Lloyd’s puts ILS investigations on hold for now

by Artemis on September 21, 2018

The Lloyd’s market has put its investigations into the potential use of insurance-linked securities (ILS) to protect its Central Fund on-hold for the moment, according to CFO John Parry.

Lloyd's of London buildingSpeaking this morning during an analyst call and answering a question from Artemis, Parry explained that given the well-capitalised nature of Lloyd’s the market has slowed its approach to the ILS market.

However Lloyd’s remains keen to access the wealth of investment interest shown by the capital markets in insurance and reinsurance linked opportunities.

Parry said, “The ILS market is a source of capital that Lloyd’s is keen to access to diversify our capital base.”

But he noted that the Lloyd’s capital structure is different and contains numerous lines of business, both catastrophe and non-catastrophe.

However, he said that the discussions with the ILS market have made good progress to-date.

He noted that were Lloyd’s to access the ILS market, he would be “Keen to use the UK regime for ILS.”

But he said that at this time Lloyd’s access to the ILS market would be a “nice to have” adding that “so we are going to be progressing this but not in the immediate future.”

With Lloyd’s well capitalised, as we explained earlier, the need for ILS backed reinsurance or retro support for the Central Fund is perhaps not particularly urgent for the market.

Also Lloyd’s has more important initiatives to improve its underwriting performance and weed out poor performing books of business underway right now.

Hence the use of ILS as a Central Fund reinsurance or retrocessional protection is perhaps not a high priority at this time.

But, as we also explained earlier, Lloyd’s would be well-advised to continue these discussions but on a broader basis, to identify more flexible ways for ILS capital to support the underwriting of business at Lloyd’s.

Capital wants to be more than just a Central Fund protection, in fact capital wants to be a partner for the Lloyd’s market underwriters.

The market would do well to explore ways to open its underwriting returns more meaningfully to ILS type investors, but with the overarching startegy being to add capital efficiency and drive growth, rather than just seeking an efficient layer of protection.

So it seems like it is a case of ILS remaining on the table for Lloyd’s, but on hold for now. It will be interesting to see whether the initiative expands beyond the Central Fund protection idea when it is next resurrected.

Also read: Lloyd’s ILS solution needs to augment syndicate capital at the right time: Vario.

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