Outwards Reinsurance

Each syndicate should avoid excessive financial and strategic reliance on outwards reinsurance and should not pursue business strategies reliant on aggressive arbitrage and/or unsustainable outwards reinsurance arrangements; where there are business justifications to high reinsurance leverage models at the whole account, syndicate class of business, or single-risk level these must be balanced with risk mitigation.

Prior approval by Lloyd’s is required if:

1.   A syndicate intends to retain a net minimum amount of exposure for any syndicate class of business it underwrites which is less than 10% of the gross line written.

2.   For current/prospective reinsurance transactions: The total aggregate estimated gross reinsurance premiums (before the deduction of reinsurance commissions):

a.   allocated to any single syndicate underwriting year of account (YOA) is planned or expected to exceed 50% of the gross gross written premium for that total aggregate YOA.

b.   allocated to any single syndicate class of business in a single syndicate underwriting YOA is planned or expected to exceed 75% of the gross gross written premium for that syndicate class of business’s YOA

c.   that are “fronted” (ceding more than 90% of GWP for any one risk) on a total aggregate basis in a single syndicate underwriting YOA is planned or expected to exceed 5% of the gross gross written premium for that total aggregate YOA

Prior notification to Lloyd’s is required if:

3.   The syndicate plans to execute any legacy or retrospective reinsurance transactions.

4.   The total estimated reinsurance recoveries associated with the syndicate’s Lloyd’s Catastrophe Model 5 Key NatCat Peril Regions (LCM5) 1:200 Aggregate Exceedance Probability (AEP) Gross Loss (before the deduction of estimated additional reinstatement premiums, offset funds or collateral) is planned or expected to exceed 100% of the syndicate’s Economic Capital Assessment (ECA).

If any of the above thresholds are crossed as a result of an unexpected change, or if there is a material increase to a previously notified position, then the managing agent should notify Lloyd’s at an early stage.

Guidance

These requirements are intended to act as triggers for managing agents to advise Lloyd’s so that Lloyd’s can consider whether or not a specific high reinsurance leverage proposal is justifiable and appropriate. Lloyd’s will review the business justifications and benefits against the risks involved and risk mitigation options available, at all times acknowledging that risk is reduced where syndicates:

• keep a meaningful underwriting interest in the risks they write
• avoid excessive financial dependency on reinsurance counterparties
• use their reinsurance to provide protection to books of business that will deliver a sustainable profit and do not use their reinsurance solely to deliver a profit through arbitrage.

Requests for approval made in respect of 1 and 2 above should be made to the Syndicate Performance or Account Management teams.

In the case of 3 and 4 above, while prior Lloyd’s approval is not required, Lloyd’s will look to undertake a risk-based review of the transaction focussing on evaluating how any potential risks have been assessed and managed by the managing agent.

It is accepted that decisions on the scale of reinsurance leverage may take place at any time during the year so managing agents should engage with their Lloyd’s Outwards Reinsurance Manager as soon as they become aware of a potential triggering of these approval/notification requirements.

Managing agent submissions of SBFs to Lloyd’s also present a natural opportunity to notify/engage with Lloyd’s regarding proposals that trigger these requirements.

The following information should accompany any request or notification as set out at 1 to 4 above:

• The syndicate’s reinsurance strategy and objectives
• The syndicate’s reinsurance purchasing rationales and design criteria
• The overall monetary values of the reinsurance risk transfer
• The types of product(s) purchased, including the use of reinsurance shared with other entities (see also the requirements for Shared Reinsurance Arrangements below) , the use of Related Parties (see also the Disclosure of Related Party and Other Transactions which May Give Rise to a Conflict of Interest), and the use of potentially Non-Standard reinsurance (see the requirements for Non-Standard and Alternative Reinsurance Arrangements below)
• A summary of any material retained risks that are not protected by the reinsurance arrangements, either due to coverage differences or differences in period of protection
• Concentration levels with each reinsurance counterparty involved
• The value, type and nature of any supporting funding and/or collateral arrangements
• A summary of the risk transfer contract structure(s) and key terms
• The reinsurer financial strength assessments undertaken by the managing agent
• Details of the syndicate’s reinsurance counterparty acceptance criteria

Lloyd’s will advise if additional information is needed. Lloyd’s will then form an opinion on the level of reinsurance risk potential and will advise the managing agent of any revised notification criteria, supplemental reporting, or broader actions that may be required.

The choice of reinsurer for a syndicate is a matter for managing agents. However, prior notification to Lloyd’s is required if:

Reinsurer concentration

1.   A syndicate intends to purchase or renew reinsurance arrangements with a single reinsurance entity and/or multiple reinsurance entities which are within the same group of companies (i.e. reinsurance entities related/affiliated to each other through common ownership, directorship or financial and/or strategic interdependency) whether or not they are related to the syndicate, if either of the following apply:

a.   the total estimated gross reinsurance premiums (before the deduction of reinsurance commissions) under all reinsurance contracts with these reinsurers in aggregate is expected to exceed 20% of any single syndicate underwriting year of account gross gross written premium.

b.   the total estimated UK GAAP balance sheet reinsurance recoverables (before the deduction of offset funds or collateral) under all the reinsurance contracts with these reinsurers in aggregate is expected to exceed 20% of the syndicate’s total balance sheet assets.

Reinsurer financial strength

2.   A syndicate intends to purchase or renew reinsurance from reinsurers where any of the criteria in a – c below apply, subject to d:

a.   The reinsurer has a financial strength rating from a recognised credit assessment/rating institution which is lower than an A-, i.e. is not considered “strong”, “superior” or “excellent”, and the full potential liability of the reinsurer(s) under the reinsurance contract(s) is not supported in full with low risk forms of collateral/securitisation and/or funding, subject to d below.

b.   The reinsurer does not have a financial strength rating from any recognised credit assessment/rating institution, and the full potential liability of the reinsurer(s) under the reinsurance contract(s) is not supported in full with low risk forms of collateral/securitisation and/or funding, subject to d below.

c.   The reinsurer has a financial strength rating from a recognised credit assessment/rating institution which is equal to or higher than an A-, but where the syndicate knows that the risk will be retroceded 100% to a reinsurer who falls within a or b above, subject to d below.

d.   The criteria set out in a to c above shall only apply where the total estimated gross reinsurance premiums (before the deduction of reinsurance commissions) under all reinsurance contracts with these reinsurers in aggregate is planned or expected to exceed 2% of any single syndicate underwriting year of account gross gross written premium.

If any of the above thresholds are crossed as a result of an unexpected change, or if there is a material increase to a previously notified position, then the managing agent should notify Lloyd’s at an early stage.

Guidance

While prior Lloyd’s approval is not required, Lloyd’s will look to undertake a risk-based review of the transaction focusing on evaluating how any potential risks have been assessed and managed by the managing agent.

It is accepted that decisions on the scale of reinsurer participation may take place at any time during the year so managing agents should engage with their Lloyd’s Outwards Reinsurance Manager as soon as they become aware of a potential triggering of these notification requirements.

Managing agent submissions of SBFs to Lloyd’s also present a natural opportunity to notify/engage with Lloyd’s regarding proposals that trigger these requirements.

The following information should accompany any notification to Lloyd’s:

• The overall monetary values of the reinsurance risk transfer
• Concentration levels with each reinsurance counterparty involved
• The value, type and nature of any supporting funding and/or collateral arrangements
• The types of product(s) purchased, including the use of reinsurance shared with other entities (see also the requirements for Shared Reinsurance Arrangements below), and the use of potentially nonstandard reinsurance (see also the requirements for Non-Standard and Alternative Reinsurance Arrangements below)
• A summary of the risk transfer contract structure(s) and key terms
• The reinsurer financial strength assessments undertaken by the managing agent
• Details of the syndicate’s reinsurance counterparty acceptance criteria.

Lloyd’s will advise if additional information is needed. Lloyd’s will then form an opinion on the level of reinsurance risk potential and will advise the managing agent of any revised notification criteria, supplemental reporting, or broader actions that may be required.

Lloyd’s will only permit products that meet the legal definition of reinsurance and that provide genuine risk transfer to be considered and treated as admissible outwards reinsurance for the purpose of calculating a syndicate’s net inwards (re)insurance risk.

Lloyd’s prior approval will therefore be required if a syndicate intends to treat a non-standard reinsurance or alternative risk transfer arrangement as a reinsurance contract in the syndicate’s insurance exposure/loss reporting, business plan or capital calculations.

For these purposes, non-standard reinsurance and alternative risk transfer arrangements include any purported contract of reinsurance or other financial instrument which it is proposed should be treated as reinsurance by the syndicate, but which does not operate on an indemnity basis or which provides for limited or no demonstrable genuine risk transfer.

For the avoidance of doubt, parametric, Industry Loss Warranty, and/or collateralised reinsurance products would not be automatically considered as non-standard reinsurance or alternative risk transfer arrangements, provided they operate on an indemnity basis and provide genuine risk transfer.

If a contract falls within this definition, then the managing agent must submit the following to Lloyd’s:

1.   Evidence (including, if appropriate, legal opinions) to demonstrate clearly that the arrangement meets the legal definition of reinsurance.

2.   Evidence that the managing agent’s auditors have confirmed that the arrangement is being recorded appropriately in accordance with all applicable accounting and regulatory requirements.

If the above cannot be demonstrated, then the arrangement will not be admissible as a reinsurance contract and should not be considered or treated as reinsurance within the syndicate’s insurance exposure/loss reporting, business plan or capital calculations.

Shared reinsurance arrangements are any reinsurance contract where a syndicate shares any of the coverage of the reinsurance contract with other cedants, whether or not they are Lloyd’s syndicates.

Syndicates with shared reinsurance arrangements must comply with the following requirements unless otherwise agreed with Lloyd’s:

1.   Shared reinsurance arrangements should clearly set out which elements are shared and which are not. This includes consideration of premium, limits, excess, any funding or collateral provision, and where appropriate the inclusion of a non-avoidance provision to ensure that in the event of a dispute between the reinsurer and a reinsured other than the syndicate(s), reinsurers will continue to honour their contractual obligations to the syndicate(s) and will not seek to avoid the reinsurance contract with the syndicate(s) as a result of that dispute.

2.   All premiums (including reinstatement premiums and adjustments) and recoveries must be allocated in a clearly defined and equitable manner. This allocation should be reviewed in the event of material change in exposure or erosion due to actual loss during the contract period, with appropriate consideration of any impact on net risk, expected profitability and/or capital requirements.

3.   The managing agent board is required to formally record that it has considered these requirements and is satisfied that each shared reinsurance arrangement:

a.   Complies with these requirements

b.   Is structurally and economically effective

c.   Is in the best interests of the members of the syndicate (see paragraph 39A of the Underwriting Byelaw).

The managing agent shall provide Lloyd’s Outwards Reinsurance team with copies of the formal records.

Managing Agents should note that the payment or transfer of assets from or to each syndicate’s Premiums Trust Fund accounts must be in accordance with the terms of the applicable Premium Trust Deed. A syndicate’s Premiums Trust Funds are not to be used to fund the obligations of other syndicates or other non-Lloyd’s reinsured entities (other than where this may be permitted by the Premium Trust Deed, for which the managing agent may require appropriate legal advice).

Managing agents must not permit a syndicate managed by it to reinsure or be reinsured by another syndicate managed by it, or by a related managing agent, unless:

1.   The managing agent of each syndicate is satisfied on reasonable grounds that the reinsurance is in the interests of all of the members of its respective syndicate

2.   The reinsurance is on terms which are fair and reasonable as respects both the reinsured syndicate and the reinsuring syndicate

3.   The reinsurance is of a type and for a class of business that the reinsuring syndicate has agreement from Lloyd’s to underwrite

4.   The reinsurance consistent with the approved reinsurance purchasing strategy of the reinsured syndicate

5.   The reinsurance has been negotiated, agreed and operated on an “arm’s length” commercial basis. Where the reinsuring syndicate is the leading or sole reinsurer this should include an independent (whether internal or external) assessment of risk transfer pricing.

The managing agent(s) shall make and retain proper records of all intersyndicate reinsurance arrangements. These should include but not be limited to a declaration for each transaction which has been signed by a member of the managing agent board and the Active Underwriter for each syndicate, declaring that 1 to 5 above have been complied with in full.

The managing agent shall provide Lloyd’s Outwards Reinsurance team with copies of the signed declarations.

This requirement should be read in conjunction with the requirements for “Disclosure of Related Party and Other Transactions which May Give Rise to a Conflict of Interest”.