Access to third-party capital & ILS positive for London market: AM Best

Rating agency AM Best has maintained its outlook for the London insurance and reinsurance market at Stable, with improving access to third-party capital one of the key drivers.

AM Best believes that access to third-party reinsurance capital and the ability to more readily utilise insurance-linked securities (ILS) are positives for the London market, which should help players with their capital needs and hedging.

There are four key factors driving AM Best’s stable outlook for the London market: upward premium rate momentum to support underlying performance; reduced COVID-19 loss uncertainty; market modernisation efforts to reduce costs; and greater accessibility of third-party capital to the London market.

While the UK’s insurance-linked securities (ILS) regulatory regime, the Risk Transformation Regulations, has “failed to gain much traction” so far, according to AM Best, and “been unable to challenge established (re)insurance hubs like Bermuda, where ILS issuances have thrived for years,” the rating agency does believe there are more positive signs emerging.

“AM Best has observed signs that market participants may make greater use of the ILS legislation,” the rating agency continued.

Noting the establishment of London Bridge Risk PCC as a dedicated insurance-linked securities (ILS) vehicle for the Lloyd’s market as a key step.

London Bridge Risk PCC Limited (LBR PCC) is a Lloyd’s sponsored and independently owned UK protected cell company (PCC), utilising the UK’s ILS legislation, and AM Best said that it “supports the Corporation’s Future at Lloyd’s strategy, and highlights its ambition to create an insurance market that attracts new forms of capital.”

Adding that London Bridge Risk PCC is also “an endorsement by the Corporation of the potential benefits of utilising the ILS legislation.”

AM Best believes that London Bridge Risk PCC can be utilised as a way Lloyd’s Members can access capital more readily, given relatively fast times to market.

“Members at Lloyd’s can use this vehicle to manage their capital requirements by attracting new investors, including pension funds, and could benefit from reduced set-up times and lower transactional costs,” the rating agency explained.

Highlighting the use of London Bridge Risk so far, AM Best points to the first use of the structure by Ontario Teachers’ Pension Plan (OTPP) in November 2021.

Since then, we’ve also seen the Lloyd’s ILS structure used by ILS fund manager Nephila Capital as a way to channel capital to its new specialty lines focused syndicate 2358.

As we were first to report back in March, Lloyd’s is now in talks with the UK regulators over an expansion of the regulatory approvals for its insurance-linked securities (ILS) structure London Bridge Risk PCC, as it seeks to make the vehicle more useful for market players.

More broadly, AM Best believes that success with ILS activity at Lloyd’s could also result in greater use of the UK’s ILS regime.

“If Lloyd’s is successful in attracting new capital through the LBR PCC it may encourage others to utilise the UK’s ILS legislation,” the rating agency said.

Concluding that, “Better ease of entry to the London market through PCCs could help to attract a greater diversity of capital providers, and support London’s reputation as an International Insurance Hub.”