Lloyd’s “prospectus” set to deliver third-party capital & ILS friendly message

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Lloyd’s of London, the oldest and most unique marketplace in the world for placing insurance and reinsurance business, is set to adopt a friendlier tone when it comes to third-party capital and ILS, according to observers and market participants.

Lloyd's of LondonLloyd’s is set to deliver its so-called “prospectus” along with its annual results tomorrow, which will set out a vision for the future of the market under the new leadership of CEO John Neale and we’re told it will be more welcoming to the capital markets as a capacity provider.

In the past, Lloyd’s largely ignored the development of the insurance-linked securities (ILS) market and had its head in the sand.

Neal admitted this recently, saying that while the “best in class in the world of insurance and reinsurance were starting to react to the changing marketplace that they found themselves operating in,” Lloyd’s was working on other expansion initiatives that ultimately meant it took its eye off the ball to the evolving global risk marketplace.

Meanwhile, ILS capital found its way into Lloyd’s through routes largely of its own creation, as a number of ILS fund managers leveraged the traditional Lloyd’s market structure to access risk through the market.

As Chairman of Lloyd’s Bruce Carnegie Brown said recently, non-traditional capital successfully “cracked the moat” of the Lloyd’s insurance and reinsurance market and is unlikely to leave, but as we explained in that article it still wasn’t clear whether the market had a strategy to make use of this capital interest in the best way for its participants.

Of course, Lloyd’s had its foray with the ILS market, looking to the potential use of insurance-linked securities (ILS) to protect its Central Fund and running a roadshow with ILS investors to explain a potential deal structure that wasn’t always all that well-received, we understand.

That approach seemed reactive at best, almost a tacit admission that “while something must be done with this ILS capital, we’re not sure what, so let’s just look at it as hedging capacity.”

That deal-focused approach to the ILS market was then put on hold by Lloyd’s, as it cited its well-capitalised nature as the reason it was slowing its approach to third-party reinsurance capital.

But CFO John Parry said that Lloyd’s remained keen to access the ILS market, if it could find the right mechanism or structure to do so.

It then seemed a more holistic approach to capital could herald a more open approach to the ILS market, as Lloyd’s said in a strategy update that “The Corporation wants a market accessible to a broad range of capital providers for trading insurance risk.”

Making itself more accessible to capital seems a better approach than asking capital to provide it with a hedging buffer against losses, a more equitable approach and one that ILS investors could likely buy into.

But still no details emerged and fast forward six months or more and we’re still awaiting any clarity on how Lloyd’s intends to embrace the ILS market.

But we know it’s coming.

CEO John Neal said in January that Lloyd’s would bring this “prospectus” along with its results at the end of March, now due tomorrow, in which it would articulate a vision and then request input and feedback from stakeholders, in order to develop a “blueprint to transform the market and the Corporation.”

Neal said this would be an evolution of the Lloyd’s market, not a revolution, so we shouldn’t get too excited about significant change coming.

However, Neal said part of the process Lloyd’s is undergoing to develop its blueprint for future transformation is “looking at how we can make better use of alternative capital.”

Alongside initiatives to look at profitability, competitiveness, use of technology, modernisation, talent, and a renewed focus on underwriting markets where profits are typically highest such as the U.S., the use of ILS and alternative capital looks set to get another meaningful look from Lloyd’s.

So tomorrow we expect to see some form of this “prospectus”, which we understand is likely to just be a teaser version along with the results, with something more meaningful to be developed likely along with a strategy refresh at Lloyd’s.

With the “prospectus” that Lloyd’s will publish set to establish the foundations on which to build a more transformational blueprint it may well lack in any significant detail, but it’s hoped it will lay out a more open approach to bringing ILS within the market, both as capital and hedging capacity source.

It’s not going to be a simple task, to welcome ILS and alternative capital into a market that is currently so fixated on increasing underwriting returns to enable legacy businesses to remain profitable.

Bringing more efficient business models into a market that has struggled to be profitable is one thing, but bringing more efficient capital in at the same time may only promise pressure on pricing and margins for legacy players.

Hence the leadership at Lloyd’s has a challenge. How to ensure the market is fit for the future, embraces efficiency, but still enables legacy players to participate profitably?

There’s no easy answer to that and we’d suggest that some difficult decisions do have to be taken, that could put some noses out of joint among the more established Lloyd’s market fraternity.

It would be encouraging to see radical measures being laid out that could really transform Lloyd’s into the most efficient and profitable place to write insurance and reinsurance business. But to achieve that it seems all sense of tradition would have to be thrown out of the window, something we’d be surprised to see.

Of course, a truly radical and transformational new blueprint for Lloyd’s would have to include some level of virtualisation of the market itself. Bringing technology, in terms of a marketplace, placement and trading tools, right into the heart of the market, while at the same time allowing capital to be flexible, fungible and leveraged from multiple sources.

Virtual would also mean less bricks and mortar, if Lloyd’s is really looking to heighten its ability to ride out market cycles over the longer-term.

We’re unlikely to see the more radical options even tabled, of course. But sources say we could see encouraging words about use of technology in general, lowering of costs across the market especially on the acquisition side, use of capital from different sources, ways this capital can be used, and Lloyd’s market’s own approach to using ILS to protect itself (the Fund) and its participants.

Will this all go far enough to secure the future of Lloyd’s of London in its current form? Or will the blueprint for the future end up being a plan for the next decade at best?

That’s a challenge facing every traditional insurance and reinsurance firm of course, as well as ILS funds and investors. As the risk market is not suddenly going to stop changing now.

Efficiency is going to be embedded in everything this market does, from the capital, to the technology and the way risks are transferred or traded.

There is no stopping a wave of efficiency as it rushes through an industry and the last decade or more may look tame as technology and the capital markets truly get to grips with matching risk and capital in increasingly effective and streamlined ways.

The prospectus of today, will likely become the legacy of tomorrow within five or ten years. At which point Lloyd’s will be adapting again.

Hence we hope the prospectus lays out an ambition at Lloyd’s to become a more flexible and responsive marketplace, a continually evolving risk capital and transfer hub fit for the future of insurance and reinsurance.

Because anything less will prove just another iteration of Lloyd’s.

Also read:

Non-traditional capital “cracked the moat” of Lloyd’s: Carnegie-Brown.

Lloyd’s is still capital efficient, but ILS can make it more so: Vario.

Lloyd’s explores options to transform its capital framework.

Lloyd’s puts ILS investigations on hold for now.

Managing agents want greater use of ILS at Lloyd’s.

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

More UK ILS deals on the way, as PRA notes ILS vital for UK’s competitiveness.

Lloyd’s positive on UK ILS, but warns will exacerbate price pressures.

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