When it comes to investment, Lloyd's has always appeared a little too much like hard work for the likes of private equity and hedge funds. The inability to get in and out if a comp-any falls in price, and the lack of opportunity to buy, restructure and sell in quick succession, has made the market unappealing.
Until now. The hurricanes of 2005, which sparked substantial rate increases in property CAT and offshore energy, have changed investors' appetite for insurance. Hedge funds and private equity have flowed into Bermuda as reinsurers try to repair their balance sheets.
Previously, London lost out to its offshore competitor as differentials in tax and trading times affected where investors chose to place their money. But the impact of capital markets and the securitisation of insurance and reinsurance risk is, according to some, becoming the topic of choice again.
Rupert Swallow, head of global operations at Benfield, points out: "Not only is the London market suffering from a move of capital investment out of London, we're getting some extremely professional slick organisations coming into our business. I'm talking specifically about investment bankers, private equity hedge funds."
The question is - how long will it be before capital investors begin sniffing at the door of Lloyd's as they look to take advantage of potential profit returns? The increased presence of hedge funds and private equity offers an opportunity for Lloyd's players as they seek to protect against severe liabilities.
Stephen Catlin, chief executive of Catlin, believes that if the insurance industry cannot provide sufficient coverage for the rising economic values in areas such as the cat-exposed coast of Florida, the capital markets can help provide risk transfer. Insurance securitisation has grown significantly in recent years and has "enormous potential" in the long term, according to the rating agencies.
Damir Bettini, a senior director at Fitch Ratings, predicts that the impact of securitisation on the insurance sector could be as profound as it was for the banking industry.
Catlin says that it intends to participate in a 'catastrophe bond' transaction. The catastrophe swap agreement will provide the insurer with cover of up to $200m in the event of severe natural catastrophes.
Lloyd's will find a very useful ally when it comes to transferring insurance risk to the capital market, but it may prove to have an even bigger effect on the Lloyd's market. Swallow believes that the emergence of capital investors could provide the impetus needed to help change the "incredibly inert market".
"It's not necessarily the securitisation of insurance risk with big bond issues that is the dynamic," he says. "But perhaps more of the brightest minds leaving our industry, joining these incredibly powerful organisations and transferring risk in a very different way."
