Lloyd’s expects ILS iSPV to be ready for use by year-end

The Lloyd’s insurance and reinsurance market hopes to have a new access point for third-party and alternative capital providers, including insurance-linked securities (ILS) investors, ready for the end of the year.

In announcing the next phase of its market modernisation and reform plans, the Blueprint Two, Lloyd’s revealed that it hopes to have a multi-arrangement UK Insurance Special Purpose Vehicle (iSPV) approved and ready for use before the renewals.

As we first explained back in July, Lloyd’s put its broader capital solution plans from Blueprint One on hold due to the pandemic, as COVID-19 forced the market to address issues of efficiency, modernisation and expense first and began to explore launching an iSPV.

Blueprint Two focuses on these areas of modernisation and efficiency, but doesn’t include much more detail on capital solutions at all. However, it does present what could potentially become a far more efficient way for risk to be marshalled into the market, matched with capital, managed and have its claims paid.

But getting the capital into Lloyd’s needs an improved capital solution and at least the continued focus on an ILS solution using the UK’s ILS regulatory regime is a step in the right direction.

Today, Lloyd’s said that it has “developed a new insurance special purpose vehicle (ISPV) that can be utilised by various sources of new capital.”

The market added that, “Our approach has included the development of standardised processes and documentation, all designed to make the process more transparent and quicker to instigate and to streamline the approach to regulatory approval for our investors.”

Lloyd’s put forward an application for the iSPV in September and now expects to receive approval this year, which is a relatively quick turnaround for the UK regulator.

Lloyd’s further clarified today that, “We are supporting the UK’s protected cell company (PCC) regime as the construct of the ISPV and we are applying to the PRA and FCA for approval of a new market PCC.”

For investors that may look to use such a structure, such as ILS funds that find accessing insurance or reinsurance returns from the Lloyd’s market attractive, the good news is that this could be ready for the all-important January renewals.

Lloyd’s said this ILS and multi-arrangement iSPV initiative is being progressed with, “The aim of getting it launched and ready for use, before the end of the year.”

We’d been discussing the opportunity for Lloyd’s to embrace the UK ILS regulations and tightly connect a UK ILS structure to itself since back in 2017.

It appears that this will now happen and soon. Lloyd’s CEO had recently said that the ILS offering it produces would be different, so it will be interesting to see how flexible it is for investors looking to source risk from within Lloyd’s and what functionality this iSPV offers for connecting risk and capital.

Getting the iSPV ready for year-end is one thing, the next question is who will use it and by when?

We could envisage some Lloyd’s syndicates seeing it as a potentially effective way to bring third-party quota share reinsurance capacity to support their growth at 1/1 renewals perhaps.

Or for ILS funds that transact with Lloyd’s syndicates to leverage the iSPV to enter into their excess-of-loss reinsurance and retrocession contracts with syndicates that are open to using the new structure.

That alone would be a win for Lloyd’s, as it will be able to tout the success of its ILS initiative.

But will it be truly innovative and a frictionless way to allow capital to enter the Lloyd’s market and attach with the risks within it? Time will tell.