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Eric Paire, head of Capital Advisory at Aon
12 September 2018 Insurance

Cap efficiency can aid Lloyd’s

Against an industry backdrop of slim underwriting profitability, slim investment returns and a stymied ability to release reserves, all of which are true for Lloyd’s syndicates at the moment, carriers must look more closely at how they access capital—and how they work their own capital, Eric Paire, head of Capital Advisory at Aon Benfield, told Monte Carlo Today.

Paire noted that capital requirements are not reducing and are even increasing in many places. Now, he said, is therefore the time to improve both capital structure and allocation.

“When we look across the industry, Lloyd’s is a prominent illustration of an often-seen dynamic, where results are thin, if indeed positive, yet the capital requirements are increasing,” said Paire.

Aon launched a Capital Advisory unit during the Monte Carlo Rendez-Vous, based within Aon’s Reinsurance Solutions business, which is designed to assist re/insurers, Lloyd’s syndicates and captives with their capital optimisation.

It aims to help clients achieve capital efficiency by accessing alternative or traditional capital, or by identifying opportunities that make better use of existing capital—all while taking into account cost and returns.

The unit has been launched in London. Nick Frankland, UK CEO of Reinsurance Solutions, said at a press briefing that it could help with some of the issues Lloyd’s is facing.

“The broader Lloyd’s issue in terms of capital is twofold. There is a lack of, or just marginal, profitability in many lines of business, and also a push from Lloyd’s to increase syndicates’ capital requirements,” said Paire.

He noted that reserve releases are effectively drying up, although there is still some positivity in this trend.

“Reserves are themselves a driver of capital requirements in the Lloyd’s capital model, which means that working on reducing the reserves through adverse development covers (ADCs), can be a very efficient way for a Lloyd’s syndicate to reduce that,” he said.

He noted that reserving deals at Lloyd’s will fall into two categories: to draw a line under discontinued business and get rid of these reserves; or to reduce the reserve risk from capital efficiency.

Although Lloyd’s has issues that need addressing, Paire noted that these issues are not apparent only in the London Market.

His goal therefore is to expand the Capital Advisory offering into Europe, EMEA, Asia and also the US.

“The real issue is what we’re seeing with underwriting margins, and that’s not Lloyd’s-specific. It’s also true in Continental Europe, it’s true in reinsurance,” said Paire.

“Clients are taking a broader view of capital.”

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