Lighter touch Lloyd’s access point could boost attractiveness to investors: Aon & LMA

While it is deemed that “the advantages of Lloyd’s as an investment destination remain strong,” a new report from broker Aon and the Lloyd’s Market Association (LMA) concludes that a lighter touch and less complex access point for investors could serve to boost the attractiveness of Lloyd’s for alternative allocators.

“There are opportunities to simplify access routes and terminology in order to enhance investors’ experience and the predictability of set-up and running costs,” the LMA and Aon found.

They highlight that the Lloyd’s investment story and explanation of the range of investment options available need clearer communication and the language used needs to be more suited to a wide range of investor types.

Simplification of “complex regulatory and onboarding procedures” would also be beneficial, while “timely access to relevant performance monitoring data” is also critical for investors.

In addition, Aon and the LMA state that “clearer articulation of early capital distribution points is needed for investors.”

At our recent Artemis London 2024 conference we held a panel discussion with precisely this focus, aiming to demystify the Lloyd’s investment opportunity and put it into the language institutional investors and the insurance-linked securities (ILS) community would appreciate.

Now Aon and the LMA are echoing a similar message to that discussion after a review was undertaken to gain better insight into the overall investment experience for the three main groups of allocators to Lloyd’s, with the pair conducting a range of interviews with a diverse range of capital providers to Lloyd’s.

The pair found that, “Whilst the view from the outside looking in can make a compelling case for investing at Lloyd’s, once on the inside and working to establish and run a participation in Lloyd’s, investors find that the experience does not necessarily match expectations, and instead often presents frustrations, challenges, and unpredictable set up costs.”

Paul Davenport, Finance & Risk Director, Lloyd’s Market Association, commented that, “Our conversations with capital providers highlighted their positive experience of working with members of the Lloyd’s executive team, who are willing to take a commercial and pragmatic approach to facilitate what investors want to achieve. While this is encouraging, there remains work to be done to enhance underlying processes for getting things done in the market.

“Many capital providers also noted their positive experience of working with the members’ agents, especially for administrative support in terms of their initial investment. Again, these positive observations were often tempered with calls for improvement in processes.”

Joanna Parsons, Strategic Growth Leader, Capital Advisory UK for Aon, added, “This research tells us clearly that there is appetite from new capital to enter the Lloyd’s market.

“The current favourable market conditions are a clear short-term driver for capital interest and deployment. Hence a key focus of all the market players should be about ensuring the longer-term commitment and participation of a diverse variety of capital providers, even when underwriting conditions are not quite as attractive as they are today.”

“In summary, we encourage Lloyd’s, the managing agents and members’ agents to each play their part in addressing the key priorities highlighted in this report. All stakeholders must collaborate to demonstrate to investors that a cross-cycle commitment is worthwhile, not just from the all-important return on capital, but also as regards the ease of doing business and a 21st century approach to process, data analysis and regulation.”

While favourable market conditions in insurance and reinsurance are a clear driver that has boosted the attractiveness of Lloyd’s and investor awareness of it, Aon and the LMA believe more can be done to make the market more understandable and easy for investors to access.

“We encourage Lloyd’s, the managing agents, and members’ agents, to each play their part in addressing the key priorities highlighted in this report. All stakeholders must collaborate to demonstrate to investors that a cross-cycle commitment is worthwhile, not just from the all- important return on capital, but also as regards the ease of doing business and a 21st century approach to process, data analysis and regulation,” Aon and the LMA’s report states.

Going on to state that, “To achieve the market growth aspirations that have been much touted, Lloyd’s needs to be both open to, and able to provide access for, new generations of investors both by type and by geography. Indeed, whilst the diversification of capital providers at Lloyd’s should be seen as a strength, accessibility also needs to be appropriate to meet the future needs of both the market and of the investor.”

Key points that emerged from the Aon and LMA review have a focus on ease of access, liquidity (both on entry and exit of investments at Lloyd’s) and the creation of a new, simpler route for investors to access the returns of the Lloyd’s market.

They say that Lloyd’s could perhaps itself play a role in “facilitating and developing a secondary structure to access a diversified portfolio of syndicate participations.”

It could be focused on syndicates that already work with third-party capital, so not a full market tracker although that is also seen as an opportunity, but it would need to be developed “in a way which protects current members’ rights or offers an attractive benefit to current members,” the pair stated.

It would also need to be developed to allow Lloyd’s to “regulate the capital provided to syndicates alongside the business planning process, so that capital supply and demand mismatches do not become an unintended influence on rates.”

The LMA and Aon add, “Creation of a secondary method of participation on syndicates would provide a much less complex route for international investors, as well as an attractive access route for investors wanting a lighter touch way of accessing Lloyd’s, without the demands of running an underwriting business.”

They note that attempts to create a Lloyd’s focused fund structure have “proved to be somewhat challenging.”

Of course, startup Solasta Innovation had been planning to leverage the London Bridge 2 PCC insurance-linked securities (ILS) structure to channel investor funds to underwriters, showing one way this could be achieved.

It has now been reported that Solasta has scrapped its plans, which makes this the second attempt to launch this type of vehicle for investors to access Lloyd’s that has failed, after Finsac failed to raise the capital required last year.

Quite why these efforts are failing is not exactly clear, especially when there seems ample investor interest to fund such a structure for launch, as long as it has the right alignment with its management and the incentives attached to it are very clear.

London Bridge is an opportunity for Lloyd’s, especially perhaps if a fund structure was developed around it to work with its quota share functionality, so allowing for aligned capital provision, on defined durations and terms, feeding into a diversified basket delivering the returns of a range of Lloyd’s syndicates performance.

Lloyd’s has an enormous opportunity to develop something truly compelling for investors looking to access the returns of the insurance and reinsurance market activity going on there, but it must do this in such a way as constituents rights and interests remain protected, while not opening the floodgates to rate-moving amounts of capital. That’s quite a delicate balancing-act of interests and priorities, but we’re sure one opportunity that Lloyd’s executives discuss regularly.