September 18th, 2012

Lloyd’s: Solvency Testing

Posted at 1:00 AM ET

Matthew Day, Senior Vice President

Lloyd’s has a well-developed risk management framework. A number of committees provide oversight for the Market and detail what is required of members in terms of their own risk management. Lloyd’s is required to conduct an ICA for the Market as a whole, using the normal FSA risk categories to examine risks that are not captured within syndicate ICAs. This process aims to determine the level of capital required to be held centrally that can withstand a 1-in-200 year event over a one-year time frame. The Lloyd’s ICA is an important driver for the Council in determining the optimum level of central assets. Another key driver is the expectation that the costs of mutuality will be less than 1 percent of members’ GWP across the insurance cycle. The central assets target and the level of contributions are regularly reviewed in light of the Market’s current financial position and forecasted needs.

Lloyd’s is able to maintain control over its members’ underwriting through its annual solvency test. This test requires managing agents to estimate “technical provisions for solvency” for each syndicate and provide all current and future liabilities for each year of account. The FSA requires Lloyd’s to maintain solvency on a continuous basis. In circumstances where it has become apparent that a member has insufficient assets in trust to meet its underwriting liabilities and solvency margin, for example, immediately following a major loss, Lloyd’s takes action in order to protect policyholders. This action results in the member having to cease underwriting unless new funds are provided.

Lloyd’s has recently developed the market level Own Risk and Solvency Assessment with the aim of managing risks and ensuring a sufficient and effective capital provision.

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