The Importance of Consortia in Driving Market Innovation and Growth

As the market approaches the completion of the 2025 Lloyd’s business planning process this September, David DeJong & Tom Gauge, Managing Directors at Howden Re, explain how Lloyd’s Consortia are not only enhancing product expertise and capital efficiency for Lloyd’s Syndicates, but are also helping to reshape the dynamics of the London market.

Consortia Trending…

Whilst Consortia have been a feature of the Lloyd’s market for many years, there has been an explosion in their popularity in recent years, as Syndicates increasingly incorporate both the leading and following of Consortia into their strategies for growth and efficiency gains.

Having been working in the Consortium broking market for 12 years, DeJong and Gauge have witnessed this first hand. Howden Re is the only broker with fully dedicated Consortium placement and operational resource, combining insurance and reinsurance capabilities, with expertise covering a broad range of classes. The team works in close collaboration with Howden Re’s Capital, Treaty, Binder & Facultative teams to offer a holistic (re)insurance placement and portfolio management service to their clients.

With the definition often confused by the occasional misuse of the term in the MGA and broker facility markets, a true Lloyd’s Consortium is a delegated authority agreement that is placed between Lloyd’s Syndicates, the subject of which is a portfolio of the Consortium Leader’s business. Via the agreement, Consortium Members assume a proportional co-insurance of the Leader’s portfolio.

“It’s still a greenfield market but Consortia are absolutely here to stay,” says DeJong, “What is now a specialist niche from both a placement and operational perspective will become part of the mainstream, but right now a surprising number of underwriters and brokers in the Lloyd’s community are still unaware of their many benefits and perhaps as importantly, how you place and manage them. Whilst they look a lot like other products available in both the insurance and reinsurance markets, they are totally unique in that respect”.

Meaningful Lloyd’s Capacity in the Global Market

The rise of the Consortium is great news for Lloyd’s of London. Consortium placements aggregate a meaningful amount of Lloyd’s capacity around the expert underwriting and claims handling capability of a single Syndicate Leader. The aggregated line deployed by the Leader with the Consortium stamp raises the significance of Lloyd’s capacity in the global market, bringing new business to the building. In recognition of this, Lloyd’s have recently created frameworks for Syndicates to launch Consortia on the Lloyd’s Asia platform and in the Australian service company market, promoting their usage overseas.

It’s not therefore surprising that they are gaining in popularity, but the impact they are having on the market does not stop there.

“Syndicate to Syndicate”

DeJong and Gauge believe that a more prevalent role for Consortia in the market should in theory improve Lloyd’s benchmark underwriting and portfolio management standards, as effectively the placement of a Consortium commercially bestows true Lloyd’s Lead status on the Syndicate that can prove market outperformance to their peer group within their chosen specialism. In that respect, Consortia are also intrinsic to the market’s much-vaulted modernisation towards a more bifurcated lead / follow model in Lloyd’s.

According to Gauge, the advent of the ‘smart follow’ underwriting model has fundamentally changed the dynamics in the Consortium market. “Consortia are the perfect point of distribution for the ‘smart follow’ market given the unquestionable alignment of interest they get with our Consortium Leaders, all of whom are bottom-line focused balance-sheet businesses with long-term underwriting and investment horizons, operating in the same regulatory framework as they are, actively risk selecting on their behalf”, he states, “And in return, our Consortium Leaders get access to non-conflicted smart follow capacity to support their products, whilst monetising their Leader status through fee income that can be reinvested into the resources they need to maintain a top-quartile book of business through the cycle. In those terms, it’s Consortia that are perhaps perpetuating the bifurcation more so than other forms of follow, facilitation or delegation – which tend to hog the limelight!”, he adds.

Capital Efficiency and Book Value

And according to DeJong and Gauge, thanks to its more elevated profile and the obvious benefits of both leading and following, the Consortium product itself is now evolving from being simply a tool used by Class Underwriters for business requiring specialist expertise or distribution, to one which is also now being used more widely by the Syndicate Executive Management to simultaneously reduce the high internal costs of leading in specialist classes and establish market presence, with the overarching ambition to create mutual value for their business and that of their Consortium partners.

“Consortia operate in a similar way to proportional reinsurance, but the premium and exposure ‘ceded’ to Consortium Members are effectively written off balance sheet as a co-insurance with other Syndicates. Lead Syndicates can therefore not only use Consortia to enhance their proprietary products, but also to optimise their finite asset bases whilst generating fee-based revenue, which can then be reinvested in their underwriting and claims capabilities to further cement their lead positions and offset expenses”, DeJong explains, “We are now seeing our clients present multiline Consortium opportunities to the market in search of strategic capacity partners who can support them across a number of their class of business portfolios”.

Supporting Product Innovation and New Entrants

Consortia also play a vital role in fostering innovation within the market. Whether that be via new entrants or evolving sectors, they present an excellent way for Syndicates to adhere to their KPIs and capital restraints while building market share to the mutual benefit of the Consortium panel. “This flexibility is essential for Syndicates looking to establish themselves and achieve traction in their chosen specialisms,” DeJong emphasises.

More to Come

It’s clear that Consortia are creating new efficiencies in the traditional subscription market given the aggregation of capacity around market-leading product expertise, the obvious benefits that Syndicates can derive from leading Consortia, and the alignment of interest between lead and follow business models, which already makes them a central feature of the effort to modernise the market.

But DeJong and Gauge believe there is more to come. “Right now, Consortia are the preserve of the syndicated market in London, but with the frameworks that Lloyd’s have created in overseas territories, and with increasing interest in the product from company markets and alternative capital looking to efficiently access fully diversified portfolios of out-performing Lloyd’s business, the playing field will only get bigger from here”, comments Gauge.

“Howden Re is continually innovating with new variations to the product to meet the evolving needs of a wide variety of clients – from the very smallest to the very largest – whilst bringing new capital to the equation,” adds Gauge, “The Consortium model is not merely about sharing risk for mutual benefit, it’s also about redefining how the relationship between one’s capital and one’s appetite for exposure is best managed”.

Consortia will be a critical component for Syndicates’ success. “Without doubt they should have Consortia first and foremost in their minds during the capital and Lloyd’s business planning season,” concludes DeJong.

This article was first published in the Intelligent Insurer’s ‘Monte Carlo Today’ publication on 11th September, 2024. Click to view the live article.