As a captive domicile, Lloyd's is unique and offers significant benefits different to any other location These include global reach, cost savings, reduced cost of capital, the recognised financial rating of the market and access to expertise.

Global reach

One key attraction of Lloyd's is the network of direct insurance licences in over 60 countries. All syndicates, including new captives, have immediate access to these licences which become effective once the syndicate has been approved by the Lloyd's regulators. Each Lloyd's syndicate, therefore, is effectively an international insurance company with a powerful global reach. For UK companies, Lloyd's has licences for the statutory classes of motor and employers' liability.

Lower costs

The Lloyd's captive can issue direct policies without the need for fronting arrangements, which results in significant savings in fronting fees, local broker fees, federal excise tax (FET) and withholding taxes. Direct issuance of policies will reduce administration and allow funds to flow more freely from overseas, thereby enhancing investment opportunities.

Reduced cost of capital

The minimum level of capital typically required will be greater than for the offshore domiciles. However, this can be provided entirely by way of letter of credit or parental guarantee, and there is no requirement for paid-up cash.

Recognised financial rating

All Lloyd's syndicates automatically qualify for the market rating of S&P A+ and AM Best A rating. The rating is useful for joint ventures to give comfort to all parties as to the security of the cover. Furthermore, if the captive owner wishes to write third party business, the new syndicate will be acceptable to the major brokers and can be accessed immediately by all brokers registered at Lloyd's.

Access to expertise

Every syndicate has access to the Lloyd's central services, including the production of wordings, claims services and advice on licensing and taxation issues. The Lloyd's policy signing office (LPSO) can ensure that all the captive's policies meet the high commercial standards enjoyed in the market. This is particularly valuable where the captive has issued policies in a high risk environment, such as US liability.

Power to the risk manager's elbow

As well as hard financial benefits, a Lloyd's captive gives the risk manager a powerful tool which not only provides effective worldwide insurance, but also reduces the need for intermediaries and tedious administration.

Once the master policies have been agreed prior to renewal, the captive syndicate can empower the risk manager to issue local policies directly. Typically the policies would be delivered through the client's own intranet system without the need for fronting companies or local brokers.

Premiums can be collected internally and direct from subsidiaries. These monies do not need to leave the group, avoiding the annoyance of fronting companies sitting on company funds.

Where applicable, the syndicate can delegate claims settling authority up to certain limits directly to the risk management department. This will allow payment of claims by the risk manager direct to the subsidiary without any need for any other service provider to be involved.

Which type of company will benefit

In order to take advantage of a Lloyd's captive, the parent company will typically have some of the following attributes:

  • It will be multi-national and it will prefer to have admitted policies for its subsidiaries. Use of the Lloyd's licence network is the key benefit, and typically the licences will cover 80-90% of the exposures for a UK based multi-national. A number of insurers are willing to front for countries where Lloyd's does not have a licence to provide a “wrap-around” to the Lloyd's global policy.

  • UK companies with significant motor or employer's liability exposures can benefit as Lloyd's is licensed in those classes. The captive syndicate, therefore, may become a fully credited motor insurer and member of the Motor Insurance Bureau. Furthermore, it is possible to write pan-European and even global motor exposures through the syndicate.

  • As a Lloyd's syndicate is a fairly sophisticated insurance vehicle, the Lloyd's captive owner will typically have a risk management department with the necessary skills to understand and control the investment. Additionally, the parent company will have a policy of centralised control where insurance requirements are specified from the centre and value is obtained by issuing the local insurance policies direct, perhaps using an intranet.

  • Although the cost of operating a captive at Lloyd's is reducing, the level of regulation is higher than for an offshore domicile, similar to a UK commercial insurance company. It is, therefore, more expensive to run a Lloyd's captive so, to make it cost effective, savings must come from benefits, such as use of the licences. It is likely, therefore, that Lloyd's will suit the larger captive with annual premiums of at least £3 million.

    How would a Lloyd's captive fit within a typical programme

    A Lloyd's captive can be licenced to write a wide range of insurance classes. Indeed, as long as the underwriting expertise is available to the syndicate, the Lloyd's captive can write every business class that is written across the market. The captive is flexible and can be used in a number of different ways.

    The following list illustrates a few key points which will help optimise the benefits.

  • In order to harness the full value from the licences, the captive should become the primary insurance vehicle and write the programme on a direct basis. The syndicate would then purchase reinsurance for the risk transfer elements. However, it may not always be cost effective to write the entire “full value” property programme or, indeed, very high limits for the liability exposure, as the capital requirement increases in proportion with the amount of reinsurance bought. It may better, instead, to buy the high level cover on a non-admitted basis outside the captive programme. However, the Lloyd's captive can typically issue a direct programme for very significant limits cost effectively. A further consideration is that Lloyd's gives credit for reinsurance purchased from more highly rated capacity.

  • It is possible to use the captive to write on a multi-line basis. Also by using the captive, it may be easier to purchase multi-line protection directly from the reinsurance market rather than from the less flexible direct market.

  • The captive syndicate can write multi-year policies. This may seem incompatible with the annual Lloyd's venture but multi-year policies are widely underwritten at Lloyd's. Indeed, as the captive will have 100% dedicated corporate capacity from the parent organisation, the task of equalising the premium and profit allocation between each year will be less critical, as the corporate member will be the same throughout the period of the policy. Therefore, it should be possible to write policies with periods of two to five years.

  • The captive's net retained exposures should be capped by policy aggregates, which are easily identifiable. The capital requirements for the Lloyd's captive are based on premiums and the net risk gap. The risk gap is defined as the difference between net exposure and the sum of available premium and capital. The level of retained risk transfer will reflect the risk attitude of the parent but will be minimal compared to the gross exposure.

  • The Lloyd's captive will soon be able to accept ART and financial risks and, indeed, may offer a useful vehicle to access these markets on a direct basis.

    Lloyd's as a domicile

    Over the last few years Lloyd's has experienced a “big bang” as the market moves from a traditional environment of individual members of Names to a corporate capital one. Many of the world's insurance companies have recognised the considerable benefits gaining by locating an insurance subsidiary within the Lloyd's domicile. Now the captive market can also takes advantage of this unique UK opportunity.

  • Alistair Rodger is business development manager at PXRE Managing Agency, managers of the first captive syndicate at Lloyd's, number 1250, managed for Smith Kline Beecham.