# About Insurance Capital Markets Research

We both started in the Lloyd's insurance market, but have spent more than a decade working in and with the capital markets. We learned our most important lesson at Lehman Brothers in 2008: “You make money until you don't.” However, the most revealing impression was how those two industries that work in such close proximity in their day to day business, e.g. most loans require insurance security, have been divided by their languages. This becomes most apparent at crossover points such as capital raising or ILS. Not surprisingly misunderstandings can and do arise as the same label can have a different meaning depending on the industry. The concept of premium, which seems clear to every investor, can be a lot more complex for an insurer, particularly in Lloyd's where there are so many different nomenclatures and accounting principles for premiums. The table below lists just some of the more common vocabulary:

(Re)insurer Investment bank/ Capital market
Reinsurer SPV, SPI
Risk period Tenor
Reinsurance structure Waterfall
Capacity Assets under management (AUM)
Capital Collateral, Principal

Both markets deal with uncertainty and risk, but with different labels and therefore perceptions of that risk. It is much easier to sell a loan or mortgage where the client receives the money, than an insurance policy where premiums have to be paid upfront for a future “promise to pay”.

Comparing the two industries by their sizes provides not only a view on the difference in scale, but also a sense of the insurance gap, since premium income (which is of comparable scale to policyholder surplus) represents around 2.5% of GDP but only about 1% of capital markets.

Industry Size
Non-life reinsurance gross premium c.$200bn Lloyd's gross premium c.$45bn
Direct non-life insurance gross premium c.$2trn World wide non-life (re)insurance gross premium c.$2.2trn
Equities market cap c.$85tn Fixed income securities outstanding c.$100trn
Capital markets c.\$185trn

Over the last 10 years, the rapid rise of direct capital markets investment in insurance risk, principally through ILS and collateralised reinsurance, have slowly started bringing about convergence between the markets, but material differences persist. The differences between a reinsurance contract wording and a bond contract remain markedly different, in part driven by the lack of legal precedent with the latter and therefore the lack of standardised clauses. It is not for no reason that the largest transaction fees tend to be the lawyers’!

We believe that we will see an evolution of insurance risk capitalisation. Where in the past most of the capital was equity from shareholders or members in the case of mutuals or Lloyd's syndicates, we will see the fixed income market participate to a much greater extent in capitalising risk, making insurance more capital efficient.

We created Insurance Capital Markets Research to bridge some of these gaps and, hopefully, to help broaden understanding between the two markets of each others drivers and issues.