September 17th, 2012

Capital Development at Lloyd’s

Posted at 1:00 AM ET

Matthew Day, Senior Vice President
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The chain of security at Lloyd’s describes the three layers of capital that Lloyd’s uses to pay claims.

Table 1

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The first layer or syndicate level assets are all the premiums received by a syndicate and held in its premium trust funds. These are generally held as fully liquid assets in order to pay claims as they become due. In the last five years, syndicate level assets have increased to GBP41.3 billion, rising by 35 percent for the period (see Table 1).

The second link in the chain of security is FAL, which represents the capital deposited centrally by members in support of their underwriting. FAL is inter-available across underwriting years and typically comprises amounts required to support two open years and the current/forthcoming year. During the “coming into line” process in November, each member’s FAL must be sufficient to cover any net deficit on the two previous underwriting years for all syndicates in which the member participated (as determined by actuarial review at the previous year-end). FAL must also meet that member’s Lloyd’s determined capital requirement for the coming year. Members’ funds have increased 64 percent since 2007. If combined with the first layer, then the capital held in trust has risen by a combined 41 percent. This is broadly in line with the growth in underwriting capacity, which has grown by 45 percent in that time period.

Mutually-held central assets are the third level of security at Lloyd’s. They comprise the Central Fund (funded by the annual contributions of members), the callable layer and subordinated debt issued by the corporation in 2004 and 2007.

The central assets are owned by the Society of Lloyd’s, which is separate from the underwriting members of Lloyd’s. The Council of Lloyd’s can decide when to deploy these assets in order to cover the liabilities of a member if it is unable to meets its obligations. The Lloyd’s current target for unencumbered central assets is at least 250 percent of the Society’s Individual Capital Assessment (ICA) on a business as usual basis.

Mutual assets increased from GBP3.4 billion in 2007 to GBP4.6 billion in 2011, representing a rise of 36 percent. This compares to an increase of 43 percent in GWP over the same period. The Central Fund increased from GBP767 million to GBP1,361 million during the same period, a rise of 77 percent over five years. Members’ contributions to the Central Fund remain at 0.5 percent of GWP for 2012.

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