policies can run for up to two years.

When The Lutine Alternative was launched in 2014 it was seen as a way for smaller Lloyd’s players to grow their market share, by combining resources under the leadership of Ariel Re in order to offer larger lines and more competitive terms to cedents.

The consortium has had some success, it would seem, but the need to grow the line size and broaden to new regions, is perhaps a reflection of the increasingly difficult property catastrophe reinsurance market conditions and the need for smaller Lloyd’s players to do what they can to remain relevant.

S&P warned yesterday, as it revised the Lloyd’s markets outlook to stable, that smaller, or more narrowly focused Lloyd’s syndicates are at risk of being marginalised, as they struggle to maintain market share.

The Lutine Alternative property catastrophe reinsurance consortium attempts to provide a remedy for exactly this, to enable smaller, property catastrophe reinsurance focused syndicates to club together in order to get onto slips as a larger line.

The consortium aimed to offer emerging reinsurance products, such as aggregate, top & drop etc, but with traditional market wording and terms, as an alternative to the collateralized or insurance-linked securities (ILS) markets and as a way to fight back against the growth of alternative reinsurance capital.

Ariel Re said that the consortium has been a great success with lines bound on semi-private deals through a variety of reinsurance brokers. As a result, and due to increasing interest from brokers and clients around the world, Ariel Re has decided to renew the U.S. section and add the International offering to provide capacity for similar products more broadly around the world.

The Lutine Alternative is an example of the traditional reinsurance market fighting back against ILS and collateralized reinsurance capacity, as it attempts to maintain its relevance. For Ariel Re it likely results in new business, where it can put its own capacity to work alongside the other syndicates, so growing its own footprint.

It’s interesting that Ariel Re markets this as an alternative to the alternative reinsurance capital and collateralized markets. Ariel explicitly states that the product uses traditional market wordings, with no commutation or other collateralized-specific language included.

As a strategy this seems a sound way to attempt to increase your relevance, by becoming part of a facility that can offer larger line sizes, using modern reinsurance product structures. The question has to be raised though, whether a consortium such as this can reach levels of efficiency high enough in order to compete on price with some collateralized markets, particularly those which have really come to terms with their lower cost-of-capital.

As more ILS managers and funds begin to push capital and reinsurance capacity into the Lloyd’s market, through a variety of mechanisms, it is possible that consortia, such as the Lutine Alternative, may become increasingly common as a way for traditional Lloyd’s players to compete more strongly. It is also possible that they may find that clubbing together is not enough on its own and that an innovative take on reinsurance products become increasingly important to the success of any consortia.