The Lloyd’s of London insurance and reinsurance market has taken out a £650 million cover from an investment bank and reinsurers to protect its Central Fund against significant loss events, according to a report from the FT.
The Central Fund reinsurance, or perhaps retrocession, arrangement, will have a five-year term and is effective from January 2021.
The first £450 million of Lloyd’s Central Fund cover is said to be fully collateralised and has been provided using a newly established cell company and financed by investment bank JP Morgan.
It’s not clear at this time if there is any third-party investor participation in this first layer.
The remaining £200 million of the Central Fund cover has been backed by eight major global reinsurance firms, including Munich Re, SCOR and Berkshire Hathaway, the FT said.
The Central Fund cover has been designed to protect Lloyd’s and its members against major industry loss events, such as another global pandemic or future global financial crisis.
“In the event that something really, really big happens, this makes it much more safe for our policyholders that we will basically pay out the claims they are entitled to receive some money for,” Lloyd’s CFO Burkhard Keese told the FT.
The arrangement will provide aggregate reinsurance protection to Lloyd’s Central Fund from an attachment point of £600 million, up to £1.25 billion, the report says.
Keese also explained that the new Central Cover protection has a lower cost of capital and as a result should help Lloyd’s to underwrite more business.
As a result, Keese suggested to thee FT that Lloyd’s could write 30% to 40% more in overall premiums, thanks to the leverage the cover will provide.
The Central Fund at Lloyd’s is a roughly £3 billion backstop funded by its underwriting members, protecting the market in times of stress.
Aon acted as the placing broker for the Lloyd’s Central Fund cover, the report says.
Lloyd’s is set to seek regulatory approval for the new Central Fund protection and expects that the arrangement will improve its core solvency metric.
The last claim against the Central Fund was back in 2007 and aggregate claims against it have never breached the level required to trigger this new cover, Lloyd’s said.