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Will Lloyd’s look to embrace third-party reinsurance capital?


Comments made two days ago by the leadership at the Lloyd’s of London insurance and reinsurance market, when announcing its annual results, may suggest that it is set to become more accommodating to capital from new sources and new markets.

Lloyd’s announced its annual results yesterday morning, demonstrating a very strong year in 2013 but, at the same time acknowledging that pressure and competition from both traditional and alternative sources of reinsurance capital remains high and may intensify as we move through 2014.

The Lloyd’s annual report states that the market is looking at its response to alternative reinsurance capital; “Work is under way to assess the potential impact of both the evolving strategies and actions of brokers and of the influx of additional non-traditional capital entering the market. The strategic plan will outline Lloyd’s response to these issues and identify specific actions.”

Inga Beale, just nine and a half weeks into her role as Chief Executive of the Lloyd’s market, also referred to the next iteration of the Lloyd’s strategic plan, due for publication in April, saying that it will include the market’s strategy for dealing with new capital from new markets.

When asked whether startups at Lloyd’s are being influenced by alternative capital, Beale said that Lloyd’s is indeed looking to encourage capital from new markets, which have not perhaps considered investing in Lloyd’s before.

Given the tone of comments made in the report and on the analysts call it is beginning to look like we could see new plans and possibly structures for attracting capital into the Lloyd’s insurance and reinsurance market in the strategic plan, due in April. Of course Lloyd’s has always welcomed capital from third-party sources, but what we are referring to here is the type of capital which wants to access the direct returns of the market, in a similar way to insurance-linked securities.

Nelson commented in the annual report; “Lloyd’s, as a market, has the opportunity over the medium and longer term to harness capital, from traditional and new sources, to meet the growing demand for specialist insurance. This will require imagination and innovation in developing the right structures – blending this new capital with the right approach to underwriting discipline, risk modelling and measurement, and appropriate pricing.”

Tom Bolt, Director of Performance Management at Lloyd’s, also hinted at the opportunity that Lloyd’s now finds itself faced with in terms of capitalising on interest in reinsurance from new sources of capital. Bolt said during the analysts call that he sees no change to the interest that investors are showing in reinsurance and suggested that the 16% return on capital made by Lloyd’s would be attractive to fixed income investors.

For new capital seeking to enter Lloyd’s there will be criteria to meet, such as needing to be able to show a business plan that suggests it will be profitable over the longer-term. Beale also said that new capital needs to bring in new business to the market, not just create churn or turnover.

That is interesting as churn is perhaps not a bad thing if the new capital entering the market brings with it a lower cost, longer term investment horizon and bigger backers, like global pension funds. Perhaps Lloyd’s needs to be more agnostic about churn and base its opinions on the robustness of the capital providers seeking to enter the market instead.

There are many large capital providers which would love to access the return of the Lloyd’s market but themselves cannot bring new business. Of course the new capital may find it can enter Lloyd’s through the managers it invests in currently, managers which could likely bring new opportunities with them.

Lloyd’s could leverage third-party reinsurance capital from the likes of global pension funds to counter facilities like the Aon and Berkshire Hathaway sidecar. Imagine if Lloyd’s, or a Lloyd’s controlled entity, managed its own full-follow facility, featuring capital backers from the global capital markets?

Lloyd’s could turn on and off the tap of such a capital facility and control the percentage of the market it had access to. Investors backing such a facility would benefit from a return based on the broadly diverse underwriting business that takes place at Lloyd’s, an extremely attractive insurance linked investment proposition.

Of course whether any of the recent statements result in an easier way for capital markets investors to enter the Lloyd’s market and access the returns of its diverse insurance and reinsurance business is uncertain (or some might say speculation). But if Lloyd’s is looking seriously at new sources of capital it really has to be considering the likes of the pension fund investors who are increasingly looking to gain exposure to the returns of the reinsurance space.

How Lloyd’s responds to the opportunity and challenge posed by new capital will be telling this year. The publication of a new strategic plan in April gives Lloyd’s the perfect chance to set out its stall as a forward-looking market which is open to sharing its return with a diverse range of investors, including the capital markets. It will be interesting to see what measures, if any, are taken to achieve this.

Finally, should Lloyd’s fail to find a way to accommodate more third-party capital, or fail to respond to it completely, it will risk someone else stealing their thunder. Some other enterprising city establishing a reinsurance market based on the Lloyd’s model, but leveraging pools of capital market investors to create a syndicated approach to a reinsurance underwriting market, is possible.

Domiciles such as Singapore, which has repeatedly expressed a desire to become a reinsurance hub for Asia with a market-based model similar to Lloyd’s, might just look at how to bring the capital markets into the heart of any reinsurance hub it develops.

It seems natural that Lloyd’s address its response to the growing interest that third-party capital shows in reinsurance sooner rather than later, before someone else gets a head start. Being second should not be an option for the oldest insurance and reinsurance market in the world.

Read our article from Wednesday morning on Lloyd’s results announcement:

Lloyd’s Nelson: £3.2bn profit, pressure from new capital to continue.

Also read some of our other recent articles on the Lloyd’s of London insurance and reinsurance market:

Lloyd’s can evolve to suit reinsurance market dynamics: Nelson.

New reinsurance capital, a challenge to Lloyd’s or an opportunity?

Lloyd’s Nelson: Alternative capital can help insurance grow to $2tn by 2025.

Lloyd’s Nelson warns on ‘systemic’ risk of alternative reinsurance capital.

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