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The Lloyd’s chase for ILS and other business

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Through Britain’s forced economic separation from the Continent, Lloyd’s of London is far more focused on emerging as a more digitally conscious entity in preparation for its leadership role in the 21st century’s new insurance world order.

Part of that new focus includes Lloyd’s awareness of the Insurance Linked Securities (ILS) business. This is, of course, of particular interest to Bermuda markets.

ILS are financial instruments with values driven by insurance loss events. Insurance risks in combination with the capital markets create a new method for insurers to spread their risk and raise capital. The ILS market is therefore appealing for insurers and investors.

Louise Charleson, of Ocorian, recently told Artemis that the ILS sector is prevailing, particularly in Bermuda. The Covid-19 pandemic has caused cross-border supply-chain disruptions, fluctuating industry and country risk factors, and excessive volatility in the capital markets.

Ms Charleson reported losses in the energy and financial sectors, but growth in tech, communication services and consumer discretionary sectors.

Bermuda Monetary Authority statistics show that almost half of all new insurers registered in Bermuda were Special Purpose Insurers over the 18 months through August. SPIs typically facilitate the transfer of specific insurance risks to the capital markets through the issuance of ILS.

Lloyd’s CEO John Neal said: “We were just slow in defining the ILS opportunity in London. It is completely different to Bermuda. We don’t operate with the same regulatory and tax environment. It is just different. That’s why I think there is such a complementary conversation between Bermuda and London.

“And in fact we use that structure innovatively to buy some reinsurance protections ourselves for our central assets. What we are trying to do with Lloyd’s is do what Bermuda has done well, and that’s really think through the lens of the stakeholder.

“So, if capital is looking to deploy, how will it deploy? And ILS is an important part of that consideration. What do the products and services look like for the customer? How does distribution work efficiently? It is all part of that thinking, modernising the [Lloyd’s] market.”

ILS Bermuda reported a catastrophe bond market size of nearly $42 billion at the end of-third quarter 2020, making the Bermuda Stock Exchange by far the world’s leading exchange for ILS, with 503 listed issuers and nearly $40 billion in market capital outstanding, representing almost 95 per cent of market share of global ILS.

But Lloyd’s will not just concentrate on ILS business. They see it as just one area that requires more of their attention.

Mr Neal says: “For me — and others may think differently — you have to play to your strengths. Lloyd’s has a 25 per cent market share of US surplus lines business, so it is clearly our strongest suit. So our No 1 priority should be on US business. It’s the only thing that is going to move the dial, if you think about it from a growth and opportunity perspective.

“So, I would think US first. I’m not embarrassed to say it. I would say Europe second. We have to design that Lloyd’s model in Europe. What could we actually be? And when you look at emerging markets in Asia and Latin America, you just have to be thoughtful around where you place your bets.

“But it’s like saying Europe; there is no Europe. There is a France, a Germany … they are all different. The same is true of Asia. You have to look at what markets you are going to be successful in, and concentrate your efforts a little more strategically.

“So that’s the game plan — US, Europe and then some strategic bets in emerging markets.

“Our primary US office is in New York and there are three other satellite locations in other US cities, so we don’t need any more people in the US.

“We have a credible person for reinsurance business in Japan. That’s a mature business. We’ve naturally got an interest in China and India. But that is a long, long, long-term plan. And the rest of the concentration is South-East Asia.

“Latin America? The logical thing to do is to hub through Miami and partner that business up with the US business. So we are treating North America and Latin America together for the time being.

“If you look at Lloyd’s gross written premiums of $50 billion, 50 per cent is in North America [US and Canada]. So, it’s our mainstay — $25 billion.

“Europe is only 8 per cent of what we do. It’s only about $4 billion. So Lloyd’s has always been significantly underweighted in Europe, which is why I say it is a painful process to have gone through [establishing a Lloyd’s company in Europe] for a relatively small part of the book of business.

“But [the other way of looking at it is] we carefully should get bigger in Europe. I just think we need to be thoughtful about it.

“The US market is set up for Lloyd’s. The whole concept of a surplus market versus an admitted market kind of fits the Lloyd’s model.

“We need to think that through in Europe. What does surplus look like in Europe and where can we patch and add value and be complementary to the domestic players.”

Mr Neal says that for Lloyd’s the potential in Europe is very significant over time. His strategic plans to re-engineer an identity for European business will not complete in a year or two. He sees it as much more long term, with planning and activities over the next five to ten years.

John Neal, CEO of Lloyd's (photograph supplied)
The Lloyd's building: the “inside-out building” of Lloyd's of London (File photograph)

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Published December 28, 2021 at 7:55 am (Updated December 28, 2021 at 7:55 am)

The Lloyd’s chase for ILS and other business

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