1A contravention of the rules in this chapter does not give rise to a right of action by a private person under section 150 of the Act (Actions for damages) and each of those rules is specified under section 150(2) of the Act as a provision giving rise to no such right of action.
PRU 2.1 applies to the Society in accordance with LLD 16.3.1 R.
PRU 2.1.34 R to PRU 2.1.35 G apply to managing agents in accordance with LLD 16.3.3 R.
PRU 2.1.9 R requires the Society to ensure, in relation to each member's insurance business, that capital resources equal to or in excess of the member's capital resources requirement (CRR) are maintained. PRU 2.1 sets out the overall framework of the CRR. PRU 7.2 sets out the calculation of the components of the general insurance capital requirement and the long-term insurance capital requirement.
Managing agents are required to calculate the ECR for the purposes of carrying out syndicate ICAs under PRU 2.3. As with-profits insurance business is not carried on through any syndicate, the calculation of the with-profits insurance capital component will not be applicable. PRU 7.4 is not applied to Lloyd's.
For the purposes of PRU 2.1.21 R, the Society must calculate the MCR in respect of the general insurance business of each member as the higher of:
the member's share of the base capital resources requirement in respect of general insurance business for the members in aggregate; and
the general insurance capital requirement for the member, calculated according to LLD 19.2.11 R.
For the purposes of LLD 19.2.5R (1), the Society must determine the member's share by apportioning the base capital resources requirement in respect of general insurance business for the members in aggregate between members in proportion to the result for each member of LLD 19.2.11 R.
For the purposes of PRU 2.1.22 R, the Society must calculate the MCR in respect of the long-term insurance business of each member as the higher of:
the member's share of the base capital resources requirement in respect of long-term insurance business for the members in aggregate; and
the sum of, for each member:
For the purposes of LLD 19.2.7R (1), the Society must determine the member's share by applying to the aggregate long-term businessbase capital resources requirement the ratio of the result for the member of LLD 19.2.7R (2) to the aggregate of the results of LLD 19.2.7R (2) for all members.
Subject to PRU 2.1.27 R, the amount of the base capital resources requirement for the members in aggregate is:
for general insurance business, €3 million; and
for long-term insurance business, €3 million.
For the purposes of PRU 2.1.30 R, the Society must calculate the general insurance capital requirement for the members in aggregate as the higher of:
the aggregate for all members of the higher of, for each member, the result of the premiums amount and the claims amount; and
The Society must determine the general insurance capital requirement for each member by apportioning the result of LLD 19.2.10 R between members on a fair and reasonable basis, provided that the general insurance capital requirement for a member must not be less than the higher of the result of the premiums amount and the claims amount for that member.
The Society should calculate the premiums amount and the claims amount for each member on the basis of the member's own general insurance business, including insurance business that attaches to the reinsuring member for the purposes of PRU following an approved reinsurance to close (see LLD 17.5.3 R).
The Society must calculate the general insurance capital requirement it would have to determine under PRU 2.1.30 R if it were an insurer carrying on all the general insurance business carried on by its members, but eliminating inter-syndicate reinsurance (the Society GICR).
For the purpose of LLD 19.2.13 R the Society may make appropriate approximations, taking reasonable care to avoid underestimating the Society GICR.
The Society must determine each member's share of the Society GICR by allocating the Society GICR between the members in proportion to the result for each member of LLD 19.2.11 R.
Subject to LLD 19.3.3 R, LLD 19.3.4 R and LLD 19.3.6 R, PRU 2.2 applies to managing agents and to the Society in accordance with:
for managing agents, LLD 16.3.3 R; and
for the Society, LLD 16.3.1 R.
PRU 2.1 sets out minimum capital resources requirements for a firm and for Lloyd's members. PRU 2.2 sets out how, for the purpose of these requirements, capital resources are defined and measured. PRU 2.2 applies:
to managing agents for their calculation of the capital resources managed by them in respect of each syndicate they manage (by reference, where there is a change in the underlying capital provision, to each open syndicate year); and
to the Society for its calculation of:
each member's capital resources; and
its own capital resources.
PRU 2.2.15 G to PRU 2.2.26 R (Limits on the use of different forms of capital) do not apply to managing agents.
PRU 2.2.15 G to PRU 2.2.26 R (Limits on the use of different forms of capital) apply to the Society with respect to:
the capital resources requirements for the members in aggregate; and
the aggregate capital resources supporting the insurance business of all the members.
PRU 2.2.72 R does not apply to the Society or to managing agents.
In this Chapter LLD 19, "the aggregate capital resources supporting the insurance business of all the members" are:
the aggregate of all the members' capital resources calculated under LLD 19.3.10 R; and
the Society's capital resources excluding callable contributions.
Table PRU 2.2.14 R applies with the modifications that:
(A) CORE TIER ONE CAPITAL includes Lloyd's members' contributions in accordance with LLD 19.3.19 R, subject, in the case of letters of credit, guarantees and verifiable sums arising out of life assurance policies, to compliance with LLD 18.3.3 G to LLD 18.3.9 G; and
the Society may also recognise and value callable contributions, pursuant to LLD 19.3.9 R.
Lloyd's member's contributions are admissible assets under LLD 19.3.19 R and include letters of credit, guarantees and verifiable sums arising out of life assurance policies held as funds at Lloyd's. Assets that may be valued as part of capital resources under PRU are not necessarily, however, permitted investments for members under the terms of any Lloyd's trust deed.
In calculating its capital resources, the Society may, subject to LLD 18.3.10 G to LLD 18.3.12 R, recognise and value callable contributions.
The Society must calculate each member'scapital resources as the sum of:
a member's proportionate share of the capital resources held at syndicate level for each syndicate in which the member participates; and
the value of a member's funds at Lloyd's after deducting liabilities in compliance with LLD 18.3.17 R.
In order to comply with PRU 2.1.9 R the Society must ensure at all times that:
each member's capital resources requirement is covered by:
that member's capital resources, calculated according to LLD 19.3.10 R; and
to the extent that (a) is insufficient, by the Society's own capital resources; and
the Society GICR is covered by the aggregate capital resources supporting the insurance business of all the members.
For the purposes of LLD 19.3.11R (1)(b), the Society must maintain at all times capital resources sufficient to meet the aggregate of, for each member, the amount, if any, by which the member's capital resources fall short of the member's capital resources requirement.
The Society must calculate each member's share of the amount of capital resources required to comply with PRU 2.2.17 R as the higher of:
1/3 of the long-term insurance capital requirement for the members in aggregate; and
allocated between the members in proportion to the result for each member of LLD 19.2.7R (2).
For the purposes of PRU 2.2.18 R, the Society must ensure that the aggregate capital resources supporting the insurance business of all the members meet the higher of:
1/3 of the general insurance capital requirement for the members in aggregate; and
1/3 of the Society GICR; and
with the sum of the items listed in PRU 2.2.18 R.
The Society must calculate each member's share of the amount of capital resources required to comply with PRU 2.2.18 R as the higher of:
1/3 of the general insurance capital requirement for the members in aggregate; and
1/3 of the Society GICR; and
allocated between the members in proportion to the result for each member of LLD 19.2.11 R.
A Lloyd's member's contribution may be included in tier one capital resources to the extent that:
the proceeds are immediately and fully available in respect of the member's insurance business at Lloyd's;
(except in relation to letters of credit), it complies with PRU 2.2.29 R (3) or cannot be repaid to a member until all of the member's liabilities in respect of its insurance business at Lloyd's have been extinguished, covered or reinsured by an approved reinsurance to close;
it otherwise complies with PRU 2.2.29 R (5) to PRU 2.2.29 R (8).
PRU 2.2.90 R applies to the Society with the modification that the Society must also value its insurance undertakings in accordance with PRU 2.2.90 R.
If a related undertaking is an insurance undertaking which has a deficit in the capital resources available to cover its capital resources requirement, the Society must make provision for:
its proportionate share of that deficit; or
in the case of a subsidiary undertaking, the whole of that deficit.
In the case of members, Lloyd's members' contributions are included in PRU 2 Annex 1R and include:
letters of credit;
guarantees; and
verifiable sums arising out of life assurance policies;
held as funds at Lloyd's.
The effect of LLD 19.3.19 R is that Lloyd's members' contributions, including letters of credit, guarantees and life assurance policies, are admissible assets.
Subject to LLD 19.4.2 R, PRU 2.3 applies to managing agents and to the Society in accordance with:
for managing agents, LLD 16.3.3 R; and
for the Society, LLD 16.3.1 R.
Managing agents must carry out assessments of capital adequacy for each syndicate they manage by reference to all open syndicate years taken together.
PRU 1.2 requires firms to carry out assessments of the adequacy of their financial resources. Financial resources include capital resources and liquidity resources. PRU 5 contains guidance on liquidity stress tests. Managing agents should manage liquidity risk affecting each syndicate they manage and the Society should manage liquidity risk affecting funds at Lloyd's and central assets, including the risk that it cannot make liquid assets available to support syndicates on a timely basis.
PRU 2 sets out provisions that deal specifically with the adequacy of that part of a firm's financial resources that consists of capital resources. PRU 2.3 sets out guidance on how firms should assess the adequacy of their capital resources. The relevant requirements for Lloyd's are that:
the Society should carry out regular assessments of the adequacy of the capital resources available to support each member's insurance business; and
managing agents should carry out regular assessments of the adequacy of capital resources held at syndicate level in respect of the insurance business carried on through each syndicate.
Responsibility for:
managing the risks associated with the insurance business; and
holding the capital resources that support those risks;
is divided between managing agents and the Society. To clarify the respective responsibilities of managing agents and the Society for ensuring the adequacy of financial resources, the FSA distinguishes between the managing agents' responsibility to carry out capital adequacy assessments for each syndicate that they manage, and the Society's responsibility to carry out an assessment for each member.
In carrying out capital adequacy assessments in respect of the insurance business carried on through each syndicate (the syndicate ICA), managing agents must consider the risks, controls and the financial resources relevant to each syndicate.
When carrying out the syndicate ICA, managing agents must not take into account risks to which a member may be exposed or controls from which a member may benefit:
because that member carries on insurance business through another syndicate or more than one syndicate year (whether or not managed by the same managing agent); or
because that member's financial resources include funds at Lloyd's or central assets.
The Society must have regard to syndicate ICAs in arriving at its own capital assessment for each member.
In assessing the adequacy of the capital resources supporting the insurance business of each member, the Society should consider the risks, controls and financial resources relevant to the totality of the member's insurance business, including:
the adequacy of syndicate ICAs;
the member's share of syndicate ICAs;
adjustments in respect of risks and controls relating to funds at Lloyd's, central assets and the interaction of risks underwritten by the member through different syndicates and in respect of different syndicate years; and
the ongoing validity of any relevant assumptions it makes.
The Society should be able to justify any reliance it places on a syndicate ICA, for example by being able to demonstrate that it has carried out appropriate checks.
In taking account of a syndicate ICA under LLD 19.4.8 R:
if the Society considers a syndicate ICA to be adequate, it should use the managing agent's risk and capital assessments in carrying out its individual capital assessment in relation to any member of that syndicate , or it should be able to justify why it will not; and
if the Society considers a syndicate ICA to be less than adequate, the Society should increase the syndicate ICA so that it is adequate for the purpose of carrying out its individual capital assessment in relation to the members of that syndicate.
The assessment of capital adequacy for a member will rarely equal the proportionate share of a syndicate ICA (or sum of those shares, where the member participates on more than one syndicate) as attributed to that member, because, in determining the capital assessments for each member, the Society may make adjustments to take account of:
risks and controls associated with funds at Lloyd's and central assets, which can increase the member's individual capital assessment;
diversification effects, including as a result of members' participations on more than one syndicate year, which can reduce the member's individual capital assessment; and
its own assessment of syndicate risks, which can be higher than the managing agent's and so increase the member's individual capital assessment.
Capital resources to meet each syndicate ICA could be:
held within a syndicate and managed by the managing agent; or
held and managed by the Society; or
not needed in full, because of effects such as diversification that the Society takes into account.
The balancing amount is a function of the relationship between the syndicate ICA and the amount of assets held within the syndicate. As illustrations:
if the syndicate holds no capital resources (but its liabilities are fully covered by relevant assets), the balancing amount equals the syndicate ICA (as there are no capital resources at syndicate level, all the capital resources must be held as funds at Lloyd's or central assets);
if capital resources held at syndicate level are negative (i.e. if relevant assets do not fully cover liabilities for the syndicate), the balancing amount should be higher than the syndicate ICA by an amount corresponding to the negative capital resources held by managing agents on behalf of the syndicate; and
conversely, if a syndicate holds positive capital resources for the syndicate, the balancing amount should be lower than the syndicate ICA by a corresponding amount.
Managing agents must periodically notify the Society of the syndicate ICA and the balancing amount in respect of each syndicate.
For the purpose of assessing the adequacy of capital resources held as funds at Lloyd's and central assets, the Society must have regard to balancing amounts notified to it by managing agents.
After notification of a balancing amount by a managing agent, the Society must:
confirm to the managing agent that capital resources held as funds at Lloyd's and central assets are adequate to support the balancing amount; or
notify the managing agent that it cannot give that confirmation.
Managing agents should submit syndicate ICAs and notify balancing amounts to the Society as part of the annual capital-setting process at Lloyd's. The submission of the syndicate ICA and notification of the balancing amount should be made in good time for the Society to review them and place appropriate reliance on them when it determines the capital assessments for each member.
When communicating the syndicate ICA and balancing amount for each syndicate to the Society, managing agents should agree with the Society an allocation of the syndicate ICA between syndicate years. The purpose of the allocation is to ensure that there is an appropriate matching of assets to risk and liabilities and an equitable treatment between the members reflecting the provision of capital in each syndicate year.
Under LLD 19.4.23 R, a managing agent has a continuing obligation to communicate to the Society a revised syndicate ICA and, where appropriate, a revised balancing amount, if it considers that the syndicate ICA and balancing amount communicated in the capital-setting process are no longer adequate in the light of the risks to which the syndicate business is exposed.
For the purposes of complying with their obligations under PRU, managing agents may assume that any balancing amount confirmed by the Society under LLD 19.4.17 R is supported by capital resources held as funds at Lloyd's and central assets.
Following initial confirmation of a balancing amount by the Society, assumptions made about risks and controls may change or risks may crystallise, affecting:
the syndicate ICA (and hence, possibly, the balancing amount); or
the relationship between a syndicate ICA and a member's individual capital assessment; or
the amount of capital resources available.
If a managing agent has, at any time, a significant doubt about the adequacy of a syndicate ICA or balancing amount with respect to syndicate risks and controls, it must notify the Society immediately.
If the Society has, at any time, a significant doubt about the adequacy of any member's capital resources held by it in support of any balancing amount, it must notify the relevant managing agent immediately.
