Lloyd’s restricts syndicate tail risk to limit central fund exposure

Lloyd’s of London has revised its guidelines on catastrophe exposure and line sizes in a bid to limit the tail risk that a syndicate can be exposed to and, in turn, protect the market’s central fund from disproportionate risk.

Under the new guidance, syndicates with an internal model that submit a  Lloyd's Capital Return (LCR) must ensure that the 99.8th percentile (1-in-500) of the insurance claims does not exceed 135 percent of the 99.5th percentile (1-in-200) of insurance claims.

For syndicates that do not have an internal model or submit an LCR, the 99.8th percentile of final net  Lloyd's Catastrophe Model  (LCM) world water assessment programme (WWAP) losses must not exceed 135 percent of the 99.5th percentile of final net LCM WWAP losses. And the 99.8th percentile of final net LCM WWAP claims shall not exceed the syndicate’s Economic Capital Assessment (ECA) plus profit.

The changes also include a new net line size requirement, which means the maximum a syndicate may have on an individual risk cannot exceed 30 percent of ECA plus profit.

The maximum gross line size that a syndicate may apply without requiring a dispensation has been increased to 25 percent of gross written premium. But  Lloyd's said this is subject to a maximum line size of £200 million.

As part of the guidance revisions,  Lloyd's has removed the limitation on a syndicate’s ‘aggregate exceedance probability (AEP) 1-in-30 whole world’ modelled loss. The market said that as  Lloyd's now monitors aggregate natural catastrophe risk using other tools, this restriction is no longer required.

Lloyd's commented: “We are satisfied that gross line sizes can be considered as part of the usual business plan agreement process, and the need for dispensations should only apply in the most material cases.

“The new guidelines for tail risk and net line size to Economic Capital Assessment (ECA) restriction are being introduced to ensure that syndicates do not expose the central fund to disproportionate risk in relation to individual syndicate losses. We have back-tested these guidelines using prior year data and, over the period tested, only a small number of syndicates would have exceeded the guidelines.

“We therefore do not anticipate that these guidelines will materially impact most syndicates in most years. We will be contacting syndicates that may be impacted to discuss with them how they will manage the tail risk and their net line sizes, to comply with the guidelines.”

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