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Capital is Front and Centre for CFOs

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Studies of the Lloyd’s market typically seek out the view of underwriters and brokers, the engine room of the industry, but what about the chief financial officers? Aon and the Lloyd’s Market Association teamed up to find out more about how CFOs see the market and the vital questions of capital management.

To watch a video interview with Eric Paire, UK Head of Capital Advisory at Aon’s Reinsurance Solutions, and Paul Davenport, Finance & Risk Director for the Lloyd’s Market Association, click below. Or read on as their share their thoughts on their recent CFO survey.


The Lloyd's market has historically been an efficient place for capital, but in the past few years fresh challenges have arisen, including the Covid-19 crisis and the Tier 2 capital limitation.

Aon and the LMA wanted to find out how chief financial officers were reacting to the various forces at work and how they looked at capital management, so we joined forces to carry out the CFO survey. The aim is to offer a benchmark for the industry, to provide finance leaders with a broad view of how their peers looked at capital and so deliver information to help them make the best strategic decisions.

The response was excellent and the CFOs who responded represent 75% of the market’s capacity. We followed up with 23 conversations with individual CFOs.

Unsurprisingly the vast majority (87%) are looking to grow their business, but our survey found that ambition for business growth is going hand-in-hand with an expanding role for the CFO. Once, the CFO’s role was focused on the end of the process — the profit and loss account — but their role is expanding as they look more intently to issues of capital planning, capital composition and capital deployment.

While this was the broad picture, this increasing focus on issues of capital was far from universal. Although half of CFOs were measuring cost of capital and return on capital as key metrics, many others were still using very traditional metrics such as loss ratios and expense ratios.

It is clear that CFOs should be asking two questions: Is enough attention being paid to cost and the return on capital? Are capital planning horizons appropriately aligned with the underlying business?

Capital planning horizons were also unexpectedly short, averaging just 24 months. This is almost certainly a reflection of how the market operates around an annual venture syndicate basis. But even so, this two-year capital planning horizon is surprising, given that the underlying business — the underwriting cycle — is typically much longer.

Good capital management always relies on good profitable and sustainable underwriting, and so a continued focus on that in the market is an essential part of the business. But there are other aspects that can and should be addressed, and from our survey it is clear that CFOs should be asking two questions: Is enough attention being paid to cost and the return on capital? Are capital planning horizons appropriately aligned with the underlying business?

There is no doubt that the focus on capital planning is much greater than a decade ago, and our survey found a mix of approaches with various degrees of capital and business planning working in balance. But there is an opportunity for CFOs to go further, and for some CFOs to catch up with the shifting focus.

Our study found that CFOs expected to see third party capital increasing as a proportion of the market over the coming year, and this is one opportunity for CFOs to adopt new approaches — they must be open to new efficient capital structures that can be used for linking to third party capital.

One obvious example of this is the London Bridge Protected Cell Company (PCC) that works to act as a transformer vehicle to link institutional investors to insurance providers at Lloyd’s.

Many CFOs also told of a growing interest in legacy transactions as a mechanism to unlock trapped capital.

The key to achieving the business growth may well lie in a greater focus on capital management and a greater willingness to look at innovative structured techniques for raisin or releasing capital.

Capital management is becoming one of the key issues for Lloyd’s market participants, and most CFOs recognise this. The next question they should be asking is whether they have investigated the full range of possibilities for their capital management, and are they using all the available tools to do so?

A new report, How CFOs Connect Capital and Business Strategy, summarising the key findings of our CFO survey, can be found here.

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