Following a review, Lloyd’s has revised its guidelines on Catastrophe Exposure and Line Sizes.
A new requirement has been introduced to restrict the amount of tail risk that a syndicate can be exposed to. This operates as follows (depending on whether a syndicate has an internal model and submits a Lloyd’s Capital Return or LCR).
For syndicates with an internal model that submit an LCR, the 99.8th percentile (1-in-500) of the insurance claims shall not exceed 135% of the 99.5th percentile (1-in-200) of insurance claims. Both measures refer to the total modelled insurance claims net of reinsurance on an ultimate basis as reported to Lloyd’s in the LCR submission.
Managing agents are expected, under normal circumstances, to operate their businesses within the guidelines. A dispensation is required from Lloyd’s where a managing agent proposes that a syndicate should operate outside the guidelines.
The limitation on a syndicate’s ‘AEP (aggregate exceedance probability) 1-in-30 Whole World’ modelled loss has been removed. Lloyd’s now monitors aggregate natural catastrophe risk using other tools and this restriction is no longer required.
For syndicates that do not have an internal model or submit an LCR, the 99.8th percentile of Final Net Lloyd’s Catastrophe Model (LCM) World Water Assessment Programme (WWAP) losses shall not exceed 135% of the 99.5th percentile of Final Net LCM WWAP losses and the 99.8th percentile of Final Net LCM WWAP claims shall not exceed ECA plus profit.
A new net line size requirement has been introduced specifying that the maximum net line size that a syndicate may have on an individual risk cannot exceed 30% of ECA (Economic Capital Assessment) plus profit, where profit is defined as ‘Profit/Loss for the period’ on an Ultimate basis.
The maximum gross line size that a syndicate may apply without requiring a dispensation has been increased to 25% of GWP (gross written premiums), subject to a maximum line size of £200m.
“We are satisfied that gross line sizes can be considered as part of the usual business plan agreement process, and the need for dispensations should only apply in the most material cases,” explains Lloyd’s.
The new guidelines for tail risk and net line size to Economic Capital Assessment restriction are being introduced to ensure that syndicates do not expose the Central Fund to disproportionate risk in relation to individual syndicate losses.