September 7th, 2012

Lloyd’s: Risk Management

Posted at 1:00 AM ET

Matthew Day, Senior Vice President
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Lloyd’s approach to risk management is integral to assessing its capital needs and measuring the return on risk. Each managing agent at Lloyd’s is responsible for managing its own risks and those of the syndicates it oversees, while the corporation manages the risks facing the Market as a whole. Strong risk management disciplines are viewed as essential to enhancing business performance and safeguarding overall franchise value. To address the risks faced by individual businesses and the risks that each syndicate poses to the franchise, extensive reviews are undertaken upon registration along with ongoing performance management reviews.

Each syndicate sets its own risk appetite, develops a business plan, arranges its reinsurance protection and manages its exposures and claims. Through the Performance Management Directorate (previously, the Franchise Performance Directorate), the corporation regularly reviews syndicate performance in each of these areas to ensure that it is satisfied with the level of risk posed to the overall Market and its mutual assets.

Realistic Disaster Scenarios

Realistic Disaster Scenarios (RDS) output is used to evaluate catastrophe exposure and is an increasingly important component of the risk management framework. It is built into Lloyd’s underwriting guidelines and capital-setting regime and is helpful in identifying potential over-reliance on individual reinsurers. RDS output provides benchmark stress tests that validate the output of Lloyd’s catastrophe model, which was introduced in 2010. By aggregating losses from particular events, the overall risk exposure of the market can be assessed, which plays into the capitalization of the Market as a whole.

Lloyd’s reviews the specifications and parameters of each RDS on an annual basis. There have been only minor changes to the RDS since 2006 with the addition of the United Kingdom flood scenario in 2009 and adjustments to offshore energy elements of the Gulf of Mexico Windstorm scenario in 2011.

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