Lloyd’s issues guidance and expectations for broker-originated reinsurance structures

As industry focus grows on designing efficient structures to enable capital to connect with reinsurance risk, Lloyd’s has issued guidance on its expectations for any broker-originated reinsurance structures, which is a strategy that Lloyd’s itself believes is likely to see increasing demand.

The issue of this guidance note from Lloyd’s comes on the heels of the high-profile news around Aon’s partnership with Blackstone on the vehicle widely said to be codenamed Cortina.

That strategy sees Aon looking to bring Blackstone into Lloyd’s, to support a share of the business it brokers in the market, which represents another signal of capital market and asset manager appetite to gain access to broadly diversified insurance and reinsurance market returns.

Lloyd’s framework for broker-originated reinsurance structures provides market guidance as to the approach, its expectations and what the approval requirements will be for broker-originated reinsurance structures.

The Aon – Blackstone news raised many questions, so this appears to be at least in part a response to that, to place some clarity around what Lloyd’s will tolerate and expect from those seeking to replicate, or design different structures to achieve similar outcomes (the outcomes being new capital entrants backing meaningful portfolios of risk underwritten there).

Third-party capital’s appetite to access returns from the reinsurance market in general and business from Lloyd’s has risen fast in the last couple of years.

At the same time, new structures and strategies are making it possible to bring capital market participants more deeply into the Lloyd’s market, in support of syndicates, so-called ReShares and broker facilities. In addition, the London Bridge structures have also provided more efficient mechanisms for routing third-party capital into the market’s underwriting workflow.

Lloyd’s explained in a market bulletin issued by Rachel Turk, Chief of Performance and Strategy, “The growth of broker facilities and third-party capital solutions has created an emerging opportunity for broker-led reinsurance portfolios supported by external capital. We expect demand for these structures to increase.

“We have today issued a clear framework for how these structures are overseen at Lloyd’s that will take effect from 1st January 2027. The framework is transparent, principles-based, and provides the market with clarity on Lloyd’s appetite, expectations and guardrails for such structures.

“The new framework seeks to support innovation and growth while maintaining underwriting discipline and protecting the Central Fund. It is anchored around Lloyd’s cross-cycle 95% net combined operating ratio target and establishes clear requirements relating to market concentration, ownership and capital, governance, managing agent capabilities,
underwriting guardrails, portfolio oversight and eligibility criteria.

“Consistent with Lloyd’s broader approach, broker-originated reinsurance structures are subject to the standard new entrant approval process and ongoing oversight arrangements.”

Facilities have existed at Lloyd’s for many years, including broker run facility structures.

But, in the past these have tended to have multiple markets backing them, largely traditional insurance and reinsurance players. Where as now, we see asset managers and capital markets players having facilities-of-one, of sorts, as they seek to derive exposure to an index, or index of a sub-set of the Lloyd’s markets underwriting business and returns.

As a strategy, it makes perfect sense, in delivering large-scale access to a broad and diversified swathe of risk. But for Lloyd’s, there is the rest of the market and its participants to consider, hence the issuance of guidelines to help the market understand what will be allowed and tolerated.

Lloyd’s has explained some of the features of its framework for broker-originated reinsurance structures in the market.

Any such venture will need to show its alignment with Lloyd’s cross-cycle 95% net combined operating ratio target, while they will initially be curtailed to a market-wide risk appetite of up to 10% of an individual broker’s treaty portfolio that can be placed into these structures.

In addition, Lloyd’s said that brokers cannot own or capitalise these reinsurance structures themselves. Of course, that would be a step too far over the boundary between broker and underwriter.

There has to be a minimum capital participation requirement from the member aligned to the managing agent of 19.99%, while at least 25% of capacity must be provided by the lead reinsurers, with the panel agreed by the managing agent.

Some business is considered out of scope for broker-originated reinsurance structures in Lloyd’s, including hybrid fronting carriers, MGUs and legacy providers, captive involvement needs a prior submit arrangement and there can be now exposure to Cyber war “type 4” language.

Interestingly, Lloyd’s also seems to want to see a commitment from those participating as cedents, saying, “Once the participation cede has been determined as part of the overall proposition, cedents must cede either all of their eligible portfolio with the respective broker to the structure, or none of it.”

While the managing agent must be sophisticated enough, in terms of reinsurance analysis and pricing, to challenge the assumptions provided by the broker.

Reporting and oversight will be key, with regular engagement with Lloyd’s and data sharing, as well as agreed guardrails needing to be in place that the capital provider and managing agent must contractually agree on.

Importantly, Lloyd’s does not want these structures running unfettered, saying, “If indexation of at least 70% has not been reached by year 3 of the structure, Lloyd’s and the managing agent will agree next steps which can include winding up the structure.”

Annual plans and any mid-year changes will need to be approved, as they are for other more traditional Lloyd’s underwriting structures. While standard new entrant capital allocation rules and timings will apply.

Finally and perhaps the most important guideline, efficiencies generated by the broker-originated reinsurance strategy must find their way back to the protection buyers.

Lloyd’s will expect the cedent to share in the efficiencies generated by the structure (both operational and capital) through the mechanism of a client dividend, the market explained.

Lloyd’s stated, “The framework applies to all broker-originated reinsurance structures seeking approval to operate within Lloyd’s and should be considered alongside the standard new entrant approval process.”

Alternative, third-party and capital markets investors are extremely interested in efficient ways to gain access to insurance and reinsurance risks at this time and over recent years Lloyd’s has itself shown that it is increasingly open to seeing new capital enter the market in more efficient ways.

It’s important to have some guidelines around it, so it’s good to see the market responding and issuing this bulletin.

However, it does raise one question. How many similar strategies of meaningful scale, backed by large capital market players (the Blackstone types), could and should Lloyd’s allow, without risking upsetting the broader market’s sentiment and equilibrium?

Of course, if efficient capital can be put to work to bring much more underwriting business into Lloyd’s that is a good thing, as long as discipline and prudence are observed.

But we all know what too much capital can do and there is a perhaps-challenging balancing-act to be followed, to keep the established market participants on-side as Lloyd’s itself evolves and broker’s increasingly marshal capital more directly to risk.