No growth in Lloyd’s special purpose syndicate (SPS) capacity in 2015

by Artemis on June 22, 2015

The amount of capacity provided by special purpose syndicates (SPS) in the Lloyd’s of London insurance and reinsurance market saw no real growth in 2015, as one more SPS took the total number to 14 but only providing somewhere over £500m of capacity.

Last year reinsurance broker Aon Benfield’s Lloyd’s Update reported that the Lloyd’s market began 2014 with 93 active syndicates, a record £26.4 billion of underwriting capacity, with £608m of sidecar quota share reinsurance capacity provided by 13 SPS’.

In this year’s report Aon Benfield said that Lloyd’s began 2015 with 92 syndicates, slightly less capacity at £26 billion and ‘over £500m’ of sidecar quota share reinsurance capacity from 14 SPS’ that were operating in the market.

The special purpose syndicate (SPS) at Lloyd’s is one way for third-party capital providers to participated in the world’s oldest insurance and reinsurance market. They continue to be a “popular entry route” into the Lloyd’s market, according to Aon Benfield.

“SPSs continue to be a popular entry route for new and existing investors, with four new vehicles established so far in 2015,” the report explains.

Backers of SPS’ now include one of the largest insurance-linked investment managers in Credit Suisse Asset Management. Other ILS managers also participate at Lloyd’s, including Nephila Capital with its Syndicate 2357 and Securis Investment Partners through its fund at Lloyd’s corporate member vehicle.

However, in the current environment where efficient ILS capacity is clamouring to gain access to risk, perhaps it’s a little surprising that Lloyd’s hasn’t seen more of this capacity try to access the market, or that SPS capacity seemingly fell.

It’s likely a reflection of two things.

Firstly, Lloyd’s reluctance to open the capital flood gates and simply allow third-party investors to augment its capacity, without bringing new business as well. Lloyd’s has always been a little restrictive towards new capital, insisting that it bring new business as well, rather than diluting the market in any way.

Secondly, the reinsurance market environment, of depressed pricing and excess capacity, meaning that new capital is not strictly required. We’re now in an underwriting environment where many smaller Lloyd’s syndicates can struggle to get their names on renewal slips, so more capital could hurt existing Lloyd’s members.

Slowly but surely third-party capital is beginning to find its way into Lloyd’s through SPS’, but it has not been an easy task for many ILS players seeking to access the market.

As London targets becoming an ILS hub, with its London Market Group initiative and working group, it will be interesting to see how or whether Lloyd’s features in these plans and whether it becomes easier.

Some London-based ILS specialists that Artemis has spoken with have echoed our opinion that London needs to think bigger than simply creating a favourable environment for domiciling special purpose insurance vehicles to bring ILS deals to its shores.

In fact, almost every ILS specialist we’ve spoken with has said that if London wants to become a leading player in ILS, then it needs to leverage what it has that is different to other insurance or reinsurance domiciles.

That’s the Lloyd’s of London market. Ideas mooted have ranged from feeder funds into Lloyd’s central capacity, to fronting vehicles attached to Lloyd’s that ILS managers and collateralised capacity could make use of. Ideas which are potentially much more interesting than simply being an ILS domicile.

The SPS could also be a feature, as they could be established as companion vehicles that augmented the market’s capacity. So not being attached to any one underwriting company, rather following the lead and supplying additional capacity to assist the smaller syndicates in filling lines.

However London addresses its ILS goals, Lloyd’s surely has to feature.

You can access the full Lloyd’s Update report from Aon Benfield via its website here.

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