Glossary of Lloyd’s Terms

Listed below is a glossary of terms that are commonly used in Hampden’s publications, in syndicate report and accounts and in Lloyd’s correspondence.

Accident year

The accident year ratio is calculated as expenses and incurred losses (paid and reserves) for claims occurring in the year as a proportion of net premiums earned during the year. It excludes movements during the calendar year on claims, expenses and premium estimates for previous years.

Active underwriter

Also sometimes described as the “lead underwriter”, the active underwriter is the person employed by a managing agent with principal authority to accept insurance and reinsurance risks on behalf of the members of a syndicate. Aside from his or her own direct underwriting role, the active underwriter also oversees the underwriting activities of the syndicate’s class underwriters in much the same way as a managing director oversees the way in which a company operates.

Actuary

An actuary is a specialist in the mathematics of insurance who calculates rates, reserves, dividends and other statistics.

Aggregate Limit

Usually refers to liability insurance and indicates the amount of coverage that the insured has under the contract for a specific period of time, usually the contract period, no matter how many separate accidents might occur.

Bespoke underwriting

Until the introduction of the Members’ Agent Pooling Arrangement (MAPA) for the 1994 year of account, all Members of Lloyd’s traded as “bespoke” Members. When writing on a “bespoke” basis, Members trade on a variety of different syndicates, generally chosen by their Members’ agent but with input of any specific requirements by themselves. As their experience of the Lloyd’s Market grows, some Members have preferred to discuss their specific objectives for the coming underwriting year with their Members’ Executive, and are then advised by their Members’ Executive as to which syndicates to support. The buying and selling of their capacity on syndicates normally occurs in the September Auctions. The main attraction of bespoke underwriting for many members is the ability to trade their own capacity in the Auctions. Unlike MAPA Members, “bespoke” Members can be directly involved in the trading decisions at the auctions.

Binding authority

This is an agreement between a Lloyd’s syndicate and a coverholder, under which the Lloyd’s syndicate allows the coverholder to enter into a contract of insurance to be underwritten by the members of a syndicate. Traditionally, a lot of overseas business, especially that emanating from North America, has been written by way of binding authorities. Local coverholders, usually regional brokers or insurance companies, have been able to access local business in a far more cost-effective way than had the syndicate itself attempted to do so.

Calendar year ratio

This is the combined ratio and is the sum of the accident year ratio and the prior years’ reserve movements.

Callable layer

Lloyd’s Central Fund assets may be supplemented by a further ‘callable layer’ of up to 3% of members’ overall premium limits in any one calendar year. These funds would be drawn from premium trust funds.

Capacity

In relation to a member, it is the maximum amount of insurance premiums (gross of reinsurance but net of brokerage) which a member can accept. In relation to a syndicate it is the aggregate of each member’s capacity allocated to that syndicate.

Capital Gains Tax (CGT)

This is a UK tax that is paid on gains made from the sale of assets. Each individual in the UK is currently (2009-2010) allowed to make tax-free capital gains of £10,100 per year, and then is obliged to pay tax on any excess amount, at a rate of 18%. In the case of Lloyd’s Members, they are most likely to incur a Capital Gains Tax liability when they sell syndicate capacity of their shares in a limited liability vehicle.

Cash call

A cash call is when Members pay money to a syndicate outside the normal settlement period for a year of account (which generally takes place at month 41 of its development). Syndicates are allowed to call cash from its Members in the event of serious losses, or in respect of other arbitrary funding requirements, such as the need to fund the US Trust funds.

Casualty Insurance

A type of insurance that is primarily concerned with losses caused by injuries to persons and legal liability imposed upon the insured for such injury or for damage to property of others. It also includes such diverse forms as plate glass, insurance against crime, such as robbery, burglary and forgery, boiler and machinery insurance and Aviation insurance.

Central assets

This describes the net assets of the Society of Lloyd’s including the Central Fund, but excluding the subordinated debt liability and the callable layer.

Central Fund

The fund financed by (among other things) contributions from Lloyd’s members and administered by the Council of Lloyd’s, whose primary purpose is to act as a fund for the protection of Lloyd’s policyholders. The Central Fund has assets of about £2.5 billion, and it includes both the ‘Old’ Central Fund and the New Central Fund.

Chinese Walls

This expression is most often used in connection with the September capacity auctions. It explains the way in which auction trading for different groups of Members is segregated within the Members’ Agency so as to avoid conflicts of interest and to enable Hampden to treat all of its customers fairly.

Claims

A demand made by the policy holder, or their beneficiary, to the syndicate for payment of the benefits as provided by the insurance policy.

Class of business

This describes the types of insurance or reinsurance business underwritten by a syndicate. HAL splits the business of Lloyd’s syndicates into nine main classes. These are marine (excluding energy and reinsurance), energy, property, reinsurance, motor, life, aviation, US liability and Non-US liability. Within Lloyd’s, each individual class of business has an individual risk code.

Class underwriter

The class underwriter is the individual responsible for underwriting a given class of business within the syndicate structure. Syndicates often employ several different class underwriters, who underwrite different classes of business. Some of the class underwriters employed at some of the larger composite syndicates, such as 33 (Hiscox) or 510 (Kiln) are responsible for some significant parts of the syndicate’s whole account.

Co-insurance

In some property insurance, a policy requires the policyholder to carry insurance equal to a specified percentage of the value of property to receive full payment on a loss. For health insurance, it is a percentage of each claim above the deductible paid by the policyholder. For a 20% health insurance coinsurance clause, the policyholder pays for the deductible plus 20% of his covered losses. After paying 80% of losses up to a specified ceiling, the insurer starts paying 100% of losses.

Combined ratio

A measure of an insurer’s underwriting profitability based on the ratio of net incurred claims plus net operating expenses to net earned premiums. A combined ratio of 100% is break even (before taking into account investment returns). A ratio less than 100% is an underwriting profit, and the lower the ratio, the better the profit.

Commercial Lines

 This phrase refers to insurance for businesses, professionals and commercial establishments.

Commission

A commission is a fee paid to an agent or insurance salesperson as a percentage of the policy premium. The percentage varies widely depending on coverage, the insurer and the marketing methods.

Conversion

This is the term used to describe the process whereby an unlimited liability Member of Lloyd’s, more commonly called a Name, becomes a limited liability Member of Lloyd’s, by forming a NameCo or a limited liability partnership (LLP).

Corporate member

A company incorporated with limited liability, a Scottish limited partnership or a limited liability partnership, admitted to membership of Lloyd’s.

Council of Lloyd’s

The Council of Lloyd’s has the management and superintendence of the affairs of the Society and the power to regulate and direct the business of insurance at Lloyd’s.

Coverage

The scope of protection provided under an insurance policy. In property insurance, coverage lists perils insured against, properties covered, locations covered, individuals insured, and the limits of indemnification. In life insurance, living and death benefits are listed.

Coverholder

A firm, either in the UK or overseas, that is authorised by a managing agent under the terms of a binding authority to enter into contracts of insurance to be underwritten by a syndicate managed by the managing agent. A Lloyd’s broker may act as a coverholder.

Deductible

This is the amount of a loss that the insured pays before its insurance policy can be triggered. Deductible levels can be increased and decreased by syndicates as and when it writes policies. Insurance buyers are sometimes prepared to accept a higher deductible in return for a lower insurance premium.

De-emption

This is the term used to describe the mandatory reduction in the overall level of a syndicate’s underwriting capacity. This reduction is expressed in percentage terms, and applies equally to all members of the syndicate. Syndicates tend to de-empt their underwriting capacity when rates are softening in the business sectors in which they operate. When rates are falling, syndicates will be looking to underwrite less business, and therefore reduce their underwriting capacity accordingly. Capacity management is something that is actively managed by the Franchise Performance Directorate (FPD).

Double use of assets

This refers to the term whereby Members of Lloyd’s have been able to use some of their existing personal assets (such as cash, bonds, stocks or shares) to back their underwriting, whilst retaining a beneficial interest in the asset. For example, a Member could use stocks and shares to back their underwriting commitment, but can still collect all dividends and benefit from any capital gain in the value of the asset. The asset is effectively working twice for the Member.

Early profit releases

Syndicates can sometimes make profit releases to their Members prior to the normal closure date of an underwriting year of account (which takes place after 36 months). This only happens if the year of account in question is trading profitably.

Exclusions

Items or conditions that are not covered by the general insurance or reinsurance contract issued by a syndicate.

Expense Ratio

This is the aggregate total of a syndicate’s expenses, and is usually expressed as a percentage of either gross or net written premiums, or sometimes a percentage of the syndicate’s underwriting capacity.

Measure of vulnerability to loss, usually expressed in currency terms.

Economic Capital Assessment (ECA)

ECA is an actuarial model that determines different capital requirements for various syndicates. It largely depends on which classes of business and the proportions of certain classes of business that are written by different syndicates in each year. The test is carried out twice a year by Lloyd’s as part of the coming into line process.

Equitas

This was a company that was established in 1995 in order to take over all of the 1992 and prior year business liability of all Lloyd’s syndicates. In 2006, it was sold on to Berkshire Hathaway. This has given Lloyd’s a significant advantage over many of its industry peers, many of whom still have to contend with substantial old year liability issues.

Exeat policy

This is a policy that a resigning Member can purchase from Centrewrite, which allows them to exit the Market free of all of their outstanding liability. Centrewrite is a company that is run and backed by Lloyd’s. The cost of the policy would depend on the specific syndicates supported by the individual Member in question.

Excess limit

An excess limit is another way of describing a deductible level. A policy holder would have to pay an “excess” amount before being able to claim off an insurance policy. For some insurance buyers, accepting a higher “excess” is sometimes seen as an alternative to a rating increase.

Financial Services Authority (FSA)

The body that regulates the financial services industry in the UK. Lloyd’s is authorised and regulated by the UK Financial Services Authority (FSA).

Franchise

The arrangements that permit managing agents and members to conduct business in the Lloyd’s Market, and maximise the benefits from the Lloyd’s brand, acommon rating, mutual security and licences to conduct business around the world.

Franchise Board

This was set-up by the Council of Lloyd’s in 2002, and was designed as an internal department for monitoring the performance of all Lloyd’s syndicates and to protect the Lloyd’s Franchise. Its plays a major role in ensuring the on-going competence of the syndicates that trade in Lloyd’s. Its job is to review and approve syndicate business plans and to ensure a competent level of underwriting across all syndicates in the Market, with particular emphasis placed on those syndicates in the bottom quartile of the Market. To date, it has been very successful in this endeavour, especially in years such as 2004, 2005 and 2008, all of which saw the Lloyd’s Market hit by a substantial number of catastrophe losses. The net effect of these losses on the syndicates in the Lloyd’s Market has been containable, and the Franchise Board must take a great deal of the credit for this fact. The first Director of the Franchise Board was Rolf Tolle. He retired in 2009, and was replaced by Tom Bolt.   

Funds at Lloyd’s (FAL)

Members of Lloyd’s must lodge funds with Lloyd’s in order to support their underwriting. These are known as funds at Lloyd’s, and commonly referred to as FAL. FAL are normally, but not always, 40% of the total amount that a Member underwrites in any given year. FAL can take the form of cash, bonds, approved stocks and shares or can be provided by way of a bank guarantee or letter of credit.

Gearing

Members use their Funds at Lloyd’s in order to underwrite and these are generally 40% of the total amount of capacity that the Member underwrites in any given year. The funds are leveraged by 2.5 times to reach the Members underwriting limit. This is known as gearing.

Gross written premium

This is the written insurance or reinsurance premium, including any business acquisition costs. The figure is usually expressed as a percentage of syndicate stamp.

HAL

This is an acronym for Hampden Agencies Ltd

Hard market

This is a term that is used to describe the condition of the insurance market when rates are increasing and terms and conditions are being amended in the favour of insurers.

HUR

This is an acronym for Hampden Underwriting Research

Integrated Lloyd’s Vehicle (ILV)

An arrangement in which a syndicate’s capital is wholly provided by corporate members that are under the same ownership and control as the syndicate’s managing agent.

Investment Income

This is the return received by syndicates from their investment portfolios. This could include interest, dividends and realized capital gains on stocks. It doesn't include the value of any stocks or bonds that the company currently owns. Most Lloyd’s syndicates have very conservative investment portfolios, where the bulk of their investment portfolio is composed of either UK Gilts or US Treasury Bonds and cash. Some syndicates do invest in the equity markets, but this is an area of their investment portfolio that is limited by Lloyd’s. Investment return forms a key part of the overall syndicate result, and can be expressed as a percentage of gross premium income, net premium income or stamp capacity.

Liability Insurance

This is a class of insurance that pays behalf of an insured for loss arising out of his responsibility, due to negligence, to others imposed by law or assumed by contract. In the US, it is sometimes referred to as casualty insurance.

Limited liability

This refers to the extent of a Members’ liability (in the event of loss)

Limited Liability Partnership (LLP)

This is one of the two main limited liability underwriting vehicles used by limited liability Members. It is a tax transparent, limited liability vehicle, where all of the income has to be paid out.

Limited liability underwriting

This is a method of underwriting where the Member’s liability is limited to the assets contained within their limited liability vehicle. These assets usually include any underwriting profits, the value of their capacity and the funds at Lloyd’s backing the vehicle.

Loss ratio

The ratio of incurred losses and loss-adjustment expenses to net premiums earned. This ratio measures the company’s underlying profitability, or loss experience, on its total book of business.

Lloyd’s Capacity Auctions

These were introduced in 1995, and are now the main method by which Members buy and sell their capacity on syndicates. There are three capacity auctions held each September, and a further one in November. Members use these auctions in order to construct their portfolios for the following year of underwriting.  

MAPA

MAPA is an acronym for Members Agents’ Pooling Arrangement. A MAPA is essentially a managed underwriting fund which contains a selection of syndicates, which have been arranged into a portfolio. It is similar to a unit trust, in that the MAPA is run by the manager, who buys and sells the syndicates within the portfolio. The first MAPA funds were introduced into the Lloyd’s market for the 1994 year of account.

Managing agent

An underwriting agent responsible for managing a syndicate.

Market-cycle

This is a term used to describe a period of development and time in the insurance market. Traditionally, it includes markets where the insurance rates are rising and falling and where the market is making profits and losses. In the past, insurance market cycles have usually been about 5 or 6 years.

Member (of the Society)

A person admitted to membership of the Society.

Members’ Executive

This is an individual employed by a Members’ Agent, whose job is to look after all aspects the affairs of Members of Lloyd’s.

National Association of Insurance Commissioners (NAIC)

A US Association of state insurance commissioners whose purpose is to promote uniformity of insurance regulation, monitor insurance solvency and develop model laws for passage by US state legislatures.

Name

A Member of the Society who is an individual, and who trades on an unlimited basis. No new unlimited Names have been allowed into the market since 2003.

NameCo

A NameCo is a limited liability underwriting vehicle at Lloyd’s. It is a UK company and it is treated and taxed as such. One of its key features is that it can determine its own dividend policy.

Net written premium

This is the amount of premium left once a syndicate has paid for its reinsurance programme.

New Central Fund

The New Central Fund constituted by and governed by the New Central Fund Byelaw (No. 23 of 1996).

North Atlantic hurricane season

This runs from June to November each year.

Pre-emption

This is the process whereby syndicates increase their capacity, and have to offer this capacity equally to all Members of the said syndicate. Pre-emption is akin to a nil-paid rights issue in the Stock market, in that there is no cost associated with the acquisition of the new capacity. Members are under no obligation to accept pre-emption offers and can choose to sell their capacity through the Auction system. If a Member wishes to accept a pre-emption, then he or she has to show more Funds at Lloyd’s in order to underwrite the increased amount of capacity for the following years’ underwriting.

Premium income limit (PIL)

This is the amount of capacity that a Member underwrites in any given year.

Premiums Trust Funds (PTF)

The premiums and other monies that Members receive in respect of their underwriting at Lloyd’s are held by their managing agents in trust for them subject to the discharge of their underwriting liabilities. The premiums trust funds comprise a sterling fund, Lloyd’s American Trust Fund, Lloyd’s Dollar Trust Funds, Lloyd’s Canadian Trust Fund and the Lloyd’s Asia trust funds (which cover general business written through coverholders in Singapore). These premiums trust funds are available to fund overseas regulatory deposits, claims, return premiums, underwriting expenses and any profit that is payable to the member after providing for all future liabilities.

Portfolio

This term is used to describe the Member’s collection of syndicate participations in any given year.

Prior years’ reserve movements

This is calculated as movements in reserves established for claims that occurred in previous accident years as a proportion of net premiums earned during the year. If there are deemed to be surpluses in the prior years, then syndicates have the option to make releases from prior years.

Protected Cell Company (PCC)

A PCC is a simple and cost-effective way of setting up a reinsurance vehicle, which otherwise would not normally be economically viable. The idea behind a PCC is to offer clients all of the benefits of captive ownership without the excess costs associated with being a wholly owned subsidiary. Each client is effectively allocated a cell in which they can underwrite their own insurance account. The PCC is a single legal entity and the law allows it to create one or more cells for the purpose of segregating and protecting the individual cell assets (i.e. capital and premium). Creditors of any one cell have no recourse to the assets held within another cell. There is an established regulatory framework in Guernsey for PCCs.

Realistic Disaster Scenarios (RDS)

A series of scenarios, such as US windstorms and earthquakes, which are used to model a given syndicate’s exposure to a variety of different catastrophe events. These are used by the Franchise Performance Directorate to enable better risk management practices within Lloyd’s. RDS are run on every Members’ underwriting programme in order to enable them to monitor their own exposure to individual losses.

Reinsurer

Most usually this is a company that sells reinsurance cover to other insurance companies or to Lloyd’s syndicates. Some well-known companies include Munich Re and Swiss Re.

Reinsurance

This is effectively insurance that a syndicate buys in order to lay-off some of the risk on its own book, and to protect its own book from the effect of catastrophe losses. The effect of a disproportionately large loss, or a series of smaller losses, can be effectively mitigated by the judicious use of reinsurance. Reinsurance enables a syndicate or insurance company to expand its capacity; stabilize its underwriting results; finance its expanding volume; secure catastrophe protection against shock losses; withdraw from a line of business or a geographical area within a specified time period.

Reinsurance programme

This is the term that is used to describe all of the reinsurance cover that a syndicate has bought in a given year.

Reinsurance to close (RITC)

A reinsurance agreement under which Members of a syndicate for a year of account to be closed are reinsured by Members who comprise that or another syndicate for a later year of account against all liabilities arising out of insurance business written by the reinsured syndicate. At syndicate level, the RITC is the mechanism by which one of account closes into another.

Reinsurance to close (RITC) syndicate

A syndicate set up solely to underwrite the Reinsurance to Close of other syndicates.

Renewal business

This is business written by a syndicate that is insured once again at the expiry of the initial policy period.

Reserve

This is an amount of money that represents actual or potential liabilities kept by an insurer to cover debts to policyholders. A reserve is usually treated as a liability.

Soft market

This is a term that is used to describe a market where rates are low or are falling, or one where terms and conditions have been eroded or weakened.

Solvency

This means that a Member has sufficient assets to be able to satisfy the financial requirements laid down by Lloyd’s to allow the Member to trade and to be eligible to transact insurance business and meet liabilities.

Special Purpose Syndicate (SPS)

A syndicate set up solely to underwrite a quota-share reinsurance of another syndicate’s business for a year of account. SPS are usually established to take advantage of specific market circumstances, most commonly in the wake of major catastrophe losses.

Special reserve fund

This is a tax-efficient fund that was set up to allow unlimited liability Members to put aside part of their profits in order to use to pay losses at a later date. Members can out aside 50% of their annual underwriting profit, but the total amount of money in the SRF must not exceed 50% of the total PIL underwritten by the Member in the previous year. Limited liability Members cannot run a SRF.

Spread Syndicate

A syndicate whose capital is provided by a number of different Members, including Members that have separate ownership and control to the syndicate’s managing agent.

Spread vehicle

A corporate member underwriting on a number of different syndicates.

Any provision in a policy designed to cut off an insurer's losses at a given point.

Subscription market

This a term used to describe syndicates in the Lloyd’s Market, all of whom can be offered, and have the capability to underwrite a given risk. Lloyd’s is often described as a subscription market in that it can divide up the risks brought to it by brokers between the syndicates that trade within it.

Syndicate

Syndicates are run by managing agents, and are constituted on annual basis. They are essentially collections of Lloyd’s Members who band together to provide capital, which is used, by the syndicate, to transact insurance business at Lloyd’s. Syndicates transact different classes of insurance and reinsurance business. Syndicates have the ability of offer pre-emption and de-emption to their members each year. Their capacity is traded at the four Lloyd’s capacity Auctions which are held each September and November.

Syndicate Analyst

Syndicate analysts are employed by Lloyd’s Members’ Agents. Their main role is analyse the existing syndicates trading in the Lloyd’s market, but they also vet potential start-up syndicates and monitor the wider insurance and reinsurance markets. The result of their work underpins the selection of syndicates, and the construction of Members’ portfolios that is undertaken by the Members’ Agents each year.

Syndicate expenses

This term covers all of the day to day expenses associated with running a syndicate, such as the salaries of the staff, the rental of the box in Lloyd’s and Lloyd’s central charges.

Term Life Insurance

This is life insurance that provides protection for a specified period of time. Common policy periods are one year, five years, 10 years or until the insured reaches age 65 or 70. The policy doesn't build up any of the non-forfeiture values associated with whole life policies.

Total loss

This is a term that is commonly used in the marine market, and is describes a loss of sufficient size that it can be said no value is left. The term also is used to mean a loss requiring the maximum amount a policy will pay.

Underwriting

This is the term used to describe the commitment of capital to the Market, and joining a selection of syndicates, with the intention to engage in assuming risks. When used in the context of underwriters, it is the process whereby they actually write risks.

Unlimited liability underwriting

This describes the way on which traditional Lloyd’s Members, known as Names, had no cap on the losses that they might incur through their underwriting activities. No new unlimited liability Members have been allowed to enter the Lloyd’s Market since 2003.

Utilisation

This refers to the amount of its capacity that a syndicate underwrites. It is usually expressed as a percentage of the overall stamp capacity, and can be quoted on a gross (before the deduction of reinsurance costs) or a net basis (after the deduction of reinsurance costs).

Year of account

The year to which a risk is allocated and to which all premiums and claims in respect of that risk are attributed. The year of account of a risk is usually determined by the calendar year in which the risk incepts. A year of account is normally closed by reinsurance at the end of 36 months.