Lloyd’s of London to launch Lloyd’s Index service for risk transfer

Lloyd’s of London, the oldest and only true insurance and reinsurance marketplace in the world, is planning to launch the Lloyd’s Index, an index for diversified insurance risks, featuring loss ratios and data on insurance market performance.

With Lloyd’s the home to a large share of the world’s major insurance and reinsurance coverage, the data the marketplace could aggregate and offer as an insurance index service could be extremely compelling to those looking for either line specific or whole-of-market indices to use in risk transfer transactions, such as an industry loss warranty (ILW) or other derivative type structures.

Lloyd’s aims to launch its own insurance based index in mid-2016, offering diversified insurance risk data, loss ratios and with a focus on insurance performance information. A Lloyd’s focused industry loss index (or market loss index) could have significant applications in ILS for risk transfer purposes.

Lloyd’s notes that by making the index data available, it will provide “Managing agents, brokers and other insurers with new options for managing risk and form the basis of index-related products of interest to the wider capital markets.”

This is a positive step in Lloyd’s new attitude towards the capital markets, having promised to find new ways to welcome alternative capital and the insurance-linked securities (ILS) community into the market.

As the only true insurance market, Lloyd’s has access to a wealth of unique data, both current and historical and so feels uniquely positioned to offer a service providing an index of diversified underwriting risk performance data.

The Lloyd’s Index will show loss ratios, so premium versus claims information, for the Lloyd’s market on an aggregated basis. It will focus entirely on insurance performance, so exactly what those seeking industry or line focused risk transfer structures will be looking for.

Index subscribers will be able to view data on a whole market basis to begin with and the Index is hoped to be published on a quarterly basis, another positive aspect as that will be a reasonably rapid timescale for risk transfer triggers to use. Lloyd’s does intend to offer additional indices defined by class or line of business in the future.

Lloyd’s Chairman, John Nelson, commented; “This is an exciting and innovative development for Lloyd’s. Our continued success is dependent on being able to develop the tools the market needs and also reflect the environment it is operating in. I believe this proposal would be advantageous to both Lloyd’s and non-Lloyd’s participants, keeping pace with the evolving insurance industry and the new sources of capital now available. We look forward to hearing the views of the market.”

Lloyd’s will now seek market input on the initiative, as well as discussing governance with UK regulators, with a target of being ready to launch the index in mid-2016.

Such an index could be extremely useful for those at Lloyd’s looking to access capital market sources of reinsurance, retrocession and risk transfer, for hedging or long-term protection based on the occurrence of major market impacting loss events.

Lloyd’s is the type of market where when a major global loss occurs, many of its players are hit, making the markets loss experience closely correlated to many of its participants in many circumstances. The index would also be closely correlated to some major global insurance and reinsurance players, whose books of business will have significant cross-over.

That makes the publishing of a Lloyd’s index for risk transfer compelling for many potential users. Of course the ILS managers operating at Lloyd’s would also likely use such an index, as well as some other ILS players with broad exposures, particularly now ILS funds are branching out increasingly into specialty insurance and reinsurance risks.

Could we ever see a Lloyd’s market loss index triggered catastrophe bond in the future? Perhaps, if the reinsurance and retrocession needs of key players in the market were sufficient and the appetite of the capital markets large enough.

Could a Lloyd’s market loss index become tradable in the future? Well that would depend on demand and whether the market participants could adjust their annual renewal habits, to adopt a more hedging based approach to risk transfer. With any traded market buyers and sellers are needed to maintain liquidity. But certainly, a Lloyd’s Index could provide the transparency required for such an initiative in years to come.

One final point to note is that such a Lloyd’s industry loss index could help to broaden the ILS market, by bringing new risks and whole-market risk transfer products to the ILS investor base. That could assist the ILS market in its next phase of growth, while providing new and interesting diversification opportunities.