London market must attract and efficiently deploy third-party capital: AM Best

London market insurance and reinsurance players need to be able to attract and efficiently deploy third-party capital, if they are to take advantage of the growth opportunities available to them, rating agency AM Best has said.

As the hard market sets in and looks likely to prevail through 2023, the rating agency has highlighted the importance of access to third-party capital and insurance-linked securites (ILS), for London market participants.

The London insurance and reinsurance market has an opportunity to achieve significant growth in the current market environment, but access to capital will be key and that access has to be streamlined, efficient from a cost perspective and also accessible to players.

The London market had become heavily reliant on specific retrocession products, such as pillared covers, with many Lloyd’s syndicates finding the regulatory capital efficient nature of them a significant draw.

While those products have dried up and retro reinsurance capital remains expensive and less available, this is the perfect time for ILS capital to demonstrate its usefulness to London market players, while other forms of financing are also likely to become increasingly prevalent, we believe.

Commenting on the London market’s prospects, AM Best noted the importance of third-party capital and ILS.

Saying, “The ability of London market insurers to attract and efficiently deploy third-party capital is important if they are to take full advantage of profitable growth opportunities.”

In addition, AM Best believes the UK’s ILS regulatory regime can be a driver of benefits to market participants there.

Explaining that, “The introduction of an insurance-linked securities (ILS) regime by the UK government in 2017, via the UK’s Risk Transformation Regulations, should help the London market compete for third-party capital with established (re)insurance hubs like Bermuda, where ILS issuances have thrived for years.”

In addition, Lloyd’s has now established its second ILS vehicle, London Bridge 2, a protected cell company that can enable Lloyd’s syndicates to more directly access collateralised reinsurance and sidecar-like capacity.

“Participants at Lloyd’s can use the PCCs to manage their capital requirements by attracting new investors, including pension funds, and could benefit from reduced set-up times and lower transactional costs,” the rating agency explains.

AM Best also noted that, “There is a long track record of London market insurers utilising ILS to transfer property catastrophe exposure to the capital markets,” citing the recent completion of Beazley’s first cyber catastrophe bond.

That transaction signalled, “appetite from capital markets for the London market’s fastest growing class of business,” AM Best said.

Friction appears to remain the key issue that has held back use of London’s ILS regulatory regime to-date, with market participants needing simplified routes to access capital, that are faster to implement and less restrictive to investors.

The market needs benchmarks for hedging performance and efficient capital structures that can allow investors to collateralise reinsurance more quickly and with less burden of oversight and regulation.

The UK’s regulators have been once again revisiting their ILS regime, so progress continues to be made and in time it’s expected that access will become smoother for investors, while market participants should be able to tap global ILS capital sources more readily as well.