Lloyd’s developed the concept of a syndicate-in-a-box (SiaB) to make it easier for innovative capital to enter the market, but there are certain requirements and differences compared to traditional syndicates.
The first company to announce the launch of an SiaB is Munich Re Syndicate Ltd., a longstanding Lloyd’s managing agent, which at the end of September formed Munich Re Innovation (MRI) Syndicate 1840. (Related Story: Lloyd’s 1st Syndicate-in-a-Box, Operated by Munich Re, Aims to Be an Innovation Lab).
Stuart Newcombe, active underwriter, of the MRI syndicate, detailed the requirements that Lloyd’s has for its newest underwriting businesses.
In addition to the requirement that it write unique risks, an SiaB must also write less than £100 million ($131.4 million) of premium, “which would be the bare minimum for a conventional Lloyd’s syndicate startup.” The reason for the lower premium amount is to reduce the barriers for entry, making it more attractive for innovative companies. He said, it also reduces the risk to Lloyd’s by limiting exposure arising from new products with less statistical data to support their pricing.
SiaBs also cannot have a presence in the Lloyd’s underwriting room. MRI will use the Lloyd’s electronic placement systems’ infrastructure, and having no physical presence in the underwriting room will ultimately help cut overhead and costs, Newcombe explained.
“One of the key criteria for a syndicate-in-a-box is it’s expected to run at a lower expense ratio than a conventional Lloyd’s syndicate,” he said.
The initial target for the SiaB combined expense ratios (including brokerage and cost of operation), is 35 at a maximum. “Lloyd’s sees that as an upper level, but not a target to achieve. They would expect the syndicate-in-a-box to outperform that 35,” said Newcombe. (According to the blueprint for its Future at Lloyd’s project, the market aims to cut the cost of insuring risk from nearly 40 percent of premiums to less than 35 percent within the next three years. A Lloyd’s representative said, the market aim “to cut substantially the cost of insuring risk” within that time period.)
Newcombe said the MRI team in London is very light, with just two underwriters who operate in an office across the street from Lloyd’s and are supported in finance and reporting by Munich Re Syndicate colleagues in the same building.
“What makes the syndicate-in-a-box unique for us is that we will not have the underwriting talent located with us here in London. We’ll be able to reach into Munich Re expertise and knowledge wherever that happens to be—in the U.S., Europe or elsewhere,” Newcombe said.
“From a business perspective, for us, the advantage is about the ability to use our group expertise wherever it is located. On the other hand, the traditional syndicate model requires us to demonstrate that we have all the expertise we need for everything we write on the payroll of the syndicate.”
With the new SiaB model, MRI has to demonstrate that it has access to that expertise. “We don’t necessarily have to have employment contracts with all of them—as long as they’re employed somewhere within the Munich Re group,” he said.
Benefits and Constraints
While a syndicate-in-a-box has constraints, it also has benefits over a traditional syndicate. For example, Lloyd’s has reduced the application fee and Lloyd’s does the internal capital modeling, Newcombe said.
For example, a traditional Lloyd’s syndicate will take 12 to 24 months build time, while a syndicate-in-a-box could be operational in just three, he said.
Indeed, Newcombe said, MRI was able to launch within three months because it has the benefit of Munich Re Syndicate’s existing resources, “so for us, it was all about adapting the processes to fit the new syndicate.”
Further, the reporting requirements are slightly less onerous, which is designed to make the market more accessible to new operations, he continued.
A SiaB might not have some of the historic data for the lines it plans to underwrite, because they are new and innovative without claims history, which means that Lloyd’s needs to keep a watchful eye, Newcombe explained.
As a result, he emphasized that barriers to entry are lower, but not low. MRI still has had to demonstrate to Lloyd’s how it will meet Lloyd’s minimum standards and regulatory filings, he said.
A traditional Lloyd’s syndicate would have to submit its business plan annually, providing extensive detail about how it will meet Lloyd’s minimum standards, but ultimately the syndicate will be left to run its underwriting year. On the other hand, a SiaB is subject to very strict quarterly and annual face-to-face reviews by Lloyd’s. “Yes, there are lower barriers to entry, but it is still a very, very thorough oversight,” he said.
A version of this article was first published in the March/April print edition of Carrier Management, and published online on Jan. 31.
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