Innovation needed to facilitate all types of capital within Lloyd’s

by Artemis on August 18, 2016

The specialist Lloyd’s of London insurance and reinsurance market has recognised a need to modernise in order to remain a key player in the changing industry landscape, including how it embraces capital from third-party investors.

With efficiency becoming ever more important it might be wise for Lloyd’s to increase innovation efforts, and develop efficient ways for all types of capital to enter the market.

In a recent report the Lloyd’s marketplace explores the history and potential future of what it describes as ‘Private Capital,’ which, for the purpose of the report Lloyd’s describes as, “capital provided by private individuals trading as an Unlimited Name, a Limited Liability Company (“Nameco”), a Limited Liability Partnership (“LLP”) or a Scottish Limited Partnership (“SLP”).”

Lloyd’s explains that since 2007 the volume of private capital has increased by just 8%, from $2.5 billion to the $2.7 billion recorded in 2016. This represents roughly 10% of the approximately $27.7 billion of current Lloyd’s capacity, which has increased by 68% since 2007.

The report notes a need to increase the volume and facilitation of private capital within the marketplace, as ‘Corporate Capital’ has increased at a more rapid rate and in an effort to modernise the Lloyd’s market and develop efficient ways for private capital to enter the market.

However, it could be said that instead of distinguishing between private capital, corporate capital and so on, the Lloyd’s market would benefit from creating efficient ways for all types of capital to enter the market as and when the providers of the capacity require.

Lloyd’s explains that ratings agencies “view Unaligned / Private Capital as a significant source of advantage to Lloyd’s. Not only does it provide an alternative source of capital unavailable to other insurance entities, but its existence underpins the mutual structure, the core concept behind the Lloyd’s Market.”

Taking this into account, plus the fact that private capital makes up just 10% of the overall Lloyd’s market capacity and has grown at a much slower pace than corporate capital (which includes insurers, banks, investment funds of hedge funds), surely the marketplace would benefit from creating structures that work across the board, enabling various sources of capital to access a broad range of risks.

That way, the marketplace could reap the benefits of capital from institutional investors (which provide the majority of insurance-linked securities (ILS) capacity that’s currently in the global reinsurance sector) entering Lloyd’s that are perhaps deploying elsewhere owing to ease of entry when compared to becoming a Lloyd’s entity.

This is something we touched on previously at Artemis, following the admission from Lloyd’s Chairman, John Nelson, that it’s “absolute necessary” that Lloyd’s modernises.

An increase of just $2 billion in the last nine years isn’t overly impressive for a marketplace that carries as much weight as Lloyd’s does in the global insurance and reinsurance sector, so it is a positive sign that the market is addressing a need to facilitate private capital entry in a more efficient manner.

But as noted previously, with all the change that’s going on in the global insurance and reinsurance market and the consistent innovations of ILS capital, for example, and an increased desire among institutional and corporate players to assume insurance and reinsurance linked risks, perhaps broader innovation is required and a move away from establishing solutions and platforms for distinguished capital groups.

The report continues to highlight potential structures that could facilitate grater entry of private capital into the Lloyd’s market, including special purpose syndicates (SPSs), quota share syndicates, broker facility syndicates, contingent capital structures, and pooled participations.

While these structures might well be suited for enabling private capital to enter the market, SPSs and quota share syndicates, for example, are also perfect solutions to facilitate the entry of other types of capital (institutional, for example) that would surely be interested in accessing Lloyd’s in an efficient manner.

In today’s global risk transfer industry individuals and institutions now have access to a far wider range of ways to manage and invest their capital, which might be far simpler and more efficient that registering with Lloyd’s.

In light of this, it’s important the Lloyd’s market doesn’t fall behind and that it becomes an attractive and easier market to enter and operate within for all types of capital, and doesn’t just focus on what it calls private capital.

Creating a liquid marketplace where all types of capital can enter and exit with greater ease and transparency should help Lloyd’s remain a valuable element of the global risk transfer and reinsurance industry. But this isn’t going to happen overnight, and it will require a concerted effort to innovate and facilitate the entry of capital from a broadening range of providers.

Also read:

Could Lloyd’s names capital start to look a lot like ILS capital?

Alternative capital to continue disruption of reinsurance: Nelson, Lloyd’s.

Efficient ILS structure will help secure London’s future: Beale, Lloyd’s.

Lloyd’s continues to loosen up to alternative capital & ILS.

For a detailed look at how Lloyd’s has shifted increasingly towards embracing ILS and alternative capital read our article from December.

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