Lloyd’s announces an innovative reinsurance deal to protect the Central Fund

Posted 22/06/2021 – Quick takes

Lloyd’s announced on Thursday, that it had taken out an innovative five-year reinsurance policy to protect its c£3bn Central Fund in the event of a systemic event, such as another pandemic or financial crisis.

Under the terms of this new reinsurance, the Lloyd’s Central Fund will absorb the first £600m of any insurance losses, but the subsequent £650m of losses will be met by JP Morgan and a panel of global reinsurers. The first £450m of cover provided by JP Morgan is collateralised by a portfolio of AAA-rated fixed-rate bonds (held in a cell structure). The next £200m of cover is provided by eight global reinsurers, including Berkshire Hathaway and Munich Re.

On the analyst call, Burkhard Keese (the CFO of Lloyd’s) explained that the cover provided very cost effective capital which would both protect the solvency ratio of Lloyd’s in the event of such a crisis as well as allowing for further growth, should Lloyd’s choose to do so in the future. Keese also said that given the low cost of the cover, he would be keen to renew the facility in five years if possible.

Alpha comment

Although the cost of the cover has not been disclosed, we welcome any move that further enhances the ability of Lloyd’s to meet legitimate claims (central to its global reputation) and allows for future profitable growth.

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