Introduction to Lloyd's: capital structure: the chain of security: the premium trust fund
Lloyd’s rules require each member of Lloyd’s to enter into a premiums trust deed to create a premium trust fund (PTF). The PTF’s trustees are appointed by the managing agent and approved by Lloyd’s. The PTF income consists of premiums received, reinsurance recoveries and investment income. Funds in the PTF are subject to restrictions imposed by Lloyd’s on the type of investment to ensure that they are available to meet claims when required.
Funds are required to be held in trust funds in certain territories, for example, the US regulator requires US dollar premiums to be held in US dollar trust funds (‘LDTF’) – see LLM1090.
Subject to the rules on continuous solvency transfers (see below), profits are only available to be distributed to members when claims and expenses for the underwriting year have been settled and the year closed by payment of a Reinsurance to Close premium (LLM2060). Where there are insufficient funds available in a syndicate’s PTF to meet liabilities, the managing agent makes a ‘cash call’ to the members. If a member fails to meet a cash call, funds will be taken from his Funds at Lloyd’s (LLM1200).
The tax treatment of the PTF is discussed at LLM2130.
Continuous solvency transfers
Under Lloyd’s traditional system of three-year accounting, profits were not generally released from PTFs until the year of account was closed at the 36 month point (LLM2120). There were some ‘early profit releases’ in the mid 1990s in connection with Reconstruction and Renewal (LLM5030).
From 2003, Lloyd’s permitted 50% of the surplus on open years to be set against cash calls or used against the following year’s capital requirements. These are referred to as ‘continuous solvency transfers’ (CSTs). From 2005, the balance of unused CSTs can be released to members (subject to capital requirements being met), up to 50% of the surplus on the 2003 and 2004 years of account. See LLM5050 for the tax treatment of such CSTs.