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Key risk factors to be noted by you

Key risk factors to be noted by you

You should note the following when reviewing your underwriting commitment each year and discuss with your Private Client Director any issues or questions which arise:

Underwriting Risk/Losses and Cash Calls

  • The underwriting of insurance risks is a higher risk business and cyclical in nature. Underwriting at Lloyd’s may generate losses as well as profits and also cash calls at short notice; the less a syndicate has been able to build reserves, the greater the risk of cash calls;
  • All assets held at Lloyd’s or within the Limited Liability Vehicle (“LLV”) itself, including pipeline profits and auction proceeds, are at risk to pay losses or cash calls;
  • The importance of having a syndicate underwriting portfolio with an appropriate balance between classes of business and individual syndicates and that exposure to large losses is managed through the monitoring of Net Catastrophe Risk Scenarios;
  • The Managing Agent(s) of the syndicates on which the LLV participates will have the sole control and management of the underwriting business of the syndicates in accordance with the standard form managing agent’s agreement. The Agreement provides that the LLV must fund underwriting liabilities without delay. In the event of losses, this may include cash calls before the year of account closes.
  • Despite the principle that each Lloyd’s Member is responsible for the proportion of risk written on its behalf, the Central Fund acts as a policyholders’ protection fund to make payments where other Members failed to pay valid claims (known as mutualisation of losses). Every Member is required to pay into the Central Fund, and the levy charged may change.
  • Mutualisation of losses can also take place in the event of a common controlling interest in one or more vehicles. Lloyd’s may use the profits of one LLV to pay the losses of other connected LLVs, if they do not have sufficient funds.
  • Some syndicates may not close by reinsurance at the end of 36 months. If a reinsurance to close premium cannot be established in respect of a particular year of account, the year of account will remain open and be placed in run off. It may be many years before the account can be wound up. The LLV will remain liable for its share of any losses on business underwritten by the syndicate until the accounts has closed by reinsurance to close and must have Funds at Lloyd’s in place during that period.
  • The LLV will assume liability for insurance risks underwritten prior to commencement of Membership and furthermore may through acceptance of reinsurance to close by syndicates of which the LLV is a Member inherit liability for claims arising from losses which occurred prior to Membership commencing.
  • The on-going underwriting and profitability of an LLV may be affected by legal and regulatory changes both within the Lloyd’s Market and from the wider tax, legal and regulatory framework;
  • Past performance is not a guide to future performance.

Funds at Lloyd’s (“FAL”)

  • Lloyd’s requires each LLV to have sufficient FAL to support their underwriting. If there is a shortfall, the LLV is obliged to provide additional funds to make good the deficiency. If additional FAL are not produced the premium limit may be reduced. The level of funds required may be significantly affected by movements in £/$ exchange rate, market conditions and the prospect for the naturally open and any run-off years of account.
  • FAL may be provided by means of investments or other assets. The capital value of such investments may fall as well as rise, which may impact on the level of funds required.

Capital and liquidity

  • The underwriting of the LLV should be at a level which is sustainable over an insurance cycle, without impacting materially on your lifestyle and commitments. Coming-into-line requirements and the Annual Solvency Test set out the obligations of the LLV to maintain adequate Funds at Lloyd’s;
  • It may become necessary to provide additional assets or fund cash calls to enable the LLV to continue underwriting at the same or an increased level. Over the first two years of underwriting the amount of capital required each year is likely to increase.

Syndicate Capacity

  • The price and availability of syndicate capacity in the annual auctions may fluctuate significantly from year to year, depending on supply and demand.

Lloyd’s Charges

  • The LLV is required to meet Lloyd’s charges including annual subscriptions and Central Fund levies and any special levy that may be imposed from time to time by Lloyd’s.

Cessation of Membership

  • If the LLV resigns from Membership of Lloyd’s it will continue to remain liable for any losses until the last underwriting year of account on the syndicates on which it participated has been closed by reinsurance and any Funds at Lloyd’s will be retained under the terms of the standard Lloyd’s Trust Deed until then.
  • If an LLP member/ Nameco shareholder wishes to sell his interest in the vehicle, that there is no guarantee that there will be market.