John Parry Director of Finance at the Lloyd’s insurance and reinsurance market said that the “Lloyd’s platform remains attractive to all forms of capital,” this morning in response to a question from Artemis on the markets ambitions to work more closely with ILS and alternative capital.
Lloyd’s has been becoming increasingly accommodating to alternative forms of reinsurance capital in recent years, moving from a defensive position when the rhetoric was high, to a desire to embrace and leverage alternative capital for its own benefit.
Only a few years ago Lloyd’s executives could not discuss alternative capital without suggesting that it was fickle, not likely to stick around after major losses and unlikely to pose a major threat to the market.
Today Lloyd’s recognises that it needs to be agnostic as to form of capital, as long as it provides incremental benefits to the marketplace and does not harm its traditional members.
That stance means that Lloyd’s has to take a softly, softly approach to alternative capital and ILS, slowly encouraging closer relationships and beginning to welcome ILS players into the market over the last few years.
Nephila Capital was the first with a syndicate at Lloyd’s, with Securis launching a special purpose syndicate alongside Novae and Credit Suisse the Arcus 1856 syndicate with the help of Barbican.
Other ILS fund managers are interested in accessing Lloyd’s, both through their own vehicles or through backing other Lloyd’s start-ups and structures, all of which demonstrates that the market is, as Parry said this morning during the Lloyd’s interim results analyst call, attractive to ILS capital.
Inga Beale, CEO of Lloyd’s, explained that the work of the UK Treasury and the London ILS taskforce to bring an ILS transformer type structure to the UK is also important for Lloyd’s.
Beale said that its important that the structure works for both alternative capital or ILS players as well as for the traditional Lloyd’s market membership and that this is where Lloyd’s has focused its input, to ensure an outcome that works for both sides.
She said that the UK ILS rules remain a “work in progress” but that she sees an opportunity from them for Lloyd’s.
“It’s great that the government is still pushing this forward despite Brexit,” Beale continued.
Parry also said that Lloyd’s market and its members already has full access to the range of alternative capital and ILS products, from catastrophe bonds to other structures and that alternative capital providers joining Lloyd’s is evidence of the market’s attractiveness.
Lloyd’s is of course a marketplace built on third-party capital, which began with private names capital and has more recently morphed into one where corporate members bring their capital to bear within the syndicated marketplace.
The next evolution of this has to be a lower-friction way to allow Lloyd’s members to leverage third-party capital, and a more lower-friction way for new capital providers to operate and tap into the markets depth of underwriting expertise.
During the analyst call today, Beale explained that the now-postponed Lloyd’s Index initiative (postponed due to Brexit) would have seen Lloyd’s positioned such that it ensured “Lloyd’s is at the centre of risk selection, we do the risk selection and pricing, while capital markets could be part of that and play off the Index without having to go to the risk source.”
That is exactly where we would see Lloyd’s benefiting, leveraging its expertise and that of its members to source and originate, analyse and price risks, while enabling capital markets or ILS players to support the underwriting, giving Lloyd’s access to a stream of fee income, as well as retaining a portion of the risks.
Lloyd’s and all traditional insurance and reinsurance players will likely see themselves increasingly positioned as analysts and pricers of risk, with capital markets capacity available for them to cede risks to in return for fees.
That means re/insurers would be getting paid for the value they create in analysing and pricing risks, while their balance-sheets would only support the risks most appropriate for them, with ILS structures able to absorb the rest for capital market investors.
Granted, our view is a bit further on from the vision of Beale and Lloyd’s at this stage. But the comments today suggest a continued evolution of Lloyd’s thinking about ILS and the future of its model, which is positive for the market and for ILS investors seeking increasing access to it in years to come.