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  3. Point in time
    2011-04-30

INSPRU 8.1 Application

INSPRU 8.1.1 R RP

1 INSPRU 8.1 applies to:

  1. (1)

    the Society;

  2. (2)

    managing agents.

INSPRU 8.1.2 R

If a provision in INSPRU or GENPRU applies to the Society "in accordance with" this rule, the Society must:

  1. (1)

    manage each member'sfunds at Lloyd's;

  2. (2)

    manage its central assets; and

  3. (3)

    supervise the insurance business carried on by each member at Lloyd's;

so as to achieve in relation to those assets and that insurance business the same effect as the relevant INSPRU or GENPRU provision would have (that is, conforming with the requirements of any rule and taking appropriate account of any applicable guidance,) when applied to a firm or to the insurance business of a firm.

INSPRU 8.1.3 G

The Society is subject to INSPRU and GENPRUrules in respect of the insurance business of each Lloyd's member. These include rules in respect of:

  1. (1)

    the calculation of the capital resources requirements for each member;

  2. (2)

    the financial resources it manages on behalf of members; and

  3. (3)

    the Society's own financial resources.

INSPRU 8.1.4 R

If a provision in INSPRU or GENPRU applies to a managing agents "in accordance with" this rule, the managing agent must, in relation to each syndicate managed by it and for each syndicate year, manage:

  1. (1)

    the syndicate assets; and

  2. (2)

    the insurance business carried on by the members of the syndicate through that syndicate;

so as to achieve in relation to those assets and that insurance business the same effect as the relevant INSPRU or GENPRU provision would have (that is, conforming with the requirements of any rule and taking appropriate account of any applicable guidance) when applied to a firm or to the insurance business of a firm.

INSPRU 8.1.5 G

Syndicate membership may change from year to year or it may remain constant. Managing agents are required to apply INSPRU and GENPRU to the insurance business carried on through each syndicate for each syndicate year. This should ensure that INSPRU and GENPRU are applied to Lloyd's in a way that is consistent with the provision of capital to support the insurance business underwritten.

INSPRU 8.1.6 G

Where common systems and controls or processes are appropriate for all the insurance business carried on through more than one syndicate year, a single response may be adequate for all syndicate years. However, in some cases it will be important to consider the business of each open syndicate year separately, particularly for quantitative rules. For example, it is important that managing agents separately assess the financial resources (including capital) that are required and are available to support the insurance business carried on through each syndicate year, where the syndicatemembership changes from year to year. This is because each member's assets are only available to support its own business, so the assets supporting one year of account may not be available to support another. For example, if a managing agent were to assess the financial requirements of two or more syndicate years together where the capital structure had changed, there would be a risk that the managing agent might take account of diversification effects that were not reflected in the capital supporting the insurance business.

INSPRU 8.1.7 G

There is no requirement on managing agents to carry out separate individual capital assessments for syndicates for each syndicate year. Managing agents are required to carry out individual capital assessments for each syndicate as if that syndicate were a firm; this would normally be on the basis of a going concern but, just as in a firm, account needs to be taken of any restrictions on the availability of assets (e.g. deposits with cedants), and some account needs to be taken of changes in the capital participation in the syndicate. The Society is responsible for the individual capital assessment for each member, which must take into account the assessments made by managing agents of any syndicates on which the member participates. INSPRU 7.1 contains rules and guidance on the assessment of capital adequacy for firms and INSPRU 7.1.74 G to INSPRU 7.1.90 R2 provide for the application of INSPRU 7.1 to the Society and managing agents.

INSPRU 8.1.8 G

The assessment which a firm makes should be based upon its future business plans and projections. This is the main area where the firm's assessment may diverge from its prescribed capital resources requirement which, necessarily, is based upon historic data.

INSPRU 8.1.9 G

Key INSPRU and GENPRU requirements for Lloyd's

Key INSPRU and GENPRU requirements

INSPRU

GENPRU

Risk management, systems and controls

The Society to establish and maintain systems and controls to address risks affecting the Lloyd's market

INSPRU 8.2

The Society to manage prudential, credit, market, liquidity and operational risks affecting funds at Lloyd's and central assets

INSPRU 4.1 , INSPRU 5.1, INSPRU 8.2 & INSPRU 8.5

Managing agents to establish and maintain systems and controls for the management of prudential, credit, market, liquidity, operational, and insurance risks affecting each syndicate

INSPRU 4.1 , INSPRU 5.1, INSPRU 8.2 & INSPRU 8.5

Adequacy of financial resources

The Society to ensure that members' financial resources are adequate

GENPRU 1.2 & GENPRU 1.5

Members taken together to maintain adequate financial resources in respect of the insurance business conducted at Lloyd's

GENPRU 1.5

Managing agents to ensure that financial resources are adequate for each syndicate

GENPRU 1.2 & GENPRU 1.5

Valuation

The Society and managing agents to apply generally accepted accounting principles to valuing assets, liabilities, equity and income statement items for the purposes of the rules and guidance in GENPRU, INSPRU and IPRU (INS) unless the contrary is expressly stated

INSPRU 3.1 & INSPRU 3.2

GENPRU 1.3 & GENPRU 1.5

Capital resources requirements

The Society to calculate the MCR in respect of the general insurance business of each member

GENPRU 2.1 & GENPRU 2.3

The Society to calculate the CRR (higher of MCR and ECR) in respect of the long-term insurance business of each member

GENPRU 2.1 & GENPRU 2.3

Capital resources

The Society and managing agents to calculate capital resources in accordance with the rules and guidance in GENPRU

GENPRU 2.2 & GENPRU 2.3

Adequacy of capital resources

Managing agents to assess the adequacy of capital resources held at syndicate level in respect of insurance business carried on through each syndicate (annual ICA for each syndicate)

INSPRU 7.1

The Society to assess the adequacy of capital resources available to support each member'sinsurance business (ICA for each member), both at syndicate level (taking account of syndicate ICAs), and as funds at Lloyd's

INSPRU 7.1

INSPRU 8.2 Special provisions for Lloyd's

Management of insurance business

INSPRU 8.2.1 R

Neither the Society nor managing agents may permit a member to carry on any insurance business except as a participant on one or more syndicates.

Obligations under INSPRU and GENPRU

INSPRU 8.2.2 R

The Society must ensure that all participants in the Lloyd's market are made aware of their obligations under INSPRU and GENPRU.

Management of risk

INSPRU 8.2.3 R

The Society must establish and maintain systems and controls to enable it appropriately to address the risks to which the Lloyd's market is exposed.

INSPRU 8.2.4 R

The systems and controls in INSPRU 8.2.3 R must include systems and controls to enable the Society to ensure that any assumptions made in calculating a member'scapital resources or in determining the individual capital assessment for each member are regularly reviewed and that appropriate action is taken if any assumption is no longer valid.

INSPRU 8.2.5 R

The Society must take all reasonable steps, including establishing and maintaining adequate systems and controls to enable it:

  1. (1)

    to manage the risks to which funds at Lloyd's and central assets are exposed; and

  2. (2)

    to ensure that funds at Lloyd's and central assets are adequate to support all balancing amounts.

INSPRU 8.2.6 R

A managing agent must establish and maintain adequate systems and controls to manage the risks to which the insurance business carried on through each syndicate it manages is exposed.

INSPRU 8.2.7 G

In complying with INSPRU 8.2.6 R, managing agents should have particular regard to:

  1. (1)

    transactions which may give rise to a conflict of interest, such as those to which the counterparties are:

    1. (a)

      other members of the managing agent's own group;

    2. (b)

      any members of any syndicates managed by the managing agent; or

    3. (c)

      any entity that is part of a group to which one or more members of any syndicates managed by the managing agent belong; and

  2. (2)

    transactions involving:

    1. (a)

      the provision of capital;

    2. (b)

      the provision of reinsurance; or

    3. (c)

      the provision of other services.

INSPRU 8.2.8 R

In complying with INSPRU 8.2.6 R a managing agent need not take account of risks associated with assets that are not syndicate assets.

INSPRU 8.2.9 R

The Society must take reasonable steps to ensure that systems and controls established and maintained by managing agents are adequate to ensure that risks to which the insurance business carried on through each syndicate is exposed do not have a detrimental effect on funds at Lloyd's or central assets.

INSPRU 8.2.10 G

Managing agents and the Society each hold and manage some of the financial resources held to support the insurance business carried on through syndicates. In particular:

  1. (1)

    the Society holds and manages funds at Lloyd's and central assets which must be held to support balancing amounts. The Society is required to manage the risks that affect funds at Lloyd's and central assets directly, once the effects of any aggregation and diversification have been taken into account;

  2. (2)

    managing agents hold and manage some of the financial resources in respect of the insurance business carried on through each syndicate that they manage. Managing agents are required to manage all risks affecting a syndicate except for the risk that funds at Lloyd's and central assets are not available to support the balancing amount.

INSPRU 8.2.11 R RP

The Society must establish and maintain effective arrangements to monitor and manage risk arising from:

  1. (1)

    conflicts of interest (including in relation to (2) to (4));

  2. (2)

    inter-syndicate transactions, including reinsurance to close and approved reinsurance to close;

  3. (3)

    related party transactions; and

  4. (4)

    transactions between members and itself.

INSPRU 8.2.12 R

The arrangements in INSPRU 8.2.11 R must enable the Society to identify any significant overstatement of financial resources resulting from any transaction falling within INSPRU 8.2.11R (2) to INSPRU 8.2.11R (4), including as a result of:

  1. (1)

    any differences in the amounts recorded as due or payable by each party to any such transaction; or

  2. (2)

    any actual or likely disputes between the parties to any such transaction.

INSPRU 8.2.13 R

If the Society identifies a significant overstatement of the kind referred to in INSPRU 8.2.12 R, it must ensure that an appropriate adjustment is made, including if appropriate by a deduction from or reduction in the value attributed to:

  1. (1)

    the capital resources of any member concerned; or

  2. (2)

    the Society'scapital resources.

Approved reinsurance to close

INSPRU 8.2.14 G

As defined in the Glossary, "approved reinsurance to close" excludes:

  1. (1)

    reinsurance between parties other than members; and

  2. (2)

    balance transfers between syndicate years of syndicates having only one member, which have no effect on the overall liabilities of that member.

INSPRU 8.2.15 G

The "approved" status of an approved reinsurance to close does not alter the legal status or effect of the original contract of insurance, or the liability of a reinsured member to the policyholder under or in respect of the original contract of insurance.

INSPRU 8.2.16 R

Notwithstanding that the liability of a reinsured member to a policyholder is unaffected by an approved reinsurance to close as described in INSPRU 8.2.15 G, for the purposes of INSPRU and GENPRU only:

  1. (1)

    for an approved reinsurance to close which is not to a subsidiary of the Society:1

    1. (a) 1

      a contract of insurance reinsured under an approved reinsurance to close must be treated as if the reinsuring member and not the reinsured member had effected the original contract of insurance; and 1

    2. (b)

      any payment received by a member as consideration for or in connection with an approved reinsurance to close must be treated as a Lloyd's member's contribution and not as premium or as a reinsurance recovery;1

  2. (2)

    for an approved reinsurance to close to a subsidiary of the Society, a contract of insurance reinsured under that approved reinsurance to close must be treated as if the reinsured member had not effected the original contract of insurance but:1

    1
    1. (a)

      for the purposes of the calculation of the Society GICR, general insurance business carried on by members and former underwriting members which has been reinsured to a subsidiary of the Society under an approved reinsurance to close must be treated as reinsured to a third party; and1

    2. (b)

      for the purposes of the calculation of the capital resources requirement of a subsidiary of the Society, the approved reinsurance to close must be treated as a reinsurance.1

Provision of information by managing agents

INSPRU 8.2.17 R

A managing agent must, as soon as possible, give the Society any information the managing agent has concerning material risks to funds at Lloyd's or central assets.

INSPRU 8.2.18 R

A managing agent need not comply with INSPRU 8.2.17 R if the managing agent knows that the Society already has the relevant information.

Insurance receivables to be carried to trust funds

INSPRU 8.2.19 R RP

The Society must take all reasonable steps to ensure that each member:

  1. (1)

    executes the appropriate Lloyd's trust deeds; and

  2. (2)

    carries to the appropriate Lloyd's trust fund all amounts received or receivable by the member, or on its behalf, in respect of any insurance business carried on by it.

INSPRU 8.2.20 R RP

The Society must carry all amounts it receives on behalf of any member in respect of that member'sinsurance business to the appropriate Lloyd's trust fund.

INSPRU 8.2.21 R RP

A managing agent must carry all amounts it receives on behalf of any member in respect of that member'sinsurance business to the appropriate Lloyd's trust fund.

INSPRU 8.2.22 R RP

In complying with INSPRU 8.2.19 R to INSPRU 8.2.21 R, the Society and managing agents must take all reasonable steps to ensure that amounts received or receivable by a member in respect of general insurance business and long-term insurance business are carried to separate Lloyd's trust funds.

Amendments to byelaws, trust deeds and standard form letters of credit and guarantees

INSPRU 8.2.23 R RP

The Society must, as soon as it is practical to do so, notify the FSA of its intention to approve the form of any new Lloyd's trust deed.

INSPRU 8.2.24 R RP

The Society must, as soon as it is practical to do so, notify the FSA of its intention to make any amendment which may alter the meaning or effect of any byelaw, including:

  1. (1)

    any Lloyd's trust deed;

  2. (2)

    any standard form letter of credit prescribed by the Society from time to time; or

  3. (3)

    any standard form guarantee agreement prescribed by the Society from time to time.

INSPRU 8.2.25 R RP

The Society must provide the FSA with full details of:

  1. (1)

    the form of any new Lloyd's trust deed it intends to approve, as described in INSPRU 8.2.23 R and

  2. (2)

    any amendments falling within INSPRU 8.2.24 R.

INSPRU 8.2.26 R RP

The Society must consult interested parties in relation to any new Lloyd's trust deed and in relation to any amendment falling within INSPRU 8.2.24 R.

INSPRU 8.2.27 G RP

Except in urgent cases, the Society should consult in relation to any new Lloyd's trust deed or amendments before the new deed or amendments take effect.

INSPRU 8.2.28 R RP

The information provided to the FSA by the Society under INSPRU 8.2.25 R must include:

  1. (1)

    a statement of the purpose of any proposed amendment or new Lloyd's trust deed and the expected impact, if any, on policyholders, managing agents, members, and potential members; and

  2. (2)

    a description of the consultation undertaken under INSPRU 8.2.26 R including a summary of any significant responses to that consultation.

INSPRU 8.2.29 G RP

The FSA would normally expect to receive the information required under INSPRU 8.2.25 R and INSPRU 8.2.28 R not less than three months in advance of the proposed change.

INSPRU 8.3 The Central Fund

Application

INSPRU 8.3.1 R

This section1 applies to the Society.

1

Purpose

INSPRU 8.3.2 G

The rules and guidance in this section1 are intended to promote confidence in the market at Lloyd's, and to protect certain consumers of services provided by the Society in carrying on, or in connection with or for the purposes of, its regulated activities. They do this by:

1
  1. (1)

    giving guidance to the Society about the protection that the Central Fund should provide for policyholders; and

  2. (2)

    enabling the FSA to keep under review the protection the Central Fund provides for policyholders.

Enabling Provision

INSPRU 8.3.3 D

The directions in this section1 are given under section 318 of the Act (Exercise of powers through Council) for the purpose of achieving the objective specified, as required by section 318(2) of the Act.

1
INSPRU 8.3.4 D

The directions given in this section1 are given in relation to the exercise of the powers by the Society in respect of the Central Fund and are given with a view to achieving the objective of ensuring that the Society in making payments or in providing any other financial assistance from the Central Fund does so on a basis which takes no account of amounts of compensation which policyholders may receive under the provisions of the compensation scheme in respect of protected claims against members.

1
INSPRU 8.3.5 G

The Society should seek to ensure that the Central Fund provides protection for policyholders so as to minimise the need for Lloyd's policyholders to have recourse to the compensation scheme.

INSPRU 8.3.6 G

The Society should seek, and take appropriate account of, the FSA's views on all proposed changes in its arrangements relating to the Central Fund.

INSPRU 8.3.7 D

The Society must, in the exercise of its powers to make payments from the Central Fund or to provide other forms of financial assistance from the Central Fund, ensure that in calculating and determining the amount of any such payment or the amount of any other financial assistance, it takes no account of the amounts of compensation which policyholders may receive under the provisions of the compensation scheme in respect of protected claims against members.

INSPRU 8.4 Capacity Transfer Market

Application

INSPRU 8.4.1 R RP

This section1 applies to the Society.

1

Purpose

INSPRU 8.4.2 G RP

The rules and guidance in this section1 are intended to promote confidence in the market at Lloyd's, and to protect certain consumers of services provided by the Society in carrying on, or in connection with or for the purposes of, its regulated activities. They do this by ensuring that the Society appropriately and effectively regulates the capacity transfer market so that it operates in a fair and transparent manner.

1

Requirement to make byelaws governing conduct in the capacity transfer market

INSPRU 8.4.3 R RP

The Society must make appropriate byelaws governing conduct in the capacity transfer market.

INSPRU 8.4.4 G RP

The byelaws referred to in INSPRU 8.4.3 R should:

  1. (1)

    ensure that adequate and effective arrangements are in place to enable members and persons applying to be admitted as members to enter into transactions to transfer syndicate capacity and settle these transactions in a timely manner;

  2. (2)

    give clear and comprehensive guidance about the dissemination of information that is, or may be, relevant to the price of syndicate capacity and the transparency of the capacity transfer market; and

  3. (3)

    prohibit unfair and abusive practices (including market manipulation), the misuse of information not generally available, and the dissemination of false or misleading information.

INSPRU 8.4.5 G RP

The Society should have adequate and effective arrangements to:

  1. (1)

    record and monitor transactions in the capacity transfer market, and maintain adequate audit trails; and

  2. (2)

    suspend or annul transactions where appropriate.

INSPRU 8.4.6 G RP

The Society should regularly review the byelaws referred to in INSPRU 8.4.3 R, taking account of the standards of conduct required in other UK financial markets.

INSPRU 8.4.7 G RP

The Society should consult members and underwriting agents before it finalises material changes in the byelaws referred to in INSPRU 8.4.3 R, and should have timely and effective arrangements for notifying them of changes in these byelaws.

INSPRU 8.5 Former underwriting members

Application

INSPRU 8.5.1 R

This section1 applies to the Society.

1

Purpose1

INSPRU 8.5.2 G

The rules and guidance in this section1 are intended to promote confidence in the market at Lloyd's and to protect certain consumers of services provided by the Society in carrying on or in connection with or for the purposes of its regulated activities by:

1
  1. (1)

    protecting policyholders against the risk that former underwriting members may not be able to meet any liabilities to carry out contracts of insurance that they underwrote at Lloyd's; and

  2. (2)

    enabling the FSA to impose requirements under section 320(3) of the Act (Former underwriting members) if it considers this appropriate to protect policyholders.

Requirements relating to former underwriting members

INSPRU 8.5.3 R

The Society must draw sections 320 to 322 of the Act (Former underwriting members, Requirements imposed under section 320, Rules applicable to former underwriting members) to the attention of any person ceasing to be an underwriting member on or after commencement.

INSPRU 8.5.4 R

The Society must require any person, other than a body corporate, ceasing to be an underwriting member on or after commencement to:

  1. (1)

    notify the Society of any change in his address within one month of the change;

  2. (2)

    in the case of a natural person, to make arrangements for the Society to be notified in the event of his death.

INSPRU 8.6 Prudential risk management and associated systems and controls

Application of SYSC 14

INSPRU 8.6.1 R

Subject to INSPRU 8.6.2 R, SYSC 14 (Prudential risk management and associated systems and controls) applies to managing agents and to the Society in accordance with:

  1. (1)

    for managing agents, INSPRU 8.1.4 R; and

  2. (2)

    for the Society,INSPRU 8.1.2 R.

INSPRU 8.6.2 R

The requirement in SYSC 14.1.18 R to take reasonable steps to ensure the establishment and maintenance of a business plan does not apply to the Society.

Application of SYSC 11, 15 and 16

INSPRU 8.6.3 R

Subject to INSPRU 8.6.5 R, SYSC 11 (Liquidity risk management systems and controls), SYSC 15 (Credit risk management systems and controls) and SYSC 16 (Market risk management systems and controls) apply to managing agents and to the Society in accordance with:

  1. (1)

    for managing agents, INSPRU 8.1.4 R; and

  2. (2)

    for the Society, INSPRU 8.1.2 R

Application of SYSC 17

INSPRU 8.6.4 R

Subject to INSPRU 8.6.5 R, SYSC 17 (Insurance risk systems and controls) applies to managing agents in accordance with INSPRU 8.1.4 R.

INSPRU 8.6.5 R

In accordance with INSPRU 8.6.2 R, the rules and guidance in SYSC 11, SYSC 15, SYSC 16 and SYSC 17 relating to the establishment and maintenance of a business plan do not apply to the Society.