PKF Littlejohn LLP

Proposed Part VII Insurance Business transfer relating to certain
Members of Lloyd’s for any and all of the 1993 to 2020 (inclusive)
years of accounts to
Lloyd’s Insurance Company S.A.

Supplementary Independent Expert Report of Carmine Papa

Dated: 10 November 2020

PKF Littlejohn LLP

Contents
1

2

3

4

5

6

Introduction

1

1.1

Background1

1.2

Scope of this Report2

1.3

Key changes to the scheme and other developments

3

Executive Summary

52.1

Significant matters

5

2.2

Approach6

2.3

Findings

6

2.4

Communications and notifications

8

2.5

Overall conclusions8

2.6

Expert’s declaration

8

Data availability

9

3.1

Revision to data

9

3.2

Review of data

12

3.3

Conclusion on data extraction exercise

12

Liabilities attaching to Transferring Policies

14

4.1

Calculation of liabilities

14

4.2

Transferring Liabilities

14

4.3

Approach taken to reviewing the Transferring Liabilities

15

4.4

Uncertainties

18

4.5
4.6

Uncertainty relating to the COVID-19 pandemic
Review of Quarter 3 2020 data

20
22

4.7

LIC’s own review of the liabilities

23

4.8

Results of my review of the Transferring Liabilities

25

4.9

Conclusions

26

Capital28

5.1

The Lloyd’s Internal Model

28

5.2

Impact of COVID-19 on the Lloyd’s market

31

5.3

Impact of Capital Injection

33

5.4

LIC Balance Sheet

34

5.5
5.6

Review of the solvency calculations for LIC after the proposed Part VII transfer 37
Capital injection38

5.7

LIC’s exposure to potential future risks

40

Lloyd’s Insurance Company S.A.

43

LIC’s Operating Model

43

6.1

PKF Littlejohn LLP

7

8

9

6.2

Quota share reinsurance contracts

45

6.3

LIC’s Outsourcing Agreements

46

6.4

Costs Agreement

47

Conversion of Syndicates of Outwards Reinsurance to Retrocessional Cover

49

7.1

49

UpdateStatus of Brexit negotiations

53

8.1

Developments

53

Policyholder communication

54

9.1

Update54

9.2

Change in Effective Date

54

9.3

Outward reinsurers and collateral and security counterparties

55

9.4

Policyholders notification

55

9.5

Objections and other Policyholder’s issues raised

56

9.6

Conclusion

57

10 Other matters59

10.1 Update on FOS and FSCS

59

10.2 Approval of Report59

Appendices
Appendix 1 – Glossary of Terms
Appendix 2 – Summary of additional data provided

PKF Littlejohn LLP

1 Introduction
1.1

BackgroundI have prepared an Independent Expert (IE) report for the Court dated
1 May 2020 entitled “Proposed Part VII Insurance transfer of certain
insurance business relating to certain Members of Lloyd’s for any andall of the 1993 to 2020 (inclusive) years of accounts to Lloyd’s
Insurance Company S.A.”.
In the above report, I describe the proposed transfer of certain policies(Transferring Policies) to Lloyd’s Insurance Company S.A. (LIC) inorder to continue to service those policies which fall within thejurisdiction of the EEA regulators without potentially breaching those
EEA regulations. A copy of my report is available, free of charge, andhas been available since 15 June 2020, on the following website:
https://www.lloyds.com/brexit-transfer/independent-expert.
Hard
copies were also made available on request free of charge.
This supplementary report has been prepared to update the Court withmore relevant information on certain matters and to provide an updateof my conclusions.
This supplementary report should be read together with my IE report
as reading this report in isolation may be misleading. Unless otherwise
stated in this report, the basis of my assumptions, sources of
uncertainty, and limitations set out in my IE report also apply to this
supplementary report.
Throughout this supplementary report I refer to financial items orevents which have no material adverse effect. I consider an event or
outcome to not have a material adverse effect if, in my opinion, theexpected impact of the event is very small, such that it would not
influence the decisions of a reader either on its own or in conjunction
with other similar defined events. In assessing whether an event
impact is very small, I have considered the following:▪

the very low probability of the event occurring▪

a very low financial impact of the event▪

a combination of the two conditions above.

1

PKF Littlejohn LLP

Similarly, I consider an event to have low probability if, in my opinion,
the chance of it occurring is so small that it would not influence thedecisions of a reader of this report. I consider an event to be unlikely if
it has a low probability of occurring.

1.2

Scope of this Report
My understanding is that copies of my supplementary report will bemade available to the Court, the PRA and the FCA, the NBB (theBelgium Prudential Regulator), the board of LIC and to Lloyd’s. I also
understand a copy of this report will be available to Policyholders andother members of the public as required by the relevant legislation and
will
be
made
availableonadedicatedwebsite:https://www.lloyds.com/brexit-transfer
In preparing this report, where applicable, my team has complied withTAS 100: Principles for Technical Actuarial work and TAS 200:
Insurance as issued by the UK Financial Reporting Council. My teamhas also complied with the Institute and Faculty of Actuaries
professional standards APSX1 and APSX2.
The additional data made available to me since I prepared my IE report
is set out in Appendix 2. I have not independently verified the
additional data and information made available to me by Lloyd’s and
LIC, or any other parties. Accordingly, my work does not constitute an
audit of the financial data or information. Where I believe it wasappropriate, I have applied certain review procedures to satisfy myselfthat the information provided is reasonable and consistent based on
my experiences and knowledge of the Lloyd’s and wider insurance
market. I have also met in person, or conducted telephone and videoconference calls, with representatives of Lloyd’s and LIC and theirprofessional advisors.
In preparing this report, I have been assisted by my team, however,any review or analysis from my team has been carried out under mysupervision. Accordingly, this report has been written in the first
person singular and opinions expressed therein are my own.
Throughout this report sections highlighted in bold reflect my opinion
on the subject matter. Definitions for capitalised terms may be foundin the Glossary.

2

PKF Littlejohn LLP

The report has been prepared in accordance with the PRA’s statementof policy – the PRA’s approach to Insurance business transfers dated
April 2015 and the FCA’s approach to the review of Part VII insurance
business transfers published on 29 May 2018.

1.3

Key changes to the scheme and other developments
In my IE report the Effective Date for this proposed Part VII transfer
was assumed to be 29 October 2020. The Effective Date is now
expected to be 30 December 2020. The delay in the Effective Date is
to ensure that all parties involved in this proposed Part VII transfer
have sufficient time to be ready to implement the Scheme
operationally. The additional time was required to:▪

implement new operating systems and processes for thesubmission of data relating to the Transferring Liabilities to LIC;▪

establish claims payment facilities; and▪

prepare for changes to financial, regulatory and business
reporting following the proposed Part VII transfer.

In my opinion the revised Effective Date does not have a material
impact on Lloyd’s, LIC, non-Transferring or Transferring
Policyholders; nor does the change have any material impact on
the effectiveness of the Scheme.
The definition of Excluded Policies has been changed since my IE
report was finalised. Excluded Policies now include “Sanctions
Policies” which are any policies: (i) under which amounts are payable(directly or indirectly) to a “designated person” (being a person or entitythat is included on any list that is subject to financial sanctions orequivalent measures in the UK, the European Union, Belgium or any
asset freeze list maintained by the United Nations Security Council or
any list maintained by the US Treasury Department Office of Foreign
Assets Control); (ii) where any amount has arisen under or inconnection with such Policy required to be blocked under US
sanctions laws; or (iii) under which the provision of (re)insurance or
payment of any claim would expose the Transferee to any sanction
prohibition or restriction under sanctions laws and regulations. Lloyd’s
estimates that the number of Sanctions Policies is extremely small (bynumber and value). This change in the definition of Excluded

3

PKF Littlejohn LLP

Policies does not affect the opinions I have expressed in my IE
report.
The data used to estimate the insurance liabilities, and to notify
Policyholders, has been amended. Details of the changes and myconclusion on the revised data are set out in Section 3. This change
was anticipated in my IE report.
Lloyd’s had, at the time my IE report was finalised, assumed that the
total estimated cost to be incurred by LIC to administer the insurance
liabilities transferred would be funded by Lloyd’s as part of the capitalprovided to LIC prior to the Effective Date. Lloyd’s and LIC have now
agreed that the cost to administer the transferred insurance liabilities
should be funded on an annual basis. Both parties have entered intoa “Costs Agreement” to give effect to this arrangement. My commentson the Costs Agreement are set out in Section 6.4.
Lloyd’s and LIC have now agreed that the funds provided by Lloyd’s
to LIC to meet its Solvency Capital Requirement following the
proposed Part VII transfer will be in the form of cash of €207m and a
Letter of Credit (LOC) of €200m which totals €407m. My comments on
this change are set out in Section 5.6.
As set out in Section 4.5 the estimate of the insurance liabilities
associated with the Transferring Policies is subject to several
uncertainties. As agreed by Lloyd’s and LIC, the total capital injectionof €407m includes €40m to cater for this uncertainty. See Section 4.7
for further details.

4

PKF Littlejohn LLP

2 Executive Summary
2.1

Significant matters
When I completed my IE Report on 1 May 2020, there were certain
matters that I said I would revisit in this Supplementary Report. These
matters were as follows.

▪

The change in methodology to extract the data necessary to
notify Policyholders of this proposed Part VII transfer, and to
estimate the insurance liabilities attaching to the Transferring
Policies;▪

The LIC operating model, which was being developed when my
IE report was completed; and▪

An update on the COVID-19 pandemic and how it impacts on
both the Lloyd’s market and the insurance liabilities attaching
to the Transferring Liabilities.

In addition to the above a number of changes have been made to theway by which the Scheme will be implemented since my IE report wascompleted. In my opinion the principal changes are as follows:▪

The costs to be incurred by LIC to administer insurance
liabilities to be transferred will now be funded annually rather
than by a one-off upfront payment.

▪

The capital injection to fund LIC consists of a combination of
cash and a Letter of Credit and includes a margin to cater for
the uncertainties surrounding the estimate of the value of theTransferring Liabilities.

5

PKF Littlejohn LLP

2.2

Approach
My approach to both the matters I have revisited and the changes to
the Scheme, was to seek additional information from Lloyd’s and from
LIC, to review this new information and to make an assessment onwhether it impacts the opinions I arrived at in my IE report.
As a result of the revision, made by Lloyd’s, to the data used to support
this proposed Part VII transfer, I have reassessed Lloyd’s calculationof the estimated insurance liabilities transferring to LIC.
I have received all the information I requested from both LIC and
Lloyd’s and I have considered the impact, if any, of this additional
information on the conclusions and the analysis set out in my IE
Report.

2.3

Findings
The revision to the data extraction process used to support this
proposed Part VII transfer is, in my opinion, a sensible change to
make, and has identified additional Policyholders, who have been
included in a second direct notification exercise. The revision to
the data has also reduced the uncertainty associated withestimating the insurance liabilities transferring to LIC. My
actuarial team has reviewed the revised calculation of theinsurance liabilities, and I have concluded that the methodology
and assumptions used by the Chief Actuary of Lloyd’s in thecalculation of the Transferring Liabilities at the Assessment Date
are reasonable.
The design of LIC’s operating model is now complete and has
been subject to testing by LIC and LIC’s advisors. I am now
satisfied that Transferring Policyholders do not have to negotiate
any new or unfamiliar processes once the Transferring policies
are transferred to LIC.
As the majority of the underwriting losses arising from COVID-19
will fall primarily on the 2019 and 2020 underwriting years and the
majority of the Transferring Policies relate to the 2018 and priorunderwriting years, I have concluded that COVID-19 will have nomaterial impact on the gross insurance liabilities transferred to
LIC (the impact on the net insurance liabilities is nil).

6

PKF Littlejohn LLP

Although, based on the current and plausible future impacts, theunderwriting loss from COVID-19 is a significant loss to the Lloyd’sMarket and is comparable to previous losses suffered by the Market.
Lloyd’s has been able to cope with similar losses in the past andbased on my experience and knowledge of the market, Lloyd’s
will be able to cope with a loss of this magnitude. Lloyd’s has, orintends to take, actions which will mitigate the impact of the estimated
COVID-19 underwriting loss on its Regulatory Solvency Capital
Requirement, see Section 5.1.6 for further details.
Following the capital injection into LIC to support the proposed Part
VII transfer, and before any mitigating actions Lloyd’s intends to take,the Central Fund is projected to still have assets of £3.8bn. After the
mitigating actions the MWSCR and the CSCR are projected to remain
in excess of the targeted Lloyd’s Solvency Ratios. Therefore, in myopinion, Members through a combination of their own resources
and recourse to the Central Fund if needed are likely to be able
to meet their obligations under their QS Reinsurance Contracts
with LIC. Further, I have concluded that Lloyd’s will be able tomeet Members liabilities to LIC, to pay valid claims, should
Members’ own funds not be sufficient to meet those liabilities infull. Accordingly, the views I have expressed in my IE report have notchanged as result of the impact of COVID-19 on the Lloyd’s market.
The change on how funds have been provided to LIC, and the use of
the Letter of Credit, does not impact on the opinions I expressed in my
IE report. The inclusion of a margin of €40 million in the funds tobe provided is a sensible arrangement to cater for the uncertainty
associated in estimating the insurance liabilities. The inclusionof this margin will have no material adverse effect on either theTransferring or non-Transferring Policyholders, although it
provides additional comfort to LIC that it will be able to meet its
solvency capital requirement should the Reserves transferredshow any deterioration.
Further, a number of non-material changes have been made to the
Scheme document since the Directions Hearing. In my opinion thechanges to the Scheme document are not material and there isno material adverse effect on any Policyholder group which isaffected by these changes.

7

PKF Littlejohn LLP

2.4

Communications and notifications
I have been kept informed and have reviewed the progress of the
Policyholder communication exercise, including the publicity
arrangements. I am satisfied that the communication andengagement with Policyholders, and other relevant parties, areconsistent with my expectations when I finalised my IE report.
None of the Policyholder objections have caused me to revise theconclusions I arrived at in my IE report.

2.5

Overall conclusions
I have considered the proposed changes to the Part VII transfer
and their likely effects on both the Transferring Policyholders
and non-Transferring Policyholders. I have concluded that there
are no material adverse effects on any Policyholder groups which
are affected by these changes. Accordingly, I am satisfied thatthe opinions I expressed in my IE Report still remain valid.

2.6

Expert’s declaration
I confirm that I fully understand my overriding duty to the Court, andthat I must help the Court on matters within my expertise. My duties to
the Court override any obligation to those from whom I have received
instructions or by whom I am paid. I believe that I have complied, andwill continue to comply, with this duty.
I confirm that I am aware of the requirements of Part 35 and PracticeDirection 35 of the Civil Procedure Rules, and the Guidance for
Instruction of Experts and Civil Claims 2014.
I confirm that I have made clear which facts and matters referred to inthis report, are within my own knowledge, and which are not. Thosethat are within my own knowledge I confirm to be true. The opinions I
have expressed represent my true and complete professional opinions
on the matters to which they refer.

8

PKF Littlejohn LLP

3 Data availability
3.1

Revision to data
In my IE Report, I reported on the challenges Lloyd’s had to resolve inconnection with the lack of data which is held centrally by the market.
This is due to Lloyd’s unique structure where the Lloyd’s market
underwriting is undertaken by the Syndicates and not by Lloyd’s
centrally (as Lloyd’s is not an insurer).
Reliable data is required in relation to this proposed Part VII transfer
in order to:▪

identify Transferring Policies;▪

identify those Policyholders which are to be notified inconnection with this proposed Part VII transfer; and▪

provide data on premiums and claims attaching to theTransferring Policies to enable the insurance liabilities
associated with the Transferring Policies to be calculated.

Lloyd’s maintains certain data centrally for regulatory reporting
purposes. This database is referred to in this report as the Regulatory
Reporting Database (RRD).
From the RRD, Lloyd’s had undertaken a data extraction exercise to
identify and extract data for those policies which are in scope for this
proposed Part VII transfer. In order to verify the data extracted fromthe RRD, Lloyd’s undertook a validation exercise to agree the centrally
held data to the data held by the Syndicates and submitted to Lloyd’s
by the Managing Agents. Full details of this validation exercise are set
out in Section 4.4 of my IE report.
Based on this validation exercise, Lloyd’s concluded:▪

The data from the Managing Agents contained more detailed
geographical information than can be extracted from the RRD.

▪

The financial data submitted by Managing Agents, such as
premiums, outstanding, paid claims, is of a lower quality thanthe data held in the RRD. Further there are significant

9

PKF Littlejohn LLP

inconsistencies between the way Managing Agents present
this data.
The previous approach adopted was to source the policy-level
information from the Managing Agents and then to attempt to matchthe history of premiums and claims associated with these policies tothe Lloyd’s RRD. This approach was fraught with difficulties and led toseveral delays and a lack of clarity over how to deal with the resulting
issues encountered. The issues arose for two main reasons:▪

The RRD was designed as a tool to support Lloyd’s financial
reporting requirements and holds information at a lower levelof granularity than is required to determine whether individual
policies are relevant to the proposed Part VII transfer.

▪

The quality of some of the Managing Agents’ data and thereference fields used to match the Managing Agents’ data with
the RRD were not sufficiently reliable.

Lloyd’s has therefore adopted the following revised approach:▪

The data supplied by the Managing Agents (which contains
more detailed geographic information) has been used, in
conjunction with the data held in the RRD, to identify those
Policies which are in scope for this proposed Part VII transfer
by using certain selection parameters. This process is referred
to in this report as Segmentation.

▪

Once the Transferring Policies have been identified, details ofclaims (both paid and outstanding) and premiums attached to
the Transferring Policies have been extracted from the RRD
held centrally by Lloyd’s.

The data extracted from the above process has been used to projectand estimate the insurance liabilities attaching to the Transferring
Policies and to identify the Policyholders who should be directly
notified of this proposed Part VII transfer.
The revised approach starts from the premise that the RRD represents
Lloyd’s most comprehensive data source of premiums and claims
attaching to the Transferring Policies and therefore should form thebasis of estimating the insurance liabilities attaching to thoseTransferring Policies. In my opinion this is a more sensible
approach and provides a known starting position which was not

10

PKF Littlejohn LLP

the case with the previous approach. I believe that this revised
approach provides a more robust, accurate and complete data
set on which to estimate the Transferring Liabilities than theprevious approach.
As a result of the change in approach set out above, the Segmentation
process used in order to ascertain whether a policy is transferring
under this Part VII has been modified from those which I reported uponin my IE report. The modification was required to incorporate the moredetailed geographical information contained within the data provided
by the Managing Agents, such as Policyholder domicile and risk
location data fields. The Segmentation was also applied at a moregranular basis than previously applied in order to improve theidentification of the Transferring Policies.
The previous calculation of the Transferring Liabilities attaching to theTransferring Policies was based on the data held in the RRD as at 31
December 2018 and certain supplementary data supplied by theManaging Agents at 30 September 2019 (non-XIS data only). These
dates were collectively referred to in my IE report as the Assessment
Date.
In order to arrive at the insurance liabilities as at the initial Effective
Date (assumed at the time to be 29 October 2020), Lloyd’s actuarial
team estimated the rate at which the Transferring Policies insurance
liabilities would reduce (i.e. settle) between the Assessment Date andthe Effective Date.
For the purpose of the court hearing now expected to be in November
2020, Lloyd’s has revised the Assessment Date as follows:▪

Lloyd’s RRD as at 31 December 2019.

▪

Non-XIS data supplied by the Managing Agents as at 30 June
2020.

In order to estimate the Insurance liabilities attaching to theTransferring Policies at the revised Effective Date (which is now
scheduled to be 30 December 2020), the Lloyd’s actuarial team has
estimated the rate at which liabilities on Transferring Policies will
reduce between the revised Assessment Date and the new Effective
Date. My comments on the Reserves attaching to the Transferring
Policies as at the new Effective Date are set out in Section 4.

11

PKF Littlejohn LLP

3.2

Review of data
In order to validate the data extraction exercise undertaken by Lloyd’s,
my team has engaged in walkthroughs of the processes Lloyd’s has
undertaken to:▪

source the Managing Agents’ data▪

match the Managing Agents’ data to the RRD▪

apply the Segmentation process to the population of matcheddata▪

validate the final answer.

I have also reviewed the relevant documentation provided by the
Lloyd’s data team and examined samples of the data files sent to theManaging Agents for their validation. Lloyd’s actuarial department has
also reviewed the data for internal consistency and the Managing
Agents’ have provided independent certification that the proposed
data submitted to Lloyd’s is materially accurate and complete.
I have reviewed the individual data validation and the Segmentation
processes at a detailed technical level and find them to be sensible
and robust. I have also reviewed the testing carried out by an “arms’length” team within Lloyd’s to check the accuracy of the data extraction
exercise and I believe that this testing has been thorough andappropriate. I have reviewed the data extracts sent to the Managing
Agents for their certification against their own datasets and find them
to be clear, detailed and appropriate.

3.3

Conclusion on data extraction exercise
Based on the work I have undertaken, and the discussions I have
had with representatives and the management of Lloyd’s, I haveconcluded the following:▪

I agree with the Lloyd’s conclusion that the data suppliedby the Managing Agents is a more reliable source of data
to use, when combined with the RRD, to identify from thetotal population of policies those Transferring Policies
being transferred by this proposed Part VII transfer.

12

PKF Littlejohn LLP▪

I agree with the revised approach of Lloyd’s to use the
RRD as the starting point to ascertain the premiums andclaims history attaching to the Transferring Policies.

▪

The revision to the original Assessment Date is a sensible
change to make as it will reduce the uncertainty
associated with the estimate of the transferring insurance
liabilities as:▪

-

It uses more up to date information in respect ofpremiums and claims arising on Transferring Policies.

-

The period between the revised Assessment Date and the
new Effective Date is substantially reduced compared tothe period between original Assessment Date andEffective Date. Therefore, the estimate of the insurance
liabilities that will settle, between the revised Assessment
Date and the new Effective Date, will be subject to lessuncertainty than the previous estimate.

The modification in the Segmentation process used to
identify Transferring Policies is required as aconsequence of using Managing Agents’ data rather thandata available to Lloyd’s centrally. I have reviewed themodification made to the Segmentation process applied to
the Managing Agents’ data to identify the Transferring
policies and in my opinion, the changes made arereasonable.

13

PKF Littlejohn LLP

4 Liabilities attaching to Transferring Policies
4.1

Calculation of liabilities
I reported in Section 5.11 of my IE Report that I would need to revisit
the calculation of the Transferring Liabilities as the data used for that
Report was based on the centrally held data as at 31 December
2018,and the additional data supplied directly by Managing Agents as
at 30 September 2019.
For this Supplementary Report, the data used to arrive at the value of
the Transferring Liabilities is the Lloyd’s centrally held data as at 31
December 2019 and the additional data supplied by the Managing
Agents as at 30 June 2020 (non-XIS data only). These dates arecollectively the Assessment Date.
The insurance liabilities attaching to the Transferring Policies havebeen calculated, by the Lloyd’s Market Reserving & Capital Team
(MRC), as at the Assessment Date. In order to arrive at the liabilities
as at the Effective Date, Lloyd’s has estimated the rate at which theliabilities on Transferring Policies will reduce between the Assessment
Date and 30 December 2020 (the Effective Date), on a class by classbasis. The estimate by Lloyd’s incorporated actual settlements
between 1 January 2020 and 31 May 2020. Some 24%, in aggregate,of the liabilities attaching to the Transferring Policies are expected to
be settled from 1 January 2020 to the Effective Date.
The insurance liabilities have been calculated on an individual class ofbusiness basis based on 72 business classes. In order to calculate thegross liabilities transferring the Lloyd’s actuarial team has used anumber of standard actuarial techniques to project both the ultimate
premiums and the ultimate claims (net of acquisition costs). The
overall approach to the valuation of the Transferring Liabilities is
described in Section 5 of my IE Report.

4.2

Transferring Liabilities
Lloyd’s best estimate of the insurance liabilities transferring under the
proposed Part VII transfer, on a high-level class of business basis isset out in the table below:

14

PKF Littlejohn LLP

Estimated Reserves by High Level Class of Business – Gross of reinsurance
Total - All Figures 000s - Converted EUR - by High Level Reserving Class
Ultimate
Ultimate Reserves as %Ultimate
Reserves as atReserves as atof Total as at
SignedAssessment
the Effective
the Effective
Premium
Date
Date
Date
Accident & Health2,286,652
313,578
222,557
5%
Aviation

4,741,834

263,373

188,096

4%

Casualty FinPro

5,311,617

1,813,771

1,520,679

32%

Casualty Other

4,422,794

1,533,509

1,309,476

27%

Casualty Treaty

372,220

131,183

116,773

2%

Energy3,383,333

326,270

169,087

4%

Marine11,454,386

907,400

578,925

12%

Property (D&F)

2,990,065

126,337

59,9401%

Property Treaty

1,914,995

240,624

191,657

4%

Specialty Other

4,204,818

607,450

407,266

9%

TOTAL

41,082,716

6,263,495

4,764,456

100%

A small proportion of the Transferring Liabilities is expected to remain
unearned at the Effective Date, leading to a slightly lower earned
reserves estimate of €4.49bn at the Effective Date. Including theprovision for unallocated loss adjustment expenses (ULAE) of €61m
total earned reserves and the unearned premium reserve of €302m
are estimated to be €4.9bn at the Effective Date.
For the purposes of my analysis and comments I have considered the
Ultimate Reserves of €4.76bn being transferred.
In order to calculate LIC’s Solvency Capital Requirement the Ultimate
Reserves amount of €6.26bn at the Assessment Date has been used.
LIC has then projected this amount forward resulting in best estimate
undiscounted Reserves of €4.76bn (as per the table above) at the
Effective Date. Under Solvency II valuation rules for Technical
Provisions the €4.76bn is discounted, adjusted for the inclusion of anallowance for Events Not In Data (ENID) and a provision for additional
expenses leading to projected Technical Provisions included in LIC’s
Solvency II balance sheet of €4.83bn at 31 December 2020 (refer to
Section 5.4.6).

4.3

Approach taken to reviewing the Transferring Liabilities
The approach I have taken to satisfy myself that the revised liabilities
calculated by Lloyd’s are reasonable is as follows:15

PKF Littlejohn LLP▪

A review of the Chief Actuary’s Report dated April 2020
prepared for the Directions Hearing;▪

A review of the final draft of the Supplementary Chief Actuary’s
Report for the Sanction Hearing to understand the changes inmethodology and approach adopted by Lloyd’s to value theTransferring Liabilities on a gross basis. I have reviewed the
major changes and I believe them to be reasonable.

I have also selected the following ten classes of business on the basisof materiality of gross written premiums or gross outstanding claims or
due to the need for special consideration. These ten classes wereselected based on the analysis of change (AOC) summary that Lloyd’s
provided to me which shows a roll-forward of previously selectedassumptions and reserves for the Transferring Liabilities. For theseclasses, I have reviewed the assumptions and methodology in moredetail and reviewed the results of the valuation of the Transferring
Liabilities on a gross basis for reasonableness. Details of my selection
criteria are as follows:
Class of Business

Rationale for Selection

Marine Hull

Top 5 by gross written premium andgross outstanding claims and large
unknown/investigative outstanding
claimsFinancial Institutions (non-US)

This is a material class that has been
relatively stable but is likely to be
exposed to any recessionary factors.

Professional Indemnity (non-US)

One of the largest classes bytransferring reserves.

Political Risks, Credit & Financial
Guarantee

Top 5 by gross written premium

Property CAT XL (Non-US)

This class has the largest
transferring RRD reserves for the2020 underwriting year.

Non-Marine General Liability(non-US direct)

Top 5 by gross outstanding claims

Medical Malpractice (non-US)

Top 5 by gross outstanding claims
and potential for latency

Overseas Motor Other

Top 5 by gross outstanding claims
and potential for latency

16

PKF Littlejohn LLPClass of Business

Rationale for Selection

Directors & Officers (US)Significant developments in the
incurred movement

Directors & Officers (Non-US)

Significant developments in the
incurred movement

These ten classes represent 64% in value of the overall Transferring
Liabilities at the Effective Date.
For each of the above classes, I have undertaken a review of theassumptions and methodology used by Lloyd’s to determine the valueof the Transferring Liabilities. I have also sense-checked the results
for reasonableness as follows:▪

The selected development patterns (including benchmarked
development patterns)▪

The selected Initial Expected Loss Ratio (“IELR”) including theTechnical Provisions Data returns (“TPD”) from the Syndicatesand Syndicate Business Forecast (“SBF”) loss ratios or otherbenchmarks used▪

The results of the projection of ultimate claims and ultimate
premiums▪

The projection methods used▪

The adjustments made (or lack thereof) for special features,such as for the potential for latent or annuity claims▪

The benchmarks used where there are data limitations▪

The stability of business mix within the data used to derive
development patterns▪

The appropriateness of applying methodology andassumptions, derived from analysing Transferring Business, toUnclear business and Non-XIS business▪

A comparison of the appropriateness of the valuation of theTransferring Policies as held against the Global market▪

The appropriateness of the segmentation of data for projection.

17

PKF Littlejohn LLP

As a result of my work I have concluded that the methodology
and assumptions used by the Chief Actuary of Lloyd’s in thecalculation of the Transferring Liabilities at the Assessment Date
are reasonable.

4.4

Uncertainties
Lloyd’s has identified a number of inherent uncertainties in arriving attheir best estimate of the value of the Transferring Liabilities. In order
to ascertain the impact these uncertainties may have on theTransferring Liabilities Lloyd’s has applied certain stress tests. Detailsof these uncertainties and results of the application of the stress tests
are set out below:
Uncertainty

Stress test applied

Increase inTransferring
Liabilities

Part VII data uncertainty

DoublingofAssumedTransferring and Remaining
Unknown data from RRD
Unclear
EEA
Indication
segment, and doubling of the
proportionof Remaining
Unknown RRD reserves
assumed to transfer

4.7%

Appropriateness of payment
pattern for reserve projection
between May 2020 andEffective Date50%
reductionintheestimated reserves paid overthe first quarter of projectionof reserves to Effective Date

4.0%

Uncertainty with 2019 and2020 premium estimates
given change in business mix

Increase in 2019 and 2020
ultimate premium by 20% and
50%

1.5%

Application of RRD projection
methods and assumptions to
Non-XIS data

Increase in IELR by 50% andpattern tail by 5% for Non-XIS
business across all classes
and underwriting years

1.0%

18

PKF Littlejohn LLP

Uncertainty

Stress test applied

Increase inTransferring
Liabilities

Uncertainty around direct
losses resulting from COVID19 and associated secondary
impact of COVID-19 due to a
global recession

Increase in COVID-19 loss
estimates by 50% andsecondary losses due to a
global recession following the
pandemic assuming a 35%
uplift on IELRs for selectedclasses applied to unearned
premium reserve as at 2019
year end

3.1%

Delayed incurred tail factor
scenario test

Slow
the
incurreddevelopment pattern by a 5%
tail factor

12.4%

Increased Initial Expected
Loss Ratios (IELR) scenario
test

Increase IELRs across allclasses by 10%

4.1%

Increased reserves for backyears (2008 and priorunderwriting years) scenario
test

Increase Incurred but notreported claims (IBNR) to
claims outstanding ratios by
50%

0.4%

Increased catastrophe IBNR
scenario test

Increase CAT IBNR by 50%

2.2%

Note:
(i)

Some of the uncertainties could result in a reduction of theestimate of Transferring Liabilities.

(ii)

The uncertainty associated with the COVID-19 pandemic is set
out in more detail in Section 4.5.

The table above is not an exhaustive list of the uncertainties relating
to the valuation of the Transferring Liabilities, but Lloyd’s has selected
the above uncertainties as they consider these to have the mostmaterial impact on the Transferring Liabilities.
In order to mitigate the potential impact on LIC’s solvency
requirements both LIC and Lloyd’s have agreed that a capital buffer
would be appropriate. Further details are set out Sections 4.7.4 to
4.7.7.

19

PKF Littlejohn LLP

4.5

Uncertainty relating to the COVID-19 pandemic
Insurance claims arising from the COVID-19 pandemic will result in asignificant loss for the insurance industry and will impact both the
Lloyd’s market and the insurance liabilities attaching to theTransferring Policies. The insurable losses from COVID-19 will ariseon policies on risk at the time the pandemic arose, i.e. early 2020. This
will impact mainly on insurance policies still on risk incepting in thecalendar years 2019 and 2020. Multiyear policies written prior to 1
January 2019 and still on risk in 2020 will also respond to losses
arising from the COVID-19 pandemic.
For Transferring Policies, the COVID-19 claims will arise from thefollowing three sources:▪

Policies written by those coverholders who were not able to set
up procedures in time to write EEA business through LIC withan inception date in 2019. Lloyd’s granted an extension to allow
some 300 coverholders to continue to write EEA businessduring the early part of 2019. The last such extension expiredon 12 April 2019.

▪

Any multiyear policies written prior to 1 January 2019 whichwere still on risk in 2020. Based on my review of the loss
development patterns extracted from the RRD, I am of theopinion that multiyear policies are not significant to theclasses of business that are impacted by COVID-19 losses.

▪

Transferring German reinsurance business which members
continue to underwrite in 2020.

Therefore, in my opinion, the impact of COVID-19 insurance
related claims on Transferring Policies will be limited in number,particularly as 94% of the Transferring liabilities relate to policies
written prior to 2019.
In order to assess the impact of COVID-19 losses on the Lloyd’s
market, all Lloyd’s Managing Agents were requested to provide anestimate of their ultimate liability to COVID-19 related claims for all
Syndicates under their management. The Managing Agents wererequested to provide details of their estimated loss on a gross and net
basis (i.e. after estimated recoveries from their reinsurers). Managing
Agents were requested by Lloyd’s to base their initial assessment on

20

PKF Littlejohn LLP

the assumption that the restrictions due to COVID-19 would end on 30
June 2020. Subsequent to this initial assessment Managing Agents
have updated their estimate of the losses from COVID-19, for thesyndicates under their management, as at 30 June 2020.
Further the Managing Agents were requested to analyse their initialloss estimate by geographical regions (one of which was Europe),year of account and classes of business. The Europe region will
include countries outside the jurisdiction of the EEA regulators andincludes policies directly written by LIC in 2019 and 2020.
Where the potential loss extended across more than one of thegeographical regions, specified by Lloyd’s, the loss was captured
within a “worldwide” region. This category was then re-allocated to theEuropean and non-European region based on the proportion of thegross loss allocated originally to those regions.
The gross expected percentage loss split by underwriting year,
estimated by Managing Agents as at 30 June 2020, was as follows:
Underwriting Year
2018
2019
2020

%
14.74
59.12
26.14
______
100.00______The bulk of the Lloyd’s market loss (approximately 85%) arises on the2019 and 2020 years. However as stated earlier some 94% of theReserves transferring relate to policies that incepted prior to 1 January
2019. In my view this shows the impact of the COVID-19 loss on
the liabilities attaching to the Transferring Policies will not only
be limited in number but also in quantum.
Lloyd’s has based their estimate of the COVID-19 liabilities relating to
the Transferring Policies on the Manging Agents initial estimate of theloss falling within the European region after allowing for an element of
the loss analysed to the worldwide region as explained above. The
initial estimate of the liabilities was split between Transferring and nonTransferring Policies using a mixture of unearned and ultimate
premiums. This initial estimate was then scaled up to reflect the21

PKF Littlejohn LLP

increase in the Managing Agents estimate of the COVID-19 loss as at
30 June 2020. In order to carry out this exercise the ultimate premiumfor policies incepting in 2020 was all considered to be unearned.
The impact of COVID-19 on LIC from the Transferring Policies will be
mitigated by the 100% quota share reinsurance (“QS Reinsurance
Contracts”) entered into between LIC and Lloyd’s. This will result in
the economic liabilities of COVID-19 related claims being ultimately
borne by those Members who originally wrote the underlying policies
giving rise to those liabilities, or subsequently assumed those liabilities
through the Reinsurance to Close process. Therefore, I haveconcluded that there will be no material adverse effect on theTransferring Policyholders as a result of claims arising fromCOVID-19. The COVID-19 loss will impact on LIC’s solvency
requirements as any increase in the gross Transferring Liabilities will
increase LIC’s counterparty risk. However, based on the current andplausible future impact of the COVID-19 loss effecting the Lloyd’s
market, only 3% of the estimated gross loss is expected to impact theTransferring Policies. Therefore, in my opinion, even a significant
increase of 50% in the COVID-19 Lloyd’s market loss will notmaterial adversely affect LIC’s Solvency Ratio. In any event theresults of any such increase will be mitigated by the additional
capital injection of €40m made available to LIC by Lloyd’s tocover uncertainties associated with calculating the insurance
liabilities attaching to the Transferring Policies (See Sections
4.7.4 to 4.7.7).
The impact of COVID-19 on the Lloyd’s market is set out in Section
5.2.

4.6

Review of Quarter 3 2020 data
Lloyd’s has undertaken an exercise to review the value of liabilities
attaching to Transferring Policies based on the latest available
information. The following areas were reviewed by Lloyd’s:▪

A review of the data segmentation as at 30 September 2020
following revisions to the draft Master List.

▪

A review of the recent experience of premiums and claims
attaching to the Transferring Policies as at 30 September 2020.

22

PKF Littlejohn LLP▪

The aggregate value of liabilities attaching to the Transferring
Polices, which have been paid during the three month period
ended 30 September 2020.

▪

The movement of foreign exchange rates between theAssessment Date and 30 September 2020.

▪

The latest Managing Agents estimates of the COVID-19 loss
impacting the syndicates under their management.

▪

The latest market information on major claims events that may
impact the value of Transferring Liabilities.

Based on their review, Lloyd’s has concluded that their estimate of the
Ultimate Claims liabilities attaching to the Transferring Policies
calculated at the Assessment Date and the Transferring Policies
calculated as at the Effective Date do not require adjustment in light ofthe developments since the calculation was completed.
I have reviewed the above exercise that Lloyd’s has undertaken,
and based on my review I concur with the Lloyd’s conclusion that
the Transferring Liabilities calculated at the Assessment Dateand the Transferring Liabilities calculated as at the Effective Date
do not require adjustment as a result of the data as at 30
September 2020, which is the most up to date data available to
Lloyd’s.

4.7

LIC’s own review of the liabilities
LIC’s actuarial team has carried out an independent review of certain
parts of the valuation of the Transferring Liabilities. Their own highlevel analysis indicated a best estimate value of the Transferring
Liabilities €216m (4.5%) lower than that calculated by the Lloyd’s MRC
team, driven by an alternative valuation approach (see below). In
addition to this Lloyd’s MRC have included in their valuation specific
IBNR provided by the Syndicates and additional amounts relating to
the Unclear Data of the Reserves totalling €241m (refer to 4.7.2.1 and4.7.2.2). LIC has also concluded that there remained significant
uncertainties in calculating the value of the Transferring Liabilities.
The key drivers of why Lloyd’s estimate of the Transferring Liabilities
is higher than LIC’s estimate are as follows:23

PKF Littlejohn LLP

4.7.2.1

Specific IBNR’s of €138m provided to the Lloyd’s MRC
team by the Syndicates which has not been included by
LIC;

4.7.2.2

Lloyd’s has included an additional reserve of €103m
relating to the Unclear Data arising from the
Segmentation process, including €26m of IBNR relating
to this element, which has not been included by LIC;

4.7.2.3€186m due primarily to the difference in the ultimate
claims estimate of the RRD transferring segment; and4.7.2.4€30m due to the uncertainty in the payment projection
from the Assessment Date to the Effective Date.

This review was not meant by LIC to be used for the actual valuationof the Transferring Liabilities but provides assurance that the MRC
valuation of the calculation is acceptable to LIC. Overall the MRC
valuation being higher by €457m and used for the Transferring
Reserve valuation is considered reasonable by LIC as €241m of thedifference is driven by elements not included in the LIC calculation,and the remaining difference of €216m is driven by an alternative
valuation approach and projection.
In arriving at their own estimate of the Reserves LIC identified theirown uncertainties surrounding their independent calculation of theTransferring Liabilities. In order to mitigate against these uncertainties
Lloyd’s has provided LIC with a capital buffer which means that LIC’s
solvency position should be strong enough to support the proposed
Part VII transfer even if there was a relatively significant deteriorationin the estimate of the Transferring Liabilities.
To estimate the volatility in the Transferring Liabilities, LIC and Lloyd’s
agreed on certain scenario tests to determine a possible upper limit to
the capital buffer. The four tests related to:▪

Payment patterns. Lloyd’s has modelled a 50% reduction in theestimated reserves paid in the period from the Assessment
Date to the Effective Date which leads to a 4.0% increase in
the Transferring Liabilities.

▪

Unclear Transferring Status. Lloyd’s has modelled a doublingof Assumed Transferring and Remaining Unknown Data fromRRD Unclear EEA Indication element of the Segmentation

24

PKF Littlejohn LLP

process, and a doubling of the proportion of Remaining
Unknown Data assumed to transfer which leads to a 4.7%
increase in the Transferring Liabilities.

▪

Ultimate Claims Projection. LIC has selected the 70th
percentile of the reserve distribution as an estimate of areasonable worst case scenario. The 70th percentile of the
distribution indicates an increase in the Transferring Liabilitiesof 9.5%.

▪

Foreign Exchange Risk. LIC has assumed that there is adeterioration of 5% in the Euro in comparison to the 31
December 2019 rate, against all other currencies by 30
December 2020. The impact on the Transferring Liabilities is
an increase of 1.7%.

Lloyd’s and LIC have assumed that correlation between the above
events is expected to be minimal. Accordingly, LIC and Lloyd’s haveagreed to apply a diversification credit to the aggregate result of theabove scenarios. This credit has been calculated by taking the squareroot of the sum of the squares of the increase in the Transferring
Liabilities resulting from applying the above scenarios.
Increase inTransferring
Liabilities%

Increase inTransferring
Liabilities€m

Payment Patterns

4.0

191

Unclear Data

4.7

224

Ultimate Claims Projection

9.5

453

Foreign Exchange Risk

1.7

81

Combined Scenario (assuming
independence)

11.4

545

Uncertainty Scenario

The capital injection into LIC to support the proposed Part VII transfer
has been calibrated to incorporate the impact of these uncertainties
on the Transferring Liabilities and ensure a Solvency Ratio above therisk appetite of 125% is maintained. As a result, the capital injection
into LIC is €40m higher due to this uncertainty buffer.

4.8

Results of my review of the Transferring Liabilities

25

PKF Littlejohn LLP

The approach used by the Chief Actuary of Lloyd’s to determine
the best estimate Reserves as described in the Supplementary
Chief Actuary’s report are appropriate and consistent withmarket practice. Standard techniques have been consistently
applied and where they are likely to be unsuitable, alternative
approaches have been adopted.

4.9Conclusions
Transferring Policyholders
4.9.1.1

I have concluded that an appropriate level of Reserves
has been calculated in respect of the Transferring
Policies and the Transferring Policyholders will not bematerially adversely affected by the reserving aspectsof the proposed Part VII transfer.

4.9.1.2

I have also concluded the overall reserving approach
used by the Chief Actuary of Lloyd’s to determine thebest estimate Reserves is reasonable.

Non-Transferring Policyholders
4.9.2.1

I have concluded that the non-Transferring
Policyholders will not be materially adversely affectedby the Reserving aspects of the proposed Part VII
transfer.

4.9.2.2

I have reached this conclusion for the following reasons:
4.9.2.2.1

The reserving process to assess the valueof Reserves for the non-Transferring
Policyholders will be unchanged following
the Transfer;

4.9.2.2.2

The economic effect of the Transferring
insurance liabilities will be fully reinsured
back to Lloyd’s Syndicates from LIC underthe 100% QS Reinsurance Contracts. The
only impact of this is to change the insurance
type from direct (or reinsurance business) toreinsurance (or retrocession) businessunderwritten

26

PKF Littlejohn LLP

4.9.2.2.3

Overall, the risk profile of the Lloyd’s
Syndicates, individually and the market inaggregate,forthenon-Transferring
Policyholders, remains unchanged.

27

PKF Littlejohn LLP

5 Capital
5.1

The Lloyd’s Internal ModelAs outlined in Section 6.2 of my IE Report Lloyd’s uses an approved
internal model to calculate its regulatory solvency requirements.
The Lloyd’s Internal Model (“LIM”) is a purpose built model designed
to address all the types of risk that the Syndicates and Lloyd’s are
exposed to through the business written. It also addresses the assets
and liabilities of the Syndicates and their aggregation and link to
Lloyd’s. This is used to calculate the SCR for the Lloyd’s Market as awhole.
As at 31 December 2019 Lloyd’s had a Market Wide SCR (MWSCR)
Solvency Ratio of 156% and a Central SCR (CSCR) Solvency Ratioof 238% and for 30 June 2020 the Market Wide Solvency Ratio was
155% and the Central Solvency Ratio was 250%. The Market Wide
Solvency Ratio and the Central Solvency Ratio noted above werebased on Lloyd’s audited financial statements as at 31 December
2019 and on its interim financial statements as at 30 June 2020 which
was subject to a limited assurance report from its auditors. Lloyd’s has
however identified that it should make an adjustment to allow for thecurrent economic conditions and the impact the COVID-19 pandemic
has had on the corporate bonds spread and equity valuations. Lloyd’s
are of the opinion that this will lead to reduced future investment
returns and this results in a significantly greater market risk capitalcharge in its SCR. Therefore, Lloyd’s decided to change its MWSCR
and CSCR, as calculated by the LIM, to recognise this higher risk. Two
adjustments (Capital Add-ons) were made to the LIM, one to the
MWSCR and the other to the CSCR. These were approved by the
PRA on 26 August 2020. These Capital Add-ons only come into effectwhen approved by the PRA. They are required to remain in place until
their removal by the PRA. Had these Capital Add-ons been applied
retrospectively it would reduce the 30 June 2020 Market Wide
Solvency Ratio by 11% and Central Solvency Ratio by 50% to 144%
and 200% respectively. The above Solvency Ratios are bothcompliant with a risk appetite of at least 125% for Market Wide
Solvency Ratio and 200% for the Central Solvency Ratio.

28

PKF Littlejohn LLP

The revised pro-forma Solvency Ratio as at 30 June 2020, as if theCapital Add-on had been applied retrospectively, was then used toproject forward the solvency results to the Effective Date. Initially, as
part of the Scheme, there will be a capital injection to LIC from theCentral Fund of €253m, of which €46m is to cater for future
underwriting and €207m is to support the proposed Part VII transfer,and a provision of a Letter of Credit facility of €200m. The provision ofa Letter of Credit will not reduce the capital available to the Central
Fund as although the Letter of Credit is a contingent liability for Lloyd’s
it is not material as the expected present value of the contingent
liability is estimated to be less than £1m. The table below shows the
pro-forma MWSCR and CSCR following the capital injection in
October 2020:
MWSCR
£bn
A

CSCR
£bn
B

SCR

20.0

2.0

Available capital

28.7

4.0

Solvency surplus

8.7

2.0

144%

200%

0

0

Available capital

-0.2

-0.2

Solvency surplus

-0.2

-0.2

SCR

20.0

2.0

Available capital

28.5

3.8

Solvency surplus

8.5

1.8

Solvency Ratio

143%

188%

-1%

-12%

125%

200%

October 2020
Pre capital injection to LIC but
after adjustment to LIM

Solvency Ratio(Available capital/SCR as %)Impact of capital injection to
LIC
SCR

Post capital injection to LIC

Change in Solvency Ratio
Lloyd’s risk appetite

Note that €253m capital injection has been converted to £230m in thetable above.

29

PKF Littlejohn LLPAs shown in column B of the table above, the October 2020 capital
injection from Lloyd’s to LIC has led to a small reduction to Lloyd’sMarket Wide Solvency Ratio of 1% but a temporary depression to
Lloyd’s Central Solvency Ratio to 188%, below its risk appetite of
200% although still well above the minimum regulatory requirement of
100%.
Lloyd’s has or intends to carry out the following mitigating actions todecrease the MWSCR and the CSCR or increase the available capital:▪

Lloyd’s has de-risked the Central Fund assets which has theeffect of decreasing the SCR (by approximately 4%); and▪

Lloyd’s will collect further Tier 1 capital in the form of syndicate
loans to bring the eligible Central assets for solvency back from
£3.8bn post the October capital injection to £4.0bn.

As shown in the table below, following the mitigating actions Lloyd’sMarket Wide Solvency Ratio and Central Solvency Ratio increase to144% and 207% at 31 December 2020.
The table below shows the pro-forma MWSCR and CSCR before andafter the proposed Part VII transfer (including the capital injection to
LIC and the mitigating actions outlined in Section 5.1.6) as at 31
December 2020:
MWSCR
£bn
A

CSCR
£bn
B

SCR

20.0

1.9

Available capital

28.9

4.2

Solvency surplus

8.9

2.3

145%

219%

0

0

Available capital

-0.2

-0.2

Solvency surplus

-0.2

-0.2

31 December 2020
Pre transfer and after
mitigating actions

Solvency ratio(Available capital/SCR as %)Impact of capital injection to
LIC
SCR

30

PKF Littlejohn LLP

MWSCR
£bn
A

CSCR
£bn
B

SCR

20.0

1.9

Available capital

28.7

4.0

Solvency surplus

8.7

2.1

Solvency ratio

144%

207%

-1%

-12%

125%

200%

31 December 2020
Post transfer

Change in Solvency ratio
Lloyd’s risk appetite

There is no impact on the gross or net claims Reserves, as the grossliabilities attaching to the Transferring Policies are replaced, on a likefor like basis, with liabilities under the QS Reinsurance Contracts withLIC.
The estimated scale of the ultimate claims Reserves that are beingtransferred to LIC is €4.76bn which on a net basis reduces to nil after
taking into account the 100% QS Reinsurance Contracts which
economically transfers the gross liabilities back to the Members.
The reduction of 1% in the Market Wide Solvency Ratio, column A of
the above table, as a result of the transfer is due to the capital injectionof €253m into LIC. At 144% the revised Solvency Ratio is still well
above Lloyd’s risk appetite of 125% for the Market Wide Solvency
Ratio. The future projections by Lloyd’s show the ratio remaining
steady into 2021 and 2022.
For the CSCR (column B) there is a 12% decrease in its Solvency
Ratio to 207%. This reduction also arises as a result of transferring€253m of capital, from the Central Fund, to LIC in order to maintain
LIC’s Solvency Ratio following the transfer of liabilities to LIC. Even
after this reduction, the Central Solvency Ratio is above the Lloyd’srisk appetite of 200% as set out in their latest ORSA. After this theCentral Solvency Ratio is forecast by Lloyd’s to increase to 215% and224% for December 2021 and 2022 respectively.

5.2

Impact of COVID-19 on the Lloyd’s market
Lloyd’s latest estimate of the impact on the Lloyd’s Market of the
COVID-19 pandemic is consistent with the earlier forecast mid-range
net underwriting loss of around £3.0bn on the basis of a large amount31

PKF Littlejohn LLPof global businesses being shut-down until around 30 June 2020.
However, there remains uncertainty about how much ultimate liability
will arise in respect of disputed coverage relating to certain types ofbusiness such as business interruption coverage within some property
policies. This level of loss, as currently estimated, is similar to theunderwriting losses Lloyd’s incurred in 2017 from the Harvey, Irma andMaria hurricanes.
Initially the major impact of COVID-19 was on the value of investments
held at the time the pandemic came to light. Since then the investment
values have mainly recovered but longer term the returns on theseinvestments are likely to be supressed. Lloyd’s has recognised thisincreased risk by modifying its LIM as explained above.
Lloyd’s has obtained the latest available projections of the Syndicates’
estimates of ultimate losses arising from the COVID-19 pandemic (i.e.
as at the 30 September 2020) and based on the information received
from the Syndicates there has been no material deterioration in the
Syndicates’ estimate of the ultimate projected losses since 30 June
2020.
As set out in section 9.1.7 of my IE Report:“The impact on the Lloyd’s market of COVID-19 is much more difficult
to assess at this early stage. Much will depend how the loss develops
over the next 12 months. There are several significant unknowns
which cannot be quantified, at this stage, with any degree of accuracy
including the following:▪

The impact, if any, on the Central Fund of underwriting losses
arising from COVID-19▪

The appetite of the Members to continue to underwrite in 2021
and beyond given the COVID-19 loss and any losses theyexperience outside the Lloyd’s market▪

The appetite for new investors to enter the Lloyd’s market or to
replace any Members which cease to underwrite in 2021
(Members are already committed for the rest of 2020).”

There is still significant uncertainty surrounding the potential
impact of COVID-19 on the Lloyd’s Market. However theuncertainty referred to above has somewhat reduced for thefollowing reasons:32

PKF Littlejohn LLP▪

A larger percentage of the losses arising from COVID-19 will
have been reported to the Syndicates than at the time my IE
Report was completed. This will result in Syndicates having
more data on which to project their ultimate loss arising fromCOVID-19. Therefore their current projected COVID-19
ultimate losses are less uncertain.

▪

The latest two syndicate Capacity Auctions for 2020 indicatethat there is still a significant appetite for Members tounderwrite in 2021.

▪

The projected Members’ funds to meet losses, as set out in
Section 5.1.8, are £28.7bn and the Central Fund assets areprojected to be £4.0bn. Accordingly, in my opinion, both theMembers and Lloyd’s centrally have significant assets
available to meet any plausible future deterioration in theestimate of the COVID-19 projected ultimate loss.

Although the projected underwriting loss from COVID-19 is asignificant loss to the Lloyd’s Market it is comparable in size toprevious losses suffered by the Lloyd’s Market. Lloyd’s has anestablished history of being able to cope with similar losses in
the past and therefore, based on my experience and knowledgeof the market, I have concluded that Lloyd’s will be able to copewith a loss of this magnitude.

5.3

Impact of Capital Injection
Following the capital injection into LIC to support the proposed Part
VII transfer, and before any mitigating actions, the Central Fund is
projected to still have assets of £3.8bn and the MWSCR and the
CSCR are projected to remain in excess of the minimum required
under the Solvency II regulations. Therefore, in my opinion,
Members through a combination of their own resources andrecourse to the Central Fund if needed are likely to be able tomeet their obligations under their QS Reinsurance Contracts with
LIC. Further, I have concluded that Lloyd’s will be able to meet
Members liabilities to LIC, to pay valid claims, should Members
own funds not be sufficient to meet those liabilities in full.
Accordingly, the views I have expressed in my IE report have notchanged as result of the funding made available to LIC to fund the
proposed Part VII transfer.

33

PKF Littlejohn LLP

5.4

LIC Balance Sheet
LIC has prepared updated Solvency Capital calculations to assess theeffects of the proposed Part VII transfer on its solvency position. The
overall intention is that there should be no material change in LIC’s
Solvency Ratio. Lloyd’s has increased LIC’s Own Funds in order tomitigate against any adverse impact on LICs Solvency II capitalrequirement as a results of the proposed Part VII transfer.
LIC’s starting point to project the impact of the proposed Part VII
transfer was the audited Solvency and Financial Condition Report for
the year end 31 December 2019. The balance sheet included within
this report has been projected to 31 December 2022. The table below
presents LIC’s assets and liabilities on a Solvency II basis for theperiod ends 31 December 2019 to 31 December 2022 excluding the
proposed Part VII transfer:
LIC Balance Sheet(excluding Part VII
transfer)

31/12/2019€m

31/12/2020€m

31/12/2021€m

31/12/2022
€m

249

295

351

380

Reinsurers’ share
Technical Provisions

1,281

2,601

3,614

4,400

Insurance/reinsurance
receivables

837

1,603

1,603

1,603

Cash & cash
equivalents

47

43

65

97

Deferred tax asset

18

13

15

18

Other assets

1

1

1

1

Total assets

2,433

4,556

5,649

6,499

Technical Provisions best estimate

1,305

2,604

3,624

4,415

Technical Provisionsrisk margin

31

61

73

84

Payables

830

1,567

1,567

1,567

Other liabilities

21

22

22

22

Total liabilities

2,187

4,254

5,286

6,088

Own funds (netassets)

246

302

363

411

Investments

34

PKF Littlejohn LLP

The main increase in own funds and investments for 2020 in the table
above is a €46m capital injection. Further capital injections totalling€85m are projected in 2021 and 2022 to cater for future underwriting
should the proposed Part VII transfer not occur.
The significant investment assets, at 31 December 2019, consist of
65% sovereign bonds and 35% corporate bonds. The rating of theseinvestment portfolios was AAA 19%, AA 41%, A 19% and BBB 21%.
LIC is expected to retain a similar ratio of assets and security for futureyears.
Reinsurers’ share of Technical Provision, which reflects the QS
Reinsurance Contracts between syndicates and LIC for LIC’s ongoing
business, will increase or decrease in line with any increase or
decrease in LIC’s assessment of its Technical Provisions.
Following the capital injection of €46m to support LIC’s ongoing
business outlined in Section 5.4.3 above, LIC has estimated thefollowing impact on its balance sheet as at 31 December 2020 as aresult of the proposed Part VII transfer:

35

PKF Littlejohn LLP

BeforeTransfer€m

AfterTransfer€m

Movement
€m

295

502

207

Reinsurers’ share Technical
Provisions

2,601

7,183

4,582

Insurance/reinsurance
receivables

1,603

1,604

1

Cash & cash equivalents

43

261

218

Deferred tax asset

13

31

18

Other assets

1

1

0

Total assets

4,556

9,582

5,026

Technical Provisions - best
estimate

2,604

7,433

4,829

Technical Provisions- risk
margin

61

120

59

1,567

1,568

1

Other liabilities

22

22

0

Total liabilities

4,254

9,143

4,889

Own funds (net assets)

302

439

137

Ancillary own funds from
Letter of Credit

0

200

200

LIC Balance Sheet
Investments

PayablesNote the Before Transfer balances in the table above includes the €46m
capital injection required in 2020 as outlined in Section 5.4.3.
The above table also highlights that there is an increase in Technical
Provisions – best estimate of €4,829m as a result of the proposed Part
VII transfer and a risk margin of €59m. These liabilities are reinsured
back to Lloyd’s syndicates hence the €4,582m increase in thereinsurers’ share of the Technical Provisions; this is net of the €218m
paid into the settlement accounts from the Syndicates as referred to in
Section 5.4.8 below. The €4,829m represents the best estimate of theTechnical Provisions of €4,805m and an additional expense provision
other than for direct claims fees of €24m as required under Solvency
II as at 31 December 2020.
The increase of €207m for investments reflects the capital injection toincrease LIC’s Tier 1 capital as calculated under the Solvency II rules
in respect of the proposed Part VII transfer. The €218m increase in
cash is from the receipt of funds from the Syndicates into their Part VII
settlement accounts in LIC to fund the claims payments. The

36

PKF Littlejohn LLP

receivables and payables remain unchanged as they only relate to theincepting business in 2020 and post.
One significant change since my IE Report is that Lloyd’s has provided
an irrevocable ancillary own funds standby Letter of Credit of €200m
to LIC instead of Tier 1 capital to meet the Solvency Capitalrequirements. Further information regarding the provision of this Letterof Credit to LIC by Lloyd’s is given in Section 5.6.4. Note also the own
funds requirement has increased by €104m of which €61m relates tothe current ongoing business of LIC. The majority of the remaining
increase relates to an uncertainty buffer of €40m (refer to Section
4.7.7). Since my IE report the Technical Provisions attaching to the
proposed Part VII transfer have increased by €457m from the original
estimate of €4,372m mainly driven by the following:▪

Specific IBNR information of €164m in respect of theTransferring Liabilities has been provided by the Managing
Agents;▪

An explicit allowance for losses related to COVID-19 of €124m
which has been derived based on the global loss estimatesestimated by the Managing Agents (refer to Section 4.5); and▪

Changes in methodologies and assumptions in the reserving
process as a result of the availability of more recent data of€169m.

Following the capital injection and Letter of Credit provided to LIC,
LIC’s projections show that no further capital is required over theperiod of the projections which end on 31 December 2022.

5.5

Review of the solvency calculations for LIC after the
proposed Part VII transfer
In order to calculate its solvency requirement, LIC uses the standard
formula.
The board of LIC has modelled the company’s solvency position
based on the forecast profit and loss and balance sheets to 31
December 2022. The result of their modelling is set out below:

37

PKF Littlejohn LLP

LIC Solvency

2020
€m

2021
€m

2022
€m

Market risk

20

20

20

Underwriting risk

12

11

11

Counterparty default

357

350

350

Operational risk

111

108

108

Diversification

-21

-20

-20

Total SCR

479

469

469

Own funds

439

460

491

Ancillary own funds from Letter of Credit

200

200

200

Solvency Ratio

133%

141%

147%

Target Ratio

125%

125%

125%

The most significant change in the solvency capital requirement frombefore the proposed Part VII transfer arises on the assessment ofcounterparty risk. Counterparty risk is the risk of a counterparty notsettling amounts fully when due. The increase is due to the additionalgross liabilities transferred to LIC under the proposed Part VII transfer
and the recoverability of those liabilities from the Members under the
QS Reinsurance Agreement.
In arriving at the above Solvency Ratio of 133% LIC has incorporated
the capital buffer of €40m which was included within the capital
injections made by Lloyds on 9 October 2020. The projected Solvency
Ratios are estimated to be above the target Solvency Ratio of 125%
for at least the period to 31 December 2022.
The capital injection by Lloyd’s of €207m, to support the
proposed Part VII transfer, and the provision of Ancillary own
funds from a Letter of Credit of €200m will, in my view, cater for
any currently reasonably foreseeable underestimation in thecalculation of insurance liabilities being transferred to LIC. In
arriving at the above opinion, I have also considered Lloyd’s
current intention to provide enough funding to LIC to enable it tooperate and meet its Solvency Capital Requirement going
forward.

5.6

Capital injection
Prior to the transfer of the Transferring Policies to LIC, LIC will enter
into a series of 100% QS Reinsurance Contracts with Syndicates,

38

PKF Littlejohn LLP

whereby the insurance liabilities attaching to the Transferring Policies
will be fully reinsured back to the Members of those Syndicates. The
net effect of the QS Reinsurance Contract is that the economic effectof the transferred EEA business will be passed back to the Membersthat originally underwrote the policies or assumed the liabilities
through the Reinsurance to Close process.
Although, the net effect of the QS Reinsurance Contract is that the net
liabilities transferred to LIC are zero, LIC’s balance sheet, immediately
after the Effective Date, will show gross Technical Provisions of €7.4
billion and an asset of the same amount (net of the €218m paid into
the settlement accounts from the Syndicates as referred to in Section
5.4.8 above and an allowance for reinsurance bad debt) which
represents the recoveries from syndicates under the QS Reinsurance
Contracts. This asset, under the Solvency Regulations, will be subject
to a solvency charge of €357 million to reflect the counterparty risk.
This is the risk of a counterparty (in this case the Members) not settlingamounts fully when due. This risk is calculated formulaically under the
Solvency II regulations.
In order to counter to the above risk, Lloyd’s has, on 9 October 2020,
made a capital injection to LIC of €253m and has arranged with
Barclays Bank plc / Barclays Bank Ireland plc an irrevocable Letter ofCredit (LOC) to the benefit of LIC of €200m. The cash injection was inreturn for the issue by LIC of non-preferential shares to Lloyd’s and to
Lloyd’s Finance Company Limited (a wholly owned subsidiary of
Lloyd’s) in line with LIC’s existing shareholdings.
The LOC is effective on 3 November 2020 and will expire on 3
November 2025. LIC has received approval from the NBB that the
LOC can be used to support the capital requirement of LIC under the
Solvency II regulations. Lloyd’s has entered into an agreement with
the issuer of the LOC to indemnify them against any demands madeby LIC under the LOC.
I have reviewed the documentation surrounding both the cash
injections and the issue of the LOC and I am satisfied that bothhave been correctly issued. I have also reviewed thecorrespondence from the NBB in connection with the LOC and I
have satisfied myself that the LOC can be used to support LIC’s
capital requirements.

39

PKF Littlejohn LLPThe LOC is due to expire on 3 November 2025 and therefore I haverequested the management of LIC to project their solvency
requirements to 31 December 2025 with and without the Part VII
transfer in order to assess whether further funding will be required
specifically to support the counter party risk associated with theproposed Part VII transfer. LIC’s management estimates thatapproximately 70% of the transferred insurance liabilities will settle bythis date. I have reviewed the settlement patterns associated with
the Transferring Liabilities and I have concluded that 70%
settlement of liabilities is a reasonable estimate.
Based on the above 70% settlement assumption, LIC’s projections
show that €10m of the €200m Letter of Credit will still be required at
the date of the Letter of Credit is due to be released in order for it tomeet its 125% Solvency Ratio Target. In view of this, Lloyd’s has
confirmed that they will provide LIC with sufficient funding to meet its
Solvency Ratio target when the Letter of Credit expires. Lloyd’s has
reserved the right to review the way that any capital is provided to LIC
in order to provide the capital in the most efficient manner.

5.7

LIC’s exposure to potential future risks
As set out at Section 7.5 in my IE Report the board of LIC, in theirlatest available ORSA, carried out the following stress tests on its
solvency capital requirement and Solvency Ratios following the
proposed Part VII transfer:▪

Decrease in gross premium written▪

Increase in expenses (including Part VII expenses)▪

Increase in exchange rate▪

GDPR breach fine▪

Rating down grade of the Lloyd’s market to BBB.

The above risks together with the risk of the liabilities attaching to the
proposed Part VII transfer proving to be under reserved have beenrecalculated by my team for this Supplementary Report, excluding thezero-diversification credit scenario which would require a change inthe EIOPA’s regulations and which is now considered highly unlikely
to occur and will not be included in LICs next ORSA. The results ofthis exercise are set out below:

40

PKF Littlejohn LLP

Scenarios
Risk appetite minimum SCR ratio
Risk tolerance minimum SCR ratio
Baseline Pillar I
30% decrease in gross written
premium
30% increase in expenses (incl. Part
VII)
25% exchange increase against Euro
€1bn extra claims (incl. €0.5bn Part
VII)
€20m GDPR breach fine
Rating downgrade for Lloyd’s to BBB

2020
125%
115%
133%
143%

2021
125%
115%
141%
158%

2022
125%
115%
147%
170%

2023
125%
115%
153%
178%

128%

134%

139%

143%

122%
119%

130%
125%

137%
131%

143%
137%

130%
57%

138%
61%

144%
64%

150%
67%

The above table shows that in most of the scenarios, highlighted ingreen, LIC’s solvency ratio remains above the minimum SCR and therisk appetite. In the scenario highlighted in yellow the Solvency Ratio
is still above the minimum SCR but below the risk appetite. The
scenarios where LIC falls below the minimum SCR requirement are in
red and solely relate to a ratings downgrade for Lloyd’s to BBB, which
I consider to be highly unlikely and was discussed in detail in my IE
Report at Section 7.5.
The €1bn extra claims scenario assumes that the liabilities transferredunder the proposed Part VII transfer are understated by €0.5bn andthat a further €0.5bn reserve deterioration following a significant EEA
catastrophic loss in 2020. The result of this combined €1bn impact
scenario is a drop below the risk appetite level for 2020 but this thenimproves to a Solvency Ratio back above this level from 2021. This isalso the case in respect of 25% increase of all currencies against theEuro which was used to assess the sensitivity of the liabilities
transferred under the proposed Part VII transfer to foreign exchange
rates.
As can be seen from the above table the proposed Part VII transfer
potentially increases the risk for LIC in many scenarios. However,there is no major solvency impact created by any of the stressscenarios modelled by LIC that I considered likely. The greatest
impact, although I consider it to be unlikely, is that arising froma downgrading of Lloyd’s credit risk.
In my IE report I concluded that “in my opinion, ultimately whether
a Policyholder’s valid claim is met will depend on the strength of
Lloyd’s Central Fund rather than a downgrade in Lloyd’s credit

41

PKF Littlejohn LLP

risk. Lloyd’s modelling shows that it would need a Lloyd’s market
wide loss of £20.2bn which the LIM predicts to be equivalent to a
1 in 450 years event (see section 6.4.16) for the Central Fund tocome under significant pressure. Although should the Central
Fund come under pressure as a result of the matters set out inparagraph 6.4.16, this would likely lead to a downgrade of Lloyd’s
credit rating. Should the proposed Part VII transfer not occur andthe Lloyd’s market suffer a future loss as set out above theTransferring Policyholders would still face the impact of adepleted Central Fund. Accordingly, the Transferring
Policyholder’s ability to recover any claim from the Central Fundin the event of such a loss would be no worse off than before theproposed Part VII transfer.”
My view, arrived at the time my IE report was completed, has notchanged as result of the additional analysis I have undertaken in the
preparation of this supplementary report.

42

PKF Littlejohn LLP

6 Lloyd’s Insurance Company S.A.
6.1

LIC’s Operating Model
LIC is authorised in Belgium and regulated by the National Bank of
Belgium (NBB) together with the Belgium Financial Services andMarket Authority. LIC was established by Lloyd’s to allow EEA
Policyholders continued access to Lloyd’s market expertise in amanner compliant with EU regulation post Brexit. LIC was authorised
to write new insurance business incepting from 1 January 2019.
In my IE report I indicated that the detailed systems relating to thehandling of the Part VII book of business were still under development
but that the principles underlying the design of the operationalframework were well advanced and that I would review the progress
made by Lloyd’s, LIC and the Lloyd’s market for this Supplementary
Report.
The new operational process for LIC has been designed with input
from LIC, Lloyd’s as well as regular consultation with market
participants (Managing Agents and Brokers) with the intention ofminimising any disruption to Policyholders and to adhere to thefollowing standards:▪

Consistency with the current operating model for the Lloyd’s
market▪

Compliance with expected changes in regulation after the endof the Transition Period▪

Continuance of Claims payments to all existing Policyholders
after the end of the transition period.

The operational framework LIC (described as Lloyd’s Brussels in the
diagram below) has adopted is outlined below:

43

PKF Littlejohn LLPKey:GL – General Ledger, LB – Lloyd’s Brussels (LIC), PVII – Part VII, SCM – Syndicate Claim Message,
STFO – Settlement and Trust Funds Office, USM - Underwriters Signing Message.

The key aspects of the operational framework are:▪

There are no fundamental changes to current pre-Part VII
market processing activities for Policyholder transactions.

▪

Policyholders, including claimants, will largely be serviced
through the same channels, in the same way as pre-transfer.

▪

LIC back office Operations and Finance activity is designed to
avoid impacting Policyholder transaction processing time.

▪

Current central processing and settlement processes, handled
by the Bureau, Xchanging, are largely unchanged.

▪

All Part VII transactions for premiums and claims are paid intoand out of LIC Bank accounts.

▪

There will be no noticeable difference in the timing of whenclaims will be paid pre and post the proposed Part VII transfer.

▪

Each Syndicate will update its records to change Transferring
Policies from direct to reinsurance.

▪

Managing Agents (on behalf of Syndicates) will administer thetransferred business as a service provider to LIC.

44

PKF Littlejohn LLP▪

Managing Agents (on behalf of Syndicates) will report all Part
VII transactions to LIC on a monthly basis for statutory andregulatory reporting purposes.

Overall, as a result of the design of this operational framework theTransferring Policyholder does not need to navigate any new or
unfamiliar processes. As outlined in Section 3.2 of my IE Report
Policyholders are currently introduced to Lloyd’s Members throughintermediaries. Following the end of the Transition Period, as long asthat intermediary has the necessary regulatory authorisations toservice EEA insurance business where required under the European
Insurance Distribution Directive (IDD), the Transferring Policyholder
will continue to interact with the same intermediaries as before theEffective Date. Where an intermediary connected to the Transferring
Policies does not have the requisite authorisation after Brexit toservice that business, LIC and Managing Agents have confirmed to us
that they will ensure alternative arrangements for LIC’s servicing of thebusiness through an authorised intermediary under the IDD.
Since my IE report I have met with representatives of LIC and Lloyd’s
to understand any significant changes to the operating model and inparticular to determine whether there is likely to be any detrimental
impact on the Policyholder service levels. There continue to berefinements to the operating model. However there are no significant
changes which would affect my conclusion in the IE report “that the
proposed Part VII transfer will have no material adverse effect on
the Transferring Policyholders in respect of matters such as new
business strategy, management, administration, claims
handling, expense levels and valuation bases in relation to how
they may affect the security of Policyholders’ contractual rights
and levels of service provided to Policyholders, particularly as
the outsourcing agreements between LIC and the Managing
Agents mean that the Transferring Policyholders will see nomaterial change in the handling of their claims following thetransfer.”

6.2

Quota share reinsurance contracts
As set out in Section 4.1 of my IE Report, prior to the Effective Date of
the Scheme, LIC and, in each case, the Members of each relevant
Syndicate will enter into 100% quota share reinsurance contract
agreements to cover the business transferred to LIC (together,referred to as the QS Reinsurance Contract).

45

PKF Littlejohn LLP

Since my IE Report, together with my legal advisers, I have had
meetings with Lloyd’s regarding changes to the drafting of the QS
Reinsurance Contract. There have been certain modifications to theterms of the QS Reinsurance Contract, for example to the collateralarrangements, following feedback from the regulators and Lloyd’sMarket. My opinion remains unchanged from my IE Report: I haveconcluded that the QS Reinsurance Contract is drafted in amanner which should give effect to its intended purpose.
The collateral arrangements referred to above allows LIC to callcollateral from individual Members for their share of any liability underthe Quota Share Reinsurance Contract in certain circumstances.
Lloyd’s has received legal advice on the effects of the collateral clauseon the Transferring and non-Transferring Policyholders in the event of
the insolvency of either Lloyd’s, LIC or both Lloyd’s and LIC. Based on
the legal advice, as long as the Members remain solvent, there is noadvantage to either Transferring or Non-Transferring Policyholders
resulting from the collateral arrangements as all claims will ultimately
be met. If a Member is insolvent and there has already been a call forcollateral, the Transferring Policyholders might have an advantage if
Lloyd’s doesn’t deploy the central fund to stand behind the insolvent
member; in my opinion this scenario is unlikely.
In a scenario where Lloyd’s as a whole is insolvent, and if there is nofurther collateral available and collateral has already been called andreceived by LIC, the Transferring Policyholders might again have an
advantage over the non-Transferring Policyholders. In section 6.4 of
my IE Report I have considered the solvency of Lloyd’s and thepossibility of Lloyd’s exhausting its Central Fund as a result ofsignificant market wide losses which may give rise to Lloyd’s
becoming insolvent. Lloyd’s modelling shows that it would needa Lloyd’s market wide loss of £20.2bn, which the LIM predicts tobe a 1 in 450 years event, for the Central Fund to come undersignificant pressure (see section 6.4.17 of my IE Report). I believe
this is not a material risk and therefore the security for nonTransferring Policyholders is not materially adversely affected by
the collateral arrangements.

6.3

LIC’s Outsourcing Agreements
As I outlined in Section 7 of my IE report, for the operational model tobe implemented, Lloyd’s will require Managing Agents to enter into
updated outsourcing agreements with LIC. These will be entered into46

PKF Littlejohn LLP

prior to the Effective Date so that they are in place before the Sanction
Hearing and triggered on the Effective Date. Under these agreements
Managing Agents will be engaged to provide services in relation to theTransferring Business, including the administration relating to claims
management services and appointment of Coverholders on behalf of
LIC.
With my legal advisers, I have met with representatives of Lloyd’s andtheir external legal advisers to understand the key terms of theoutsourcing agreements to ensure that they provide operational
continuity and consistency of administration as between Transferring
Policies and those which are not transferred.
As a result of my discussions with Lloyd’s, together with my legal
advisers, I have made several recommendations for how the wordingof the outsourcing agreements could be strengthened. Lloyd’s has
adopted my recommendations and changed the original draft of theoutsourcing agreements accordingly.
The revised outsourcing agreements include adequate provisions forthe servicing of the Transferring Policies including schedules dealing
with endorsements (for premium), claims handling, complaints
handling and any other ad-hoc services (for example credit control andpolicy-level tax information) together with Service Level requirements.
I have concluded that the outsourcing agreements provide
appropriate safeguards for LIC, the Managing Agents and for theTransferring Policyholders and they give effect to the operating
model for the Transferring Business.

6.4

Costs Agreement
The proposed Part VII transfer will not confer any significant benefits
on LIC (other than increased investment return from the funds
provided for the €207m capital injection), with all profits (or losses)
from the Transferring Liabilities being passed back to the Syndicates
under the QS Reinsurance Contracts.
LIC will incur additional systems maintenance and other administration
costs as a result of the proposed Part VII transfer. Withoutcompensation for these additional administrative costs the proposed
Part VII transfer would be loss-making for LIC.

47

PKF Littlejohn LLP

At Section 7.2.8 of my IE Report I detailed that LIC would receive acash injection of €75m from Lloyd’s to cover the administrative
expenses over the period the Transferring Liabilities are expected to
be settled. This has now been revised such that, in consideration for
LIC agreeing to enter into the proposed Part VII transfer, Lloyd's and
LIC have agreed to enter into a Costs Agreement under which Lloyd’s
will make certain payments to LIC as reimbursement for the costs
associated with running off the Transferring Liabilities, as they arise.
LIC management have re-performed an independent estimate of theforecast incremental costs LIC will incur as a result of the proposed
Part VII transfer. The upper estimate of these costs is €45m, with thecosts expected to be incurred over the next fifteen years. LIC
management has projected that the Transferring Liabilities will
decrease by 98% over the fifteen years to 31 December 2034. I havereviewed these projections and, in my view, €45m will be
sufficient to cover the costs in dealing with the Transferring
Liabilities.
In my opinion, the total aggregate cost that LIC is likely to incurin administering the Transferring Liabilities over the next 15
years will be covered by the Costs Agreement entered into. The
cost of settling the remaining 2% of the Transferring Liabilities
after 15 years will have no material adverse effect on LIC’s
financial resources.

48

PKF Littlejohn LLP

7 Conversion of Syndicates of Outwards Reinsurance toRetrocessional Cover
7.1

UpdateAs I reported in my IE report, as part of the scheme, Lloyd’s intends toseek court approval to convert the current Syndicate Outwards
Reinsurance cover to retrocessional cover. In that report I discussed
the risk that non-UK courts are likely not to recognise the court orderin respect of reinsurers not domiciled in the UK (see section 4.1.29 to
4.1.39 of my IE report). In order to mitigate this risk, Lloyd’s has
obtained legal opinions from the three jurisdictions (excluding the UK)
in which they estimate Lloyd’s syndicates have the largest exposure.
In order to assess the exposure by syndicates to reinsurers not
domiciled in the UK, I used, as a proxy, the aggregate reinsurance
recoverable by the syndicates as at 30 June 2019. Since my report
was finalized, Lloyd’s has now completed an analysis of the
syndicates’ exposure to reinsurers in different jurisdictions. This
analysis was based on data syndicates provided to Lloyd’s centrally
and used the experience of the Lloyd’s Outward Reinsurance team toestimate the following:▪

The scale of the reinsurance recoverables applicable to theTransferring Liabilities▪

An analysis of reinsurers, for the above reinsurance
recoverables, by country of domicile▪

The likely legal jurisdictions in which any disputed cover under
the above reinsurance contracts will be subject to.

49

PKF Littlejohn LLP

Based on the above analysis, Lloyd’s has estimated the exposure of
the syndicates, in aggregate, to reinsurers by country of domicile, inrespect of the Transferring Liabilities is as follows:

Exposureon Transferring
Liabilities

Based onReinsurer
Recoveries
per IE report%%

Bermuda

37.3

35.0

United Kingdom

21.2

23.4

United States

15.4

14.0

9.5
________
83.4

10.8________
83.2

Switzerland

4.0

4.1

Barbados

2.7

2.0

9.9
________
100________

10.7________
100________

Germany

OthersLloyd’s has also estimated that the aggregate total recoveries due on
the Transferring Liabilities that are due from reinsurers, domiciled
outside the UK (other than Bermuda, USA and Germany) are as
follows:£m
Switzerland

58

Barbados

39

Other

145

No single jurisdiction included within ‘Other’ represents more than £34
million of Outward Reinsurance recoveries.

50

PKF Littlejohn LLP

In respect of Barbados 85% of the above exposure arises from a single
syndicate under a single reinsurance contract with a single related
party reinsurer and is subject to England and Wales law andjurisdiction.
Lloyd’s estimate that 43% of the exposure to reinsurers domiciled in
Switzerland is due from a single reinsurer who represents the 5thlargest external reinsurer to the Lloyd’s market and has a longstanding
and active relationship with the Lloyd’s market. Given thisrelationship, I do not believe it is likely they will challenge the
Court Order to convert their outward reinsurance toretrocessional cover in respect of the Part VII transferring
liabilities.
Lloyd’s has reviewed a selection of reinsurance contracts for a numberof selected syndicates and has concluded that the dominant
contractual choice of law jurisdiction are as follows:▪

England and Wales▪

United States▪

BermudaFor reinsurers domiciled in Bermuda Lloyd’s estimates, based on areview of a sample of reinsurance contracts of twelve syndicates
representing 46% of the estimated Bermuda reinsurance recoveries,that the majority of the reinsurance contracts are subject to English
law and jurisdiction.
As set out in my IE report, as result of the significant exposure to
Bermuda, United States and Germany, Lloyd’s obtained legal opinionsfrom those jurisdictions on whether the courts in those countries would
recognise the UK Court Order. Further analysis of this matter is set
out in Sections 4.1.30 and 4.1.34 of my IE report.
Since the completion of my IE report Lloyd’s, at the request of the UK
regulators, has sought additional clarifications from their legal advisers
in Bermuda, the United States and Germany. In conjunction with myown legal adviser, I have reviewed this further advice, and I haveconcluded that this additional advice adds support to my original
conclusion that the courts in Bermuda, Germany and the UnitedStates would likely recognise the UK Court Order to convert the
Outward Reinsurances to retrocessional cover.

51

PKF Littlejohn LLP

I have not asked Lloyd’s to obtain legal advice from any otherjurisdictions as I consider the amount recoverable from any othersingle jurisdiction is, in my opinion, not material.
I have reviewed the work Lloyd’s has undertaken to ascertain the
country of domicile of the reinsurers associated with the Transferring
Liabilities. Based on my review and the other procedures I haveundertaken, as set out in paragraph 4.1.37 of my IE report, I am still of
the opinion that“the risk that a reinsurer in an overseas jurisdiction will succeed
in challenging the Court Order which converts the existing
syndicate Outwards Reinsurance to retrocessional cover, isunlikely to be a material risk.”
My opinion as set out above has not changed and was based on thefollowing analysis:▪

Any reinsurer who successfully challenges the Court Order toconvert Outward Reinsurance to retrocessional cover would be
unlikely to continue to trade with the Lloyd’s Market as theywould be perceived by the Lloyd’s Market not to have met valid
claims. This should, in my opinion, discourage thosereinsurers who currently trade with the Lloyd’s Market oflaunching such a challenge.

▪

In order to challenge the Court Order the reinsurer would haveto persuade the courts in their country of domicile to ignore the
Court Order contrary to the legal opinions obtained by Lloyd’s
in those jurisdictions where Lloyd’s exposure is material. In my
opinion this scenario is unlikely.

Should a reinsurer be able to avoid a claim based on challenging the
Court Order, in my view based on the above analysis, it is unlikely
to have a material impact on the Lloyd’s Market. In arriving at my
opinion, I have also considered that Lloyd’s has historically paid all
valid claims and it is likely that the Central Fund will step in to ensure
Policyholders’ valid claims continue to be met if the result of any
single reinsurer successfully challenging the Court Order leads toMembers being unable to meet their liabilities to Policyholders.

52

PKF Littlejohn LLP

8 Status of Brexit negotiations
8.1

Developments
The proposed Part VII transfer assumes that following the exit of theUK from the European Union the freedom of establishment andfreedom of services passporting rights will be withdrawn.
As at the date of this Report there are just under two months until theend of the Transition Period. There continues to be significant
uncertainty as to whether a deal will be agreed between the UK and
the European Union before 31 December 2020.
Without the Transfer there is a significant risk that Lloyd’s could be
prevented by law from paying claims and servicing policies. This would
be detrimental to all Policyholders as valid claims may not be legallysettled and is the key reason for the proposed Part VII transfer to beenacted now. Delaying this proposed Part VII transfer until such timeas the trading arrangements between the EU and UK have been
finalised may not provide sufficient time to complete the proposed Part
VII transfer should the passporting arrangements not be included in
the future agreement between the two parties.
Under certain Brexit scenarios, a legal route for paying claims andservicing policies may be agreed by the UK Government and theEuropean Union. Notwithstanding this, I am still of the opinion that
this proposed Part VII transfer would be a more certain, complete
and cost effective solution to the problems resulting from Brexit
and therefore better overall for Policyholders.

53

PKF Littlejohn LLP

9 Policyholder communication
9.1

UpdateI have been kept informed of the communication and publicity
arrangements surrounding the proposed Part VII transfer and I am
satisfied that the communications and engagement with Policyholders,and other relevant parties, are consistent with my expectations when
I completed my IE Report dated 1 May 2020.
I have reviewed a sample of the documents sent to Policyholders andincluded on the Lloyd’s dedicated Brexit website and I am satisfied
that both the Policyholder communication and the content of the
Lloyd’s Brexit website fairly reflect the details of the proposed Part VII
transfer. I have also reviewed the publication strategy and I am
satisfied that it is in line with my expectations when I completed my IE
report.
Based on the review of the documents made available to me, I agreewith Lloyd’s assessment that the COVID-19 pandemic has not caused
any major impact on the way that the notifications strategy andresponse management programme were implemented.

9.2

Change in Effective Date
I am aware of the changes to the sanctions hearing date from October
2020 to 18 November 2020 and the change of Scheme Effective Datefrom 29 October 2020 to 30 December 2020. I am satisfied that thereason for this change is valid and that the steps taken by Lloyd’s toinform Policyholders of this change and the revised publication
timetable are appropriate. Further details of the actions taken by
Lloyd’s are set out in the first witness statement of Robert Alexander
Murtagh. This delay in the date when the proposed Part VII transfer
becomes effective has not led me to change any of my conclusions
regarding the proposed Part VII transfer.

54

PKF Littlejohn LLP

9.3

Outward reinsurers
counterparties

andcollateralandsecurity

Given the circumstances of this proposed Part VII transfer where
Lloyd’s will seek court approval to convert, as part of the terms of thescheme, the Syndicate’s Outwards Reinsurance to retrocessional
cover (see section 4.1.5 to 4.1.7 of my IE report and section 7 of thisReport) I have paid particular attention to the process of notifying theSyndicate’s Outward Reinsurance and collateral and security
counterparties.
I have been informed that all reinsurers who are currently involved in
the in-force reinsurance programmes of the syndicates at 1 January
2020 have been directly informed of the proposed Part VII transfer.
Further, reinsurers who represent 99.9% of the global reinsurance
asset reported by syndicates at 31 December 2019 have also been
directly informed of the proposed Part VII transfer. The addresses forthe remaining 0.1% have not been verified but they have been notified
at the best address that Lloyd’s can identify. I am informed by Lloyd’sthat they believe that the remaining 0.1% are entities that are largely
considered to be legacy reinsurers who have not participated on areinsurance of a Lloyd’s Syndicate for many years. I have no reason
to doubt this assertion. Lloyd’s has estimated the 0.1%, where theaddresses could not be fully verified, represents approximately£250,000 of the reinsurance recoveries in respect of the Transferring
Liabilities.
Details of the syndicate collateral and security counterparties arecaptured by Lloyd’s centrally in a periodic return made by Managing
Agents. Accordingly, Lloyd’s has been able to directly notify all the
syndicate collateral and security counterparties of the proposed Part
VII transfer.
Based on the above, together with the steps Lloyd’s has taken to
publicise the proposed Part VII transfer, I am satisfied that a highpercentage of the Syndicates’ reinsurers and collateral andsecurity counterparties have been made aware of the proposed
Part VII transfer.

9.4

Policyholders notification
Policyholders were notified of the proposed Part VII transfer in two
batches. The first batch of Policyholders were identified from the data55

PKF Littlejohn LLP

extraction exercise carried out at the time of my IE Report wascompleted. The second batch of Policyholders represent additional
Policyholders identified as a result of the revision to the data extraction
exercise details of which is set out in Section 3.1.
The total number of Policyholders directly notified of the proposed Part
VII transfer were as follows:
Batch

No. of letters / emails sent

Date notified

1

269,479

July/August

2

28,895October

Note: 6% of the letters/emails have been returned as gone away.

In addition, the proposed Part VII transfer was advertised in 83
publications and the dedicated Lloyd’s website has had 21,500 hits at
30 October 2020.
Included within batch 2 is data from a number of Managing Agents
representing some 7,000 Policyholders where the data was notreceived in time to notify these Policyholders six weeks in advance ofthe expected date of the Sanction Hearing. Of these Policyholders
58% were notified on 7 October 2020. The remaining Policyholders
were notified at varying dates between 20 and 27 October 2020.
Based on the low numbers of Policyholders not notified six
weeks prior to the proposed date of the Sanction hearing , thepublicity surrounding the proposed Part VII transfer, the fact the
majority of these Policyholders would still have between 2 to 5
weeks to register any objections and the low number ofobjections received from Policyholders in general, in my opinion,
the lateness of these notifications does not change theeffectiveness of Lloyd’s communication strategy.

9.5

Objections and other Policyholder’s issues raised
As at 30 October 2020, Lloyd’s has had approximately 1,500 enquiries
which related to ongoing business queries, or enquiries of a generalor technical nature. Lloyd’s has either responded to these enquiries
appropriately or requested the enquirer to contact their normal service
provider.
In addition to the above queries, Lloyd’s has received three objections
as follows:56

PKF Littlejohn LLP

Objection

Lloyd’s response

Policyholder raised concern that thescheme will reduce the amount oftax paid in the UK, and therefore
have a detrimental effect on
healthcare, education, justice andinfrastructure.

Lloyd’s has responded that as theliabilities will be transferred back to
the members, under the QS
reinsurance contracts, economicallytheunderwriting
profits/losses
attributable to the transferringbusiness will ultimately be taxable in
the hands of the members, who are
all UK tax resident.

A UK based Policyholder challenged
why their policy is transferring.
States that without cogent reasons,they would object to their policy
transferring and would seek newcover within the “London Lloyd’s”
marketLloyd’s has clarified to the
Policyholder that they were notifying
holders of historic policies withelements of EEA cover. The
Policyholder was notified as an
associated EEA company wasnamed on the policies in prior years
The Policyholder indicated that hewill not object to the Scheme as thecurrent UK policy continues to beunderwritten by syndicates at
Lloyd’s.

Policyholder challenges why theirpolicy is transferring. States his
concern that, should his policies
transfer, he would lose the right tohave disputes settled via English law

Lloyd’s has recommended that theindividual contact the broker who
deals with their affairs to confirm if
the policy, or part thereof, needed to
be underwritten by an EEA regulated
insurer and therefore needs to betransferred under the Scheme.
Lloyd’s also confirmed that if any ofthe policies (or parts thereof) dotransfer, then they will continue to be
governed by English law.

One complaint was received which was of a general nature which did
not specify either that they were objecting to the transfer or the natureof their objection.
Some EEA regulators have raised queries on the proposed Part VII
transfer via the PRA. Lloyd’s has responded to these queries andsupplied any additional information requested. My understanding isthat none of the EEA regulators have raised any objections to the
proposed Part VII transfer.

9.6

Conclusion
I have considered the above objections raised by Policyholders
and I am satisfied with Lloyd’s responses to the matters raised.
None of the objections have caused me to perform any additional

57

PKF Littlejohn LLP

work or have led me to alter the conclusions I arrived at, as set
out in my IE report.
I am satisfied that the communication plan adopted by Lloyd’s,
as set out in my IE report, has been materially executed.

58

PKF Littlejohn LLP

10 Other matters10.1 Update on FOS and FSCS
In section 7.11 of my IE report, I described the protections some of theTransferring Policyholders currently receive under the Financial
Services Compensation Scheme (FSCS) and Financial Ombudsman
Service (FOS) and the impact the proposed Part VII transfer will haveon those protections.
As I set out at section 7.11.4 of my IE Report, LIC currently has apassported branch in the UK. We understand that the relevant
notifications have been made such that the branch will fall within the
Temporary Permissions Regime (TPR) after 31 December 2020. Post
Brexit, and once the Temporary Permission Regime ends, certain of
the protections under the FSCS and FOS will continue to apply if LIC
establishes a fully UK authorised branch. I sought and received
reconfirmation from LIC that they still intend to seek full UK
authorisation for the branch and that they know of no reason why it will
not be fully authorised by the UK Regulators.
Based on the above, I have satisfied myself that there are no
adverse changes to my conclusions, set out in my IE report, inrespect of eligible Policyholder protection under the FSCS and
FOS.

10.2 Approval of Report
This report was approved on 10 November 2020.

Carmine Papa
Partner
PKF Littlejohn LLP
15 Westferry Circus
LondonE14 4HD
www.pkf-littlejohn.com

59Appendix 1
Glossary of Terms
Assessment Date means 31 December 2019 for data held on the RDD and 30 June 2020 for NonXIS data.
Category 1 policies means those policies included in the Policy File which have been identified prior
to the Effective Date and it is possible to determine with sufficient certainty that they are Transferring
Policies.
Category 2 or Category 3 policies means those policies included in the Policy File which have been
identified prior to the Effective Date but it has not been possible to determine with sufficient certainty
that they are Transferring Policies.
Capacity Auction means the auction process that participates on Syndicates in 2020 may be able torealise any value attaching to the disposal of all or part of their capacity for the 2021 year of account.
The auction may also enable participants to gain access to Syndicates on which capacity is available.
Costs Agreement means the agreement to be entered into between LIC and Lloyd’s for Lloyd's tomake certain payments to LIC as effective reimbursement of the costs up associated with running-off
the Transferring Liabilities up to a maximum of €45m in the aggregate.
Court means the High Court of Justice in England and Wales.
EEA means the European Economic Area as constituted by the Agreement on the European Economic
Area (94/1/ECSC, EC), as amended from time to time, excluding the United Kingdom.
EEA Policy means a Policy or part thereof, effected or carried out by or on behalf of any of theMembers as insurer, co-insurer, reinsurer or retrocessionaire on or prior to the applicable Cut-Off Dateand originally allocated to a Relevant Year of Account, which will immediately after the Transition End
Date require an insurer authorised by an EEA regulator (including, for these purposes, with respect toMonaco) to carry out or service that Policy (or the relevant part thereof, in each case whether by reasonof its terms or the subject matter of the policy or by reason of the identity or location, domicile orresidency of the Policyholder, insured or claimant or for any reason whatsoever), in order to ensure no
legal or regulatory insurance authorisation requirements in the EEA are breached. For the purposes ofdetermining whether a Policy (or part thereof) is an EEA Policy for the purposes of this Scheme, theapplication of, or any permission granted by, any Temporary Run-off Regime shall be ignored in respectof that Policy.
EEA Policyholder means a policyholder resident in an EEA State.
EEA Risk means any risk in respect of which an EEA State is the state in which the risk is situated.
EEA State has the meaning given to it in Schedule 1 to the Interpretation Act 1978.
Effective Date means the time and date on which this Scheme shall become effective in accordancewith the Court Order made under Section 111 of the FSMA sanctioning the Scheme on or before theeffective date.
EIOPA means the European Insurance and Occupational Pensions Authority.
EU means the European Union.
Excluded Assets means any asset or property of the Members which is not expressly provided for inthis Scheme as a Transferring Asset, including:(a)the Existing Outwards Reinsurance Agreements,(b)

the Tax Recoveries;
60

(c)

the Sundry Assets; and(d)any other asset or property which Lloyd’s and the Transferee agree in writing prior to the
Effective Date shall be classified as an Excluded Asset on the Effective Date provided the PRA
and the FCA have given their prior consent to such asset or property being an Excluded Asset.

Excluded Jurisdiction means Australia, Canada, Hong Kong, Singapore, South Africa and/or
Switzerland.
Excluded Liabilities means:(a)any liability to a person who is not or was not:(i) a Policyholder under the terms of the Transferring Policies; or(ii) an assignee or a pledgee entitled to claims resulting from the Transferring Policies, and any
Costs in relation to the same;(b)

any liabilities of the Members not attributable to, or arising from or in connection with, theTransferring Assets or the Transferring Liabilities and any Costs in relation to the same;(c)any liabilities of the Members under or relating to the Excluded Policies and any Costs inrelation to the same;(d)any Non-Insurance Liabilities of the Members arising in connection with the Transferring Assets
including, for the avoidance of doubt, any Conduct Liabilities;(e)any Tax liabilities arising, or relating to the period, prior to the Effective Date in connection with
the Transferring Business; or(f)any other liability which Lloyd’s and the Transferee agree in writing prior to the Effective Dateshall be classified as am Excluded Liability on the Effective Date provided the PRA and the FCA
have given their prior consent to such liability being an Excluded Liability.

Excluded Policy means:(a)a Policy that is a Long-Term Insurance Contract;(b)a Non-EEA Policy;(c)a Policy or part thereof which would otherwise fall within the definition of “EEA Policy” but the
Policy or part thereof is subject to the requirements of a local regulatory licence or otherinsurance approval granted to Lloyd’s in an Excluded Jurisdiction (“Excluded Jurisdiction
Policy”);(d)an Inwards Reinsurance Policy;(e)a Sanctions Policy; and/or(f)

any other Policy or part thereof, including any class of Policy, under which any liability remains
unsatisfied or outstanding at the Effective Date:(i) which is not capable of being transferred pursuant to section 111 of FSMA;(ii) which the Court for any reason determines not to transfer by virtue of the Order; or(iii) which Lloyd’s and the Transferee agree in writing prior to the Effective Date shall not betransferred on the Effective Date provided the PRA and the FCA have given their prior consent
to such liability being an Excluded Liability.

FCA means the United Kingdom’s Financial Conduct Authority and its successors from time to time.
61

Financial Services and Market Authority or Belgium FSMA is Belgium’s Conduct Regulator.
FSMA means the Financial Services and Markets Act 2000.
IDD means the European Insurance Distribution Directive.
Independent Expert (or IE) report means the report dated 1 May 2020 headed “Proposed Part VII
Insurance transfer of certain insurance business related to certain Members at Lloyd’s for any and allof the 1993 to 2020 (inclusive) years of accounts to Lloyd’s Insurance Company SA”.
LIC means Lloyd’s Insurance Company SA, a company incorporated in Belgium, with its registeredoffice at Place du Champ de Mars 5, 1050 Bruxelles, Belgium.
Lloyd’s means the Society of Lloyd’s incorporated by Lloyd’s Act 1871 by the name of Lloyd’s, with its
head office at One Lime Street, London EC3M 7HA.
Managing Agent means a managing agent is a company set up to manage one or more syndicateson behalf of the members. Managing agents have responsibility for employing underwriters, overseeing
their underwriting and managing the infrastructure and day-to-day operations.
Master List means the Policy File.
Members means the underwriting members, former underwriting members and estates of former
underwriting members of Lloyd’s comprising the Syndicates and Closed Year Syndicates, in theircapacity as members of such syndicates.
NBB or National Bank of Belgium is Belgium’s Prudential Regulator.
Non-EEA Policy means a Policy or part thereof, effected or carried out by or on behalf of any of theMembers as insurer, co-insurer, reinsurer or retrocessionaire and originally allocated to a RelevantYear of Account, which immediately after the Transition End Date does not require an insurer withauthorisation from an EEA regulator to carry out or service that Policy (or part thereof). For the purposesof determining whether a Policy (or part thereof) is a Non-EEA Policy for the purposes of this Scheme:(a) the application of, or any permission granted by, any Temporary Run-off Regime shall be ignored
in respect of that Policy; and (b) no Policy (or relevant part thereof) which is identified on the Policy Fileshall be treated as a Non-EEA Policy.
Non-XIS data means the premiums and claims data not appearing in the RRD data.
Outward Reinsurers means, in respect of any Syndicate or Closed Year Syndicate, any contract ofreinsurance to which the Members comprising the Syndicate or Closed Year Syndicate are parties toas the reinsured, together with any collateral, letter of credit facilities or other security arrangements
which have been arranged by the relevant reinsurer for the benefit of the Syndicate, which attaches toany part or all of any of the Transferring Policies and under which any obligations remain to be
performed in whole or in part at the Effective Date.
Proposed Part VII transfer means Scheme.
Policy and Policyholder have the meaning ascribed to “policy” and “policyholder” by the Financial
Services and Markets Act 2000 (Meaning of Policy and Policyholder) Order 2001, and shall include any
expired, surrendered, lapsed, matured or reinstated policies and all treaties, slips and other contracts
of insurance, reinsurance and retrocession, binding quotations, supplements, endorsements, notices,
assignments, novation’s and riders thereto and all ancillary agreements in connection therewith.
Policy File means the file having the name “The Part VII Master List”, as provided by Lloyd’s to LIC
prior to the Effective Date through a secure file transfer portal. A Policy may be included in the Policy
File under the column headed “Category 1” or “Category 2” or “Category 3”.
PRA means the United Kingdom’s Prudential Regulation Authority and its successors from time to time.
QS Reinsurance Contract means the 100% reinsurance contract agreement between the transferee(as cedent) and each syndicate by which the insurance liabilities attaching to the Transferring Policies
are reinsured back into the Lloyd’s market.
62

Reinsurance to close (RITC) means the process to describe the transfer of risks from one underwriting
year to a later year of the same syndicate, or another syndicate.
Relevant Year of Account means any or all of the 1993 to 2020 (inclusive) years of account;Reserves means Technical Provisions.
RRD data means the premiums and claims data contained in the Xchanging (XIS) and Lloyd’s Direct
Reporting (LDR) database.
Sanctions Policy means a Policy or part thereof effected or carried out by or on behalf of any of theMembers as insurer, co-insurer, reinsurer or retrocessionaire and originally allocated to a RelevantYear of Account:(a)under or in connection with which any amount has arisen which is or was directly or indirectly
payable by, to, through or for the benefit of a Designated Person or in which a Designated
Person has a direct or indirect interest of any nature;(b)which is, or where any amount has arisen under or in connection with such Policy is, required
to be blocked (or treated as blocked) pursuant to US Sanctions; or(c)under which the provision of (re)insurance, the payment of any claim or the provision of any
benefit would expose the Transferee or any service provider to, or bank of, the Transferee, toany sanction, prohibition or restriction or the risk thereof under Sanctions Laws.

Scheme means the way which the liabilities attaching to relevant Years of Account are transferred to
LIC as approved by the Court in accordance with Part VII of Schedule 12 to the FSMA.
SCR or Solvency Capital Requirement means a measure of the regulatory capital requirement
insurers are required to maintain by the appropriate Solvency II regulations and is an estimate of thecapital required to ensure that an insurer is able to meet its obligations over the next 12 months.
Segmentation means the process used by Lloyd’s to identify Transferring Policies.
Solvency II means the Solvency II Directive (EU Directive 2009/138/EC) and any regulations, directive,
enactment, statutory provision or other applicable law implementing that directive.
Solvency Ratio means a quantitative measure of an entity financial resources and is calculated asfollows:
Solvency Ratio % = Entities own funds
Solvency II capital requirement
Syndicate means a group of underwriting members of Lloyd’s, to which a particular number is assignedby or under the authority of the Council, for whose account an active underwriter accepted or accepts
insurance business at Lloyd’s.
Technical Provisions means the amounts set aside by insurance entities, at a given date, to pay for
all potential future cash-flows that would be incurred in meeting liabilities to policyholders from existing
insurance and reinsurance contracts. The principles which are followed to calculate these provisions
will differ depending on their purpose e.g. regulatory (Solvency II) or annual accounts reporting (GAAP).
In this report, used interchangeably with Reserves.
Temporary Run-off Regime means, in an EEA State, a temporary national run-off regime for
insurance contracts which would permit a Member to carry out a Policy in that EEA State after the UK
has ceased to be a member of the EU without breaching applicable legal or regulatory insurance
authorisation requirements.
Transfer Date means the Effective Date.
Transferring Assets means all of the following whatsoever and wheresoever situated as at the
Effective Date:
63

(a)

the rights, benefits and powers of the Members under or by virtue of the Transferring Policies(including, for the avoidance of doubt, the right to receive premiums);(b)

the rights, benefits and powers (whether actual or contingent) of the Members whatsoever
under or by virtue of the Transferring Contracts;(c)the Transferring Reserves; and(d)all rights and claims of the Member against any third party in relation to the Transferring
Business or arising as a result of the Members having carried on the Transferring Business;but excluding the Excluded Assets and, until the relevant Subsequent Transfer Date, if any, theResidual Assets;

Transferring Reserves means the sum of (A) the Lloyd’s best estimate of gross reserves in respectof the Transferring Business on a non-discounted basis as at the Valuation Date; plus (B) associatedexpenses, in each case in an amount agreed between Lloyd’s and LIC prior to the Effective Date.
Transferring Liabilities means all liabilities and commitments of any kind and description of theMembers to the extent arising from the Transferring Policies or Transferring Assets, irrespective ofwhether the liabilities and commitments arise prior to or following the Effective Date, excluding the
Excluded Liabilities and, until the relevant Subsequent Transfer Date, if any, the Residual Liabilities.
Transferring Policies means each of the following:a)the Policies or parts thereof included in the Policy File under the column headed “Category 1”
as at the Effective Date unless it is subsequently determined by the Transferor and theTransferee that any such Policy or part thereof has been included in Category 1 of the Policy
File in error because it neither: (i) relates to an EEA Risk; nor (ii) was issued to or is held by an
EEA Policyholder;b)

the Policies or parts thereof included in the Policy File under the columns headed “Category 2”
and “Category 3” as at the Effective Date provided such Policy (or part thereof) (i) relates to
EEA Risk; or (ii) has been issued to or is held by an EEA Policyholder; andc)the EEA Policies, together or individually as the context may indicate, in each case, excluding
any Excluded Policy.

Transferring Policyholder means a Policyholder in relation to a Transferring Policy.
Transition Period means the period 1 February 2020 to 31 December 2020 agreed in the UK-EU
Withdrawal Agreement in which the UK is no longer a member of the EU but continues to be subject
to EU rules and remains a member of the single market and customs union.
UK or United Kingdom means the United Kingdom of Great Britain and Northern Ireland.
Unclear/Unknown Data means the database of Policies which, after the segmentation process has
been applied to the Policies, it is unknown or unclear whether the policies are Transferring Policies .
Xchanging means the independently owned business process and technology services provider which
provides technology enabled business services to the commercial insurance industry.

64

Appendix 2
Summary of data provided by Lloyd’s
Data Received from Lloyd’s
In writing the Supplementary report, we have relied upon the accuracy of certain documents andinformation provided by Lloyd’s Staff. These included the following:
Balance sheets•

Solvency II balances sheet for Lloyd’s Insurance Company SA as at 31 December 2019•

Investment funds composition of Lloyd’s Insurance Company SA•

Pro-forma balance sheets (GAAP and SII) for post-Transfer Lloyd’s Insurance Company SA as at
31 December 2020, 31 December 2021, 31 December 2022

Quality of data•

Part VII Transfer Data Workstream Independent Expert Paper setting out a description andexplanation of the approach taken by the data team for the Lloyd’s proposed Part VII transfer•

Lloyd’s of London – Part VII Transfer, Part VII Data Approach report explaining the approach taken
to data analysis, validation and use throughout the Lloyd’s Part VII transfer process•

Lloyd’s of London Data architecture landscape diagrams for the Part VII transfer

Capital•Standard Formula Return: the 2020 projection Guidance and Instructions for Lloyd’s Insurance
Company SA•

Standard Formula calculations, including projected Standard Formula models at years end 31
December 2020 to 31 December 2025 for Lloyd’s Insurance Company SA (“Lloyd’s Insurance
Company SA”) for pre- and post- Transfer•

ORSA model overview for Standard Formula calculations for Lloyd’s Insurance Company SA•

Report on the implication of LIC’s Letter of Credit on capital and solvency

Reserving•

Lloyd’s Chief Actuary’s Report for the proposed Part VII transfer•

Lloyd’s Brussels Part VII: Reserves & Capital report•

Lloyd’s Part VII Supplementary Chief Actuary’s Report•

Data summary spreadsheets detailing premiums, paid claims and outstanding claims from theRegulatory Reporting Database (RRD) on a Global basis split by class of business, Year of
Account and with segmentation logic applied•

Part VII – Projections Summary files•

Various data files and returns summarising the impact of COVID-19 on the Lloyd’s Market

Policy communications•

Communications and notifications documents•

Notifications Strategy Execution Reports65

Other Non-financial information•

Scheme document•

Transferor Third Witness Statement and Transferee Second Witness Statements•

Communications Manager First Witness Statement•

Lloyd’s Insurance Company SA Part VII Operational Framework documents, presentations andwalkthroughs, detailing the proposed operating model for Lloyd’s Insurance Company SA for thetransferred business post-Transfer•

Copies of the outsourcing agreement entered into between Lloyd’s Insurance Company SA andManaging Agents•

Copies of the Quota Share Reinsurance Agreement entered into between Lloyd’s Insurance
Company SA and Managing Agents•

Copy of the Costs Agreement entered into between Lloyd’s and Lloyd’s Insurance Company SA•

Analysis of reinsurer domicile based on 30 June 2019 and 31 December 2019 balance sheet
reporting•

Lloyd’s Technical Briefing Note – analysis of Syndicate Level Outwards Reinsurance – Domicile &Jurisdiction Estimates dated October 2020•

Copies of Monthly Presentations to the Lloyd’s Market Association regarding the Part VII transfer,the data requirements, the progress made to date, and the Lloyd’s Insurance Company SA
operating model

Other specialist advice•

Deloitte UK VAT and corporation tax analysis of the Cost Agreement•

Lloyd’s analysis of the accounting and corporation tax implications for the proposed Part VII
transfer

Other information available in the public domain•

Individual Solvency Financial Condition Reports (SFCR) 2019 for the Corporation of Lloyd’s and
Lloyd’s Insurance Company SA•

Lloyd’s Insurance Company SA financial statements for the year ended 31 December 2019•

Lloyd’s Half Year Results 2020•

Background to the Lloyd’s Part VII transfer, the Corporation of Lloyd’s and Lloyd’s Insurance
Company SA from Lloyds.com and Lloydsbrussels.com

66