London Views
By LEN WILKINS
London Correspondent
On Nov. 10 Lime Street announced that Ontario Teachers’ Pension Plan Board will be the first investor to provide capital for Lloyd’s London Bridge Risk Protected Cell Company that will offer Insurance Linked Securities cover. Ontario Teachers is the administrator of Canada’s largest single-profession pension plan and has around $227.7 billion in net assets.
A Protected Cell Company is an insurance vehicle with multiple cells that are connected to the company’s core. This creates a single legal entity, in this instance, the London Bridge Risk PCC. The core then rents out individual cells to insurance facilities, each of which can underwrite its own specific risks.
A sponsor (in this case Lloyd’s) sets up the core PCC. Each cell is isolated from the others with separate assets and liabilities. Even though Lloyd’s is the sponsor, the PCC’s management services are provided by Bermudan-based Horseshoe, the world’s largest ILS service provider, which is an Artex Risk Solutions company.
Lloyd’s launched the London Bridge Risk PCC in January 2021. As a new investment platform, U.K. regulators’ approval is a key milestone for the Future at Lloyd’s strategy – being open to all forms of investment.
Market access was a problem for Lloyd’s in the past, but the PCC platform will make it easier for investors to access the Lloyd’s market and will benefit investors by offering a more transparent and efficient capital management process.
The PCC will provide an access point for U.K. and international investors to deploy funds in the Lloyd’s market. Lloyd’s members will be able to use the new vehicle to manage their capital requirements for underwriting by attracting new classes of investors, such as pension funds, and will benefit from reduced set-up times and lower transaction costs.
The first syndicates to use the system for providing reinsurance cover to members are CFC Syndicate 1988, Beazley’s Syndicate 5623 and Beat’s Syndicate 1416. Coverage will begin in 2021 and be expanded in 2022. Initially, capital in excess of $140 million will be provided, but this is anticipated to grow over time. Investors can access the market by entering into quota share reinsurance transactions with a Lloyd’s member and using standardized documentation.
This is the first time that a U.K. PCC was set up as a platform to allow investors to back and provide capital to members at Lloyd’s. Lloyd’s is the sponsor, but the company is owned by an Orphan Charitable Trust and will be regulated by the Prudential Regulation Authority and the Financial Conduct Authority.
Lloyd’s may have chosen the ideal time to offer ILS protections. Artemis, a news, analysis and data service specializing in alternative risk transfer, alternative reinsurance capital, catastrophe bonds and ILS, reported that catastrophe bond and related ILS business reached a record $17 billion in 2021. Property catastrophe bonds reached almost $10.4 billion in 2021 and are closing in fast on the annual record set a year ago of just over $11 billion.
Lloyd’s returns to normal
No one is overconfident, but it seems the U.K. is over the worst of Covid-19. Things are returning to normal gradually. During the pandemic Lloyd’s and the London market showed their ability to adapt and change, and the pandemic accelerated the modernization of Lloyd’s by some years.
At the beginning of October, people began using the London market and Lloyd’s building once again. While the market is not back to pre-Covid levels, at least people are getting together to make deals. Face-to-face meetings are also happening between seniors and juniors, so learning the complexities of insurance and reinsurance is resuming.
Market associations and committees recently sent a letter to brokers saying they will ensure that their members are in Lloyd’s every Tuesday, Wednesday and Thursday. Pressure is being put on underwriters to provide service five days a week and make visiting the underwriting room worthwhile for brokers.
While electronic trading kept the market ticking, the camaraderie of a team is difficult to keep up over a computer screen. At the same time, London recognizes that electronic trading has benefits. The next step will be to build a hybrid model that brings out the best of both systems.
Beazley launches ESG syndicate
Beazley is known for being a market leader with new ideas. Its latest is to set up a specialist environmental, social and governance syndicate. Beazley already received in principle approval from Lloyd’s to establish Syndicate 4321 beginning Jan. 1, 2022. The syndicate was established under the Lloyd’s Syndicate in a Box framework.
Syndicate 4321 will operate an underwriting consortium led by Syndicates 623/2623. A Lloyd’s consortium is a delegated authority arrangement where one syndicate accepts risks on behalf of other syndicates. Eligible clients that can meet the standards of the ESG scoring criteria will be able to access additional capacity from Syndicate 4321.
The company will use rating agencies’ scoring categorizations to determine which clients are eligible for additional capacity. Beazley told Artemis that it partnered with three rating agencies to provide ESG data, S&P, Reprisk and Sustainalytics.
Initially, the syndicate will accept, D&O, healthcare, financial institutions, London market U.S. cyber, property, marine hull, marine cargo and aviation business.
The only way for rates is up
The game of cat and mouse, also known as the London market renewal season, has begun in earnest. The sellers loudly talk about rate increases while the brokers discuss deals and express shock at the quoted rates. The problem for the buyers is when to commit. Go too early and you might end up paying more than everyone else; go too late and you might end up paying a lot more for less security.
The experts will see how the market shapes and judge when the best time is to buy or sell. Usually all attention is on rates, but this year, wording is under scrutiny. Wording reviews are demanded by reinsurers who are worried about future pandemics and their effects. The primary carriers have the same concerns and are carrying out the same exercises. Both sides learned from their business interruption claims experiences.
Reinsurers were deprived of their traditional Monte Carlo Rendezvous, but the Baden-Baden reinsurance conference went ahead as scheduled. Reinsurers who attended were adamant rates will rise. We have heard this before, but that was when the European losses were light and it was the U.S. and Asia that were producing major catastrophe claims. Now, London and Europe have to pay out some $11.5 billion following the German floods, and it doesn’t help buyers that Hurricane Ida’s losses are predicted between $35 billion and $45 billion.
There is no doubt the hard market is still with us. Reinsurance sources predict increases of 5-10 percent on clean European cat programs, and for programs that were hit, the prediction is 20-25 percent rate increases. The magic words “climate change” are on everyone’s lips, and climate change is blamed for Hurricane Ida. As a consequence, the major European reinsurers in attendance at Baden-Baden appear resolute in demanding rate increases at Jan. 1.
While primary insurers shudder from the cleaning up process and from paying increased reinsurance costs, London insurers are deciding how much they can charge. In practice, the talked about rates often tend to reduce when reality kicks in. However, one big difference between this Baden-Baden and others, according to one delegate, is that this time the primary market went home expecting to pay more.
Marshmallow solves problems
The identical twins who founded insurtech, Marshmallow, didn’t start the business because they loved insurance – quite the opposite. Some six years ago they were working on a start-up and heard about a South African emigrant to the U.K. who was quoted outrageously expensive premiums for car insurance.
The twins investigated and found traditional insurers not only cash in on emigrant drivers, but cash in on a lot of people because the insurers work from a default position of distrust and judge people based on impersonal and outdated systems, charging rates unrelated to driving ability, according to Marshmallow’s website.
Determined to take on the industry, the brothers developed an algorithm, and Marshmallow began to offer affordable car insurance to U.K. newcomers. The company grew fast (the second black-founded firm to exceed $1 billion valuation) and thought big. Beginning in a lounge of a Virgin Active gymnasium, their start-up attracted backers, such as Investec and tech investor Passion Capital, and sold more than 100,000 policies.
Compared to existing motor insurers these are small figures. Much of Marshmallow’s recent growth was achieved amid the pandemic’s reduced traffic levels, so the end of U.K. lockdowns potentially poses another challenge for the firm which plans expanding to Europe.
Marshmallow founders are Alexander and Oliver Kent-Braham, co-CEOs, and David Goate, CTO. “It was really clear again and again that insurers play this hugely pivotal role in society, yet they probably weren’t digitizing fast enough,” Oliver Kent-Braham said in an interview with Bloomberg. “We found that we were able to use data that other insurers aren’t using.”
Bloomberg Intelligence insurance analyst Kevin Ryan observed that the advantage insurtechs have is lack of baggage; they don’t have legacy systems to digitize, and they can be quick and agile.
Capacity auctions find buyers
Unlike in previous years, members of Lloyd’s syndicates now can auction off their memberships. There is only one auction a year, and this year’s took place over three days recently.
In auction one of syndicate capacity for the 2022 underwriting year, a total of $102 million of market capacity was up for sale involving 18 syndicates underwriting this year. The capacity sold for a total value of $33 million, or with each unit of capacity costing 32 percent of its value.
In the second auction, a total of $55.48 million of capacity involving 18 syndicates was sold for a total value of $14.98 million, or 27 percent. In the third auction, a total of $58.0 million of capacity involving 18 syndicates was auctioned at a total value of $13.7 million, or 23 percent.
Central Fund to net zero
Lloyd’s joined the U.N.-convened Net Zero Insurance Alliance and affirmed its commitment to transition all of its operational and attributable greenhouse gas emissions to net-zero by 2050. Lloyd’s already committed to reduce all the operational emissions at its landmark building in London to net zero before 2025.
By joining the NZIA, Lloyd’s will transition its Central Fund to net zero by 2050 and redirect capital flows to green investments. Within 12 months, Lloyd’s will publish a detailed roadmap to achieve this goal and outline interim five-year targets.
The Central Fund is an approximately $4 billion backstop funded by underwriting members, protecting policyholders and the market.
The market must be concerned that by limiting investments for the Central Fund, its advisors may not be able to generate as much income as they otherwise could.
While Lloyd’s will advocate and support all market participants to introduce and implement their own net zero plans in order to reach a net zero underwriting position for the market by 2050, Lloyd’s cannot insist on this. Lloyd’s can, however, embed the formal expectations in Lloyd’s market oversight framework, putting climate action at the heart of annual business planning cycles with syndicates.
By joining NZIA Lloyd’s becomes part of the Glasgow Financial Alliance for Net Zero (GFANZ). This U.N.-backed group is for financial institutions to make credible net zero commitments through the U.N.’s Race to Zero and includes over 250 financial firms from across the entire financial system. The firms are responsible for assets in excess of $88 trillion.
Cop26 leads to climate protests
Cop26, the United Nations 2021 climate change conference, led to a number of demonstrations throughout the U.K. Lloyd’s insuring fossil fuel producers led to protests before, but this time the protesters spilled 220 gallons of fake oil outside 1 Lime Street as part of their campaign to draw attention to the finance industry’s financing of fossil fuel production.
Even though Lloyd’s and other insurers have restricted their activities in insuring coal mining, Lloyd’s still insures oil exploration and production facilities, both on and off-shore. The activists protested Lloyd’s underwriting these risks and other fossil-fuel projects, including a tar sands pipeline in Canada.
Police arrested one protester for criminal damage after the protest organization, Insurance Rebellion, dumped the plant- and water-based liquid onto the street outside Lloyd’s from the back of a van.
The protesters want a total and immediate cessation of funds for fossil fuels.
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