The announcement today of a new insurance linked system (ILS) for Lloyd’s of London’s insurance and reinsurance market will bring about a significant change in the way Lloyd’s participants can access capital markets and investors to acquire risk from underwriters in the market.
The story was broken by the Financial Times overnight, as we previously reported, but now Lloyd’s has released more information on its new structure linked to insurance (ILS), which is the second insurance company, not just the first expansion.
The new structure, London Bridge 2 PCC (LB2), is a new protected cell company, which has been established to have a wide range of insurance related business licenses (ILS) thus offering greater flexibility and choice to the market and investors.
Lloyd’s had been in talks with regulators about expanding the number of licenses for the London Bridge Risk PCC, Lloyd’s first ILS system to be launched in early 2021, but it appears the talks have changed to setting up a new vehicle instead.
Lloyd’s said this morning that it has now received the necessary approvals from the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) to set up its second Protected Company (PCC).
The new ILS PCC vehicle will provide “greater market potential and greater access to investors; a key future priority for Lloyd’s,” the market said.
Lloyd’s said it wants to further the success of its ILS structure with the new vehicle, as it will give the market and investors the opportunity to choose how they operate and link insurance or insurance risks with third-party capital.
The London Bridge 2 PCC provides a number of enhancements to what can be written, and how the responsibilities can be supported, as well as some changes in the way they work together, Lloyd’s explained.
LB2 provides “access to qualified investors, to invest in the Lloyd’s market,” Lloyd’s said.
Adding that, “Lloyd’s members and managers will be able to use the new vehicle to manage their capital and risk management needs by attracting new sources of payment and insurance protection.”
Importantly, the differences between the first models of the London Bridge Risk PCC are very important and answer many of the questions people have had about the need for the first Lloyd’s ILS vehicle.
Since the introduction of the London Bridge Risk PCC in 2021, it has been recognized that the number of licenses has not kept up with the requirements of both Lloyd’s participants and institutional investors.
London Bridge 2 PCC (LB2) has been approved for three more, Lloyd’s said.
First, for a Lloyd’s Corporate Member, as well as writing quota share reinsurance, LB2 can also write quota share reinsurance.
This is important, as London Bridge Risk PCC has been restricted to only listing shares by a member of Lloyd’s.
One point to note, is that the new LB2 PCC format will probably make the London Bridge Risk PCC obsolete, with the potential to create similar business models and a number of new functions.
Second, and this could be the most revolutionary addition, the new LB2 PCC vehicle will be able to provide reinsurance coverage, for major losses and share sharing, to Lloyd’s.
This therefore extends the scope beyond just Corporate members, which means that the ILS fund market can give their leverage to Lloyd’s Syndicates using a UK special purpose vehicle for Lloyd’s, rather than using their offshore houses.
The move, allowing syndicates to enter mortgage insurance through LB2, could be the most important step ever taken in the UK’s ambitions to become a major player in the global ILS market.
Third, for all subsidized assets, LB2 can pay for its recycling obligations through donations, and separate cells of the PCC, of interest or debt securities.
Previously it was dividend, which was good for a small portion of Members, but would have made it unattractive due to the loss of capital and the reinvestment arrangements of ILS and other businesses.
Lloyd’s said that the implementation of the new ILS vehicle has also involved the introduction of legal terms for the main documents that are being produced, which have been specifically designed to provide greater flexibility in trade and comply with regulations.
The number of Permits will also allow new cells to be installed and re-insured without the need for additional approval, providing the pre-defined permits and documentation are followed.
This also brings speed to the sale of inquiries and means that when Lloyd’s members, or members, enter the ILS arrangement through LB2, their renewal and expansion should be easier and faster to implement.
What is most important about ILS funds are investors, because they do not need to go through lengthy authorizations each time they renew, only to re-commit to the same partner on very similar terms.
In addition, as we mentioned earlier, Lloyd’s has a desire to expand its ILS services to longer and risk-free lines, and the reinsurance market approach (RTC) appears to be important.
As with the first London Bridge Risk PCC vehicle, Lloyd’s supported the program to develop the new PCC.
The LB2 PCC will be owned by the Orphan Charitable Trust, as was the case with LBR, which will supply the self-driving Transformer car to the market, regulated directly by the PRA and FCA.
LB2 is designed to provide independent services to investors, Members and/or Syndicates of Lloyd’s, depending on the type of reinsurance underwritten, by Artex Risk Solutions managing the insurance, we understand.
Burkhard Keese, CFO of Lloyd’s commented on the matter, “I am pleased that we are able to build on the success of our first risk transfer vehicle to offer the market a new vehicle with more power, thus helping market participants to have more options. attract investors funds in capital markets to support their records at Lloyd’s.
“Both PCC vehicles will support the traditional funding and risk management processes at Lloyd’s, while LB2 will provide an efficient way for investors to support the growth and diversification of the risk underwritten in the market.”
You can hear a keynote from Burkhard Keese, CFO at Lloyd’s, at our upcoming ILS conference in London on September 6. Register here to attend.