Calculating a new Syndicate’s Solvency Capital Requirement (SCR)
From January 2016, Lloyd’s capital is set in accordance with Solvency II requirements. Lloyd’s Internal Model (LIM) was approved in 2015 and all managing agents/syndicates are Solvency II compliant.
On the basis that all risks facing a new syndicate are not quantifiable at start-up and a new syndicate will not have its own calculation kernel within the managing agent’s Solvency II model, Lloyd’s will calculate the syndicate’s first year capital requirement through the LIM.
Lloyd’s approach to setting the ultimate SCR for a new syndicate
Year 1 capital setting:
Full year business plan: The capital modelling submission for a new syndicate that commences trading on 1 January comprises:
- a three-year SBF set out by Lloyd’s risk code and by currency
- a preliminary indication of the catastrophe risk within the proposed syndicate’s plan during the first year, based on the RDS exposures and any cat model simulations (the LCM return).
ECA uplift: All syndicate 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%
New syndicate load: The modelled ECA (SCR plus 35% uplift) for all new syndicates is increased by 20% for the first three underwriting years of account. This load will not be applied to the capital calculation for Syndicates in a box. Applying the load for Special Purpose Arrangements is at the discretion of the Capital and Planning Group.
New syndicate/SPA – modelling indicative year 1 capital requirement
Lloyd’s can model (a limited number of times) an indicative year one capital requirement for a new syndicate/SIAB/SPA. In order to do so, the applicant will need to provide a prospective three-year underwriting plan and the LCM return. At the appropriate time (the earliest being when the BOC has agreed to move the proposal to the Detailed Plan Presentation stage) Lloyd’s can provide the relevant Template (in Excel) for completion.
The required level of detail in the Template is:
- Premiums gross net and net
- by Lloyd’s risk code
- by major currency
- Administrative expenses
- Forecast aggregate exceedance probability and Realistic Disaster Scenario numbers
Applicants should note that September to November is a peak period and existing syndicates’ work will have to take priority over new syndicate capital modelling.
New Syndicate in a box – modelling indicative year 1 capital requirement
The constraints on what business can be written, their smaller scale and the rules surrounding their underwriting permission, limit the risk that syndicates in a box pose. This means Lloyd’s can remove some of the capital-setting rules that apply to new syndicates in their first three years.
- Removal of the 20% new entrant uplift.
- No requirement to develop an internal model early on. There will be an option to use the Lloyd’s internal model for the entire three years (vs. two years today for a new syndicate).
- Option to defer enhanced Central Fund contributions from years 1-3 to years 4-6.
- Permitted to use own performance experience in agreeing business plan and setting capital if adequate historical track record provided. Where there is none, Lloyd’s will use loss ratios based on market experience.
- Subject to agreement by the Business Opportunities Committee, the capital requirement will now be based on the actual premium planned to be written in each year of account, rather than the annualised premium when the syndicate begins trading mid-year.
- The method of hypothecating reserves that is currently used in the first three years of syndicate operations will not apply.
- No perpetual participation tenancy rights will apply to members supporting a Syndicate in a box.
The syndicate in a box capital calculation will rely on the information from the Data Pack being the risk code split from the SBF and any cat exposure details.