2.RISK AND CAPITAL MANAGEMENTa)Governance framework
The primary objective of the Syndicate’s risk and financial management framework is to protect the Syndicate’s members from events that hinder the sustainable achievement of financial performance objectives, including failing to exploit opportunities. The Managing Agent recognises the critical importance of having efficient and effective risk management systems in place, as part of a ‘three lines of defence’ governance model.
The Managing Agent has established a risk management function for the Syndicate. Responsibilities are articulated in terms of reference and policies which are cascaded throughout the organisational structure, delegated from the board of directors, its board level committees and the associated executive management forums.
The board of directors of the Managing Agent approves the risk management policies and meets regularly to approve any commercial, regulatory and organisational requirements of such policies. These policies define the identification of risk and its interpretation to ensure the appropriate quality and diversification of assets, align underwriting and reinsurance strategy to the Syndicate goals, and specify reporting requirements. Significant emphasis is placed on assessment and documentation of risks and controls, including the articulation of “risk appetite”. The Board sets risk appetite annually as part of the Syndicate’s business planning and capital setting process. The risk management function is also responsible for reviewing the Syndicate’s Own Risk and Solvency Assessment (‘ORSA’), recommending the assessment to the Board for approval.
b)Capital management objectives, policies and approach
Capital framework at Lloyd’s
The Society of Lloyd’s (Lloyd’s) is a regulated undertaking and subject to the supervision of the Prudential Regulation Authority (PRA) under the Financial Services and Markets Act 2000.
Within the supervisory framework, Lloyd’s applies capital requirements at member level and centrally to ensure that Lloyd’s complies with Solvency II capital requirements, and beyond that to meet its own financial strength, licence and ratings objectives.
Although Lloyd’s capital setting processes use a capital requirement set at Syndicate level as a starting point, the requirement to meet Solvency II and Lloyd’s capital requirements apply at overall and member level only respectively, not at Syndicate level. Accordingly, the capital requirement in respect of Syndicate 1910 is not disclosed in these financial statements.
Lloyd’s capital setting process
In order to meet Lloyd’s requirements, each Syndicate is required to calculate its Solvency Capital Requirement (SCR) for the prospective underwriting year. This amount must be sufficient to cover a 1 in 200 year loss, reflecting uncertainty in the ultimate run-off of underwriting liabilities (SCR ‘to ultimate’). The Syndicate must also calculate its SCR at the same confidence level but reflecting uncertainty over a one-year time horizon (one year SCR) for Lloyd’s to use in meeting Solvency II requirements. The SCRs of each Syndicate are subject to review by Lloyd’s and approval by the Lloyd’s Capital and Planning Group.
A Syndicate may be comprised of one or more underwriting members of Lloyd’s. Each member is liable for its own share of underwriting liabilities on the Syndicate on which it is participating but not other members’ shares. Accordingly, the capital requirement that Lloyd’s sets for each member operates on a similar basis. Each member’s SCR shall thus be determined by the sum of the member’s share of the Syndicate SCR ‘to ultimate’. Where a member participates on more than one Syndicate, a credit for diversification is provided to reflect the spread of risk, but consistent with determining an SCR which reflects the capital requirement to cover a 1 in 200 year loss ‘to ultimate’ for that member. Over and above this, Lloyd’s applies a capital uplift to the member’s capital requirement, known as the Economic Capital Assessment (ECA). The purpose of this uplift, which is a Lloyd’s not a Solvency II requirement, is to meet Lloyd’s financial strength, licence and ratings objectives. The capital uplift applied for 2024 was 35% (2023: 35%) of the member’s SCR ‘to ultimate’.
Provision of capital by members
Each member may provide capital to meet its ECA either by assets held in trust by Lloyd’s specifically for that member (funds at Lloyd’s), held within and managed within a Syndicate (funds in Syndicate) or as the member’s share of the members’ balances on each Syndicate on which it participates.
Accordingly, the ending members balances reported on the balance sheet on page 17, represent resources available to meet the member’s and Lloyd’s capital requirements. c)Insurance risk
The principal risk the Syndicate faces under (re)insurance contracts is that the actual claims and benefit payments or the timing thereof, differ from expectations. This is influenced by the frequency of claims, severity of claims, actual benefits paid and subsequent development of
