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

LLD 18.3 Valuation and recognition

Application of PRU 1.3

LLD 18.3.1R

PRU 1.3 applies to managing agents and to the Society in accordance with:

  1. (1)

    for managing agents, LLD 16.3.3 R; and

  2. (2)

    for the Society, LLD 16.3.1 R.

Amounts receivable but not yet received

LLD 18.3.2R

When recognising and valuing assets that are available to meet liabilities arising from a member's insurance business, neither the Society nor managing agents may attribute any value to any amounts receivable but not yet received from that member or another member, except for:

  1. (1)

    timing differences provided that a corresponding amount has been deducted from syndicate assets or funds at Lloyd's;

  2. (2)

    the Society's callable contributions, which are valued according to LLD 18.3.10 G to LLD 18.3.12 R; and

  3. (3)

    debts owed by a member to another member of the Society where the debt is a liability arising out of the insurance business he carries on at Lloyd's.

Letters of credit, guarantees and life assurance policies

LLD 18.3.3G

Letters of credit, guarantees and life assurance policies are admissible assets in respect of insurance business at Lloyd's and qualify as capital resources under PRU 2.2, subject to LLD 18.3.4 R to LLD 18.3.9 G.

LLD 18.3.4R

When recognising and valuing assets held as members' funds at Lloyd's the Society may, if the conditions in LLD 18.3.5 R are satisfied, attribute a value to letters of credit and guarantees that it holds in respect of a member's insurance business.

LLD 18.3.5R

The conditions referred to in LLD 18.3.4 R are that letters of credit and guarantees must be:

  1. (1)

    in the form prescribed by the Society from time to time and notified to the FSA; and

  2. (2)

    issued by a credit institution or an insurance undertaking.

LLD 18.3.6R

When recognising and valuing assets held as members' funds at Lloyd's the Society may attribute a value to verifiable sums arising out of life assurance policies.

LLD 18.3.7R

The Society must value any letter of credit, guarantee or life assurance policy at its net realisable value. The Society must make all appropriate deductions, including those in respect of:

  1. (1)

    the expenses of realisation; and

  2. (2)

    any reduction in value that would be likely to occur if the asset needed to be realised at short notice to meet liabilities falling due earlier than expected.

LLD 18.3.8R

If a member relies on a value attributed to a letter of credit or guarantee to meet any applicable capital resources requirement and that letter of credit or guarantee will expire in less than one month, the Society must take appropriate steps to ensure that the applicable capital resources requirement will continue to be met, including taking steps to ensure that sums due under the letter of credit or guarantee are drawn down when due and carried to the appropriate Lloyd's trust fund.

LLD 18.3.9G

In LLD 18.3.8 R, the expiry date includes the date on which the instrument will terminate if not renewed, and the date on which any notice to terminate will or would take effect.

The Society's callable contributions

LLD 18.3.10G

Under LLD 19.3.7R (2) and LLD 19.3.9 R, the Society may recognise and value callable contributions in its calculation of its own capital resources. LLD 18.3.11 R specifies the maximum value that may be attributed to callable contributions.

LLD 18.3.11R

For the purposes of LLD 19.3.7R (2) and LLD 19.3.9 R, the amount assumed to be callable from a member must not exceed the lower of:

  1. (1)

    the maximum callable contribution that member is or may be liable to make in that financial year; and

  2. (2)

    the amount by which the member's own capital resources exceed the member's own capital resources requirement.

LLD 18.3.12R

The Society must value callable contributions taking appropriate account of any legal, constructive or other limits on its ability to call for contributions from members or to realise the amount called.

LLD 18.3.13R

The Society must give the FSA adequate advance notice if it proposes to change the maximum amount of the callable contribution that members may be liable to make in any financial year.

LLD 18.3.14G

The FSA would normally expect not less than six months' notice under LLD 18.3.13 R.

Liabilities

LLD 18.3.15R

Subject to LLD 18.3.16 R, the Society must recognise and value all of a member's liabilities in respect of its insurance business.

LLD 18.3.16R

The Society need not recognise or value a member's liabilities that are recognised and valued at syndicate level by managing agents in accordance with PRU 1.3.

LLD 18.3.17R

For the purposes of calculating a member's capital resources, when valuing a member's funds at Lloyd's the Society must deduct the value of a member's liabilities determined under LLD 18.3.15 R.

LLD 18.3.18G

The liabilities to be valued under LLD 18.3.15 R and deducted under LLD 18.3.17 R include:

  1. (1)

    amounts owing to members' agents;

  2. (2)

    amounts owing to the Society;

  3. (3)

    an appropriate accrual for tax payable on any profits;

  4. (4)

    (where required under any applicable accounting principle in accordance with PRU 1.3.5 R), any contingent liability relating to liabilities reinsured into Equitas Reinsurance Ltd; and

  5. (5)

    amounts apportioned to members in respect of the credit equalisation reserve under PRU 7.5.

LLD 18.3.19R

In recognising and valuing a member's liabilities, the Society and managing agents may, to the extent permitted by applicable accounting principles, leave out of account the liabilities in respect of 1992 and prior general insurance business reinsured by Equitas Reinsurance Limited.

LLD 18.3.20G

There may be contingent liabilities associated with the reinsurance into Equitas. PRU 1.3 requires managing agents and the Society to treat those contingent liabilities in accordance with applicable accounting principles: see PRU 1.3.5 R. Depending on the circumstances, managing agents or the Society may need to disclose or account for such a liability.