LLD 17.4 Management of risk

As well as the risks that are common to other firms, there are significant risks in the Lloyd's market arising out of its structure and the interrelationships between the entities involved. The risks include aggregations of risk in the market. The Society should ensure that the systems and controls required by LLD 17.4.1 R enable it to identify, monitor and manage those risks.

In complying with LLD 17.4.4 R the Society should take appropriate account of effects such as diversification and concentrations.

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.

Should the Society intend to exercise any power it may have to prescribe a course of action for a managing agent which the managing agent might reasonably consider to be inconsistent with the interests of any member whose insurance business it manages, the Society should:

1. (1)

   consult any affected member, where practical in advance; and

2. (2)

   in accordance with PRIN 11 (Relations with regulators), LLD 2 and, to enable the FSA to comply with section 314 of the Act (Authority's general duty), consider whether it should notify the FSA.

Many entities operating within the Lloyd's market are part of a corporate group, including the Society, certain managing agents and members. Those entities are subject to group risk arising from their own corporate group and, depending on the relationships within their own group, may be subject to FSA systems and controls requirements or group risk requirements. The rules and guidance in this section are intended to ensure that sufficient systems and controls are in place to protect policyholders and potential policyholders from such risks. The Society is also subject to the risk of wider conflicts of interest or the appearance of conflicts of interest in carrying out the Society's regulatory functions. LLD 17.4.13R (1) requires the Society to monitor and manage those risks.

In complying with LLD 17.4.6 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.

In complying with LLD 17.4.14 R and LLD 17.4.15 R, the Society should consider the significance of any overstatement with regard to the value of the Society's capital resources that are not required to cover shortfalls in a member's capital resources.