Part

LLD Lloyd's

Chapter

Prudential requirements for the Society

Printed on: 05/07/2024

Rulebook at: 31/12/2004

LLD 9

Prudential
requirements for the Society

LLD 9.1

Application and purpose

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Application

LLD 9.1.1

handbook-rule
This chapter applies to the Society.
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LLD 9.1.2

handbook-guidance
This chapter applies substantially the same requirements to the Society as IPRU(INS) applies to insurers.
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LLD 9.1.3

handbook-rule
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 9.1.4

handbook-guidance
The purpose of this chapter and LLD 10 to LLD 15 is to:
(1) protect policyholders against the risk that the Society and members may not have adequate financial resources to meet claims as they fall due;
(2) promote confidence in the market at Lloyd's by requiring the Society, and through it members, to maintain resources which are adequate to meet their liabilities;
(3) promote confidence in the market at Lloyd's and enhance public awareness by improving the transparency of financial reporting by the Society; and
(4) protect the interests of consumers of insurance business at Lloyd's.
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LLD 9.1.5

handbook-guidance
This chapter sets out high level prudential requirements relating to insurance business at Lloyd's.
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LLD 9.2

General prudential requirements

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LLD 9.2.1

handbook-rule
The Society must manage its affairs, including the exercise of its byelaw-making powers, with due regard to the interests of policyholders and potential policyholders.
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LLD 9.2.2

handbook-rule
The Society must ensure that its affairs are soundly and prudently managed and take reasonable steps to ensure that the Lloyd's market is soundly and prudently managed.
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LLD 9.2.3

handbook-rule
The Society must adopt the standards of due care and diligence set out in the custody rules at CASS 2 in relation to the custody of assets that constitute members' funds.
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LLD 9.2.4

handbook-rule
The Society may not permit any syndicate to carry on both long-term insurance business and general insurance business.
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LLD 9.2.5

handbook-rule
The Society must, having regard to the availability and value of the central assets of the Society, ensure that its assets and its members' assets are adequate to meet the liabilities which members assume in their insurance business at Lloyd's.
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LLD 9.2.6

handbook-rule
The Society must:
(1) ensure that its admissible assets:
(a) that are investments are diversified and adequately spread; and
(b) taking into account the risks posed to the Society by its activities and by the insurance business carried on by members, are of appropriate safety, yield, maturity and marketability; and
(2) take reasonable steps to ensure that the admissible assets of members:
(a) which are investments are diversified and adequately spread; and
(b) taking into account the type of insurance business carried on by members, are of appropriate safety, yield, maturity and marketability.
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LLD 9.3

General guidance on financial resources

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LLD 9.3.1

handbook-guidance
LLD 9 to LLD 15 are concerned with the adequacy of the financial resources of the Society and members, which may be threatened by the inherent uncertainties of insurance business.
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LLD 9.3.2

handbook-guidance
These uncertainties include:
(1) uncertainty about the amount of claims and expenses;
(2) uncertainty about the timing of claims and expenses, which may result in assets not being realisable at full value, or at all, when they are needed to pay claims and expenses;
(3) the risk that non-insurance liabilities may deplete available assets;
(4) the risk of adverse movements in the value of, or income from, general or specific assets including fluctuations in interest and foreign exchange rates which may result in a fall in value of the assets held by the Society and by its members; and
(5) the risk of default by counterparties.
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LLD 9.3.3

handbook-guidance
These inherent uncertainties apply both to existing contracts of insurance and prospectively to planned new business. In addition members are subject to operational risks that impact upon the adequacy of provisions established for past business, the premiums charged for new business and the funds held to support both past and new business.
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LLD 9.3.4

handbook-guidance
LLD 9 to LLD 15 address the significant business risks faced by members. They are designed to ensure that the business of the Lloyd's market is properly managed and has in place the controls needed to safeguard policyholders' interests.
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LLD 9.3.5

handbook-guidance
The central prudential safeguard is for the Society to maintain sufficient net assets to cover any shortfall in members' resources. Detailed rules and guidance on this subject are contained in LLD 11 (Required margins of solvency).
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LLD 9.3.6

handbook-guidance
The requirement to maintain sufficient assets to cover any shortfall in members' resources is underpinned by a standard approach to the valuation and recognition of the assets and liabilities of the Society and its members. Requirements are made in LLD 10 to LLD 14 which set out:
(1) the types of asset which can count towards meeting solvency obligations, any limits on the value which can be placed on an asset, and admissibility limits on the amount of exposure to any one counterparty;
(2) how insurance and other liabilities should be determined; and
(3) requirements that an actuary certify the adequacy of reserves set.
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LLD 9.3.7

handbook-guidance
For the purpose of calculating solvency in accordance with LLD 9 to LLD 15, the other personal wealth of members is left out of account.
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LLD 9.3.8

handbook-guidance
The Society is required to prepare and submit an audited annual return which reports on assets and liabilities and includes a statement that any shortfall in members' resources has been covered. The requirements for reporting are in LLD 15 (Reporting by the Society).
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LLD 9.3.9

handbook-guidance
Requirements in relation to valuation and reporting are supplemented by requirements to hold assets that adequately match the risks posed by estimated liabilities. These requirements are contained in LLD 14 (Assets: market and credit risk).
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LLD 9.3.10

handbook-guidance
LLD 10 (Insurance operational risk) includes rules requiring premiums and other assets to be held in suitable trust arrangements to provide policyholders with additional safeguards. LLD 10 (Insurance operational risk) also includes requirements on the Society to assess the risks posed to the Society by the business underwritten by each member and to set capital requirements accordingly.
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LLD 9.4

Accounting principles and records

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Accounting principles

LLD 9.4.1

handbook-rule
The Society must, for the purposes of LLD 9 to LLD 15, apply the insurance accounts rules and generally accepted accounting practice, adapted where necessary to apply to the special circumstances of Lloyd's, unless the provisions of this sourcebook otherwise require.
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LLD 9.4.2

handbook-guidance
An important source of such accounting practice is the Statement of Recommended Practice on Accounting for Insurance Business, as issued in December 1998 by the Association of British Insurers and endorsed by the Accounting Standards Board.
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LLD 9.4.3

handbook-guidance
Assets are subject to the valuation and admissibility provisions of LLD 13 (Assets: valuation and realisability risk) and LLD 14 (Assets: market and credit risk) and may in the Lloyd's Return and for other reporting purposes have attributed to them a lesser value than would be the case under generally accepted accounting practice.
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LLD 9.4.4

handbook-guidance
Liabilities are subject to the valuation and admissibility provisions of LLD 12 (Determination of liabilities) and may in the Lloyd's Return and for other reporting purposes have attributed to them a greater value than would be the case under generally accepted accounting practice.
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Records

LLD 9.4.5

handbook-rule
The Society must make and maintain for an appropriate period adequate accounting records in the United Kingdom.
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LLD 9.4.6

handbook-guidance
LLD 9.4.5 R refers only to those accounting records appropriate to demonstrate compliance by the Society with the reporting requirements of LLD 9 to LLD 15.
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LLD 9.4.7

handbook-guidance
An appropriate period for the purposes of LLD 9.4.5 R would normally be not less than 10 years.
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