Follow-up from panel discussion at Lloyd’s

London has often been at the centre of innovation in (re)insurance and although it is a hub for ILS, Bermuda has taken the lead in this market with a supportive regulatory and taxation system and access to the main types of risks currently been protected by the so-called Alternative Capital. This ‘new’ capital coming to the insurance market has transformed the property catastrophe sector and is beginning to have an impact on other types of business. London needs to respond and not completely surrender the large and growing ILS insurance segment to other competing domiciles, but to use its underwriting, capital markets and asset management skills and concentration of expertise to build its own distinctive place in this market. Senior market practitioners have gone public with statements that “efficient ILS structures are needed to secure London’s future” and it is an aim for all those that wish the London Market to grow and prosper. It is therefore encouraging to see the UK Government committed to help address the regulatory and tax disadvantages London currently has for ILS. However, it will need individual insurers, reinsurers, ILS funds and consultants to also invest in this area and this will need to be supported by regulators and market organisations.

So how is London doing? A good progress assessment was obtained on 31 May 2017 when the LMA, in conjunction with Vario Partners LLP, organised an expert panel discussion on the impact and opportunities for the Lloyd’s market offered by Insurance Linked Securities (ILS). This was a well-attended event in the Old Library at Lloyd’s, with around 120 practitioners at all levels from the market. The experts were specifically chosen to provide different perspectives of capital markets engagement with P&C insurance risk. The panellists were:

• Rob Procter, Investor, Securis Investment Partners
• Rajiv Punja, Underwriter, Arcus Syndicate 1856
• James Slaughter, ILS sponsor, Liberty Mutual
• Des Potter, ILS structuring, Guy Carpenter Securities

with Bryan Joseph of ILS specialist firm, Vario, in the chair.

In their opening remarks, both Ken Curtis (Director of Finance, LMA) and Trevor Maynard (Head of Innovation, Lloyd’s) highlighted the double-digit growth of the ILS markets over the last ten years and their unqualified support for the HM Government’s initiative to establish London as an ILS centre.

What is ILS and why in London/ Lloyd’s?

Although the panel members had different perspectives on precisely what ILS was and where London currently fitted into ILS market development, the broadly consistent theme was, to quote James Slaughter, “ILS provided capital that needed to be connected to insurance risk” intermediated and underpinned by Lloyd’s acknowledged underwriting and claims management expertise.

Indeed, several times the panel highlighted the specific opportunity offered by the concentration of (re)insurance expertise existing in Lloyd’s and the London Market working with capital markets to leverage the underwriting talent that Lloyd’s offers. Rob Procter noted that access to talent was one of the key reasons for setting up Securis in London rather than Bermuda. Rajiv Punja, who was a member of the Credit Suisse ILS team in London prior to Arcus, agreed commenting that getting closer to the business and directly accessing risks entering Lloyd’s was one of the main reasons behind Credit Suisse establishing Arcus with capital backing from its ILS funds. Setting up a dedicated syndicate, without legacy issues, allowed him to put the processes and infrastructure in place to serve his investors in respect of analysis and regular reporting.

Des Potter reminded the audience that the use of ILS and collateralized reinsurance structures is well established and used by many market participants as an integral tool in risk mitigation for exposure in key risk areas. Whether the Lloyd’s market engaged directly with ILS providers or not, reinsurance pricing was being influenced by this new capital.

Challenges for ILS at Lloyd’s

There were, however, a number of issues that the panel highlighted as potential barriers for Lloyd’s and London’s success in this area. First was some of the archaic processes and accounting rules and regulations at Lloyd’s which made it difficult for capital markets investors to operate and report. Second was the cost of doing business in London relative to other markets, and thirdly competition from the existing ILS markets with established product, procedures, infrastructure and regulatory framework.

For James Slaughter the key to overcoming those barriers is for London to develop new products that demonstrate clear value to clients. Although processes can be improved, he argued that London and Lloyd’s should not seek to compete solely on price, but on the development of innovative products that have a higher value to clients. He argued that London’s location and reputation in the reinsurance market is unique and it is this that should be leveraged. Indeed, there seems to be significant interest from younger market participants to work in the ILS space, illustrated by the breadth and source of questions from the floor.

The Opportunities

Broadening the ILS space from pure property catastrophe related products was seen as the biggest opportunity by the panel. Rob Procter highlighted that currently less than 0.5% of global invested pension fund assets is allocated to insurance linked securities. Transactions such as Limestone Re by Liberty and Horse Capital by Generali clearly demonstrate the appetite from investors and the value to insurers. This view was supported by the results of a survey of attendees sent at the end of the seminar.

More than 80% of respondents saw ILS as an opportunity for the Lloyd’s.

Reflecting the perspective that collateralized reinsurance from Bermuda may be unacceptable in certain domiciles, more than 80% of respondents believed that there was an opportunity for Lloyd’s/London to exploit its embedded underwriting expertise and grow business in underinsured regions and in other lines of business e.g. specialty underwriting. Yet, it is still worthwhile noting that 70% of global natural catastrophe losses remain uninsured, despite the inroads that ILS and reinsurance markets have made.

Developing products outside the catastrophe arena is seen by many as an opportunity.

Interestingly, however, there was a wider range of opinions in respect of using ILS to manage the underwriting cycle. Perhaps, highlighting the different views of attendees, some regard ILS investors as long term capital partners, while other use them for short term reinsurance activities.

What Next?

So, what should the London market do next to make progress in this area? The focus should emphatically be on underwriting and leveraging the acknowledged talent in the market, not on “me too” strategies aimed at competing with other market solely on price. Developing and establishing new products and processes are seen as the critical next steps, particularly widening the ILS offering beyond purely catastrophe risk. The UK government’s proposed ILS initiative, if implemented, could assist by providing the necessary legal and taxation framework to underpin wider ILS development in London. However, as noted by the panel the development of new products and new ways of using available market data can be undertaken irrespective of the planned government intervention. Lloyd’s could also consider implementing some changes in its rules which would allow it to leverage its unique structure and bring ILS to London on a much-foreshortened timetable.

As outlined by Ken Curtis in his opening remarks, the LMA is keen to support the market. The feedback suggested that a ILS sub-group should be established to create a suitable framework for Lloyd’s and we are aware that progress has been made in this area.

Conclusion

ILS represents a glittering prize for London. More companies need to embrace its potential through innovation and new product development. These must exploit the existing strengths of the London market and build on its reputation as an innovator in (re)insurance underwriting and fund management.