Private capital remains vital to Lloyd’s but supply mechanism must adapt

Private capital plays a vital role in the capital structure of Lloyd’s and will continue to do so in the market’s plans for the future set out in Vision 2025 but the way it is provided to managing agents needs to adapt.

That was the key finding of a report commissioned by the Association of Lloyd’s and three member agents, Hampden, Argenta and Alpha, the conclusions of which have been seen by Intelligent Insurer.

Written by Christopher Harman, the chairman of ReSolution Underwriting, and Ian Clark, a partner of Deloitte, the 2016 Private Capital report surveyed the attitudes of the managing agency community, and other interested parties, towards private capital’s role.

It examines the first stages of how the significant contribution made by private capital to Lloyd’s might best grow and evolve in the future.

The report outlines how private capital had benefitted from some very profitable underwriting returns since 2002, and that since 2007, there has been an 8 percent increase in the amount of private capital at Lloyd’s.

Capacity of £600 million has also been provided to the market since 2002, collectively provided by new members at Lloyd’s, recruited by ALM agents.

The report suggests private capital has suffered a decline as a percentage of the overall Lloyd’s market, owing to the faster growth of aligned corporate capital at Lloyd’s between 2007 and 2016.

However, private capital still accounts for 10 percent of the overall Lloyd’s market capacity in 2016 of £27 billion.

According to Harman and Clark, ratings agencies continue to see the existence of private capital as important to Lloyd’s as a source of capital unavailable to others.

One finding from the report was that managing agents have expressed an overwhelming degree of support for the on-going role of private capital.

Despite this, there was a general recognition that the way in which private capital is provided to managing agents needs to adapt in order to meet their requirements for the future.

Managing agents had expressed a view that they would like to move away from the structure of the Agency Agreement, and would like to deal with capacity that is supplied to them through collective entities that can commit large amounts of capacity to their syndicate using more innovative methods than that of freehold tenancy in perpetuity.

According to Harman and Clark, managing agents also said that they favoured future commitment of capital coming from collective capacity-provision arrangements, such as Members’ Agents’ Pooling Arrangements (MAPAs) and discretionary funds.

The report also stated that managing agents felt that third party capital could be provided by means of Quota Share Syndicates (QSS) or participations through contingent capital structures.

Harman and Clark concluded that these vehicles were welcomed by managing agents and may prove to be valuable building blocks for third party capital’s continued evolution at Lloyd’s.