Lloyd’s of London hopes a new investment structure it has agreed with UK financial regulators will attract billions of dollars in alternative capital and boost its competitiveness with other hubs such as Bermuda in the growing market for insurance-linked securities.
A centuries-old insurance marketplace, Lloyd’s launched the first phase of its “London Bridge” programme last year. It allowed investors such as Canada’s Ontario Teachers’ Pension Plan to gain exposure to the market’s underwriting profits — and losses — through a reinsurance arrangement with a Lloyd’s insurer, without incurring corporation or withholding taxes. The programme has drawn in $200mn for Lloyd’s.
The second phase, due to be announced on Wednesday as “London Bridge 2”, marks a substantial expansion to the programme and Lloyd’s ambitions, according to plans shared with the Financial Times.
Lloyd’s, which is made up of more than 50 individual underwriting firms covering big and esoteric risks ranging from oil tankers to footballers’ legs, has been traditionally reliant on individuals and insurance firms for the capital that backs insurance contracts. But in recent years it has thrown the doors wider to money from outside investors.
New features in the London Bridge 2 scheme include allowing the reinsurance contracts to be funded by debt securities for the first time, opening the door to a wider array of investment funds.
They also simplify some regulatory hurdles as well as expanding the agreements into what is known as excess-of-loss contracts, where reinsurers take on exposure for an insurer’s losses beyond a certain level.
Excess-of-loss policies dominate the $90bn market for insurance-linked securities, an alternative form of reinsurance that includes catastrophe bonds, which pay out after events such as earthquakes.
Lloyd’s chief financial officer Burkhard Keese told the Financial Times that it amounted to a “major step” for London’s insurance market, allowing it to regain its competitive edge against other offshore jurisdictions that specialise in insurance-linked securities. He said billions of alternative capital could be drawn into Lloyd’s through the programme.
“The speed of possible execution of transactions is now super fast, and we are at least as quick as other jurisdictions can be,” said Keese. “It is the speed of execution that is awfully important for potential investors.”
UK financial regulators have come under criticism in recent years from executives who argued that the slow pace of sign-offs for insurance-linked securities was leading to London losing business to other financial centres.
Keese predicted that the market’s “reinsurance to close” mechanism at Lloyd’s — where underwriting books are effectively closed after three years and reinsured — would allow other areas of property & casualty insurance, such as professional indemnity, to be structured for ILS investors.
An investment through the London Bridge platform — managed by insurance-linked securities specialist Artex ILS Services UK — works as a collateralised reinsurance contract with a Lloyd’s insurer, which is contained in a “cell”. The cell is not subject to corporation tax on its profits or withholding tax on distributions, Lloyd’s says.
The market for insurance-linked securities has grown in recent years as underwriters look for places to lay off their risks, while investors are lured by returns that are less correlated to traditional financial markets.
Lloyd’s said it had received approval from the Prudential Regulation Authority and Financial Conduct Authority. The PRA and FCA declined to comment.