Risk Based Capital Modelling at Lloyd’s

1. Risk Based CapitalModellingat Lloyd’s

2. Lloyd’s Market Structure How the market works Getting covered Corporation of Lloyd’s The policyholder Members The brokers Managing agents The coverholders Syndicates SEE: www.lloyds.com/directories 2 Source: Lloyd’s Annual Report 2011

3. ICAs are driven primarily by insurance risk • All FSA risk groups are addressed within syndicate ICAs • Increase in market risk • Insurance risk covers underwriting risk and reserving risk • Underwriting risk considers the risk of loss arising from prospective underwriting, reflecting the current point in the cycle and considering catastrophe, large and attritional losses separately • Reserving risk considers the adequacy of set reserves, addressing the possible effects of changes in legislation, emergence of latent claims and making allowance for trends such as inflation • Credit risk addresses the risks posed by all counterparties • Reinsurance credit risk makes up the majority of syndicates’ credit risk and allows for the risk of downgrade, duration of recoveries and concentration of reinsurers MF - introduction to ICAs

4. Syndicate ICAs are essential element of capital setting process at Lloyd’s RDS returns Syndicate ICA Submissions Business Plans Other data ICAS agreed Reviewed by Lloyd’s 35% Uplift applied to reach “Economic Capital” level desired Allocated to members Funds at Lloyd’s Syndicate risk information to Stochastic model and other risk information Lloyd’s ICA and desired Central Fund established MF - introduction to ICAs

5. Lloyd’s internal model Successful implementation at Lloyd’s represents a unique challenge

6. Lloyd’s planning for total capital to be similar under Solvency II to now Now Solvency II Uplift and Central Assets Total 1:200 asset stack Ultimate Risk ICA SCR (one year risk) Adjust for premium debtors moving to TPs UK GAAP Technical Provisions Solvency II Technical Provisions

7. Six year summary (2001 – 2006)

8. Six year summary (2007 – 2012)

9. Thank You