LLD 19
Application of PRU 2 to Lloyd's
LLD 19.1
Section 150 of the Act (Actions for damages)
- 01/01/2005
LLD 19.1.1
See Notes
A
contravention of the rules in
this chapter does not give rise to a right of action by a private person under section 150 of the Act (Actions for damages)
and each of those rules is
specified under section 150(2) of the Act as
a provision giving rise to no such right of action.
- 01/01/2005
LLD 19.2
Calculation of capital resources requirements
- 01/01/2005
Application of PRU 2.1
LLD 19.2.1
See Notes
- 01/01/2005
LLD 19.2.2
See Notes
- 01/01/2005
LLD 19.2.3
See Notes
PRU
2.1.9 R requires the Society to ensure, in relation to each member's insurance business, that capital resources equal to or in excess
of the member's capital resources requirement (CRR) are maintained. PRU
2.1 sets out the overall framework of the CRR. PRU 7.2 sets out the calculation of the components of the general insurance capital requirement and
the long-term insurance
capital requirement.
- 01/01/2005
LLD 19.2.4
See Notes
Managing agents are required
to calculate the ECR for
the purposes of carrying out syndicate
ICAs under PRU 2.3.
As with-profits insurance
business is not carried on through any syndicate, the calculation of the with-profits insurance capital component will
not be applicable. PRU 7.4 is not applied to
Lloyd's.
- 01/01/2005
Calculation of the MCR
LLD 19.2.5
See Notes
For the purposes of PRU 2.1.21 R, the Society must calculate the MCR in respect of the general insurance business of each member as the higher of:
(1) the member's share of the base capital resources requirement in respect of general insurance business for the members in aggregate; and
(2) the general insurance capital requirement for the member, calculated according to LLD 19.2.11 R.
- 01/01/2005
LLD 19.2.6
See Notes
For
the purposes of LLD
19.2.5R (1),
the Society must
determine the member's share
by apportioning the base
capital resources requirement in respect of general insurance business for the members in aggregate between members in proportion
to the result for each member of LLD 19.2.11 R.
- 01/01/2005
LLD 19.2.7
See Notes
For
the purposes of PRU 2.1.22 R, the Society must calculate
the MCR in
respect of the long-term
insurance business of each member as
the higher of:
(1) the member's share
of the base capital resources
requirement in respect of long-term
insurance business for the members in
aggregate; and
(2) the sum of, for each member:
(a) the long-term
insurance capital requirement; and
(b) the resilience
capital requirement.
- 01/01/2005
LLD 19.2.8
See Notes
For the purposes of LLD 19.2.7R (1), the Society must determine the member's share by applying to the aggregate long-term business base capital resources requirement the ratio of the result for the member of LLD 19.2.7R (2) to the aggregate of the results of LLD 19.2.7R (2) for all members.
- 01/01/2005
Calculation of the base capital resources requirement
LLD 19.2.9
See Notes
Subject to PRU 2.1.27 R, the amount of the base capital resources requirement for the members in aggregate is:
(1) for general insurance business, €3 million; and
(2) for long-term insurance business, €3 million.
- 01/01/2005
Calculation of the general insurance capital requirement
LLD 19.2.10
See Notes
For the purposes of PRU 2.1.30 R, the Society must calculate the general insurance capital requirement for the members in aggregate as the higher of:
(1) the aggregate for all members of the higher of, for each member, the result of the premiums amount and the claims amount; and
(2) the brought forward amount.
- 01/01/2005
LLD 19.2.11
See Notes
The Society must determine
the general insurance
capital requirement for each member by apportioning the result of LLD 19.2.10 R between members on a fair and
reasonable basis, provided that the general
insurance capital requirement for a member must not be less than the higher of
the result of the premiums
amount and the claims
amount for that member.
- 01/01/2005
LLD 19.2.12
See Notes
The Society should calculate
the premiums amount and
the claims amount for
each member on
the basis of the member's own general insurance business,
including insurance business that
attaches to the reinsuring member for
the purposes of PRU following
an approved reinsurance
to close (see LLD 17.5.3 R).
- 01/01/2005
LLD 19.2.13
See Notes
The Society must calculate
the general insurance
capital requirement it would have to determine under PRU
2.1.30 R if it were an insurer carrying on all the general insurance business carried
on by its members,
but eliminating inter-syndicate
reinsurance (the Society
GICR).
- 01/01/2005
LLD 19.2.14
See Notes
For
the purpose of LLD 19.2.13 R the Society may make appropriate
approximations, taking reasonable care to avoid underestimating the Society GICR.
- 01/01/2005
LLD 19.2.15
See Notes
The Society must determine
each member's share
of the Society GICR by
allocating the Society
GICR between the members in
proportion to the result for each member of LLD 19.2.11 R.
- 01/01/2005
LLD 19.3
Capital resources
- 01/01/2005
Application of PRU 2.2
LLD 19.3.1
See Notes
Subject to LLD 19.3.3 R, LLD 19.3.4 R and LLD 19.3.6 R, PRU 2.2 applies to managing agents and to the Society in accordance with:
(1) for managing agents, LLD 16.3.3 R; and
(2) for the Society, LLD 16.3.1 R.
- 01/01/2005
LLD 19.3.2
See Notes
PRU 2.1 sets out minimum capital resources requirements for a firm and for Lloyd's members. PRU 2.2 sets out how, for the purpose of these requirements, capital resources are defined and measured. PRU 2.2 applies:
(1) to managing agents for their calculation of the capital resources managed by them in respect of each syndicate they manage (by reference, where there is a change in the underlying capital provision, to each open syndicate year); and
(2) to the Society for its calculation of:
(a) each member's capital resources; and
(b) its own capital resources.
- 01/01/2005
LLD 19.3.3
See Notes
PRU
2.2.15 G to PRU 2.2.26 R (Limits
on the use of different forms of capital) do not apply to managing agents.
- 01/01/2005
LLD 19.3.4
See Notes
PRU 2.2.15 G to PRU 2.2.26 R (Limits on the use of different forms of capital) apply to the Society with respect to:
(1) the capital resources requirements for the members in aggregate; and
- 01/01/2005
LLD 19.3.5
See Notes
- 01/01/2005
LLD 19.3.6
See Notes
In this Chapter LLD 19, "the aggregate capital resources supporting the insurance business of all the members" are:
- 01/01/2005
Calculation of capital resources
LLD 19.3.7
See Notes
Table PRU 2.2.14 R applies with the modifications that:
(1) (A) CORE TIER ONE CAPITAL includes Lloyd's members' contributions in accordance with LLD 19.3.19 R, subject, in the case of letters of credit, guarantees and verifiable sums arising out of life assurance policies, to compliance with LLD 18.3.3 G to LLD 18.3.9 G; and
- 01/01/2005
LLD 19.3.8
See Notes
Lloyd's member's contributions are admissible assets under LLD 19.3.19 R and include letters
of credit, guarantees and verifiable sums arising out of life assurance policies
held as funds at Lloyd's.
Assets that may be valued as part of capital
resources under PRU are
not necessarily, however, permitted investments for members under the terms of any Lloyd's trust deed.
- 01/01/2005
LLD 19.3.9
See Notes
In
calculating its capital
resources, the Society may,
subject to LLD 18.3.10 G to LLD
18.3.12 R, recognise and value callable contributions.
- 01/01/2005
LLD 19.3.10
See Notes
The Society must calculate each member's capital resources as the sum of:
(1) a member's proportionate share of the capital resources held at syndicate level for each syndicate in which the member participates; and
(2) the value of a member's funds at Lloyd's after deducting liabilities in compliance with LLD 18.3.17 R.
- 01/01/2005
LLD 19.3.11
See Notes
In order to comply with PRU 2.1.9 R the Society must ensure at all times that:
(1) each member's capital resources requirement is covered by:
(b) to the extent that (a) is insufficient, by the Society's own capital resources; and
(2) the Society GICR is covered by the aggregate capital resources supporting the insurance business of all the members.
- 01/01/2005
LLD 19.3.12
See Notes
For
the purposes of LLD
19.3.11R (1)(b), the Society must
maintain at all times capital
resources sufficient to meet the aggregate of, for each member, the amount, if
any, by which the member's capital resources fall
short of the member's capital resources requirement.
- 01/01/2005
LLD 19.3.13
See Notes
The Society must calculate each member's share of the amount of capital resources required to comply with PRU 2.2.17 R as the higher of:
(1) 1/3 of the long-term insurance capital requirement for the members in aggregate; and
(2) the base capital resources requirement;
allocated between the members in proportion to the result for each member of LLD 19.2.7R (2).- 01/01/2005
LLD 19.3.14
See Notes
For the purposes of PRU 2.2.18 R, the Society must ensure that the aggregate capital resources supporting the insurance business of all the members meet the higher of:
(1) 1/3 of the general insurance capital requirement for the members in aggregate; and
(2) 1/3 of the Society GICR; and
(3) the base capital resources requirement;
with the sum of the items listed in PRU 2.2.18 R.- 01/01/2005
LLD 19.3.15
See Notes
The Society must calculate each member's share of the amount of capital resources required to comply with PRU 2.2.18 R as the higher of:
(1) 1/3 of the general insurance capital requirement for the members in aggregate; and
(2) 1/3 of the Society GICR; and
(3) the base capital resources requirement;
allocated between the members in proportion to the result for each member of LLD 19.2.11 R.- 01/01/2005
Characteristics of tier one capital
LLD 19.3.16
See Notes
A Lloyd's member's contribution may be included in tier one capital resources to the extent that:
(1) the proceeds are immediately and fully available in respect of the member's insurance business at Lloyd's;
(2) (except in relation to letters of credit), it complies with PRU 2.2.29 R (3) or cannot be repaid to a member until all of the member's liabilities in respect of its insurance business at Lloyd's have been extinguished, covered or reinsured by an approved reinsurance to close;
(3) it otherwise complies with PRU 2.2.29 R (5) to PRU 2.2.29 R (8).
- 01/01/2005
Adjustments for related undertakings
LLD 19.3.17
See Notes
PRU
2.2.90 R applies to the Society with the modification that the Society must also value
its insurance undertakings in
accordance with PRU 2.2.90 R.
- 01/01/2005
LLD 19.3.18
See Notes
If a related undertaking is an insurance undertaking which has a deficit in the capital resources available to cover its capital resources requirement, the Society must make provision for:
(1) its proportionate share of that deficit; or
(2) in the case of a subsidiary undertaking, the whole of that deficit.
- 01/01/2005
Modification of Annex 1R for Lloyd's
LLD 19.3.19
See Notes
In the case of members, Lloyd's members' contributions are included in PRU 2 Annex 1R and include:
(1) letters of credit;
(2) guarantees; and
(3) verifiable sums arising out of life assurance policies;
held as funds at Lloyd's.- 01/01/2005
LLD 19.3.20
See Notes
The
effect of LLD 19.3.19 R is
that Lloyd's members'
contributions, including letters of credit, guarantees and life
assurance policies, are admissible
assets.
- 01/01/2005
LLD 19.4
Individual capital assessment
- 01/01/2005
Application of PRU 2.3
LLD 19.4.1
See Notes
Subject to LLD 19.4.2 R, PRU 2.3 applies to managing agents and to the Society in accordance with:
(1) for managing agents, LLD 16.3.3 R; and
(2) for the Society, LLD 16.3.1 R.
- 01/01/2005
LLD 19.4.2
See Notes
Managing
agents must carry out assessments of capital adequacy for each syndicate they manage
by reference to all open syndicate years taken
together.
- 01/01/2005
Assessment of adequacy of capital resources for syndicates and members
LLD 19.4.3
See Notes
PRU 1.2 requires firms to carry out assessments
of the adequacy of their financial resources. Financial resources include capital resources and
liquidity resources. PRU
5 contains guidance on liquidity
stress tests. Managing
agents should manage liquidity
risk affecting each syndicate they
manage and the Society should
manage liquidity risk affecting funds at Lloyd's and central assets, including
the risk that it cannot make liquid assets available to support syndicates on a timely
basis.
- 01/01/2005
LLD 19.4.4
See Notes
PRU 2 sets out provisions that deal specifically with the adequacy of that part of a firm's financial resources that consists of capital resources. PRU 2.3 sets out guidance on how firms should assess the adequacy of their capital resources. The relevant requirements for Lloyd's are that:
(1) the Society should carry out regular assessments of the adequacy of the capital resources available to support each member's insurance business; and
(2) managing agents should carry out regular assessments of the adequacy of capital resources held at syndicate level in respect of the insurance business carried on through each syndicate.
- 01/01/2005
LLD 19.4.5
See Notes
Responsibility for:
(1) managing the risks associated with the insurance business; and
(2) holding the capital resources that support those risks;
is divided between managing agents and the Society. To clarify the respective responsibilities of managing agents and the Society for ensuring the adequacy of financial resources, the FSA distinguishes between the managing agents' responsibility to carry out capital adequacy assessments for each syndicate that they manage, and the Society's responsibility to carry out an assessment for each member.- 01/01/2005
LLD 19.4.6
See Notes
In carrying out capital adequacy assessments
in respect of the insurance
business carried on through each syndicate (the syndicate ICA), managing agents must consider the risks,
controls and the financial resources relevant to each syndicate.
- 01/01/2005
LLD 19.4.7
See Notes
When carrying out the syndicate ICA, managing agents must not take into account risks to which a member may be exposed or controls from which a member may benefit:
(1) because that member carries on insurance business through another syndicate or more than one syndicate year (whether or not managed by the same managing agent); or
- 01/01/2005
LLD 19.4.8
See Notes
The Society must
have regard to syndicate
ICAs in arriving at its own capital assessment for each member.
- 01/01/2005
LLD 19.4.9
See Notes
In assessing the adequacy of the capital resources supporting the insurance business of each member, the Society should consider the risks, controls and financial resources relevant to the totality of the member's insurance business, including:
(1) the adequacy of syndicate ICAs;
(2) the member's share of syndicate ICAs;
(3) adjustments in respect of risks and controls relating to funds at Lloyd's, central assets and the interaction of risks underwritten by the member through different syndicates and in respect of different syndicate years; and
(4) the ongoing validity of any relevant assumptions it makes.
- 01/01/2005
LLD 19.4.10
See Notes
The Society should
be able to justify any reliance it places on a syndicate ICA, for example by being able
to demonstrate that it has carried out appropriate checks.
- 01/01/2005
LLD 19.4.11
See Notes
In taking account of a syndicate ICA under LLD 19.4.8 R:
(1) if the Society considers a syndicate ICA to be adequate, it should use the managing agent's risk and capital assessments in carrying out its individual capital assessment in relation to any member of that syndicate, or it should be able to justify why it will not; and
(2) if the Society considers a syndicate ICA to be less than adequate, the Society should increase the syndicate ICA so that it is adequate for the purpose of carrying out its individual capital assessment in relation to the members of that syndicate.
- 01/01/2005
LLD 19.4.12
See Notes
The assessment of capital adequacy for a member will rarely equal the proportionate share of a syndicate ICA (or sum of those shares, where the member participates on more than one syndicate) as attributed to that member, because, in determining the capital assessments for each member, the Society may make adjustments to take account of:
(1) risks and controls associated with funds at Lloyd's and central assets, which can increase the member's individual capital assessment;
(2) diversification effects, including as a result of members' participations on more than one syndicate year, which can reduce the member's individual capital assessment; and
(3) its own assessment of syndicate risks, which can be higher than the managing agent's and so increase the member's individual capital assessment.
- 01/01/2005
The balancing amount
LLD 19.4.13
See Notes
Capital resources to meet each syndicate ICA could be:
(1) held within a syndicate and managed by the managing agent; or
(2) held and managed by the Society; or
(3) not needed in full, because of effects such as diversification that the Society takes into account.
- 01/01/2005
LLD 19.4.14
See Notes
The balancing amount is a function of the relationship between the syndicate ICA and the amount of assets held within the syndicate. As illustrations:
(1) if the syndicate holds no capital resources (but its liabilities are fully covered by relevant assets), the balancing amount equals the syndicate ICA (as there are no capital resources at syndicate level, all the capital resources must be held as funds at Lloyd's or central assets);
(2) if capital resources held at syndicate level are negative (i.e. if relevant assets do not fully cover liabilities for the syndicate), the balancing amount should be higher than the syndicate ICA by an amount corresponding to the negative capital resources held by managing agents on behalf of the syndicate; and
(3) conversely, if a syndicate holds positive capital resources for the syndicate, the balancing amount should be lower than the syndicate ICA by a corresponding amount.
- 01/01/2005
LLD 19.4.15
See Notes
Managing
agents must periodically notify the Society of the syndicate ICA and the balancing amount in respect of each syndicate.
- 01/01/2005
LLD 19.4.16
See Notes
For the purpose of assessing the adequacy
of capital resources held
as funds at Lloyd's and central assets, the Society must have regard
to balancing amounts notified
to it by managing agents.
- 01/01/2005
LLD 19.4.17
See Notes
After notification of a balancing amount by a managing agent, the Society must:
(1) confirm to the managing agent that capital resources held as funds at Lloyd's and central assets are adequate to support the balancing amount; or
(2) notify the managing agent that it cannot give that confirmation.
- 01/01/2005
LLD 19.4.18
See Notes
Managing
agents should submit syndicate
ICAs and notify balancing
amounts to the Society as
part of the annual capital-setting process at Lloyd's. The submission of the syndicate ICA and notification
of the balancing amount should
be made in good time for the Society to
review them and place appropriate reliance on them when it determines the
capital assessments for each member.
- 01/01/2005
LLD 19.4.19
See Notes
When communicating the syndicate ICA and balancing amount for each syndicate to the Society, managing agents should agree with the Society an allocation
of the syndicate ICA between syndicate years. The
purpose of the allocation is to ensure that there is an appropriate matching
of assets to risk and liabilities and an equitable treatment between the members reflecting the
provision of capital in each syndicate
year.
- 01/01/2005
LLD 19.4.20
See Notes
Under LLD 19.4.23 R, a managing
agent has a continuing obligation to communicate to the Society a revised syndicate ICA and, where
appropriate, a revised balancing
amount, if it considers that the syndicate ICA and balancing amount communicated in the capital-setting
process are no longer adequate in the light of the risks to which the syndicate business is
exposed.
- 01/01/2005
Monitoring of capital resources
LLD 19.4.21
See Notes
For the purposes of complying with their
obligations under PRU, managing agents may assume
that any balancing amount confirmed
by the Society under LLD 19.4.17 R is supported by capital resources held
as funds at Lloyd's and central assets.
- 01/01/2005
LLD 19.4.22
See Notes
Following initial confirmation of a balancing amount by the Society, assumptions made about risks and controls may change or risks may crystallise, affecting:
(1) the syndicate ICA (and hence, possibly, the balancing amount); or
(2) the relationship between a syndicate ICA and a member's individual capital assessment; or
(3) the amount of capital resources available.
- 01/01/2005
LLD 19.4.23
See Notes
If a managing agent has, at any time, a significant
doubt about the adequacy of a syndicate
ICA or balancing
amount with respect to syndicate risks
and controls, it must notify the Society immediately.
- 01/01/2005
LLD 19.4.24
See Notes
If the Society has, at any time, a significant
doubt about the adequacy of any member's capital resources held
by it in support of any balancing
amount, it must notify the relevant managing agent immediately.
- 01/01/2005