Lloyd’s looking at UK’s new ILS regime for Disaster Risk Facility

by Artemis on December 19, 2017

The Lloyd’s Corporation, an independent organisation and regulator that sits behind the Lloyd’s of London insurance and reinsurance market, has been looking at the United Kingdom’s new insurance-linked securities (ILS) regulatory regime and considering its potential uses for disaster risk transfer.

Lloyd's of London at nightIn the Lloyd’s end of year email to the market, in which Lloyd’s Chairman, Bruce Carnegie-Brown and Chief Executive, Inga Beale reflect on 2017 and look to the year ahead, the UK ILS regulations are cited as one area of innovation that Lloyd’s has been exploring.

The UK’s new ILS regulatory regime, which will allow for collateralised reinsurance and other insurance-linked security (ILS) vehicles and transactions to be established and issued in the country, were recently passed by Parliamentary committee and have now become law.

The first applications for ILS vehicles in the UK have already been made, as we wrote recently re/insurer Neon was among the first to file an application, and with collateralised sources of reinsurance playing a vital role in protecting UK re/insurers and companies operating at Lloyd’s of London, it’s not surprising to hear Lloyd’s has been working to establish exactly what the new regime means for it.

The email from Carnegie-Brown and Beale reveals that the Lloyd’s Corporation has been considering the implications and opportunities presented by the UK’s new ILS regulatory regime, along with the Lloyd’s Disaster Risk Facility consortium of companies.

The Lloyd’s Disaster Risk Facility consortium is a group of Lloyd’s syndicates that make their specialist underwriting skills and $400 million of natural catastrophe insurance and reinsurance capacity available to help developing economies build resilience to disaster, climate and weather risks.

The consortium was launched in 2015 and works alongside other initiatives focused on narrowing the protection gap and increasing penetration of disaster risk insurance around the globe.

The fact Lloyd’s has been assessing the ILS regulations alongside the Disaster Risk Facility consortium suggests that the group perhaps see an opportunity to tap into the depths of the capital markets to augment the capacity available to them for underwriting disaster risks.

The UK ILS regulations would enable the consortium to cede some of the disaster risks they underwrite to third-party capital providers, through a special purpose vehicle, or even to issue notes in a catastrophe bond like manner to investors keen to assume global disaster risks.

Having an ILS vehicle that allowed the consortium to effectively expand its capacity outside of Lloyd’s and into the capital markets could result in an efficient solution for growing the amount of disaster risk it can underwrite considerably, providing an effective source of collateralised reinsurance or retrocession capacity.

The Disaster Risk Facility is perhaps an ideal use-case for Lloyd’s and ILS, offering an area of the market which is not as central to the risks more typically traded within the market and a chance to try out the capital markets in an initiative that requires the utmost efficiency, in terms of capital.

The email does not go into more detail on the outcome of the Lloyd’s Corporations consideration of the UK ILS regime, but the fact it is being considered at all is positive for the ILS market and for those underwriters involved in the consortium.

It’s also positive for the Lloyd’s market as a whole, as it is another sign that the world’s oldest insurance and reinsurance market is gradually coming around to the idea of utilising more capital markets capacity to augment the market’s own capacity pools.

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