Lloyd’s promises capital flexible access to risk in new strategy

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Lloyd’s of London, the world’s oldest and most traditional marketplace for insurance and reinsurance underwriting, has promised six key changes in its new strategic direction, one of which is allowing flexible capital access to a diverse set of risks written in the market.

Lloyd's of LondonLloyd’s prospectus was released today, dubbed the “The Future at Lloyd’s.”

In all honesty, there isn’t really anything unexpected in the initial announcement and detail is lacking around all of the proposed initiatives.

But the six key ideas or themes the Lloyd’s market intends to follow-up on bode well for those investors and underwriters seeking to gain more simple and efficient access to the returns of underwriting there.

Lloyd’s calls the initiatives “transformational” saying that they could “shape the future of the world’s (re)insurance market.”

It’s worth pointing out though that they are really all borrowed from the broader trends already playing out across the insurance and reinsurance marketplace, hence have been implemented already by distinct re/insurance players, or companies servicing the space. They’ve also been previously announced in the prospectus teaser a few weeks ago.

A few have actually been raised before over the last two decades during other modernisation efforts at Lloyd’s.

In the past Lloyd’s failure to take on modernisation ideas that were presented to it has hampered its position, so it is encouraging to see this concerted effort emerge in 2019.

The question then is whether these six initiatives are enough to boost the profile and relevance of the Lloyd’s market and sustain that relevance into the future. The jury will remain out on that until we see these fully implemented.

Lloyd’s said there is a focus on “delivering higher quality risk protection for the market’s customers,” as well as providing ways to, “simplify access to the global insurance market,” while also reducing the cost of doing business at Lloyd’s itself.

Work is expected to begin on building and delivering prototypes of each of the initiatives from October 2019, with some expected to be operational in early 2020.

Interesting, John Neal, CEO of Lloyd’s, said today that where available technology already exists that can deliver quick-wins the market will look to embrace them, which is encouraging.

The six initiatives are:

  • A platform for complex risk that makes doing business easier and enables efficient digital placement of the most difficult-to-cover risks.
  • Lloyd’s Risk Exchange through which less complex risks can be placed in minutes at a fraction of today’s costs.
  • Flexible capital that can simply and effectively access a diverse set of insurance risks on the Lloyd’s platform.
  • A Syndicate-in-a-Box, which offers a streamlined opportunity for innovators to bring new products and business into the market.
  • A next generation claims service that improves customer experience and increases trust in the market by speeding up claims payments.
  • An ecosystem of services that helps all market participants develop new business and provide outstanding service to their customers.

It’s unclear what the first means in relation to the second, as surely a placement platform or electronic platform should look to cover all the bases when it comes to risk transfer and placement.

Perhaps these two will be combined in years to come, but as we said previously Lloyd’s would do well to look to already established operators of risk marketplaces, as recreating the wheel may not be necessary here and allowing third-party designed risk exchanges to dovetail into the Lloyd’s transaction flow may provide greater flexibility and optionality for the future.

The third item is the one that is likely to pique the interest of insurance-linked securities (ILS) investors and funds the most, as flexible capital is truly what the ILS and capital market can provide.

It was expected that the prospectus would deliver a third-party capital and ILS friendly message.

But again, details are key here, as this could be anything from a sidecar of Lloyd’s, a layer in its retrocessional style protection tower. Or it could be something considerably more meaningful, such as a way for ILS funds to transform risks from participants more easily out of Lloyd’s and into their investment portfolios.

Integration between the Lloyd’s market and outside capital is vital. Conduits to channel risk and capital in both ways, efficiently and without friction, likely to deliver the greatest benefits to the market over the longer-term.

CEO of Lloyd’s John Neal commented during a briefing just now, “We will make it easier for new sources of capital to enter the market and attach to risk much more simply than it can today.”

The syndicate in a box is a concept that has been heard before in relation to Lloyd’s, in fact it seems similar to concepts that came out of previous modernisation efforts in prior years, but never gained adoption.

This could also be of interest to ILS funds, who may find a lower friction way to enter into Lloyd’s as underwriters appealing.

But the costs of setting up and operating at Lloyd’s will need to come down considerably if a syndicate in a box is to have really broad appeal, and how that would go down with existing full syndicate players remains to be seen.

Rather, the syndicate in a box reminds us of a bootstrapped or sandbox approach to operating at Lloyd’s, ideal for those with new product ideas or business models to test out before making a full entry into the market. But it could also be useful for testing out new capital (from ILS funds and investors) as well, prior to establishment of a more meaningful operation at Lloyd’s.

Improved claims services and the provision of other services are as expected, here there are leaps and bounds to be made for the market’s efficiency, if the right steps are taken and particularly if data flows are assisted and aggregated in useful ways to help participants at Lloyd’s operate more effectively.

It’s a bold set of changes, that if implemented well and quickly could help Lloyd’s to sustain its position as a leading marketplace for much longer.

In all seriousness though, Lloyd’s has a commanding role in global reinsurance and insurance that is unlikely to change significantly.

But how exactly these initiatives are implemented is going to be the driving force behind Lloyd’s future success. The devil really is in the detail and it will be very hard to predict the effectiveness of any of these initiatives until it is clearer what the intended delivery really is.

Commenting on today’s release of the prospectus and new strategic direction, John Neal, Lloyd’s CEO said, “Lloyd’s unique attributes – the ability to access unparalleled underwriting expertise, financial security and market access all in one place – are more relevant today than ever. However, a dynamic risk environment combined with rapid advancements in technology have fundamentally changed the world. Lloyd’s is changing too, driven by a desire to provide the best (re)insurance products and services available anywhere.

“We will succeed by harnessing the entrepreneurial and innovative spirit that is at the heart of Lloyd’s. Together we have a tremendous opportunity to reimagine Lloyd’s and build a marketplace that is future focused, highly responsive to the changing and diverse needs of our global customers, with a culture of inclusivity and innovation.”

Bruce Carnegie-Brown, Chairman of Lloyd’s, added, “Throughout its history Lloyd’s has always sought to reinvent itself by remaining at the forefront of insurance innovation. The proposals we have announced today represent the culmination of months of engagement with stakeholders across the market and around the world. I believe they will set Lloyd’s up for success for the years to come.”

Key insurance and reinsurance market stakeholders are behind Lloyd’s in its efforts to modernise and improve the marketplace.

Greg Case, CEO of Aon, commented, “Every nation, every business and every community has never faced greater risk and greater volatility than they do today. In publishing this prospectus Lloyd’s has identified promising ideas to develop innovative solutions that will allow the insurance sector to move more quickly, at far less cost and in a way that helps all involved address today’s greatest risks. We know that risks will continue to evolve. I also know that, working together, our sector will adapt and remain relevant to our clients today and in the years to come. I want to commend Lloyd’s for taking a leadership position on this issue with true conviction.”

Bronek Masojada, CEO of Hiscox, also said, “These initiatives remind us of Lloyd’s centrality to the global insurance market and its determination to remain central to it as the world evolves. We look forward to working with all our Lloyd’s colleagues to bring these ideas to realisation.”

Chris Croft, CEO of the London & International Insurance Brokers’ Association (LIIBA), explained, “At LIIBA we have welcomed the very collaborative approach that Lloyd’s has taken to drawing up these ideas and in seeking our help. We share a common central objective: a strong, vibrant, innovative Lloyd’s market must be a key part of the offering we make to our clients. The ability to find cover for clients that is simply not available elsewhere has always been at the heart of London’s unique offering. We must ensure it retains and grows that ability, and we look forward to discussing what happens next.”

Finally, Sheila Cameron, CEO of the Lloyd’s Market Association, said, “Today’s launch of “The Future at Lloyd’s” demonstrates John Neal’s commitment to put Lloyd’s at the front of the insurance flotilla. It offers an exciting view into how our shared marketplace can evolve and we are excited to work together with Lloyd’s on building out this braver future for the ultimate benefit of our customers.”

While the “structurally unprofitable” underwriting in the market adds urgency to Lloyd’s reforms, these initiatives are likely to be fast-paced in their implementation.

Hopefully that will give the market and those on the outside a quick view of their potential for success or otherwise.

These are positive steps to modernise the market, that could lay the foundations for more fundamental change in years to come as they have the potential to make up the building blocks of a new Lloyd’s marketplace paradigm.

It’s not a reimagining of Lloyd’s yet, as just a list of ideas and no real substance so far. But if fleshed out to provide really inspirational ideas on how to match risk and capital in the most efficient ways, all under the construct of a Lloyd’s marketplace, the end delivery could be something much more radical.

But will the leadership be brave enough to go all-out for efficiency and reduction of costs in years to come? Or will the status-quo at Lloyd’s still persist, under a slightly more shiny veneer of modernisation?

We’ll have to wait and see.

Also read:

Lloyd’s wants risk exchange tech. Lloyd’s Lab just selected one.

“Structurally unprofitable” underwriting adds urgency to Lloyd’s reforms.

Lloyd’s “prospectus” set to deliver third-party capital & ILS friendly message.

Lloyd’s 2018 results “not of the standard” expected: John Neal, CEO.

Lloyd’s can “nurture” alternative capital: CFO John Parry.

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