Prudential Regulation Authority Rulebook

3.1

The requirement to hold eligible own funds covering the central requirement is intended to ensure that risks to the Society, including risks to central assets (and in particular, the risk that own funds attributable to a member may not be sufficient to enable the member to meet obligations arising from the member’s insurance business at Lloyd’s) are suitably covered by the Society.

3.2

Solvency Capital Requirement — General Provisions 6.6 recognises in its application to Lloyd’s that own funds attributable to a member are not available to absorb the losses of other members, or any losses of the Society. Consequently, in respect of own funds attributable to a member, where there is no diminution in those own funds consequent upon the application of scenarios taken into account in the internal model, those own funds attributable to that member must not be taken into account for the purposes of satisfying Solvency Capital Requirement — General Provisions 6.2. Similarly, in respect of own funds attributable to a member, any surplus of own funds in excess of the diminution to those own funds consequent upon the application of the scenarios taken account of in the internal model, must not be taken into account for the purposes of satisfying Solvency Capital Requirement — General Provisions 6.2.

3.3

The notional syndicate SCR is intended to facilitate the Society’s compliance with Solvency Capital Requirement — General Provisions 8.2. While the PRA expects the calculation of the notional SCR to meet the relevant standards required under Solvency II, managing agents do not need to seek separate approval from the PRA for any internal model that is used to calculate the notional SCR of a syndicate. The notional SCR will also assist the Society in determining the notional SCR of each member of the syndicate pursuant to Solvency Capital Requirement — General Provisions 8.4. However, the notional member SCR will, to the extent applicable, also take account of diversification effects in respect of members participating on more than one syndicate which have not been reflected in the notional syndicate SCR.

3.4

In deriving the SCR, the Society should have regard to the notional SCR for each syndicate, that is calculated by managing agents either by reference to the standard formula or an internal model. However, the Society should make its own assessment of the risk profile and governance arrangements in respect of each syndicate, in conjunction with the methodology applied by each managing agent to calculate the notional SCR. It may need to increase a notional syndicate SCR, and hence the overall SCR for Lloyd’s, if it concludes that there are additional risks to which the Society is exposed in relation to the business written by a syndicate, that would not otherwise be covered, when performing the calculations envisaged by Solvency Capital Requirement — General Provisions 7.

3.5

The approach set out in Solvency Capital Requirement — Internal Models 17.2 is, when combined with the internal model requirements set out in Solvency Capital Requirement — Internal Models 10 to 16 and Solvency Capital Requirement — General Provisions 8.2, intended to produce, for each risk taken into account in the internal model, the negative impact on basic own funds at Lloyd’s. In this way, the effect of the application of the risks taken into account in the internal model may be determined in respect of Lloyd’s as a whole.