LLD 14
Assets: market and credit risk
LLD 14.1
Application and purpose
- 01/12/2004
Application
LLD 14.1.1
See Notes
This
chapter applies to the Society.
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LLD 14.1.2
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.
- 01/12/2004
Purpose
LLD 14.1.3
See Notes
LLD
9.2.5 R requires the Society to ensure that it and its members maintain adequate assets to meet
the liabilities that it assumes and which members assume. LLD
11.2.1 R requires the Society to
maintain sufficient net central assets to
cover the total of solvency deficits of members.
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LLD 14.1.4
See Notes
The requirements in this chapter address
both specific and general market risk. Specific market risk refers to the
risk arising from fluctuations in the value of specific assets. General market
risk refers to more widespread fluctuations in market values. It includes
foreign exchange risk (see also LLD
9.1.4 G).
- 01/12/2004
LLD 14.2
Limitation of general market risk ' all types
- 01/12/2004
LLD 14.2.1
See Notes
A fluctuation in asset values may have
an impact upon the value of the Society's own
assets and the assets of members and
upon the amount of their liabilities. Any of these effects may have an impact
on the ability to meet valid claims as
they fall due. In many, but not all, cases these effects may offset each other
especially where assets are closely matched to the liabilities they cover.
- 01/12/2004
LLD 14.2.2
See Notes
The Society should
limit this net exposure to specific market risk by requiring a close matching
of assets to the liabilities they cover.
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LLD 14.2.3
See Notes
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LLD 14.3
Currency matching and localisation
- 01/12/2004
LLD 14.3.1
See Notes
The Society must take reasonable steps to ensure that members in aggregate comply with the matching rules set out in:
(1) Annex 1 of the Second Non-Life Directive (88/357/EEC) in relation to general insurance business; and
(2) Annex 1 of the Third Life Directive (92/96/EEC) in relation to long-term insurance business;
as if all discretionary powers of the United Kingdom as Member State have been fully exercised in favour of the Society and members. In complying with this rule the Society may exercise, in favour of members, any discretion allowed to the United Kingdom as a Member State under those Directive provisions.- 01/12/2004
LLD 14.3.2
See Notes
LLD 14.3.3 R does not apply to:
(1) insurance business carried on outside the EEA States; or
(2) reinsurance business (unless it is facultative reinsurance).
- 01/12/2004
LLD 14.3.3
See Notes
The Society must
take reasonable steps to ensure that assets (other than claims against
reinsurers) held pursuant to LLD
14.3.1 R in
respect of risks situated within the EEA are
localised within the EEA, or
if they cover liabilities in any currency other than sterling, in any EEA State or the state of that currency.
- 01/12/2004
LLD 14.3.4
See Notes
Claims against debtors must be treated
as situated in the state where those debts can be liquidated.
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LLD 14.4
Assets to be taken into account only to a specified extent
- 01/12/2004
LLD 14.4.1
See Notes
LLD 13 (Assets: valuation and realisability risk) specifies the classes of assets which are admissible assets and valuation rules. LLD 14.5 and LLD 14.6 contain rules which, for certain classes of assets, place limitations on the value which may be attributed to them in the Lloyd's Return and for solvency purposes. So, having identified and valued assets under LLD 13 (Assets: valuation and realisability risk), the aggregate value of those assets both for each member (taking their funds at Lloyd's and share of premium trust fund assets together) and for the Society in both cases will be reduced by an amount representing the total of:
(1) the amount of exposure to assets of any description over the permitted asset exposure limit for assets of that description, as determined under LLD 14.5;
(2) the amount of exposure to a counterparty over the permitted counterparty exposure limit for that counterparty, as determined under LLD 14.6; and
(3) the amount of excess concentration with a number of counterparties, as determined under LLD 14.6.
- 01/12/2004
LLD 14.4.2
See Notes
Where a member carrying
on long-term insurance business has
attributed assets partly to a long-term insurance
business fund and partly to other assets, any reduction required
to be made under LLD 14.5 or LLD 14.6 must be made in the same
proportion as the attribution.
- 01/12/2004
LLD 14.4.3
See Notes
The following assets need not be taken into account in any of the calculations described in LLD 14.5 and LLD 14.6:
(1) approved securities or any interest accrued on them; or
(2) debts to which LLD 13.8.3 R applies; or
(4) debts in respect of premiums; or
(5) monies due from, or guaranteed by, the government of any Zone A country; or
(6) holdings in a scheme falling within the UCITS directive; or
(7) deferred acquisition costs; or
(8) any of the assets described under LLD 13.4.3 R (4).
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LLD 14.5
Permitted asset exposure limits
- 01/12/2004
LLD 14.5.1
See Notes
Subject to LLD 14.5.2 R, the Society must:
(1) ensure that the value of its admissible assets, calculated under LLD 13 (Assets: valuation and realisability risk); and
(2) take reasonable steps to ensure that the value of the admissible assets for each member individually, calculated under LLD 13 (Assets: valuation and realisability risk);
do not, for each description of asset, exceed the permitted asset exposure limits set out in LLD 14.5.17 R.- 01/12/2004
LLD 14.5.2
See Notes
In applying the less restrictive permitted asset exposure limits set out in LLD
14.5.17 R for individual
members, the Society must
ensure that in aggregate compliance with Article 22 of the Third Non-Life
Directive (92/49/EEC) and Article 22 of the Third Life Directive (92/96/EEC)
is maintained.
- 01/12/2004
LLD 14.5.3
See Notes
The percentages in the table of permitted asset exposure limits set out in LLD
14.5.17 R should be applied separately
to the admissible assets of each
description for each member and
the Society.
- 01/12/2004
LLD 14.5.4
See Notes
In the same way that LLD 9 to LLD 15 does not prohibit the holding of any type of asset, LLD 14.5.1 R does not prohibit the holding of excess assets of each description, but simply limits the extent to which they can be counted for solvency and reporting purposes.
- 01/12/2004
LLD 14.5.5
See Notes
The asset exposure under LLD 14.5.1 R must be calculated by determining the amount of exposure to assets of each description by:
(1) ascribing a value to assets of each description under LLD 13 (Assets: valuation and realisabilty risk); or
(2) where the assets are of a description for which no provision for valuation is made in LLD 13 (Assets: valuation and realisabilty risk), an amount which would reasonably be paid as consideration for an immediate assignment or transfer of those assets;
and adjusting the value of the assets under LLD 14.5.10 R to LLD 14.5.15 R.- 01/12/2004
LLD 14.5.6
See Notes
Where there is exposure to assets of any description in excess of the permitted asset exposure limit for those assets, the reduction required under LLD 14.5.1 R must be made:
(1) by deducting (as far as possible) the amount of the excess from the assets of that description; and
(2) where there are insufficient assets of that description to eliminate the excess, by making an appropriate deduction from the aggregate value of the assets which may otherwise be taken into account for any of the purposes in LLD 13 (Assets: valuation and realisability risk) and this chapter.
- 01/12/2004
LLD 14.5.7
See Notes
The permitted
asset exposure limits in LLD
14.5.17 R are
the percentages of all admissible assets (excluding
reinsurance recoveries).
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LLD 14.5.8
See Notes
In the case of an admissible
asset not covered by any of the descriptions in LLD
14.5.17 R (other than a derivative contract
or quasi-derivative contract),
the permitted asset exposure limit in LLD
14.5.1 R is 100%.
- 01/12/2004
LLD 14.5.9
See Notes
The amount arrived at under LLD
14.5.5 R for assets of each description
must be increased or decreased (as the case may be) by the value of assets
of that description which are deemed to have been acquired or disposed of
as a result of a futures contract.
- 01/12/2004
LLD 14.5.10
See Notes
For the purposes of LLD 14.5.9 R, assets are deemed to have been acquired or disposed of as a result of a futures contract if, at the valuation date, a futures contract has been entered into (but not closed out) which:
(1) provides for the acquisition of assets; or
(2) is listed and provides for the disposal of assets; or
(3) is not listed but provides for the disposal of assets to an approved counterparty, and where it is prudent to assume the disposal will take place within one year of the valuation date.
- 01/12/2004
LLD 14.5.11
See Notes
The amount arrived at under LLD
14.5.5 R for assets of each description
must be increased or decreased (as the case may be) by the value of assets
of that description which are deemed to have been acquired or disposed of
through an option.
- 01/12/2004
LLD 14.5.12
See Notes
For the purposes of LLD 14.5.11 R, assets are deemed to have been acquired or disposed of through an option if, at the valuation date, it is prudent to assume the option will be exercised and that the option:
(1) provides for the acquisition of assets; or
(2) is listed and provides for the disposal of assets; or
(3) is not listed but provides for the disposal of assets to an approved counterparty, and it is prudent to assume the disposal will take place within one year of the valuation date.
- 01/12/2004
LLD 14.5.13
See Notes
The amount arrived at under LLDLLD
14.5.5 R for
assets of each description must be increased by the value of any assets of
that description which were transferred as initial
margin.
- 01/12/2004
LLD 14.5.14
See Notes
The amount arrived at under LLD 14.5.5 R for assets of each description must be increased or decreased (as the case may be) by the value of assets deemed to have been acquired or disposed of under:
(1) an undiversified contract for differences; or
(2) a contract or asset other than a diversified contract for differences which is a quasi-derivative contract.
- 01/12/2004
LLD 14.5.15
See Notes
For the purposes of LLD
14.5.14 R, assets must be treated as having been acquired
when the contracts covering those assets are entered into.
- 01/12/2004
LLD 14.5.16
See Notes
In the case of the Society,
the amount arrived at under LLD
14.5.5 R and LLD
14.5.9 R to LLD
14.5.15 R for assets of the Society of
any description must be increased by an amount representing the exposure,
if any, of its subsidiary undertakings to
assets of that description, calculating the exposure under paragraphs 4 to
11 of Appendix 4.2 of IPRU(INS) as
if the subsidiary undertakings were insurers (whether they are or not).
- 01/12/2004
LLD 14.5.17
See Notes
Permitted asset exposure limits (see LLD 14.5.1 R, LLD 14.5.7 R and LLD 14.5.8 R)
| Definition of asset | Percentage of all admissible assets, in each case for general insurance business and long-term insurance business | Percentage of all admissible assets, in each case for general insurance business and long-term insurance business for individual members | |
| 1 | Land or an interest in land. Where there is more than one piece of land the value ascribed to the aggregate may, where applicable, be greater than the value of any pieces of land valued separately | 5% | 5% |
| 1a | A reversionary interest or a remainder not falling within 1 | 1% | 1% |
| 2 | All debts which are, or are to become, due from any one individual (except an individual connected with the member) being debts which are fully secured on any dwelling or any land belonging to it owned or to be purchased by the individual and used or to be used by him for his own residence | 1% | 1% |
| 3 | All debts due, or to become due, from an individual, other than debts specified in 2 | 0.25% | 0.25% |
| 4 | All unsecured debts (other than those arising under the terms of debt securities or debts from a regulated institution) which have, or are to, become due from any one counterparty other than an individual, body corporate or group | 1% | 1% |
| 5 | All unsecured debts (other than those arising under the terms of debt securities or debts from a regulated institution) which are, or are to become, due from any one company, taken with all such debts which are, or are to become due from a connected company of that company | 1% | 1% |
| 6 | All unsecured debts (other than those arising under the terms of debt securities or debts from an approved counterparty) which are, or are to become, due from any one regulated institution, taken together with all such debts which are, or are to become, due from a connected company of that institution | 2.5% | 2.5% |
| 7 | All debts, other than those arising under the terms of debt securities, which are, or are to become, due from any one counterparty which is not an approved counterparty taken together with all such debts which are, or are to become, due from any connected company (other than an approved counterparty) of that counterparty | 5% | 5% |
| 8 | All debts, other than short term deposits with an approved credit institution or debts arising under the terms of debt securities, which are, or are to become, due from any one approved counterparty, taken with all such debts which are, or are to become, due from any connected company of that approved counterparty | 10% | 10% |
| 9 | All debts which are, or are to become, due from an approved credit institution (or a connected company of that institution) taken together | 20% | 20% |
| 10 | The aggregate of debts of the descriptions in 3, 4 and 5 | 5% | 5% |
| 11 | All investments
of a kind to which LLD
13.11.1 R applies (other
than secured debt securities, debt securities (excluding hybrid securities)
issued by a regulated institution or
investments which are listed and
readily realisable) issued by any one issuer taken together with: (a) all units or other beneficial interests in a collective investment scheme falling within LLD 13.12.2 R (3) issued by that issuer; and (b) all investments of the kinds mentioned in this section which are issued by a connected company of that issuer | 1% | 2% |
| 12 | The aggregate of assets of any of the descriptions in 1a and 11 | 10% | 20% |
| 13 | All shares and hybrid securities issued by any one issuer with all such securities issued by a connected company of that issuer | 2.5% | 5% |
| 14 | All securities issued by any one issuer which is not an approved counterparty, taken with all securities issued by a connected company, except an approved counterparty, of that issuer | 5% | 10% |
| 15 | All securities issued by any one counterparty | 10% | 20% |
| 16 | All holdings in any one authorised unit trust scheme or recognised scheme | 25% | 50% |
| 17 | All cash | 3% | 3% |
| 18 | All computer equipment | 5% | 5% |
| 19 | All office machinery (except computer equipment) taken together with all furniture, motor vehicles and other equipment | 2.5% | 2.5% |
- 01/12/2004
LLD 14.6
Counterparty exposure limits
- 01/12/2004
LLD 14.6.1
See Notes
The Society must
ensure that the value of its admissible assets calculated
under LLD 14.5 are further reduced to the permitted counterparty exposure limits set
out in LLD
14.6.3 R, LLD
14.6.4 R, LLD
14.6.10 R and LLD
14.6.11 R, subject to LLD 14.6.14 R (2) and take reasonable
steps to ensure that the value of the admissible
assets for each member individually
calculated under LLD 14.5 are
further reduced to the permitted counterparty
exposure limits set out in LLD
14.6.3 R, LLD
14.6.4 R, LLD
14.6.10 R and LLD
14.6.11 R,
subject to LLD
14.6.14 R.
- 01/12/2004
LLD 14.6.2
See Notes
Exposure to any one counterparty (when
taken with its connected companies)
is also restricted. LLD 14.6 requires
the value of all investments in debts due from a counterparty and
rights against a counterparty to
be aggregated in order to calculate the counterparty exposure.
The counterparty exposure calculation
is arrived at after taking account of the permitted
asset exposure limits, thus avoiding double counting.
- 01/12/2004
LLD 14.6.3
See Notes
If the counterparty is
an individual, an unincorporated body, or a government of a state or any public
body, local authority or nationalised industry of a state, the permitted counterparty exposure limit is
5% of all admissible assets (excluding
reinsurance recoveries).
- 01/12/2004
LLD 14.6.4
See Notes
If the counterparty is a body corporate or a group of companies, the permitted counterparty exposure limit is the lower of:
(1) if the exposure is to a body which is not an approved counterparty, 5% of all admissible assets (excluding reinsurance recoveries); or
(2) if the exposure is to a body which is an approved counterparty and the exposure does not arise from debts which are, or will become, due as a result of short term deposits made with an approved credit institution, 10% (or where prudent a lower amount) of all admissible assets (excluding reinsurance recoveries); or
(3) 20% of all admissible assets (excluding reinsurance recoveries).
- 01/12/2004
LLD 14.6.5
See Notes
Where a reduction is required as a result
of LLD
14.6.3 R, LLD
14.6.4 R or LLD
14.6.10 R,
the reduction must be made by a deduction from the aggregate value of the
assets which could otherwise be taken into account for any of the purposes
in LLD 13 (Assets: valuation and realisability risk).
- 01/12/2004
LLD 14.6.6
See Notes
Subject to LLD 14.6.7 R and LLD 14.6.8 G:
(1) the value of all investments (determined under LLD 13.11) issued by any one counterparty and the value of all rights (determined under LLD 13.6.1 R and LLD 13.8) against that counterparty, in each case up to the amount of the relevant permitted asset exposure limit, must be aggregated; and
(2) if the counterparty is an issuer of a collective investment scheme falling within LLD 13.12.2 R (3), the value must include the value of units or other beneficial interests in the collective investment scheme.
- 01/12/2004
LLD 14.6.7
See Notes
The aggregation required under LLD 14.6.6 R need not include the value of the rights referred to in LLD 14.6.6 R (1), if those rights exist in respect of an obligation to be fulfilled by a counterparty and:
(1) the obligation is a secured obligation which:
(a) is secured by cash deposited with, a letter of credit established with, or securities issued by, or a guarantee provided by, an approved credit institution or an approved financial institution; and
(b) is due to be fulfilled within 12 months of the valuation date; or
(2) the obligation is secured by listed securities which are readily realisable, or by approved securities which:
(a) were deposited with an approved credit institution, an approved financial institution or an approved investment firm; and
(b) are beneficially owned by the counterparty, but will not be available for the benefit of creditors generally if the counterparty is wound up.
- 01/12/2004
LLD 14.6.8
See Notes
If there are liabilities to the counterparty which may be offset against
the assets mentioned in LLD
14.6.7 R,
in accordance with generally accepted accounting practice, then these liabilities
may be offset for the purposes of the aggregation required under LLD
14.6.6 R.
- 01/12/2004
LLD 14.6.9
See Notes
[In the case of the Society,
the amount arrived at under LLD
14.6.6 R to LLD
14.6.8 G must be increased by
an amount representing the exposure, if any, of its subsidiary
undertakings to the counterparty,
calculating the exposure under paragraphs 13 to 15 of Appendix 4.2 of IPRU(INS) as if the subsidiary
undertakings were insurers (whether they are or not).]
- 01/12/2004
LLD 14.6.10
See Notes
The deduction for an amount of exposure
to a counterparty over the permitted counterparty exposure limit must
be calculated by subtracting from the amount of the exposure to the counterparty, the amount of the permitted counterparty exposure limit and,
if the figure arrived at is negative, it must be taken to be zero.
- 01/12/2004
LLD 14.6.11
See Notes
However, if exposure to a counterparty is in excess of the permitted counterparty exposure limit in
more than one of the circumstances set out in LLD
14.6.4 R, the deduction required must be made in the
circumstances of the greatest excess exposure.
- 01/12/2004
LLD 14.6.12
See Notes
If there is exposure to more than one counterparty of the type mentioned in LLD 14.6.4 R (2), then the aggregate
of these exposures must not exceed 40% of all admissible
assets.
- 01/12/2004
LLD 14.6.13
See Notes
For the purposes of LLD 14.6.12 R:
(1) exposure to a counterparty is to be taken into account only up to the level of the permitted counterparty exposure limit for that counterparty;
(2) exposure to a counterparty is not to be taken into account if it does not exceed 5% of all admissible assets (excluding reinsurance recoveries); and
(3) exposure to a counterparty is not to be taken into account if the permitted counterparty exposure limit does not exceed 5% of all admissible assets (excluding reinsurance recoveries).
- 01/12/2004
LLD 14.6.14
See Notes
For the purposes of LLD 14.6.1 R:
(1) in respect of individual members, the permitted counterparty exposure limits are double those set out in LLD 14.6.3 R, LLD 14.6.4 R and LLD 14.6.12 R; and
(2) in respect of assets falling within LLD 14.5.17 (16) LLD 14.5.17 R (16), the permitted counterparty exposure limits are 50% of all admissible assets (excluding reinsurance recoveries).
- 01/12/2004