Lloyd’s begins looking to ILS and capital markets for capacity support

It’s been reported that Lloyd’s of London has begun the process of looking more seriously at collateralised reinsurance instruments, such as insurance-linked securities (ILS) and catastrophe bonds, as a way to augment its own capacity and to offload excess risks to third-parties.

It’s been widely understood that Lloyd’s standpoint on ILS and the use of capital market investors more directly in reinsurance has been softening, we’ve been reporting on the softening viewpoint for a number of years now.

But now Lloyd’s is beginning to put additional thought into how it could leverage the appetites of ILS investors and the capital markets to enhance and protect its own balance-sheet and capacity, which could add a layer of protection around the central fund and the business underwritten at Lloyd’s, using ILS backed financial structures.

As we reported recently, Lloyd’s has already been the implications and opportunities presented by the UK’s new ILS regulatory regime as a way to augment the capacity of the Lloyd’s Disaster Risk Facility consortium of companies, while transferring some of the risks underwritten to the capital markets.

Now, a report this morning from Reinsurance Magazine suggests that Lloyd’s is looking at a broader use of ILS and collateralized reinsurance structures as a way to underpin the capital adequacy of the market, while securing efficient risk transfer capacity.

A Lloyd’s market representative told Artemis that an analysts presentation was held at Lloyd’s on Friday 19th January, during which the market’s potential future use of ILS and the capital markets was discussed.

It’s reported that Lloyd’s has engaged Citi to run a very light roadshow with ILS market participants, investors and analysts, to help the insurance and reinsurance market develop its ideas and a strategy for engaging with the ILS and capital markets.

We’re told that Lloyd’s is also considering other capital market structures that could augment its capital and capacity.

The ILS market could provide a useful layer of protection, or risk sharing, around the Lloyd’s central fund in such a way that investors would share in its underwriting returns, and losses, which could have the effect of minimising volatility in the market’s results.

A Lloyd’s representative said it is very early days and it is natural that Lloyd’s is considering its use of ILS, but so far no decisions have been taken to proceed with any transactions or structures.

It would make a great deal of sense for Lloyd’s to have a sidecar like structure that enables ILS funds and investors to access a spread of its risks, while augmenting the market’s capacity and providing a buffer against losses. It’s going to be interesting to see what Lloyd’s can come up with, as it looks to ILS increasingly meaningfully, although it’s important to remember this is very early days in its investigations of ILS opportunities.