David Strachan, FSA Insurance Sector Leader, said:
"The proposals we are setting out today will help to ensure that senior management at both the Society of Lloyd's and at managing agents focus on their responsibilities for managing risk effectively and on the level of capital needed to support the risks of the insurance businesses. This will, in turn, enhance confidence in the Lloyd's market and improve protection for policyholders."Our capital requirements for managing agents will closely mirror the approach we are adopting for other general insurers as set out in CP 190. The new system recognises the Society's continuing responsibility for ensuring that the members of Lloyd's hold adequate capital.
"The new arrangements involve a step change from previous practice and are due to come into effect from the beginning of 2005. Given this timescale it is vital that senior management engage with our proposals positively and quickly, and take responsibility for implementation planning which should already be underway."
The new regime is designed to bring about:
- improved risk management within the Lloyd's market;
- better assessment of the capital needed to support each syndicate, ensuring that the financial resources supporting syndicates are adequate at all times;
- more effective assessment by the Society and managing agents of the capital needs of Lloyd's members;
- greater protection for policyholders; and
- improved confidence in the Lloyd's market as a whole.
The proposed new capital requirements for Lloyd's will involve the four key elements of the CP 190 regime for general insurers. These are:
- a new Enhanced Capital Requirement (ECR) - this is a higher and more risk-sensitive measure than the current EU Directive minimum;
- a new requirement for managing agents to assess the financial resources needed to support the risks of the insurance business that they manage taking into account the underlying risks, the effectiveness of controls that mitigate those risks and stress and scenario tests - this includes the Individual Capital Assessment (ICA);
- our intention to issue Individual Capital Guidance (ICG) about the amount of capital we believe should be held; and
- a new approach to classifying capital resources into 'tiers' according to qualitative criteria, rather than measuring eligible capital as simply being the total of admissible assets less foreseeable liabilities.
The proposed rules will require managing agents:
- to maintain appropriate controls over syndicates including managing risks such as credit risk and market risk within limits that are substantially the same as those defined for companies; and
- to assess the capital needed to support each syndicate that they manage, which we believe will help engender a better understanding and management of the risks involved and help to ensure that financial resources are adequate at all times.
The proposed rules for the Society will require it:
- to maintain appropriate controls over the funds that it holds and manages centrally including managing risk within appropriate limits; and
- to assess the capital needs for each member, taking into account the capital needs of syndicates assessed by managing agents.
Background
- Consultation Paper 04/07 Lloyd's: integrated prudential requirements, and changes to auditing and actuarial requirements is available here. Responses to the CP are sought by 30 July 2004. It takes forward the concepts set out in CP 178 Review of prudential regulation of the Lloyd’s market, which is available here and will bring Lloyd's insurance business within the scope of the FSA's Integrated Prudential Sourcebook in a way that takes account of the market's unique structure and operation.
- The FSA's proposed reforms to the capital regime for non-life insurers were set out in Consultation Paper 190 published last July is available here.
- The FSA assumed responsibility in respect of the regulation of Lloyd's on 1 December 2001. The FSA's primary concern in relation to Lloyd's regulation is to ensure that policyholders are adequately protected in line with the FSA’s consumer protection and market confidence objectives.
- The Society of Lloyd’s is a body corporate that manages the Lloyd’s market (including the managing agents that operate within it) on behalf of all members of Lloyd’s. Managing agents directly manage the insurance business at Lloyd’s on behalf of Lloyd’s members.
- Under the Chairman’s Strategy Group proposals, Lloyd’s has moved to a franchise structure whereby the Society acts as franchisor and managing agents, as franchisees. In line with this move, internal governance arrangements at Lloyd’s have changed, and in particular the responsibilities of the previous Regulatory Board have been subsumed into a new Franchise Board that has similar powers but a wider remit.
- Prudential regulation by the FSA aims to ensure that the firms it regulates are financially sound. This includes specifying standards covering risk management and other related requirements.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection of consumers; and fighting financial crime.
- The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.
