As part of the "London Bridge" program expansion, Lloyd's is looking for billions in new capital

In the expanding market for insurance-linked securities, Lloyd's of London hopes that a new investment structure it has agreed upon with UK financial regulators will draw billions of dollars in alternative capital and increase its competitiveness with other hubs like Bermuda.

The first stage of the "London Bridge" program was introduced by the historically significant insurance market Lloyd's last year. Through a reinsurance agreement with a Lloyd's insurer, it allowed investors like Canada's Ontario Teachers' Pension Plan to access the market's underwriting profits — and losses — without paying corporation or withholding taxes. For Lloyd's, the program brought in $200 million.

Plans provided to the Financial Times indicate that the second phase, dubbed "London Bridge 2," represents a significant expansion of the program and Lloyd's goals.

In the past, Lloyd's, which consists of more than 50 distinct underwriting companies and insures risks as diverse as footballers' legs and oil tankers, has relied on private investors and insurance companies to provide the capital behind insurance contracts. But in recent years, it has made it easier for outside investors to contribute money.

The London Bridge 2 scheme has new features, such as the first-ever ability for the reinsurance contracts to be funded by debt securities, opening the door to a wider range of investment funds.

They also expand the agreements into what are known as excess-of-loss contracts, where reinsurers assume exposure for an insurer's losses that exceed a certain level. They also simplify some regulatory obstacles.

The $90 billion market for insurance-linked securities, an alternative to reinsurance that includes catastrophe bonds that pay out after events like earthquakes, is dominated by excess-of-loss policies.

According to Burkhard Keese, chief financial officer of Lloyd's, this represents a "major step" for the London insurance market, giving it the opportunity to reclaim its competitive edge over other offshore jurisdictions that focus on insurance-linked securities. He claimed that the program could bring billions in alternative capital to Lloyd's.

According to Keese, "the speed of possible execution of transactions is now super fast, and we are at least as quick as other jurisdictions can be. It is the speed of execution that is awfully important for potential investors." 

Executives who claimed that the slow rate of approvals for insurance-linked securities was causing London to lose business to other financial centers have criticized UK financial regulators in recent years.

Keese predicted that other types of property & casualty insurance, like professional indemnity, could be structured for ILS investors thanks to the market's "reinsurance to close" mechanism at Lloyd's, where underwriting books are effectively closed after three years and reinsured.

An investment made through the London Bridge platform, which is run by insurance-linked securities expert Artex ILS Services UK, functions as a "cell" of a collateralized reinsurance contract with a Lloyd's insurer. According to Lloyd's, the cell is not subject to corporation tax on its earnings or withholding tax on distributions.

As underwriters look for places to offload their risks and investors are drawn in by returns that are less correlated to conventional financial markets, the market for insurance-linked securities has expanded recently.

According to Lloyd's, the Prudential Regulation Authority and Financial Conduct Authority had given their approval. Neither the PRA nor the FCA would comment.

By fLEXI tEAM