CHAPTER 4 - C Flashcards
Lloyd’s chain of security
the demonstration of solvency is assisted by the existence of the Central Fund, which is a ‘pot of money’ held centrally by Lloyd’s.
The Central Fund operates what is known as the final link in the Lloyd’s chain of security.
The links in the chain of security are outlined in the following table.
Links in the Lloyd’s chain of security
Syndicate level assets
the premiums received for the business
written which are all held in trust funds.
These funds are the first source of money to pay any claims which are made on the syndicate. The funds must be held in ways
that can be released quickly (or liquidated) in order to pay claims.
Links in the Lloyd’s chain of security
Members’ Funds at Lloyd’s (FAL)
Should the above funds be inadequate (i.e. the premiums are not large enough to
pay all the claims) there is a second line of available funds that forms the next link
in the chain.
These funds have been deposited at Lloyd’s by the members of the syndicate as a condition of becoming an investor in
the Market.
Once these funds are exhausted, then the members can be asked for more funds to
the limit of their liability
The amount of funds that each Member needs to provide in order to support their
underwriting is calculated by starting with the Solvency Capital Requirement (SCR) of
each syndicate.
The Corporation reviews each SCR and then uplifts it by a certain percentage to
ensure that there is sufficient capital available. This uplift is known as the syndicate’s Economic Capital Assessment (ECA).
Links in the Lloyd’s chain of security
Central assets
What happens once the members’ funds have been depleted?
By this time, an insurance company would potentially have gone into liquidation with limited recourse for any policyholders who had outstanding valid claims.
However, the Lloyd’s Market has the Central Fund available as a last resort for use in case all other sources of funds for the payment of any valid claims are exhausted.
Under the Central Fund Byelaws, the Council of Lloyd’s has the ultimate control of the use of the Central Fund.
It is fed by contributions from all the written premium in the market and the basic rate of contribution for all existing members is 0.35% for 2024.
