From time to time this publication speaks to the sometimes arcane-sounding world of the "names" at the Lloyd's of London insurance market, a field rich in expertise about risk management. The topic has seldom been more relevant.

Stormy weather, a two-year pandemic and the war in Ukraine have, among other events, put management of risk right at the top of the agenda. And an industry with risk management in its DNA is the centuries-old Lloyd’s of London market. 

Lloyd’s is not an insurance company but is a marketplace of a number of different insurance syndicates backed by a layer of mutual security, taking the form of a “Central Fund” to which all members – corporate and individual – contribute, and from which policyholders may be paid if a member of Lloyd’s can’t meet its liabilities. The market has around 50 managing agents running about 75 individual syndicates which underwrite insurance and reinsurance business for policyholders. (This news service has written before about the Lloyd's market, such as here.)

As a normal rule, profits (or losses) are only paid out (or collected) after three years. Advocates of investing in this market say underwriting results are largely uncorrelated with other investments, and they also benefit from valuable tax advantages.

We talked to Robert Flach, managing director of Argenta Private Capital, a business specialising in creating underwriting vehicles for a worldwide client base. It supplies more than £3.2 billion ($4.22 billion) of investor capacity. 

“With our origins dating back to 1962, we have been consistently at the forefront of innovation in the Lloyd’s market, launching a number of new limited liability vehicles in the last five years with aggregate underwriting capacity of over £1 billion,” Flach said. 

(Underwriting “capacity” is the maximum amount of premium that a syndicate agrees to assume from its underwriting activities. Underwriting capacity represents an insurer’s ability to retain risk.)

“People desire exposure….the timing is great,” Flach said, commenting in light of a series of heavy storms in parts of the world – in the UK for example – and the crisis in Ukraine. These episodes remind people why risk management, and the need for financing it, matters.

Ukraine
“Every syndicate will have different levels of exposure to the awful events in Ukraine, but it is definitely true to say that Russia and Ukraine is a small market for Lloyds as a whole. That is not to say it won’t have any impact at all, and it is an ever-changing situation, but currently I would suspect Lloyd's is shielded to some extent from what has happened,” Flach said. (He was interviewed just prior to the start of Russia’s invasion.)

War is excluded across all policies written in the Lloyd’s market (especially a war involving the “Power 5” of NATO that stipulates that an attack on a member nation is an attack on all, requiring a concerted response).

“In general, fundamental perils such as war and economic recession are too broad for anything but government to carry the risk. War between any two (or more) of the five great powers (UK, US, Russia, France and China) is a general exclusion. Some insurers, including Lloyd’s syndicates, are able to write specific policies for more localised war and terrorist acts. Without the aviation war market, the airline industry would not have been able to resume flying in the aftermath of the 9/11 attacks, while the marine war supported shipping in the Straits of Hormuz during the Somalian civil war,” Flach said. “There will undoubtedly be some business written that includes force majeure. In general, insurance can be considered the oil in the engine of internal trade, without it, nothing would move.”

Market cycle
“Like most investments, insurance is also a cyclical industry, but what is important about insurance and Lloyd’s is that it is uncorrelated from traditional asset classes like equities and bonds. The Lloyd’s pricing environment responds to previous years' claims, usually due to extreme weather events, increased cyberattacks etc. All the syndicates are trying to make a profit, so if claims are particularly high one year, that will increase the cost of insurance the subsequent year which, in the event of expected losses, will generate profits for investors. So it is an excellent way to diversify risk across a balanced portfolio,” Flach said.

“There is a long way to go, but the pricing environment is the strongest it has been for a long while, and we are currently anticipating 19 per cent returns on capital for our investors,” he said. 

This news service asked about the level of interest that high net worth advisors and clients are showing in the Lloyd's market.

“Many of our investors have noticed that the price they personally [pay] or businesses they are associated with have seen the cost of their insurance going up, and they have put two and two together and seen that now is a good time to invest and try and take advantage of this and get their insurance costs back,” he said. “Amongst our current investors, we have also seen them increase the size of their investment by around 7 per cent this year. In the past few weeks, we have had conversations with HNW advisors, family offices and the like who have approached us looking to find out more about how to get involved in the market, and we are ready to have those conversations and work out an investment strategy that suits their circumstances best.”

Clients can invest in a range of syndicates across the Lloyd’s market. Argenta’s research team produces a book every year on the syndicates that are available to them, the sort of business they write, past performance, and risk appetite. 

How are profits calculated?
“Profits are generated by syndicates when the amount of premiums received is in excess of expenses and claims incurred. The capital that a member provides is dependent on the risks assumed but for a client’s typical diversified portfolio equates to around 50p per £1 of premium assumed.  So, if a portfolio were to generate £1 million of premium and paid out £900,000 in claims and expenses, the return on the £500,000 of capital would be 20 per cent. Insurance companies tend to report their results in terms of a combined ratio, the cost of claims and expenses as a proportion of premium income, in this example, the combined ratio is 90 per cent,” Flach said. 

A run of natural disasters – floods and hurricanes – have sent rates (aka premiums) up, creating a need for more capital in the space.

“The past few years have seen a number of catastrophic events, such as Hurricane Ida and the flooding across central Europe last year, which have pushed insurance rates higher. Rates of course vary depending on the risk you are insuring, cyber insurance has seen some of the biggest price rises across Lloyd’s, but as an average there have been 16 successive quarters, or four years of rate growth. This means that across Lloyd’s and the syndicates, there is the expectation that this year could be the most profitable year for syndicates and underwriters since the early 2000s,” he added.