The Lloyd’s of London insurance and reinsurance market must look to embrace new and alternative forms of capital which are showing an interest in the reinsurance sector as an investment opportunity, suggested chief executive of Amlin Charles Philipps in a lecture held in London yesterday. Speaking at an Insurance Institute of London lecture on ‘London vs rest of World – Is the London Platform still as firm?’, the CEO commented on the opportunity Lloyd’s has to take advantage of third-party capital.
During his time with Amlin, Philipps has held a number of positions in the London market, such as Deputy Chairman of the Lloyd’s Market Association and a seat on the Council of Lloyd’s, so he is well placed to comment on the Lloyd’s and London insurance markets future. It’s clear from the comments made in his speech that Philipps sees an opportunity for Lloyd’s to attract some of the third-party capital which has flowed into the reinsurance market, or that is sitting in the wings waiting for an opportunity to enter the space.
His comments are timely given the recent development which saw the largest investment manager in the insurance-linked securities (ILS) sector, Nephila Capital, enter the Lloyd’s reinsurance market by backing a new syndicate in the market. Asta Managing Agency Ltd. are setting up and managing Lloyd’s syndicate 2357 which will be backed by capital from Nephila Capital’s operations.
The Lloyd’s market has been cited by a number of investment analysts as a good opportunity for capital markets investors in recent months. The typical Lloyd’s model has seen the market operate in a semi-mutualised manner with a mix of capital from individuals, or ‘Names’, and corporations providing the backing for underwriters at Syndicates. That is not that far removed from the collateralized reinsurance market place which sees fund and private investor capital backing reinsurance companies, fund based entities or buying into transactions like catastrophe bonds and ILS.
The Lloyd’s model seems eminently suitable as an extension of the collateralized and ILS fund space, and for those operating in collateralized entities which are often unrated, moving into or backing a Syndicate, in the Lloyd’s market would allow them to access new business under the umbrella of Lloyd’s A+ rating and long standing reputation in the insurance and reinsurance market.
With investors keen to access the returns possible from insurance and reinsurance premiums, the Lloyd’s market could provide a good source of investment opportunities which might allow some of the collateralized reinsurance fund managers to significantly grow their assets under management. The rated nature of the market and trusted nature of the Lloyd’s name may prove just the draw to encourage investors such as pension funds, sovereign wealth funds and mutual funds which have to date investigated the ILS space but not yet committed to it.
Charles Philipps commented (as reported by Insurance Day) that those already operating at Lloyd’s must look to embrace the new forms of capital entering the reinsurance space or risk seeing their business diminish as opportunities go elsewhere. This is true, as if Lloyd’s does not find ways to attract this capital it will move in to other markets, such as we already see in Bermuda, where it can perhaps more easily establish operations in the insurance and reinsurance space. In this respects the Lloyd’s market is perhaps a more difficult place to establish business, but if Lloyd’s could find a way to enable investors such as hedge funds to more easily set up or subscribe to Syndicates it could attract a lot more of this capital.
Philipps also commented on pension funds, saying that Lloyd’s has an opportunity to target them as a new source of capital and that Lloyd’s could become one of the leading third-party capital backed reinsurance markets in the world.
With investors keen to access the returns possible in the insurance and reinsurance market, Lloyd’s has a chance to reinvent itself if it can find a way to accommodate these investors with as little frictional cost to them as possible. The Lloyd’s market was historically backed by third-party capital which funded underwriters and Syndicates, so leveraging the capital markets interest in the sector once again would not be a particularly foreign concept at all.