Market Oversight plan JANUARY31 DECEMBER

Transcription

1 Market Oversight plan JANUARY31 DECEMBER

2 Contents Page Introduction 2 Overall Market Conditions 3 Key Risks Affecting the Lloyd s Market in Market Oversight Timetable Appendix 1: Market Oversight Objectives 11 Appendix 2: Glossary 13 Vision 2025: Lloyd s market oversight will be supportive of sustainable profitable growth and will be valued by all stakeholders 1

3 INTRODUCTION Oversight of the Lloyd s market is one of the key roles undertaken by the Corporation The nature of Lloyd s, as a market of independent businesses backed by the Central Fund, requires the Corporation to play an active supervisory role. This role covers performance management, capital setting and risk management. In addition to these supervisory activities, it is important that Lloyd s market oversight is supportive of sustainable profitable growth, innovation and is valued by all stakeholders. The Corporation needs to ensure that supervision of the market is effective and we are accountable to both the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) in that regard. It is, however, a key objective for us to minimise duplication with work undertaken by the PRA and the FCA. Managing Agency Boards are critical to ensuring sustainable profitable performance and the management of risk. We therefore expect Boards to ensure that business strategy and key risks are subject to appropriate levels of oversight and challenge Oversight Plan The purpose of this oversight plan is to provide managing agents with a summary of the Corporation s view of the key risks facing the market in The underlying objective is to ensure that the Corporation and the market manage risks to the Central Fund, Lloyd s licences, ratings, brand and reputation and ensure good outcomes for policyholders. The accompanying Market Oversight Timetable summarises the key activities that will form part of the Corporation s oversight for The Corporation will write to each managing agent outlining the specific priorities for supervision in 2016 We have enhanced last year s oversight plan to provide managing agents with greater transparency over the Corporation s work and to help you anticipate deadlines and activities throughout the year. As part of this enhancement, we will be writing a letter to each managing agent outlining how the Corporation will focus its supervision of them over the course of Letters will be sent to managing agent CEOs following the publication of this plan and should be shared with the board of the managing agent. The intention of this additional communication is to ensure that oversight planned by the Corporation is risk based, proportionate, effective and efficient. These letters will translate the Franchise Board s overarching view of risk into a set of activities which take account of the performance of each managing agent in order to efficiently prioritise supervision of the market. Review of the Capital and Business Plan process Following the completion of this year s capital and planning work, we are now examining the CPG process to identify any efficiencies that can be brought in prior to next year s timetable starting. Any recommended changes will be shared with the Market towards the end of the first quarter next year. We welcome your feedback as we continue to improve and enhance our Market Oversight Framework. Sean McGovern Chief Risk Officer and General Counsel Please send any feedback or questions you may have on to risk.assurance@lloyds.com The 2016 Market Oversight Plan and the Market Oversight Timetable is also available online at 2

4 Overall Market Conditions The prevailing environment means managing agents must be agile and flexible Competition within the insurance industry has intensified with capital, including from alternative sources such as hedge funds and institutional investors, gravitating to (re)insurance industry in the search for returns. Continued consolidation is expected during M&A and broker initiatives are expected to remain features of the industry and participants pursue scale / relevance and cost / capital efficiencies. Prices in most classes remain under pressure, challenging profitability in an environment of reduced investment income. While the industry has seen a relatively benign insured catastrophe experience recently the long term trend is for an increasing frequency and severity of catastrophe claims and rising underwriting exposures. Maintaining underwriting discipline remains vital as the industry continues to experience soft market conditions. The prevailing environment means managing agents must be agile and flexible, showing a willingness to withdraw from lines of business, innovate in terms of distribution, new markets and products. The PRA s recent Dear CEO letter dated 4 December 2015 (insuranceletter pdf) on the impact of soft market conditions reinforces the importance attached to ensuring managing agency boards are sufficiently focused on the issues and risks associated with the current challenging market conditions. Additionally, Lloyd s and the wider insurance industry continue to experience significant regulatory change across multiple jurisdictions with UK and international policy makers being committed to implementing a regulatory system that promotes financial stability. Given the above market conditions the Corporation has identified the following key risks / macro level issues which are likely to impact the Lloyd s market through the course of the year. Set against each is the activity that the Corporation has planned to seek to mitigate those risks. 3

5 Key Risks Affecting the Lloyd s Market In 2016 Note: The below risks are ordered alphabetically and not in order of priority. Cyber Risk Cyber is a rapidly developing area of risk: attacks have increased in frequency, the resultant claims have increased in size, and the overall threat levels have become heightened. This presents operational and underwriting risk as well as opportunity to the Lloyd s market. The size of the global market (GWP) is believed to have increased from 560m in 2012 to an estimated 1.65bn in 2014 (source: Insurance Journal, 5 October 2015). Cyber liabilities will have an increasing impact on Lloyd s as the market grows. The Corporation will therefore focus on three areas; ensuring cyber exposures in policies are understood with improved exposure management and aggregation techniques, the risk is appropriately reserved and capitalised and finally that operational security and resilience is suitable to control the growing threat. We are working closely with Governments and regulators around the world on this issue to position Lloyd s as a key hub for the development of cyber products and capacity. It is therefore critical that we ensure that we have a robust approach to risk management in both underwriting and operations. Area Description Corporation Action(s) Underwriting Cyber is a class of business that has grown significantly since the risk codes were introduced in Further growth is planned in 2016 (by over 50%) as more syndicates seek to write this class either by setting up in-house teams with specialist expertise or supporting recognised leaders writing market facilities. There is increasing pressure on the market to widen terms and conditions in a number of lines of business in order to provide cover for cyber exposures. Underwriters are providing wider write backs and specific policy sections providing cyber coverage. However, there are also a large number of policies where coverage for cyber is not specifically included or excluded and we consider it is better for customers to be up front and clear about the cover that is provided. With the increasing frequency of cyber-attacks, the potential for aggregation of exposures across classes of business and policies remains a real risk. Lloyd s thought leadership publications such as the Business Blackout report published in July 2015 with Cambridge Centre for Risk Studies have highlighted the risks that syndicates may face and are aiding the discussion with the market on cross class aggregation. The Cyber Data Collection exercise completed by the market since 2014 has been implemented as a full RDS from the September 2015 business plan submission. An oversight framework for cyber-attack exposure monitoring was introduced in November 2015 for cyber exposures across all lines of business. This three stranded approach covers syndicates risk appetite, the review of cyber risks and exposures through a syndicates cyber-attack risk management framework and the reporting of aggregation to Lloyd s through a cyber-attack scenario based approach. Cyber specific risk codes are being closely monitored with all new delegated authority cover holders being reviewed and requests for new risk codes considered carefully Cyber data collection exercise implemented as Realistic Disaster Scenario (RDS) and in the RDS process from September 2015 Oversight framework for cyber-attack exposure monitoring - the first reports will be submitted by the end of quarter (see Catastrophe Exposure objective in the Market Oversight Timetable). The data collection exercise run by the Exposure Management team will be part of the Realistic Disaster Scenario process from January 2016 (see Market Bulletin Y4938). Contd. 4

6 Area Description Corporation Action(s) Lloyd s has published details of underwriters views on cyber risks and exposures as part of the cyber consultation feedback run in conjunction with the LMA. Further work on Probable Maximum Loss (PML) methodologies will be completed in Further details of exposure management principles for cyber-attack, and related returns that managing agents are required to submit to Lloyd s, please see Market Bulletin Y4938. Reserving The potential cyber underwriting opportunities create additional reserving uncertainty due to a lack of claims experience and historical data. There are also challenges with the evaluation and monitoring of cyber reserves as the immaturity of this class makes reliance on certain standard actuarial reserving techniques less appropriate. Lloyd s collects cyber reserving data from the market under specific cyber risk codes which allows separate monitoring of this class of business. Cyber risks will be monitored using the same oversight activities as for other classes, with more emphasis placed on those oversight tools which are less dependent on historical data e.g. IBNR burn, material strengthening of IBNR, movement in case reserves and number of advices. Cyber risks will be monitored via the same oversight activities as for other classes. More emphasis will be placed on those oversight tools which are less dependent on historical data e.g. IBNR burn, material strengthening of reserves. Operational A successful cyber-attack could potentially have serious reputational and financial repercussions for the managing agent and Lloyd s. Therefore, we must ensure that the market has appropriate information security measures in place and clear resilience plans to mitigate this risk. Lloyd s is currently developing proposals for market oversight in this area, seeking to minimise any duplication with an already complex regulatory landscape. LMA interaction has commenced and a revised approach to oversight is targeted for Q Lloyd s is engaging with managing agents, via the LMA, to develop an appropriate oversight approach for the operational aspects of cyber risk. This will include the adoption of the Cyber Essentials accreditation, incorporating this framework into the Lloyd s minimum standards. 5

7 Continued soft Market Conditions The general insurance market continues to experience soft market conditions. The PRA highlighted the importance of adequate Board challenge and oversight in their recent Dear CEO letter on continued soft market conditions in the UK general insurance sector, dated 4 December 2015 (insuranceletter pdf). As set out in the PRA letter, heightened Board engagement is expected in key processes across underwriting, reserving, reinsurance and capital management during soft market conditions. Further details about the proposed oversight activities for each of these key areas can be found in the Market Oversight Timetable (see oversight objectives 1 (Reserving), 2 (Underwriting), 5 (Reinsurance) and 9 (Capital Adequacy, Internal Model Approval). Additional commentary on Reserving and Underwriting is included in the table below. Area Description Corporation Action(s) Reserving Lloyd s mix of business contains a high inherent level of reserve risk and reserve adequacy is monitored continuously. Despite the current stage of the insurance cycle which would inherently increase reserve risk, reserving risk in aggregate remains stable with a strong estimated surplus held within syndicate accounts. As the market continues to soften there is a greater risk of reserving inadequacy, especially in the long tail classes where there can be a lag between initial reserve setting and the emergence of deficit. Latest analysis has highlighted potential concerns around the most recent years of account. The Lloyd s reserving minimum standards (MS9) are already in force and compliance will be assessed in Q1. All managing agents will be required to complete a self-assessment against the reserving minimum standards (MS9) which will be reviewed in the first quarter of the year. Supervision will be increased via monitoring of casualty reserves both at market and syndicate level. This is in addition to normal reserve oversight activities. Underwriting The longer tail, casualty classes continue to grow as the market faces increased competition in shorter tail catastrophe classes. Nevertheless, in general premium targets remain under pressure and rates are likely to continue to fall. We expect that mergers and acquisitions will impact the shape of the reinsurance market in particular. There will also be contraction in property treaty income as markets look to make savings on reinsurance spend. Recent losses, for example, the Tianjin port explosion and Superstorm Sandy, have highlighted the uncertainty inherent in large losses impacting ports, particularly arising from cargo risk. The gradual recovery from the financial crisis will be demonstrated in growing trade and a revived interest in financial insurance products. Active portfolio and cycle management will remain critical to successful underwriting through this period. The Underwriting Performance review process will continue in Recommendations for class or underwriting performance reviews include Cargo and financial lines classes. Growing demand for risk transfer from high growth economies will remain important sources of new business supporting the Lloyd s Vision

8 Critical suppliers and infrastructure Managing agents need robust and tested business continuity plans in place to ensure they can effectively recover from an operational incident. Description Corporation Action(s) Following self-certification against the Lloyd s Governance minimum standard, targeted follow up meetings will be undertaken with a number of managing agents where weaknesses have been identified. Follow up with targeted agents to discuss business continuity plans The Corporation has been working with the LMA on contingency procedures for the failure of an outsourced supplier. Guidance will be issued to the market to assist with operational planning. Guidance to be issued regarding contingency procedures for the failure of key outsourced suppliers Distribution The concentration of business into Lloyd s from the top five brokers has increased slightly in the past few years and could increase further. Description Corporation Action(s) Ongoing industry conditions present challenges for many brokers in maintaining or growing their revenues and profitably. Broker consolidation continues as firms look for acquisitions to increase scale, drive efficiencies and / or broaden proposition. Most of the large brokers have a stated intent to reduce the number of insurers they use in their placing strategy. This is likely to lead to more facilities, smaller insurer panels, continued weakening of terms and conditions and a possible reduction in income to Lloyd s. Broker facilities remain a feature of the current soft market and also reflect a longer term feature of evolving broker business models. This presents challenges in operational and underwriting controls as well as ensuring policyholders are treated fairly and receive the service they expect. Our market oversight will therefore be focused on ensuring robust management of delegated authority underwriting and facilities to manage risk and safeguard policyholder interests. Changes in distribution will be kept under close scrutiny with the growth in delegated authority and market facilities pushing some underwriters further away from underwriting of individual policies. Managing agents should also reference Market Bulletin Y4864 for the updated Lloyd s Consolidated Guidance on Distribution Costs, Broker Remuneration and Additional Charges. The bulletin also outlines the revised Lloyd s reporting requirements for managing agents in connection with additional payments. Lloyd s will focus on the challenges presented to syndicates assuming business through lineslips and large coverholders Strategic engagement with the larger brokers at group and London management level TOM process efficiencies for brokers and coverholders Review consortia administrative and oversight arrangements 7

9 Financial Markets Although the global economy has shown some signs of entering a period of modest growth with largely positive economic data being reported in the US and the UK, the low interest rate environment continues to constrain investment return prospects with investment grade bond yields at historically low levels. Description Corporation Action(s) In aggregate, there has been a gradual modest shift in asset allocation towards risk bearing assets as some managing agents increase their risk appetites in order to improve investment return. Whilst this provides a boost to investment return in normal market conditions, this exposure could lead to investment losses when markets are volatile particularly when low risk bonds provide very little cushion due to the current low yield environment. Whilst exposure to risk assets remains conservative overall, exposure by agent is varied. Developments at managing agent level will be closely monitored throughout The composition of risk assets tends to be quite mixed: ranging from direct equity holdings through to absolute return strategies; and this will also be a key consideration when assessing higher risk agents. Other oversight activity including reviews of agent risk metric versus internal appetites, minimum standards self-assessments and capital setting will continue to take place in Lloyd s will continue to perform risked-based oversight of investments including: Closer monitoring of agents with higher than average investment risk appetites Targeted follow up work on the 2015 investment minimum standards self-assessment submissions and reviews Analysis of trends emerging at the aggregate level for investments. 8

10 Regulatory risk Lloyd s expects the market to be compliant with overseas laws, and has processes in place to assist the market with these requirements. Lloyd s continues to experience significant regulatory change across multiple jurisdictions with UK and international policy makers being committed to implementing a regulatory system that promotes financial stability. There has been particular focus of late, by both the PRA and FCA on strengthening the fit and proper rules applicable to senior insurance managers and Non-Executive Directors. There is also an increasing focus on conduct supervision in the insurance sector. Solvency II comes into force in the European Economic Area with effect from 1 January Its development, together with the ongoing increased focus on financial services regulation post global financial crisis and the rapid development of a coordinated and collaborative global regulatory community, including key players such as the International Association of Insurance Supervisors (IAIS), has led to a significant amount of change to regulatory frameworks as regulators seek to address risk in their own markets, and to a proliferation of risk based prudential regulatory frameworks. The Corporation seeks, through its monitoring of regulatory change and its close engagement with international regulators, to maintain access in all Lloyd s markets, on as flexible a basis as possible, and to minimise the additional regulatory, prudential or compliance burdens placed on the market by managing those processes and interfaces directly. In all countries, Lloyd s seeks to provide international regulators with confidence in Lloyd s security, compliance culture and standards. An overview of the key regulatory risks faced by the market over the next 12 months is in the table below: Area Description Corporation Action(s) Financial Crime The financial crime landscape continues to evolve and in particular, the application of international sanctions has never been more complex or dynamic. Significant enforcement action by international regulators against financial institutions for wrongdoing, and inadequate systems and controls, remains a regular occurrence, and everything points to 2016 continuing as a compliance challenge on several fronts: The Nuclear Agreement with Iran (the Joint Comprehensive Plan Of Action ) should see the phased relief of sanctions (financial and trade) against Iran during This will have a varying impact on the Lloyd s market due to the diversity of capital (US and non-us), as primary US sanctions will remain in place, and therefore still posing significant regulatory risk. Prevailing soft market conditions will test underwriting discipline and risk appetites as new opportunities including the expected continued easing of US sanctions against Cuba are presented to market participants in an environment where the application of international sanctions are extremely complex. Lloyd s will continue to keep the market informed with guidance and bulletins. Themed review planned for Q of managing agents writing K&R. Themed review (Q2) of managing agents on the Lloyd s China platform (Sanctions Protocol) and a review (Q3 & Q4) of sanctions / AML screening tools in use by all the market. Other regulatory changes recent and anticipated also need to be carefully considered. The UK s Counter-Terrorism and Security Act 2015 clarified the law in relation to insurance payments made in response to terrorist demands, thereby having an impact on the kidnap and ransom ( K&R ) class of business. Also the UK Bribery Act 2010 remains a constant risk and the recently announced first enforcement action under Section 7 (corporate offence of failure to prevent bribery) illustrates the risks posed by associated persons, such as those under delegated authorities. contd. 9

11 Area Description Corporation Action(s) Policyholder Protection Finally, the UK s 2015 National Risk Assessment on money laundering / terrorist financing and the 4th Money Laundering Directive continues to require the Lloyd s market to maintain systems and controls to prevent all forms of financial crime. In response to the FCA s increased expectation of financial services firms to consider conduct throughout their business model and strategies, Lloyd s created the Conduct Minimum Standards, which have been in force since 1 January (The exception to this is the requirement under CR13 for the development of Conduct Management Information ( MI ), which will be in force from 1 January 2016.) The effective implementation of the Standards by the market is an important strategic objective for Lloyd s. The framework is a significant step forward and aims to ensure the experience of policyholders is at the heart of the strategy of the market. The Standards set out conduct of business responsibilities for managing agents in the areas of Sales, Distribution, Service and Products, with a key focus on UK & EEA consumer policyholders of high product risk products (as defined in the Standards). Market returns show significant volume of high product risk policyholders in the UK & EEA as well as indications of material growth in 2015 and Standards self-assessments submitted by managing agents during 2014 and 2015 highlighted certain areas where the market recognises the need to develop processes. In the event that the market does not address these issues, then we may impose remedial actions through our assurance reviews which could lead to business plan limitations for specific agents. Themed review work is planned for early in 2016 to assess the Market s response to conduct minimum standard related to management information (CR13). Continued managing agent specific reviews. Disseminate best practice and market guidance through workshops, seminars and newsletters. The topics for Newsletters and Seminars will in part be driven through ongoing reviews and also through a thematic review (management information in Q1, 2016). Introduction of the new process for handling international complaints. During 2015 the Corporation undertook 20 conduct assurance reviews and provided specific feedback for further action. Some managing agents had restrictions placed on the ability to write certain classes of business until satisfactory remedial action was taken. Lloyd s will continue its conduct assurance programme throughout This will involve undertaking assurance reviews of a further 16 Lloyd s managing agents as well as conducting follow-up reviews of the 20 managing agents that were reviewed in The review activity will continue to ensure that agents are taking an effective approach to managing conduct. Lloyd s will also undertake a themed review in early 2016 to assess the market s compliance with the conduct Management Information standard (CR13) which comes into force on 1 January This will enable Lloyd s to provide the market with feedback on the effective collation and use of MI. Lloyd s will also continue its programme of disseminating best practice through the use of seminars, workshops and newsletters. contd. 10

12 Area Description Corporation Action(s) Finally, a new process for handling international complaints will be introduced across the EEA and USA during This includes the notification of all complaints to Lloyd s to ensure that all complaints are handled in accordance with international regulations, whilst satisfying the requirements of the FCA. This includes reporting complaints data to the FCA on a six monthly basis as well as providing data to international regulators, where applicable. Senior Insurance Managers regime (SIMR) Since late 2014, the PRA and FCA have issued a joint series of three consultation papers proposing changes to the current Approved Person Regime. In part, the proposed changes were intended to address certain governance and fitness and propriety requirements under the Solvency II Directive. The regulators have since published Policy Statements which have included new rules setting out the new regime. Lloyd s will issue a market bulletin in January 2016 setting out the new Notification requirements. The revised regime is designed to cover those persons who effectively run the business, or have responsibility for important, or critical, areas of the business. The new regime is far more wide reaching than the previous approved person regime, and also requires the production of specific documentation. Managing agents will need to make appropriate arrangements to review its governance arrangements and develop documentation to support the new regime. Lloyd s has required the submission from the market of certain documents within the governance submission request at year end Currently, Lloyd s operates a system whereby notifications are submitted in advance of applications being made to the PRA and FCA for Approved Person status. This approach will be amended to align to the requirements of the new regime and the new system will be operational from early February From this point, the Lloyd s notification system will align to the requirements of the new Senior Manager regime. Solvency II Compliance The PRA granted approval to Lloyd s internal model application in December This marked the conclusion of a number of years of work by both Lloyd s and the market. The Solvency II regime goes live from 1 January 2016 and adherence to the Solvency II requirements is an ongoing regulatory requirement for both Lloyd s and the market. There are a number of areas, notably model change and Pillar 3, where the final approach is yet to be fully implemented. Compliance with the requirements of Solvency II remains a key risk both for Lloyd s and the market into 2016 and beyond. Our approach will continue to Lloyd s Minimum Standards will be the key vehicle for the assessment of on-going managing agent compliance. Oversight activity carried out will be tailored to reflect the risks faced and performance against standards by the market. contd. 11

13 Area Description Corporation Action(s) integrate Solvency II compliance monitoring into our business as usual market oversight as we need to move away from the intensive projectbased activity to achieving on-going Solvency II assurance through more targeted, efficient mechanisms. We will be developing this approach in early 2016 in time for the 2017 planning cycle. Lloyd s will develop its oversight regime to ensure it can impose appropriate measures on managing agents who are non-compliant with the Solvency II requirements. Tax The tax environment has shifted in recent years, resulting in much closer scrutiny from tax authorities and the public, at both the global and UK level. The OECD Base Erosion and Profit Shifting ( BEPS ) project delivered final reports on 5 October 2015 which are likely to result in the biggest changes to international tax rules in 100 years. In some areas there is more work to be done but the outcome of the report is already influencing tax policy and legislation (such as the Diverted Profits Tax introduced in the UK in 2015). The BEPS issue is likely to have the most wide-ranging impact for the market with the threshold at which a taxpayer based in one territory creates a taxable presence in another country. There is likely to be considerable effort required to assess possible impacts on coverholders, service companies and members which will depend on the particular facts and circumstances of the arrangements being looked at. The Corporation will continue consultation with the market during 2016 to better understand the likely impacts on the market of these changes and form a robust tax strategy to mitigate and set risk appetite going forward. At a UK level, in December 2015 HMRC set out plans to legislate in 2016 to introduce a requirement for large businesses to publish a tax strategy and to introduce a framework for Co-operative Compliance. HMRC will consult further on the framework but have stated they will view compliance with the framework as an indicator of lower-risk behaviour (and non-compliance as an indicator of higher-risk behaviour). 12

14 Thematic Reviews As a result of the above actions, the Corporation s thematic reviews to be conducted will include: Area Description Corporation Timings Policyholder Protection (Conduct) Themed review work is planned to assess the Market s response to the conduct minimum standard related to management information (CR13). April, 2015 Exposure Management Thematic work is planned on cyber, model completeness and catastrophe risk uncertainty. The review work will be ongoing throughout the year, in accordance with the returns and feedback set out in the Market Oversight Timetable. On-going throughout 2016 Regulatory Targeted sample of agents to review the understanding of Kidnap & Ransom / Counter Terrorism and Security Act and SYSC surrounding underwriting and claims. Q1, 2016 Targeted at Managing Agents on the Lloyd s China Platform, focus on compliance with Lloyd s China Sanctions Protocol Q2, 2016 Thematic work is planned on gaining assurance of managing agents sanctions / AML screening tools to ensure their correct calibration and effective performance September to December, 2016 Reserving A number of thematic exercises were completed following the 2014 year end (e.g. Reserve Adequacy PI and Financial Institutions); the results have been fed back to agents (with associated follow up) and thematic reviews will be planned based on the 2015 year end data as necessary. On-going throughout 2016 Underwriting There will be a thematic Underwriting Performance review of Cargo for a selection of agents. Other targeted review work will include financial lines classes. Q1, 2016 Themed review work is planned to assess the effectiveness of Managing Agent s Oversight of Wordings Q3, 2016 Contd. 13

15 Area Description Corporation Timings Underwriting Data Quality There will be a review of Binder Rate Change and Price Monitoring for a selection of agents H1, 2016 There will be a review of Agent s Underwriting Data Quality Audits H2, 2016 Note: The timing of the above reviews will be confirmed by the relevant Oversight Team early in It is also worth noting that additional thematic reviews may be carried out following analysis of market trends and major events (e.g. potential major claims return - dependent on timing of large loss). See the Market Oversight Timetable for further details. 14

16 Appendix 1: Market Oversight Objectives Oversight objective minimum standard core processes reporting from/to market 1. RESERVE ADEQUACY To ensure adequate reserving processes and limit significant reserving deficits MS9 - Reserving Standards Reserve Surplus Analysis Incurred But Not Reported (IBNR) Burn Analysis Syndicate feedback meetings Quarterly Monitoring Return reviews Reserve Early Warning Exercise Statement of Actuarial Opinion (SAO) Review Valuation of Liabilities Rules Technical Provisions Data return analysis Gross Quarterly Data return analysis 2. UNDERWRITING To ensure market performance is better than that of our peers, recognising that as a specialist P&C market, we have appetite for volatile risk classes To ensure a reasonable expectation of making a gross underwriting profit on each Line Of Business every year To ensure effective systems and controls for managing, recording and reporting underwriting data to management and to Lloyd s. MS1.1 Underwriting Strategy and Planning Standards MS1.2 Underwriting and Controls Standards MS1.4 - Pricing and Rate Monitoring Standards MS1.7 Underwriting Data Quality Syndicate Business Forecast (SBF) review as input to the Capital & Planning Group (CPG) process Quarterly Monitoring Return B (QMB) review Monthly Performance Management Data Return (PMDr) review Review of new Syndicate and Agency proposals BAU/monthly meetings Broker Remuneration analysis Syndicate Business Forecast (SBF) Quarterly Monitoring Return B (QMB) Monthly Performance Management Data Return (PMDr) Monthly Performance Management Data Return (PMDr) playback reports Quarterly Performance Information packs Broker Remuneration Return 3. DELEGATED AUTHORITY To ensure that delegation of underwriting is properly managed and controlled MS1.3 -Delegated Authority Standards Coverholder approval Regional and Class of Business (COB) extension approvals Monthly Atlas exceptions Coverholder audit co-ordination Query system/task log 6 monthly meeting reviews Targeted reviews 4. CATASTROPHE EXPOSURE To understand and manage Lloyd's catastrophe-risk, at the level of individual syndicates and Lloyd's as a whole MS1.5 - Exposure Management Standards Minimum Standards reviews Syndicate Business Forecast (SBF) and Lloyd's Capital Return (LCR) reviews Syndicate Business Forecast (SBF) Lloyd's Catastrophe Model (LCM) Realistic Disaster Scenarios (RDS) Lloyd's Catastrophe Model (LCM) process Realistic Disaster Scenarios framework and reporting Realistic Disaster Light (RDL) Ad hoc Major Claims Return Cyber Aggregation Report Cyber aggregation review Model Completeness feedback Validation of catastrophe-risk, including external cat models Emerging Risks 15

17 Oversight objective minimum standard core processes reporting from/to market 5. REINSURANCE To ensure an appropriate degree and quality of diversification in reinsurance coverage To avoid excessive use of reinsurance to limit exposure to reinsurance counterparties and encourage underwriting performance discipline MS1.6 - Reinsurance Standards Syndicate Business Forecasts (SBF) review Lloyd s Capital Return (LCR) review Syndicate Reinsurance Structure (SRS) review Quarterly Monitoring Return (A) review Quarterly Monitoring Return (B) review Syndicate Business Forecast (SBF) Lloyd s Capital Return (LCR) Syndicate Reinsurance Structure (SRS) Quarterly Monitoring Return A (QMA) Quarterly Monitoring Return B (QMB) Own Risk Self-Assessment (ORSA) Own Risk Self-Assessment (ORSA) review Realistic Disaster Scenario (RDS) review Realistic Disaster Scenario Light (RDL) review Related Party Declaration and Disclosure Return review Realistic Disaster Scenario (RDS) Realistic Disaster Scenario Light (RDL) Reinsurance Asset Pack Related Party Declaration and Disclosure Return Ad hoc Major Claims Return 6. CLAIMS To ensure managing agents manage and adjust claims to meet or exceed Lloyd s Claims Management Principles and Minimum Standards MS2- Claims Management Standards Lloyd s Claims Management Summary (LCMS) review Claims Business Plans review 6 monthly meeting reviews Quarterly Lloyd s Claims Management Summary (LCMS) Claims Business Plans Ad hoc Major Claims Return 7. INVESTMENT To ensure syndicates do not take excessive investment risk To ensure members do not take excessive investment risk MS8 - Investment Management Standards Market Risk element of LCR Investment Risk (Quarterly Asset Data - QAD)/ Lloyds Asset Database (LAD) Quarterly Market Risk Review Quarterly asset holdings 8. GOVERNANCE, RISK & OPERATIONS To ensure that effective operational and governance processes exist across the Market MS3 Governance MS4 - Risk Management MS12 - Operating at Lloyd s Standards Board appointments and departures Notification of Appointments/Departures - may result in exit interviews Change of Control 9. CAPITAL ADEQUACY/INTERNAL MODEL APPROVAL To ensure Central Fund exposures are managed within risk appetite MS6 - Modelling, Design and Implementation MS5 - Scope, Change and Use MS7 Validation Standards Capital Approval Solvency II model sign off ORSA Use Test interviews Validation Report Actuarial Function Report Model Change Report 10. REGULATION (INCLUDING TAX) To ensure effective market wide systems or processes that enable the transaction of business To ensure managing agents comply with relevant laws and regulations MS10 - Regulatory Standards; Issue resolution and post event assurance Guidance & advice to the market Engagement with any targeted thematic financial crime and non-compliance reviews Information requests from agents subject to assurance reviews 11. POLICYHOLDER PROTECTION To ensure managing agents pay due regard to the interests of Lloyd s customers and treat them fairly at all times MS11 - Conduct Risk Standards Complaints Reporting Conduct risk assurance reviews (and self-assessment) High Product Risk data to be collected in future from agents as part of SBF process Information requests from agents subject to assurance reviews 16

18 Appendix 2: Glossary The returns below are used by various teams in the Corporation and so cut across many of the oversight objectives (Appendix 1). The returns are outlined in the Financial Reporting and Other Returns (to support multiple standards) row in the Market Oversight Timetable. GQD Gross Quarterly Data - collects gross signed premium (before and after acquisition costs), paid claims during the quarter and outstanding claims at the end of the quarter. TPD Technical Provisions Data collects Profit & Loss and Balance Sheet data (on both a UK GAAP and SII basis) by pure year of account, risk code and currency. QMR Quarterly Monitoring Returns, which includes: QMA Quarterly Monitoring Return Part A used to collect UK GAAP balance sheet and income statements and other information for Lloyd s annual and interim accounts, and central financial monitoring QMB Quarterly Monitoring Return Part B used to collect information for central financial monitoring QMC Quarterly Monitoring Return Part C used to collect Solvency II balance sheet, used in Lloyd s capital tests Solvency II Returns Forms: ASR Annual Solvency Return used to collect annual Solvency II Pillar 3 data (except assets) AAD Annual Asset Data used to collect annual Solvency II Pillar 3 data (detailed asset listing) QSR Quarterly Solvency Return used to collect quarterly Solvency II Pillar 3 data (except assets) QAD Quarterly Asset Data used to collect quarterly Solvency II Pillar 3 data (detailed asset listing) Realistic Disaster Scenario (RDS and RDL) The objective of Lloyd s Realistic Disaster Scenario exercise is to obtain managing agents estimate of the maximum losses syndicates would incur from a variety of hypothetical disaster scenarios, using consistent and appropriate methods and assumptions. For further details about returns due and the purpose of each return, please refer to the following: Core Market Returns Guidebook and Non-Core Market Returns Guidebook - resources/core-market-returns-guidebook Lloyd s business timetable webpage

19 We welcome your feedback as we continue to improve and enhance our Market Oversight Framework. 18

20 Lloyd s One Lime Street London EC3M 7HA United Kingdom