The importance of Lloyd’s consortia in driving market innovation and growth

The popularity of using a Lloyd’s consortium, whereby one point of transaction is possible for brokers wishing to place a risk with multiple underwriters, has exploded in recent years, as Lloyd’s Syndicates increasingly incorporate the leading and following of consortia into their strategies for growth and efficiency gains.

David DeJong and Tom Gauge, managing directors at Howden Re, have witnessed this first-hand at Howden Re, the only broker with fully dedicated consortium placement and operational resource.

“It’s still a greenfield market but consortia are here to stay,” said DeJong. “They will become part of the mainstream, but a surprising number of underwriters and brokers in the Lloyd’s community remain unaware of their benefits.

“Consortia look similar to other products available in the insurance and reinsurance markets but are unique in placement and operational terms.”

The rise of the consortium is great news for Lloyd’s. Consortium placements aggregate Lloyd’s capacity around a single Syndicate leader’s expert underwriting and claims capability. The aggregated line deployed by the leader with the consortium stamp raises the significance of Lloyd’s capacity in the global market, bringing new business to the building.

In recognition of this, Lloyd’s has created frameworks for Syndicates to launch consortia on the Lloyd’s Asia platform and in the Australian service company market, promoting their usage in these regions.

Syndicate to Syndicate

DeJong and Gauge believe that a more prevalent role for consortia should improve Lloyd’s benchmark underwriting and portfolio management standards, by bestowing lead status on Syndicates that can prove market outperformance. They also support modernisation towards a more bifurcated lead/follow model in Lloyd’s.

“Consortia are the perfect point of distribution for the ‘smart follow’ market,” said Gauge. “They benefit from an unquestionable alignment of interest with our consortium leaders, who are bottom line-focused balance-sheet businesses, with long-term underwriting and investment horizons, operating in the same regulatory framework and actively selecting risk for their members.

“Our consortium leaders get access to non-conflicted capacity to support their products, while monetising their leader status and reinvesting into the resources required to maintain a top-quartile book through the cycle. In those terms, it’s consortia that are perpetuating the bifurcation more than other forms of follow, facilitation, or delegation,” he explained.

“Lead Syndicates can use consortia to enhance their proprietary products.” David DeJong

Capital efficiency and book value

According to DeJong and Gauge, consortia are evolving from being a tool used by class underwriters to one being used more widely by the executive to reduce the internal costs of leading in specialist classes and establishing market presence, creating mutual value for their business and consortium members.

“Consortia operate similarly to proportional reinsurance, but the exposure ‘ceded’ to consortium members is effectively written off balance sheet as a co-insurance, so lead Syndicates can use consortia to enhance their proprietary products, and to optimise their finite asset bases while generating fee-based revenue,” DeJong explained.

“We are now seeing our clients present multiline consortium opportunities to the market, searching for strategic partners who can support them across a number of their portfolios.”

Supporting product innovation

Consortia play a vital role in fostering innovation, presenting an excellent way for Syndicates to adhere to their key performance indicators and capital restraints while building market share to the consortium panel’s mutual benefit.

“Howden Re is continually innovating with new variations.” Tom Gauge

“This flexibility is essential for Syndicates looking to establish themselves and achieve traction in their chosen specialisms,” DeJong emphasised.

Consortia clearly create new efficiencies in the traditional subscription market, making them a central feature of the market modernisation effort.

DeJong and Gauge believe there is more to come. “Currently, consortia are the preserve of London’s syndicated market, but with the frameworks that Lloyd’s has created in overseas territories, and with increasing interest in the product from company markets and alternative capital looking to access fully diversified portfolios of outperforming Lloyd’s business, the playing field will only get bigger,” commented Gauge.

“Howden Re is continually innovating with new variations to the product to meet the needs of a wide variety of clients—from the very smallest to the very largest—while bringing new non-conflicted capital to the equation. The consortium model is not merely about sharing risk for mutual benefit, it’s also about redefining how the relationship between capital and appetite for exposure is best managed.”

Consortia will be a critical component for Syndicates’ future success. “Consortia should be first and foremost in their minds during the capital and Lloyd’s business planning season,” DeJong concluded.

David DeJong is a managing director at Howden Re. He can be contacted at: david.dejong@howdenre.com

Tom Gauge is a managing director at Howden Re. He can be contacted at: tom.gauge@howdenre.com

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