Lloyd’s takes out £650m cover to protect fallback fund

Lloyd’s of London, the specialist market for large and esoteric risk insurance, has itself taken out £ 650 million in cover in a new arrangement to protect its fallback fund from extreme losses such as a future pandemic or global financial crisis.

The five-year contract is essentially a reinsurance agreement for Lloyd’s Central Fund. The first £ 450m was financed by a newly formed cell company, funded by investment bank JPMorgan. The rest of the exposure is held by a group of eight reinsurers, including the German Munich Re, the French Scor and Berkshire Hathaway in the US.

Set up Nearly 100 years ago, and supplemented by a levy on Lloyd’s members, the nearly £ 3 billion central fund there was blown back as a claim against any Lloyd member by its own capital buffer. The new cover compensates annual total losses in the fund that exceed £ 600 million, up to £ 1.25 billion.

“In the event that something really, really big happens, it makes it much safer for our policyholders that we will basically pay out the claims to which they are entitled to receive money,” said Burkhard Keese, Lloyd’s London chief financial officer. Keese added that the structure will also enable the market to write more business, as the arrangement has a lower capital cost, which could allow overall premiums to grow in the region of 30 percent to 40 percent.

Harrison’s Folly

Lloyd’s Central Fund was set up in the 1920s after one market underwriter, Stanley Harrison, incurred debts of more than £ 360,000, in a case known as Harrison’s Folly.

The then chairman of the market said that Lloyd’s “will never recover in our lifetime” if the money is not paid, according to Lloyd’s corporate history. Other members paid part of the debt, ranging from 8 pence to £ 10,000, which established a principle of mutuality. The Central Fund was formally established four years later.

The new insurance coverage was placed and structured by Aon, one of the largest insurance brokers in the world, with the first layer being covered by the JPMorgan-funded cell. Reinsurers included in the agreement also have units within the Lloyd market. Overlap has a mixed history at Lloyd’s: in the so-called LMX spiral in the late 1980s, the practice of Lloyd’s syndicates reinsured each other in a spectacular way at the same risk. inflated after a series of major claims, losses occurred in the market.

Keese said the first £ 450m cover of the cover was fully pledged and would be kept in safe assets, and that the remaining risk was diversified among the group of reinsurers. Lloyd’s has conducted the necessary research with the companies to make sure funds would be available, even if one of the reinsurers had exposure to the same ‘tail-end’ event, he said.

The cover is effective from January 2021. Lloyd’s will seek approval for the model of the UK’s prudential regulator, which is expected by the end of the year. Lloyd’s expects this to mean an improvement in the market’s central solvency ratio, an important measure of its robustness. The last claim against the Central Fund was in 2007 and the total claims against the Central Fund in one year never exceeded the amount of £ 600 million that would be needed to activate this new contract.

The Central Fund last had a reinsurance arrangement in 1999, but the JPMorgan-backed structure is the first place for the market, Keese said.

Source: Financial Times