Lloyd’s Outlines its Reinsurance Activities, Thunderbird Re Sidecar

In anticipation of the upcoming Reinsurance Rendezvous in Monte Carlo, Lloyd’s has presented an outline of its reinsurance activities and announced the creation of a Cayman Islands-based sidecar, Thunderbird Re, to back up the capacity of its Syndicates.

The world’s major reinsurers and buyers will gather in Monte Carlo the week of Sept. 11 in preparation for the reinsurance renewal season. For the past two years the Rendezvous has taken place against the background of serious hurricane strikes in the U.S. – Katrina last year and Ivan in 2004. Despite the losses, Lloyd’s and the other major reinsurers have weathered the storms and have been rebuilding their capital.

Although it came at the end of the bulletin, Lloyd’s made an important announcement concerning the creation of Thunderbird Re. Lloyd’s said it had “created a framework to give syndicates access to a pool of securitized reinsurance capacity.” It described Thunderbird Re as a “special purpose reinsurer,” domiciled in the Cayman Islands. The vehicle’s purpose is to create Cat Bonds to back up the commitments of its Syndicates who supply reinsurance coverage. Lloyd’s said it is now “creating a working party of managing agents to determine the size and nature of syndicate cat bond requirements going forward.”

The bulletin, on the Lloyd’s Website (www.lloyds.com) notes that those Syndicates “have an ally in the Franchise Performance Directorate (FPD), which has, among other things, the dual role of monitoring the syndicates’ catastrophe exposure levels and opening up channels of communication between the market and its reinsurance partners to enable collection of catastrophe claims.”

Further explaining the FPD’s role, Lloyds said its reinsurance oversight is “considered on two levels. The first level looks at the active and current reinsurance underwriting and conditions, while the second concentrates on the levels of reinsurance assets outstanding in the market.

“Reinsurance availability and price for US catastrophic risk, added to the entry of new insurers and increased interest shown by capital markets through hedge funds, creates a ‘fascinating market dynamic’ according to Lloyd’s Joint Head of Underwriting & Business Plan Review Franchise Performance, Bob Stevenson.

“Insurers, including syndicates at Lloyd’s, are obliged to explore alternatives that access capital markets to supplement traditional sources of reinsurance supply,” he noted. “These alternatives range from so-called reinsurance ‘sidecars’ to securitization through the issuance of catastrophe-related bonds and everything in between.”

As the Thunderbird Re initiative shows, Lloyd’s is in the process of determining”whether it is feasible to establish a framework that facilitates effective access to Cat Bonds for its Syndicates. “This,” Stevenson stated, “is exactly what Lloyd’s should be doing, ‘exploring alternatives and providing a platform for the market to make choices.'”

The bulletin also highlights the increasing concern over the differentiation between ‘vertical’ exposure arising from a single event, and the evaluation of ‘horizontal’ exposure from multiple events, during the course of the 2006 US windstorm season. “Increases in retentions, coupled with reductions in the level of reinsurance cover, mean insurers, including Lloyd’s syndicates, will bear more losses arising from smaller and medium-sized events.”

Peter Montanaro, Lloyd’s Head of Reinsurance, explained the role of the “Asset Unit,” which “helps ensure syndicates are monitoring reinsurance exposures and effectively managing relationships with their reinsurers.” Syndicates report to the Reinsurance Unit as part of the Franchise Directorate’s business plan requirements. “The aim’s to ensure we have an overall picture of the levels of reinsurance,” Montanaro explained. “Across the market, all but 7 percent of the reinsurance coverage is with companies with a financial strength rating of ‘A-‘ or higher.”

He added: “The reinsurers are pleased that we can speak on behalf of the syndicates in the market. Our aim is to take an overall view of the market and its trends to ensure we can react quickly if conditions change.”