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III. Insurance-Linked Securities
the turnkey route into Lloyd’s in establishing its standalone syndicate, Syndicate 2357. While Nephila partnered with Asta for operational purposes, the fund manager’s own staff underwrites the syndicate’s portfolio of property catastrophe industry loss warranties.
Lloyd’s has indicated that it is open to accepting syndicates from well-regarded alternative market reinsurers. In addition to standalone syndicates, special purpose syndicates, which are set up solely to underwrite a quota share reinsurance of another syndicate’s business for a year of account, continue to be a popular, less expensive entry route for ILS players into the Lloyd’s market. The most recent special purpose syndicate to evolve into a full-fledged syndicate in the alternative capital space was backed by China Re (launched with Catlin in 2012). Barbican and Credit Suisse may apply for full syndicate status for their SPS 6120. If the Credit Suisse-backed SPS did become a standalone syndicate, the firm would become the second ILS fund manager to back its own syndicate.
Alternatively, a sponsor can set up its own corporate member to participate on one or more existing syndicates, allowing its investors to take a synthetic equity share in their overall results. This is an attractive option pursued by ILS fund managers who want to provide their investors with access to insurance risks coming into the Lloyd’s market, while at the same time diversifying their existing ILS funds. However, this approach depends on obtaining access to the desired syndicates and, at times when there is overcapacity in the market, syndicates may not be willing to accept new investors. The Securis corporate member, for example, signed up to support a number of Lloyd’s syndicates in 2015.
ILS players want to be able to offer their investors access to the Lloyd’s global brand, license network and capital- efficient framework. It will be interesting to see whether the plans to promote London as an ILS hub will make it any easier for ILS players seeking to access the Lloyd’s market. Even if tax and regulatory reforms prove difficult to implement, ILS players will at least continue to have
Developments and Trends in Insurance Transactions and Regulation 2015 Year in Review
options to participate within the Lloyd’s market, which is a key factor setting London apart from other insurance or reinsurance jurisdictions.
J. Other U.K. Developments
1. Lloyd’s Insurance Index
In December 2015, Lloyd’s announced its plans to launch its own insurance-based index, the Lloyd’s Index, in the middle of 2016. The index will be based on loss ratios reported by syndicates at the corporation. The index will provide managing agents, brokers and other insurers with new options for managing risk through index-linked hedges and form the basis of index-related products that could attract the interest of the wider capital markets. The whole- market index is intended to be available to subscribers on a quarterly basis, with plans to add data sets broken down by class of business at a later date. We understand that Lloyd’s will spend the first few months of 2016 discussing the initiative with the market and regulators.
2. Bank of England Study
According to the latest U.K. Financial Stability Report, published and prepared by the Financial Policy Committee of the Bank of England (“FPC”) and released in December 2015, the FPC has, as a result of the potential for risk being distributed outside of the re/insurance market and the potential for it to create connections between insurance or reinsurance risks and other financial intermediaries, tasked the Bank of England’s staff with reviewing ILS and alternative capital during the first half of 2016. The FPC cites Cat Bonds as an example of risk being distributed outside of the insurance and reinsurance industry and into other parts of the financial system and notes that the growth of alternative reinsurance capital, while contributing to increasing levels of competition, “could give rise to new risks going forward.” We understand that this is the first time the Bank of England is to review the risks that it sees as potentially associated with the entry of alternative capital into the reinsurance market-place.
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