The Lloyd’s of London insurance and reinsurance market wants to make it a simpler place for capital to enter after the next major market-turning event, which is both a strategy to make the market an easier place to do business but would also be likely to dampen post-event price rises.
A report published today by Lloyd’s explains a process to; “Enhance and speed up the process of approving syndicate business plans in the aftermath of a market turning event (MTE), an insurable loss so significant it results in a rapid upturn in pricing.”
Liquidity after a major loss event is absolutely key to Lloyd’s, which remains a market made up of many businesses with some still quite small entities. Access to capital and capacity is vital to enable continuity post-event, as well as to ensure that the Lloyd’s underwriters are able to continue offering capacity at a time when many have had their re/insurance programs wiped out.
The report covers a number of ways the market would respond in the event of a market turning event, but the focus appears to be on enabling capital to come in to back Lloyd’s underwriters more easily in order to prevent the business going elsewhere.
Lloyd’s explains; “The last clear market changing event was caused by the World Trade Center attacks in September 2001, after which there were rate increases of approximately 40% across all classes of business.
“More than half the new reinsurance capital raised globally in the immediate aftermath of 9/11 went to Bermuda.”
There are numerous reasons why this capital went to Bermuda, but the main one is that Bermuda was a faster, more efficient place to establish a new underwriting business, re-capitalise an existing one, or indeed to set up collateralized vehicles such as sidecars.
None of that was at all simple in the London and Lloyd’s insurance or reinsurance market, hence it did not attract the initial flow of “fast” capital, although Lloyd’s players did benefit from capital injections further down the line.
But that’s not always quick enough to take advantage of any increase in rates and given the market generally accepts that any hard market scenario is likely to be short-lived these days, it’s imperative that the Lloyd’s market has processes in place to bring in capital and to maintain liquidity for its underwriting businesses.
In the past it has taken too long for new capital to be able to enter Lloyd’s. The number of large institutional investors that show an interest in Lloyd’s, but never actually get into the market in any meaningful way is high. It’s been deemed costly, time-consuming and ultimately it is more easy to access insurance or reinsurance linked returns in an ILS strategy these days.
But Lloyd’s remains hugely attractive to these investors, given the market’s unique underwriting abilities, breadth of business, attractive return profile and access to risk.
So making access to the market simpler for investors will no doubt help the market maintain post-event continuity, but it could also have more of a dampening effect on rates meaning that hard markets last an even shorter length of time.
For Lloyd’s there is a conundrum here.
Make it easier for capital to enter, new business plans to be approved, and possible exacerbate softening of rates even after a market turning event. Or continue to be a less simple place to do business, at first, and risk losing a significant chunk of the capital that would have liked to have been in the world’s oldest re/insurance market but simply found the task of gaining entry to onerous.
Lloyd’s explained that it will look to shorten the review and agreement process for both business and capital plans, to enable syndicates to make a swifter response in the aftermath of a major catastrophe, so that capital can flow into the re/insurance market more efficiently.
Jon Hancock, Director of Performance Management at Lloyd’s, commented; “We want to make it easier for syndicates to do business by focusing our oversight efforts on the important things. One important area where we can help is to make sure the Lloyd’s market is in a position to act swiftly and decisively to any future market-turning events. This is about stronger, smarter oversight.
“We don’t want to impose overly burdensome requirements on syndicates or insist on any unnecessary processes or paperwork. We want to make it as straightforward as possible to raise new capital. Doing so will ensure that Lloyd’s is even better prepared for once-in-a-generation market turning events.”
It’s a very positive step and perhaps signals yet another sign of Lloyd’s gradually being modernised, perhaps leading (eventually) to it being simpler to access the market for investors at times of less stress as well.
Will this make Lloyd’s a more attractive place for investors in future, perhaps. Can it help the market to operate more efficiently after a major loss? Definitely.
Access to capital and continuity for clients are both key for Lloyd’s, particularly in a time when new competitors are entering the market with a desire to make the insurance and reinsurance process as simple and efficient for their clients as possible.
But as capital enters the Lloyd’s market after event in a swifter manner, with less friction, it will dampen the rate rises that the underwriters and their capital backers would like to profit from, ultimately amplifying the widely held expectation that hard market peaks will never be as sharp or long-lived again.
But at the end of the day, if Lloyd’s doesn’t make this easier, and reduce the friction around market entry, it will lose business after the next major loss to regions and players that can raise capital immediately post-loss. But it is to be hoped that this move is not just a reaction to the state of the market, but also a recognition that there is a need to be more open and accessible to the re/insurance capital providers of the future.
Of course, Lloyd’s being Lloyd’s, it’s guaranteed that any lowering of the barriers will be done in such a way as to protect the market, its participants, clients and returns, as any such modernisation of course should. It’s to be hoped this doesn’t slow down the potential for a liquid pipeline of capital to be established after losses.
After the next market-turning event the capital markets and third-party investors will increase their stake in global re/insurance and it’s unlikely to be through equity-backed start-ups, or difficult and lengthy recapitalisation processes, when there will be smoother ways to deploy capital and extract the insurance-linked returns.
It looks like Lloyd’s recognises this and as a result things could get easier for investors looking at this market opportunity. But whether it will be the simplest and most profitable way for a major investor to access re/insurance returns after the next event remains to be seen.
Capital isn’t the only piece of the post-major loss puzzle for Lloyd’s. Six guiding principles have been published in the report:
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Principle 1: Market stability and payment of claims
Lloyd’s primary focus is on the stability of the market by ensuring it is solvent and liquid to ensure prompt payment of claims to affected policyholders.
Principle 2: Management of failing syndicates/members
It is likely that some syndicates/members will fail following an MTE. Lloyd’s will ensure that the run off of those syndicates are managed in an orderly fashion to minimise any wider impact to the market.
Principle 3: Stakeholder/data collection/coordination and communication
Lloyd’s would look to take a lead with coordinating interaction and collation of data with key external stakeholders (e.g. regulators, governments, rating agencies) minimising any duplication where possible.
Principle 4: Support the market
Support the market in responding to opportunities arising from an MTE which ultimately supplies capacity to clients. Where possible, activities in support of existing businesses may be prioritised ahead of new entrants.
Principle 5: Accelerate key processes
Lloyd’s approach will be commercial and pragmatic. This may include the use of an accelerated version of syndicate business and capital plan review/approval process.
Principle 6: Lloyd’s priorities
Corporation staff will focus on supporting the market in response to the event – potentially all other non-essential central activities will be temporarily suspended.