LLD 10
Insurance
operational risk
LLD 10.1
Application and purpose
- 01/12/2004
Application
LLD 10.1.1
See Notes
This chapter applies to the Society.
- 01/12/2004
LLD 10.1.2
See Notes
A contravention of the rules in
this chapter does not give rise to a right of action by a private
person under section 150 of the Act (Actions
for damages) and each of those rules is
specified under section 150(2) of the Act as
a provision giving rise to no such right of action.
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Purpose
LLD 10.1.3
See Notes
This chapter addresses the systems and
controls appropriate to managing operational risk (see also LLD
9.1.4 G).
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LLD 10.1.4
See Notes
There are significant operational risks
present in the Lloyd's market arising out of the interrelationships between
the entities involved in effecting and carrying out contracts
of insurance. This chapter therefore contains specific requirements
for the Society to continue
to maintain systems for monitoring and managing operational risk in the market
and ensuring that assets are adequately matched to liabilities.
- 01/12/2004
LLD 10.1.5
See Notes
This chapter also requires the Society to take reasonable steps to ensure
that systems and controls are maintained by managing
agents to address the risks that arise with respect to the effecting
and carrying out of contracts of insurance.
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LLD 10.1.6
See Notes
General guidance on the adequacy of financial
resources is set out at LLD 9.3.
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LLD 10.2
Systems and controls
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LLD 10.2.1
See Notes
The Society must
maintain systems and controls that appropriately address the operational risks
to which the Lloyd's market is exposed.
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LLD 10.2.2
See Notes
LLD 10.3 to LLD 10.7 require the Society to maintain specific systems and
controls that go towards satisfying the Society's obligations
under LLD
10.2.1 R.
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LLD 10.2.3
See Notes
- 01/02/2003
LLD 10.3
Carrying of insurance receivables to trust funds
- 01/12/2004
LLD 10.3.1
See Notes
The Society must
take all reasonable steps to ensure that every member carries to a trust fund,
in accordance with the provisions of a trust deed, all amounts received or
receivable by him, or on his behalf, in respect of any insurance
business.
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LLD 10.3.2
See Notes
The Society must
approve the provisions of every trust deed referred to in LLD
10.3.1 R and any amendments to it.
- 01/12/2004
LLD 10.3.3
See Notes
The Society must
take all reasonable steps to ensure that amounts received by members in respect of long-term
insurance business are not carried to the same trust fund as
amounts received in respect of general insurance
business.
- 01/12/2004
LLD 10.3.4
See Notes
The trust deeds approved by the Society under LLD
10.3.2 R may allow each member to
pool his separate trust funds, provided that separate funds are maintained
for long-term insurance business and
for general insurance business.
- 01/12/2004
LLD 10.4
Changes in approved trust deeds
- 01/12/2004
LLD 10.4.1
See Notes
- 01/12/2004
LLD 10.4.2
See Notes
- 01/12/2004
LLD 10.4.3
See Notes
The information given by the Society to the FSA under LLD
10.4.2 R must include a statement
of the purpose and the impact of the proposed amendment or new trust deed
on policyholders and potential policyholders.
- 01/12/2004
LLD 10.4.4
See Notes
The Society should,
having regard to the materiality of a proposed change, consult interested
parties before it gives information to the FSA under LLD
10.4.2 R. The information given
to the FSA should describe the
consultation undertaken and summarise the responses received.
- 01/12/2004
LLD 10.4.5
See Notes
Any information given under LLD
10.4.2 R should be supplied in
sufficient time to allow the FSA fully
to consider the amendment or new deed before it is approved by the Society.
- 01/12/2004
LLD 10.5
Requirement to maintain risk-based capital system
- 01/12/2004
LLD 10.5.1
See Notes
The Society must maintain an appropriate and effective risk-based capital system, including:
(1) a risk-based capital (RBC) model to calculate the funds at Lloyd's required to support the insurance business of each member;
(2) arrangements for periodically comparing the premium income of each syndicate against the premium income forecast for that syndicate used in RBC calculations; and
(3) an appropriate dynamic financial model of the insurance business carried on in the Lloyd's market.
- 01/12/2004
LLD 10.5.2
See Notes
The Society must discuss with the FSA any material changes it proposes to make in:
(1) the RBC model it maintains under LLD 10.5.1 R (1);
(2) the monitoring arrangements it has established to comply with LLD 10.5.1 R (2); and
(3) the dynamic financial model it maintains under LLD 10.5.1 R (3).
- 01/12/2004
LLD 10.5.3
See Notes
The Society must
give the FSA adequate time to
review any significant changes that it proposes to make in the RBC model it
maintains under LLD 10.5.1 R (1),
and to assess the implications of those changes for policyholders and potential
policyholders and for the adequacy of the Central
Fund.
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LLD 10.5.4
See Notes
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LLD 10.5.5
See Notes
The RBC model should take account of the best estimate of prospective losses given the current state of the market. This might be achieved by bulk percentage loads in market sectors that show evidence of soft or softening rates and should take account of the following:
(1) the expected prospective level of underwriting losses or profits, taking account of the underwriting cycle where one can be made out;
(2) the prospective variability of underwriting profits or losses;
(3) mitigation of risk because of the independence or partial independence of various tranches of insurance business; and
(4) mitigation of risk based on the prospective reinsurance programme or proxies for reinsurance.
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LLD 10.5.6
See Notes
The factors listed in LLD
10.5.5 G should be adjusted for any factors that may
increase underwriting risk.
- 01/12/2004
LLD 10.5.7
See Notes
If underwriting risk is not considered
on a discounted basis within the RBC model, an explicit adjustment for future
investment income is appropriate.
- 01/12/2004
LLD 10.5.8
See Notes
Any discount rate used in the RBC model
should be set with reference to prospective returns on assets. An adjustment
should be made for non-interest bearing assets.
- 01/12/2004
LLD 10.5.9
See Notes
The RBC model should reflect reserving risk by taking account of factors such as:
(1) the prospective reserving run-off loss or profit;
(2) the prospective variance of run-off loss or profit; and
(3) mitigation of risk because of the independence or partial independence of various types of insurance business between classes and across time.
- 01/12/2004
LLD 10.5.10
See Notes
The factors listed in LLD
10.5.9 G should be adjusted for any other factors that
may increase reserving risk, including exposure to latent claims,
significant litigation or arbitration in progress. The RBC model should also
reflect substantial changes in the reinsurance purchased over time.
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LLD 10.5.11
See Notes
The RBC model should reflect credit risk on reinsurance recoveries by taking account of:
(1) the spread of outcomes as regards quantum of reinsurance recoverable, for example catastrophe-exposed accounts;
(2) the quality of the reinsurers, for example their credit agency ratings; and
(3) the possibility of future reinsurer downgrade or failure if a lengthy payout pattern is envisaged.
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LLD 10.5.12
See Notes
The RBC model should take account of
credit risk on receivables other than reinsurance recoveries if these are
substantial.
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LLD 10.5.13
See Notes
The RBC model need not treat asset risk in a sophisticated manner where the character of the asset/liability mix is such that the residual asset risk is small compared to the risk associated with the underwriting. A simple percentage allowance in the discount rate used may well suffice. If not, the formulation of the asset risk should reflect:
(1) prospective interest and inflation rates and their volatility;
(2) the nature, quality, duration and currency of assets; and
(3) mitigation of risk because of matching liability profiles.
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LLD 10.5.14
See Notes
The RBC model should reflect mitigation
due to the independence or partial independence between the various risk components.
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LLD 10.5.15
See Notes
The RBC model should take account of
concentrations of assets by counterparty,
country and economic sector. It should also reflect the potential for asset
shocks not matched by compensating changes in the value of liabilities.
- 01/12/2004
LLD 10.5.16
See Notes
The RBC model should also provide for
loadings where this is appropriate to reflect inadequate systems and controls
maintained by any managing agent.
- 01/12/2004
LLD 10.6
Requirements relating to monitoring aggregations of risk
- 01/12/2004
LLD 10.6.1
See Notes
The Society must
establish and maintain effective arrangements to monitor aggregations of risk
within the Lloyd's market.
- 01/12/2004
LLD 10.6.2
See Notes
The arrangements established by the Society under LLD
10.6.1 R should include regular reviews of the effect
on the market as a whole, and on specific parts of it, of a number of realistic
disaster scenarios. The arrangements should where appropriate assess significant
threats to the market posed by aggregations of risk.
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LLD 10.6.3
See Notes
These arrangements should also enable
the Society to make and review
other ad hoc or periodic analyses of aggregations, or potential aggregations,
of risk within the market.
- 01/12/2004
LLD 10.6.4
See Notes
These arrangements should also enable
the Society to obtain verification,
on a sample basis, of the accuracy or reasonableness of the information on
aggregations of risk given to it in respect of individual syndicates.
- 01/12/2004
LLD 10.6.5
See Notes
The Society should
discuss with the FSA the results
of its reviews of aggregations of risk and its future plans for aggregation
monitoring, including the realistic disaster scenarios it proposes to specify
and any other kinds of aggregation it plans to examine. The Society should
take account of any suggestions the FSA makes
about the types of aggregation of risk it should monitor and the techniques
it should apply to do so.
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LLD 10.7
Requirements relating to syndicate business plans
- 01/12/2004
LLD 10.7.1
See Notes
The Society must establish and maintain effective arrangements to:
(1) satisfy itself of the adequacy of the business plans of all new syndicates for their first three syndicate years; and
(2) monitor the business plans of all active syndicates for each syndicate year.
- 01/12/2004
LLD 10.7.2
See Notes
The Society must
where appropriate satisfy itself of the adequacy of the business plans of
active syndicates for any syndicate year if a material change in the syndicate'sinsurance
business is proposed or if there is reason to believe the interests
of policyholders or potential policyholders are, or may be, threatened.
- 01/12/2004
LLD 10.7.3
See Notes
The Society should require that the syndicate business plans submitted to it under LLD 10.7.1 R include details of:
(1) the syndicate's key characteristics and strategy;
(2) the syndicate's objectives for the year, including underwriting and financial targets, investment policy, main risks to achieving the plan?s targets, and contingency plans;
(3) the class, size and volume of insurance business to be carried on (specifying any proposed new products), including a syndicate income projection analysed by class;
(4) the reinsurance policy and programme, including details of proposed outward reinsurance to other syndicates;
(5) the reserving policy and methods; and
(6) the use of information technology.
- 01/12/2004
LLD 10.7.4
See Notes
The Society should
consider each year, in the light of market developments and its assessment
of risks to policyholders and potential policyholders, whether syndicate business plans should routinely
cover areas other than those listed in LLD
10.7.3 G.
- 01/12/2004
LLD 10.7.5
See Notes
The Society should
ensure that the syndicate business
plans required under LLD 10.7.1 R (2) are
submitted to it at least two months before the start of the relevant year.
- 01/12/2004
LLD 10.7.6
See Notes
The Society should
review the syndicate business
plans under LLD 10.7.1 R (2),
allocating the resources to be applied to each review with regard to its assessment
of the relative risks to policyholders and potential policyholders posed by
each syndicate (or type of syndicate).
- 01/12/2004
LLD 10.7.7
See Notes
The Society should
use the syndicate business
plans provided under LLD
10.7.1 R when
it plans and carries out its monitoring of managing
agents, allocating the resource to be applied to monitoring
each managing agent with regard
to the Society's assessment of the relative
risks to policyholders and potential policyholders posed by each managing agent's portfolio of syndicates.
- 01/12/2004
LLD 10.8
Managing agents systems and controls
- 01/12/2004
LLD 10.8.1
See Notes
The Society must take reasonable steps to ensure that managing agents maintain adequate internal systems and controls to manage the operational risks to which the syndicates they manage are exposed, including controls over the processes by which they, on behalf of members:
(1) enter into contracts of insurance;
(2) settle and pay claims;
(3) determine technical provisions and other provisions; and
(4) determine the overall adequacy of the resources supporting the insurance business.
- 01/12/2004
LLD 10.8.2
See Notes
Managing
agents, as authorised persons, are required to comply with PRIN and SYSC,
and should have regard to those provisions of Guidance Note P.3 (Systems and
Controls in Insurers) in IPRU(INS) which
are relevant to the activities of managing
agents. The FSA will
monitor the Lloyd's market to satisfy itself that managing
agents, by complying with the requirements of the Society in relation to maintaining effective
systems and controls, are in compliance with the relevant requirements of PRIN and SYSC.
- 01/02/2003
LLD 10.8.3
See Notes
In making its assessment of the adequacy of the systems and controls operated by managing agents the Society should take into account the factors listed below.
(1) The board of directors of a managing agent is responsible for:
(a) approving adequate policies and procedures for managing operational risk;
(b) understanding and approving acceptable limits for insurance-liability risks to which syndicate members are or may be exposed; and
(c) ensuring that an adequate system is in place to enable those risks to be identified, measured and controlled.
(2) The policies and procedures for managing the operational risk of each managing agent should be:
(a) documented and regularly reviewed and updated;
(b) effectively communicated to enable all staff to understand and adhere to the policies and procedures which relate to their own responsibilities;
(c) comprehensive, with particular reference to business critical processes; and
(d) regularly reviewed by operationally independent, appropriately trained and suitably skilled staff.
(3) The senior management of each managing agent should have clear and well defined responsibilities for:
(a) implementing the policies and procedures approved by the directors; and
(b) establishing and maintaining an appropriate internal control system, including:
(i) an organisational structure with appropriate segregation of duties and with clearly defined responsibilities and reporting relationships;
(ii) an assessment procedure that ensures that all significant operational risks are recognised and continually assessed; and
(iii) an appropriate system to monitor and ensure compliance with procedures, limits and other controls.
(4) Appropriate records should be made and maintained by each managing agent. These should include records of:
(a) an assessment of the validity of notified claims by reference to the underlying contracts of insurance;
(b) any investigations into any delays in underwriting, claims-handling, and other key processes, the remedial action taken and the effect of those delays on the reliability of the records of each syndicate;
(c) underwriting and claims records, so as to enable the managing agent to identify trends in the earnings profile and claims experience analysed, as appropriate for a proper control of the insurance business, by class and by source of insurance business;
(d) sufficient information from both internal and external sources to enable the managing agent, so far as reasonably possible, to identify new sources of loss or aggregations of risk whether from changes in the economic, business, legal or physical environment or from any other change in circumstance which might make past experience a poor predictor of the future;
(e) appropriate analyses (statistical or otherwise) applied to data, records and information, and appropriate assumptions made in the application of those analyses, to inform key business decisions including the setting of premium rates, the determination of the amount of technical provisions and the assessment of the overall adequacy of resources; and
(f) regular tests of the adequacy of premiums and technical provisions against actual results.
(5) The Society should also have regard to Guidance Note P.3 (Systems and Controls in Insurers) in IPRU(INS) as specified in LLD 10.2.3 G.
- 01/02/2003
LLD 10.9
Requirements relating to the role of actuaries
- 01/12/2004
LLD 10.9.1
See Notes
- 01/12/2004
LLD 10.9.2
See Notes
The position of Lloyd's
actuary is not a controlled
function.
- 01/12/2004
LLD 10.9.3
See Notes
The Society must ensure that the Lloyd's actuary:
(1) prepares the statement required under LLD 15.9.1 R (2) to be annexed to the Lloyd's Return;
(2) is required to take reasonable steps to ensure that the general insurance business technical provisions for each syndicate year have been reviewed by the syndicate actuary under LLDLLD 10.9.4 R (3)(a) and that an appropriate opinion has been obtained under LLD 10.9.4 R (3)(b); and
(3) where a syndicate actuary's opinion has not been provided, sets appropriate technical provisions and, within 6 months of the end of the financial year, submits a report to the FSA on the setting of those technical provisions.
- 01/12/2004
LLD 10.9.4
See Notes
The Society must have byelaws in place requiring:
(2) the syndicate actuary of a long-term insurance business syndicate to:
(a) make an investigation at the end of each financial year into the financial condition of the business carried on through each syndicate year (other than a closed year);
(b) make an abstract of his report of the investigation; and
(c) prepare the certificate required under LLD 15.9.1 R (3) to be annexed to the Lloyd's Return; and
(3) the syndicate actuary of a general insurance business syndicate to:
(a) review the technical provisions (both gross and net of reinsurance recoveries) of each syndicate year (other than a closed year); and
(b) provide an opinion confirming that the technical provisions for each syndicate year are no less prudent than his best estimate of the amounts required.
- 01/12/2004
LLD 10.9.5
See Notes
When the Society becomes
aware that a syndicate actuary of
a general insurance business syndicate will
or may be unable to provide an unqualified opinion under LLD 10.9.4 R (3)(b), it must promptly inform the FSA that this is the case.
- 01/12/2004
LLD 10.9.6
See Notes
The Society must have byelaws in place requiring a managing agent that appoints a syndicate actuary to take reasonable care to ensure that the actuary:
(1) has the required skill, resources and experience to perform his duties;
(2) is a fellow of an actuarial body or (except for a syndicate actuary of a long-term insurance business syndicate) is a fellow of the Casualty Actuarial Society who is a member of an actuarial body.
- 01/12/2004
LLD 10.9.7
See Notes
For a general
insurance business syndicate each actuarial
body requires the syndicate
actuary to have a practising certificate.
- 15/11/2001
LLD 10.10
Limitation of business
- 01/12/2004
LLD 10.10.1
See Notes
The Society must take all reasonable steps to ensure that:
(1) members which are bodies corporate or partnerships do not carry on any commercial business other than insurance business and activities arising directly from that business; and
(2) individual members do not, in their capacity as underwriting members, carry on any commercial business other than insurance business and activities arising directly from that business.
- 01/12/2004
LLD 10.10.2
See Notes
The limitation in LLD 10.10.1 R (2) does not restrict the ability of individual members to conduct other business,
at Lloyd's or elsewhere, for which membership of the Society is
not a necessary pre-condition (for example, accepting employment by an underwriting agent).
- 01/12/2004
LLD 10.11
Monitoring of transactions between members
- 01/12/2004
LLD 10.11.1
See Notes
The Society must take reasonable steps to:
(1) monitor material connected-party transactions involving a member in the course of members' insurance business; and
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