Captives could be operating in Lloyd’s within the next year, as risk managers show growing interest in the market’s global licensing and financial strength rating, brokers and other experts have told Commercial Risk Europe.

Lloyd’s launched a new framework last year that allows captives to operate in the market through a captive syndicate.

The solution is essentially an alternative to using a fronting insurer. “You would set up a Lloyd’s syndicate in your company name and issue policies around the world through the syndicate, and then reinsure a proportion to your captive. It is a great alternative to using a fronting insurer, and I can see it would work in the future,” said Richard Tee, Director for Captive Management, Guernsey.

“I think it is a great idea and it will take off. A captive owner can access ‘A’-rated paper from Lloyd’s and issue policies all over the world via Lloyd’s global licences,” he added.

Lloyd’s captive proposition is likely to appeal to large multinationals looking for international market access and an alternative to using fronting insurers, said Keith Nevett, Head of Business Development at Asta, a Lloyd’s managing agent and part of Davies.

Asta has been working with captive owners interested in the Lloyd’s syndicate option. Most are waiting to see how the proposal pans out, according to Nevett. “I am very confident, but it will take a little more time to get the first captive syndicate over the line. Once we get that, I think there will be an influx of interested parties,” he told Commercial Risk Europe.

WTW has also seen interest from clients in Lloyd’s captive solution, said Peter Carter, head of the broker’s global captive practice. He is optimistic that Lloyd’s proposition will take off in the next 12 months. “We believe Lloyd’s are working on a number of opportunities. I would expect we will see Lloyd’s captives formed some time towards the end of this year or early in 2024,” he said.

Lloyd’s said in a statement that it is not ready to give a full update on its captive initiative but welcomes captive syndicate applications. Large multinational businesses with sophisticated risk management functions and gross written premium in excess of $30m per year are most likely to be attracted to a Lloyd’s captive syndicate, it said.

The Lloyd’s captive initiative has come at a good time, according to Carter. “Lloyd’s onshore option addresses some concerns around reputation and governance of using an offshore domicile. Lloyd’s unique selling point for captives is its financial strength rating and the ability to leverage Lloyd’s global licences without the need for a fronting insurer,” he said.

“Lloyd’s global licensing and the market’s credibility should be a strong selling point for a large blue-chip company considering redomiciling a captive to the UK, or a multinational corporate looking to streamline a current global multi-captive strategy. The Lloyd’s platform will come with higher fixed operating costs, but for very large captives this should be easily offset by reduced fronting costs,” Carter said.

According to Nevett, Lloyd’s offers lots of benefits for captives. “A platform like Lloyd’s, with its licensing network, its rating, capital efficiency, brand and reputation, is a perfect place for a captive. In essence, you do not need a fronting partner. With a captive syndicate, a risk manager has more control. It’s a cleaner option. You make your own decisions, issue your own policies, using your own capital and your own risk appetite,” he said.

A Lloyd’s syndicate can alleviate some of the frustrations and uncertainties captive owners may have when using fronting insurers, which typically issue and service policies on behalf of offshore captives.

By owning a Lloyd’s syndicate, a captive would not need to rely on the risk appetite of a fronting insurer, and risk managers would be able to achieve greater continuity of cover because the fronting arrangement does not need to be renewed on an annual basis, explained Nevett. However, the business plan does need to be approved each year, he added.

One of the criticisms levelled at Lloyd’s is the relative cost of operating in the market. But Nevett argues these costs are outweighed by the benefits, at least for large captives, and compare favourably to the cost of a fronting insurer.

“The costs of a captive syndicate are set to be lower than the traditional fronting arrangements. The commission for a fronting partner is between 5% and 10%, while the estimated costs of the captive syndicate are approximately 5.5%, depending on size of gross written premium,” he said.

Nevett is optimistic about the Lloyd’s captive syndicate initiative but would like Lloyd’s to go further and introduce a protected cell company (PCC) concept. PCCs would enable a broker or captive manager to set up a captive structure at Lloyd’s, and then rent out cells to companies.

If you would like to continue the conversation, get in touch with Head of Business Development at Asta, Keith Nevett at k.nevett@asta-uk.com or Director, Captive Management, Richard Tee at richard.tee@davies-group.com

This article was first published in Commercial Risk on 21st June 2023 and has been re-published here with their kind permission.