Special purpose arrangement (Lloyd's)
A Lloyd's syndicate that does not underwrite itself but takes a quota share of a host syndicate's business, letting outside capital enter Lloyd's without building an underwriting team.
A special purpose arrangement is a Lloyd's syndicate whose sole activity is to take, through a reinsurance quota share, a defined fraction of the business written by another syndicate, the host, without underwriting of its own. The host syndicate's managing agent continues to choose risks and set terms; the special purpose syndicate follows its decisions in the agreed proportion. The structure serves first to bring into Lloyd's capital that wants exposure to an identified portfolio without taking on the organization: insurance-linked securities funds, institutional investors, foreign reinsurers, sometimes players seeking a presence in a particular line, such as catastrophe reinsurance or cyber. It also serves the host syndicate, which increases its underwriting capacity and earns a commission on the business ceded. For the observer, it is the London version of the sidecar: a vehicle that rents an underwriter's skill to capital that lacks it, with the classic risk of misalignment if the commission rewards volume rather than results.
Textbook case: an insurance-linked securities fund wants cyber exposure without building a team. It capitalizes a special purpose syndicate that takes 30 percent of a well-regarded host syndicate's cyber portfolio, in exchange for a reinsurance commission of about 30 percent of premiums and a profit commission on results.
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