Wednesday, July 24, 2024

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Lloyd’s provides curious alternative for multinationals, but rush of applications not expected


  • Rising fronting fees and collateral costs one driver of Lloyd’s interest
  • Extensive cost analysis required as Lloyd’s brings other associated costs
  • A Captive Syndicate could form part of an effective multi-captive strategy
  • Formation could take as little as eight weeks, but process largely untested

Despite the first Lloyd’s Captive Syndicate being formed this year, there is unlikely to be a sudden surge of new captive syndicates as the proposition is expected to appeal to only the largest multinational organisations in the short term.

Companies with global operations would benefit most from leveraging the associated costs of a Lloyd’s captive against the Corporation’s extensive fronting network and AA- rated paper.

Captive Intelligence understands Lloyd’s is speaking to several companies about the possibility of forming a captive syndicate in the future.

Captive Syndicate 1100 was launched at Lloyd’s earlier this month, managed by Apollo Syndicate Management.

The formation is part of a multi-captive strategy for a multinational technology company with Marsh also working closely on the captive programmes and implementation.

It is the first new Captive Syndicate formed at Lloyd’s since the turn of the century.



Rob Geraghty, international sales and consulting leader at Marsh Captive Solutions, said it’s great to see the first deal done.

“We’ll see what happens in that space, but I think for clients the key is giving them more options, so they have the best opportunity to find the optimal risk management solution for them,” he told Captive Intelligence.

Captive syndicates at Lloyd’s can write first party risks as well as related third-party risk where there is a degree of alignment on common interests.

“For example, if a captive owner wants to insure contracting partners, employees or customers of their own, then that flexibility exists within a Captive Syndicate,” Nick Donovan, head of market development at Lloyd’s, said.

Captive syndicates can also write life and non-life risk at Lloyd’s, but must be written by separate syndicates. Both syndicates can be capitalised by the same member.

Bob Stevenson, consultant at managing agent Asta, said Lloyd’s is currently looking to entice the larger clients in the £50-100m annual gross written premium range.

“This is reasonable as a place to start, but we think ultimately there may also be a strong argument for a solution for multiple entities, each perhaps with as little as £5-10m in annual premiums likely managed by the same captive manager,” he told Captive Intelligence.

Oliver Schofield, CEO and managing partner at RISC CWC, said that the large organisations interested in Lloyd’s would typically be mature insurance buyers with their own in-house professional risk and insurance management teams.

“It is exciting that the new Lloyd’s captive model is gaining interest,” he said.

“It brings additional choice to our clients which is aways a positive,” he added. “It also brings additional benefits to our clients, widening out the ability for captives to issue direct, admitted policies into a number of countries.”

Those companies that decide Lloyd’s is the right option will have direct access to the expertise of the London insurance market.

Stephen Cross, group COO and head of innovation and strategy at McGill and Partners, told Captive Intelligence the Lloyd’s captive proposition is “fascinating” with Lloyd’s and the wider London market well positioned to provide “distinct advantages” to captives.

“Bermuda was the best domicile for many, many years because it has a market around it and the conditions here in London are exactly that,” Cross said.

“In the square mile here in London, 300 meters from Lloyd’s of London, you have so much capability and intellectual property and capital, both insurance and reinsurance, that I frankly think they’d be remiss if they didn’t do it and didn’t really push hard.”

Cross also believes it should be an important and valuable step for Lloyd’s to take to get closer to the end client, the insured.

“Captives could also help Lloyds to accelerate their innovation agenda,” he added. “By their very nature, captives require the ultimate client to participate in taking risk, which fosters collaboration and aligns interests while incubating new and meaningful products.”

Charles Winter, head of strategic risk consulting at Aon, said the broker has had a number of conversations regarding Lloyd’s captive Syndicates.

“But we do not expect this to be of mainstream applicability as most captive will not meet the criteria,” he said. “We remain supportive of the concept, however, for the right profile.”

Donovan said that, subject to approval of Council, a Captive Syndicate could be formed in a minimum of eight weeks.

“Speaking completely frankly, I would say captives are not, in my experience, the fastest moving applicants to join the Lloyd’s market,” he said.

“I don’t think we’re going to be inundated with requests from captives that want to join the Lloyd’s market in eight weeks, but I think the core message I would like to get out to the captive community is that we are a responsive regulator, and if they need something done quickly at Lloyd’s, then we’re happy to be tested to show that we can respond to requests and challenges quickly.”

Costs and fronting

Compared to most domiciles, the costs involved with a Captive Syndicate are relatively high, but multinational clients will see the financial benefits from a reduction in fees paid to fronting carriers.

“This is because one of the key aspects of the Lloyd’s proposition is the lower variable costs that captive syndicates can benefit from relative to traditional captives, driven by Lloyd’s unique global network of cross-border and direct insurance and reinsurance licences,” Donovan said.

“It’s therefore larger multinational businesses who will tend to benefit most from a Lloyd’s Captive Syndicate.”

Lloyd’s has 80 direct insurance licenses and the capability to write reinsurance in more than 200 territories.

“Lloyd’s licences in many cases work differently to other insurers’ in that in most jurisdictions where syndicates can write direct insurance, Lloyd’s does not need to issue local policies and risks can be written more efficiently using a single Lloyd’s policy,” Donovan said.

Donovan noted that in regions such as Latin America where Lloyd’s is only licenced on a reinsurance basis, fronting partnerships may continue to be required.

“There’ll be plenty of appetite for a variety of fronting partners in those territories to support these programmes if customers want to set up a Captive Syndicate and have additional territories that still need cover,” he said.

“It’s also important to note that, where the Lloyd’s licensing network extends to reinsurance only, the Captive Syndicate’s rating will generally allow for fronting partners to recognise balance sheet credit for reinsurance provided by the syndicate, rather than the significant collateral requirements for unrated entities.”

Stevenson said he hears frequently that captives are often dissatisfied with the level of service they receive from a fronting carrier despite the often-significant fronting fees. 

“We are told of fronting fees in the range of 7-10% to access the licences of these carriers,” he added.

Philip Jacob, director at PwC, said a lot of the conversations he has had with clients have been centred around their current fronting costs.

“Reducing cost is perennially something that people are interested in, and one of the main selling points is around significant fronting costs, and this can be a way to reduce those,” he said.

“The biggest entities in the world are paying millions, if not tens of millions, in fronting fees.”

Donovan said as a Captive Syndicate owner, insureds will be less at the mercy of the “whims” of fronting partners in terms of wordings and their own appetite.

“There is a greater control of their own destiny in terms of setting wordings and limits and things like that,” he said.

However, Stevenson noted that Captive Syndicates must understand they are joining a mutual society.

“When they join, they have immediate access to the benefits, but they are expected to behave in accordance with those principles,” he said.

As well as a reduction in fees paid to fronting carriers, captive syndicates will expect to see a reduction in collateral costs, which can otherwise add up to be quite expensive.

“Usually, a captive is unrated so the fronter requires clients to collateralise the reinsurance that they use to bring the risk back to the captive,” Jacob said.

He said that the collateral needed across all a client’s fronted policies can become substantial.

“In Lloyd’s, if a client is writing directly using the Lloyd’s direct licences, that collateral goes away because the captive is writing directly, and they are covered by the solvency capital they have in Lloyd’s,” Jacob said.

“Sometimes fronters are still necessary, because the Lloyd’s licences do not cover every risk in every jurisdiction, but because Lloyd’s is AA- rated, they may be able to negotiate lower, potentially even significantly lower, collateral requirements on those fronted policies.”

Jacob said it is important for captives to consider that Lloyd’s cannot be used as a pure front, so clients will not be able to write policies through Lloyd’s and then 100% reinsure them back into their captive.

“Also, the business that a client writes through Lloyd’s needs to be profitable and that is a Lloyd’s red line, and I know that in some cases captives might write at a loss, whereas with Lloyd’s that won’t work,” he said.

Martin Murphy, commercial insurance advisory lead at PwC, said if an organisation is placing most, if not all, of their external policies through Lloyd’s already, then it arguably makes sense to have the captive based there as well from a consistency standpoint.

“There is also the practical advantage for a UK-based company in having their captive close at hand in London,” he said.

Many multinational captives have long-term relationships with their fronting carriers so pulling them away from may not always be easy.

“Ultimately shifting from an existing proposition to introduce something that is even as well-known as Lloyd’s isn’t easy,” Stevenson said.

“The pioneering part is quite painful, but our expectation is that the dam may break once others see that the success.”

The application fee to form a Lloyd’s captive Syndicate is £100,000, which is pricey when compared to traditional domiciles such as Vermont, Bermuda, Luxembourg or Guernsey.

Keith Nevett, head of business devolvement at Asta, said captives need to realise what they get for that price.

“The client gets their own fully rated, licenced and branded entity and they only pay that once,” he said.

Nevett believes the concern around the cost of a Lloyd’s captive is an “over the top concern” particularly as Lloyds has recently reduced its Central Fund levy.

“It used to be 1.4%, but now it’s 0.35%, including managing agent costs and all Lloyd’s costs,” he said.

“For a Captive Syndicate that has £25-£30m gross written premium, the cost is approximately 4.5%, which is way below the average fronting fee, and if the Gross Written Premium (GWP) is bigger that percentage comes down,” Nevett added.

In addition to the costs associated with transitioning to Lloyd’s and the costs of operating within Lloyd’s, the tax implications will also need to be considered carefully.

“There will also be clients for whom Lloyd’s could be significantly more capital intensive than their existing arrangements,” Jacob said.

Multi captive strategies

Due to their size, most companies looking to form captives at Lloyd’s will already have established captives, and there are several different ways companies will be able to utilise them within a multi-captive strategy.

In most instances, implementing a Lloyd’s captive will be an addition to a company’s existing insurance framework rather than as a standalone conversation.

“The existing captive will be capitalised in some form, so that captive could be leveraged for the Lloyd’s syndicate’s capital, and that could be through collateral for a letter of credit to support their funds at Lloyds,” Nevett said.

“It could also potentially be used as reinsurance to reinsure the syndicate, or the syndicate could reinsure the captive.”

Jacob said in the case of a US-based company with operations worldwide, one solution would be to have the US captive writing business in the US, with the Lloyd’s captive sitting parallel and writing policies globally.

“Because it is a relatively new concept, the entry point for the conversations is often that the Lloyd’s captive can supplement or sit alongside the existing captive, though that may not be where we end up,” he said.

Donovan revealed that Lloyd’s is talking to some large businesses that do not currently have a captive, but are of sufficient scale that it could warrant setting one up within the Lloyd’s framework.

“We’re talking to a large multinational logistics business as an example, that doesn’t currently have a captive, but might be interested in a Lloyd’s captive syndicate,” he said.

Although Lloyd’s main target market is the largest multinational companies, there has been discussion around introducing a facility structure in order to make the Lloyd’s proposition more viable for smaller companies.

“It’s something that we’ve certainly spoken about with people in the market, and we’ve discussed how it might work and whether it’s feasible,” Jacob said.

He said the idea has come up in conversations with Lloyds, and he believes they are thinking about it.

“I’ve discussed it with Polo, one of our London Market partners, and we’ve considered potential ways it might be structured,” Jacob said.

“There has been some pretty good thinking gone into how it could be set up within the Lloyd’s structure in such a way where it has got multiple segments within a syndicate, but still managing to find a way to segregate the risk and the capital.”

PoloWorks and PwC UK announced a joint venture in March – PoloPartners – with an initial focus on captive solutions.

Donovan said that although he is aware of the idea of a potential cell facility within Lloyd’s, it is unlikely to be something Lloyd’s considers in the short-term.