Introduction to Lloyd's: capital structure: the chain of security: Funds at Lloyd’s
If there are insufficient funds in the premium trust fund to meet insurance liabilities, the member will be asked to meet those liabilities from other funds. The member may do so from funds outside Lloyd’s, or from their Funds at Lloyd’s. Funds at Lloyd’s (FAL) are made up as follows.
Lloyd’s requires each member to maintain a Lloyd’s Deposit. The amount is prescribed by the Council. The deposit must consist only of “approved assets”, which include cash, stocks and shares, securities, bank guarantees and letters of credit. It is available to meet claims, but in practice it is a fund only drawn upon as a last resort.
Personal reserve fund (PRF)
Lloyd’s requires each Name to place additional funds – again consisting of “approved assets” – at Lloyd’s to support their underwriting. Since 2001, all members have a minimum capital requirement based on a percentage of their overall premium limit (that is, the maximum amount the member is allowed to accept in premium income).
In addition to the percentage requirement, a risk-based approach is used to determine whether any additional capital is required. This takes into account the nature of the underwriting. High-risk business will require a higher level of capital.
The PRF may be built up gradually from retained syndicate profits, investment income and capital gains on assets in the PRF.
Up until the year 2000, individual Names also had to show that they had a minimum level of liquid net assets with which to support their underwriting. This requirement has been abolished.
Special reserve fund (SRF)
Only individual unlimited liability Names may have SRFs, not those who participate via Namecos, SLPs or LLPs. They are a fund into which part of the profits may be paid in good years to finance losses in bad years. They attract particular tax reliefs (see LLM5230). SRFs are permitted to make up to 10% of an individual Name’s FAL requirement.
Ancillary trust fund
The tax legislation uses the term “ancillary trust fund” or “ATF”, a term that is not found in Lloyd’s rules. This means any fund that is not the premium trust fund or a special reserve fund and will comprise the Lloyds’s Deposit plus personal reserve fund. Together with, in the case of an individual member, the SRF, it is equivalent to the Funds at Lloyd’s.
Other personal wealth
All members may have assets held outside Lloyd’s that may be available to meet underwriting losses. Individual Names trade with unlimited personal liability and are liable for underwriting losses to the full extent of their personal wealth. Traditionally Names were allowed to declare other personal wealth (OPW) and to reduce the amount of FAL they were required to put up. From 2006 onwards, OPW is no longer eligible to support underwriting in this way.