Introduction to Lloyd's: capital structure: the chain of security: solvency
It is a fundamental principle of insurance company supervision that assets must exceed liabilities by a minimum amount. This is often described as the margin of solvency. The General Insurance Manual (GIM3130) gives more details (see LLM10000).
Lloyd’s has always been subject to an annual solvency test, to demonstrate that it is solvent at both the level of the market as a whole and at the level of each member. If a single individual member failed the test the market as a whole would be declared insolvent.
Between 2005 and 2007 Lloyd’s is being brought within the general approach to prudential supervision that the Financial Services Authority applies to insurers, and which in turn derives from the implementation of European-wide solvency standards for non-life insurers. This regime is based on the concept of using ‘risk based’ formulae to arrive at ‘Individual Capital Assessments’ (ICAs) and ‘Enhanced Capital Requirements’ (ECRs). The regime is modified to take account of some of the differences between Lloyd’s and other insurers, for example, the existence of the Central Fund.
Broadly, managing agents are responsible for assessing the capital needs of syndicates and the Society of Lloyd’s is responsible for assessing the capital needs of members.