Market Oversight Plan: Key Risks 2018 - December 2017
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Market Oversight Plan: Key Risks 2018 December 2017
2
Contents
Introduction 3
2018 Lloyd’s Market Oversight Key Risks 4
2018 Market Oversight Framework 4
2018 Lloyd’s Market Returns 5
Lloyd’s 2018 Key Risks, Impact & Oversight 6
Macro-Economic Conditions 8
Brexit 8
Interest Rates & Investment Environment 8
Insurance Industry Conditions 9
Market Conditions Likely To Be More Volatile 9
Hurricane Claims 9
Regulatory Environment 10
Insurance Distribution Directive (IDD) 10
General Data Protection Regulation (GDPR) 10
Financial Crime 10
Policyholder Protection 11
International Regulation 12
UK Regulation 12
Lloyd’s Specific Conditions & Risks 13
Catastrophe Exposure 13
Reinsurance 13
Cyber 14
Cyber Underwriting Risk 14
Cyber Security 14
Reserve Estimates 15
Emerging Risks 16
Appendix 1: Lloyd’s Returns & Continuous Monitoring 17
Market Oversight Plan 20183
Introduction
Market oversight remains a priority for the Corporation.
The nature of Lloyd's, as a market of independent businesses backed by the Central Fund, requires the Corporation to
provide clear and strong oversight in all areas of 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 and is valued by all stakeholders.
The Corporation must 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 this regard. It is also a key objective for Lloyd’s
to minimise duplication with work undertaken by the PRA and the FCA, and for the regulators to take comfort from the
oversight undertaken by Lloyd’s.
In support of their Executives, Managing Agency Boards are critical to ensuring sustainable profitable performance as
well as the management of risk. Lloyd’s therefore expects that business strategy and key risks are subject to appropriate
levels of Board oversight and challenge.
The Corporation continues to evolve the way in which it provides Market Oversight, further enhancing its risk-based
approach to ensure that activity is appropriately focused and is proportionate to the risks faced. For example, there are a
number of pieces of thematic work listed in the Market Oversight Plan for 2018, the purpose of which is to establish the
extent of a given risk across the wider Lloyd’s market, to identify and share both good and bad practice.
We are limiting the number of Managing Agents included in each thematic review, to ensure they are more manageable
and more impactful, and they will be used in the Corporation’s oversight activity in conjunction with ‘issue specific’
reviews.
Finally, for 2018 the individual managing agent oversight plans, contained in bespoke Oversight Letters will be managed
by the recently appointed Lloyd’s Oversight Managers, which will help ensure the right issues are reviewed by the right
people in the right manner.
Jon Hancock
Performance Management Director
Please send any feedback or questions to oversight.framework@lloyds.com
The 2018 Market Oversight Plan is also available online at www.lloyds.com
Market Oversight Plan 20184
2018 Lloyd’s Market Oversight Key Risks
In order for Lloyd's oversight of the Market to be Macro-
effective and efficient, it must be risk-based and Economic
Conditions
proportionate as well as transparent to all
stakeholders.
Insurance
Industry
This document covers the high-level key risks to Conditions
the Lloyd’s Market, taking into account the wider
risks of macro-economic conditions, insurance Lloyd's
industry conditions, Lloyd’s specific conditions and Specific
emerging risks. This provides managing agents Conditions
with the Corporation’s view of the risks and issues
facing the Market and gives transparency over the
Corporation’s planned oversight activity to manage
those risks. Emerging
Risks
2018 Market Oversight Framework
Lloyd’s will be fully implementing its new Account Management regime. This will ensure that engagement between
managing agents and the Corporation is structured, cohesive and commercially effective. This will be led by Oversight
Managers and Development Managers who have a full understanding of their assigned managing agents’ strategic
aspirations, risk profiles, capabilities and business requirements.
Accompanying this document will be individual managing agent oversight plans that will be undertaken by Lloyd’s during
2018, to ensure the key risks are appropriately managed.
The implementation of the 2018 Market Oversight plan at individual Managing Agency level is one of the responsibilities
of the Oversight Managers.
Market Oversight
Minimum Standards
Lloyd's Returns* Thematic Oversight Additional Oversight
Reviews
*Appendix 1 shows in more detail the Lloyd’s Returns and the continuous monitoring undertaken on these.
Market Oversight Plan 20185
Definitions
Returns Continuous monitoring of the Lloyd’s returns submitted by the managing agent, as per
the Business Timetable. This monitoring may trigger any of the below.
Thematic Oversight Oversight of the Market regarding a particular topic or risk, with a sample of managing
agents. The work will result in Market wide feedback.
Minimum Standards A Minimum Standards review, which will include a scope, fieldwork and report.
Review
Additional Oversight Oversight triggered by a particular Minimum Standard concern, Lloyd’s return, or
unexpected market event. The work is focused and risk based, and could (but does
not have to) include fieldwork.
Scheduled – As detailed in individual Managing Agent Oversight letters.
Unscheduled – Triggered by a concern which was not apparent at the point of the
Market Oversight Letter distribution, and leads to discussions or further work. This
must be agreed with the Oversight Manager before being conducted.
2018 Lloyd’s Market Returns
During 2018 Lloyd’s will improve the technology and processes for the collection of oversight and regulatory data from
the market as part of the Market Data Collections (MDC) Programme. MDC will schedule existing market returns to be
migrated onto the platform at the most appropriate times and ensure that this will be undertaken to minimise impact to
the market stakeholders. Appropriate levels of notice and training will be given in advance and further information on
specific impacted returns and timelines will be published in Q1 2018 directly by the MDC Programme team.
Market Oversight Plan 20186
Lloyd’s 2018 Key Risks, Impact & Oversight
Risk Area Impact on Lloyd’s 2018 Oversight
Brexit Lloyd’s businesses suffer due to issues or delays in maintaining Lloyd’s will focus on preparing the Company for operations and continue to
access to the single market and not ensuring our customers are able work with Lloyd’s Market participants to agree the arrangements for placing
Conditions
Economic
to access the Lloyd’s market seamlessly for EU business. business with Lloyd’s Insurance Company SA.
Macro-
Interest Rate & Lloyd’s businesses suffer losses or erode their capital base due to The type of investment strategy adopted by each agent will be a key factor
Investment assets that pose additional risk to the New Central Fund. in determining the level of risk-based oversight we undertake.
Environment
Market Conditions Lloyd’s businesses suffer due to failure to respond to changing market Lloyd’s oversight activities during 2018 will focus on cross class post
conditions, not ensuring market performance is better than that of our hurricane analysis, Marine Hull, Property, Overseas Motor, with follow up
peers. work on Non US Professional Indemnity. Oversight will also include a focus
on actual vs estimated rates at 01 January.
Insurance Industry Conditions
Claims Lloyd’s businesses suffer financial impact, loss of business and Regular assessment of risk based factors (supported where relevant by
reputational harm as a result of the ineffective and inefficient specific or thematic oversight) combined with a focus on catastrophe loss
management of claims. response, delegated claims handling performance and enhancements to
customer experience.
Regulatory Lloyd’s businesses suffer due to failure to respond to and comply with Lloyd’s will continue to analyse the core processes of how business is
Environment relevant laws and regulations. written and processed to ensure the international speciality market can
function under applicable multiple sanctions regimes.
Thematic oversight identified will include Lineslips & Consortia, broker
remuneration, distribution of consumer products underwritten against
Master Policies.
Market Oversight Plan 20187
Catastrophe Lloyd’s businesses suffer losses or erode their capital base through Lloyd’s will focus on close monitoring of managing agents’ catastrophe-
Exposure material aggregations of risks or insufficient monitoring processes. exposed business as reported, including completeness of non-modelled
risks in syndicate models, to ensure that syndicates remain within forecasts
agreed by Lloyd's during CPG.
Reinsurance Lloyd’s businesses suffer losses or erode their capital base as a result Lloyd’s oversight activities during 2018 will focus on RI Liquidity
of reinsurers’ unwillingness or inability to satisfy the terms of Management, RI Counterparty Management, and RI Bad Debt & RI Credit
Lloyd’s Specific Conditions
reinsurance contracts, in part or in full. Risk methodologies.
Cyber Lloyd’s suffers a systemic loss as a result of a malicious electronic Lloyd’s oversight activities during 2018 will focus on cross class cyber
attack or through exposure to both known and non-affirmative underwriting and compliance with the PRA supervisory statement ‘Cyber
aggregations of risk via the policies written by its businesses. Insurance Underwriting Risk’. Additionally, cyber security oversight activity
will include some thematic work to assess the level of managing agent
understanding and protection against cyber security risk.
Reserve Estimates Lloyd’s businesses suffer losses due to significant inherent risk in In recent years Casualty classes have been a key focus of reserve
reserve estimates and potential lack of reserve adequacy if the market oversight. Syndicates can expect more direct, targeted discussion from
is not appropriately managed. Lloyd’s in this area requiring detailed explanation or resulting in changes to
reserves or capital.
2018 is expected to see reserves established for catastrophe events in
2017. Lloyd’s will monitor the development of these in detail across the
market.
A summary of the continuous monitoring across these nine risk areas can be found at Appendix 1. These returns are detailed in the Core Market Returns Guidebook (along with
the Non-Core Market Returns Guidebook) and are scheduled within the Lloyd’s Business Timetable.
Market Oversight Plan 20188
Macro-Economic Conditions
Brexit
In March 2017 the Council of Lloyd’s decided to establish an insurance company in Brussels in order to enable Lloyd’s
underwriters to continue to have full access to EU/EEA business once the UK leaves the EU. The licence application for
the new company, Lloyd’s Insurance Company SA, has been submitted and plans for the company to be operational by
July 2018 are on schedule. Subject to regulatory approval, the first policies will incept on 1 January 2019, in advance of
29 March 2019; the expected date on which the UK will leave the EU.
For 2018, whilst there will be no explicit individual market oversight activity for Brexit risk outside of the annual business
planning process, Lloyd’s will focus on preparing the Company for operations and continue to work with the Lloyd’s
Market participants to agree the arrangements for placing business with Lloyd’s Insurance Company SA.
In the meantime, the existing trading rights of Lloyd’s underwriters in the EU/EEA under the passporting regime are
unaffected.
Interest Rates & Investment Environment
Financial markets have experienced a period of relatively low volatility in 2017, despite the various sources of geopolitical
risk.
Increased uncertainty was sparked by elevated turmoil in Washington, an unexpected result in the UK election, mixed
economic data and Central Bank rhetoric around potential tightening of monetary policy but markets have generally been
resilient, and investment return performance as at Q3 2017 will have taken benefit from this strength in equity markets.
Lloyd’s overall exposure to high-risk assets remains conservative, although exposure by managing agent is varied.
For 2018, the type of investment strategy adopted by each agent will be a key factor in determining the level of oversight
Lloyd’s undertakes.
Market Oversight Plan 20189
Insurance Industry Conditions
Market Conditions Likely To Be More Volatile
2017 has seen a series of significant events. It is anticipated that market conditions will see some hardening of pricing
and terms and conditions in loss-affected classes. There are some signs that underwriting discipline is improving but
managing agency boards must remain vigilant in their challenge of the business.
Effective portfolio management is the key to mitigating the impact of volatile market conditions. Lloyd’s Performance
Management Director Jon Hancock has been working with the Market to ensure that it focuses on maintaining strong
underwriting discipline and profitable lines of business.
Competition within the insurance industry remains intense with capital, including from alternative sources such as hedge
funds and institutional investors, gravitating to the (re)insurance industry. Mergers, acquisitions and broker initiatives are
expected to remain features of the industry as participants pursue scale and relevance as well as looking to reduce
acquisition costs.
Whilst the recent catastrophe activity will impact pricing levels and adequacy in affected regions and lines, it remains to
be seen what, if any, the impact will be in other areas. There are still underperforming lines written at Lloyd’s impacting
overall market performance. It is expected that Market volatility will dominate the array of risks facing general insurers;
coupled with the challenge of low investment returns, managing agents must seek to return their portfolios to profitability
and ensure that underwriting discipline and effective cycle and portfolio management are priorities.
Maintaining underwriting discipline remains vital as the industry experiences a return to more normalised catastrophe
activity. The prevailing environment means managing agents must be agile and flexible, showing a willingness to
withdraw from lines of business and innovate in terms of distribution, new markets and products. Cycle management,
underwriting discipline and strict adherence to the Board approved risk appetites remain key.
Lloyd’s oversight activities during 2018 will focus on cross class post-hurricane analysis, Marine Hull, Property, Overseas
Motor, with follow up work on Non US Professional Indemnity. In hurricane affected classes this will include an actual vs
estimated rates analysis as at 01 January.
Hurricane Claims
The 2017 hurricane season has not triggered the Market Turning Event (MTE) protocols.
Lloyd’s issued guidelines during 2017 on MTE covering how agents should prepare for such events and how Lloyd’s will
deal with the resultant changes. It is important that agents re-visit this guidance and consider creating an MTE internal
plan (including resourcing of claims surge) to assist with a prompt consideration of underwriting opportunities should an
MTE occur.
Lloyd’s oversight activities will include a focus on catastrophe loss response, delegated claims handling performance and
enhancements to customer experience.
Market Oversight Plan 201810
Regulatory Environment
Lloyd’s expects the Market to be compliant with UK and international regulatory requirements, and has processes in
place to assist the market with these obligations.
Through its monitoring of regulatory change and its close engagement with international regulators, the Corporation
seeks to maintain access in all Lloyd’s markets and to minimise the additional regulatory, prudential or compliance
burden placed on the Market by managing processes and interfaces directly wherever possible.
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.
Lloyd’s market oversight activities in respect of the regulatory environment are detailed under each sub-heading.
Insurance Distribution Directive (IDD)
The Insurance Distribution Directive (IDD) is additional EU legislation on the conduct of business and will be
incorporated into the FCA’s regulatory handbook. Compliance is currently due to be required from 23 February
2018. Significant industry wide consultation is being undertaken through the FCA as it drafts and finalises its
updated rule book to implement the directive for FCA related entities.
Part of the IDD extends and reinforces a number of the current conduct related regulatory rules. Lloyd’s expects
managing agents (and coverholders) to implement and update their control frameworks to ensure these new rules
are met.
Lloyd’s will work with the Market during to 2018 to ensure it complies with the requirements including as they
apply to business written through the new Lloyd’s Insurance Company SA once the new company has received
appropriate authorisation.
General Data Protection Regulation (GDPR)
The implementation of the EU General Data Protection Regulation (GDPR) in May 2018 will replace the existing
UK Data Protection Act to strengthen and harmonise data privacy laws around Europe. Managing agents have
been engaged through the LMA, and will each be undertaking their own assessment of any work required as a
result of the new regulation. Lloyd’s Minimum Standards have been updated to reflect the need for managing
agents to comply with the GDPR requirements when they come into force. Current proposals as part of the UK’s
Brexit strategy include transposing EU laws into UK law which would include the GDPR.
The new GDPR requirements will include tighter cyber regulation around Europe, setting rigorous standards for
businesses dealing with consumer data, for example the requirement to report any data breach within 72 hours,
with the threat of fine up to 4% of annual worldwide turnover, or €20m, whichever is greater.
Lloyd’s will use the annual Board Attestation of Compliance with the Minimum Standards to assess
implementation.
Financial Crime
The financial crime landscape continues to evolve and in particular, the application of international sanctions
remains complex as evidenced by the continued challenges of trading with Iran, additional sanctions against
North Korea and tightening of sanctions against Russia.
The threat of enforcement by international regulators against financial institutions for wrongdoing and inadequate
systems and controls remains significant. Compliance challenges continue into 2018:
Market Oversight Plan 201811
Despite the sanctions relief for Iran since 2016, challenges continue due to a divergence in risk appetites
amongst the market (diversity of capital – US and non-US), lack of banking support and processing
challenges of legitimate business through outsourced entities (Market Bulletin Y5098).
The regional dispute focusing on Qatar and sectoral sanctions on Venezuela highlight how new sanctions
add to the compliance challenge.
HM Treasury’s Office of Financial Sanctions Implementation (OFSI) prepares to create a new legal
framework (The International Sanctions Bill announced in the Queen’s speech) to enable the UK to pursue
its own global sanctions regime post-Brexit.
Recent enforcement cases against insurers for failings in controls, screening weaknesses and ineffective
use of exclusionary clauses puts the spotlight on the insurance sector on how cover is provided and to
whom.
The UK Criminal Finances Act 2017 introduces a new corporate offence of failure to prevent facilitation of
tax evasion. Like the Bribery Act 2010, the offence will make it easier to convict Corporates and their
Directors for the activities of their employees or associated persons.
The FCA is also increasing its focus on Anti-Money Laundering and sanctions and has implemented a set of
measures to enhance their supervision strategy.
As the above environment is fluid, the Market will need to remain flexible.
Lloyd’s market oversight will continue to analyse the core processes of how business is written and processed to
ensure the international speciality market can function under applicable multiple sanctions regimes.
Policyholder Protection
In line with Lloyd’s overall approach to Market Oversight, there will be a risk-based approach to customer
standards oversight (which covers Delegated Authorities, Conduct and Claims) designed to ensure policyholders
are treated fairly at all times.
Lloyd’s approach to customer standards oversight will be influenced by regularly assessed risk factors, and may
be influenced by biannual Customer Standards Oversight Meetings with managing agents. Lloyd’s will take a
holistic approach across all the customers standards when undertaking any new thematic or agent specific
oversight activity and will work closely with the market to resolve all outstanding activities from the conduct
assurance programme delivered over the last three years.
Thematic Oversight work identified for 2018 include:
Lineslips and Consortia – deferred from 2017 in order to have regard for the release of the revised Code of
Practice (COP), this oversight work will establish the approach adopted by managing agents in supporting
the updated areas of the COP
Distribution of consumer products underwritten against Master Policies - focusing on managing agent
controls and oversight of sales and servicing of these policies and providing practical guidance to support
the proper use of master policies
Broker Remuneration – will explore managing agents strategy towards remunerating brokers, the oversight,
controls and breadth and visibility of MI reporting within the business, (Lloyd’s will map the proposed scope
against that of the FCA’s Wholesale Insurance Broker Review to identify any overlap)
Use of peer reviews in overseeing delegated authority activities – primarily focusing on the effectiveness of
peer review programmes in place and operating at Coverholders and TPAs, the analysis will extend to
consider the reporting output shared with managing agents and how this supports ongoing performance
oversight, reducing overreliance on periodic external audits.
Other specific activities that Lloyd’s will engage in over the coming year include:
robust and efficient oversight over third parties, including introducing ongoing coverholder oversight
ensuring improved oversight over claims third party administrators
Market Oversight Plan 201812
ensuring managing agents meet their own obligations in terms of overseeing their third parties
the requirements within the Insurance Distribution Directive.
Lloyd’s will also focus on improving the policyholder experience whilst delivering more streamlined and cost
efficient processes; this will include activities designed to improve claims payment timings.
Processes for handling international complaints will continue to be introduced and embedded. This includes the
notification of all complaints to Lloyd’s to ensure that these are handled in accordance with international
regulations, whilst satisfying the requirements of the FCA. The team will also continue to monitor and take action
where necessary to ensure managing agents meet their complaints handling obligations.
International Regulation
In all countries, Lloyd’s seeks to provide international regulators with confidence in our security, compliance
culture and standards. The key market oversight risk and activity is expected to be in the Financial Crime space,
mentioned earlier, as Lloyd’s manages the broader regulatory risk for the Market.
Lloyd’s Market Oversight will include strategies for:
external crime controls operated by the Market and the required level of oversight and assurance of
managing agents
external crime (anti-money laundering) controls operated by members’ agents.
UK Regulation
Whilst many people refer to Solvency II compliance they are in fact simply referring to the current UK regulatory
framework in which Lloyd’s operates. It is imperative that the Market continues to have capital models, systems,
processes and validation in place which continues to meet the current regulatory environment.
Lloyd’s monitors and approves changes in an agent’s internal model through the Lloyd’s Model Change process
which has been live since 1 January 2016.
Market Oversight Plan 201813
Lloyd’s Specific Conditions & Risks
Catastrophe Exposure
Lloyd's protects people and businesses around the world from a wide variety of catastrophe risks including hurricanes,
earthquakes, flooding and wildfires. The Lloyd's Market routinely models these and submits information to Lloyd's to
form a comprehensive view of catastrophe risk within the Market. This feeds into the calculation of the necessary size of
the Central Fund and also to member capital calculations.
The catastrophe and other models used in this process help the Market assess risk levels based on strong scientific and
engineering principles in a statistically sound manner. The models contain many key parameters and assumptions; they
also rely heavily on the quality of the exposure data to which they are applied. Therefore the calculated values are
subject to uncertainty. Lloyd's Minimum Standards require illustrations of this uncertainty be communicated to the
managing agency Boards to ensure that they and capital providers appreciate the potential for mis-estimation.
Syndicates with material exposure in the US will be expected to incorporate lessons learned from recent hurricanes in
terms of ‘non-modelled’ contributions to insured losses.
Lloyd's needs to maintain tight understanding and control of catastrophe risk throughout 2018. Agents need to be
mindful of both their own catastrophe risk appetite and that of the aggregation of catastrophe risk across the whole
Market (and therefore Lloyd’s own appetite).
Lloyd’s oversight activities during 2018 will focus on close monitoring of managing agents’ catastrophe-exposed business
as reported, including completeness of non-modelled risks in syndicate models, to ensure that syndicates remain within
forecasts agreed by Lloyd's during CPG.
Reinsurance
To manage Reinsurance (RI) Risk effectively it is essential that the processes and controls to manage reinsurance
arrangements (in particular those pertaining to reinsurance recoveries and associated cash-flow / liquidity management)
continue to remain appropriate for the level and nature of the Reinsurance Risk present. Especially the ability for such to
identify and mitigate potential risks arising from economically strained reinsurance arrangements and/or financially
challenged reinsurance counterparties.
The Lloyd's Market makes material use of reinsurance protections to manage loss volatility, both from individual large
losses / events, and following the aggregation of major man-made or natural catastrophe losses. The benefit of
reinsurance recoveries, and the associated risk of non-payment by reinsurers, directly feeds into the calculation of
syndicate capital. This in turn influences the level of member capital and the necessary size of the Central Fund. There
is always the possibility of reinsurance disputes or delay in payment, but this potential risk increases when either the
individual reinsurance arrangements / relationships are put under economic strain, or the reinsurance counterparties
involved are themselves under wider cash-flow or financial strain. An increase in this risk could impact on a syndicate’s
ability to manage liquidity after major loss events, or increase the scale of losses it retains. This can be compounded
further where local regulatory funding requirements also need to be satisfied.
The Market is currently in a state of transition. There is some uncertainty as to reinsurance recoveries, simply because
of the volume of claims in Quarters 3 & 4 2017. As Market conditions change, the financial strength of (solvent)
reinsurers should begin to improve given hardening of terms and conditions if primary rates and conditions move in line.
The outlook for reinsurance risk is uncertain:
Scale of RI has increased year on year
Market conditions and recent aggregated losses will put some reinsurance programmes / relationships under
economic strain
Market Oversight Plan 201814
Rating agencies’ financial strength outlook for the Reinsurance sector remains negative.
Lloyd’s oversight activities during 2018 will focus on RI Liquidity Management, RI Counterparty Management, and RI Bad
Debt & RI Credit Risk methodologies.
Cyber
Lloyd’s continues to grow its affirmative cyber product offerings for this fast-changing risk where the Market is adapting
for both cyber-specific policies and traditional coverage. As coverage becomes more widespread oversight will continue
to ensure that syndicates adequately underwrite, price and manage exposures.
Lloyd's therefore continues to focus on understanding and discouraging non-affirmative (“silent”) cyber risks. These are
risks where policies may cover losses arising from cyber by virtue of the terms and conditions not specifically mentioning
if cyber is covered or excluded. While the market should be getting better at handling non-affirmative cyber, generic
exposures will continue to grow as the world becomes more interconnected.
In order to ensure consistency of approach between the PRA and Lloyd’s and to reduce the burden on managing agents
that would be involved in complying with different PRA and Lloyd’s requirements, the Lloyd’s cyber oversight framework
is being aligned with the broader PRA approach.
To that end managing agents should regard the PRA’s supervisory statement SS4/17 as superseding and replacing the
requirements set out in Market Bulletin Y4938. Managing agents that can demonstrate compliance with SS4/17 will be
considered as meeting Lloyd’s expectations for the underwriting of cyber risks.
Lloyd’s research has found that businesses could face a much higher bill than expected after falling victim to a cyber-
attack. The research helps companies better understand the cyber threat, including ‘slow burn’ costs such as
reputational damage, litigation and loss of competitive edge.
Cyber Underwriting Risk
The PRA released a Supervisory Statement in July 2017 for Solvency II firms on cyber underwriting risk covering
three key areas:
1. Firms are expected to assess and manage their products with specific consideration to non-affirmative cyber
risk exposures. Firms should reduce unintended exposure to align residual risk with risk appetite and
strategy and actions they could consider are adjusting the premium, introducing wording exclusions or
attaching specific limits of cover.
2. Firms which underwrite cyber insurance policies risks (either affirmative or non-affirmative) must have clear
strategies for the management of risks, which are owned by the board. Firms should have a clear
articulation of risk appetite (both quantitative and qualitative) and strategy, aggregate exposure metrics and
relevant stress testing that considers the potential for aggregation.
3. Firms must always show commitment to continually increasing knowledge and expertise in the continually
evolving landscape of both affirmative and non-affirmative cyber underwriting risk.
The Market will need to adapt processes, procedures and reporting to become/remain compliant.
Lloyd’s oversight activities during 2018 will focus on cross class cyber underwriting and compliance with the PRA
supervisory statement ‘Cyber Insurance Underwriting Risk’.
Cyber Security
Cyber security is high on the agenda for the UK and European regulators. For example, the FCA has set out
expectations for firms around increasing resilience through enhanced resources, capabilities and testing. The
Market Oversight Plan 201815
European Commission proposed a cyber security reform package in September 2017, which aims to build on the
measures put in place by the cyber security strategy and its main pillar, the directive on security of network and
information systems (NIS directive). The proposal sets out new initiatives such as building a stronger EU cyber
security agency, introducing an EU-wide cyber security certification scheme and swiftly implementing the NIS
directive. Current proposals as part of the UK’s Brexit strategy include transposing EU laws into UK law which
would include the NIS directive.
Lloyd’s work planned for cyber security oversight activity will include some thematic work to assess the level of
managing agent understanding and protection against cyber security risk. We expect to cover a representative
sample of agents across Lloyd's, which will also include agents who manage syndicates with experience in
underwriting cyber risk. Our conclusions will determine how we should best oversee managing agent cyber
security risk going forwards, which could also include revisiting the current minimum standard requirements
around cyber security.
Reserve Estimates
Given the Lloyd’s mix of business and the current rating environment it is recognised that there is a significant inherent
risk in reserve estimates. Market Reserving & Capital (MRC) have taken the opportunity to redefine Lloyd’s reserve
monitoring procedure to improve insight into reserve setting compared to syndicate history and peers.
As part of this redesign the annual Reserve Benchmarking exercise will not continue in its current form and packs will no
longer be distributed. We will move to a more syndicate-specific monitoring process.
Starting from the January 2018, Lloyd’s will visit each managing agent at least once every twelve months. The meetings
will be an opportunity for managing agents to discuss reserving considerations as well as facilitating improvement in
Lloyd’s understanding. Lloyd’s may also cover particular thematic issues to understand what each agent is doing to
manage them, as well as syndicate-specific queries arising from the reserve monitoring processes.
Lloyd’s expects that, where appropriate and/or required by Lloyd’s, Managing Agents will escalate issues or actions
arising from these meetings to the Board. The Lloyd’s Minimum Standards for Reserving (MS9) will be updated
accordingly.
For Casualty classes of business, reserve estimates are heavily influenced by assumptions on the expected performance
of the business. Lloyd’s has undertaken some thematic oversight work in this area which has not supported the
expectation of the market that performance of this business will improve in recent years. Syndicates can expect more
direct, targeted discussion from Lloyd’s in this area requiring detailed explanation or resulting in changes to reserves or
capital.
2018 is expected to see reserves established for catastrophe events in 2017. Lloyd’s will monitor the development of
these in detail across the market.
Market Oversight Plan 201816
Emerging Risks
Whilst the key risks are critical to the long term viability of Lloyd’s, there are emerging risks that the Corporation will
continue to monitor and report to the market as appropriate. Akin to the cyber emerging risks, these may influence
Lloyd’s future market oversight activity though they do not impact currently it.
There are many emerging risks but those that may directly impact future market oversight activity include:
Pandemics: the worldwide threat of a mutated virus versus the medical innovation and advances required to
combat this.
Food System Shock: the impact of reduced yield from multiple staple foods affected by various factors causing
extreme price rises and political tension.
Space Weather: the impact of a major magnetic storm on energy grids (especially in US due to long
transmission lines) and the impact of lasting blackout.
Lloyd’s regularly issues research papers on emerging risks and more can be found on www.lloyds.com.
Market Oversight Plan 201817
Appendix 1: Lloyd’s Returns & Continuous Monitoring
The result of these activities may trigger any market oversight work as defined on page 5 for any particular managing agent.
There are also some territory specific and topic specific returns which are detailed in the Core Market Returns Guidebook (along with the Non-Core Market Returns Guidebook)
and are scheduled within the Lloyd’s Business Timetable.
Oversight Objective Minimum Standard Continuous Monitoring Reporting from Market
1. Reserve Adequacy • MS9 - Reserving Standards • Reserve Surplus Analysis • Quarterly Monitoring Return A (QMA)
• To ensure adequate • Incurred But Not Reported (IBNR) Burn Analysis • Technical Provisions Data return analysis
reserving processes and
• Reserve Early Warning Exercise • Gross Quarterly Data return analysis
limit significant reserving
deficits • Statement of Actuarial Opinion (SAO) analysis – • Statement of Actuarial Opinion (SAO)
Valuation of Liabilities Rules
• Quarterly Monitoring Return analysis
2. Underwriting • MS1.1 - Underwriting • Syndicate Business Plan (SBP) evaluation as • Syndicate Business Plan (SBP)
Strategy and Planning input to the Capital & Planning Group (CPG)
• To ensure that managing • Quarterly Monitoring Return B (QMB)
Standards process
agents’ underwriting
• Monthly Performance Management Data
strategy, planning and • MS1.2 - Underwriting and • Quarterly Monitoring Return B (QMB) analysis
Return (PMDr)
controls are appropriate and Controls Standards
• Performance Information packs
adequate
• MS1.4 - Pricing and Rate
• Monthly Performance Management Data Return
Monitoring Standards
(PMDr) analysis
• MS1.7 - Underwriting Data
• Broker Remuneration analysis
Quality
Market Oversight Plan 201818
Oversight Objective Minimum Standard Continuous Monitoring Reporting from Market
3. Delegated Authority • MS1.3 - Delegated Authority • Coverholder approval • Broker Remuneration Return
Standards
• To ensure that delegation of • Regional and Class of Business (COB)
underwriting is properly extension approvals
managed and controlled
• Query system/task log
4. Catastrophe Exposure • MS1.5 - Exposure • Syndicate Business Plan (SBP) and Lloyd's • Syndicate Business Plan (SBP)
Management Standards Capital Return (LCR) analysis
• To understand and manage • Lloyd's Catastrophe Model (LCM)
Lloyd's catastrophe risk, at • Lloyd's Catastrophe Model (LCM) process
• Realistic Disaster Scenarios (RDS)
the level of individual
• Realistic Disaster Scenarios framework and
syndicates and Lloyd's as a • Realistic Disaster “Light” (RDL)
reporting
whole
• Ad hoc Major /Rapid Claims Return
• Cyber aggregation evaluation
• Cyber Risk Reporting
• Validation of catastrophe-risk, including external
cat models • Lloyd’s Capital Return (LCR)
• Emerging Risks monitoring
5. Reinsurance • MS1.6 - Reinsurance • Syndicate Business Plan (SBP) evaluation • Syndicate Business Plan (SBP)
Standards
• To ensure an appropriate • Lloyd’s Capital Return (LCR) evaluation • Lloyd’s Capital Return (LCR)
degree and quality of
• Syndicate Reinsurance Structure (SRS) • Syndicate Reinsurance Structure (SRS)
diversification in
analysis
reinsurance coverage • Quarterly Monitoring Return A (QMA)
• Quarterly Monitoring Returns analysis
• To avoid excessive use of • Quarterly Monitoring Return B (QMB)
reinsurance to limit • ORSA evaluation
• ORSA submission
exposure to reinsurance
• Realistic Disaster Scenario (RDS) analysis
counterparties and • Realistic Disaster Scenario (RDS)
encourage underwriting • Realistic Disaster Scenario “Light” (RDL)
• Realistic Disaster Scenario “Light” (RDL)
performance discipline analysis
Market Oversight Plan 201819
Oversight Objective Minimum Standard Continuous Monitoring Reporting from Market
• Related Party Declaration & Disclosure Return • Reinsurance Asset Pack
evaluation
• Related Party Declaration & Disclosure Return
• Ad hoc Major/Rapid Claims Return
6. Claims • MS2 - Claims Management • Claims Business Plans analysis • Claims Business Plans
Standards
• To ensure managing agents • Claims Reporting Suite analysis • Major/Rapid Claims Return
manage and adjust claims
to meet or exceed Lloyd’s
Claims Management
Principles and Minimum
Standards
7. Investment • MS8 - Investment • Market Risk element of LCR • Quarterly Monitoring Return (QMR)
Management Standards
• To ensure syndicates do • Quarterly investment risk monitoring • Investment Risk (Quarterly Asset Data -
not take excessive QAD)
investment risk
• ORSA submission
• To ensure members do not
• Annual Board Minimum Standards
take excessive investment
Attestation on MS8
risk
8. Governance, Risk & • MS3 - Governance • Board appointments and departures - may • Notification of Appointments/Departures
Operations result in exit interviews, or appointment
• MS4 - Risk Management • Notification of Change of Control
interviews
• To ensure that effective
• MS12 - Operating at Lloyd’s • ORSA submission
operational and governance • Change of control
Standards
processes exist across the • Annual Board Minimum Standards Attestation
• ORSA Report and Board management
market
information evaluation
• Annual Board Minimum Standards Attestation
analysis
Market Oversight Plan 201820
Oversight Objective Minimum Standard Continuous Monitoring Reporting from Market
9. Capital Adequacy/Internal • MS6 - Modelling, Design and • Capital Approval • Validation Report
Model Approval Implementation
• Solvency II model sign off • Actuarial Function Report
• To ensure Central Fund • MS5 - Scope, Change & Use
• ORSA evaluation • Model Change Report
exposures are managed
• MS7 - Validation Standards
within risk appetite • Use Test interviews • ORSA submission
10. Regulation • MS10 - Regulatory • Issue resolution and post-event assurance • Annual Board Minimum Standards Attestation
Standards;
• To ensure effective market
wide systems or processes
that enable the transaction
of business
• To ensure managing agents
comply with relevant laws
and regulations
11. Policyholder Protection • MS11 - Conduct Risk • Complaints Reporting • Eligible Complainant returns
Standards
• To ensure managing agents • Reacting to any alert of potential mis-selling or
pay due regard to the failure to ensure good customer outcomes.
interests of Lloyd’s
• Newsletters to market (topics for newsletters &
customers and treat them
seminars will be driven through ongoing
fairly at all times
monitoring and continuous monitoring activity)
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