Lloyd’s plans for third-party & ILS capital appear pushed back

Lloyd’s of London appears to have lowered the priority level of its plans for welcome insurance-linked securities (ILS) capital into the insurance and reinsurance marketplace, as three other initiatives from its Blueprint One are set to be the immediate focus.

When Lloyd’s revealed its ambitious “Blueprint One” last September, the plan to “build the most advanced insurance marketplace in the world” placed a heavy emphasis and prioritisation on creating new capital rules and processes to achieve a goal of making it simpler for ILS capital to access the market.

In fact, making it simpler for ILS capital to participate at Lloyd’s, as well as introducing new ways for capital to attach to risk at Lloyd’s including through ILS structures, were seen as a particular focus of the Blueprint One Phase 1 piloting period.

This so-called capital solution was designed to make it easier for capital to enter and easier for those underwriting at Lloyd’s to use that capital, while also providing a range of risk and return opportunities for third-party investors looking to access the returns of insurance and reinsurance business in the market.

As we explained at the time, this was set to include the development of complementary reinsurance investment opportunities in structured, ILS form, including ILS cell-structures, follow-only opportunities, and tracker products for investors and capital providers.

The pilot phase saw ILS and capital solutions being touted as key, with Lloyd’s saying that by investing there, capital providers would be able to benefit from the Lloyd’s brand, licences, ratings, and access to a broader range of risks than they can find in ILS structures from other jurisdictions.

The Corporation of Lloyd’s also said it intended to release endorsed, standardised documentation and reporting requirements, to offer investors transparency, consistency and reliability in their ILS investments at Lloyd’s.

While market participants such as managing agents would be able to provide a range of structured investment opportunities for ILS capital providers, and therefore benefit from this access to diversified financing and a lower cost of capital, and benefits for existing Lloyd’s members were also highlighted.

Plans change of course and a program of works like the Blueprint One is a significant undertaking and requires buy-in from the market and its members, as well as its key capital providers (which are largely corporate remember).

Now, Lloyd’s has, after consultation with the market and based on feedback received, decided to prioritise other initiatives from the Blueprint, while the capital solution appears to have moved back somewhat.

Lloyd’s said, “Following feedback received from the Lloyd’s market during the transition and planning phase (October 2019-March 2020) the development of PPL as a complex risk platform has been confirmed as a Phase One delivery priority, alongside the coverholder solution, which is foundational to the risk exchange, and the claims solution, which will significantly improve customers’ experience.”

No mention of the capital solution, which appears to no longer be a priority for this Phase One delivery of the Blueprint and Future at Lloyd’s.

“Focusing our efforts on these workstreams, including delivery of proofs of concept, will drive tangible progress in 2020 across the solutions that the market has asked us to prioritise,” Lloyd’s said.

Adding, “In parallel, Lloyd’s will continue to develop a number of foundational initiatives that create essential infrastructure and enablers. These include data and technology architecture and the modern syndication of risk, including the practice of lead-follow.”

Some of those foundational infrastructure initiatives are no doubt going to assist in delivering capital solutions further down the line, but for any ILS investors hoping that access to Lloyd’s insurance and reinsurance business may open up soon, it’s perhaps best to look to the other routes to accessing the returns of underwriting at Lloyd’s at this time.

Lloyd’s said a detailed update on the Future at Lloyd’s Blueprint One will be made available online on 26th February, which should provide more detail on the roadmap for the program of work, although Lloyd’s only said that detailed plans would cover development and execution through 2020.

“We are committed to building on the investments already made by the market, together with maintaining the ambition we set out with to create the world’s most advanced insurance marketplace,” Lloyd’s said.

Blueprint One is a significant investment, so spend has to be allocated wisely and the wishes of the existing market players must be prioritised.

Within Lloyd’s there is no doubt some challenges emerging over this prioritisation efforts, as it cannot be easy to keep all participants and stakeholder happy, while trying to ensure that what’s delivered provides value for money and really does position the insurance and reinsurance market for future success.

With a huge £300 million raised to help pay for these efforts, the initiative will be highly politicised within Lloyd’s.

It’s possible, of course, that the wishes of incumbents may be to enhance their efficiency first, to help them compete with ILS capital, rather than to help ILS capital enter the market and compete more with them.

Whether that is the case, proving it a short-sighted decision to de-prioritise the capital solution, remains to be seen. The proof will be in how Lloyd’s delivers on the first phase initiatives and whether they offer transformational benefits for incumbents, or not.

As at the end of the day this is supposed to cement the markets future, which means cementing the participants future.

Something that is extremely challenging in a fluid and highly competitive insurance and reinsurance marketplace, where opportunities exist for players to embrace efficiency by leveraging platforms outside of strict market control as well.