Wednesday, December 14, 2022
HomeInsuranceLloyd’s of London: putting out the welcome mat for alternative capital

Lloyd’s of London: putting out the welcome mat for alternative capital

Lloyd’s of London wants to attract billions of pounds of fresh capital by lowering regulatory hurdles. That is a frisson-inducing message for those who remember the insurance market’s near-death experience in the 1980s. The reality is less dramatic. Efforts to attract alternative capital are unlikely to be transformative but worthwhile nonetheless.

Lloyd’s has lagged behind on insurance-linked securities (ILS), which allow investors to back insurance policies directly, bypassing traditional insurance companies. Bermuda dominates the global market, with $50bn of ILS listings on its stock exchange at the end of 2021.

The UK gave the green light to ILS in 2017. Ministers trumpeted the opening of a valuable new market, citing estimates that it would more than double from $90bn to $224bn by 2021. That did not materialise: the global ILS market has been broadly stable. Nor did the UK market take off — there have been just 11 ILS issues so far.

Red tape is partly to blame. So it is welcome that Lloyd’s, with the nod of regulators, is streamlining its processes. Its platform called London Bridge, which was expanded on Wednesday, offers investors a speedy, tax transparent way to participate.

Will investors want to take part? The appeal of ILS is their low correlation with other asset classes. They therefore provide a valuable source of diversification. Their popularity has been boosted by investors’ search for yield at a time of rock bottom interest rates.

Rising interest rates somewhat dent their appeal. The ILS market has also been hit by high catastrophe losses. Some investors have pulled out. Top-tier ILS managers lost more than $2bn, around 6 per cent of their assets under management in the second half of 2021, according to analysis group Trading Risk.

The ILS market could get a boost if Lloyd’s extends use of the securities to casualty insurance. Even if that fails to take off, Lloyd’s is right to open its doors to alternative capital. Ensuring access to the widest and cheapest sources of capital available should help it maintain its competitive edge.

City Bulletin is a daily City of London briefing delivered directly to your inbox as the market opens. Click here to receive it five days a week.



Please enter your comment!
Please enter your name here

- Advertisment -

Most Popular

Recent Comments