Swiss Re Insurance-Linked Fund Management

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Lloyd’s Central Fund cover has no direct ILS participation


There isn’t any direct participation from insurance-linked securities (ILS) funds or investors in the £650 million reinsurance or retrocession protection Lloyd’s has purchased to cover its Central Fund, despite nearly 70% of it being collateralised.

lloyds-london-buildingAs we explained earlier this morning, Lloyd’s has secured an innovative cover for its Central Fund that will provide it with a £650 million arrangement for five-years of annual aggregate reinsurance or retro protection.

As we said, the lower £450 million layer of the cover is fully collateralised and was transacted using a cell structure. But it turns out this was 100% financed by investment bank JP Morgan, with no direct participation from third-party investors or ILS funds.

Lloyd’s told us that the fully-collateralised layer, which is the lower or first loss layer of this Central Fund cover arrangement, was all funded by the investment bank.

The collateralised portion of the Central Fund cover was transacted using a newly established Guernsey based cell structure, named Constellation IC Limited.

Constellation IC is an Incorporated Cell of White Rock Insurance (Guernsey) ICC Limited , a subsidiary of Aon and Managed by Aon Insurance Managers (Guernsey) Limited.

Using a cell structure in this way has enabled Lloyd’s to effectively bring third-party capital into its structure, even though it’s not formalised ILS capital, rather being investment bank funding.

It is an example of how ILS capital could have been brought in though, as this is effectively collateralised reinsurance and as we suggested earlier today this may set the ground-rules for future ILS participation in the Central Fund cover.

It still has the same effect, of bringing a lower-cost and diversified source of reinsurance capital into Lloyd’s, providing protection and solvency capital benefits to the market and its members.

In addition, this is capital markets funding, even though it’s not true ILS capital, or the kind of institutional money more typically seen in insurance-linked securities (ILS) arrangements.

Aon Insurance Managers has again demonstrated its ability to provide large-scale ILS-like solutions, to bring efficient reinsurance and risk capital to clients.

Commenting on the use of the White Rock cell structure in the Lloyd’s arrangement, Paul Sykes, MD, Aon Insurance Managers (Guernsey) Limited, said, “The selection of White Rock Guernsey to bring capital market support to Lloyd’s of London is the greatest endorsement yet of Guernsey as an international insurance centre of excellence. I believe it’s our finest hour.

“This follows recent achievements facilitated by Aon in the jurisdiction including the first humanitarian Cat Bond for the Danish Red Cross and several mega deals for the de-risking of global pension funds.

“We are bringing risk and capital together in new and innovative ways that will drive the growth of the insurance industry, make insurance more relevant to the needs of customers and society at large whilst delivering the best prices to our customers and policyholders.”

Dermot Finnerty, Managing Director of the White Rock Group also said, “It is a fantastic achievement by our White Rock team in Guernsey to partner on this capital market support to Lloyd’s of London.”

The eight reinsurance companies that backed the £200 million layer above the collateralised portion of Lloyd’s Central Fund cover are Arch, Berkshire Hathaway, Everest Re, Hannover Re, Munich Re, RenaissanceRe, SCOR and Swiss Re. The reinsurer backed layer does feature pre-paid reinstatements as well.

There could be some third-party or ILS style capital within this, indirectly, of course.

For example, RenaissanceRe could have used capital from one of its third-party vehicles, or could cede a portion of the risk it has assumed from the Central Fund arrangement to one of its investor relationships. But we cannot be certain.

What we can be certain of though, is that while the majority of Lloyd’s Central Fund cover is from the capital markets and has been transacted in a manner suited to third-party capital, it’s not an example of direct ILS participation at all.

Also read: Lloyd’s secures £650m Central Fund cover, £450m of it collateralised.

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