Lloyds Capital

[George88]

I can't make head nor tail of the Lloyds stuff in Chapter 4. I had a look on the Lloyds website and couldn't find much to help. Are there any other sources or papers I can have a look at?

 

[Katherine Young]

Can you be more exact George? Which bit are you struggling with?

 

[George88]

• 
  PRA Solvency requirements will be those of solvency II from 1/1/2016.” What does this mean for the member PRA solvency test?
  
  
• To be in line the FAL > 1.35 * uSCR (I think). What is the relationship between the syndicate uSCR and the member uSCR. Which is calculated first?
  
  
• How does the RBC and ELC fit in?
  
  
• I think before SII the ICA was calculated for each syndicate, allocated in some way to members. The ECA was a syndicate measure which was 1.35 * syndicate ICA. I think this calculation is the same now but using uSCR rather than ICA at both the syndicate and member level.
  
  
• If someone is member of different syndicates, how is their FAL aggregated?
  
  
• Central capital – “FAL are set bottom up as uSCR* 1.35 for each member less a credit for member diversification”. If all members are in line then the FAL is equal to the sum of each member i.e. the total funds that are at Lloyds. The mention of member diversification suggests that we are talking about a reuired FAL. Is this an extra criteria on top of the MWSCR and the Central SCR?
  
  
• Are the MWSCR and the CSCR calculated based on the syndicate uSCRs, the member uSCRs or something else?
  
  
• What is the difference between the syndicate uSCR and the notional syndicate SCR? How does section 4.5 fit in with the above? Is the regulatory requirement SCR a separate calculation?
  

I just haven’t been able to build up a picture in my mind of the whole process and how it works, and how all the bits fit together.

 

[MorningtonCrescent]

Some answers below. Perhaps some Lloyd's gurus out there can give more detail.

• PRA Solvency requirements will be those of solvency II from 1/1/2016.” What does this mean for the member PRA solvency test?

I've a feeling Lloyd's was pretty much S2-ready before 1/1/2016. So the member PRA Solvency Test is S2 compliant.

• To be in line the FAL > 1.35 * uSCR (I think). What is the relationship between the syndicate uSCR and the member uSCR. Which is calculated first?

I think they're both pretty much calculated at the same time. The syndicate uSCR is used to inform the member uSCR, but it's the member uSCR that counts.

• I think before SII the ICA was calculated for each syndicate, allocated in some way to members. The ECA was a syndicate measure which was 1.35 * syndicate ICA. I think this calculation is the same now but using uSCR rather than ICA at both the syndicate and member level.

I think so too. Not 100% sure though. As above though, I think the ICA pretty much did this anyway?

• If someone is member of different syndicates, how is their FAL aggregated?

I bet they just do something pretty sensible. Eg just add up the FAL for each syndicate and allow for diversification?

• If all members are in line then the FAL is equal to the sum of each member i.e. the total funds that are at Lloyds.

But members each have different exposure. So you need to allow for diversification. Plus, you have to worry about the idea of Names being severally liable. So if some Names become insolvent, you can't use other Name's FAL to meet the shortfall. So it gets REALLY complicated. Plus, sum of members' FAL is NOT all funds that are at Lloyd's, what about PTF's and central assets?


So, big picture: calculate members' uSCRs for a syndicate (using syndicate uSCR to help). Then aggregate up to find each members' total SCR based on all the syndicates they participate on, at this point each individual member must satisfy the member PRA Solvency test. Then aggregate all members' exposure (ie all members, all syndicates) and calculate the CSCR. Finally calculate MWSCR (includes FAL and CSCR).

• Are the MWSCR and the CSCR calculated based on the syndicate uSCRs, the member uSCRs or something else?

CSCR Is the Central Capital required at the 99.5th level, that's not the FAL. The MWSCR is the 99.5 point of all capital, ie FAL, Central fund, other central assets etc.

 

[George88]

thanks alot

 

[AllIsWell]

Then aggregate all members' exposure (ie all members, all syndicates) and calculate the CSCR. Finally calculate MWSCR (includes FAL and CSCR).

I imagined this would be easier done by:
1) simulating the aggregate exposures (all members/syndicates), allowing for correlations between the syndicates
2) The resulting SCR required to avoid ruin at 99.5% confidence will be the MWSCR, and this will be larger than the sum of the syndicate SCRs (more accurately, ECAs = marked up uSCRs by 135%) because the probability of at least one syndicate amongst all failing is larger than the probability of any single syndicate failing.
3) The difference between MWSCR and the sum of syndicate capital requirements would be the CSCR

Just a thought.

 

[zuglubuglu]

Just another question with respect to this chapter. All the members of a syndicate must be in line at the start of year for it to be allowed to underwrite. Say there is one rouge member who did not CIL as at YoA 2018. For YoA 2019, would s/he be holding the rest of the syndicate hostage or would her/his share be (forcefully) auctioned off?

 

[MorningtonCrescent]

They certainly wouldn't be holding the rest of the syndicate hostage. I suspect the Name simply wouldn't participate that year, so the syndicate would have less capital backing and correspondingly a lower OPIL that year. (This is what they mean when they talk about a syndicate's "capacity", it's the amount of business they're allowed to write that year, which itself is a function of the total FAL backing that YOA.)

Not sure if the Name's share would end up being auctioned. Quite possibly yes. No doubt this is in the Lloyd's Auction Rules (https://www.lloyds.com/market-resources/market-services/capacity-auctions/rules-and-guides) but frankly, if you read this, you have more time than I have!