Lloyd’s explores options to transform its capital framework

The Lloyd’s of London insurance and reinsurance market has recognised that there are constraints to the way capital can move in and out of the marketplace, leading the Corporation to reveal that it is exploring options to transform the capital framework that underpins it.

There have been ongoing discussions about the free movement of capital and the mechanisms through which investors can access underwriting returns at Lloyd’s in recent years, largely stimulated by the advent of the insurance-linked securities (ILS) market.

Institutional investors can now access the returns of insurance and reinsurance underwriting much more easily through an ILS fund allocation than is possible through Lloyd’s, except for a few sideways routes where additional fees tend to apply.

As a result, with major institutional investors taking to the ILS market, Lloyd’s would be advised to look at other ways to help encourage investors to allocate to its underwriting pot, rather than that of an ILS fund.

In the latest strategy update from Lloyd’s it’s clear that this is now sinking in and the Corporation of Lloyd’s has begun work to look at how to make Lloyd’s underwriting performance more accessible to investors.

“The Corporation wants a market accessible to a broad range of capital providers for trading insurance risk,” Lloyd’s latest strategy update says.

Adding that the, “Lloyd’s capital framework has a number of advantages for capital providers but there are some constraints.”

As a result of which, “The Corporation is looking at options for transforming the capital framework.”

The Corporation also said that it is, “Considering a number of options for further enhancing central resources.”

One of these is likely the Central Fund ILS investigation, whereby Lloyd’s was looking at how it could utilise the UK ILS framework to issue a catastrophe bond like structure to protect its Central Fund against major losses.

However, as we explained on Friday, this ILS activity is now on-hold for the moment, as Lloyd’s finds itself well-capitalised at this time.

But that activity had been focused on what would really amount to a layer of protection for the Fund, rather than a true partnership with investors and sharing in the market’s underwriting returns.

Hence, perhaps the shift in strategy to “transform” Lloyd’s capital framework may result in something more compelling for insurance and reinsurance linked investors.

With other strategic work at Lloyd’s focused on remaining competitive, distribution, technology and making the market more efficient, it is encouraging to see that the Corporation has not forgotten that capital efficiency is also a very important lever.

Given the interest that investors show in accessing the direct returns of insurance and reinsurance underwriting business, the Lloyd’s market has an unprecedented opportunity to capitalise on this right now.

It will be interesting to see how the updated strategy comes to life and whether Lloyd’s can find a way to encourage capital to flow more freely into its market construct, to support its underwriting, in a manner where the investors can feel more like partners to the syndicates and underwriters, rather than just an efficient form of protection.

Also read:

– 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.