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  1. Point in time
    2006-04-06

LLD 19.4 Individual capital assessment

Application of PRU 2.3

LLD 19.4.1R

Subject to LLD 19.4.2 R, PRU 2.3 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.

LLD 19.4.2R

Managing agents must carry out assessments of capital adequacy for each syndicate they manage by reference to all open syndicate years taken together.

Assessment of adequacy of capital resources for syndicates and members

LLD 19.4.3G

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.

LLD 19.4.4G

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. (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. (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.

LLD 19.4.5G

Responsibility for:

  1. (1)

    managing the risks associated with the insurance business; and

  2. (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.

LLD 19.4.6R

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.

LLD 19.4.7R

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. (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

  2. (2)

    because that member's financial resources include funds at Lloyd's or central assets.

LLD 19.4.8R

The Society must have regard to syndicate ICAs in arriving at its own capital assessment for each member.

LLD 19.4.9G

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. (1)

    the adequacy of syndicate ICAs;

  2. (2)

    the member's share of syndicate ICAs;

  3. (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. (4)

    the ongoing validity of any relevant assumptions it makes.

LLD 19.4.10G

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.

LLD 19.4.11G

In taking account of a syndicate ICA under LLD 19.4.8 R:

  1. (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. (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.

LLD 19.4.12G

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. (1)

    risks and controls associated with funds at Lloyd's and central assets, which can increase the member's individual capital assessment;

  2. (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. (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.

The balancing amount

LLD 19.4.13G

Capital resources to meet each syndicate ICA could be:

  1. (1)

    held within a syndicate and managed by the managing agent; or

  2. (2)

    held and managed by the Society; or

  3. (3)

    not needed in full, because of effects such as diversification that the Society takes into account.

LLD 19.4.14G

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. (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. (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. (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.

LLD 19.4.15R

Managing agents must periodically notify the Society of the syndicate ICA and the balancing amount in respect of each syndicate.

LLD 19.4.16R

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.

LLD 19.4.17R

After notification of a balancing amount by a managing agent, the Society must:

  1. (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. (2)

    notify the managing agent that it cannot give that confirmation.

LLD 19.4.18G

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.

LLD 19.4.19G

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.

LLD 19.4.20G

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.

Monitoring of capital resources

LLD 19.4.21G

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.

LLD 19.4.22G

Following initial confirmation of a balancing amount by the Society, assumptions made about risks and controls may change or risks may crystallise, affecting:

  1. (1)

    the syndicate ICA (and hence, possibly, the balancing amount); or

  2. (2)

    the relationship between a syndicate ICA and a member's individual capital assessment; or

  3. (3)

    the amount of capital resources available.

LLD 19.4.23R

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.

LLD 19.4.24R

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.