Performance
Management Supplemental
Requirements& GuidanceJune 2024

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Contents
Introduction
Performance Management Requirements andGuidance
Franchise Guidelines
Overwriting
Rate Reductions
Outwards Reinsurance
Disclosure of Related Party and Other Transactions which
May Give Rise to a Conflict of Interest
Distribution Costs, Broker Remuneration and Additional
Charges“Grossing Up”/Net-Equivalent Clauses
Reinsurance to Close
Special Termination/Downgrade and Funding Clauses
General insurance Contracts Involving Risks Relating
to the Death of an IndividualMarket Reform Contracts/Contract Certainty
Inception Date Allocation
Classes Subject to Additional Oversight and/or Approval
War & NCBR Exposures
Financial Guarantee
Viatical & Life Settlements
Retrospective Reinsurance
US and Canadian Cannabis Risks

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Abbreviations
In this document, the following abbreviations have been used:
ECA:
GWP
PMDR:
RDS:
RITC:
SBF:
SCR:

Economic Capital Assessment
Gross Written Premium
Performance Monitoring Data Review
Realistic Disaster Scenario
Reinsurance to Close
Syndicate Business Forecast
Syndicate Capital Requirement

Other abbreviations are defined in the relevant section where they are used.

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Introduction
This document sets out supplemental requirements and guidance that relate
to performance management in the Lloyd’s market.

Background
Lloyd’s performance management framework provides that managing
agents may only underwrite on behalf of the members of a syndicate inaccordance with a business plan that has been agreed by Lloyd’s. Lloyd’s
also prescribes a number of Principles for Doing Business at Lloyd’s against
which the capabilities of managing agents are assessed.
In a number of areas, the Markets function has issued supplemental
requirements and guidance which relate to performance management
issues. In a number of cases these requirements have been concernedwith the underwriting of particular classes of business. In many instances,
Lloyd’s considers that compliance with these requirements is a matter ofprudential concern for the market.
Whereas, in the past, these requirements have been issued in the form ofMarket Bulletins or as emails, they are now consolidated in this document.
The intention of this document is to provide managing agents with a single
point of reference for Lloyd’s supplemental performance management
requirements and guidance. It supersedes and replaces the earlier Market
Bulletins or emails covering the same topics.

Scope of this document
While this document includes requirements and guidance that are relevant
to all parts of the Markets function, the topics covered are primarily
concerned with underwriting and business plan matters. This document
does not cover delegated authority requirements, which are addressed
separately.
This document also does not include requirements or guidance that are
specific to compliance with the Lloyd’s annual timetable. These matters willcontinue to be dealt with in Market Bulletins or emails to the market.
Where managing agents are in any doubt as to the application of therequirements or guidance set out in this document they should raise thematter with the relevant account manager.

Updates to this Document
This document updates and replaces the version of this document issued inJuly 2020.
It is intended that this document will be updated and supplemented fromtime to time, to reflect changes to Lloyd’s requirements.
A copy of this document can be downloaded fromwww.lloyds.com/supplementalrequirements.

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Performance Management Requirements
and GuidanceFranchise Guidelines
The guidelines set out below were developed by Lloyd’s to help managing
agents to optimise and, where necessary, improve the performance of their
syndicates. The guidelines (subject to being updated) derive from the
Chairman’s Strategy Group (CSG) consultation document and were arrived
at following extensive consultation with the market.
Each managing agent is expected, under normal circumstances, to operate
its business within the guidelines. If a managing agent wishes to operate
outside the guidelines in respect of a syndicate, it will need to discuss its
position and obtain a dispensation in advance from Lloyd’s.
It is not intended that the guidelines should be blindly applied to every
syndicate and on every line of business. Lloyd’s will consider requests fordispensations if a robust argument can be made to justify the dispensation.
Each Franchise Guideline is stated below. This is followed, where relevant,by guidance in respect of that guideline.
1 Profitability by product line

There should be a reasonable expectation of making a gross underwriting
profit on each line of business every year.
2 Catastrophe and tail risk exposure

a.
b.

c.

Catastrophe exposure should be analysed using tools or methods thatare approved by Lloyd’s.
A Syndicate’s projected and in-force loss estimates for Realistic
Disaster Scenarios, shall not exceed 80% of ECA plus Profit for Gross
Losses and 30% of ECA plus Profit for Final Net Losses.
The 99.8th percentile (1-in-500) of the insurance claims shall not
exceed 135% of the 99.5th percentile (1-in-200) of insurance claims.
Both measures refer to the total modelled insurance claims net ofreinsurance on an ultimate basis as reported to Lloyd’s in the LCR
submission (Form 311). For syndicates which do not have an internal
model and do not submit an LCR to Lloyd’s this does not apply.
Instead, the 99.8th percentile of Final Net LCM WWAP losses shall not
exceed 135% 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 ECA plus Profit. Final Net LCM WWAP metrics will becalculated by Lloyd’s based on syndicates’ latest approved LCM
Forecast submissions.

‘Profit’ for these purposes shall be defined as ‘Profit/Loss for the period’ on
an Ultimate basis in the approved Year of Account SBF (item 16 of SBF
Form 100s).

6- Guidance
In reviewing a syndicate’s management of gross and net catastrophe
exposures and tail risk, attention will be paid not only to overall syndicate
capital, but also to:• The level of expected underlying profitability in the line of business absent
major catastrophic events• The level of expected profitability in the other lines of business written by
the syndicate, and the degree of inherent volatility in those other lines• The quality, nature and effectiveness of the reinsurance protecting thegross exposures; in terms of the overall scale, types of productpurchased, the legal and structural strength of the contracts involved, thefinancial strength and concentration levels of the reinsurance
counterparties involved, and the quantity and quality of any supporting
collateral arrangements• The overall liquidity of the syndicate, and its ability to meet any expected
regulatory funding requirements• The assumptions used in modelling catastrophe exposures, and• The managing agent’s capability and competence
The purpose of this guideline is to ensure that the capital of any syndicate(and ultimately the Central Fund) should not be threatened to an
unreasonable or unexpected extent by catastrophe losses.
3 Gross and net line size

The maximum gross line that a syndicate should have on an individual risk
is 25% of GWP, subject to a maximum line size of £200m. The maximum
net line size that a syndicate should have on an individual risk cannot
exceed 30% of ECA plus profit, where profit is defined as per 2 above.
- Guidance
In reviewing a syndicate’s gross line sizes on individual risks for any class ofbusiness, attention will be paid not only to overall syndicate GWP, but alsoto:
• The GWP allocated by the syndicate to the line of business• The level of capital• The risk characteristics of the line of business, and the level of expected
profitability in that line
• The level of expected profitability in the other lines of business written by
the syndicate, and the degree of inherent volatility in those other lines• The quality, nature and effectiveness of the reinsurance protecting thegross line size (including the overall scale, types of product purchased,
the legal and structural strength of the contracts involved, the financial
strength and concentration levels of the reinsurance counterparties
involved, and the quantity and quality of any supporting collateralarrangements)• Line size utilisation, and• The managing agent’s capability and competence
When reviewing the net line size in relation to the level of capital, thefollowing aspects will be taken into account:• Line size utilisation and the number of risks exceeding the threshold

7• The risk of accumulation between individual risks• The maturity of the syndicate and future growth plans, and• The member structure of the syndicate.
The intent of the guidelines is that individual risks should not be allowed tothreaten the viability of the syndicate, putting members and the Central
Fund at risk.
For the sake of clarity it is emphasised that it is not the intention to apply
guideline percentages to the premium or ECA and profit allocated to theindividual line of business, but to the GWP or ECA and profit of the
syndicate as a whole.
4 Casualty Reserve Deterioration

A stress of a 45% increase in the net of reinsurance reserves for all casualty
classes of business should not exceed 100% of ECA for each syndicate.
- Guidance
Casualty classes of business are defined as the following three high levelclasses of business: Casualty FinPro, Casualty Other, Casualty Treaty. Risk
code mapping can be found on Lloyds.com.
Net of reinsurance reserves for this purpose shall be defined as follows:‘Total modelled insurance claims (including ALAE) for all underlying pureyears in aggregate net of reinsurance using the balance sheet date as perlatest submitted capital model. The basis should correspond to ‘Mean Net
Claims’ as per LCR form 510.
Syndicates which do not submit an LCR will not be required to run this test.
If a managing agent has identified that a syndicate may breach theguideline or if it wishes to obtain a dispensation, the managing agent will be
expected to address the following points:• The reasons for breach or the requirement for the dispensation, including
due to new transactions, risk mix changes or other factors leading to achange in reserve mix.
• The extent of the effect of the breach or dispensation on the syndicate's
capital requirements• Any other relevant Franchise Guideline dispensations• Whether the SCR needs to be resubmitted
Where a managing agent fails to notify that it may breach the guideline andsubsequently the LCR or other core market returns show that the syndicate
has breached the guideline, Lloyd’s will, in addition to the above
considerations, also wish to review the effectiveness of management
controls.
5 Multi-year policiesa.
b.

Non-cancellable policies covering a period of greater than 18 months
should be recorded as multi-year policies.
Multi-year policies should either have matching reinsurance cover or
be limited to the agreed maximum net exposure to the class ofbusiness as set out in the syndicate’s business plan.

8- Guidance
Account will be taken of the availability of reinsurance protection whichmatches the vertical limits to be written, the policy periods written, the terms
and conditions of the inwards policies, plus the adequacy of thereinstatement protection.
Managing agents (together with their auditors, where appropriate) areresponsible for deciding whether reallocation of premium is appropriate on
multi-year policies (ie contracts where the overall period of risk exceeds 18
months and the costs and/or benefits under the contract may affect morethan one year of account).
6 Overall market dominance by a managing agent

No managing agent should write more than 15% of the overall market grossnet premium without the prior agreement of Lloyd’s.

Overwriting
Overwriting is writing more GWP at a whole account level than has been
approved by Lloyd’s for the year of account in question as stated in themost recent SBF approval letter or where the GWP for a particular class ismaterially greater than that stated in the most recently approved SBF forthat particular class.
Overwriting, may also result in a syndicate exceeding its capacity.

The procedure for obtaining Lloyd's agreement to
overwrite
If a syndicate wishes to overwrite, its managing agent must obtain priorapproval from Syndicate Performance who, in conjunction with the
managing agent, will determine if a revised SBF and SCR needs to besubmitted.
Note:• Managing agents should contact their Syndicate Performance Manager ifthey require clarification as to whether a particular variance of GWP for aclass of business would be considered ‘material’. The key considerations
will include the size of increase and the impact on capital requirements
resulting from a change in the composition of the whole account portfolio.
• The Syndicate Performance team use the Quarterly Monitoring Return(QMB) and the PMDR Return to assess the expected premium volume forthe year. The Syndicate Performance team takes into account fluctuations
in exchange rates when monitoring premium volume. This ensures that
Lloyd’s is comparing the plan and PMDR on as consistent a basis as
possible.
• The requirement to inform the Syndicate Performance team of overwriting
is derived from the Underwriting Byelaw, which requires that managing
agents should write in accordance with a syndicate’s approved businessplan and provides that managing agents should notify Lloyd’s where they
deviate from the plan (paragraphs 25 and 26). There is also a separate
requirement on managing agents under the Underwriting Byelaw to take9reasonable steps to ensure that they do not write in excess of the
syndicate’s capacity (as calculated based on Gross Net Premium)(paragraph 37). Writing in excess of the syndicate’s approved GWP or
exceeding its capacity may therefore be a breach of Lloyd’s byelaws.

The implications of overwriting
If a syndicate has identified that it may overwrite or if it wishes to obtain
Lloyd's agreement to overwrite, the Syndicate Performance team will wish to
discuss the following points:• The reasons for overwriting – ie due to new business, better rates, failureof controls etc• The effect of overwriting on the syndicate's capital requirements• If applicable, any franchise guideline dispensations• The procedure taken for notifying the syndicate's capital providers andwhether their approval has been obtained• Whether the SBF and SCR need to be resubmitted• The profitability of any additional premium and the impact on class andsyndicate performance
Where a syndicate fails to notify the Syndicate Performance team that it
may overwrite and subsequently the QMB, PMDR or other core market
returns show that the syndicate has actually overwritten, the Syndicate
Performance team will, in addition to the above considerations, also wish toreview the effectiveness of management controls. The risk of premium
volumes exceeding plan will be taken into account when agreeing bothbusiness plans and SCRs.

Writing in excess of the syndicate’s capacity
As noted, it is a byelaw requirement for managing agents to take reasonable
steps to ensure that they do not write in excess of the syndicate’s capacity.
Where a syndicate is seeking permission to overwrite it will also need toconsider if the overwriting will result in the syndicate exceeding its capacity(calculated on a Gross Net Premium basis). Where a syndicate is whollyaligned or has a small number of members and where all those members
give express agreement, it is permissible for a syndicate to increase its
capacity (referred to as pre-empting) mid-year as part of obtaining
agreement to amend its plan to accommodate any proposed overwriting.
Any increase in capacity should be recorded in the revised SBF.
For non-aligned syndicates with larger memberships, it will not be possible
in practice to obtain the positive consent of each member to a pre-emption
mid-year and so a mid-year pre-emption of capacity to allow for additional
GWP will not be possible.
In exceptional circumstances, however, the Underwriting Byelaw(paragraph 37(a)) gives Lloyd’s discretion to permit a syndicate to write
above its capacity. Managing agents that require permission to exceed their
syndicate’s capacity should contact the Syndicate Performance Team.
Permission will only be given where the managing agent can provide arobust justification for exceeding capacity, receives appropriate agreementfrom Lloyd’s to any proposed change to its business plan and candemonstrate that it has sufficient capital to support the additional business.
In addition, the managing agent must provide written evidence of support forthe overwriting of capacity from each direct corporate participant on the

10syndicate and from each of the members’ agents that has one or moremembers participating on the syndicate.
Any agreement to exceed capacity will only be given for the remainder ofthe year of account in question. For the following year of account, thesyndicate will be expected to write within its existing capacity or to pre-emptin accordance with the Syndicate Pre-emption Byelaw.
Managing agents are strongly encouraged to ensure they have sufficient
headroom in their capacity to avoid the risk that they may exceed it.

Premium monitoring
Lloyd’s uses QMB, PMDR and other core market returns to monitor several
aspects of performance, one of these being the amount of GWP written.
More specifically Lloyd’s looks at:• Whether GWP is in line with the approved plan and if there is a potential
for overwriting compared to the plan.
• For non-aligned syndicates whether there is the potential to overwrite
syndicate capacity.
• Comparison to previous years written premium development patterns.
If as a result of analysis of the QMB and PMDR (and any other relevant
data sources), the Syndicate Performance team identifies that current GWP
volume when trended for ultimate development is likely to exceed plan, theSyndicate Performance team will inform the managing agent accordingly
and seek confirmation from them in writing as to their position. In the first
instance, however, it is for managing agents to monitor premium volumes
against their approved plans, in order to identify if they are likely to overwrite
and to take appropriate action, including notifying the Syndicate
Performance team.

Rate Reductions
Rate or pricing reductions occur when there is market softening and may
result in the Risk Adjusted Rate Change (RARC) achieved by a syndicate
being lower than planned. In such circumstances, it will usually be the casethat syndicates will either write less business than planned to maintain thesame rate adequacy or that the price adequacy on business written will beless than planned, potentially resulting in a higher loss ratio than planned in
the SBF. In both circumstances, there may be a consequential effect on
profitability and the Insurance Risk element of the syndicate’s approved
SCR.
If a syndicate expects that rate or price reductions may result in its
performance materially deviating from its approved business plan then its
managing agent must inform its Syndicate Performance Manager who, in
conjunction with the managing agent will determine if a revised SBF needs
to be submitted. The agent must also assess the impact on capital and in
conjunction with Lloyd’s determine if a re-submission of the SCR isrequired.

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A similar and equivalent approach will be adopted by Syndicate
Performance for considering and monitoring pricing rate reductions as thatset out in the section on Overwriting.
As highlighted in the section on Overwriting, the requirement to inform
Syndicate Performance of any material deviation from the SBF is derived
from the Underwriting Byelaw (paragraphs 25 and 26), which requires thatmanaging agents should write in accordance with a syndicate’s approved
business plan and provides that managing agents should notify Lloyd’s
where they expect to deviate from the plan.

Outwards Reinsurance
Lloyd’s supports syndicates use of reinsurance to manage the insurance
risks they write, subject to compliance with Lloyd’s governance framework,and the effective operation of reinsurance management and control
practices.
Because of the materiality of reinsurance to most syndicates’ businesses,
Lloyd’s looks closely at syndicate reinsurance plans when agreeing SBFs
and capital calculations. Lloyd’s will consider whether planned reinsurance
is logical, realistic and achievable, including consideration of risks to both
placement execution and ultimate performance of the planned reinsurance.
Outside of planning, Lloyd’s will look to see whether the syndicate’s
approach to reinsurance could create any material prudential risks for thesyndicate or for Lloyd’s, in the event that the reinsurance protection(s) fail toperform as intended.
In addition to the Lloyd’s Principles for doing business (Principle 3: Outward
Reinsurance), and any relevant byelaw provisions, Lloyd’s has prescribed
the following requirements. These apply to all reinsurance arrangementsthat benefit or protect a syndicate.

Reinsurance leverage
Each syndicate should avoid excessive financial and strategic reliance on
outwards reinsurance and should not pursue business strategies reliant on
aggressive arbitrage and/or unsustainable outwards reinsurance
arrangements.
Prior approval by Lloyd’s is required if:
1 A syndicate intends to retain a net minimum amount of exposure for any

risk it underwrites which is less than 10% of the gross line written.
2 For current/prospective reinsurance transactions: The total aggregate

estimated gross reinsurance premiums (before the deduction ofreinsurance commissions) allocated to any single syndicate underwriting
year of account (YOA) is planned or expected to exceed 50% of the gross
gross written premium for that YOA.
Prior notification to Lloyd’s is required if:
3 The syndicate plans to execute any legacy or retrospective reinsurance

transactions.

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4 The total estimated reinsurance recoveries associated with the syndicate’s

Lloyd’s Catastrophe Model 5 Key NatCat Peril Regions (LCM5) 1:200
Aggregate Exceedance Probability (AEP) Gross Loss (before thededuction of estimated additional reinstatement premiums, offset funds orcollateral) is planned or expected to exceed 100% of the syndicate’s
Economic Capital Assessment (ECA).
If any of the above thresholds are crossed as a result of an unexpectedchange, or if there is a material increase to a previously notified position,then the managing agent should notify Lloyd’s at an early stage.
Guidance
The purpose of these requirements is to ensure that syndicates:• keep a meaningful underwriting interest in the risks they write• avoid excessive financial dependency on reinsurance counterparties• use their reinsurance to provide protection to books of business that will
deliver a sustainable profit and do not use their reinsurance to deliver a
profit through arbitrage.
Requests for approval made in respect of 1 and 2 above should be made to
the Syndicate Performance team.
In the case of 3 and 4 above, while prior Lloyd’s approval is not required,
Lloyd’s will look to undertake a risk-based review of the transaction
focussing on evaluating how any potential risks have been assessed andmanaged by the managing agent.
It is accepted that decisions on the scale of reinsurance leverage may takeplace at any time during the year so managing agents should engage with
their Lloyd’s Outwards Reinsurance Manager as soon as they becomeaware of a potential triggering of these approval/notification requirements.
Managing agent submissions of SBFs to Lloyd’s also present a natural
opportunity to notify/engage with Lloyd’s regarding proposals that trigger
these requirements.
The following information should accompany any request or notification as
set out at 1 to 4 above:• The syndicate’s reinsurance strategy and objectives• The syndicate’s reinsurance purchasing rationales and design criteria• The overall monetary values of the reinsurance risk transfer• The types of product(s) purchased, including the use of reinsurance
shared with other entities (see also the requirements for Shared
Reinsurance Arrangements below) and the use of potentially nonstandard reinsurance (see the requirements for Non-Standard andAlternative Reinsurance Arrangements below)• A summary of any material retained risks that are not protected by thereinsurance arrangements, either due to coverage differences ordifferences in period of protection• Concentration levels with each reinsurance counterparty involved• The value, type and nature of any supporting funding and/or collateralarrangements• A summary of the risk transfer contract structure(s) and key terms

13• The reinsurer financial strength assessments undertaken by the managing
agent• Details of the syndicate’s reinsurance counterparty acceptance criteria
Lloyd’s will advise if additional information is needed. Lloyd’s will then form
an opinion on the level of reinsurance risk potential and will advise themanaging agent of any revised notification criteria, supplemental reporting,or broader actions that may be required.

Reinsurer selection
The choice of reinsurer for a syndicate is a matter for managing agents.
However, prior notification to Lloyd’s is required if:
Reinsurer concentration
1

A syndicate intends to purchase or renew reinsurance arrangementswith a single reinsurance entity and/or multiple reinsurance entities which
are within the same group of companies (i.e. reinsurance entities
related/affiliated to each other through common ownership, directorship or
financial and/or strategic interdependency) whether or not they are related
to the syndicate, if either of the following apply:a.

b.

the total estimated gross reinsurance premiums (before thededuction of reinsurance commissions) under all reinsurance
contracts with these reinsurers in aggregate is expected to exceed
20% of any single syndicate underwriting year of account gross
gross written premium.
the total estimated UK GAAP balance sheet reinsurance
recoverables (before the deduction of offset funds or collateral)
under all the reinsurance contracts with these reinsurers inaggregate is expected to exceed 20% of the syndicate’s totalbalance sheet assets.

Reinsurer financial strength
2 A syndicate intends to purchase or renew reinsurance from reinsurers

where any of the criteria in a – c below apply, subject to d:
a.

b.

c.

d.

The reinsurer has a financial strength rating from a recognised credit
assessment/rating institution which is lower than an A-, i.e. is notconsidered “strong”, “superior” or “excellent”, and the full potential
liability of the reinsurer(s) under the reinsurance contract(s) is notsupported in full with low risk forms of collateral/securitisation and/or
funding, subject to d below.
The reinsurer does not have a financial strength rating from any
recognised credit assessment/rating institution, and the full potential
liability of the reinsurer(s) under the reinsurance contract(s) is notsupported in full with low risk forms of collateral/securitisation and/or
funding, subject to d below.
The reinsurer has a financial strength rating from a recognised credit
assessment/rating institution which is equal to or higher than an A-,
but where the syndicate knows that the risk will be retroceded 100%
to a reinsurer who falls within a or b above, subject to d below.
The criteria set out in a to c above shall only apply where the total
estimated gross reinsurance premiums (before the deduction ofreinsurance commissions) under all reinsurance contracts with thesereinsurers in aggregate is planned or expected to exceed 2% of any

14single syndicate underwriting year of account gross gross written
premium.
If any of the above thresholds are crossed as a result of an unexpectedchange, or if there is a material increase to a previously notified position,then the managing agent should notify Lloyd’s at an early stage.
Guidance
While prior Lloyd’s approval is not required, Lloyd’s will look to undertake arisk-based review of the transaction focusing on evaluating how any
potential risks have been assessed and managed by the managing agent.
It is accepted that decisions on the scale of reinsurer participation may takeplace at any time during the year so managing agents should engage with
their Lloyd’s Outwards Reinsurance Manager as soon as they becomeaware of a potential triggering of these notification requirements.
Managing agent submissions of SBFs to Lloyd’s also present a natural
opportunity to notify/engage with Lloyd’s regarding proposals that trigger
these requirements.
The following information should accompany any notification to Lloyd’s:• The overall monetary values of the reinsurance risk transfer• Concentration levels with each reinsurance counterparty involved• The value, type and nature of any supporting funding and/or collateralarrangements• The types of product(s) purchased, including the use of reinsurance
shared with other entities (see also the requirements for Shared
Reinsurance Arrangements below), and the use of potentially nonstandard reinsurance (see also the requirements for Non-Standard andAlternative Reinsurance Arrangements below)• A summary of the risk transfer contract structure(s) and key terms• The reinsurer financial strength assessments undertaken by the managing
agent• Details of the syndicate’s reinsurance counterparty acceptance criteria.
Lloyd’s will advise if additional information is needed. Lloyd’s will then form
an opinion on the level of reinsurance risk potential and will advise themanaging agent of any revised notification criteria, supplemental reporting,or broader actions that may be required.

Non-standard reinsurance arrangements
Lloyd’s will only permit products that meet the legal definition of reinsurance
and that provide genuine risk transfer to be considered and treated asadmissible outwards reinsurance for the purpose of calculating a
syndicate’s net inwards (re)insurance risk.
Lloyd’s prior approval will therefore be required if a syndicate intends totreat a non-standard reinsurance or alternative risk transfer arrangement asa reinsurance contract in the syndicate’s insurance exposure/loss reporting,business plan or capital calculations.
For these purposes, non-standard reinsurance and alternative risk transfer
arrangements include any purported contract of reinsurance or otherfinancial instrument which it is proposed should be treated as reinsurance

15

by the syndicate, but which does not operate on an indemnity basis or
which provides for limited or no demonstrable genuine risk transfer.
For the avoidance of doubt, parametric, Industry Loss Warranty, and/or
collateralised reinsurance products would not be automatically considered
as non-standard reinsurance or alternative risk transfer arrangements,
provided they operate on an indemnity basis and provide genuine risk
transfer.
If a contract falls within this definition, then the managing agent must submit
the following to Lloyd’s:
1 Evidence (including, if appropriate, legal opinions) to demonstrate clearly

that the arrangement meets the legal definition of reinsurance.
2 Evidence that the managing agent’s auditors have confirmed that thearrangement is being recorded appropriately in accordance with allapplicable accounting and regulatory requirements.
If the above cannot be demonstrated, then the arrangement will not be
admissible as a reinsurance contract and should not be considered ortreated as reinsurance within the syndicate’s insurance exposure/loss
reporting, business plan or capital calculations.

Shared reinsurance arrangements
Shared reinsurance arrangements are any reinsurance contract where a
syndicate shares any of the coverage of the reinsurance contract with othercedants, whether or not they are Lloyd’s syndicates.
Syndicates with shared reinsurance arrangements must comply with thefollowing requirements unless otherwise agreed with Lloyd’s:
1 Shared reinsurance arrangements should clearly set out which elements

are shared and which are not. This includes consideration of premium,limits, excess, any funding or collateral provision, and where appropriate
the inclusion of a non-avoidance provision to ensure that in the event of adispute between the reinsurer and a reinsured other than the syndicate(s),reinsurers will continue to honour their contractual obligations to thesyndicate(s) and will not seek to avoid the reinsurance contract with thesyndicate(s) as a result of that dispute.
2 All premiums (including reinstatement premiums and adjustments) andrecoveries must be allocated in a clearly defined and equitable manner.
This allocation should be reviewed in the event of material change in
exposure or erosion due to actual loss during the contract period, withappropriate consideration of any impact on net risk, expected profitability
and/or capital requirements.
3 The managing agent board is required to formally record that it has
considered these requirements and is satisfied that each sharedreinsurance arrangement:a.
Complies with these requirementsb.
Is structurally and economically effectivec.
Is in the best interests of the members of the syndicate (seeparagraph 39A of the Underwriting Byelaw).
The managing agent shall provide Lloyd’s Outwards Reinsurance team withcopies of the formal records.

16

Managing Agents should note that the payment or transfer of assets from or
to each syndicate’s Premiums Trust Fund accounts must be in accordancewith the terms of the applicable Premium Trust Deed. A syndicate’s
Premiums Trust Funds are not to be used to fund the obligations of othersyndicates or other non-Lloyd’s reinsured entities (other than where thismay be permitted by the Premium Trust Deed, for which the managing
agent may require appropriate legal advice).

Inter-syndicate reinsuranceManaging agents must not permit a syndicate managed by it to reinsure or
be reinsured by another syndicate managed by it, or by a related managing
agent, unless:
1 The managing agent of each syndicate is satisfied on reasonable grounds

that the reinsurance is in the interests of all of the members of its
respective syndicate
2 The reinsurance is on terms which are fair and reasonable as respects
both the reinsured syndicate and the reinsuring syndicate
3
The reinsurance is of a type and for a class of business that thereinsuring syndicate has agreement from Lloyd’s to underwrite
4 The reinsurance consistent with the approved reinsurance purchasing
strategy of the reinsured syndicate
5 The reinsurance has been negotiated, agreed and operated on an “arm’s
length” commercial basis. Where the reinsuring syndicate is the leading orsole reinsurer this should include an independent (whether internal orexternal) assessment of risk transfer pricing.
The managing agent(s) shall make and retain proper records of all intersyndicate reinsurance arrangements. These should include but not belimited to a declaration for each transaction which has been signed by amember of the managing agent board and the Active Underwriter for eachsyndicate, declaring that 1 to 5 above have been complied with in full.
The managing agent shall provide Lloyd’s Outwards Reinsurance team withcopies of the signed declarations.
This requirement should be read in conjunction with the requirements for“Disclosure of Related Party and Other Transactions which May Give Riseto a Conflict of Interest”.

Disclosure of Related Party and Other
Transactions which May Give Rise to a Conflict ofInterest
Lloyd’s requires managing agents to disclose details relating to any
association or current or proposed underwriting transaction which may giverise to a conflict of interest. These requirements derive from paragraph 14Aof the Underwriting Byelaw.
Since the Legislative Reform (Lloyd’s) Order 2008, which repealed thedivestment provisions in Lloyd’s Act 1982 prohibiting associations between
managing agents and brokers, the disclosure requirements in respect ofsuch transactions have been extended to transactions that are placed with

17or through an intermediary that is a member of the managing agent’s owngroup.
A disclosable insurance transaction will include one where the syndicate will
either:• insure, reinsure or place reinsurance with or through a related party; or• insure, reinsure or place reinsurance with or through any person otherthan on an arms-length basis on ordinary commercial terms.
“Through” for these purposes means through any person acting as aninsurance intermediary or broker.
Each managing agent is further required as part of the business planning
process to provide a statement confirming that it has systems and controls
in place for dealing with related parties in order to ensure any conflicts ofinterest are managed fairly in accordance with the applicable Lloyd’s, PRA
or FCA rules.
The required transaction details, and information providing details ofcontrols for managing conflicts of interest are collected by Lloyd’s throughmarket returns. The market returns include the definitions of related parties
to be adopted for the purposes of completing the returns,
Managing agents should note that in addition to the specific requirements
for disclosure set out above there is a general requirement in paragraph
14A of the Underwriting Byelaw to disclose information relating to any
association or current or proposed underwriting transaction which may giverise to a conflict of interest. Any such disclosure should be made to the
managing agent’s Syndicate Performance Manager.
Managing agents are required to make available to members of the relevant
syndicate (or their members’ agents) the information referred to above.
Members’ agents are required to make sure this information is drawn to theattention of their members (paragraph 23A).
Managing agents will be aware that there are separate obligations todisclose related party transactions when preparing syndicate annual
accounts. So that it can prepare the Aggregate Accounts, Lloyd’s also
requires managing agents annually to provide details of related party
transactions where the transactions are material and have not beenconcluded under normal market conditions. This is coordinated by theMarket Finance team as part of the annual syndicate report and accounts
process.

Distribution Costs, Broker Remuneration and
Additional Charges
Placement structures and remuneration arrangements in the London market
continue to evolve and increase. Whilst Lloyd’s does not seek to interferewith the agreement of commercial arrangements in the market,
nevertheless it is important that managing agents continue to consider
properly the structure and terms of such arrangements to ensure theircompatibility with relevant laws and regulations and to meet the very highest

18

standards in their dealings with brokers for the benefit of Lloyd’s
policyholders.

Bribery Act
The Bribery Act 2010 (the “Act”) is in force and all managing agents must
make sure that they continue to consider the implications of the Act (and theassociated guidance issued by the Ministry of Justice). In summary, the Act
provides that it is both an offence to offer, promise or give bribes (active
offences) and to request, agree to receive or accept a bribe (passive
offences). The Act also introduced corporate liability for failing to prevent
bribery.
It is ultimately a matter for the board of each managing agent (taking its own
external legal advice where appropriate) to ensure that any arrangementthat a managing agent enters into does not breach the terms of the Act.
The consequences of breaching the Act are very serious and any criminal
charges would be a matter for the Serious Fraud Office (rather than Lloyd’s
or the FCA). Lloyd’s continues to expect managing agents to adopt a very
cautious and rigorous approach to compliance having regard in particular to
the following matters.
Brokerage
The payment of brokerage within the usual range is a long-standing
commercial practice that has consistently been upheld by the courts ascompatible with brokers’ and insurers’ fiduciary duties. Accordingly, Lloyd’s
has been advised and has concluded that it is inconceivable that agreement
or payment of brokerage would lead to prosecution where the amountagreed is an amount within the usual range for the type of business inquestion and where the amount has been fully disclosed to the client.
Additional fees charges and commissions
Payment by the insurer of additional fees, charges or commissions (orbrokerage outside the usual range) to a broker which acts for a policyholder,
including under a line slip (rather than as agent for underwriters under abinding authority), raises concerns that the additional payment might beseen as inducing or influencing the broker to place business with the insurer
contrary to the broker’s client’s best interests, or which might otherwise
cause improper performance by the broker of its duties. This is particularly
the case where the additional payments are calculated by reference(whether directly or indirectly) to the amount of business underwritten by the
insurer or by reference to the profitability of the business.
Considerable care therefore needs to be taken before any such additional
payments are agreed having regard to the underlying commercial reality of
the arrangement in question rather than merely to how it is represented or
described.
Accordingly, Lloyd’s expects each managing agent to continue to ensure
that, as a minimum, each of the following questions has been considered
before additional payments are agreed to –1 no matter how the additional payment is described, is the real commercial

motivation to agree to the additional payment to secure underwriting

19business or the opportunity to quote for such business? If so, the additional
payment should not be agreed to without the managing agent obtaining its
own legal advice which specifically addresses the commercial motivation
for the additional payment.
Subject to the guidance below on line slip and binding authority
arrangements, in no circumstances should additional payments be agreed,with an intermediary acting on behalf of the client, which are contingent
upon the profitability of business being entered into or which are contingent
upon receiving target volumes of business which represent a very high risk
under the Bribery Act;
2 is the additional payment compatible with the managing agent’s obligation

to pay due regard to the interests of Lloyd’s customers and treat them fairly
at all times?
3 where the additional payment is said to be in return for any services

provided to the insurer (whether for administrative services, provision ofmanagement information or otherwise) –a.

b.

are the services of real additional value to the managing agent anddemonstrably commensurate with the additional payment? If not, theadditional payment should not be agreed to or arrangements shouldbe negotiated in good faith so that the value of the service isobjectively and demonstrably commensurate with the additional
payment;
are the services fully defined and set out in a contractually binding
agreement which would meet equivalent PRA and FCA outsourcing
requirements (see SYSC 13.9) and (a) allow proper monitoring andcontrol of the services, (b) allow access to the managing agent’s
internal and external auditors to review the provision of the agreed
services and (c) make the broker legally responsible for providing
the services and accepting liability for failure to do so. If not, theadditional payment should not be agreed to without the managing
agent obtaining its own legal advice;

4 has the broker agreed to provide clear and readily comprehensible

disclosure to its clients in respect of each contract of insurance placed foreach client of (a) the amount of the additional payment and (b) of any
services for which they are paid? If not the additional payment should not
be agreed;
5 can the broker demonstrate that it has appropriate and proportionate

processes and procedures to ensure that it and its staff will continue toperform their fiduciary duties to their clients in all of the circumstances? If
not, the additional payment should not be agreed to. The confirmations
and undertakings that a broker provides under the model non risk transfer
and risk transfer Terms of Business Agreements (‘TOBA’) published by
LMA and LIIBA, including in relation to the Bribery Act, are likely to be
sufficient for these purposes.
Where a managing agent does consider that it is appropriate to agree
additional payments the managing agent must keep a clear record of how it
reached that decision.
It is important that each managing agent agreeing to additional payments
satisfies itself that the payment is appropriate rather than relying on the fact

20

that other managing agents or insurers may have agreed to enter into thesame or similar arrangement.
Where an additional payment has been agreed not at managing agent levelbut at group level, then the managing agent should consider the above
questions when considering a proposal to recharge any of the additional
payment to the syndicate.

Supplementary guidance with regard to profit
commission on line slips
It is understood that currently some line slips do permit profit commission for
the named broker. Profit commission (“PC”) represents a high risk under theBribery Act. This is because an agreement between a managing agent anda broker which rewards the broker for placing (profitable) business with the
managing agent raises clear concerns that the broker may be influenced toplace business with that managing agent even where that is otherwise
contrary to its duties to its client. In this regard it is important to bear in mind
that under a line slip the broker remains the agent for its client (the insured).
(This is in contrast to the position where a broker acts as agent forunderwriters under a binding authority, which includes under a “limited” or“prior submit” binding authority.)
However, the legal risks regarding agreement of PC under a line slip arelikely to be materially less where the managing agent is reasonably satisfied
that –a.

b.

c.

the broker has expressly stated to its client that it will not be
undertaking a fair market analysis when seeking terms for the client(but instead will seek to place the business under the line slip); andthe broker has disclosed, or will disclose, the remuneration
arrangements to its client in accordance with the broker’s duties under
ICOBS and in accordance with any additional fiduciary duties it owes its
client; andthe broker is, when required or requested to disclose the remuneration
it receives under the line slip, expressly providing the client with detailsof the level of the PC and basis of calculation.

In the case where the client is separately paying its broker a fee, and the
managing agent is aware of this arrangement, then the managing agent
should satisfy itself that the broker is disclosing the remuneration details(including the PC) in respect of each contract of insurance whether or not
the client specifically requests disclosure.
The broker is under an ICOBS obligation always to state to its client
whether or not it is operating on a fair analysis basis or only dealing with alimited number of insurers (or one only) (ICOBS 4.1.6R).
In these circumstances, and where the managing agent is satisfied that thebroker has appropriate processes to comply with its regulatory and fiduciary
obligations and adequate procedures under the Bribery Act, the managing
agent may decide that allowing PC is acceptable since the concern that thebroker might improperly perform its duties to its client to seek best terms
would not arise.

21

Supplementary guidance with regard to profit
commission on binding authorities
In some cases binding authorities provide for profit commission to bepayable to both the coverholder and also to the Lloyd’s broker which placed
the binding authority on behalf of its client (the coverholder). Where –a.
b.

the Lloyd’s broker’s only role is acting for the coverholder in placing thebinding authority (and not acting for the ultimate policyholders); andwhere the profit commission arrangement for the Lloyd’s broker is
included in the binding authority

then there should not be a concern from the Bribery Act. This is because
the broker’s client (the coverholder) is a party to the binding authority
agreement permitting the profit commission.

Managing agent recording of arrangements and reporting
to Lloyd’s
While managing agents are no longer required to submit an annual Broker
Remuneration Return, Lloyd’s considers that recording appropriate
information is an important control to help managing agents identify, assess
and manage any legal or regulatory risks arising from any remuneration
arrangements (including risks under the Bribery Act). Managing agents are
therefore encouraged to continue to record and retain the information
required by the Return as part of their own internal controls.
Details of the return previously required and the accompanying guidance
are made available by Lloyd’s for use by managing agents. (Contact
conduct@lloyd’s.com).
In addition, managing agents must notify Lloyd’s at conduct@lloyds.com
prior to entering into any new agreement which:• involves an additional payment;• is material to the managing agent’s business; and• is believed by the managing agent to present a significant risk, even if thisrisk will be appropriately managed and mitigated through internal
governance and controls.

“Grossing Up”/Net-Equivalent Clauses
Grossing up is a practice whereby the gross premium (ie including
commission) agreed between broker and insurer (or reinsurer) is less thanthe premium which the broker notifies the proposed policyholder is payable.
The difference between the two amounts remains in the hands of the broker
and the proposed policyholder is left unaware that they are paying a greater
sum than has been agreed by the broker on their behalf with the insurer (orreinsurer).
Such a practice, without the informed consent of the proposed policyholder,
is wholly unacceptable and is a breach of the agency duties which thebroker owes the policyholder as its principal.

22

In certain cases, slips have contained wordings which have allowed thebroker to adjust the gross premium while the underwriter receives the samenet premium (for example, contracts with an “or net equivalent” clause).
In view of the concerns that can arise from “grossing up” and the difficulties
in ensuring that there is appropriate policyholder consent, managing agentsshould not include clauses in contracts where the commission is expressed
as a net equivalent and may be varied by the broker, unless the commission
appearing on the slip is expressed as a specific sum or maximum amountwhich can only be reduced.

Reinsurance to Close
Documentation of RITC contracts
Managing agents closing open years of accounts of syndicates under their
management must ensure that any reinsurance to close is properly
documented in a Contract of Reinsurance to Close. This requirement
applies to all syndicates closing years of account where there is more than
one member of the syndicate on either the reinsuring year or on thereinsured year. This also applies where both the reinsuring and reinsured
year consists of a single member but where the legal identity of thereinsured and reinsuring member is different.
Where the syndicate has one member which is the only member on boththe year of account that is being closed and on the year of account into
which the open year is being closed, no reinsurance to close is required.
The managing agent of the syndicate must, however, ensure that itcomplies with all other accounting and Lloyd’s requirements for closing
syndicate years of accounts.

Mandatory terms in contracts
Every contract of reinsurance to close underwritten by members of a
syndicate shall, unless Lloyd’s otherwise agrees (whether generally or in
relation to a particular case) include express terms to the following effect –1

the reinsuring members unconditionally agree to indemnify the reinsured
members, without limit as to time or amount, in respect of the net
amount of all known or unknown losses, claims, refunds, reinsurance
premiums, outgoings, expenses and other liabilities (including extracontractual obligations for punitive or penal damages and obligations toprovide regulatory redress as a result of policyholder complaints) arisingin relation to the underwriting business of the syndicate for the reinsured
year of account (and earlier years of account of the same or any othersyndicate reinsured to close into that year of account) (the “underwriting
business”) after taking account of all amounts recoverable by thereinsured members under syndicate reinsurances in respect of thoseliabilities and actually recovered on or after the inception date of thecontract;2

notwithstanding that the indemnity under the contract is against liabilities
net of syndicate reinsurance recoveries or that the ultimate net liability of
the reinsuring members may not yet have been ascertained, the23reinsuring members shall discharge or procure the discharge of theliabilities of the reinsured members;
3either:a. the rights to receive all premiums, recoveries and other monies
recoverable at any time in connection with the insurance business of
the reinsured members are assigned to the reinsuring members by
the contract or are to be assigned on their subsequent request; orb. the reinsuring members are authorised by the reinsured members tocollect on behalf of the reinsured members the proceeds of all suchrights and retain them for their own benefit so far as they are notapplied in discharge of the liabilities of the reinsured members;

4

the reinsuring members are required and fully, irrevocably andexclusively authorised on behalf of the reinsured members to conduct
the underwriting business, and authorised to sub-delegate that authority
to the reinsuring members’ managing agent and to any person
underwriting any RITC of the reinsuring members and to permit thefurther sub-delegation of the whole or part of that authority in either case;and5

the contract shall not be cancelled or avoided for any reason, including
mistake, non-disclosure or misrepresentation (whether innocent or not).

Multi-reinsurer contracts
No contract of RITC may be underwritten by more than one syndicate
except:1
2

in the case of a contract where the reinsuring syndicates are parallel
syndicates; orwhere Lloyd’s is satisfied that it is not practicable for the contract to beunderwritten by a single syndicate only and that the contract should bepermitted to be underwritten by more than one syndicate and grants its
consent.

Consent granted under paragraph 2 may be subject to such conditions as
Lloyd’s thinks fit.
Managing agents should also note that in view of the PRA Rulebook
definition of ‘approved reinsurance to close’, contracts of RITC to beunderwritten by more than one syndicate may additionally require theapplication to the PRA for a modification of SII Firms – Lloyds Approved
Reinsurance to Close – Rule 3.1

Partial reinsurance
Partial RITC involves leaving a year of account open but paying forward a
premium to the following year of account by way of reinsurance in respect ofthat part of the account which the managing agent considers to be readily
quantifiable. Partial RITC is not permitted.

Prohibition of certain exclusion clauses
Where the RITC is to be provided by a syndicate other than a later year ofaccount of the same syndicate (“third party RITC”), potential RITC providers
have to inspect accounts and records of the closing syndicate and to ask

24questions of its managing agent to enable themselves to assess and quote
an appropriate premium for the RITC. RITC providers therefore need to beable to rely on what is said to them by managing agents in reply toquestions, particularly so where the normal duty of disclosure and theremedy of avoidance for non-disclosure do not apply. Moreover, RITC
providers need to be able to rely on replies to such questions without having
to load the RITC premium, at the expense of the members of the closing
syndicate, to cover the risk of any negligent misrepresentation or
misstatement by the closing syndicate’s managing agent.
The managing agent of the closing syndicate is not permitted to exclude its
duty to its members not to make negligent misrepresentations which might
result in the avoidance of reinsurances placed on their behalf. No more soshould it be permitted to exclude any reliance by a RITC provider on the
managing agent’s replies to questions or to exclude any duty of care to thepotential RITC provider in replying to questions or any remedy in damages
for breach of that duty.
Accordingly, RITC contract wordings shall not include clauses which:
1 exclude any reliance by the reinsurer on anything said by the managing

agent of the closing syndicate in relation to the contract; or
2 exclude any liability on the part of the managing agent of the closing

syndicate for any negligent misrepresentation or misstatement made by
the managing agent in relation to the contract.
Nothing in this part is intended to alter the requirement set out above that all
RITC contracts should include an express term to the effect that thecontract shall not be cancelled or avoided for any reason, including mistake,non-disclosure or misrepresentation (whether innocent or not).

Special Termination/Downgrade and Funding
Clauses
It is recommended that managing agents should have a clear policy on
what, if any, downgrade clauses and their component parts are acceptable
to them.
When considering what downgrade clauses might be acceptable, managing
agents should consider and assess the potential risks to their members and
Lloyd’s as a whole which may arise as a result of their use.
As a minimum, any policy should provide that, as a rule, the managing
agent:• Will not accept provisions in clauses that, when triggered, require that thesyndicate provides collateral for liabilities. It should of course be noted thatin a number of territories Lloyd's syndicates already have in place fundingor collateralisation arrangements, including through Lloyd's trust funds, tomeet local regulations;• Will not agree to provisions that lead to the returning of earned premium.
Premium will not always be deemed to be earned on a proportionate
basis. LMA 5140 is an example of a clause that may be used wherepremium is earned disproportionately, for example on seasonal

25

catastrophe business. Managing agents should also consider their policy
on returning premium where a loss has been paid.
• Will only agree to clauses that have a minimum trigger that is consideredappropriate by the managing agent. One approach is to require that theclause is triggered only if the rating falls below a minimum rating (suchas A-).
Any downgrade clauses used on inwards business should be clear andcontract certain.
Lloyd’s recognises that there will be cases where a managing agent will not
be able to achieve its requirements for special termination/downgrade
clauses. A record, however, should be kept of all exceptions.
Managing agents are encouraged to develop more detailed policies asappropriate for their syndicates. The above points Lloyd’s believes reflect
an appropriate and prudent minimum requirement.
Managing agents may wish to consider using the LMA model downgrade
clauses (LMA 5139 and LMA 5140). Where managing agents choose to use
other clauses, they should give careful consideration to the operation of theclause selected to ensure that the prudential risk is properly managed andthat, where relevant, it addresses the same issues as those addressed by
LMA 5139 and LMA 5140.
The Lloyd’s Market Association has also produced additional informationand guidance for its members on the use of these clauses.

General Insurance Contracts Involving Risks
Relating to the Death of an Individual
It is a UK regulatory requirement that managing agents must not permit bothgeneral insurance business and long term insurance business (which
includes all life insurance) to be carried on together through any syndicate
managed by them. It is also a requirement that amounts received or
receivable in respect of general insurance business and long term businessmust be carried to separate premium trust funds.
A number of policies are written by general syndicates in the A&H andcontingency market where the contract, amongst other covers provided,
may be triggered by the death of an individual (other than accidental death).
Typically, in conjunction with other causes of financial loss, these products
provide an indemnity for a contractual loss suffered by the insured arisingfrom the death of a named individual. For example, a contingency policy
may include cover for a concert promoter for the cost of cancelling an event
as a result of the death of the performer.
The particular features of these policies mean that extra care must be taken
to ensure that the risks written are appropriate for a general insurance
syndicate.
To evidence compliance with the relevant PRA regulations, Lloyd’s
anticipates that managing agent wishing to write this type of risk will ensure
they have suitable legal advice confirming that the business may properly
be written by a syndicate writing general insurance business. In obtaining

26

any legal opinion the managing agent should provide copies of its standard
contract wordings for review.
Where the risks are located in overseas territories which are the subject of
local regulation, managing agents must additionally ensure compliance withthe equivalent local regulatory requirements.

Market Reform Contracts/Contract Certainty
Market Reform Contract
The Council has mandated through the Underwriting Requirements(paragraph 3A) that:
1 Managing agents shall not permit the syndicate stamp of a syndicate

managed by it to be affixed to any slip which relates to a contract orcontracts of insurance unless:
a.

b.
c.

the slip is in the form of the Market Reform Contract and theinformation contained in the slip has been properly completed inaccordance with the relevant London Market Group guidance;
the slip has been marked “MR Exempt – Client Requirement”; orthe slip relates to motor business, personal lines business or term life
insurance business and the slip will not be processed by Velonetic.

2 Managing agents shall not permit the syndicate stamp of a syndicate

managed by it to be affixed to any slip which relates to a binding authority
or to any line slip unless the slip has been completed in accordance withthe relevant slip guidelines issued by the London Market Group.
3 Managing agents can find details of the applicable guidelines and details of

the Market Reform Contract on the London Market Group website:www.lmg.london.

Contract Certainty
The contract certainty project began in December 2004 with an FSA
challenge to the UK insurance industry to end the "deal now, detail later”
culture. The industry took steps to improve the way it develops and agrees
contracts ensuring that the insured has greater certainty over what it hasbought and the insurer greater certainty over what it has committed to.
Contract certainty has brought operational improvements across the Lloyd’s
market and wider industry, reducing risk and improving service. Contract
certainty applies to general insurance contracts either entered into by a UK
regulated insurer, or arranged through a UK regulated intermediary.
Contract certainty is achieved by the complete and final agreement of allterms between the insured and insurer by the time that they enter into thecontract, with contract documentation provided promptly thereafter.
The Contract Certainty Code of Practice (reissued in September 2018) was
produced by the Contract Certainty Steering Committee, a cross-market
committee, and has been endorsed by all the UK’s leading insurance
market bodies. All managing agents are expected to note and comply with
the Code of Practice. Managing agents are further reminded that the Codeof Practice requires that they should be able to demonstrate their27

performance in respect of Contract Certainty principles A & B (which set out
the parties’ responsibilities when entering into the contract and after
entering into the contract).
The Code of Practice can be downloaded from www.lmg.london.

Several Liability Clauses
It is of the utmost importance that all insurance and reinsurance
documentation issued for or on behalf of underwriters includes anappropriate several liability clause. LMA 3333 in particular has been drafted
for use by Lloyd’s underwriters and is suitable for use on all contracts.
In the case of binding authority business Lloyd’s has issued guidance which
permits the use of alternative several liability clauses for combined
certificates or where the risk is written solely by Lloyd’s underwriters. This
guidance is set out in Market Bulletin Y4133.
The London Market Group website (www.lmg.london) includes a Several
Liability Decision Chart showing which several liability clause should be
used in each case.

Inception Date Allocation
Inception Date Allocation (IDA) is the market practice adopted at Lloyd’s forthe allocation of risks to a year of account based on the inception date of
the risk in question.
The proper allocation of risks in accordance with IDA can require carefulconsideration of the policy in question (for example where the policy is amulti-year risk or has been written under a binding authority or line slip).
As the incorrect allocation of risks can also delay the processing ofsubmissions, Velonetic has issued a market communication providing
guidance on the proper application of IDA: ‘Lloyd’s Inception Date Allocation(IDA) – Reminder of How to Process through Velonetic’ (Reference
2018/084).
Managing agents are encouraged to refer to the guidance provided by
Velonetic to ensure the proper allocation of risks in accordance with IDA. A
copy of Velonetic’s guidance can be obtained from
Service.Centre@dxc.com.

28

Classes Subject to Additional Oversightand/or Approval
The uncontrolled writing of certain perils can present a material source ofprudential risk for Lloyd’s. The ability for exposures to aggregate meansthat these perils have the potential to threaten the market’s financial
position. Certain types of risks, if written, may also have a reputational
impact on Lloyd’s. Accordingly, these perils, as specified in this section,cannot be written by managing agents, or can only be written if done so inline with the restrictions set out. Any managing agent that wishes to obtainan exemption from the requirements will require the separate agreement of
Lloyd’s. Agreement to write these perils can be obtained through thesyndicate business planning process.

War & NCBR Exposures
In this section War and NCBR are defined as follows:• War - includes all war related perils, including war, civil war, invasion, act offoreign enemies, hostilities (whether war be declared or not), rebellion,
revolution, insurrection, military or usurped power. War related perils,
however, does not include terrorism or SRCC (strikes, riots and civilcommotion).
• NCBR - means nuclear, chemical, biological or radioactive material used asa weapon. Losses arising from the use of NCBR weapons can occur as aresult of war related perils. They can also arise from criminal or terrorist acts
or incidents. NCBR perils may result in direct or indirect losses.
When can War and NCBR risks be written?
1 Except as provided for in 2. below, all insurance and reinsurance policies

written at Lloyd’s must contain a clause or clauses excluding all losses
caused by War and NCBR perils.
2 Coverage for War and NCBR perils can only be provided in the following
circumstances:
a.
b.

c.

Syndicates have Lloyd’s express agreement through the businessplanning process;
Where exclusions for War and NCBR perils are prohibited by reasonof local legal or regulatory requirements. This does not include thewriting of non-compulsory War and NCBR risks, such as reinsuranceof the French GAREAT pool; or
The exposures fall within one of the following exempt classes ofbusiness:i.
Legal Expenses (LE)ii.
All Casualty risk codes (which includes all risk codes within,
Casualty FinPro, Casualty Treaty and Casualty Other) other than:• BBB/Crime (BB)• Workers Compensation (US & non US) (W4, W5 & W6)• Cyber (CY, CZ, RY & RZ)
iii.
All Political Risk, Credit and Financial Guarantee risk codes (PR,CF, CR FG , SB & FM)

29

Requirements for writing War and NCBR Risks
In all cases where coverage is provided for War and NCBR perils thefollowing principles should be applied:
Policy language
Where cover is to be given, the scope of cover must be clearly stated. Thiscan be most easily achieved by using a separate policy, a separate insuring
clause or a separately identifiable section of the policy. Managing agentsshould not seek to provide cover merely by omitting a suitable exclusion
clause (“remaining silent”) in view of the risk that a court may decide thescope of cover is wider than that intended.
Specific requirements for state-backed cyber attacks can be found in Market
Bulletin Y5381 and Market Bulletin Y5433.
The LMA has developed a number of model clauses that specifically
exclude or provide coverage.
It is important to ensure that, where policies are specifically extended tocover War perils, the wording of the extension does not override any NCBR
exclusion contained within the policy.
Where local law or regulations impose requirements on how coverage
should be provided for in policy documentation it is acceptable to follow
those requirements.
Monitoring and control of exposureManaging agents are required to demonstrate that they are monitoring andcontrolling the exposure of their syndicates to War and NCBR perils. This
includes all exposures, however written by the syndicate, including where
any coverage given is only included because War and NCBR exclusions areprohibited by local legal or regulatory requirements. Exposures within
exempted classes should also be included when syndicates are monitoring
and controlling exposures.
Syndicates should have in place processes and procedures to monitor
exposures from War and NCBR perils. These exposures should beassessed against the syndicate’s risk appetite for these exposures on aregular basis.
Exposure control is reviewed by Lloyd’s through the provision by managing
agents of the War and NCBR Return as part of the business plan and RDS
processes. The War and NCBR Return should be completed for all
exposures other than categories i. and ii. of the exempted classes (Legal
Expenses and Casualty).

Syndicate Business Plan agreement
Where syndicates intend to write War and NCBR risks they must complete
the War and NCBR Return (other than for categories i. and ii. of the
exempted classes (Legal Expenses and Casualty)) and submit it as part ofthe syndicate business planning process. Agreement to any plans for thewriting of War and NCBR will be provided as part of the business planning
process. Mid-year changes to business plans in respect of War and NCBR
can be made in the usual way.

30

Delegated underwriting
Subject to appropriately robust underwriting controls being in place for any
delegated authority arrangements and subject to compliance with therequirements in the rest of this section, the underwriting of War and NCBR
perils by coverholders or by way of line slips or consortium arrangements ispermitted.
In all cases, underwriters should ensure that there are arrangements inplace to provide them with prompt advice of exposure assumed under suchdelegated authorities.

Civil nuclear risks
The restrictions on NCBR coverage, as noted above, only apply to the useof NCBR material as weapons. Accordingly, the requirements do not apply
to the underwriting of civil nuclear incidents. Most of such coverage iscurrently provided by insurance pools and industry mutuals, which may bereinsured by Lloyd’s underwriters. This business currently forms a discrete
specialist class the underwriting of which is agreed in the business plan
process. Managing agents underwriting this class should neverthelesssatisfy themselves that the exposure generated by participation in the pools,
reinsurance of pools and industry mutuals, when aggregated with ancillary
coverages such as personal accident catastrophe reinsurance of life
companies, falls within their business plans.

Financial Guarantee
Financial Guarantee risks have long been identified by Lloyd’s as a class ofbusiness that can bring a high level of prudential risk to the Society if written
without proper controls. Therefore, the underwriting of this class is closely
monitored and restricted.
Lloyd’s operates a risk-based approach to underwriting in this class and willconsider proposals on their merits through the business planning process
having regard to the characteristics of the business being proposed andmanaging agents demonstrating that they have the appropriate controls inplace.
Managing agents are therefore not required and should not seek to obtainapproval for the underwriting of individual contracts unless the risk falls
outside the syndicate’s business plan or the managing agent has beenrequired by Lloyd’s to submit individual contracts for agreement. In all othercases, it is for the managing agent to assess that the risk is within theagreed syndicate plan and to make any decision to bind the risk. Lloyd’s will
return without reviewing any policies that do not meet the criteria for referral
to Lloyd’s.
It is important to emphasise that this approach now operated by Lloyd’s,
which differs from the previous more prescriptive and rules-based approach,
is not intended to signal a relaxation in Lloyd’s risk appetite for the writing of
this class of business, which remains limited. However, by operating a riskbased approach Lloyd’s can assess each proposal and managing agentsare not limited in the type of risks they can write by unduly rigid rules.

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Definition
Financial Guarantee insurance is defined as contracts of insurance (which
includes any indemnity, guarantee, bond, contract of surety or other similar
instrument, and references to “insurance” include reinsurance) where theinsurer agrees to indemnify the insured against loss, or pay or otherwise
benefit the insured in the event of any of the following:
1 the financial failure, default, insolvency, bankruptcy, liquidation or winding

up of any person whether or not a party to the contract of insurance
2 the financial failure of any venture
3 the lack of or insufficient receipts, sales or profits of any venture
4 the lack of or inadequate response or support by sponsors or financial

supporters
5 a change in levels of interest rates
6 a change of rates of exchange of currency
7 a change in the value or price of land, buildings, securities or commodities

or any other tangible or intangible assets
8 a change in levels of financial or commodity indices
9 any liability or obligation under an accommodation bill or similar instrument

Included within Financial Guarantee are the following classes:• Contract Frustration (Risk Code CF)• Credit Risk (renamed from Trade Credit) (Risk Code CR)• Mortgage Indemnity Insurance (Risk Code FM)• Surety Bond Reinsurance (Risk Code SB)• Salvage Guarantee Insurance• Maritime Liens
For the purposes of allocating a risk code, where a risk falls within thedefinition of Financial Guarantee, it should only be assigned to the FG risk
code where the risk cannot be properly allocated to one of the other risk
codes specified for Financial Guarantee business. For example, Salvage
Guarantee and Maritime Liens cannot be assigned to one of the otheravailable risk codes and so risks in these classes would be coded FG.
Where a managing agent is considering a risk but is uncertain as to whether
it falls within the definition of Financial Guarantee insurance, the managing
agent should discuss it with its Syndicate Performance Manager.

Premium Income Limits
Lloyd’s will consider all business plans that propose to include Financial
Guarantee insurance, in any of the above classes, individually. By way ofgeneral guidance, it is unlikely that business plans will be approved where
the income arising amounts to more than 2% of the agreed Syndicate
Business Plan GWP income, other than Credit Risk and Contract
Frustration business where the relevant figure is 6% for each (in addition to
income arising from other Financial Guarantee classes).

Credit Risk and Contract Frustration
Within Financial Guarantee, the two largest classes written at Lloyd’s are
Credit Risk and Contract Frustration. These codes cover insurance thatindemnify an insured, in relation to the provision of assets, goods, services
and/or financing, either (1) for the non-performance of a valid contractual
obligation or (2) in relation to the calling of a valid contractual bond.

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In Contract Frustration, the obligor is a government entity or a commercial
entity controlled and/or majority owned by a government entity(ies). In
Credit Risk the obligor is a commercial entity with a majority private
ownership.
It should be noted that Lloyd’s is unlikely to agree business plans where any
expected obligor is an individual, unless the proposed insured contracts
relate to their trade, business or profession.
In agreeing to plans for Credit Risk and Contract Frustration business
Lloyd’s does not expect the risks to be explicitly linked to a trade, contract or
security. Instead, business plans will be considered individually.

Additional requirements for the writing of Financial
Guarantee risks
When considering proposals for the writing of any type of Financial
Guarantee risks Lloyd’s will expect that the managing agent candemonstrate that the following points are addressed:
Appropriate capability and resource
The writing of Financial Guarantee classes requires a high level of technicalexpertise in the underlying risks. Where it is proposed that a syndicate will
write any of the Financial Guarantee classes then Lloyd’s will expect the
managing agent to be able to demonstrate that it has suitable underwriting
resources in place. In particular, Lloyd’s will expect managing agents tohave a suitably robust analytical resource to support the underwriting of any
business. Managing agents should also have appropriate models in place,suitable to the types of risk being underwritten.
Assignment of policy
All Financial Guarantee policies (in whichever of the risk codes listed above)
must contain a condition that only allows assignment of the policy with theprior written agreement of underwriters. Where assignment of a policy doestake place, the obligations placed upon the original insured by the terms of
the policy must be transferred so that they become obligations of theassignee.
It is acceptable to allow for the proceeds of a policy to be paid to a third
party provided that the obligations on the insured under the terms of thepolicy remain with the insured.
Insolvency of the Insured
All policies must contain an exclusion in respect of any loss arising from theinsolvency of the insured. In a number of territories or classes it isrecognized that market practice may mean that a full exclusion is notachievable (examples of such classes include Japanese contingency,
aviation contingency business, and (re)insurance of Export Credit
Agencies). In such cases Lloyd’s, on a request received from the managing
agent (either as part of the business plan agreement process or forindividual risks outside the business plan), may agree with the managing
agent the use of clauses that do not provide a full exclusion. Lloyd’s will also
agree the scope of business that can be written on this basis.

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Delegated underwriting
Other than where delegation is to a service company coverholder, Lloyd’s isunlikely to agree plans for the writing of Financial Guarantee business inany of the classes listed where the risks are bound by way of delegatedunderwriting. This includes, in particular, binding authorities and line slips.
Accelerated payments
Where policies provide for the insured to be indemnified for the nonpayment of a financial obligation by the obligor where the obligation inquestion involves the obligor making a payment at a future date or anumber of payments over time (for example the re-payment of a loan ininstalments) then it will be usual for the insurance backing the obligation to
pay out over time in accordance with the original payment schedule.
Lloyd’s may agree in appropriate cases to the inclusion of provisions for the
making of accelerated payments at the sole election of the insured. As ageneral rule, however, underwriters should, in each case, have theopportunity to agree or decline to make the accelerated payments.
Fraud
Subject to any local legal or regulatory requirements, all policies must
contain a clause, or clauses, to the effect that the insurer shall have at least
the remedies available under the Insurance Act 2015 in relation to
fraudulent misrepresentation and fraudulent claims.
In s8/Schedule 1, the Act sets out that if a qualifying breach of the duty offair presentation was deliberate or reckless, the insurer (a) may avoid thecontract and refuse all claims, and (b) need not return any of the premium
paid.
In s12 the Act sets out that if the insured makes a fraudulent claim, theinsurer (a) is not liable to pay the claim, (b) the insurer may recover from theinsured any sums paid by the insurer to the insured in respect of the claim,and (c) in addition the insurer may by notice to the insured treat the contract
as having been terminated with effect from the time of the fraudulent act.
Contracts of surety
Underwriters are reminded that, while underwriters at Lloyd’s can provide
reinsurance to non-Lloyd’s firms in respect of business they undertake aslicensed surety bond providers (Risk Code SB), Lloyd’s does not permit thedirect writing of these contracts of surety. Additionally, licensing restrictions
apply to this class in most jurisdictions.
Proposals that are unlikely to be agreed
In view of the nature of the risks involved, managing agents should note that
Lloyd’s is unlikely to agree plans that involve the writing of the following
types of risks:• Where the underlying risk is a tradeable instrument or a contract fordifference• Where the primary risk is price risk rather than credit risk, for example:o Currency fluctuation risko Commodity price fluctuation risk

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o Any Agricultural revenue protection product (under risk code AG or
HA), with the exception of U.S. Multi Peril Crop Insurance
reinsurance that is subsidised by the Federal Crop Insurance
Corporationo Financial market fluctuation risko Property/land price fluctuation risk

Viatical & Life Settlements
Viatical/Life Settlements is a class that has been identified by Lloyd’s as
posing potentially a reputational risk to Lloyd’s.
Therefore, no syndicate should write this class without prior agreement by
Lloyd’s. Lloyd’s will require full details of the managing agent’s proposals
for writing this class before approval will be given. In particular, managing
agents should be able to provide the following information:• How the managing agent will manage the potential reputational risks to
Lloyd’s;• The underwriting process used to write the business, including themethodology used to price the business;• The methodology used to reserve for the business, including controls
used to manage the long-tail effects of the business;• The process used for the handling of claims;• The operational controls in place to manage the business.
• An explanation of the products offered; and• Details of the experience of the underwriter and support staff.

Retrospective Reinsurance
The writing of retrospective reinsurance includes the writing of run-off
covers, stop loss policies, adverse development covers, portfolio transfers
and all similar arrangements. Such policies may be written in respect ofwhole books of business or to cover particular risks. Their common featureis that the reinsurance provides retrospective cover, covering business thathas already been written by the reinsured and where losses may already be
developing. The purpose of the reinsurance is to cap or take over entirely
the liabilities of the reinsured in respect of the developing losses.
Although not reinsurance, Part VII Transfers are for these purposesconsidered to be equivalent to retrospective reinsurance.
The Lloyd’s market is primarily a market for writing live risks and prudential
concerns can arise where Lloyd’s syndicates write retrospective reinsuranceof company market risks. The writing of retrospective reinsurance caninvolve taking on very large exposures in circumstances where it can bedifficult to assess the underlying risks either due to poor records or otheruncertainties. These issues can make it difficult for Lloyd’s to assess
whether syndicates have the necessary competencies to take on thebusiness and whether the business is being appropriately priced andreserved.
Retrospective reinsurance also exposes the Central Fund to risks that were
not written in the Lloyd’s market.

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Lloyd’s does not believe that it will ordinarily be prudent to write
retrospective reinsurance into the Lloyd’s market. Given the concerns
involved, Lloyd’s considers that it is appropriate to require that any
managing agent that wishes to provide retrospective reinsurance for nonLloyd’s business should first obtain the agreement of Lloyd’s for eachretrospective reinsurance contract that it proposes to write.
This section does not apply to the writing of RITC or the reinsurance of
portfolios in run-off within the Lloyd’s market, which are subject to separate
requirements.

US and Canadian Cannabis Risks
The guidance in this section applies to cannabis related business in the US
and Canada only. The writing of such business outside of the US andCanada will require managing agents to consider the application of the laws
and regulations as they apply in the relevant territory.

US Cannabis and Hemp Risks
Cannabis Risks
Currently, cannabis is listed as a Schedule 1 drug under US federal
Controlled Substances Act, which means that it is not legal for sale. In
addition, cash generated from the sale of cannabis may implicate federal
Anti-Money Laundering laws. Nevertheless, a number of states havepassed laws that permit the sale of cannabis for medicinal purposes andadditionally a smaller number allow its sale for recreational purposes.
Based upon a thorough review of all positions, unless and until the sale ofeither medicinal or recreational cannabis is formally recognized by theFederal government as legal (as opposed to subject to non-enforcement
directives), underwriters should not insure such operations in any form
(including crop, property, or liability cover for those who grow, distribute or
sell any form of cannabis or cover for the provision of banking or related
services to these operations) in the United States.
Coverage may be provided to non-cannabis-related businesses withincidental cannabis exposures (e.g. a pharmacy or physician where a small
amount of their business may include cannabis products or prescriptions)although, losses arising from such exposures should, where possible, be
excluded from cover.
Lloyd’s will continue to monitor developments under US law and willreconsider this position if and when the conflict of laws is resolved.
Hemp Risks
The Agricultural Improvement Act of 2018 (the ‘Act’) – popularly known as
the ‘Farm Bill’ – among other matters legalises industrial hemp. The Act
reclassifies hemp to distinguish it from cannabis, affirms the legitimacy ofhemp research, and establishes a framework for state and federal
regulation of hemp production.
Section 10113 of the Act amends section 297A of the US AgriculturalMarketing Act of 1946 to define ‘hemp’ as:36“the plant Cannabis sativa L. and any part of that plant, including theseeds thereof and all derivatives, extracts, cannabinoids, isomers, acids,
salts, and salts of isomers, whether growing or not, with a delta-9
tetrahydrocannabinol concentration of not more than 0.3 percent on a dry
weight basis.”
Section 12619 of the Act amends the US Controlled Substances Act (CSA)
to exclude hemp – as defined above under the Agricultural Marketing Act –from the definition of cannabis. In addition, the section excludes
tetrahydrocannabinols (THC) found in hemp from the listing of THC in
Schedule I of the CSA.
Hemp is legal within the US and may be underwritten at Lloyd’s.
Syndicates underwriting US hemp related risks should be mindful, however,that the Act’s relaxation of federal law does not equate to a complete
deregulation of hemp. Further, some states’ laws may be more restrictive
than the federal CSA. Underwriters should therefore take steps to remain
informed of the development of regulations in this area and ensure that any
risks written conform to state and federal laws - this would include verifyingthat any applicable state or federal regulatory approvals have beenacquired.

Canadian Cannabis Risks
The Canadian Cannabis Act makes it legal in Canada to produce, distribute,sell and possess cannabis, subject to compliance with the provisions of that
Act. Lloyd’s is satisfied that, if properly done, Lloyd’s underwriters are well
positioned to write Canadian cannabis business subject to compliance withlocal Canadian requirements.
However, as cannabis remains a Class B drug in the UK, Lloyd’s has
considered whether Part 7 of the Proceeds of Crime Act 2002 (POCA) is
engaged by underwriters providing insurance cover in Canada. In particular,
it is recognised by Lloyd’s that by reason of a combination of section 328(3),329(2) and 340 POCA, sections 4, 6, and 37 Misuse of Drugs Act 1971, theproduction etc. of cannabis in Canada could be said to be “proscribed
conduct” under POCA. This raises the question whether providing cannabis
related insurance could result in an offence under section 328 POCA,
notwithstanding that the underlying risks have been legalised in Canada.
Having taken advice from specialist Leading and Junior Counsel, Lloyd’s issatisfied that:• Providing insurance for Canadian cannabis risks would not amount, in thecircumstances under consideration, to entering into, or becoming
concerned in, an arrangement which facilitates the acquisition, retention,use or control of criminal property by another person thereby breaching
section 328 POCA.
• That neither POCA – nor any of its statutory predecessors – was designed
to bring wholly lawful conduct such as the provision of insurance ofbusiness activity carefully legalised in another country, into its scope.
• This view is consistent with the Explanatory Notes to POCA, including forexample paragraph 6 which states that the statute’s purpose was tocriminalise money laundering in its broadest form which “is the process bywhich the proceeds of crime are converted into assets which appear tohave a legitimate origin so that they can be retained permanently or37

recycled into further criminal enterprises” – this is far removed from
Lloyd’s underwriters openly and properly providing businesses in Canada
with insurance against a conventionally covered ascertainable external
event.
Lloyd’s will therefore consider the writing of Canadian cannabis business bysyndicates at Lloyd’s as part of the usual business planning process.
Managing agents will, however, be required to demonstrate an appropriate
understanding of the Canadian Cannabis Act to ensure compliance with all
local laws. Where necessary, and should there be any question as to thelegality of accepting any particular risk, either under UK or Canadian laws,
managing agents will be required to obtain appropriate legal advice.
Particularly in view of the proximity of the USA to Canada and the potential
to write cross-border exposures, it is important that managing agentsensure that any cannabis risks have Canadian risk location only.