In 2022, as we transition to the Principles based regime, the self-assessments will not require formal Board sign off and will be completed on a best-efforts basis by managing agents’ technical teams. However, we would expect the self-assessment to be discussed with the Board to ensure the Board maintains a clear view on performance against principles and appropriately challenges how to address any gaps.
From 2023, we will expect Boards to formally sign-off on the self-assessment against the Principles. Conducting the self-assessment in an outcomes-based regime requires a different mindset to be adopted to that under a prescriptive, rules-based oversight approach. Ticking off a list of prescriptive requirements takes a “bottom up” approach and can potentially result in the misleading conclusion that as long as all the underlying requirements are met, then the overall intention must also be met. However, this is often not the case. An assessment conducted under an outcomes-based approach takes an entirely different approach, requiring a “top down” view to be formed and a higher level of judgement needs to be applied.
Principles focus on the purpose, rather than the requirements and it is against this purpose that an assessment should be made. This requires a different type of questioning and discussion to be had in forming an assessment. Under the new Principles based oversight, Boards and senior management will need to engage with the Principles and the outcomes that they set out to achieve at the highest level, and not regard them as activities that can be delegated to compliance.
Examples of the questions which should be considered when forming an assessment against the Principles are:
- How successful have we been in achieving the outcome?
- Are the times when we haven’t been successful? What should / could we have done differently?
The switch to the Principles based regime is taking place gradually over the first half of 2022 – allowing time for the market to familiarise themselves with the new Principles and Framework before each syndicates new categorisation will formally be communicated and used ahead of the 2023 YoA Capital and Planning. The move to Principles does not represent a lowering of standards in any way and as we transition over, managing agents will be expected to remain compliant against minimum standards.
Where managing agents are currently compliant with minimum standards, they should be confident that they will continue to meet the new Principles.
There is no requirement for self-assessment submission to be supported by documentary evidence. However, a managing agent can provide supporting evidence where they believe this is beneficial. Managing agents will be expected to provide a short narrative explaining how they arrived at their assessed position – which should focus on the outcomes they have achieved.
Where a managing agent is below the expected level of maturity, the narrative should contain a clear description of the issue(s), the actions to be taken to resolve it, and the timescales.
As some areas within the Principles are new to inclusion within the Oversight Framework, additional information may be required. An example of this is Liquidity where additional information will be collected from all syndicates via the Liquidity Stress Test.
As with minimum standards reviews, we will also undertake Principles reviews from time to time, which may require documentary evidence to be provided. Gaps may also be addressed through additional oversight activities throughout the year.
As it is now, the level of oversight from the Capital and Planning Group (CPG) will be dependent on a syndicate’s categorisation. Where syndicates are not meeting expectations of Lloyd’s, a higher level of CPG review will take place. “Lighter” capital reviews or “file and use” business plans will be reserved for those syndicates which are meeting our expectations across all areas – and are outperforming the Market in terms of their achieved levels of profitability.
In addition, a syndicates performance against Principles will be considered in conjunction with the goals and objectives of the business. For example, if a syndicate wishes to grow, those growth ambitions will be more likely to be supported by Lloyd’s if they are achieving the level of expectation aligned with its goals.
The Principles have been launched in December alongside the 2022 Market Oversight Letters. The Market Oversight Letters provide further context and transparency for managing agents, detailing expected maturity against Principles. All managing agents will conduct a self-assessment against the new Principles by April 2022.
The implementation for the pricing element of the Underwriting Profitability Principles (Sub-Principle 6) will follow a different timeline (see question 23) as will the application of the Catastrophe Exposure Principles to non-natural catastrophe risk (see question 26).
The new Principles and underlying guidance will inform our oversight work for the 2023YOA capital and business planning period. For the first half of 2022 managing agents will be expected to remain compliant against minimum standards, until a full transition to the Principles from the beginning of Q3 2022.
Four dimensions have been given additional emphasis within the new Framework: Underwriting Profitability, Reserving, Governance, Risk Management & Reporting and Culture. A syndicate can only ever be rated as high as the lowest of these four dimensions.
Recognising that Culture is a new dimension for Oversight, for 2022, benefit will be given where managing agents can demonstrate a credible plan for addressing any gaps vs our expectations
The maturity matrix provides suggested examples for how syndicates could meet the Principles, for each level of maturity.
Guidance documents for specific processes will continue to exist. For example, Solvency II Guidance for new entrants or Internal Model Guidance.
Due to the new oversight areas such as, Culture and Operational resilience, we are reviewing what information and data we currently receive and the requirements to effectively evaluate new areas.
A new market wide stress test will also be collected to assess Liquidity risk.
In the majority of cases we will not be expecting syndicates to provide additional documentation or information to allow oversight teams to rate a syndicate - we will use current data, self-assessment detail provided by managing agents and oversight team knowledge to make an initial evaluation.
However, in some cases, predominantly because the area is new to the oversight framework or because Lloyd’s believes the market is generally below where it should be in terms of maturity, additional documentation may be requested. These areas include the pricing assessment within Underwriting (previously the BPPF), investments, liquidity and the assessment of non-natural catastrophe risk once it is included.
There may also be instances where Lloyd’s has a materially different view to a managing agent, and in these cases a managing agent may be asked to provide further information to support their view.
The new Principles based regime does not represent a lowering of standards in any way and the current minimum standards generally align with the foundational level.
However, decluttering the existing minimum standards will reduce complexity and focus Lloyd’s and managing agent’s attention on the most important Principles.
The BPPF has been incorporated into the Rio Framework as Underwriting Profitability sub-principle 6. As part of this, some elements of the BPPF which were broader than pricing were transferred to the other Sub-Principles under Underwriting Profitability. This resulted in a more focused set of expectations for pricing alone.
The roll-out of the assessment against the pricing sub-principle is following a slightly different timeline to the broader Rio roll-out. Each syndicate will be performing their self-assessment during H1-2022, in conjunction with Lloyd’s. Therefore as part of the broader self-assessment against the Principles which syndicates are required to complete by the end of April, no assessment against Underwriting Profitability sub-principle 6 is required.
The materiality for the pricing sub-principle (as communicated in oversight letters) will initially align with the materiality for the broader Underwriting Profitability principle. However, this may be subject to change as the assessments are conducted depending on the nature of the business written.
Note – the BPPF has therefore been renamed the Pricing Maturity Matrix.
Lloyd’s will not publish syndicate categorisations as it is commercially sensitive.
Any syndicates going through due diligence would be expected to share their categorisation with a new acquirer.
There are some Principles and Sub-Principles where the guidance does not differentiate. This is because for some cases we do not consider that there would be tangible and visible differences in approach from the least to the most material syndicates. Where this is the case the guidance would apply to all syndicates regardless of their materiality and would be expressed in the Maturity Matrix at only the Foundation level.
Similarly, there are some cases where there may be differences in approach across only two or three maturity levels, and in these cases the guidance reflects this by setting out less than four levels of maturity.
Across the Maturity Matrices, some of the sections contains either much more, or much less detail than other sections. Differences in levels of detail are as a result of:
- Areas of oversight where the market are currently in the phase of building out their processes/ approaches/ frameworks contain a higher amount of detail in the guidance to assist managing agents, for example Financial Crime, Pricing (within Underwriting Profitability)
- New areas of focus where high-level outcomes are understood but processes to achieve those outcomes have not yet been fully developed or built out contain a lower amount of detail in the guidance. Guidance in these areas will be developed over time as Lloyd’s gains a deeper understanding of the processes and practices in place across the market, for example Culture, ESG (as part of the Underwriting Profitability and Investments Principles) and Liquidity