In response to growing industry demand for efficient mechanisms connecting capital with reinsurance risk, Lloyd’s has released guidance establishing its regulatory expectations and approval requirements for broker-originated reinsurance structures.
Lloyd’s guidance follows news of Aon’s partnership with Blackstone on the broker-originated reinsurance structures vehicle codenamed “Cortina.”
This strategy sees Aon looking to bring Blackstone into Lloyd’s to back broker-originated business, highlighting capital market demand for diversified insurance returns.
Lloyd’s framework for broker-originated reinsurance structures provides market guidance as to the approach, its expectations and what the approval requirements will be for broker-originated reinsurance structures.
The guidance from Lloyd’s seems partly designed to address the questions triggered by the Aon-Blackstone news, offering clear parameters regarding what is acceptable for entities aiming to replicate or develop alternative structures with comparable goals – namely, attracting new capital entrants to support significant risk portfolios underwritten within the market.
The surging popularity of broker facilities and alternative capital partnerships has unlocked clear commercial demand for broker-led portfolios, yet growth cannot come at the expense of underwriting discipline and protecting the Central Fund.
The new framework is anchored around Lloyd’s cross-cycle 95% net combined operating ratio target and establishes clear requirements relating to market concentration, ownership and capital, governance, managing agent capabilities, underwriting guardrails, portfolio oversight and eligibility criteria.
Consistent with Lloyd’s broader approach, broker-originated reinsurance structures are subject to the standard new entrant approval process and ongoing oversight arrangements.
Key features of the framework include an initial market-wide risk appetite capping placements into these structures at up to 10% of an individual broker’s treaty portfolio.
In addition, Lloyd’s said that brokers cannot own or capitalise these reinsurance structures themselves.
There has to be a minimum capital participation requirement from the member aligned to the managing agent of 19.99%, while at least 25% of capacity must be provided by the lead reinsurers, with the panel agreed by the managing agent.
Some business is considered out of scope for broker-originated reinsurance structures in Lloyd’s, including hybrid fronting carriers, MGUs and legacy providers, captive involvement needs a prior submit arrangement and there can be no exposure to Cyber war “type 4” language.
Furthermore, Lloyd’s appears keen to secure clear commitment from participating cedents, saying, “Once the participation cede has been determined as part of the overall proposition, cedents must cede either all of their eligible portfolio with the respective broker to the structure, or none of it.”
It was also stated that the managing agent must have strong reinsurance pricing capabilities, existing portfolio solutions expertise, and sufficient data access to validate, verify and challenge the assumptions provided by the broker.
Reporting and oversight will be key, with regular engagement with Lloyd’s and data sharing, as well as agreed guardrails needing to be in place that the capital provider and managing agent must contractually agree on.
To prevent these vehicles from operating indefinitely without sufficient adoption, Lloyd’s required that if a structure fails to achieve at least 70% indexation by its third year, the managing agency and Lloyd’s must determine appropriate corrective measures, which may involve winding down the operation.
Annual plans and any mid-year changes will need to be approved, as they are for other more traditional Lloyd’s underwriting structures. While standard new entrant capital allocation rules and timings will apply.
Moreover, and arguably most crucially, the cost savings and efficiencies produced by broker-led reinsurance strategies most directly benefit buyers seeking protection.
Finally, through a client-divided mechanism, Lloyd’s expects cedents to participate in the operational and capital efficiencies created by the structure. Standard new entrant capital allocation rules and timings apply.
The framework, published in a market bulletin issued by Rachel Turk, Chief of Performance and Strategy, applies to all broker-originated reinsurance structures seeking approval to operate within Lloyd’s and should be considered alongside the standard new entrant approval process. Further information
