Lloyd’s explores multi-use iSPV structure under UK ILS regulations

The Lloyd’s insurance and reinsurance market appears to be actively exploring use of a specific insurance-linked securities (ILS) structure under the UK ILS regulatory regime, to help capital markets investors access risk underwritten in the market more easily.

Lloyd’s has been discussing the prospect of making it simpler for capital market or insurance-linked securities (ILS) investors to access the underwriting returns of risks written in its marketplace for some years.

Already, ILS investors and capital market institutions have found ways to do this, with numerous different capital market backed business models having emerged, from full syndicates, to sidecar syndicates, to the provision of reinsurance and quota shares, of capitalising Funds at Lloyd’s.

But, to date, none of them really make it significantly easier to deploy capital in any meaningful way into Lloyd’s without a significant frictional set-up cost being incurred.

With its Blueprint, Lloyd’s has promised a number of “other ways” for capital to access the returns of insurance and reinsurance underwriting in the marketplace and one is perhaps beginning to become a little clearer.

Way back in 2015, when the UK started to write its legislation and tax framework to enable insurance-linked securities (ILS) transactions to be domiciled and hosted in the country, Lloyd’s sat the heart of such a framework.

As we explained at the time, early versions of the legislation discussed Lloyd’s as being able to have some level of oversight of a UK ILS structure.

The structure discussed was a transformer vehicle and our sources at the time said that some involved in the legislative process had called for the UK ILS transformer vehicle to be able to “attach” to Lloyd’s to transform risks in or out of the market and make it easy for investor capital to connect with them.

This would have made the UK ILS regulatory regime a specific entry point for capital into the Lloyd’s insurance and reinsurance market, but this would have been almost a side door to the alternative capital markets and perhaps it was too early for such an initiative to gain traction.

Later, in 2017 we explained that the UK ILS regulations were pushing further away from a tight integration of any UK ILS structure with Lloyd’s itself.

“We understand that the ILS initiative had originally been looking for much tighter integration of an ILS structure with Lloyd’s, but sources said the market was not looking for such tight integration at this time and senior representatives at Lloyd’s pushed back on this angle of the regulations.”

Then, in 2019 and after many other articles related to the UK’s ILS ambitions, we wrote that Lloyd’s has a significant opportunity to embrace the legislation as it stood at the time.

“The real trick for Lloyd’s is in finding a way to integrate the UK ILS structure and its marketplace, perhaps allowing the multi-use iSPV vehicle to attach itself to the Lloyd’s market as a transformer, for getting capital in and risk out.”

In that same article we suggested this could be a step too far, but it now transpires this may not have been so far from where Lloyd’s ambitions currently lie, when it comes to use of the UK ILS regulatory framework.

In a document published yesterday Lloyd’s says, “If Lloyd’s is successful in setting up a multi-arrangement Insurance Special Purpose Vehicle under the UK regulations, it will be able to offer a way to access risk that investors recognise – an efficient Insurance Linked Securities (ILS) structure that gives the same economic and tax outcomes they are used to from similar non-UK ILS structures.”

That’s our emphasis on the key text above, that suggests activity is underway on an initiative to launch an iSPV that attaches to the Lloyd’s marketplace.

Sources have previously told us previously that Lloyd’s is engaging with the regulator on ILS and specifically a multi-use collateralised reinsurance transformer-style vehicle.

There’s no information on how Lloyd’s would put such a structure to work, whether it would be to enable ILS investors to support the market’s retrocessional needs. Or a conduit through which an underwriter at Lloyd’s could transact with investors directly and facilitated by Lloyd’s, as the iSPV owners.

Lloyd’s is also planning to standardise as much documentation as it can around such initiatives related to ILS, to make them simpler and more efficient for investors to engage with, as familiarity, speed to market and ease of use are all likely to breed repeat business as well.

So, if one of the original ambitions of the project to bring ILS transaction activity to the UK and London marketplace was to enable capital providers to connect more efficiently and directly into Lloyd’s, perhaps we will finally see this come to fruition.

We’ll have to wait and see, for now.

Lloyd’s would not be drawn to comment on how it is approaching the use of an iSPV at this time.

But just the fact it is exploring such a structure bodes well and could finally result in a more frictionless way for ILS to transact with parties at Lloyd’s and to source risk from that marketplace, while Lloyd’s participants could gain a new route to access ILS capacity.