Required margins of solvency

Part

LLD Lloyd's

Chapter

Required margins of solvency

Printed on: 05/07/2024

Rulebook at: 31/12/2004

LLD 11

Required margins of solvency

LLD 11.1

Application and purpose

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Application

LLD 11.1.1

This chapter applies to the Society.

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LLD 11.1.2

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 11.1.3

This chapter imposes on the Society solvency requirements that have a similar effect on Lloyd's as a whole to those imposed on insurers. The solvency requirements for insurers are set out in IPRU(INS) 2 (Margins of solvency) (see also LLD 9.1.4 G).

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LLD 11.1.4

Members are not responsible for meeting the liabilities of other members, so the Society needs to calculate solvency requirements (the required amount) attributable to each member's insurance business. LLD 11.2.1 R provides that, where a member's assets are insufficient to cover his required amount, any shortfall must be covered by net central assets of the Society.

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LLD 11.1.5

However, especially for general insurance business, the requirements of this chapter should be regarded as the minimum. They do not relieve the Society of the requirement to assess the actual risks arising from its activities and the insurance business carried on at Lloyd's by its members and to ensure the adequacy of the assets and other resources available to support those risks.

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LLD 11.1.6

In accordance with Principle 11 (Relations with regulators), LLD 11.2.4 R requires the Society to inform the FSA if the solvency requirement of LLD 11.2.1 R is or is likely to have been breached. Likewise LLD 11.2.11 R requires the Society to inform the FSA if a criterion similar to the guarantee fund requirement for insurers is or is likely to have been breached.

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LLD 11.1.7

The rules in this chapter implement the Solvency 1 Directives (2002/12/EC and 2002/13/EC) in respect of Lloyd's.

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LLD 11.2

Solvency requirement

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LLD 11.2.-2

If IPRU(INS) 2.4(6) operates to increase the Society margin, the Society may attribute all or part of that increase to a member by increasing that member's required amount, as provided for in LLD 11.2.6 R.

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LLD 11.2.-1

If the Society relies on LLD 11.2.-2 R to attribute any part of the increase in the Society margin to a member, it must establish and use a reasonable and transparent methodology for making that attribution.

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LLD 11.2.1

The Society must maintain available net central assets which are adequate to cover the aggregate of:

(1) for each member, the amount by which his general insurance business assets are less than the required amount calculated under LLD 11.2.6 R;

(2) for each member, the amount by which his long-term insurance business assets are less than the required amount calculated under LLD 11.2.7 R;

(3) the amount by which the Society margin, less any increase resulting from the operation of IPRU(INS) 2.4(6), exceeds the sum for all members of the members' margins for general insurance business;

(4) the excess (if any) of 3,000,000 Euros (using the conversion rate notified by the FSA from time to time for this purpose) over the sum for all members of the members' margins for long-term insurance business; and

(5) the amount of any increase in the Society margin resulting from the operation of IPRU(INS) 2.4(6) that is not attributed to a member or members under LLD 11.2.-2 R.

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LLD 11.2.2

Where an asset is held as part of funds at Lloyd's and is available to meet the liabilities of more than one member (interavailable funds), the Society may, as it considers appropriate, allocate that asset (net of any attaching liability) between those members for the purpose of LLD 11.2.1 R.

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LLD 11.2.3

LLD 11.2.1 R is the central financial requirement placed on the Society. The Society will need to perform an assessment of the financial position of each member, to the extent necessary to confirm continuing compliance with LLD 11.2.1 R. It will need to have sufficient funds centrally to cover the total of:

(1) any shortfall in the assets of members when, individually, their assets are less than the sum of their liabilities and a member's margin, calculated according to formulae set out in LLD 11.3.1 R and LLD 11.3.4 R;

(2) any adjustment required of the Society when the total of members' margins is less than the result would have been had the Society been treated as a single insurer and applied the relevant solvency test to itself; and

(3) any amount of the increase in the Society margin resulting from the operation of IPRU(INS) 2.4(6) that the Society does not or cannot attribute to a member or members, by increasing the required amounts of those members under LLD 11.2.-2 R.

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LLD 11.2.4

The Society must inform the FSA promptly if:

(1) its net central assets fall below the amount required under LLD 11.2.1 R; or

(2) it cannot confirm that it has maintained the net central assets required under LLD 11.2.1 R.

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LLD 11.2.5

If the Society fails to maintain the net central assets required under LLD 11.2.1 R, the FSA would expect to require the Society to prepare and submit a plan for the restoration of a sound financial position similar to that required from insurers by SUP App 2, and other remedies might also apply, including the FSA's exercise of its own-initiative power under section 45 of the Act (Variation etc. on the Authority's own initiative).

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LLD 11.2.6

For each member, the required amount for general insurance business is the aggregate of:

(1) his general insurance business liabilities;

(2) the member's margin for general insurance business, calculated under LLD 11.3.1 R and

(3) any amount attributed to that member under LLD 11.2.-2 R.

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LLD 11.2.7

For each member, the required amount for long-term insurance business is the aggregate of:

(1) his long-term insurance business liabilities; and

(2) the member's margin for long-term insurance business, calculated under LLD 11.3.4 R.

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LLD 11.2.8

The member's margin and the Society margin (together with the requirement for the Society to maintain net central assets to cover any shortfalls) are similar to the required minimum margin for insurers.

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LLD 11.2.9

The required minimum margin for an insurer contains within it a further threshold, that assets must exceed liabilities by the guarantee fund. If this requirement is not met, further regulatory actions are triggered. The guarantee fund for an insurer is an amount which is calculated as one third of the required minimum margin(or the minimum guarantee fund if greater).

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LLD 11.2.10

A similar test for the Society is whether it maintains net central assets to meet the criterion of LLD 11.2.11 R.

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LLD 11.2.11

The Society must inform the FSA promptly if its net central assets are, or are likely to be, inadequate to cover the aggregate of:

(1) for each member, the amount by which his general insurance business assets are less than the lower required amount calculated under LLD 11.2.13 R;

(2) for each member, the amount by which his long-term insurance business assets are less than the lower required amount calculated under LLD 11.2.14 R;

(3) the amount by which the Society guarantee fund, less any increase resulting from the operation of IPRU(INS) 2.4(6), exceeds one-third of the sum for all members of the members' margins for general insurance business;

(4) the excess (if any) of 3,000,000 Euros over one-third of the sum for all members of the members' margins for long-term insurance business.

(5) one-third of the amount of any increase in the Society margin resulting from the operation of IPRU(INS) 2.4(6) that is not attributed to a member under LLD 11.2.-2 R.

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LLD 11.2.12

If the Society fails to meet this criterion, the FSA would expect to require the Society to prepare and submit a short-term financial scheme similar to that required from insurers by SUP App 21.4, and other remedies might also apply, including the FSA's exercise of its own-initiative power under section 45 of the Act (Variation etc. on the Authority's own initiative).

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LLD 11.2.13

For each member, the lower required amount for general insurance business is the aggregate of:

(1) his general insurance business liabilities;

(2) one-third of the member's margin for general insurance business, calculated under LLD 11.3.1 R; and

(3) one-third of any amount attributed to that member under LLD 11.2.-2 R.

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LLD 11.2.14

For each member, the lower required amount for long-term insurance business is the aggregate of:

(1) his long-term insurance business liabilities; and

(2) one-third of the member's margin for long-term insurance business, calculated under LLD 11.3.4 R.

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LLD 11.2.15

(1) Subject to (2) and (3), the base amount, in Euro, specified in LLD 11.2.1 R (4) and LLD 11.2.11 R (4) will increase each year, starting on the first review date of 20 September 2003 (and annually after that), by the percentage change in the European index of consumer prices (comprising all EU member states as published by Eurostat) from 20 March 2002 to the relevant review date, rounded up to a multiple of 100,000 Euro.

(2) In any year, if the percentage change since the last increase is less than 5%,then there will be no increase.

(3) The increase will take effect 30 days after the EU Commission has informed the European Parliament and Council of its review and the relevant percentage change.

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LLD 11.2.16

Where the nature or quality of reinsurance relied on to reduce the member's margin for general insurance business for any member or members changes significantly during the financial year, the Society must notify the FSA forthwith of the change.

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LLD 11.2.17

To the extent that an asset is valued at market value, and there has been a significant decrease in the market value since the end of the prior financial year, the Society must notify the FSA forthwith of the change.

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LLD 11.3

Member's margin

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General insurance business

LLD 11.3.1

A member's margin for general insurance business is the higher of the amounts determined under:

(1) LLD 11.4.8 R (the premiums basis); and

(2) LLD 11.4.13 R and LLD 11.4.16 R (the claims basis);

multiplied by the netting-down percentage (to allow for reinsurance) determined under LLD 11.4.20 R.

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LLD 11.3.2

The member's margin applying throughout a financial year depends on premiums receivable during the previous financial year or claims incurred during the three previous financial years, multiplied in each case by a ratio derived primarily from claims incurred in the previous three financial years.

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LLD 11.3.3

LLD 15 (Reporting by the Society) requires the annual returns to reflect the solvency requirements applicable to the following financial year in the statement of the financial position as at the end of a financial year.

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Long-term insurance business

LLD 11.3.4

A member's margin for long-term insurance business is the required margin of solvency which would apply to the member for his long-term insurance business if the member were an insurer and that requirement were modified as in LLD 11.3.6 R.

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LLD 11.3.5

IPRU(INS) 2 (Margins of solvency) specifies the margins of solvency which an insurer must maintain.

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LLD 11.3.6

Mathematical reserves (both before and after deduction of reinsurance cessions) and capital at risk must be calculated as if every reinsurance to close were a transfer of engagements.

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LLD 11.3.7

The purpose of LLD 11.3.6 R is to ensure that each member's margin applicable to a financial year is calculated by reference to his participation as at the start of the financial year.

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LLD 11.3.8

As supplementary sickness and accident insurance business is not written as part of any long-term insurance contract at Lloyd's, this chapter does not include solvency requirements for that business.

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LLD 11.4

General insurance

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Provisions common to the premiums and claims bases

LLD 11.4.1

In LLD 11.4.8 R and LLD 11.4.13 R, actuarial health insurance means general insurance business which is sickness insurance and satisfies the following conditions:

(1) the gross premiums receivable are calculated on the basis of sickness tables appropriate to insurance business;

(2) the reserves include provision for increasing age;

(3) an additional premium is collected in order to set up appropriate additional prudential provisions;

(4) it is not possible for the member or syndicate to cancel the contract after the end of the third year of insurance; and

(5) the contract provides for the possibility of increasing premiums or reducing benefits during its currency.

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LLD 11.4.2

In LLD 11.4.8 R, LLD 11.4.13 R and LLD 11.4.19 R, the member's share of premiums receivable and claims incurred:

(1) excludes amounts in respect of syndicate years which have been closed into open syndicate years in which the member did not participate at the end of the previous financial year; but

(2) includes amounts, determined under LLD 11.4.4 R, in respect of syndicate years which have been closed into open syndicate years in which the member participated at the end of the previous financial year.

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LLD 11.4.3

The member's share includes amounts in respect of open syndicate years in which the member participated at the end of the previous financial year.

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LLD 11.4.4

In LLD 11.4.2 R the member's share for a closed syndicate year must be determined by reference to the member's participation in the open syndicate year into which it has been closed.

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LLD 11.4.5

LLD 11.4.4 R establishes the principle that a member's share of premiums and claims is determined according to the member's participation in the open syndicate year into which the closed syndicate year has been closed. Therefore any participation the member had in the closed syndicate year (or any other syndicate year into which it was previously closed) should not be used. This applies whenever amounts were receivable, paid, outstanding or recoverable, and to whatever date they relate.

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LLD 11.4.6

In determining for each member the amount of general insurance business premiums receivable in a period for the purposes of LLD 11.4.8 R and LLD 11.4.11 R, premiums under contracts of reinsurance accepted shall be included, but amounts receivable under contracts of reinsurance to close accepted shall be excluded.

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LLD 11.4.7

Subject to LLD 11.4.2 R, LLD 11.4.4 R and LLD 11.4.6 R, the amounts of premiums and claims should be determined in accordance with the accounting principles and rules contained in the insurance accounts rules and generally accepted accounting practice. They should therefore exclude amounts arising from contracts, regardless of their legal form, that do not fall to be classified as insurance or reinsurance under generally accepted accounting practice.

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Premiums basis

LLD 11.4.8

Subject to LLD 11.4.2 R, LLD 11.4.6 R and LLD 11.4.9 G, for each member the premiums basis referred to in LLD 11.3.1 R is his share of the general insurance business premiums receivable (or one-third of his share for actuarial health insurance) in the previous financial year multiplied by 16% of the factor determined under LLD 11.4.11 R. For each member, his share of the general insurance business premiums is either his share calculated for general insurance business premiums earned, or that calculated for general insurance business premiums receivable, whichever is the higher.

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LLD 11.4.9

For the purpose of calculating each member's share of general insurance business premiums under LLD 11.4.8 R, premiums in respect of classes 11, 12 and 13 of general insurance business (see Annex 11.2 of IPRU(INS)) must be increased by 50% for both general insurance business premiums earned and general insurance business premiums receivable. Statistical methods may be used to allocate the premiums in respect of these classes.

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LLD 11.4.10

In setting the premium basis at 16% of premiums in the year (and one-third of this for actuarial health insurance), LLD 11.4.8 R is similar to the corresponding calculation for insurers. Liabilities subjected to reinsurance to close are treated as having been written originally by members of the accepting syndicate year, rather than of the ceding syndicate year.

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LLD 11.4.11

The factor referred to in LLD 11.4.8 R is the ratio for all members taken together of general insurance business premiums receivable in the previous financial year net of inter-syndicate reinsurance premiums, to those premiums before deducting inter-syndicate reinsurance premiums.

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LLD 11.4.12

Adjustments are made for inter-syndicate reinsurance on an approximate basis to enable Lloyd's as a whole to avoid double-counting part of the margin.

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Claims basis

LLD 11.4.13

Subject to LLD 11.4.13A R for each member, the claims basis referred to in LLD 11.3.1 R is his share, determined under LLD 11.4.2 R, of the general insurance business claims incurred (or one-third of his share in the case of actuarial health insurance) in the three previous financial years divided by three and multiplied by 23% of the factor determined under LLD 11.4.17 R.

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LLD 11.4.13A

For the purposes of LLD 11.4.13 R claims, provisions and recoveries in respect of classes 11, 12 and 13 of general insurance business (see Annex 11.2 of IPRU(INS)) must be increased by 50%. Statistical methods may be used to allocate the claims, provisions and recoveries in respect of these classes.

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LLD 11.4.14

LLD 11.4.4 R and LLD 11.4.6 R apply to the determination of claims incurred.

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LLD 11.4.15

In setting the claims basis at 23% of the annual average of claims incurred in the three year period (and one-third of this for actuarial health insurance), LLD 11.4.13 R is similar to the corresponding calculation for insurers. Liabilities subjected to reinsurance to close are treated as having been written originally by members of the accepting syndicate year, rather than the ceding syndicate year.

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LLD 11.4.16

For a member, the claims basis referred to in LLD 11.3.1 R is nil if:

(1) every open syndicate year in which the member participated at the end of the previous financial year; and

(2) every other syndicate year which has been closed into any such open syndicate year;

commenced after the start of the third last previous financial year.

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LLD 11.4.17

The factor referred to in LLD 11.4.13 R is the ratio for all members taken together of general insurance business claims paid in the three previous financial years net of inter-syndicate reinsurance recoveries, to those claims before deducting inter-syndicate reinsurance recoveries.

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LLD 11.4.18

Adjustments are made for inter-syndicate reinsurance on an approximate basis to enable Lloyd's as a whole to avoid double-counting part of the margin.

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Factor to net down for reinsurance

LLD 11.4.19

For the purposes of LLD 11.4.20 R and subject to LLD 11.4.2 R, the ratio for each member is the ratio for the three previous financial years of his share of net (of reinsurance) claims incurred to his share of gross claims incurred divided by the factor determined under LLD 11.4.21 R.

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LLD 11.4.20

For each member the netting-down percentage referred to in LLD 11.3.1 R is:

(1) where the ratio determined under LLD 11.4.19 R is greater than 100%, 100%; or

(2) the ratio determined under LLD 11.4.19 R, where it is greater than 50%, but not greater than 100%; or

(3) in any other case, 50%.

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LLD 11.4.21

The factor referred to in LLD 11.4.19 R is the ratio for all members taken together of general insurance business claims paid in the previous financial year net of inter-syndicate reinsurance recoveries, to those claims before deducting inter-syndicate reinsurance recoveries.

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LLD 11.4.22

Adjustments are made for inter-syndicate reinsurance on an approximate basis to enable Lloyd's as a whole to avoid double-counting part of the margin.

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LLD 11.5

Society margin

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LLD 11.5.1

The Society must calculate the required minimum margin it would have to maintain under IPRU(INS) 2 (Margins of solvency) if it were an insurer carrying on all the general insurance business carried on by its members, but eliminating inter-syndicate reinsurance (the Society margin).

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LLD 11.5.2

The Society must calculate the guarantee fund it would have to maintain under IPRU(INS) 2 (Margins of solvency) if it were an insurer carrying on all the general insurance business carried on by its members, but eliminating inter-syndicate reinsurance (the Society guarantee fund).

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LLD 11.5.3

The required minimum margin and the guarantee fund must, under IPRU(INS), at least equal the minimum guarantee fund. So the Society margin and the Society guarantee fund must at least equal the minimum guarantee fund which would apply if the members taken together constituted an insurer, other than a mutual, authorised for all classes of general insurance business carried on at Lloyd's.

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LLD 11.5.4

Appendices 2.1 to 2.3 of IPRU(INS) also set out how the "premium basis", the "claims basis" and the minimum guarantee fund should be calculated for an insurer.

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LLD 11.5.5

For the purpose of LLD 11.5.1 R and LLD 11.5.2 R the Society may make appropriate approximations, taking reasonable care to avoid underestimating the Society margin and the Society guarantee fund.

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