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Original Risk: A Society for Change Agents

Lloyd’s ambitious Blueprint to help ILS capital participate more easily


Lloyd’s of London has revealed an ambitious “Blueprint One” which lays out a strategy to “build the most advanced insurance marketplace in the world” part of which includes new capital rules and processes and a goal to make it simpler for ILS capital to access the market.

lloyds-london-reinsurance-underwriting-roomBlueprint One is the next step along from the much-discussed prospectus, that saw the Lloyd’s insurance and reinsurance market detailing its ambitions for modernisation and change.

The Blueprint details some of the initial work that will be done across multiple streams of effort, with the end-goal being a total transformation of Lloyd’s into something that seems quite a departure from what we see today.

Capital is a key component of this ambition for change and the Blueprint lays out a plan for developing a capital solution to ease access to the market for investors, provide better support for insurance-linked securities (ILS) and let market participants such as managing general agents (MGA’s) leverage third-party capital more readily.

Blueprint One details the initiatives that Lloyd’s will look to roll out to customers and market participants over the next year or so, encompassing broad modernisation projects and plans to make doing business simpler.

Lloyd’s expects to update on its plans at least annually as it makes progress on some of the initiatives and develops new ideas.

Blueprint One lays out six specific areas for change, focusing on digital, data and technology deliverables to drive greater benefits to customers of the insurance and reinsurance market.

John Neal, Lloyd’s CEO, commented on the launch of the Blueprint, “The extensive feedback we have received in progressing the blueprint has confirmed the preeminent place Lloyd’s holds globally in insurance and reinsurance. The plans unveiled today create execution certainty through phased delivery. The support we have enjoyed to date has been essential to delivering Blueprint One and we are seeking the renewed commitment of all market participants to partner with us to achieve our vision to build the most advanced insurance marketplace in the world.”

“Blueprint One is deliberately ambitious,” Chairman of Lloyd’s Bruce Carnegie-Brown explained. “This is a special time to be working at Lloyd’s. The changes we are making over the next few years will last for generations and will secure the future of this market we are all so passionate about.”

Phase I is expected to be delivered during 2020, featuring quick wins such as the launch of an electronic risk exchange, as well as the first phases of a claims solution, onboarding for coverholders and also the capital solution.

Among the specific deliverables, the “capital solution” is most interesting to potential investors that may want to access Lloyd’s insurance and reinsurance returns.

It promises a platform for that will make it easier to connect capital to risk at Lloyd’s, for new types of capital to access the market, for ILS transactions to be entered into by Lloyd’s participants, and generally make Lloyd’s a more attractive and simpler place for capital to find a home.

The vision is to give capital providers access to a range of flexible opportunities to back risks, both existing and emerging, through the Lloyd’s platform.

That will include opening the doors to new forms of capital and making it much simpler for investors to access risk-linked returns from Lloyd’s and participants to leverage additional capital from outside sources.

It will allow investors capital to “attach to risk more flexibly, for the benefit of all participants” Lloyd’s says, making the market more attractive to existing and new forms of capital, all while “maintaining strong underwriting discipline.”

In addition, “Managing agents will be able to offer new capital products as well as optimise their capital,” which will meet the needs of many underwriting teams in the market and perhaps make it a lot simpler for the good ones to attract more capital to help them expand their ambitions in the market.

Phase 1 of the first Blueprint aims to produce a set of pilot use-cases for the capital platform and a refined set of rules and processes for capital at Lloyd’s.

Insurance-linked securities (ILS) functionality is expected to be part of the Phase 1 pilot use-case deliverables, with specific risk opportunities already identified and capital raising underway, according to Lloyd’s.

Lloyd’s suggests this will involve leaning on the UK ILS legislation in order to create something that is tax-transparent and likely tax neutral as well.

Lloyd’s wants to develop complementary investment opportunities in structured, ILS form, including ILS cell-structures, follow-only opportunities, and tracker products for investors and capital providers.

The aim is to make accessing Lloyd’s simpler to understand and action for capital providers and investors, opening up Lloyd’s to alternative reinsurance capital and ILS funds or investors, while also providing new and simpler ways for more traditional capital providers to participate as well.

Lloyd’s said it is embracing the following principles in delivery of its capital solution and platform:

  • Retaining the chain of security, and fairness and mutuality of the Central Fund, while significantly improving the capital rules and processes. The Corporation will ensure the changes made do not unduly expose the Central Fund, and that all capital providers, existing and new, benefit from the changes. All changes must benefit the whole market, not just specific segments, unless there is a compelling reason for the change.
  • The capital platform will be managed and promoted by the Corporation, but the design will be driven by the feedback from market participants to ensure it attracts a wide variety of capital, to support the risks being written. The platform will be built with open IT architecture to ensure it is widely accessible and will be underpinned by standardised investor documentation and reporting.
  • Market participants will remain free to determine which of these opportunities to take advantage of, and what new sources of capital they embrace.
  • Lloyd’s will attract new capital and risks to the market while retaining its strong underwriting discipline and financial strength.

A particular focus of the Phase 1 piloting period will be in making it simpler for ILS capital to participate at Lloyd’s, while also introducing new ways for capital to attach to risk at Lloyd’s including through ILS structures.

Lloyd’s said that by investing there, capital providers will benefit from the Lloyd’s brand, licences, ratings, and access to a broader range of risks than they can find in ILS structures from other jurisdictions.

In addition, the Corporation intends to release endorsed, standardised documentation and reporting requirements, to offer investors transparency, consistency and reliability in their ILS investments at Lloyd’s.

Managing agents will be able to provide a range of structured investment opportunities for ILS capital providers, and therefore benefit from this access to diversified financing and a lower cost of capital.

Existing Lloyd’s members haven’t been forgotten and Lloyd’s says they will benefit from these opportunities as well.

One of the pilot ideas being developed includes a proposal for a syndicate supported by private capital, Lloyd’s says.

The capital platform will also enable cost-efficient access to follow only capacity as well, which can really benefit players at Lloyd’s, by enabling them to pull in capacity as required through the capital platform to boost their underwriting capacity for specific deals.

It’s not to the liking of all investors though, some of who prefer to access insurance-linked returns through funds or structures where a manager adds alpha and is more selective in the portfolio of risks they back. But for some it may be attractive, particularly the more traditional capital providers at Lloyd’s for who this would offer a more flexible way to back underwriters.

There’s also a more beta style investment proposal for a tracker that would comprise following capacity “designed to ‘track’ multiple syndicates across a single line, or a range of lines, of business.”

For investors backing ILS structures that follow performance of counterparties, such as quota share or sidecar portfolio strategies, this could be a very attractive option to add investment exposure to the Lloyd’s market on a line by line basis.

Continuing in its ambitious vein with the Blueprint, Lloyd’s said that it wants the first ILS transaction to be placed using its capital solution in 2020, while it aims to have the entire platform solution delivered by the end of 2021.

Lloyd’s said this first ILS transaction in 2020 will feature a “tax-transparent ILS at Lloyd’s through the new capital solution.”

That is an ambitious roll-out timescale.

But then it needs to be, as for every month that passes when Lloyd’s is not an easy marketplace for ILS capital to attach itself to risk investors find other ways to access the insurance and reinsurance linked returns they are looking for.

In reality, this could just be a UK ILS transaction, using a cell of a multi-use insurance SPV vehicle licensed in the UK, but leveraging data flows from the capital solution to provide two-way reporting and a flow of risk for the counterparty and investors. That would meet this pilot Blueprint One goal, we’d imagine.

In particular this could see managing agents setting up UK ILS structures that are able to access Lloyd’s through the capital solution and under the new capital rules the market sets.

Could this meet the use-case we laid out a few years ago, of providing a way to transform risk from inside Lloyd’s outside and into ILS funds more readily? Perhaps, that would be an interesting way for managing agents at Lloyd’s to work more closely with ILS funds and directly with investors, while bringing new and diversified capital into Lloyd’s.

Could that help Lloyd’s sustain its position in the global insurance and reinsurance market and its relevance for clients and participants?

It actually could, as capital and efficiency is what it needs to increase its share of global risk underwriting.

The Blueprint is definitely ambitious and delivery in the timescales laid out will be a challenge.

Also challenging will be getting consensus from the market and buy-in from participants, particularly as some of the initiatives will force incumbents to find more efficient ways to do their own business as well and could threaten disruption for some players in the market.

It’s going to make for a fascinating few years, watching the Lloyd’s market undergoing what looks set to be the most radical changes in its history.

How radical they prove in the end will come down to adoption and consensus from the market.

If fully implemented as the Blueprint vision suggests, then Lloyd’s could be a very different beast in three years time. Some of the changes will require incumbents to make significant adjustments to the way they do business and it could also put much more focus on the role of the Corporation as well, all of which suggests implementation may drag and be a challenging, possibly political process.

Capital and insurance-linked securities (ILS) market appetite has a chance to shape that beast and it’s going to be interesting to see how influential capital providers become in the future of Lloyd’s.

Implemented in the right way, this could be the greatest opportunity for Lloyd’s to harness as much capital as it could ever need for underwriting, while investors could benefit from one of the most attractive insurance-linked investment opportunities around.

Implemented poorly or not to its full potential, this could be the final chance Lloyd’s has to attract ILS style investors to the market in volume.

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