Lloyd's has received regulatory approval for its new ILS special purpose vehicle (SPV), which CFO Burkhard Keese told this publication would give market members more options over financing without endangering its capital discipline.
The new vehicle, London Bridge Risk, is a UK-based protected cell company (PCC) that ILS investors can use to access the market, which will connect via quota share reinsurance to a Lloyd's member.
Services firm Horseshoe will manage the new ILS vehicle, which has been accompanied by the development of standardised documentation to speed up the process of registering a vehicle.
Provided investors' proposals use the standard documentation and stay within a set scope of permissions agreed with the Prudential Regulation Authority and the Financial Conduct Authority, setting up a new deal will be a case of a simple notification process rather than having to make individual regulatory applications.
Besides speed to market, the main advantage is what Lloyd's called the tax transparency of the structures – which, like other UK ILS vehicles, means that no tax attaches to the risk transfer deals but instead is paid by investors on their income – whereas members themselves pay corporation tax.
Keese explained that this avoided pension fund investors being double-taxed on Lloyd's revenue.
Lloyd's had opted for the structure involving a PCC connecting to a member in order to avoid creating "a second class of members" within the marketplace, Keese added.
It also means that all other Lloyd's processes involved in providing capital to support underwriting remain intact, including know-your-client tests and the Funds at Lloyd's calculation process and the like.
While Lloyd's feedback had shown that investors felt the process of setting up corporate members to directly access the market was difficult, this was necessary to some extent because members are essentially insurance companies, Keese pointed out.
However, the response from managing agents to the ILS proposals was "overwhelmingly positive", and Keese said he expected to see demand to use the new route to market from pension funds, sovereign wealth investors and US ILS managers backed by high-net-worth investors.
But the process of setting up the vehicles showed there was much more demand from the ILS market to access risk than the Lloyd's market has for fresh capital, the CFO noted.
"There's a lot of confidence in our rigour and the planning process."
The quota share deals underpinning London Bridge transactions could be tailored to target lines of business or whole account, although Keese said he foresaw more demand for the latter as investors are keen on accessing a diversified selection of Lloyd’s risk.
Lloyd's would not use the new ILS vehicles to bring in more capital, which would risk driving the market to another soft pricing phase, he emphasised.
"The bottleneck is not the investor side, it is how much capital is needed in the market," Keese said. "We are not using this to inflate Lloyd's capital."
The launch of the new London Bridge platform brings Lloyd's to the point of achieving its initial capital goals set out in Blueprint One, the CFO noted.
Besides the SPV platform, Lloyd's also introduced a banking-style app and portal to give investors more transparency over monitoring their Funds at Lloyd's and has rewritten its capital rules to make them clearer and easier for lay people to understand.
Final consultations and feedback on the latter will be held in late January but the Corporation has essentially ticked off the proposals under the “capital” element of Blueprint One.
Other ideas that it raised initially, such as the concept of introducing shorter-scale time frames for ILS investors than the three-year system of accounting, were not as much of a priority as many investors were happy to accept longer time frames.
Commenting on the news, ILS service provider Horseshoe said the London Bridge Risk PCC will provide international ILS and alternative capital investors an access point to the Lloyd’s market.
"This new PCC reaffirms the ILS potential of the London Market and hopefully this is the first of many more to be established in the UK,” Horseshoe CEO Andre Perez said in a statement on Thursday.
Clifford Chance, which advised Lloyd's on the platform launch, said the London Bridge structure demonstrated regulatory support for innovative use of UK ILS regulations.
The market standard template documentation meets Lloyd's capital requirements and market practices while at the same time having flexibility to accommodate a range of investment models, the firm added.
"It will facilitate capital efficient investment into Lloyd's and reduce the frictional costs and time otherwise required to establish and operate a standalone ILS investment vehicle."
