- A Special Purpose Arrangement (SPA) is a type of Lloyd’s syndicate that is similar to a reinsurance sidecar in the Company market. An SPA is a structure created to allow investors to capitalise a portfolio of business.
- An SPA can only write a single quota share reinsurance contract of another Lloyd’s syndicate, referred to as the ‘host syndicate’, or ‘host’, with both syndicates under the management of the same managing agent.
- An SPA quota share reinsurance contract can provide whole account reinsurance of the host, or it can cover specified classes of business. It does not have to reinsure all the host’s business.
- SPAs reinsure a single year of account but can also be re-established annually to cover future years of account.
- The host must retain a minimum of 10% of any business it underwrites.
Establishing a Special Purpose Arrangement at Lloyd’s
A guide for applicants
This guide is for businesses who wish to establish a Special Purpose Arrangement, in order to partner with an existing syndicate to develop their business.
What is a Special Purpose Arrangement (SPA)
Why establish an SPA?
The SPA is a flexible model that can be used by existing market participants or new entrants to the market.
SPA’s have been established for a variety of reasons, including:
- Capital management: a means of introducing third party capital support to the host Business Plan, reinsuring the whole account or selected classes of business. This model allows the SPA capital provider(s) to participate in the host’s business without requiring the infrastructure associated with a full syndicate.
- Capacity management: a means for the host to secure third-party capital support and thus manage exposures within the syndicate’s risk appetite.
- Partnership: a third party may introduce business to the host, which is then reinsured to the SPA. The SPA may be capitalised by a third party. Such an arrangement may be a first step towards developing a standalone syndicate. Lloyd’s agreement to this model does not necessarily mean Lloyd’s will accept a standalone syndicate application in the future.
What is different about an SPA application?
It’s worth starting by saying that SPAs are not intended to operate as standalone market-facing syndicates. A single quota share reinsurance contract is written through the host syndicate, and this therefore means that an SPA should not represent itself to brokers, clients or other market participants as an independently operating syndicate in the market.
Unlike a full syndicate application, an SPA does not undergo a standalone, end-to-end review against the Lloyd’s Principles for Doing Business; Lloyd’s relies on the existing managing agent’s approved governance, culture and control framework in most cases.
Furthermore, SPAs commonly operate on a “funds withheld” basis for premium and claims settlement. Under this structure, premium due from the host syndicate to the SPA is retained by the host and claims payable by the SPA are settled through adjustments to the funds withheld balance. This is operationally efficient and means that, in many cases, the SPA does not need to establish its own Premium Trust Fund (PTF) and associated custody account.
In such cases, funds are held in the host syndicate’s premium trust funds at Lloyd’s, subject to the terms of their relevant Premium Trust Deeds, with settlement to be made only in accordance with the Settlement & Reinsurance to Close (RITC) Clause. This enables streamlined settlement at closure by separating accounting from the physical movement of cash during the life of the arrangement.
It should also be noted that SPA capital is still provided in the usual way through members’ Funds at Lloyd’s, in line with Lloyd’s capital requirements. The use of funds withheld for settlement purposes does not alter the underlying capital arrangements supporting the SPA. While a funds withheld approach is typical for SPAs, applicants considering transitioning to a full syndicate in the future may wish to consider establishing PTF for the syndicate from the outset (known as “funds dispersed”).
Lloyd’s Council has delegated authority to the Executive Team to approve new SPAs. More detail on this is set out below.
Lloyd’s assessment criteria
Lloyd’s has established overarching criteria for the assessment of all new entrants; these criteria are detailed in the requirements made under the Underwriting Byelaw which can be found here, under the Byelaws and Requirements heading.
You are strongly advised to read and consider the full requirements available here.
In order to help you formulate your proposition and obtain a better understanding of the typical costs associated with operating a syndicate at Lloyd’s we have created the following templates:
- Lloyd’s Standard Model (LSM)
- Triage Quantitative Submission
For more detailed information on the Capital Setting framework please see Appendix 1 and the useful resources section.
The role of the managing agent
All members of Lloyd’s must underwrite insurance through an agent, known at Lloyd’s as a managing agent. It is the managing agent that will employ the underwriters who will bind the contracts of insurance and reinsurance on behalf of the Lloyd’s members of the SPA. Managing agents will also carry out all the other activities of insurance business at Lloyd’s on behalf of the members. All Lloyd’s managing agents are regulated in the UK by the PRA and FCA, as well as Lloyd’s.
In the case of SPAs, it is our expectation that the managing agent of the host will also manage the SPA. Representatives of the managing agent will need to attend the BOC meeting.
The managing agent will charge fees for the services they deliver (which may include finance, actuarial, claims etc), however the level of fees is a matter of commercial negotiation between you and the managing agent.
Fees and charges
- Application fee is £75,000 (VAT is not payable).
- The application fee invoice will be issued once the application has been recommended to Lloyd’s Executive Committee by the Business Opportunities Committee.
- Please note the application fee is non-refundable.
- Further information on charges payable by members to operate in the Lloyd’s market can be found in the Triage Quantitative Submission.
- New members are not required to pay an application fee however; a £1,000 prospect fee is payable for each entity onboarded within an application (waived for known entities). This is adjustable on the number of controller entities and directors requiring KYC checks. The full fees will be charged once the member application is completed.
- The Third Party FAL provider application fee is £2,000 with an additional £1,000 prospect fee for each entity. This is payable in full with the application.
We review our charges annually and every September we release a Market Bulletin confirming the charges for the following year.
Application process
An application has seven steps.
SPA applications typically take 2–4 months from the Triage stage to permission to underwrite.
All SPA applications are handled in full confidentiality.
1.
Enquiry
Contact the New Entrants team
Please contact the New Entrants team to arrange an initial discussion.
The purpose of this initial discussion is to understand the principal features of the SPA proposal and to discuss operating at Lloyd’s and Lloyd’s criteria for SPA applications.
We ask that you provide a summary of the proposition (maximum five slides), two full working days in advance of the initial discussion, outlining:
- Who you are, including your management team and relevant experience.
- What you do, including the opportunity, approximate gross written premiums for the first three years, classes of business to be underwritten by the SPA and the geographical split of the business.
- Why Lloyd’s is right for you and how you believe you will contribute to the success of the Lloyd’s market.
Following the conclusion of all enquiry meetings, we will advise you of the outcome, which in most cases will either be:
- Progress to Triage (stage two); or
- Why an SPA may not be right for your proposal at this time
2.
Triage
Qualitative and Quantitative submission
The Triage Group comprises heads of business areas from a wide range of Lloyd’s teams, including: Syndicate Performance; Underwriting Performance; Exposure Management; Capital and Market Development. The Triage Group members report to the members of the Business Opportunities Committee.
The role of the Triage Group is to review a more detailed summary of the proposal, alongside relevant financial information. We ask that you complete both the Triage Qualitative and Quantitative Submission templates. If you have any questions about the templates, please contact the New Entrants team.
There is a weekly standing meeting of the Triage Group to ensure we can review your proposal in a timely manner. You will need to provide the completed templates at least two full working days prior to the agreed Triage Group meeting to which we assign your proposal. Please note you do not attend the Triage Group meetings.
The Triage Group will review the submitted Qualitative and Quantitative templates and any other information provided and will confirm, within two working days, either:
Progress to the Business Opportunities Committee (process stage three);
- A request for further information; or
- An explanation of why the Triage Group considers that your proposal does not meet the criteria for new SPAs.
- If the SPA application is subsequently endorsed by the BOC for consideration by Lloyd’s Executive Team, [AW8] any new member application(s) must be submitted ahead of Executive Team for Lloyd’s to complete the ‘Stage 1’ DD.
3.
Business Opportunities Committee
Detailed plan presentation
Select members of Lloyd’s Executive Team are the voting members of the Business Opportunities Committee and you will be invited to attend an hour’s meeting in person with the Committee.
Typically, this will allow 25 minutes for you to present your opportunity, 25 minutes for the Committee to raise questions and remaining time for further questions from non-voting committee members. Please note that if you are unable to attend in person then a virtual meeting can be arranged.
Your submission will consist of four parts:
- A summary presentation consisting of no more than 20 pages.
- Narrative Submission: Business Plan & Governance
- 3 Year GAAP P&L
- A completed Lloyd’s Standard Model template
There are scheduled meetings through the year for the Business Opportunities Committee. We will agree with you the meeting to be allocated to your application. This ensures we can review your proposal in a timely manner. You will need to provide the information at least three full working days prior to the agreed meeting.[SC4] [AW5] [AW6]
The outcome of the presentation will be either:
- Agreement that the proposal represents a suitable strategic opportunity for the Lloyd's market and should proceed to Lloyd's Executive Team for further consideration. A request for further information; or
- An explanation as to why the Committee considers your proposal does not meet the criteria for new SPAs.
If your application is to be supported by one or more new members, or third-party Funds at Lloyd’s providers, you will need to submit the relevant applications once the Business Opportunities Committee has endorsed your application to be submitted to Lloyd’s Executive Team.
4.
Application process
Capital & Planning Group
The Capital & Planning Group (CPG) will undertake a detailed review of the proposed Business Plan and capital requirements.
Accordingly, once your SPA application is endorsed by the Business Opportunities Committee, the managing agent will be required to submit the following documents:
- A full SBF and supporting narrative (please refer to SBF guidance documentation under the Useful Resources tab on Lloyds.com)
- Completed Lloyds Standard Model template
- Completed Lloyd’s LCM Forecast and YLT
The managing agent submits the SBF and Lloyd’s Capital Modelling (LCM) output, which will be presented to the Capital & Planning Group (CPG) for review.
Note that the host may also need to resubmit its own SBF if the SPA application gives rise to material changes in the host’s business plan.
CPG agreement to the SBF(s) and SPA Economic Capital Assessment(s) (ECA) is necessary for escalation to Lloyd’s Executive Team.
5.
Lloyd’s Executive Team
Provides ‘in-principle’ approval
Following CPG agreement, the New Entrants team prepares a paper for consideration by Lloyd’s Executive Team, in which they will review the proposal across all aspects, taking into account the strategic assessment provided by the Business Opportunities Committee and the outcome of the Capital & Planning Group review. Under authority delegated by Lloyd's Council, Lloyd's Executive Team determines whether to grant in-principle approval to the proposed SPA.
The timing of the presentation to Lloyd’s Executive Team will be determined by the next available scheduled Executive Team meeting.
The outcome will be either:
- Lloyd’s Executive Team grants ‘in-principle’ approval;
- Lloyd’s Executive Team requests further information; or
- An explanation of why Lloyd’s Executive Team considers that your proposal does not meet the criteria for new SPAs.
6.
Making it Happen
Deliver the operational and administrative aspects
Once the SPA application has ‘in-principle’ approval from Lloyd’s Executive Team, we will work with you through a number of ‘Making it Happen’ actions.
The New Entrants team will set out and explain the actions required to obtain final approval (Permission to underwrite).
These actions include:
- Securing capital and finalising the capital arrangements to support the SPA.
- Obtaining approval of any new corporate member(s).[LR1]
- ‘Know your customer’, Anti-Money laundering and other due diligence (collectively “DD”) checks on known key persons and controllers.
- Preparing the SPA quota share contract, which will be reviewed by Lloyd’s.
- Establishing the necessary legal arrangements. This will include the SPA management agreement and/or SPA Active Underwriter Secondment agreement
- Possible resubmission of the SPA’s SBF if there are material changes from SBF previously agreed.
We strongly prefer that the Active Underwriter (AU) of the SPA is based in the UK. However, we recognise that in some cases the applicant may wish to appoint an AU who is resident overseas.
In these cases, the applicant and the managing agent will need to establish a set of protocols (to be agreed by Lloyd’s) that ensure the activities of the AU are conducted in the UK. Conducting AU functions overseas could create a ‘permanent establishment’ that would jeopardise Lloyd’s tax agreements.
We anticipate that a SPA application will take approximately four to six weeks to navigate the Making it Happen stage. However, this time frame excludes any material period in which we are waiting for responses to questions we raise and responses to requests for additional information.
When all the Making it Happen actions are satisfactorily completed, your application will move to the final stage – Permission to underwrite.
7.
Permission to underwrite
Final approval and launch
The Business Opportunities Committee has delegated authority to approve the final Permission to underwrite. The New Entrants team will prepare a submission to the Committee summarising the application and confirming that the requirements of the Making it Happen process have been successfully completed. This stage can usually be completed after circulation of a paper to members of the Committee, without the requirement for a meeting. Unless a member of the Committee requests further information, the decision will be confirmed within two working days[AW1] .
In some cases, where there are Making it Happen actions that are not fully completed, these may be addressed by the addition of conditions to the Permission to underwrite.
A letter confirming Permission to underwrite will be provided via the New Entrants team. The SPA quota share contract cannot be executed until this letter is received.
Post Permission to underwrite
In line with the host, the SPA performance is subject to quarterly review and annual assessment by the relevant Lloyd’s technical teams. The managing agent will provide quarterly metrics on behalf of the SPA to validate it is performing in line with the agreed plan.
Appendices
Calculating an SPA Solvency Capital Requirement (SCR)
Although not subject to a review against the Principles for doing business through the Making it Happen process, a SPA needs to adhere to Principle 5 relating to capital – which means that it needs Solvency II compliant internal model, which requires longer timeframes and significant resource to build. Therefore, the practice for new SPAs is to set their capital using Lloyd’s Standard Model (LSM) until they have had their internal model approved.
The Lloyd’s Standard model is a spreadsheet model which calculates the capital requirement for the SPA, which is structurally based on the Solvency II Standard Formula.
All syndicates are required to have applied for and been granted internal model approval within three years of accounting of underwriting – this can be extended in some circumstances, e.g. if the first year of account was a partial year. Syndicates cannot normally apply for internal model approval within less than one year of account.
Find out more.
Lloyd’s approach to setting the ultimate SCR for an SPA
Year 1 capital setting:
The LSM inputs include:
- The first year SBF set out by Lloyd’s risk code. The net claims are used as exposures for the insurance risk calculation, but expected profit is also used as an offset in the capital calculation.
- A preliminary indication of the catastrophe risk within the proposed SPA’s plan during the first year, based on the Realistic Disaster Scenario exposures and any cat model simulations.
- Information about planned asset holdings.
- Information about planned outwards reinsurance with regards to credit risk exposures and risk mitigation.
Operational risk is considered by the Capital and Planning group and, where relevant, added as a charge which depends on the age of the syndicates – so it is higher in the first year than subsequent years, with further risk charges for managing agents where there are any existing governance and risk management concerns.
Mid-year start – part year business plan:
Where an SPA starts underwriting at Lloyd’s part-way through a year of account (‘mid-year start’) Lloyd’s will determine whether the premium needs to be annualised.
Factors affecting a SPA’s first year SCR/ECA
Fixed:
- ECA uplift: All syndicate/SPA/SIAB SCRs are uplifted by a common factor to increase the SCR (at a BBB rating) to support Lloyd’s current rating at present the uplift is 35%.
Variable:
- Business mix: the SCR for a SPA’s Business plan that is focussed on a limited number of lines (classes) of business is less diverse and may result in a higher SCR.
- Volatility of business: a business plans focussed on more volatile (e.g. catastrophe exposed) business in more volatile geographic locations may result in a higher SCR. Please note that this is also relevant for non-natural catastrophes like terrorism/war, cyber etc.
- Loss ratio and profit expectations: the LSM uses the expected claims from the syndicate, hence higher loss ratio and lower profit expectations will lead to a higher capital requirement.
- Risk Mitigation: reinsurance arrangements (e.g. whole account stop losses) will lower the capital requirement.
- Mid-year start: projected part year premium may be a disproportionately low proportion of the annualised year one premium figure.
Lodging Funds at Lloyd’s (FAL) in currencies other than GBP
It is acceptable to lodge FAL in currencies other than GBP. You are allowed a 7-day window on the ‘day rate’ (spot rate) to convert to GBP, however you should check with Lloyd’s FAL team that the non-GBP FAL when converted is sufficient to cover the member’s funding requirement (member ECA) in GBP.
Years 2 and 3 capital setting
You can model the second- and third-year SCR through the LSM, however, should the SPA continue into a fourth year (or transition to a full syndicate) the managing agent will need to have developed an approved Solvency II model for capital setting purposes for the SPA/syndicate.
You may also wish to review other useful resources on Lloyd’s.com.
Although not subject to a review against the Principles for doing business through the Making it Happen process, a SPA needs to adhere to Principle 5 relating to capital – which means that it needs Solvency II compliant internal model, which requires longer timeframes and significant resource to build. Therefore, the practice for new SPAs is to set their capital using Lloyd’s Standard Model (LSM) until they have had their internal model approved.
The Lloyd’s Standard model is a spreadsheet model which calculates the capital requirement for the SPA, which is structurally based on the Solvency II Standard Formula.
All syndicates are required to have applied for and been granted internal model approval within three years of accounting of underwriting – this can be extended in some circumstances, e.g. if the first year of account was a partial year. Syndicates cannot normally apply for internal model approval within less than one year of account.
Find out more.
Lloyd’s approach to setting the ultimate SCR for an SPA
Year 1 capital setting:
The LSM inputs include:
- The first year SBF set out by Lloyd’s risk code. The net claims are used as exposures for the insurance risk calculation, but expected profit is also used as an offset in the capital calculation.
- A preliminary indication of the catastrophe risk within the proposed SPA’s plan during the first year, based on the Realistic Disaster Scenario exposures and any cat model simulations.
- Information about planned asset holdings.
- Information about planned outwards reinsurance with regards to credit risk exposures and risk mitigation.
Operational risk is considered by the Capital and Planning group and, where relevant, added as a charge which depends on the age of the syndicates – so it is higher in the first year than subsequent years, with further risk charges for managing agents where there are any existing governance and risk management concerns.
Mid-year start – part year business plan:
Where an SPA starts underwriting at Lloyd’s part-way through a year of account (‘mid-year start’) Lloyd’s will determine whether the premium needs to be annualised.
Factors affecting a SPA’s first year SCR/ECA
Fixed:
- ECA uplift: All syndicate/SPA/SIAB SCRs are uplifted by a common factor to increase the SCR (at a BBB rating) to support Lloyd’s current rating at present the uplift is 35%.
Variable:
- Business mix: the SCR for a SPA’s Business plan that is focussed on a limited number of lines (classes) of business is less diverse and may result in a higher SCR.
- Volatility of business: a business plans focussed on more volatile (e.g. catastrophe exposed) business in more volatile geographic locations may result in a higher SCR. Please note that this is also relevant for non-natural catastrophes like terrorism/war, cyber etc.
- Loss ratio and profit expectations: the LSM uses the expected claims from the syndicate, hence higher loss ratio and lower profit expectations will lead to a higher capital requirement.
- Risk Mitigation: reinsurance arrangements (e.g. whole account stop losses) will lower the capital requirement.
- Mid-year start: projected part year premium may be a disproportionately low proportion of the annualised year one premium figure.
Lodging Funds at Lloyd’s (FAL) in currencies other than GBP
It is acceptable to lodge FAL in currencies other than GBP. You are allowed a 7-day window on the ‘day rate’ (spot rate) to convert to GBP, however you should check with Lloyd’s FAL team that the non-GBP FAL when converted is sufficient to cover the member’s funding requirement (member ECA) in GBP.
Years 2 and 3 capital setting
You can model the second- and third-year SCR through the LSM, however, should the SPA continue into a fourth year (or transition to a full syndicate) the managing agent will need to have developed an approved Solvency II model for capital setting purposes for the SPA/syndicate.
You may also wish to review other useful resources on Lloyd’s.com.
SPA Member Default Risk
The Lloyd’s Central Fund (CF) is available at the discretion of the Council to meet the underwriting liabilities of all members. In an event a member’s Funds at Lloyd’s are exhausted, the CF will (subject to Council’s approval) continue to meet the member’s valid obligations to policyholders.
This applies equally to SPA members. Nevertheless, in the case of SPAs, Lloyd’s reserves the right to adopt a different approach as a protection for the CF if it considers this to be prudent. Any alternative position will be considered, discussed and fully articulated before the SPA arrangement is formally approved.
Without limitation, measures to protect the CF might include:
- SPA member(s) default risk passes back to the host;
- Loaded SPA capital requirement
- SPA stop loss reinsurance
The Lloyd’s Central Fund (CF) is available at the discretion of the Council to meet the underwriting liabilities of all members. In an event a member’s Funds at Lloyd’s are exhausted, the CF will (subject to Council’s approval) continue to meet the member’s valid obligations to policyholders.
This applies equally to SPA members. Nevertheless, in the case of SPAs, Lloyd’s reserves the right to adopt a different approach as a protection for the CF if it considers this to be prudent. Any alternative position will be considered, discussed and fully articulated before the SPA arrangement is formally approved.
Without limitation, measures to protect the CF might include:
- SPA member(s) default risk passes back to the host;
- Loaded SPA capital requirement
- SPA stop loss reinsurance
1. RITC back to host
- The first option is for each SPA year of account to RITC back to the host. The managing agent will determine the SPA RITC premium, which is accounted back to the host, coinciding with the host effecting its RITC (and payment of the premium) to the following host year of account.
- The funds withheld arrangement between the host and SPA must be ended simultaneously with any RITC payment from the SPA to the host. This allows the host to release funds for the purpose of the SPA settling its RITC premium due to the host and the balance remaining can be paid to the SPA members as profit (if any).
- Through this option, the SPA member(s) carry no practical or regulatory future obligation for, or benefit from, the performance of the run-off of the RITC’d SPA year(s) of account.
2. SPA RITC’s its prior year liabilities
- The second option is for the following SPA year of account to assume the SPA’s prior year liabilities. However, unless the SPA has its own PTF to receive the RITC premium into the second year of account, it is not possible under Lloyd’s requirements for an SPA operating on a funds withheld basis to RITC directly into the subsequent year of the SPA.
- In order to address this, the mechanism for closing initially follows the first option (above). The host will then effect its RITC as normal to the following year of account. The additional step is that the members of the subsequent then assume the SPA closed year ‘RITC premium’ (and obligations) through that subsequent year’s quota share contract. The model QS contract provides suitable wording that can be used to achieve both the first and second options.
- If the SPA establishes its own separate PTF account into which the SPA transactions are accounted, the SPA is able to RITC one SPA year into the subsequent SPA year without the above accounting complexity.
3. SPA goes into run-off
- Despite there being a stated RITC path at the time an SPA is established, circumstances may subsequently change which change that path; this is likely to be the case for SPAs that have been established under the Partnership model.
- In these circumstances it is important that the managing agent contacts Lloyd’s at the earliest opportunity to discuss the options available. Such options might include commutation of the SPA quota share or third party RITC. Where an SPA solely reinsures a host syndicate’s whole account, or specified classes of the host’s business, Lloyd’s expects the SPA RITC will be written back into the host.
Q: From where can an SPA source its business?
A: An SPA only underwrites a single quota share reinsurance of the Host, an existing Lloyd’s syndicate;
However, the SPA QS may comprise;
- A share of the host’s whole account
- Different shares of selected classes of business within the host’s whole account
- Business introduced to the host by the SPA partner
Q: Can SPA capacity be traded in Lloyd’s capacity auctions?
A: No. SPA capacity can only be offered on a short-term, limited tenancy and non-tradeable basis.
Q: Can an SPA member participate (underwrite) on other syndicates?
A: Yes. SPA participation is no different from participation on a traditional, market-facing syndicate.
Q: How does the SPA Quota Share operate?
A: Lloyd’s has a model QS wording on which Lloyd’s expects the final contact will be based. The QS may include or exclude the Host’s prior years’ Reinsurance to Close.