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Status: You are viewing the version of the handbook as on 2005-06-30.

LLD 17.4 Management of risk

LLD 17.4.1R

The Society must establish and maintain systems and controls to enable it appropriately to address the risks to which the Lloyd's market is exposed.

LLD 17.4.2G

As well as the risks that are common to other firms, there are significant risks in the Lloyd's market arising out of its structure and the interrelationships between the entities involved. The risks include aggregations of risk in the market. The Society should ensure that the systems and controls required by LLD 17.4.1 R enable it to identify, monitor and manage those risks.

LLD 17.4.3R

The systems and controls in LLD 17.4.1 R must include systems and controls to enable the Society to ensure that any assumptions made in calculating a member's capital resources or in determining the individual capital assessment for each member are regularly reviewed and that appropriate action is taken if any assumption is no longer valid.

LLD 17.4.4R

The Society must take all reasonable steps, including establishing and maintaining adequate systems and controls to enable it:

  1. (1)

    to manage the risks to which funds at Lloyd's and central assets are exposed; and

  2. (2)

    to ensure that funds at Lloyd's and central assets are adequate to support all balancing amounts.

LLD 17.4.5G

In complying with LLD 17.4.4 R the Society should take appropriate account of effects such as diversification and concentrations.

LLD 17.4.6R

A managing agent must establish and maintain adequate systems and controls to manage the risks to which the insurance business carried on through each syndicate it manages is exposed.

LLD 17.4.7R

In complying with LLD 17.4.6 R a managing agent need not take account of risks associated with assets that are not syndicate assets.

LLD 17.4.8R

The Society must take reasonable steps to ensure that systems and controls established and maintained by managing agents are adequate to ensure that risks to which the insurance business carried on through each syndicate is exposed do not have a detrimental effect on funds at Lloyd's or central assets.

LLD 17.4.9G

Managing agents and the Society each hold and manage some of the financial resources held to support the insurance business carried on through syndicates. In particular:

  1. (1)

    the Society holds and manages funds at Lloyd's and central assets which must be held to support balancing amounts. The Society is required to manage the risks that affect funds at Lloyd's and central assets directly, once the effects of any aggregation and diversification have been taken into account;

  2. (2)

    managing agents hold and manage some of the financial resources in respect of the insurance business carried on through each syndicate that they manage. Managing agents are required to manage all risks affecting a syndicate except for the risk that funds at Lloyd's and central assets are not available to support the balancing amount.

LLD 17.4.10G

Should the Society intend to exercise any power it may have to prescribe a course of action for a managing agent which the managing agent might reasonably consider to be inconsistent with the interests of any member whose insurance business it manages, the Society should:

  1. (1)

    consult any affected member, where practical in advance; and

  2. (2)

    in accordance with PRIN 11 (Relations with regulators), LLD 2 and, to enable the FSA to comply with section 314 of the Act (Authority's general duty), consider whether it should notify the FSA.

Group risk and conflicts of interest

LLD 17.4.11G

Many entities operating within the Lloyd's market are part of a corporate group, including the Society, certain managing agents and members. Those entities are subject to group risk arising from their own corporate group and, depending on the relationships within their own group, may be subject to FSA systems and controls requirements or group risk requirements. The rules and guidance in this section are intended to ensure that sufficient systems and controls are in place to protect policyholders and potential policyholders from such risks. The Society is also subject to the risk of wider conflicts of interest or the appearance of conflicts of interest in carrying out the Society's regulatory functions. LLD 17.4.13R (1) requires the Society to monitor and manage those risks.

LLD 17.4.12G

In complying with LLD 17.4.6 R, managing agents should have particular regard to:

  1. (1)

    transactions which may give rise to a conflict of interest, such as those to which the counterparties are:

    1. (a)

      other members of the managing agent's own group;

    2. (b)

      any members of any syndicates managed by the managing agent; or

    3. (c)

      any entity that is part of a group to which one or more members of any syndicates managed by the managing agent belong; and

  2. (2)

    transactions involving:

    1. (a)

      the provision of capital;

    2. (b)

      the provision of reinsurance; or

    3. (c)

      the provision of other services.

LLD 17.4.13R

The Society must establish and maintain effective arrangements to monitor and manage risk arising from:

  1. (1)

    conflicts of interest (including in relation to (2) to (4));

  2. (2)

    inter-syndicate transactions, including reinsurance to close and approved reinsurance to close;

  3. (3)

    related party transactions; and

  4. (4)

    transactions between members and itself.

LLD 17.4.14R

The arrangements in LLD 17.4.13 R must enable the Society to identify any significant overstatement of financial resources resulting from any transaction falling within LLD 17.4.13R (2) to LLD 17.4.13R (4), including as a result of:

  1. (1)

    any differences in the amounts recorded as due or payable by each party to any such transaction; or

  2. (2)

    any actual or likely disputes between the parties to any such transaction.

LLD 17.4.15R

If the Society identifies a significant overstatement of the kind referred to in LLD 17.4.14 R, it must ensure that an appropriate adjustment is made, including if appropriate by a deduction from or reduction in the value attributed to:

  1. (1)

    the capital resources of any member concerned; or

  2. (2)

    the Society's capital resources.

LLD 17.4.16G

In complying with LLD 17.4.14 R and LLD 17.4.15 R, the Society should consider the significance of any overstatement with regard to the value of the Society's capital resources that are not required to cover shortfalls in a member's capital resources.