Lloyd’s of London still aims to attract more alternative capital providers and products into the market by the end of 2018, as its interim milestones remain unchanged, and will revisit the Index featuring loss ratios and data on the insurance market’s performance, at the end of this year, Inga Beale said today.
However it appears that the Index work really involves keeping insurance-linked securities (ILS) players on the outside, while Lloyd’s syndicates and members remain the underwriters of risk, and answering a question from Artemis today, Chief Executive Inga Beale gave some insight into this.
Lloyd’s had delayed the development of the Index due to its work to prepare for Brexit taking priority. With the announcement of its new Brussels base today, Lloyd’s has made good steps there and so the Index may get back onto the agenda.
Beale said that the Index would have meant that capital providers would not have needed to come into Lloyd’s and get “closer to the risk”, rather that they would have been able to “play off an Index of Lloyd’s.”
The Index is certainly an attractive opportunity for ILS players, but given how the ILS market has developed over the last year or two, while this is almost guaranteed to be used, it is still perhaps just a distraction from the more meaningful access that ILS funds and alternative capital would like to the Lloyd’s underwriting market.
So is Lloyd’s stated milestone to “embrace alternative capital and new products and processes,” actually a realistic goal still, or something that will manifest as a watered-down initiative, as it seeks engage with alternative capital in a manner that protects its market participants.
Lloyd’s milestone states; “There will be an increase in both the number of non-traditional capital providers investing at Lloyd’s and non-traditional products being traded at Lloyd’s.”
However, if an Index is the result of Lloyd’s alternative capital ambitions by end of 2018, the investing will be outside of Lloyd’s and the non-traditional products created using the Index are likely to be traded outside of Lloyd’s market as well.
Beale’s comments that the Index would mean that ILS players did not need to get “closer to the risk” is perhaps telling, and she also said that Lloyd’s players are the “experts” when it comes to underwriting the risks.
But ILS fund managers want to gain direct access to Lloyd’s underwriting business, to underwrite their place in the market, as do other ILS capital providers.
ILS players are already providing capital as reinsurance and retrocession to Lloyd’s players, so gaining secondary access to Lloyd’s market risks. But as we now see across insurance and reinsurance, the real aim is to narrow the gap to the original source of risk, so generating the best margins and allowing the efficiency of the capital markets to have the greatest effect.
Beale said this morning that Lloyd’s hopes to revisit the Index by the latter stages of this year, as resources allow, and that this project remains an objective of the market.
The London ILS initiative was also cited by Beale as an alternative capital initiative that Lloyd’s is engaged with, as it will wait to see how its market participants can utilise it.
However it’s increasingly apparent that Lloyd’s will not be as connected to the London ILS initiative and resulting structure as had originally been envisaged when the first versions of the legislation pointed to Lloyd’s perhaps having some oversight over a transformer. Suggesting that the original ambitions of the ILS project had been to enable capital providers to connect more efficiently and directly into Lloyd’s.
As we wrote at the time, this would have been a game changer for Lloyd’s, as it could have had a structure that enabled capital to flow in easily to be used by its underwriters, so augmenting the market’s efficiency rather than simply taking its business away.
If Lloyd’s underwriters are struggling to make their own capital pay sufficiently, perhaps they’d be better off using someone else’s?
But, Artemis understands that there was pushback from Lloyd’s in the early stages of the London ILS initiative, and we’re told that among the highest levels of Lloyd’s leadership people were against the idea of moving too fast and bringing too much capacity in too quickly.
We’re told that some of the market players driving the London ILS work had pressed for a structure to be created that would enable ILS players to more directly access Lloyd’s underwriting business, and that would allow capital to connect, flow in and flow out more freely.
However, this was seen as a step too far too fast, sources tell us, as Lloyd’s felt it could herald a wave of capital flooding the market, with the resulting exacerbation of pressures and issues for existing market players.
It’s perhaps a shame that Lloyd’s didn’t go for the more radical approach, but it does have its members and syndicates best interests to protect. Whether the result of not engaging as deeply with the initial London ILS ideas will be positive or a missed opportunity, remains to be seen.
The ambition to embrace ILS more wholeheartedly clearly remains at Lloyd’s, but it increasingly seems like that will be on its own terms and with the protection of its market and players at its heart.
Whether this milestone of having more alternative capital investors and products in Lloyd’s by the end of 2018 will actually ever be realised now seems a little uncertain, as the initiatives Lloyd’s has engaged with would all involve more ILS business being transacted and invested in outside of Lloyd’s, rather than within it.
The completion of its Index would be a positive step, benefiting Lloyd’s, it’s market participants and adding a new option for the ILS market as well. The market will welcome it getting back on the agenda later this year, if priorities allow.
But will that be as beneficial to Lloyd’s as having structures which enable capital to more efficiently participate there, as the original vision of some driving the London ILS initiative perhaps could have realised? Probably not, and it seems increasingly unlikely any steps in that direction beyond existing SPS/SPA/Fund’s at Lloyd’s will be taken in the near future.