Lloyd’s Chairman: Index Project to Tap Insurance as Asset Class
December 18, 2015 by David Pilla, news editor, BestWeek: David.Pilla@ambest.com
LONDON – Citing the ability of Lloyd’s to bring “the most objective and robust database in the world for this kind of operation,” the market’s chairman said a just-revealed plan to launch an “alternative asset” index for insurance is an ideal way to deploy the information Lloyd’s has accumulated.
“We had been thinking about this for a long time,” Chairman John Nelson said in an interview with Best’s News Service. He noted that in light of the U.S. Federal Reserve’s long-anticipated interest-rate hike, markets are looking more toward the insurance industry as an important asset class in capital-management strategies.
Nelson added the specialist insurance markets that are the source of Lloyd’s expertise are volatile and high risk, but are also uncorrelated to other markets and their cycles.
“Real estate beginning about 40 years ago became an asset class, and insurance is now becoming an asset class, and of course the insurance industry is growing very substantially worldwide because of the industrialization and commercialization of growth countries,” he said. Nelson added insurance is “one of the few industries in the world where you can still see good growth coming through,” particularly in emerging markets.
As Lloyd’s is “the only insurance market in the world” and is not simply a profit-seeking company, Nelson said it is in a unique position to launch an index tracking the “alternative asset class” of insurance.
Nelson said Lloyd’s will launch the insurance-based index, called the Lloyd’s Index, in the middle of 2016. “Fairly rapidly, we intend to produce a suite of indices by different classes of business,” he said.
According to Nelson, the indices “will have to be fairly liquid and diffuse,” to avoid their being dominated by a few big players.
Subscribers can view information from the index probably published on a quarterly basis.
According to Nelson, the index is based on what Lloyd’s can bring, “detailed insight into the performance of the market,” and will provide managing agents, brokers and other insurers “with new options for the managing of risk and form the basis of index-related products that could attract the interest of wider capital markets.”
Lloyd’s will look to leverage its “ideally placed” position as a source of insurance information that can be used by both insurance carriers an capital-market players, said Nelson. Following the announcement of its intention to launch an index, he said Lloyd’s will seek comment from market participants and regulators about the initiative”(Best’s News Service, Dec. 16, 2015).
He added a strength of the index is its tracking of diversified risk, with an emphasis on using loss ratios rather than combined ratios or other measurements, to focus on insurance performance. He said the Lloyd’s Index will show loss ratios (premiums versus claims) for the Lloyd’s market on an aggregated basis, “and will focus entirely on insurance performance.”
That data used for the index is Lloyd’s market data, particularly through managing agents, Nelson explained. What Nelson calls “addressable capital” is roughly $600 billion in insurance capital market, which can provide information on alternative insurance and reinsurance assets usable for an index. Nelson said that capital can rise to $2 trillion in the near future.
“In terms of reinsurance markets, all indications are that there is substantial demand for this, and you can see it in other sections of the capital markets,” he said. A Lloyd’s index can in time be seen as an essential benchmark or tool for capital-market players seeking to trade securities based on insurance assets, he added.
Nelson said Lloyd’s has data covering all lines of business from more than 200 countries and territories worldwide.
Lloyd’s currently has a Best’s Financial Strength Rating of A (Excellent).
