Blackstone’s plans to set up a new insurance vehicle at Lloyd’s of London sparked a firestorm when they leaked this month during the industry’s annual conference in Monte Carlo.
“Why the eff is Lloyd’s doing this? They’re bringing the wolf in with the sheep,” one senior insurance broker told the FT. “I don’t know if it’s a late-cycle stupid idea or . . . the future of reinsurance.”
The New York asset manager has held talks with Aon, the world’s largest reinsurance broker, about creating a syndicate that could allow it to earn returns on up to $2bn of premiums annually, people involved in the discussions told the FT.
Blackstone’s move adds to growing tensions between private capital groups that have muscled into the insurance sector and reinsurers who fear that they will lose business to more aggressive investors.
The proposed structure would not be Blackstone’s first foray into Lloyd’s, a centuries-old insurance market where underwriters cover risks ranging from cyber attacks and hurricanes to defaults on private credit loans. The $1.3tn asset manager already backs policies written by insurers at Lloyd’s, including AIG.
But Blackstone’s latest plans are different, since they are modelled after a controversial structure: the so-called broker facility.
Traditionally, insurance brokers speak to clients about risks such as cyber attacks or flooding, and then shop around for the carrier that will insure those risks at the most competitive prices.
But brokers have increasingly set up facilities in which they package up risk and send it to pre-selected carriers. This gives the insurers guaranteed business but has proved contentious since they give up control over vetting individual risks and setting prices.
The structures have also given brokers more market power and have drawn past scrutiny from regulators as potentially anti-competitive.
The Blackstone-Aon syndicate would take broker facilities a step further, giving a broker the ability to send risks straight to a private equity backer. This would allow Blackstone, in effect, to substitute its funds for the balance sheet of a traditional insurer.
Under the terms being discussed, Aon would direct a percentage of the reinsurance business it brings in from commercial clients to Blackstone’s syndicate.
The structure would be backed by private equity funds, such as Blackstone Private Equity Strategies (BXPE) or the firm’s flexible “tactical opportunities” strategy, people familiar with talks said, and would target returns in the mid-teens.
“Funds managed by Blackstone have been long-term investors in the insurance sector,” Blackstone said. “All our Lloyd’s investments will continue to be made within the established Lloyd’s approval and oversight frameworks, alongside existing established market participants.”
Aon said that its clients “expect our firm to develop . . . solutions that consider all forms of available capital”.
Although other insurers would have vetted the same risks - the syndicate would sign up for business that had been underwritten by other carriers - insurers and actuaries were conspicuously absent from Blackstone’s planned structure, critics pointed out.
The syndicate would likely rely on claims-handling services provided by a third party, in effect creating the key functions of an insurer, but without a carrier directly involved.
Insurers traditionally vet and price risk before agreeing to cover it for a premium and retaining at least some of the risk on their own balance sheets. Regulators require carriers to have enough capital on hand to pay claims, though insurers can use the same funds to back multiple perils that are unlikely to strike at once, such as a ship sinking, a Japanese earthquake and a French terrorist attack.
But private capital groups such as Blackstone and Brookfield have increasingly disrupted the way risk is originated and distributed.
Adding to controversy, Blackstone’s talks come at a time when the price of commercial insurance is tumbling, putting insurers in competition for a limited pool of premiums.
“It’s not generating new business, it’s just more capital for existing business” that could push prices down, Aki Hussain, chief executive of insurer Hiscox, told the FT.
One reinsurance executive said of the plans that Aon would be “pre-packing risk and taking it away” from the insurance market.
During a period when prices are sliding due to an oversupply of capital, the executive added, “a broker should be leading the charge on innovation” by pitching new insurance products to its clients, rather than feeding its existing business to a new entrant, pushing down prices.
Private investors have been increasingly drawn to insurance due to the sector’s returns, which can be uncorrelated with financial markets, since they depend on the timing of disasters such as natural catastrophes.
Other private capital groups have recently joined the market too, with Oaktree, the distressed debt investor owned by Brookfield, last year agreeing to set up a Lloyd’s syndicate.
Like traditional insurers, they aim to pay out less in claims than they draw in, while earning income by investing premiums.
Reinsurers have argued that alternative investors might not stick around after facing large losses.
Depending on how Blackstone invested assets backing these policies, Hussain warned that “it could put more risk into the system”.
“This is not their core business,” he said. “When the going gets really tough . . . it’s not just that you may see no returns. We know you may lose your principal. That’s not something these sorts of investment houses are used to.”
