Market Oversight Plan: Key Risks 2019 - December 2018 - Lloyd's of London
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Market Oversight Plan: Key Risks 2019 December 2018
2
Contents
Introduction 3
2019 Lloyd’s Market Oversight Key Risks 4
2019 Market Oversight Framework 4
Emerging Risks 5
Lloyd’s Returns 5
Lloyd’s 2019 Key Risks, Impact and Oversight 6
Macro-Economic Conditions 9
Lloyd’s Brussels Subsidiary / Brexit 9
Interest Rates and Investment Environment 9
Insurance Industry Conditions 10
Market Conditions Continue To Be Challenging 10
Cyber Resilience and Security 10
Regulatory Environment 11
Financial Crime 11
IDD Requirements Implementation 12
Policyholder Protection 12
Fair Value in Consumer Products 12
Claims Experience 13
Remuneration Strategy 13
Third Party Oversight 13
Lloyd’s Specific Conditions and Risks 14
Market Expenses 14
Capital Adequacy 14
Catastrophe Exposure 14
Reinsurance 14
Cyber Underwriting Risk 15
Board and Governance Capability 15
Risk Management Capability 15
Shared Services 15
Reserve Estimates 16
Lloyd’s Overseas Offices 16
Appendix 1: Lloyd’s Returns and Continuous Monitoring 17
Market Oversight Plan 20193
Introduction
The overall purpose of the Corporation of Lloyd’s is to create and maintain a
competitive and secure market place where insurance and reinsurance
business can be transacted. The Lloyd’s Market Oversight Plan is a key
component to achieving just that, and enables us to share our priorities for
the coming year with the Lloyd’s market.
Market oversight remains a strategic priority for the Corporation, and for
2019 our significant areas of focus are; sustainable performance of the
market, including consideration of Lloyd's’ solvency; operational risk; brand
and reputation. In addition to supervisory activities, which aim to ensure that
oversight is appropriately balanced and is proportionate to the risks faced, it
is important that Lloyd's market oversight is supportive of sustainable,
profitable business and is valued by all stakeholders.
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 itself. Our activity in 2019 will also consider managing agents’ own group
oversight activities in more detail, with a view to ensuring the right risks are receiving the right attention from the right
people.
Strong oversight is about establishing a framework that enhances the ability of companies to do business, while
protecting customers. We continue to evolve our risk-based approach to market oversight, focusing our efforts on the
things we are really worried about and where our intervention can really make a difference. By adopting this approach,
we recognise the diversity and complexity of the many different practitioners in the Lloyd’s market and that not all risks
presented are the same. We will be piloting our ‘light touch oversight’ with a small number of managing agents and will
develop a framework to roll out as part of risk-based approach.
My role is to ensure the framework is fit for purpose, and to provide assurance that everyone is operating to the high
standards that Lloyd’s sets and requires. Our approach is principles-based which from the top-down identifies, mitigates
and manages those risks which are most material to 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, challenge and approval.
For 2019 there are a number of thematic reviews listed in the Market Oversight Plan, the purpose of which is to establish
the extent of a given risk across the wider Lloyd’s market, to identify and address shortcomings and to share best
practice.
Lloyd’s oversight is dynamic and will continue to adapt to the changing environment and the market conditions in which
everyone operates. Our oversight will continue to focus on the sustainable, profitable performance required through the
operational and financial delivery of the 2019 plans. Next year, we will also have a heightened focus on expense
management in the market, with thematic reviews planned for Administration and Acquisition costs, and with Brexit likely
upon us, we will be reviewing operational readiness and effectiveness across the market.
We hope that you find this document helpful in sharing the key risks the Corporation sees for 2019, and the oversight
activity we plan to manage those risks effectively.
Jon Hancock
Performance Management Director
Please send any feedback or questions to oversight.framework@lloyds.com
The 2019 Market Oversight Plan is also available online at www.lloyds.com
Market Oversight Plan 20194
2019 Lloyd’s Market Oversight Key Risks
The Market Oversight Plan provides managing
agents with the Lloyd’s view of the high-level key Macro-
risks and issues facing the market, taking into Economic
Conditions
account the wider risks of macro-economic
conditions, insurance industry conditions, Lloyd’s
specific conditions and emerging risks, and gives Insurance
Industry
transparency over the Corporation’s planned Conditions
oversight activity to manage those risks. It includes
detail on -
Lloyd's
Specific
• Strategic priorities related to oversight Conditions
• Market conditions and related issues
• Annual Market Oversight objectives
• Planned Market Oversight activities
Emerging
Lloyd's provides efficient and effective oversight of Risks
the market through a risk-based approach that is
proportionate as well as transparent to all
stakeholders.
2019 Market Oversight Framework
The Account Management structure ensures that engagement between managing agents and the Corporation is
structured, cohesive and commercially effective. This is 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 specific oversight plans that will be undertaken by
Lloyd’s during 2019, to allow Lloyd’s to have greater oversight of syndicate specific issues and key risks are
appropriately monitored.
Oversight Managers are responsible for overseeing the implementation of the 2019 Market Oversight Plan at individual
managing agency level.
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 20195
Definitions
Continuous monitoring of the Lloyd’s Returns submitted by the managing agent, as
Lloyd’s Returns per the Business Timetable. This monitoring may trigger any of the below.
Oversight of the market regarding a particular topic or risk, with a sample of managing
Thematic Oversight agents. The work will result in market wide feedback.
Minimum Standards A Minimum Standards review, which will include a scope, fieldwork and report.
Review
Oversight triggered by a particular Minimum Standard concern, Lloyd’s return, or
Additional Oversight unexpected market event. The work is focused and risk-based and could, but does
not have to, include fieldwork.
Emerging Risks
Key risks are critical to the long-term viability of Lloyd’s. There are also emerging risks, some of which the Corporation
continues to monitor, and others are areas that may drive substantial changes in the risk profile in the long term and
directly impact future market oversight activity though they do not impact it currently.
Lloyd’s regularly issues research papers on emerging risks and more can be found on Emerging Risks Library
Lloyd’s Returns
The Lloyd’s Market Data Collections (MDC) programme is a strategic initiative closely aligned to the London Market
Target Operating Model (TOM) that has been created to improve the ways in which Lloyd’s collects, validates, stores,
reports, governs and distributes data. This platform will make it easier for the market to provide information to Lloyd’s.
The MDC platform was launched to the market in December 2018. As part of the release, all Syndicates’ 2019
Syndicate Business Forecast (SBF) and Lloyd’s Capital Returns (LCR) that were submitted through CMR will be
migrated to the new platform. Training for market users has been scheduled and will be running through to the end of
January.
A summary of the continuous monitoring across the Lloyd’s risk areas can be found at Appendix 1. These Market
Returns are detailed in the Core Market Returns (along with the Non-Core Market Returns Guidebook) and are
scheduled within the Lloyd's Business Timetable
Market Oversight Plan 20196
Lloyd’s 2019 Key Risks, Impact and Oversight
Risk Area Impact on Lloyd’s 2019 Oversight
Lloyd’s Brussels / Lloyd’s businesses suffer due to issues of uncertainty with the UK Lloyd’s will continually monitor the situation as it unfolds, supporting the market
Brexit relationship with the European Union, which will impact the risk wherever possible, completing the Part VII, already agreeing to pay out claims
Macro-Economic
landscape whatever happens throughout the year with regard to Brexit.
Conditions
Interest Rate and Lloyd’s businesses suffer losses or erode their capital base due to The type of investment strategy adopted by each managing agent will be a key
Investment assets that pose additional risk to the Central Fund. factor in determining the level of oversight Lloyd’s undertakes. Managing agents
Environment whose strategies are vulnerable to periods of heightened market volatility will be
under increased scrutiny to ensure that the risks are well managed, understood
and monitored.
Market Conditions Lloyd’s businesses suffer due to failure to respond to changing Lloyd’s will focus on active portfolio management with closer oversight of syndicate
market conditions. remediation activities and detailed performance KPIs. This will encompass
Insurance Industry Conditions
syndicates’ progress with their Portfolio Review and Decile 10 performance
improvement plans. Lloyd’s will also be following up on market level
recommendations arising from the 2018 thematic reviews. Development in
underwriting and exposure management controls relating to Cyber in Energy and
Property (D&F and Treaty) classes will also be examined. Other focus areas will
be to develop and embed Lloyd’s capabilities regarding: (1) Pricing and rate
monitoring standards with a focus on Marine, International Casualty and Property
Treaty classes and (2) Portfolio management.
Cyber Resilience and Lloyd’s businesses suffer a systemic loss as a result of a malicious Lloyds will submit a request for information that will enable Lloyd's to develop a
Security electronic attack more granular understanding of the cyber risk profile of the market. The results will
enable Lloyd’s to develop a better understanding of the cyber risk profile of the
market, develop a market wide benchmark and apply a risk-based oversight
approach to work with managing agents that fall below this threshold.
Market Oversight Plan 20197
Regulatory Lloyd’s businesses suffer due to failure to respond to and comply Lloyd’s will focus on financial crime with a comprehensive risk assessment being
Environment with relevant laws and regulations. Specific attention to Financial conducted to understand the risk profile of the market, with a deep dive of a sample
crime and IDD requirements of managing agents. IDD Requirements Implementation focus initially with five
agents with the highest volumes of eligible business; using this analysis to
establish how agents have embedded the requirements and adjusted their
oversight, both internally and with coverholders.
Market Expenses Lloyd’s businesses fail to close the performance gap as a result of Lloyd's will conduct an analysis of expenses using existing data and will also
continued high expense ratio. conduct a thematic review to understand managing agents’ approaches to
managing expenses providing feedback to the market.
Capital Adequacy Lloyd’s is unable to pay valid claims due to the inaccessibility of Lloyd’s will work with the market to agree a consistent approach to help managing
assets agents to address the gap between the planned loss ratios and actual loss ratios
achieved. To agree a consistent approach so there is transparency and help address
this concern in their own internal models prior to submission of capital returns.
Lloyd’s Specific Conditions
Catastrophe Lloyd’s businesses suffer losses or erode their capital base For 2019, oversight will focus on a thematic review of Model Completeness; this
Exposure through material aggregations of risks or insufficient monitoring includes lessons learned from recent hurricane seasons, methodologies used for
processes. assessing non-core/non-LCM5 natural perils. Lloyd’s will additionally concentrate
on the application of Exposure Management Minimum Standards to long-tail
classes of business, and will also continue thematic work on developing and
implementing a Catastrophe Risk Operational Framework, which will assist in
ensuring syndicates’ Exposure Management capabilities are commensurate with
their materiality to Lloyd’s catastrophe risk
Reinsurance Lloyd’s businesses suffer losses or erode their capital base as a Lloyd’s will focus on reinsurance counterparty management; reinsurance contract
result of an inability to recover from their reinsurance contracts in term effectiveness and reinsurance protection design and optimisation; in particular
part or in full. economic and capital benefit objectives and reinsurance credit control and bad
debt procedures.
Cyber Underwriting Lloyd’s businesses suffer losses through exposure to both known Lloyd’s will focus on the underwriting of cyber exposures, evaluating how managing
and non-affirmative aggregations of risk via the policies written by agents demonstrate they are identifying, quantifying and evaluating/pricing cyber
its businesses. exposures within all lines of business. Assessment of this will be undertaken within
each line of business and will be ongoing throughout the year
Market Oversight Plan 20198
Board Governance Lloyd’s businesses suffer losses due to gaps or weaknesses in Lloyd's will undertake a thematic review of the governance, key planning and
and Risk governance and risk management structures and performance. strategic decisions including the performance of the Board to determine common
Management Specific attention to key planning and strategic decisions, risk areas which require improvement across the market or best practices. Additionally,
management frameworks and also shared services models. Lloyd’s will conduct a qualitative thematic review of the various elements of risk
management frameworks of differing maturity levels and approaches and to identify
areas of best practice, Lloyd’s will also conduct a thematic review looking at some of
the shared services models in use across the market to identify best practice or any
areas of concern.
Reserve Estimates Lloyd’s businesses suffer losses or erode their capital base due to Casualty classes have been a key focus of reserve oversight and syndicates can
significant inherent risk in reserve estimates and potential lack of expect continued direct, targeted discussion from Lloyd’s in this area requiring
Lloyd’s Specific Conditions
reserve adequacy if the market is not appropriately managed. detailed explanation or resulting in changes to reserves or capital. 2019 is
expected to see reserves established for catastrophe events in 2018. Lloyd’s will
monitor the development of these in detail across the market.
Overseas Offices Lloyd’s businesses suffer due to failure to respond to and comply Lloyd’s will look to ensure that controls and oversight activity for overseas offices
with relevant international laws and regulations. are consistent with requirements and activity in London offices.
Risk Area Impact on Lloyd’s Policyholders 2019 Oversight
Value to Customer A failure by managing agents to properly evaluate and ensure that Lloyd’s will explore this subject through research and collaboration with managing
there is fair value in the consumer products they provide and agents and coverholders. Insights will be gathered from all relevant available MI
through the distribution of these, will result in policyholders paying and through interactions with the market. The aim is to establish Lloyd’s strategy
inflated premiums for the cover they purchase. and approach towards ensuring there is fair value in consumer products.
Additionally, Remuneration Strategy development to enable the market to drive
more informed decisions and governance over broker and third party
remuneration.
Claims Experience A failure by managing agents to ensure that claims are efficiently Lloyd’s will engage with managing agents to promote pro-active claims
and transparently progressed can impact on Lloyd’s brand and management. This will focus on improving the claims lifecycle (from first
business retention. notification to final payment) and will also look at cost management and efficiencies
especially in terms of non-complex and delegated claims.
Market Oversight Plan 20199
Macro-Economic Conditions
Lloyd’s Brussels Subsidiary / Brexit
2019 is a key year when the UK will begin a transition to the new relationship with the European Union, and there is
therefore heightened risk because of uncertainty which will impact the risk landscape.
In November 2018, Lloyd’s Insurance Company SA (Lloyd’s Brussels) a Lloyd’s subsidiary, was officially opened and
began processing EEA (European Economic Area) business and is now fully operational.
The Corporation will support Lloyd’s Brussels in respect of its oversight over regulatory compliance, underwriting,
delegated authorities, claims, conduct and complaints.
For 2019, the Corporation will continually monitor the situation as it unfolds, supporting the market wherever possible,
completing the Part VII, already agreeing to pay out claims whatever happens throughout the year with regard to Brexit.
Interest Rates and Investment Environment
The investment environment for 2018 has been challenging for fixed income as major central banks continue to shift
towards decreased accommodation. If the pattern of rising interest rates continues this will result in initial losses but
generate higher expected returns over the longer term. Managing agents who employ asset-liability matching will retain
their solvency strength regardless of interest rate movements.
Risk assets have experienced volatility which is unsurprising given the geopolitical landscape and the consensus that we
are in the late stages of the economic cycle. This increases the importance of having a resilient portfolio and robust risk
management processes. As such Lloyd’s continues to expect agents to adhere to the prudent person principle when
considering their investment governance and strategy.
For 2019, the type of investment strategy adopted by each managing agent will be a key factor in determining the level of
oversight Lloyd’s undertakes. Using a risk-based approach, managing agents whose strategies are vulnerable to periods
of heightened market volatility will come under increased scrutiny to ensure that the risks are well managed, understood
and monitored.
Market Oversight Plan 201910
Insurance Industry Conditions
Market Conditions Continue To Be Challenging
Pricing in 2018 has generally stabilised with some limited increases evident in the 2017 hurricane-impacted lines. Major
loss activity to date this year continues to conform to longer term norms with little sign yet of a reduction in the high levels
of attrition. Market conditions next year are likely to remain challenging but stable across the major lines, with softening
anticipated in some areas. While further market hardening is expected in some of the classes with performance
challenges, without continued adherence to a strict regime of remediation and curtailment of risk appetite, the
sustainability of Lloyd’s overall profitability will remain questionable.
Effective portfolio management is the key to mitigating the impact of volatile market conditions. Lloyd’s Performance
Management team continues to work with the market to ensure that it focuses on having 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, still gravitating to the (re)insurance industry. Mergers, acquisitions and broker initiatives
have picked up pace late in 2018 and are expected to remain features of the industry as participants pursue scale and
relevance as well as looking to reduce costs.
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.
The PRA wrote to the specialist insurance market in May and November 2018 warning of the risks that the current
market conditions bring to firms, and they remain concerned about the extent to which firms are recognising and acting
on these risks warning that “it is possible that some firms are taking false comfort about the extent to which the risks
raised apply to their own business models.”
Lloyd’s oversight activities during 2019 will address our and the PRA’s concerns through a strong focus on active
portfolio management with closer oversight of syndicate remediation activities and detailed performance KPIs. This will
encompass syndicates progress with their Portfolio Review and Decile 10 performance improvement plans. Lloyd’s will
also be following up on market level recommendations arising from the 2018 thematic reviews. Development in
underwriting and exposure management controls relating to Cyber in Energy and Property (D&F and Treaty) classes will
also be examined. Other focus areas will be to develop and embed Lloyd’s capabilities regarding: (1) Pricing and rate
monitoring standards with a focus on Marine, International Casualty and Property Treaty classes and (2) Portfolio
management.
In addition to the focus on the poorly performing parts of the business, in 2019 Lloyd’s would also like to have a better
understanding of what is performing well and why by looking at syndicate top Decile 1 and 2 classes. This will help the
Corporation to support growth in the planning process. Lloyd’s will do this through detailed conversations rather than
requesting specific returns.
Cyber Resilience and Security
As cyber criminals have become more sophisticated and the cyber risk landscape continues to evolve, operational cyber
risk has presented an ever-growing challenge for the insurance sector. This, along with the increasing frequency and
severity of cyber-attacks means that operational cyber resilience and security has remained high on the agenda for the
regulators and therefore it is crucial organisations do more to better protect themselves. The PRA, FCA and the Bank of
England have set out expectations for firms to increase the effectiveness of managing operational resilience (including
cyber) through enhanced resources, capabilities and testing during 2018 and Lloyd’s are expecting the regulators to
continue to focus on this area in 2019.
Lloyd’s carried out a thematic review of cyber security during 2018 to assess the level of managing agent understanding
and protection against cyber security risk, with this undertaken across a representative sample of 9 Lloyd’s managing
agents. It was clear that those managing agents who participated in this review have gone beyond Cyber Essentials
Market Oversight Plan 201911
accreditation by taking steps to increase awareness of cyber risks amongst staff, as well as putting in place policies,
procedures and controls.
It is clear however, that further work is needed to strengthen the controls and enhance the general procedures around
governance and oversight. A copy of the report and a presentation highlighting areas for improvement as well as
examples of good practice in managing cyber security risk, were provided to the market in October 2018.
For 2019, Lloyds will submit a request for information that will enable Lloyd's to develop a more granular understanding
of the cyber risk profile of the market. The results will enable Lloyd’s to develop a better understanding of the cyber risk
profile of the market, develop a market wide benchmark for cyber resilience and security and apply a risk-based
oversight approach to work with managing agents that fall below this threshold. Lloyd’s will also compile more detailed
guidance around cyber resilience and security through the Lloyd’s minimum standards annual update, in collaboration
with the LMA during 2019.
Regulatory Environment
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. 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 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, Lloyd’s seeks to provide international regulators with confidence in our security, compliance
culture and standards
Lloyd’s market oversight activities in respect of the regulatory environment are detailed under each sub-heading.
Financial Crime
The financial crime landscape continues to evolve and in particular, the application of international sanctions
remains complex as evidenced by the US’ withdrawal from the nuclear agreement with Iran (with the resultant EU
Blocking Regulation) and increasing expectations from regulators on the insurance sector to do more to prevent
the illicit trade with North Korea.
The threat of enforcement by international regulators against financial institutions for wrongdoing and inadequate
systems and controls remains significant. Compliance challenges continue into 2019:
• The US’ withdrawal from the nuclear agreement with Iran in May 2018 has caused a divergence in
foreign policy in relation to Iran, between the EU and the US. Insurers are now caught between directly
conflicting regulations and lawful business from the EU will now be potentially exposed to US-
Secondary sanctions. The diversity of the market participants – US and non-US owned – presents
claims processing challenges.
• The UN and regulators increasingly expect marine (re)insurers to prevent the illicit trade with North
Korea with higher compliance requirements.
• In May 2018 the new UK Sanctions and Anti-Money Laundering Act 2018 became law and managing
agents must ensure that their systems and controls reflect the requirements of the new legislation. The
Act makes provisions enabling sanctions to be imposed where appropriate for the purposes of
compliance with UN obligations or other international obligations or for the purposes of furthering the
prevention of terrorism or for the purposes of national security or international peace and security or for
the purposes of furthering foreign policy objectives; to make provision for the purposes of the detection,
investigation and prevention of money laundering and terrorist financing and for the purposes of
implementing Standards published by the Financial Action Task Force relating to combating threats to
the integrity of the international financial system; and for connected purposes.
Market Oversight Plan 201912
• Continued enforcement cases against financial institutions for failings in controls and screening
weaknesses puts the spotlight on the insurance sector on how cover is provided and to whom.
• The risk of UK financial services institutions being used to further financial crime and launder money is
high, and has been a consistent priority for the FCA, which has a continuous programme of work in
place to ensure firms have appropriate controls in place to minimise this risk.
As the above environment is fluid, the market will need to remain vigilant and focussed on responding to the
evolving risk management and compliance challenges.
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. A
comprehensive risk assessment will be conducted to understand the financial crime risk profile of the market to
enable a more focused oversight of high risk areas. The risk assessment with involve profiling the market
(questionnaire) in order to understand the key financial crime risks exposure posed by the market participants’
relationship activities and processes taking into account its customer base, products, delivery and distribution
channels, jurisdiction and other relevant considerations and to document these. The profiling of the market will
also involve a deep dive with a sample of managing agents.
IDD Requirements Implementation
Lloyd’s will assess the impact of the implementation of the requirements associated with the Insurance
Distribution Directive ‘IDD’, identify best practice to help managing agents deliver against the spirit of the directive
as well as its regulatory requirements. The IDD became mandatory on 1 October 2018, this review will examine
whether managing agents and coverholders have adequately revised and implemented their frameworks to meet
the new rules. The review will be conducted in two stages, initially Lloyd’s will engage with around five agents with
the highest volumes of eligible business; this early analysis will help establish how agents have embedded the
requirements and adjusted their oversight, both internally and with coverholders. Later in the year Lloyd’s will
return to this topic and explore the same areas with five more agents – having allowed sufficient time for
additional business to be underwritten and for any guidance and best practice to have been adopted.
Policyholder Protection
The Policyholder and Third Party Oversight team will continue its programme of establishing and fully embedding a risk-
based approach to oversight of Delegated Authorities, Conduct and Claims. The nature and frequency of Lloyd’s
oversight of managing agents will continue to be influenced by the regular assessment of inherent and adjustable risk
factors, and through biannual Customer Standards oversight meetings with managing agents. Lloyd’s will take a holistic
approach across the Customer Standards when undertaking any new thematic or agent specific oversight activity and
will work closely with the market to resolve all outstanding actions from previous thematic or agent specific effectiveness
reviews.
Fair Value in Consumer Products
Establishing Lloyd’s strategy and approach towards ensuring there is fair value in consumer products will be the
primary focus of Lloyd’s Policyholder Protection in 2019. Insights will be gained through research and analysis of
information from relevant data sources, through market engagement and collaborative forums. Lloyd’s will
explore the following work streams as part of the overall objective:
• Distribution chains – understanding the models and how these impact on the value proposition, from
traditional to technology enabled, simple through complex
• Non-standard consumer and add-on products - explore the proliferation and value of these products.
• Price comparison websites - research their use as a distribution tool and how Lloyd’s products are
presented
• Loyalty pricing – establish whether Lloyd’s policies are subject to introductory premium discounts or
additional premium uplifts for long standing policyholders
Market Oversight Plan 201913
Claims Experience
Building on the positive results of initiatives previously introduced; Lloyd’s will challenge managing agents to
identify and enact opportunities, on open market claims where they are in the lead position, to shorten the initial
investigative stages and accelerate the payment of valid claims. Successful outcomes will drive an overall
improvement in claims handling, impacting positively on the policyholder experience and through shortened
lifecycles reduce the cost of claims management.
Remuneration Strategy
Develop a Remuneration Strategy that helps enable the market to drive more informed decisions and governance
over broker and third party remuneration. In doing so Lloyd’s will seek to understand the remuneration spend in
the market through improved MI and engagement with the market / LMA. The appropriateness of existing Lloyd’s
guidance will be considered, best practice documented and to the extent possible – supporting MI will be shared
with the market where appropriate.
Third Party Oversight
Implement Lloyd’s risk-based approach to third party oversight through triaged approval of coverholders and
TPAs based on the risk profile of the third party, the product and the lead managing agent capabilities. This
programme will include:
• Introduction of a consistent approach to third party registration and oversight meaning that other key
third parties such as TPAs are subject to centralised oversight
• Revision to Lloyd’s Byelaws to reflect modern distribution processes
• Replacement of ATLAS/BAR to ensure that the market has a technology solution that supports the new
risk-based approach
Other specific activities that Lloyd’s will engage in over the coming year include:
• Ensuring managing agents meet their own obligations in terms of overseeing their third parties
• Fully embedding the revisions to Lloyd’s Complaints handling mandate and compliance charges for
failing to meet complaints metrics
• Leveraging the AiMS system to continue to enhance the third party audit experience and explore with
relevant stakeholders the feasibility of introducing Audit Accreditation to drive up audit standards
Market Oversight Plan 201914
Lloyd’s Specific Conditions and Risks
Market Expenses
Whilst Lloyd's will continue to focus on strong portfolio management in 2019, we will also turn our focus to managing
expenses in the market, which is also a key aspect of closing the performance gap. We will conduct an analysis of
expenses using existing data and will also conduct a thematic review to understand managing agents’ approaches to
managing expenses providing feedback to the market highlighting good practice or any areas of concern.
Capital Adequacy
Lloyd’s are considering how better to manage the timetable in respect of capital model approval and capital setting and
the annual business planning process. We will work with the market in Q1 2019 to implement a sustainable capital
timetable
Lloyd’s shared data with the market in May 2018 showing that there is a gap historically between the planned loss ratios
and actual loss ratios achieved. This trend has been deteriorating and continued in 2017, even excluding natural
catastrophe activity. The 2018 results will be monitored and measured with all agents in 2019. We will work with the
market to agree a consistent approach so there is transparency and help managing agents to address this concern in
their own internal models prior to submission of capital returns.
Lloyd’s will share outcomes of the recent capital setting exercise with the market early in 2019. This will include
information regarding assumptions used in Lloyd’s central Internal Model to enable agents to understand, monitor and
address (where appropriate) different approaches to tail dependency, data outliers and consider benchmarking of key
risks.
Catastrophe Exposure
Lloyd's will continue to maintain tight understanding and control of catastrophe risk throughout 2019. Managing agents
should 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), and Lloyd’s will continue to monitor in-force and planned levels of
catastrophe-exposed business in order to ensure that syndicates remain within their agreed forecasts.
For 2019, oversight will focus on a thematic review of Model Completeness; this includes lessons learned from recent
hurricane seasons, methodologies used for assessing non-core/non-LCM5 natural perils. Lloyd’s will additionally
concentrate on the application of Exposure Management Minimum Standards to long-tail classes of business and will
also continue thematic work on developing and implementing a Catastrophe Risk Operational Framework, which will
assist in ensuring syndicates’ Exposure Management capabilities are commensurate with their materiality to Lloyd’s
catastrophe risk.
Reinsurance
The scale of reinsurance recoveries on the Lloyd’s aggregate balance sheet remains high. This is partly due to a general
increase in the reliance on reinsurance in recent years (both retrospective and prospective protections) but also because
large portions of the estimated reinsurance recoveries from the 2017 natural catastrophe losses are yet to be due for
payment by reinsurers.
Market conditions have not changed materially during 2018 which means that, whilst the risk of systemic significant
reinsurance cost increases is not expected, the financial strength of some reinsurance counterparties may be put under
strain. In addition, the business and economic relationships between individual syndicates and some of their reinsurance
counterparties may be put under strain due to the loss performance of some classes of business, and any decisions to
scale back or exit from these classes. These features could lead to delays or non-payment of reinsurance recoveries
driven directly by financial or cash flow limitations, strategic differences and/or contractual disagreements or disputes.
Market Oversight Plan 201915
The 2019 outlook for reinsurance risk is therefore currently uncertain. In response Lloyd’s oversight activities during
2019 will focus on reinsurance counterparty management; reinsurance contract effectiveness and reinsurance protection
design and optimisation; in particular economic and capital benefit objectives and reinsurance credit control and bad debt
procedures.
Cyber Underwriting Risk
Responding to an ongoing increase in demand for cyber risk transfer solutions, Lloyd’s continues to grow its stand-alone
affirmative cyber product offerings for this dynamic line of business and additionally address coverage for cyber caused
losses within traditional product lines, whether written on an affirmative or non-affirmative basis. The focus of Lloyd’s
cyber risk oversight remains aligned with the PRA stance of making sure that syndicates can identify, quantify, evaluate
and price cyber exposures, regardless of what product line they exist within. Consequently, managing agents will
continue to be measured against compliance with the PRA Supervisory Statement SS4/17 and will be required to
demonstrate that they are meeting these and Lloyd’s expectations for the underwriting of cyber risks during 2019 and
beyond.
For 2019, oversight will focus on the Underwriting of cyber exposures, and evaluating how managing agents
demonstrate they are satisfactorily identifying, quantifying and evaluating/pricing cyber exposures. Assessment of this
will be undertaken within the Energy, Property and Property Treaty lines of business in conjunction with the monitoring of
the aggregation of cyber exposures through the Risk Aggregation returns. Our oversight will also follow up the responses
to the 2018 attestation of compliance with the supervisory statement.
Board and Governance Capability
Effective Board governance is a key element of syndicate oversight, ensuring sound business planning and providing
robust challenge to business plans and portfolio management. With the major focus during 2018 on closing the
performance gap expected to continue into 2019, one of the areas that Lloyd's will be reviewing in 2019 is the strength
and adequacy of Board oversight in the market.
Lloyd's will undertake a thematic review of the governance surrounding key planning and strategic decisions and the
performance of the Board in these situations in order to determine if there are any common areas which require
improvement across the market or best practices. The review will incorporate Senior Managers Regime (SMR) regulatory
requirements, Board and committee structures and operations, and culture and values as to how the Board articulates
and maintains a culture of risk awareness and ethical behaviour in pursuit of business and strategic goals.
Risk Management Capability
Whilst managing agents were preparing for Solvency II compliance, a great deal of work was carried out across the
industry to implement risk management frameworks. Since then the frameworks have developed in different ways and at
different rates across the Lloyd’s market, and at times we have seen evidence that they are not meeting Minimum
Standards, leading to the risk that there is insufficient focus on risk management in the market.
Lloyd’s will conduct a thematic review of risk management frameworks in a variety of managing agents to understand the
differing maturity levels and approaches and to identify areas of best practice. This review will aim to cover at a high
level the management of risk without getting into detailed analysis of individual risks or controls with any given
framework. Whilst this review will take into account the Minimum Standards, this is not a review of adherence to
Minimum Standards, rather a qualitative review of the various elements of the risk management frameworks.
Shared Services
Shared services is the provision of a service by a central function of an organisation or group, where that service had
previously been provided ‘locally’ in multiple parts of the organisation or group. Thus the funding and resourcing of the
service is shared and the providing department effectively becomes an internal service provider. This sharing needs to
Market Oversight Plan 201916
fundamentally include shared accountability for results with the receiver and the provider of the service. The provider
must ensure that the agreed results are delivered based on defined measures.
Over the past 12 to 18 months there has been an increase in the number of managing agents adopting a shared services
model. This has implications for the provision of adequate resources across all group companies and there is a danger
that if this is not properly managed, key functions could become under-resourced. We will conduct a thematic review
looking at some of the shared services models in use across the market to identify best practice or any areas of concern.
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 and Capital (MRC) have taken the opportunity to continue to redefine
Lloyd’s reserve monitoring procedure to improve insight into reserve setting compared to syndicate history and peers.
Last year we introduced visits with each managing agent at least once every twelve months. 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.
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.
Lloyd’s expects that the shorter tailed classes should not compensate for deficiency in the longer tailed classes. Given
the different assumptions applied in the capital model, the reserve levels must be included within the correct classes of
business,
Building on from 2018, syndicates can continue to expect more direct, targeted discussion from Lloyd’s in this area
requiring detailed explanation or resulting in changes to reserves and / or capital.
2019 is expected to see reserves established for catastrophe events in 2018. Lloyd’s will monitor the development of
these in detail across the market.
Lloyd’s Overseas Offices
Lloyd's will continue to oversee the performance of business written on the global platforms through the existing business
as usual processes of syndicate business monitoring and reporting. However, in 2019 we will focus on ensuring that any
additional oversight that we conduct of business written in the overseas offices is carried out in a risk-based way, to align
our approach with the way we conduct our oversight in London. Individual managing agent oversight plans will set out
what oversight can be expected for those syndicates operating on the various global platforms.
Lloyd’s will look to ensure that controls and oversight activity for overseas offices are consistent with requirements and
activity in London offices.
Market Oversight Plan 201917
Appendix 1: Lloyd’s Returns and Continuous Monitoring
The result of these activities may trigger any market oversight work as defined on page 5 for any 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
Underwriting • MS1 - Underwriting Strategy • Syndicate Business Plan (SBP) evaluation as • Syndicate Business Plan (SBP)
and Planning input to the Capital and Planning Group (CPG)
To ensure that managing agents’ • Quarterly Monitoring Return B (QMB)
process
underwriting strategy, planning and • MS2 - Underwriting and
• Monthly Performance Management Data
controls are appropriate and adequate Controls • Quarterly Monitoring Return B (QMB) analysis
Return (PMDr)
• MS3 - Pricing and Rate • Performance Information packs
Monitoring
• Monthly Performance Management Data Return
• MS11 - Cyber Security and (PMDr) analysis
Data Management
• Broker Remuneration analysis
Governance, Risk and Operations • MS4 - Governance • Board appointments and departures - may • Notification of Appointments/Departures
result in exit interviews, or appointment
To ensure that effective operational • MS5 - Risk Management • Notification of Change of Control
interviews
and governance processes exist
• MS11 – Cyber Security and • ORSA submission
across the market • Change of control
Data Management
• Annual Board Minimum Standards
• ORSA Report and Board management
Attestation
information evaluation
• Annual Board Minimum Standards Attestation
analysis
Catastrophe Exposure • MS6 - Exposure Management • Syndicate Business Plan (SBP) and Lloyd's • Syndicate Business Plan (SBP)
Capital Return (LCR) analysis
To understand and manage Lloyd's • MS11 - Cyber Security and • Lloyd's Catastrophe Model (LCM)
catastrophe risk, at the level of Data Management • Lloyd's Catastrophe Model (LCM) process
Market Oversight Plan 201918
Oversight Objective Minimum Standard Continuous Monitoring Reporting from Market
individual syndicates and Lloyd's as a • Realistic Disaster Scenarios framework and • Realistic Disaster Scenarios (RDS)
whole reporting
• Realistic Disaster “Light” (RDL)
• Cyber aggregation evaluation
• Ad hoc Major /Rapid Claims Return
• Validation of catastrophe-risk, including external
• Cyber Risk Reporting
cat models
• Lloyd’s Capital Return (LCR)
• Emerging Risks monitoring
Reinsurance • MS7 - Reinsurance • Syndicate Business Plan (SBP) evaluation • Syndicate Business Plan (SBP)
To ensure an appropriate degree and • MS11 - Cyber Security and • Lloyd’s Capital Return (LCR) evaluation • Lloyd’s Capital Return (LCR)
quality of diversification in reinsurance Data Management • Lloyd's Catastrophe Model (LCM) analysis • Lloyd's Catastrophe Model (LCM)
coverage • Syndicate Reinsurance Structure (SRS) • Syndicate Reinsurance Structure (SRS)
To avoid excessive use of reinsurance analysis • Quarterly Monitoring Return A (QMA)
to limit exposure to reinsurance • Quarterly Monitoring Returns analysis • Quarterly Monitoring Return B (QMB)
counterparties and encourage
• Reinsurance Recoverables Playback Pack • ORSA submission
underwriting performance discipline
analysis • Realistic Disaster Scenario (RDS)
• ORSA evaluation • Realistic Disaster Scenario “Light” (RDL)
• Realistic Disaster Scenario (RDS) analysis • Related Party Declaration and Disclosure
• Realistic Disaster Scenario “Light” (RDL) Return
analysis • Ad hoc Major/Rapid Claims Return
• Related Party Declaration and Disclosure
Return evaluation
Reserve Adequacy • MS8 - Reserving • Central Reserving Analysis and IBNR allocation • Quarterly Monitoring Return A (QMA)
to syndicate
To ensure adequate reserving • MS11 - Cyber Security and • Technical Provisions Data return analysis
processes and limit significant Data Management • Incurred But Not Reported (IBNR) Burn Analysis
• Gross Quarterly Data return analysis
reserving deficits
• Reserve Early Warning Exercise
Market Oversight Plan 201919
Oversight Objective Minimum Standard Continuous Monitoring Reporting from Market
• Statement of Actuarial Opinion (SAO) analysis – • Statement of Actuarial Opinion (SAO)
Valuation of Liabilities Rules
• Quarterly Monitoring Return analysis
• Actuarial Function Report monitoring
Policyholder Protection and Third • MS9 – Customer Minimum • Eligible Complainant volumes and analysis of • Eligible Complainant returns
Party Oversight Standards Complaints Handling Performance against
• Quarterly attestation for UK complaints
Complaint Performance Metrics
To ensure managing agents • MS11 - Cyber Security and
• Progress reports against core customer
maintain adequate governance Data Management • Claims Reporting Suite analysis
KPIs
frameworks, oversight and controls
• Coverholder and TPA approvals and ongoing
to support fair customer outcomes, • Major Claims Returns
compliance oversight
manage claims handling and
• Broker Remuneration Return
engage with and delegate only to • Investigating and determining subsequent
capable third parties activities involving issues with coverholders and • Pre-bind Consumer Product Questionnaires
other third parties (where required)
• Reacting to any alert of potential mis-selling or • Value assessment of acquisition costs on
failure to ensure good customer outcomes. consumer business where these exceed
50%
• Research into topical and thematic areas of
focus, leading to the issuance of best practice
and guidance
Regulation • MS10 - Regulatory • Issue resolution and post-event assurance • Annual Board Minimum Standards
Attestation
To ensure effective market wide • MS11 - Cyber Security and
systems or processes that enable the Data Management
transaction of business
To ensure managing agents comply
with relevant laws and regulations
Market Oversight Plan 201920
Oversight Objective Minimum Standard Continuous Monitoring Reporting from Market
Capital Adequacy/Internal Model • MS12 - Scope, Change and • Capital Approval • Validation Report
Approval Use
• Solvency II model sign off • Actuarial Function Report
To ensure Central Fund exposures are • MS13 - Modelling, Design
• ORSA evaluation • Model Change Report
managed within risk appetite and Implementation
• Use Test interviews • ORSA submission
• MS14 - Validation Standards
Investment • MS15 - Investment • Market Risk element of LCR • Quarterly Monitoring Return (QMR)
Management Standards
To ensure syndicates do not take • Quarterly investment risk monitoring • Investment Risk (Quarterly Asset Data -
excessive investment risk • MS11 - Cyber Security and QAD)
Data Management
To ensure members do not take • ORSA submission
excessive investment risk
• Annual Board Minimum Standards
Attestation on MS15
Market Oversight Plan 2019You can also read
