Franchise Guidelines

2. Catastrophe and tail risk exposure 3. Gross and net line size 4. Casualty Reserve Deterioration 5. Multi-year policies 6. Overall market dominance by a managing agent

The guidelines set out below were developed by Lloyd’s to help managing agents to optimise and, where necessary, improve the performance of their syndicates. The guidelines (subject to being updated) derive from the Chairman’s Strategy Group (CSG) consultation document and were arrived at following extensive consultation with the market.

Each managing agent is expected, under normal circumstances, to operate its business within the guidelines. If a managing agent wishes to operate outside the guidelines in respect of a syndicate, it will need to discuss its position and obtain a dispensation in advance from Lloyd’s.

It is not intended that the guidelines should be blindly applied to every syndicate and on every line of business. Lloyd’s will consider requests for dispensations if a robust argument can be made to justify the dispensation.

Each Franchise Guideline is stated below. This is followed, where relevant, by guidance in respect of that guideline.

1. Profitability by product line

There should be a reasonable expectation of making a gross underwriting profit on each line of business every year.

2. Catastrophe and tail risk exposure

a.   Catastrophe exposure should be analysed using tools or methods that are approved by Lloyd’s.

b.   A Syndicate’s projected and in-force loss estimates for Realistic Disaster Scenarios, shall not exceed 80% of ECA plus Profit for Gross Losses and 30% of ECA plus Profit for Final Net Losses.

c.   The 99.8th percentile (1-in-500) of the insurance claims shall not exceed 135% of the 99.5th percentile (1-in-200) of insurance claims. Both measures refer to the total modelled insurance claims net of reinsurance on an ultimate basis as reported to Lloyd’s in the LCR submission (Form 311). For syndicates which do not have an internal model for insurance claims and do not calculate the 99.8th percentile, this does not apply. Instead, the 99.8th percentile of Final Net LCM WWAP claims shall not exceed ECA plus Profit. Final Net LCM WWAP metrics will be calculated by Lloyd’s based on syndicates’ latest approved LCM Forecast submissions.

‘Profit’ for these purposes shall be defined as ‘Profit/Loss for the period’ on an Ultimate basis in the approved Year of Account SBF (item 16 of SBF Form 100s).

Guidance

In reviewing a syndicate’s management of gross and net catastrophe exposures and tail risk, attention will be paid not only to overall syndicate capital, but also to:

  • The level of expected underlying profitability in the line of business absent major catastrophic events
  • The level of expected profitability in the other lines of business written by the syndicate, and the degree of inherent volatility in those other lines
  • The quality, nature and effectiveness of the reinsurance protecting the gross exposures; in terms of the overall scale, types of product purchased, the legal and structural strength of the contracts involved, the financial strength and concentration levels of the reinsurance counterparties involved, and the quantity and quality of any supporting collateral arrangements
  • The overall liquidity of the syndicate, and its ability to meet any expected regulatory funding requirements
  • The assumptions used in modelling catastrophe exposures, and
  • The managing agent’s capability and competence

The purpose of this guideline is to ensure that the capital of any syndicate (and ultimately the Central Fund) should not be threatened to an unreasonable or unexpected extent by catastrophe losses.

3. Gross and net line size

The maximum gross line that a syndicate should have on an individual risk is 25% of GWP, subject to a maximum line size of £200m. The maximum net line size that a syndicate should have on an individual risk cannot exceed 30% of ECA plus profit, where profit is defined as per 2 above.

Guidance

In reviewing a syndicate’s gross line sizes on individual risks for any class of business, attention will be paid not only to overall syndicate GWP, but also to:

  • The GWP allocated by the syndicate to the line of business
  • The level of capital
  • The risk characteristics of the line of business, and the level of expected profitability in that line
  • The level of expected profitability in the other lines of business written by the syndicate, and the degree of inherent volatility in those other lines
  • The quality, nature and effectiveness of the reinsurance protecting the gross line size (including the overall scale, types of product purchased, the legal and structural strength of the contracts involved, the financial strength and concentration levels of the reinsurance counterparties involved, and the quantity and quality of any supporting collateral arrangements)
  • Line size utilisation, and
  • The managing agent’s capability and competence

When reviewing the net line size in relation to the level of capital, the following aspects will be taken into account:

  • Line size utilisation and the number of risks exceeding the threshold
  • The risk of accumulation between individual risks
  • The maturity of the syndicate and future growth plans, and
  • The member structure of the syndicate.

The intent of the guidelines is that individual risks should not be allowed to threaten the viability of the syndicate, putting members and the Central Fund at risk.

For the sake of clarity it is emphasised that it is not the intention to apply guideline percentages to the premium or ECA and profit allocated to the individual line of business, but to the GWP or ECA and profit of the syndicate as a whole.

4. Casualty Reserve Deterioration

A stress of a 45% increase in the net of reinsurance reserves for all casualty classes of business should not exceed 100% of ECA for each syndicate.

Guidance

Casualty classes of business are defined as the following three high level classes of business: Casualty FinPro, Casualty Other, Casualty Treaty. Risk code mapping can be found on Lloyds.com.

Net of reinsurance reserves for this purpose shall be defined as follows: ‘Total modelled insurance claims (including ALAE) for all underlying pure years in aggregate net of reinsurance using the balance sheet date as per latest submitted capital model. The basis should correspond to ‘Mean Net Claims’ as per LCR form 510.

Syndicates which do not submit an LCR will not be required to run this test.

If a managing agent has identified that a syndicate may breach the guideline or if it wishes to obtain a dispensation, the managing agent will be expected to address the following points:

  • The reasons for breach or the requirement for the dispensation, including due to new transactions, risk mix changes or other factors leading to a change in reserve mix.
  • The extent of the effect of the breach or dispensation on the syndicate's capital requirements
  • Any other relevant Franchise Guideline dispensations
  • Whether the SCR needs to be resubmitted

Where a managing agent fails to notify that it may breach the guideline and subsequently the LCR or other core market returns show that the syndicate has breached the guideline, Lloyd’s will, in addition to the above considerations, also wish to review the effectiveness of management controls.

5. Multi-year policies

a.   Non-cancellable policies covering a period of greater than 18 months should be recorded as multi-year policies.

b.   Multi-year policies should either have matching reinsurance cover or be limited to the agreed maximum net exposure to the class of business as set out in the syndicate’s business plan.

Guidance

Account will be taken of the availability of reinsurance protection which matches the vertical limits to be written, the policy periods written, the terms and conditions of the inwards policies, plus the adequacy of the reinstatement protection.

Managing agents (together with their auditors, where appropriate) are responsible for deciding whether reallocation of premium is appropriate on multi-year policies (ie contracts where the overall period of risk exceeds 18 months and the costs and/or benefits under the contract may affect more than one year of account).

6. Overall market dominance by a managing agent

No managing agent should write more than 15% of the overall market gross net premium without the prior agreement of Lloyd’s.