Market Oversight Plan: Key Risks 2018

Transcription

1 Market Oversight Plan: Key Risks 2018 December 2017

2 2 Contents Introduction Lloyd s Market Oversight Key Risks Market Oversight Framework Lloyd s Market Returns 5 Lloyd s 2018 Key Risks, Impact & Oversight 6 Macro-Economic Conditions 8 Brexit 8 Interest Rates & Investment Environment 8 Insurance Industry Conditions 9 Market Conditions Likely To Be More Volatile 9 Hurricane Claims 9 Regulatory Environment 10 Insurance Distribution Directive (IDD) 10 General Data Protection Regulation (GDPR) 10 Financial Crime 10 Policyholder Protection 11 International Regulation 12 UK Regulation 12 Lloyd s Specific Conditions & Risks 13 Catastrophe Exposure 13 Reinsurance 13 Cyber 14 Cyber Underwriting Risk 14 Cyber Security 14 Reserve Estimates 15 Emerging Risks 16 Appendix 1: Lloyd s Returns & Continuous Monitoring 17

3 3 Introduction Market oversight remains a priority for the Corporation. The nature of Lloyd's, as a market of independent businesses backed by the Central Fund, requires the Corporation to provide clear and strong oversight in all areas of performance management, capital setting and risk management. In addition to these supervisory activities, it is important that Lloyd's market oversight is supportive of sustainable, profitable growth and is valued by all stakeholders. The Corporation must ensure that supervision of the market is effective and we are accountable to both the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) in this regard. It is also a key objective for Lloyd s to minimise duplication with work undertaken by the PRA and the FCA, and for the regulators to take comfort from the oversight undertaken by Lloyd s. In support of their Executives, Managing Agency Boards are critical to ensuring sustainable profitable performance as well as the management of risk. Lloyd s therefore expects that business strategy and key risks are subject to appropriate levels of Board oversight and challenge. The Corporation continues to evolve the way in which it provides Market Oversight, further enhancing its risk-based approach to ensure that activity is appropriately focused and is proportionate to the risks faced. For example, there are a number of pieces of thematic work listed in the Market Oversight Plan for 2018, the purpose of which is to establish the extent of a given risk across the wider Lloyd s market, to identify and share both good and bad practice. We are limiting the number of Managing Agents included in each thematic review, to ensure they are more manageable and more impactful, and they will be used in the Corporation s oversight activity in conjunction with issue specific reviews. Finally, for 2018 the individual managing agent oversight plans, contained in bespoke Oversight Letters will be managed by the recently appointed Lloyd s Oversight Managers, which will help ensure the right issues are reviewed by the right people in the right manner. Jon Hancock Performance Management Director Please send any feedback or questions to oversight.framework@lloyds.com The 2018 Market Oversight Plan is also available online at

4 Lloyd s Market Oversight Key Risks In order for Lloyd's oversight of the Market to be effective and efficient, it must be risk-based and proportionate as well as transparent to all stakeholders. This document covers the high-level key risks to the Lloyd s Market, taking into account the wider risks of macro-economic conditions, insurance industry conditions, Lloyd s specific conditions and emerging risks. This provides managing agents with the Corporation s view of the risks and issues facing the Market and gives transparency over the Corporation s planned oversight activity to manage those risks. Macro- Economic Conditions Insurance Industry Conditions Lloyd's Specific Conditions Emerging Risks 2018 Market Oversight Framework Lloyd s will be fully implementing its new Account Management regime. This will ensure that engagement between managing agents and the Corporation is structured, cohesive and commercially effective. This will be led by Oversight Managers and Development Managers who have a full understanding of their assigned managing agents strategic aspirations, risk profiles, capabilities and business requirements. Accompanying this document will be individual managing agent oversight plans that will be undertaken by Lloyd s during 2018, to ensure the key risks are appropriately managed. The implementation of the 2018 Market Oversight plan at individual Managing Agency level is one of the responsibilities of the Oversight Managers. Market Oversight Lloyd's Returns* Thematic Oversight Minimum Standards Reviews Additional Oversight *Appendix 1 shows in more detail the Lloyd s Returns and the continuous monitoring undertaken on these.

5 5 Definitions Returns Thematic Oversight Minimum Standards Review Additional Oversight Continuous monitoring of the Lloyd s returns submitted by the managing agent, as per the Business Timetable. This monitoring may trigger any of the below. Oversight of the Market regarding a particular topic or risk, with a sample of managing agents. The work will result in Market wide feedback. A Minimum Standards review, which will include a scope, fieldwork and report. Oversight triggered by a particular Minimum Standard concern, Lloyd s return, or unexpected market event. The work is focused and risk based, and could (but does not have to) include fieldwork. Scheduled As detailed in individual Managing Agent Oversight letters. Unscheduled Triggered by a concern which was not apparent at the point of the Market Oversight Letter distribution, and leads to discussions or further work. This must be agreed with the Oversight Manager before being conducted Lloyd s Market Returns During 2018 Lloyd s will improve the technology and processes for the collection of oversight and regulatory data from the market as part of the Market Data Collections (MDC) Programme. MDC will schedule existing market returns to be migrated onto the platform at the most appropriate times and ensure that this will be undertaken to minimise impact to the market stakeholders. Appropriate levels of notice and training will be given in advance and further information on specific impacted returns and timelines will be published in Q directly by the MDC Programme team.

6 Insurance Industry Conditions Macro- Economic Conditions 6 Lloyd s 2018 Key Risks, Impact & Oversight Risk Area Impact on Lloyd s 2018 Oversight Brexit Lloyd s businesses suffer due to issues or delays in maintaining access to the single market and not ensuring our customers are able to access the Lloyd s market seamlessly for EU business. Lloyd s will focus on preparing the Company for operations and continue to work with Lloyd s Market participants to agree the arrangements for placing business with Lloyd s Insurance Company SA. Interest Rate & Investment Environment Market Conditions Lloyd s businesses suffer losses or erode their capital base due to assets that pose additional risk to the New Central Fund. Lloyd s businesses suffer due to failure to respond to changing market conditions, not ensuring market performance is better than that of our peers. The type of investment strategy adopted by each agent will be a key factor in determining the level of risk-based oversight we undertake. Lloyd s oversight activities during 2018 will focus on cross class post hurricane analysis, Marine Hull, Property, Overseas Motor, with follow up work on Non US Professional Indemnity. Oversight will also include a focus on actual vs estimated rates at 01 January. Claims Lloyd s businesses suffer financial impact, loss of business and reputational harm as a result of the ineffective and inefficient management of claims. Regular assessment of risk based factors (supported where relevant by specific or thematic oversight) combined with a focus on catastrophe loss response, delegated claims handling performance and enhancements to customer experience. Regulatory Environment Lloyd s businesses suffer due to failure to respond to and comply with relevant laws and regulations. Lloyd s will continue to analyse the core processes of how business is written and processed to ensure the international speciality market can function under applicable multiple sanctions regimes. Thematic oversight identified will include Lineslips & Consortia, broker remuneration, distribution of consumer products underwritten against Master Policies.

7 Lloyd s Specific Conditions 7 Catastrophe Exposure Lloyd s businesses suffer losses or erode their capital base through material aggregations of risks or insufficient monitoring processes. Lloyd s will focus on close monitoring of managing agents catastropheexposed business as reported, including completeness of non-modelled risks in syndicate models, to ensure that syndicates remain within forecasts agreed by Lloyd's during CPG. Reinsurance Lloyd s businesses suffer losses or erode their capital base as a result of reinsurers unwillingness or inability to satisfy the terms of reinsurance contracts, in part or in full. Lloyd s oversight activities during 2018 will focus on RI Liquidity Management, RI Counterparty Management, and RI Bad Debt & RI Credit Risk methodologies. Cyber Lloyd s suffers a systemic loss as a result of a malicious electronic attack or through exposure to both known and non-affirmative aggregations of risk via the policies written by its businesses. Lloyd s oversight activities during 2018 will focus on cross class cyber underwriting and compliance with the PRA supervisory statement Cyber Insurance Underwriting Risk. Additionally, cyber security oversight activity will include some thematic work to assess the level of managing agent understanding and protection against cyber security risk. Reserve Estimates Lloyd s businesses suffer losses due to significant inherent risk in reserve estimates and potential lack of reserve adequacy if the market is not appropriately managed. In recent years Casualty classes have been a key focus of reserve oversight. Syndicates can expect more direct, targeted discussion from Lloyd s in this area requiring detailed explanation or resulting in changes to reserves or capital is expected to see reserves established for catastrophe events in Lloyd s will monitor the development of these in detail across the market. A summary of the continuous monitoring across these nine risk areas can be found at Appendix 1. These returns are detailed in the Core Market Returns Guidebook (along with the Non-Core Market Returns Guidebook) and are scheduled within the Lloyd s Business Timetable.

8 8 Macro-Economic Conditions Brexit In March 2017 the Council of Lloyd s decided to establish an insurance company in Brussels in order to enable Lloyd s underwriters to continue to have full access to EU/EEA business once the UK leaves the EU. The licence application for the new company, Lloyd s Insurance Company SA, has been submitted and plans for the company to be operational by July 2018 are on schedule. Subject to regulatory approval, the first policies will incept on 1 January 2019, in advance of 29 March 2019; the expected date on which the UK will leave the EU. For 2018, whilst there will be no explicit individual market oversight activity for Brexit risk outside of the annual business planning process, Lloyd s will focus on preparing the Company for operations and continue to work with the Lloyd s Market participants to agree the arrangements for placing business with Lloyd s Insurance Company SA. In the meantime, the existing trading rights of Lloyd s underwriters in the EU/EEA under the passporting regime are unaffected. Interest Rates & Investment Environment Financial markets have experienced a period of relatively low volatility in 2017, despite the various sources of geopolitical risk. Increased uncertainty was sparked by elevated turmoil in Washington, an unexpected result in the UK election, mixed economic data and Central Bank rhetoric around potential tightening of monetary policy but markets have generally been resilient, and investment return performance as at Q will have taken benefit from this strength in equity markets. Lloyd s overall exposure to high-risk assets remains conservative, although exposure by managing agent is varied. For 2018, the type of investment strategy adopted by each agent will be a key factor in determining the level of oversight Lloyd s undertakes.

9 9 Insurance Industry Conditions Market Conditions Likely To Be More Volatile 2017 has seen a series of significant events. It is anticipated that market conditions will see some hardening of pricing and terms and conditions in loss-affected classes. There are some signs that underwriting discipline is improving but managing agency boards must remain vigilant in their challenge of the business. Effective portfolio management is the key to mitigating the impact of volatile market conditions. Lloyd s Performance Management Director Jon Hancock has been working with the Market to ensure that it focuses on maintaining strong underwriting discipline and profitable lines of business. Competition within the insurance industry remains intense with capital, including from alternative sources such as hedge funds and institutional investors, gravitating to the (re)insurance industry. Mergers, acquisitions and broker initiatives are expected to remain features of the industry as participants pursue scale and relevance as well as looking to reduce acquisition costs. Whilst the recent catastrophe activity will impact pricing levels and adequacy in affected regions and lines, it remains to be seen what, if any, the impact will be in other areas. There are still underperforming lines written at Lloyd s impacting overall market performance. It is expected that Market volatility will dominate the array of risks facing general insurers; coupled with the challenge of low investment returns, managing agents must seek to return their portfolios to profitability and ensure that underwriting discipline and effective cycle and portfolio management are priorities. Maintaining underwriting discipline remains vital as the industry experiences a return to more normalised catastrophe activity. The prevailing environment means managing agents must be agile and flexible, showing a willingness to withdraw from lines of business and innovate in terms of distribution, new markets and products. Cycle management, underwriting discipline and strict adherence to the Board approved risk appetites remain key. Lloyd s oversight activities during 2018 will focus on cross class post-hurricane analysis, Marine Hull, Property, Overseas Motor, with follow up work on Non US Professional Indemnity. In hurricane affected classes this will include an actual vs estimated rates analysis as at 01 January. Hurricane Claims The 2017 hurricane season has not triggered the Market Turning Event (MTE) protocols. Lloyd s issued guidelines during 2017 on MTE covering how agents should prepare for such events and how Lloyd s will deal with the resultant changes. It is important that agents re-visit this guidance and consider creating an MTE internal plan (including resourcing of claims surge) to assist with a prompt consideration of underwriting opportunities should an MTE occur. Lloyd s oversight activities will include a focus on catastrophe loss response, delegated claims handling performance and enhancements to customer experience.

10 10 Regulatory Environment Lloyd s expects the Market to be compliant with UK and international regulatory requirements, and has processes in place to assist the market with these obligations. Through its monitoring of regulatory change and its close engagement with international regulators, the Corporation seeks to maintain access in all Lloyd s markets and to minimise the additional regulatory, prudential or compliance burden placed on the Market by managing processes and interfaces directly wherever possible. Lloyd s continues to experience significant regulatory change across multiple jurisdictions with UK and international policy makers being committed to implementing a regulatory system that promotes financial stability. Lloyd s market oversight activities in respect of the regulatory environment are detailed under each sub-heading. Insurance Distribution Directive (IDD) The Insurance Distribution Directive (IDD) is additional EU legislation on the conduct of business and will be incorporated into the FCA s regulatory handbook. Compliance is currently due to be required from 23 February Significant industry wide consultation is being undertaken through the FCA as it drafts and finalises its updated rule book to implement the directive for FCA related entities. Part of the IDD extends and reinforces a number of the current conduct related regulatory rules. Lloyd s expects managing agents (and coverholders) to implement and update their control frameworks to ensure these new rules are met. Lloyd s will work with the Market during to 2018 to ensure it complies with the requirements including as they apply to business written through the new Lloyd s Insurance Company SA once the new company has received appropriate authorisation. General Data Protection Regulation (GDPR) The implementation of the EU General Data Protection Regulation (GDPR) in May 2018 will replace the existing UK Data Protection Act to strengthen and harmonise data privacy laws around Europe. Managing agents have been engaged through the LMA, and will each be undertaking their own assessment of any work required as a result of the new regulation. Lloyd s Minimum Standards have been updated to reflect the need for managing agents to comply with the GDPR requirements when they come into force. Current proposals as part of the UK s Brexit strategy include transposing EU laws into UK law which would include the GDPR. The new GDPR requirements will include tighter cyber regulation around Europe, setting rigorous standards for businesses dealing with consumer data, for example the requirement to report any data breach within 72 hours, with the threat of fine up to 4% of annual worldwide turnover, or 20m, whichever is greater. Lloyd s will use the annual Board Attestation of Compliance with the Minimum Standards to assess implementation. Financial Crime The financial crime landscape continues to evolve and in particular, the application of international sanctions remains complex as evidenced by the continued challenges of trading with Iran, additional sanctions against North Korea and tightening of sanctions against Russia. The threat of enforcement by international regulators against financial institutions for wrongdoing and inadequate systems and controls remains significant. Compliance challenges continue into 2018:

11 11 Despite the sanctions relief for Iran since 2016, challenges continue due to a divergence in risk appetites amongst the market (diversity of capital US and non-us), lack of banking support and processing challenges of legitimate business through outsourced entities (Market Bulletin Y5098). The regional dispute focusing on Qatar and sectoral sanctions on Venezuela highlight how new sanctions add to the compliance challenge. HM Treasury s Office of Financial Sanctions Implementation (OFSI) prepares to create a new legal framework (The International Sanctions Bill announced in the Queen s speech) to enable the UK to pursue its own global sanctions regime post-brexit. Recent enforcement cases against insurers for failings in controls, screening weaknesses and ineffective use of exclusionary clauses puts the spotlight on the insurance sector on how cover is provided and to whom. The UK Criminal Finances Act 2017 introduces a new corporate offence of failure to prevent facilitation of tax evasion. Like the Bribery Act 2010, the offence will make it easier to convict Corporates and their Directors for the activities of their employees or associated persons. The FCA is also increasing its focus on Anti-Money Laundering and sanctions and has implemented a set of measures to enhance their supervision strategy. As the above environment is fluid, the Market will need to remain flexible. Lloyd s market oversight will continue to analyse the core processes of how business is written and processed to ensure the international speciality market can function under applicable multiple sanctions regimes. Policyholder Protection In line with Lloyd s overall approach to Market Oversight, there will be a risk-based approach to customer standards oversight (which covers Delegated Authorities, Conduct and Claims) designed to ensure policyholders are treated fairly at all times. Lloyd s approach to customer standards oversight will be influenced by regularly assessed risk factors, and may be influenced by biannual Customer Standards Oversight Meetings with managing agents. Lloyd s will take a holistic approach across all the customers standards when undertaking any new thematic or agent specific oversight activity and will work closely with the market to resolve all outstanding activities from the conduct assurance programme delivered over the last three years. Thematic Oversight work identified for 2018 include: Lineslips and Consortia deferred from 2017 in order to have regard for the release of the revised Code of Practice (COP), this oversight work will establish the approach adopted by managing agents in supporting the updated areas of the COP Distribution of consumer products underwritten against Master Policies - focusing on managing agent controls and oversight of sales and servicing of these policies and providing practical guidance to support the proper use of master policies Broker Remuneration will explore managing agents strategy towards remunerating brokers, the oversight, controls and breadth and visibility of MI reporting within the business, (Lloyd s will map the proposed scope against that of the FCA s Wholesale Insurance Broker Review to identify any overlap) Use of peer reviews in overseeing delegated authority activities primarily focusing on the effectiveness of peer review programmes in place and operating at Coverholders and TPAs, the analysis will extend to consider the reporting output shared with managing agents and how this supports ongoing performance oversight, reducing overreliance on periodic external audits. Other specific activities that Lloyd s will engage in over the coming year include: robust and efficient oversight over third parties, including introducing ongoing coverholder oversight ensuring improved oversight over claims third party administrators

12 12 ensuring managing agents meet their own obligations in terms of overseeing their third parties the requirements within the Insurance Distribution Directive. Lloyd s will also focus on improving the policyholder experience whilst delivering more streamlined and cost efficient processes; this will include activities designed to improve claims payment timings. Processes for handling international complaints will continue to be introduced and embedded. This includes the notification of all complaints to Lloyd s to ensure that these are handled in accordance with international regulations, whilst satisfying the requirements of the FCA. The team will also continue to monitor and take action where necessary to ensure managing agents meet their complaints handling obligations. International Regulation In all countries, Lloyd s seeks to provide international regulators with confidence in our security, compliance culture and standards. The key market oversight risk and activity is expected to be in the Financial Crime space, mentioned earlier, as Lloyd s manages the broader regulatory risk for the Market. Lloyd s Market Oversight will include strategies for: external crime controls operated by the Market and the required level of oversight and assurance of managing agents external crime (anti-money laundering) controls operated by members agents. UK Regulation Whilst many people refer to Solvency II compliance they are in fact simply referring to the current UK regulatory framework in which Lloyd s operates. It is imperative that the Market continues to have capital models, systems, processes and validation in place which continues to meet the current regulatory environment. Lloyd s monitors and approves changes in an agent s internal model through the Lloyd s Model Change process which has been live since 1 January 2016.

13 13 Lloyd s Specific Conditions & Risks Catastrophe Exposure Lloyd's protects people and businesses around the world from a wide variety of catastrophe risks including hurricanes, earthquakes, flooding and wildfires. The Lloyd's Market routinely models these and submits information to Lloyd's to form a comprehensive view of catastrophe risk within the Market. This feeds into the calculation of the necessary size of the Central Fund and also to member capital calculations. The catastrophe and other models used in this process help the Market assess risk levels based on strong scientific and engineering principles in a statistically sound manner. The models contain many key parameters and assumptions; they also rely heavily on the quality of the exposure data to which they are applied. Therefore the calculated values are subject to uncertainty. Lloyd's Minimum Standards require illustrations of this uncertainty be communicated to the managing agency Boards to ensure that they and capital providers appreciate the potential for mis-estimation. Syndicates with material exposure in the US will be expected to incorporate lessons learned from recent hurricanes in terms of non-modelled contributions to insured losses. Lloyd's needs to maintain tight understanding and control of catastrophe risk throughout Agents need to be mindful of both their own catastrophe risk appetite and that of the aggregation of catastrophe risk across the whole Market (and therefore Lloyd s own appetite). Lloyd s oversight activities during 2018 will focus on close monitoring of managing agents catastrophe-exposed business as reported, including completeness of non-modelled risks in syndicate models, to ensure that syndicates remain within forecasts agreed by Lloyd's during CPG. Reinsurance To manage Reinsurance (RI) Risk effectively it is essential that the processes and controls to manage reinsurance arrangements (in particular those pertaining to reinsurance recoveries and associated cash-flow / liquidity management) continue to remain appropriate for the level and nature of the Reinsurance Risk present. Especially the ability for such to identify and mitigate potential risks arising from economically strained reinsurance arrangements and/or financially challenged reinsurance counterparties. The Lloyd's Market makes material use of reinsurance protections to manage loss volatility, both from individual large losses / events, and following the aggregation of major man-made or natural catastrophe losses. The benefit of reinsurance recoveries, and the associated risk of non-payment by reinsurers, directly feeds into the calculation of syndicate capital. This in turn influences the level of member capital and the necessary size of the Central Fund. There is always the possibility of reinsurance disputes or delay in payment, but this potential risk increases when either the individual reinsurance arrangements / relationships are put under economic strain, or the reinsurance counterparties involved are themselves under wider cash-flow or financial strain. An increase in this risk could impact on a syndicate s ability to manage liquidity after major loss events, or increase the scale of losses it retains. This can be compounded further where local regulatory funding requirements also need to be satisfied. The Market is currently in a state of transition. There is some uncertainty as to reinsurance recoveries, simply because of the volume of claims in Quarters 3 & As Market conditions change, the financial strength of (solvent) reinsurers should begin to improve given hardening of terms and conditions if primary rates and conditions move in line. The outlook for reinsurance risk is uncertain: Scale of RI has increased year on year Market conditions and recent aggregated losses will put some reinsurance programmes / relationships under economic strain

14 14 Rating agencies financial strength outlook for the Reinsurance sector remains negative. Lloyd s oversight activities during 2018 will focus on RI Liquidity Management, RI Counterparty Management, and RI Bad Debt & RI Credit Risk methodologies. Cyber Lloyd s continues to grow its affirmative cyber product offerings for this fast-changing risk where the Market is adapting for both cyber-specific policies and traditional coverage. As coverage becomes more widespread oversight will continue to ensure that syndicates adequately underwrite, price and manage exposures. Lloyd's therefore continues to focus on understanding and discouraging non-affirmative ( silent ) cyber risks. These are risks where policies may cover losses arising from cyber by virtue of the terms and conditions not specifically mentioning if cyber is covered or excluded. While the market should be getting better at handling non-affirmative cyber, generic exposures will continue to grow as the world becomes more interconnected. In order to ensure consistency of approach between the PRA and Lloyd s and to reduce the burden on managing agents that would be involved in complying with different PRA and Lloyd s requirements, the Lloyd s cyber oversight framework is being aligned with the broader PRA approach. To that end managing agents should regard the PRA s supervisory statement SS4/17 as superseding and replacing the requirements set out in Market Bulletin Y4938. Managing agents that can demonstrate compliance with SS4/17 will be considered as meeting Lloyd s expectations for the underwriting of cyber risks. Lloyd s research has found that businesses could face a much higher bill than expected after falling victim to a cyberattack. The research helps companies better understand the cyber threat, including slow burn costs such as reputational damage, litigation and loss of competitive edge. Cyber Underwriting Risk The PRA released a Supervisory Statement in July 2017 for Solvency II firms on cyber underwriting risk covering three key areas: 1. Firms are expected to assess and manage their products with specific consideration to non-affirmative cyber risk exposures. Firms should reduce unintended exposure to align residual risk with risk appetite and strategy and actions they could consider are adjusting the premium, introducing wording exclusions or attaching specific limits of cover. 2. Firms which underwrite cyber insurance policies risks (either affirmative or non-affirmative) must have clear strategies for the management of risks, which are owned by the board. Firms should have a clear articulation of risk appetite (both quantitative and qualitative) and strategy, aggregate exposure metrics and relevant stress testing that considers the potential for aggregation. 3. Firms must always show commitment to continually increasing knowledge and expertise in the continually evolving landscape of both affirmative and non-affirmative cyber underwriting risk. The Market will need to adapt processes, procedures and reporting to become/remain compliant. Lloyd s oversight activities during 2018 will focus on cross class cyber underwriting and compliance with the PRA supervisory statement Cyber Insurance Underwriting Risk. Cyber Security Cyber security is high on the agenda for the UK and European regulators. For example, the FCA has set out expectations for firms around increasing resilience through enhanced resources, capabilities and testing. The

15 15 European Commission proposed a cyber security reform package in September 2017, which aims to build on the measures put in place by the cyber security strategy and its main pillar, the directive on security of network and information systems (NIS directive). The proposal sets out new initiatives such as building a stronger EU cyber security agency, introducing an EU-wide cyber security certification scheme and swiftly implementing the NIS directive. Current proposals as part of the UK s Brexit strategy include transposing EU laws into UK law which would include the NIS directive. Lloyd s work planned for cyber security oversight activity will include some thematic work to assess the level of managing agent understanding and protection against cyber security risk. We expect to cover a representative sample of agents across Lloyd's, which will also include agents who manage syndicates with experience in underwriting cyber risk. Our conclusions will determine how we should best oversee managing agent cyber security risk going forwards, which could also include revisiting the current minimum standard requirements around cyber security. Reserve Estimates Given the Lloyd s mix of business and the current rating environment it is recognised that there is a significant inherent risk in reserve estimates. Market Reserving & Capital (MRC) have taken the opportunity to redefine Lloyd s reserve monitoring procedure to improve insight into reserve setting compared to syndicate history and peers. As part of this redesign the annual Reserve Benchmarking exercise will not continue in its current form and packs will no longer be distributed. We will move to a more syndicate-specific monitoring process. Starting from the January 2018, Lloyd s will visit each managing agent at least once every twelve months. The meetings will be an opportunity for managing agents to discuss reserving considerations as well as facilitating improvement in Lloyd s understanding. Lloyd s may also cover particular thematic issues to understand what each agent is doing to manage them, as well as syndicate-specific queries arising from the reserve monitoring processes. Lloyd s expects that, where appropriate and/or required by Lloyd s, Managing Agents will escalate issues or actions arising from these meetings to the Board. The Lloyd s Minimum Standards for Reserving (MS9) will be updated accordingly. For Casualty classes of business, reserve estimates are heavily influenced by assumptions on the expected performance of the business. Lloyd s has undertaken some thematic oversight work in this area which has not supported the expectation of the market that performance of this business will improve in recent years. Syndicates can expect more direct, targeted discussion from Lloyd s in this area requiring detailed explanation or resulting in changes to reserves or capital is expected to see reserves established for catastrophe events in Lloyd s will monitor the development of these in detail across the market.

16 16 Emerging Risks Whilst the key risks are critical to the long term viability of Lloyd s, there are emerging risks that the Corporation will continue to monitor and report to the market as appropriate. Akin to the cyber emerging risks, these may influence Lloyd s future market oversight activity though they do not impact currently it. There are many emerging risks but those that may directly impact future market oversight activity include: Pandemics: the worldwide threat of a mutated virus versus the medical innovation and advances required to combat this. Food System Shock: the impact of reduced yield from multiple staple foods affected by various factors causing extreme price rises and political tension. Space Weather: the impact of a major magnetic storm on energy grids (especially in US due to long transmission lines) and the impact of lasting blackout. Lloyd s regularly issues research papers on emerging risks and more can be found on

17 17 Appendix 1: Lloyd s Returns & Continuous Monitoring The result of these activities may trigger any market oversight work as defined on page 5 for any particular managing agent. There are also some territory specific and topic specific returns which are detailed in the Core Market Returns Guidebook (along with the Non-Core Market Returns Guidebook) and are scheduled within the Lloyd s Business Timetable. Oversight Objective Minimum Standard Continuous Monitoring Reporting from Market 1. Reserve Adequacy To ensure adequate reserving processes and limit significant reserving deficits MS9 - Reserving Standards Reserve Surplus Analysis Incurred But Not Reported (IBNR) Burn Analysis Reserve Early Warning Exercise Statement of Actuarial Opinion (SAO) analysis Valuation of Liabilities Rules Quarterly Monitoring Return analysis Quarterly Monitoring Return A (QMA) Technical Provisions Data return analysis Gross Quarterly Data return analysis Statement of Actuarial Opinion (SAO) 2. Underwriting To ensure that managing agents underwriting strategy, planning and controls are appropriate and adequate MS1.1 - Underwriting Strategy and Planning Standards MS1.2 - Underwriting and Controls Standards MS1.4 - Pricing and Rate Monitoring Standards MS1.7 - Underwriting Data Quality Syndicate Business Plan (SBP) evaluation as input to the Capital & Planning Group (CPG) process Quarterly Monitoring Return B (QMB) analysis Performance Information packs Monthly Performance Management Data Return (PMDr) analysis Broker Remuneration analysis Syndicate Business Plan (SBP) Quarterly Monitoring Return B (QMB) Monthly Performance Management Data Return (PMDr)

18 18 Oversight Objective Minimum Standard Continuous Monitoring Reporting from Market 3. Delegated Authority To ensure that delegation of underwriting is properly managed and controlled MS1.3 - Delegated Authority Standards Coverholder approval Regional and Class of Business (COB) extension approvals Query system/task log Broker Remuneration Return 4. Catastrophe Exposure To understand and manage Lloyd's catastrophe risk, at the level of individual syndicates and Lloyd's as a whole MS1.5 - Exposure Management Standards Syndicate Business Plan (SBP) and Lloyd's Capital Return (LCR) analysis Lloyd's Catastrophe Model (LCM) process Realistic Disaster Scenarios framework and reporting Cyber aggregation evaluation Validation of catastrophe-risk, including external cat models Syndicate Business Plan (SBP) Lloyd's Catastrophe Model (LCM) Realistic Disaster Scenarios (RDS) Realistic Disaster Light (RDL) Ad hoc Major /Rapid Claims Return Cyber Risk Reporting Lloyd s Capital Return (LCR) Emerging Risks monitoring 5. Reinsurance To ensure an appropriate degree and quality of diversification in reinsurance coverage To avoid excessive use of reinsurance to limit exposure to reinsurance counterparties and encourage underwriting performance discipline MS1.6 - Reinsurance Standards Syndicate Business Plan (SBP) evaluation Lloyd s Capital Return (LCR) evaluation Syndicate Reinsurance Structure (SRS) analysis Quarterly Monitoring Returns analysis ORSA evaluation Realistic Disaster Scenario (RDS) analysis Realistic Disaster Scenario Light (RDL) analysis Syndicate Business Plan (SBP) Lloyd s Capital Return (LCR) Syndicate Reinsurance Structure (SRS) Quarterly Monitoring Return A (QMA) Quarterly Monitoring Return B (QMB) ORSA submission Realistic Disaster Scenario (RDS) Realistic Disaster Scenario Light (RDL)

19 19 Oversight Objective Minimum Standard Continuous Monitoring Reporting from Market Related Party Declaration & Disclosure Return evaluation Reinsurance Asset Pack Related Party Declaration & Disclosure Return Ad hoc Major/Rapid Claims Return 6. Claims To ensure managing agents manage and adjust claims to meet or exceed Lloyd s Claims Management Principles and Minimum Standards MS2 - Claims Management Standards Claims Business Plans analysis Claims Reporting Suite analysis Claims Business Plans Major/Rapid Claims Return 7. Investment To ensure syndicates do not take excessive investment risk To ensure members do not take excessive investment risk MS8 - Investment Management Standards Market Risk element of LCR Quarterly investment risk monitoring Quarterly Monitoring Return (QMR) Investment Risk (Quarterly Asset Data - QAD) ORSA submission Annual Board Minimum Standards Attestation on MS8 8. Governance, Risk & Operations To ensure that effective operational and governance processes exist across the market MS3 - Governance MS4 - Risk Management MS12 - Operating at Lloyd s Standards Board appointments and departures - may result in exit interviews, or appointment interviews Change of control ORSA Report and Board management information evaluation Notification of Appointments/Departures Notification of Change of Control ORSA submission Annual Board Minimum Standards Attestation Annual Board Minimum Standards Attestation analysis

20 20 Oversight Objective Minimum Standard Continuous Monitoring Reporting from Market 9. Capital Adequacy/Internal Model Approval To ensure Central Fund exposures are managed within risk appetite MS6 - Modelling, Design and Implementation MS5 - Scope, Change & Use MS7 - Validation Standards Capital Approval Solvency II model sign off ORSA evaluation Use Test interviews Validation Report Actuarial Function Report Model Change Report ORSA submission 10. Regulation To ensure effective market wide systems or processes that enable the transaction of business To ensure managing agents comply with relevant laws and regulations MS10 - Regulatory Standards; Issue resolution and post-event assurance Annual Board Minimum Standards Attestation 11. Policyholder Protection To ensure managing agents pay due regard to the interests of Lloyd s customers and treat them fairly at all times MS11 - Conduct Risk Standards Complaints Reporting Reacting to any alert of potential mis-selling or failure to ensure good customer outcomes. Newsletters to market (topics for newsletters & seminars will be driven through ongoing monitoring and continuous monitoring activity) Eligible Complainant returns