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Clifford Chance

Clifford Chance

Insurance Insights

Lloyd's ILS platform: A good result for Lloyd's and the UK ILS market

Lloyd's announcement last month that it has obtained approval from the PRA to establish its own ILS platform is a big step for the Future of Lloyd's capital strategy and also potentially provides a significant boost to the UK ILS market.

A number of Lloyd's members already choose to manage their capital requirements through the use of ILS structures but the majority of these transactions are not placed through the UK and instead sit with more established ILS regimes such as Bermuda and Guernsey. This is generally consistent with the wider international ILS market and is perhaps not unsurprising given that the UK regime was only introduced in 2017 and it has taken some time to establish itself.

The Lloyd's ILS platform, London Bridge Risk PCC Limited, has the potential to attract investors away from the more established regimes and into the UK. The scope of the PCC's approval is different to any approval previously issued by the PRA and reflects the unique nature of the Lloyd's market in that it permits the PCC to reinsure any class of business written at Lloyd's without requiring a new regulatory application that the PCC enters into. This improves even on Bermuda's 2 week target regulatory approval period for new transactions.

Perhaps more importantly though, the PCC provides a ready-made platform for investors to access the Lloyd's market with its global licences and variety of business lines. It also provides members at Lloyd's with an efficient mechanism to access the capital markets and, from Lloyd's perspective, it is hoped that this will provide the capital to drive innovation at Lloyd's and will support emerging, large risks which require significant capital investment such as pandemic risk, cyber and terrorism risk, as well as the more traditional cat risk cover.

The multi-use nature of the approval is possible, in large part, because Lloyd's has agreed a structure and set of standard form template documentation with the PRA. It has been devised with flexibility to accommodate a range of individual investment models and objectives while meeting Lloyd's capital requirements and market practices and also ensuring compliance by the PCC with the UK ILS regulations. It is hoped that the availability of standard form documentation will further reduce the time and expenses of transacting and, combined with the lack of regulatory approval required, will make the UK ILS regime more attractive to ILS investors and cedants.

Should investors or cedants wish to materially diverge from the standard form structure or documentation then this would be possible but it would be subject to the PCC obtaining a variation of permission ("VOP") from the PRA. Historically a VOP process has been treated by the PRA as a material application that can take 6 to 8 weeks to approve. However, we understand that the PRA are also keen to improve their internal processes for VOP applications and that this timeframe may be significantly reduced in future. If the PRA are able to improve their internal processes for matters such as VOP applications it has the potential to significantly improve the UK's reputation internationally for ILS investment.

It is worth noting that HMT is currently undertaking a review of Solvency II and the Financial Services Future Regulatory Framework to identify areas of the financial services sector, and  the insurance sector in particular, where the UK can be more competitive following its departure from the EU. The UK's ILS regime is clearly one such area and the Lloyd's ILS platform provides an excellent opportunity to develop the UK regime and increase competition with the other international ILS markets.

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