Lloyd’s plans to allow ILS investors increasing access to the market via its new London Bridge vehicle could be a “game changer” for the ILS sector, according to Ascot CEO Andrew Brooks.
Brooks said that current ILS structures made it difficult to build a “diverse and optimal” portfolio, being largely linked to catastrophe perils.
He said that London Bridge would allow investors access to portfolios including risks such as marine, terrorism and some long-tail casualty lines such as cyber, as the Lloyd’s reinsurance to close structure made the tail of these risks manageable.
It could also be used to allow ILS investors secondary liquidity for collateralised reinsurance on longer-tailed risk such as earthquakes, by selling on the development risk to allow collateral to be withdrawn, he suggested.
Finally, the structure would also allow managing agents and investors to easily expand when the market is set to peak, with an exit point built in, without spending money on infrastructure.
“If you believe in stringent cycle management, you can come into the class when the class needs new capacity and create new business, and you can have an exit,” the Ascot CEO said.
The executive made the comments in a panel discussion about Lloyd’s and the ILS market as part of the Trading Risk ILS week.
Lloyd’s announced at the beginning of the year that it had received regulatory approval for the special purpose vehicle London Bridge. This will allow investors to provide whole-account quota share to syndicates via funds-at-Lloyd's support, funnelled through an ILS cell company structure to reduce complexity for investors of dealing with Lloyd’s structures.
Lloyd’s CFO Burkhard Keese said during the panel discussion that it would provide diversity of capital sources to managing agents. “It is of utmost importance for our members and their syndicates to have all types of equity financing available to remain competitive and to optimise their cost of capital.”
On the investor side, Lloyd’s efficient global distribution model, financial strength and efficient capital requirements made it an attractive proposition for institutional investors, he added.
The new ILS structures could appeal to both private equity and long-term investors, said non-executive chairman of TigerRisk Michael Wade.
“The opportunity is for private equity to utilize the new UK ILS structures - and London Bridge in particular - as backers of managing agency syndicate start-ups at Lloyd's,” Wade said.
“ILS & Syndicate-in-a-box are ideal combinations for the next generation of Lloyd's start-up.”
He predicted that pension funds were more likely to back a market tracker rather than individual start-ups.
On the syndicate-in-a-box structure, Guy Carpenter chairman of global capital solutions, international Vicky Carter pointed to the example of the Bounce New Zealand earthquake offering as an example of where ILS capital could help Lloyd’s expand by offering parametric covers.
Carter said that the advantage of London Bridge was having the access to diversify portfolios across multiple lines, as investors might be concerned if portfolios were quite heavy on potentially correlating lines of business.
“The great thing about London Bridge and the access to Lloyd’s is having that ability to diversify portfolios across multi-lines, the capital efficiency that Lloyd’s offers, the rating that Lloyd’s offers and just the unique distribution into such huge sources of diversified revenue,” she said.
ILS Week 2021 will feature two further days of free-to-air webinars, with sessions on Future ILS Structures and ESG coming up on Wednesday and Thursday.
Separately, Lloyd’s is hosting an investor marketplace on Wednesday for investors to speak 1 to 1 with managing agents.
