Lloyd’s of London insurance and reinsurance market has taken out £ 650million in coverage from an investment bank and reinsurers to protect its central fund against large losses, FT report says .
The Central Fund reinsurance agreement, or perhaps retrocession, will run for five years and come into effect from January 2021.
The first £ 450million of Lloyd’s Central Fund coverage is said to be fully collateralized and was provided through a newly formed cellular company and funded by investment bank JP Morgan.
It is not clear at this time whether there is any involvement of third party investors in this first layer.
The remaining £ 200million of Central Fund coverage has been guaranteed by eight major global reinsurance companies, including Munich Re, SCOR and Berkshire Hathaway, the FT said.
Central Fund coverage has been designed to protect Lloyd’s and its members against major industry disasters, such as another global pandemic or a future global financial crisis.
“In the event that something really, really important happens, it makes it much safer for our policyholders that we will basically pay the claims for which they are entitled to receive money,” said Lloyd’s Chief Financial Officer Burkhard. Keese at FT.
The deal will provide global reinsurance protection to Lloyd’s Central Fund from a tie point of £ 600million, up to £ 1.25 billion, according to the report.
Keese also explained that the new Central Cover protection has a lower cost of capital and, therefore, should help Lloyd’s take on more business.
As a result, Keese suggested to you at FT that Lloyd’s could write 30-40% more in overall premiums, thanks to the leverage the hedge will provide.
Lloyd’s central fund is a safety net of around £ 3 billion funded by its underwriting members, protecting the market in times of stress.
Aon acted as an investment broker for the Lloyd’s Central Fund cover, according to the report.
Lloyd’s is in the process of seeking regulatory approval for the new central fund protection and expects the arrangement to improve its baseline solvency measure.
The last claim against the Central Fund dates back to 2007 and aggregate claims against it never exceeded the level required to trigger this new coverage, Lloyd’s said.