Lloyd's as a counterparty

Insurance policies at Lloyd's are underwritten through syndicates, which are groups of members (capital providers) underwriting together. Syndicates do not have separate legal personality; each member of a syndicate remains liable for its proportion of the risk on a several, rather than joint, basis. As a result, the contract of insurance is with the relevant underwriting members participating on the risk.

Underwriters are employed by managing agents, which are responsible for managing syndicates on behalf of members in accordance with the terms of a standard for Managing Agents Agreement, the terms of which are prescribed by Lloyd’s. Managing agents are responsible for underwriting, claims management and the day-to-day operation of the syndicates they manage.  Managing agents are authorised by the PRA and regulated by the PRA and the FCA.

As market operator and regulator, Lloyd's does not prescribe the terms of individual insurance contracts. Policy wording is ordinarily agreed between the policyholder, broker and managing agent, subject to any applicable market or prudential requirements.

The Chain of Security is the framework Lloyd’s has put in place to hold the assets that back the insurance policies written at Lloyd’s.  The first two links (the Premium Trust Fund (PTF) and Funds at Lloyd’s (FAL)), consist of assets held in trust to meet the insurance liabilities of members,  The third link, the Central Fund, is available at the discretion of the Council to meet the liability of any members whose PTF assets and FAL may be exhausted.

The Central Fund forms part of Lloyd's central assets and is available, at the discretion of the Council of Lloyd's, to meet valid claims that cannot be met from a member's own resources.

The Central Fund was accessed in each calendar year from 2001 to 2014 and in 2016, with the most recent withdrawal occurring in 2016. The reasons for Central Fund access have varied over time. Approximately half of the cases resulting in Central Fund support were associated with World Trade Centre losses. The remainder arose from a range of underwriting loss events, including poor attritional underwriting performance and deterioration in specific portfolios.

Lloyd's operates a risk-based capital framework, which is compliant with Solvency UK, under which managing agents submit capital assessments in respect of each syndicate they manage. These self-assessments are then reviewed through the annual Lloyd’s capital and planning process. Capital requirements are determined using Lloyd's Economic Capital Assessment framework, and capital is assessed on an ultimate basis, allowing for the development of liabilities beyond a one-year horizon and providing additional protection against adverse development.

Market oversight extends beyond capital requirements. Lloyd's additionally reviews and agrees syndicate business plans ahead of each year of account and monitors underwriting performance through the year. Lloyd’s Market Oversight team additionally assesses managing agent capabilities against the Principles for Doing Business at Lloyd’s.

Leading international credit rating agencies assign ratings to the Lloyd's market. This reflects the fact that all Lloyd's syndicates benefit from the market's common resources, including the Lloyd's brand, global licence network and the Chain of Security (including the Central Fund).

As a result, rating agencies assess the financial strength of the Lloyd's market as a whole, taking into account factors such as capital adequacy, operating performance, risk management, market position and the frameworks that support the market. These ratings provide an independent external assessment of Lloyd's financial strength and are commonly considered by banks, financial institutions and other counterparties.

Lloyd's holds insurance and reinsurance licences, permissions and trading rights that enable business to be written in more than 200 territories worldwide, including more than 80 where Lloyd’s has a licence to write direct business. The writing of local risks in a territory will be subject to locally prescribed regulatory requirements.

One example is Lloyd's Insurance Company S.A. ("Lloyd's Europe"), a regulated Belgian insurance company that forms part of the wider Lloyd's market framework. Lloyd's Europe is authorised by the National Bank of Belgium (NBB) and is regulated by both the NBB and the Financial Services and Markets Authority.  Lloyd’s Europe maintains its own Solvency II capital and is wholly owned by the Society of Lloyd's.

All business underwritten by Lloyd's Europe is 100% reinsured to Lloyd's syndicates through quota share reinsurance arrangements. As a result, liabilities written by Lloyd's Europe benefit from the wider Lloyd's capital structure, including the Chain of Security and Central Fund, in addition to Lloyd's Europe's own capital resources.