Glossary of Lloyd's Terms

Glossary of Lloyd’s terms

Listed below is a glossary of terms that are used in the ALM publications, other Lloyd’s documents or which often appear in work produced by Members’ agents.    

A

ACCIDENT YEAR

The calendar, or accounting, year in which a loss occurs.

ACTIVE UNDERWRITER

Also sometimes described as the “lead underwriter”, the active underwriter is the person employed by a managing agent with principal authority to accept insurance and reinsurance risks on behalf of the members of a syndicate. Aside from his or her own direct underwriting role, the active underwriter also oversees the underwriting activities of the syndicate’s class underwriters in much the same way as a managing director oversees the way in which a company operates.

ACTUARY

An actuary is a specialist in the mathematics of insurance who calculates rates, reserves, dividends and other statistics.

AGGREGATE

Total limit of indemnity in the event of a single loss.

AGGREGATE EXCESS OF LOSS REINSURANCE

A form of reinsurance where the excess and limit of liability are expressed as annual aggregate amounts.

AGGREGATE LIMIT

Usually refers to liability insurance and indicates the amount of coverage that the insured has under the contract for a specific period of time, usually the contract period, no matter how many separate accidents or loss events might occur.

ALIGNED CAPITAL

A corporate member of a syndicate under common control with the managing agent of the syndicate.

ALLOCATED CAPACITY

This can refer to the member’s or a syndicate’s capacity.

ALTERNATIVE CAPITAL

This is a term used to describe capital that is invested into the insurance or reinsurance industry that does not generally come from insurance or reinsurance specialists.  The capital might come from other financial entities such as hedge funds or venture capitalists.

ANNUAL ACCOUNTING

The reporting of syndicate results on a calendar year basis, with profit taking being restricted to earned premiums.

ANNUAL VENTURE

This term refers to the reconstitution of a syndicate as an annual business venture where insurance and reinsurance business is written on a year of account basis for a given year.

ASSURED

Another name for an insured.

ATTRITIONAL LOSS

This is a way of describing a non-catastrophe loss event.

AUCTIONS

The capacity auctions were introduced in 1995 and are the main way in which capital providers can buy and sell capacity on syndicates.

 

B

BACK YEARS

Another name for open years

BESPOKE UNDERWRITING

When writing on a “bespoke” basis, members trade on a variety of different individual syndicates, generally chosen by their members’ agent, but sometimes with input of specific requirements by themselves. As their experience of the Lloyd’s market grows, some members have preferred to discuss their specific objectives for the coming underwriting year with their members’ executive, and are then advised by their members’ executive as to which syndicates to support. The buying and selling of their capacity on syndicates normally occurs in the annual capacity auctions. The main attraction of bespoke underwriting for many members is the ability to trade their own capacity in the auctions. Unlike MAPA members, “bespoke” members can be directly involved in the trading decisions at the auctions.

BILATERAL AUCTION TRADES

These are auction trades that are carried out as part of the Lloyd’s capacity auction process, whereby the purchase or sale of a set sum of syndicate capacity can be negotiated at a pre-set execution price between two parties.  The amount of capacity traded has to be in excess of £250,000.  All bilateral trades have to be reported to the auction office, and they also have to inter-act with the Lloyd’s auction itself.  This means that members trading in the auctions can purchase or sell capacity on the syndicate in question.  Bilateral deals are mostly used by members’ agents, who are looking to dispose of, or buy, large sums of capacity on a given syndicate.

BINDING AUTHORITY

This is an agreement between a Lloyd’s syndicate and a coverholder, under which the Lloyd’s syndicate allows the coverholder to enter into a contract of insurance to be underwritten by the members of a syndicate. Traditionally, a lot of overseas business, especially that emanating from North America, has been written by way of binding authorities. Local coverholders, usually regional brokers or insurance companies, have been able to access local business in a far more cost-effective way than would have been feasible had the syndicate itself attempted to do so.

BROKERAGE

The commission that is payable to a broker for placing an insurance or reinsurance contract with an insurer or a reinsurer. Although brokerage is payable by the insured as part of the gross premium the amount of brokerage is agreed by the insurer. The insured may request his broker to state the amount of his brokerage on a given placement. Similar considerations apply to reassureds under reinsurances.

BROKER

At Lloyd’s, brokers act as the agent of the insured or reinsured to arrange insurance or reinsurance with Lloyd’s syndicates. Brokers may be registered Lloyd’s Brokers who are able to enter into terms of business agreements with any Lloyd’s managing agent. Non-Lloyd’s brokers may also enter into terms of business agreements subject to the managing agent assessing that the broker meets certain minimum standards. Only brokers registered as Lloyd’s Brokers may refer to themselves as a Lloyd’s Broker. Many broking firms are also approved by Lloyd’s to act as a coverholder (See Coverholder).

BROKER FACILITY

A structure whereby a broker bundles its account, or significant portions of its account, and places it in the market as a block of business.  The market must participate across the whole block of business rather than being able to underwrite individual risks. The leading underwriter or underwriter may have a level of discretion on each risk underwritten, but the rest of the market follows blindly.

BROKER FACILITY SYNDICATE

A syndicate which exclusively participates on one or more broker facilities.

BUSINESS CODES

Lloyd’s assigns a different business code to each area of business written by syndicates.

 

C

CALENDAR YEAR RATIO

This is the combined ratio and is the sum of the accident year ratio and the prior years’ reserve movements.

CALLABLE LAYER

Lloyd’s Central Fund assets may be supplemented by a further ‘callable layer’ of up to 3% of members’ overall premium income limits in any one calendar year. These funds would be drawn from premium trust funds.

CAPACITY

In relation to a member, it is the maximum amount of insurance premiums (gross of reinsurance but net of brokerage) which a member can accept. In relation to a syndicate, it is the aggregate of each member’s capacity allocated to that syndicate.

CAPACITY TRANSFER PANEL

A committee of Lloyd’s whose role is to adjudicate in circumstances where there may be conflict of interest issues between the managing agent and its Private Capital members.

CAPITAL GAINS TAX (CGT)

This is a UK tax that is paid on gains made from the sale of assets. In the case of Lloyd’s members, they are most likely to incur a Capital Gains Tax (CGT) liability when they sell syndicate capacity or their shares in a limited liability vehicle. 

CARRIER

An insurer or reinsurer.

CASH CALL

A cash call occurs when members pay money to a syndicate outside the normal settlement period for a year of account (which generally takes place at month 41 of its development). Syndicates are allowed to call cash from members in the event of serious losses, or in respect of other arbitrary funding requirements, such as the need to fund the US Trust Funds.

CASUALTY INSURANCE  

A type of insurance that is primarily concerned with losses caused by injuries to persons and legal liability imposed upon the insured for such injury or for damage to property of others.

CEDANT

A syndicate or company that transfers a risk exposure under a reinsurance contract.

CENTRAL ASSETS

This describes the net assets of the Society of Lloyd’s including the Lloyd’s Central Fund, but excluding the subordinated debt liability and the callable layer.

CHINESE WALLS

This expression is most often used in connection with the annual capacity auctions. It explains the way in which auction trading for different groups of members is segregated within the members’ Agency so as to avoid conflicts of interest and to enable it to treat all of its customers equally and fairly.

CLAIM

A demand made by the policy holder, or their beneficiary, through their broker, to the syndicate, for payment of the benefits as determined by the limits of the policy.

CLAIMS MADE BUSINESS

This is business where the wording stipulates that claims have to be notified to the insurer during the policy period and not thereafter.  US liability business moved to this form in the mid-1980s. 

CLASS OF BUSINESS

This describes the types of insurance or reinsurance business underwritten by a syndicate. There are nine main classes of business in Lloyd’s. These are marine (excluding energy and reinsurance), energy, property, reinsurance, motor, life, aviation, US liability and Non-US liability. Within Lloyd’s, each individual class of business has an individual risk code.

CLASS UNDERWRITER

The class underwriter is the individual responsible for underwriting a given class of business within the syndicate structure. Syndicates often employ several different class underwriters, who underwrite different classes of business. Some of the class underwriters employed at some of the larger composite syndicates, such as 33 (Hiscox) or 510 (Kiln) are responsible for some significant parts of the syndicate’s whole account. 

CLOSED YEAR

A year of account that has declared a result and which has been closed by means of a reinsurance to close.

CO-INSURANCE 

In some property insurance, a policy requires the policyholder to carry insurance equal to a specified percentage of the value of property to receive full payment on a loss. For health insurance, it is a percentage of each claim above the deductible paid by the policyholder. For a 20% health insurance coinsurance clause, the policyholder pays for the deductible plus 20% of his covered losses. After paying 80% of losses up to a specified ceiling, the insurer starts paying 100% of losses.

COMBINED RATIO

A measure of an insurer’s underwriting profitability based on the ratio of net incurred claims plus net operating expenses to net earned premiums. A combined ratio of 100% is break even (before taking into account investment returns). A ratio less than 100% is an underwriting profit, and the lower the ratio, the better the profit.

COMMERCIAL LINES

This refers to insurance for businesses, professionals and commercial establishments.

COMING INTO LINE

This is the annual process by which every member of Lloyd’s determines and provides the assets (known as funds at Lloyd’s) to support the following year’s underwriting.  The calculation to determine the assets required takes the value of a member’s funds held at Lloyd’s on a given date and then deducts liabilities (such as outstanding losses, solvency deficits and assets disallowed under the concentration of assets rules) to give a capital provider’s net assets.  This figure is then compared to the funds at Lloyd’s requirement determined by the risk based capital ratio applying to a member’s portfolio of syndicates. If there is a shortfall, this has to be funded by new assets by a set deadline which is usually at the end of November.

COMMISSION

A commission is a fee paid to an agent or insurance salesperson as a percentage of the policy premium. The percentage varies widely depending on coverage, the insurer and the marketing methods.

CONSORTIA UNDERWRITING  

Underwriting on the part of a group of either syndicates or insurers, where risks, premiums and costs are split proportionately between the participants.  If a consortium member fails, losses do not fall back on other capital providers.

CONTINUOUS SOLVENCY

The early release of some profits from an account to aid capital providers in the payment of losses. Remaining profits are held in the Member’s Premiums Trust Fund to be used to settle cash calls or losses until the year of account closes, when the balance will be paid out in the normal way.

CONVERSION

This is the term used to describe the process whereby an unlimited liability member of Lloyd’s, more commonly called a Name, becomes a limited liability Member of Lloyd’s, by forming a NameCo or a limited liability partnership (LLP).

CO-ORDINATING AGENT

A single agent appointed by a member to co-ordinate the administration of their underwriting  affairs at Lloyd’s, in cases where the member uses more than one members’ agent.

CORPORATE CAPITAL

A generic term for Corporate members of a syndicate who are directly or indirectly owned by an insurance or financial trade interest. Corporate capital was first introduced into Lloyd’s for the 1994 year of account.

CORPORATE MEMBER

A company incorporated with limited liability, a Scottish Limited Liability Partnership (SLP) or an English Limited Liability Partnership (LLP), admitted to membership of Lloyd’s.

CORPORATION OF LLOYD’S

The central corporate structure which facilitates the Lloyd’s market and provides services to market participants.

COUNCIL OF LLOYD’S

The Council of Lloyd’s was constituted as the governing body of Lloyd’s by Lloyd's Act 1982. It currently comprises 6 external members, 6 working members and 6 nominated members and is empowered to make byelaws governing the conduct of insurance business at Lloyd’s.

COVERAGE  

The scope of protection provided under an insurance policy. In property insurance, coverage lists perils insured against, properties covered, locations covered, individuals insured, and the limits of indemnification. In life insurance, living and death benefits are listed.

COVERHOLDER

 A firm, either in the UK or overseas, that is authorised by a managing agent under the terms of a binding authority to enter into contracts of insurance to be underwritten by a syndicate managed by the managing agent. A Lloyd’s broker may act as a coverholder.

 

D

DEDICATED VEHICLE

A corporate vehicle that participates exclusively on a syndicate of a single managing agent or managing agency group.

DEDUCTIBLE

This is the amount of a loss that the insured pays before its insurance policy can be triggered. Deductible levels can be increased and decreased by a syndicate as and when it writes policies. Insurance buyers are sometimes prepared to accept a higher deductible in return for a lower insurance premium. It can also be called an “excess”.

DE-EMPTION

This is the term used to describe the mandatory reduction in the overall level of a syndicate’s underwriting capacity. This reduction is expressed in percentage terms, and applies equally to all members of the syndicate. Syndicates tend to de-empt their underwriting capacity when rates are softening in the business sectors in which they operate. When rates are falling, syndicates will be looking to underwrite less business, and therefore reduce their underwriting capacity accordingly. Capacity management is something that is actively managed by the Franchise Performance Directorate (FPD).

DIRECT INSURANCE

This is straightforward insurance of an insured, with or without the addition of a deductible.

DIRECTORS’ AND OFFICERS’ (D&O)

A specialised form of professional liability coverage for legal expenses and liability to shareholders, bondholders, creditors or others due to actions or omissions by a director or an officer of a corporation or non-profit organisation.

DISTRIBUTION

The process by which members’ profits are paid out, or losses are settled.

DOUBLE USE OF ASSETS

This refers to the term whereby members of Lloyd’s have been able to use some of their existing personal assets (such as cash, bonds, stocks or shares) to back their underwriting, whilst retaining a beneficial interest in the asset. For example, a member could use stocks and shares to back their underwriting commitment, but can still collect all dividends and benefit from any capital gain in the value of the asset. The asset is effectively working twice for the member.

 

E

EARLY PROFIT RELEASES

Syndicates can sometimes make profit releases to their members prior to the normal closure date of an underwriting year of account (which takes place at 36 months). This only happens if the year of account in question is trading profitably.

ECONOMIC CAPITAL ASSESSMENT (ECA)

ECA is an actuarial model that determines different capital requirements for syndicates. It largely depends on which classes of business and the proportions of certain classes of business that are written by different syndicates in each year. The calculation is carried out twice a year by Lloyd’s as part of the coming into line process.

ERRORS AND OMISSIONS INSURANCE

A form of professional indemnity insurance.  Errors and omissions insurance protects business professionals whose clients could claim damage as a result of the business professional’s faulty performance. 

EQUITAS

This was a company that was established in 1996 in order to take over all of the 1992 and prior years’ business liability of all Lloyd’s syndicates. In 2006, it was sold to Berkshire Hathaway.

ESTATE PROTECTION PLAN

A scheme that allows a member to provide for the payment of losses and outstanding liabilities following his or her death.

EXEAT POLICY

This is a policy that a resigning member can purchase from Centrewrite, which allows them to exit the Market free of all of their outstanding liability. Centrewrite is a company that is run and backed by Lloyd’s. The cost of the policy would depend on the specific syndicates supported by the individual member in question.

EXCESS

This is the amount of a loss that is paid by the insured before an insurance policy can be triggered. Also known as a deductible.

EXCESS LIMIT

An excess limit is another way of describing a deductible level. A policy holder would have to pay an “excess” amount before being able to claim from an insurance policy. For some insurance buyers, accepting a higher “excess” is sometimes seen as an alternative to a rate increase.

EXCESS OF LOSS

Reinsurance cover provided to an insured in excess of a specified deductible level.  The business is usually written on a layer by layer basis.

EXCLUSIONS

Items or conditions that are not covered by the general insurance or reinsurance contract issued by a syndicate.

EXPENSE RATIO

This is the aggregate total of a syndicate’s operating expenses, and is usually expressed as a percentage of either gross or net written premiums, or sometimes a percentage of the syndicate’s underwriting capacity.

EXPOSURE

Measure of vulnerability to loss, which is usually expressed in currency terms.

EXTERNAL MEMBER

A member who is not a working member.

 

F

FACULTATIVE BUSINESS

Risks that are underwritten subject to individual negotiation between the insurer and the underwriter, as opposed to those that are ceded under a reinsurance treaty.

FOLLOWING UNDERWRITER

An underwriter of a syndicate who agrees to accept a proportion of a given risk on terms set by another underwriter, known as the lead underwriter.

FRANCHISE

The arrangements that permit managing agents and members to conduct business in the Lloyd’s market, and maximise the benefits from the Lloyd’s brand, a common rating, mutual security and licences to conduct business around the world.

FRANCHISE BOARD

This was set up by the Council of Lloyd’s in 2002, and was designed as an internal department for monitoring the performance of all Lloyd’s syndicates and to protect the Lloyd’s Franchise. Its job was to review and approve syndicate business plans and to ensure a competent level of underwriting across all syndicates in the market, with particular emphasis placed on those syndicates in the bottom quartile of the market. To date, it has been very successful in this endeavour, especially in years such as 2004, 2005 and 2008, all of which saw the Lloyd’s market hit by a substantial number of catastrophe losses. The net effect of these losses on the syndicates in the Lloyd’s market was containable, and the Franchise Board must take a great deal of the credit for this fact. The first Director of the Franchise Board was Rolf Tolle. He retired in 2009, and was replaced by Tom Bolt. Bolt retired in early 2016 and has now been replaced by Mr Hancock, formerly of RSA, who will commence work in the role in December 2016.

FUNDS AT LLOYD’S (FAL)

Members of Lloyd’s must lodge funds with Lloyd’s in order to support their underwriting. These are known as funds at Lloyd’s, and commonly referred to as FAL. FAL are initially set at 40% of the total amount that a member underwrites in any given year.   However, as members underwrite into their second and third years, FAL will tend to increase as a result of solvency and ECA requirements.  The average FAL provided by members is currently about 50% of the amount that they underwrite.  FAL can take the form of cash, bonds, approved stocks and shares or can be provided by way of a bank guarantee or letter of credit.

 

G

GEARING

Members use their Funds at Lloyd’s in order to underwrite and these are generally required to be about 50% of the total amount of capacity that the member underwrites in any given year. The funds are leveraged by two times to reach the members underwriting limit. This is known as gearing.

GROSS CLAIMS

Claims under contracts of insurance underwritten by a syndicate plus internal and external claims settlement expenses less salvage or other recoveries, but before the receipt of reinsurance recoveries.

GROSS LINE

The amount of risk that an insurer or reinsurer is carrying before taking account of any applicable reinsurance that reduces that risk.

GROSS WRITTEN PREMIUM

This is the written insurance or reinsurance premium received by a syndicate, minus any business acquisition costs, such as brokerage. The figure is usually expressed as a percentage of syndicate’s stamp capacity.

 

H

HARD MARKET

This is a term that is used to describe the condition of the insurance market when rates are increasing and terms and conditions are being amended in the favour of insurers.

 

I

INSURANCE LINKED SECURITY (ILS)

Insurance Linked Securities (ILS) are broadly defined as financial instruments whose values are driven by insurance loss events. Those instruments that are linked to property losses due to natural catastrophes are a unique asset class the return from which is uncorrelated with that of the general financial market.

INCEPTION

Commencement, or beginning, of cover for a given risk.

INCURRED BUT NOT REPORTED (IBNR)

Refers to claims that may have occurred, but of which the syndicate has not been advised. The underwriter therefore establishes a monetary provision for the impending claim, which is known as the IBNR.

INCURRED LOSS RATIO

Paid claims and known outstanding claims expressed as a percentage of the premiums underwritten by the syndicate.  This can be on a gross or net basis (i.e. before or after reinsurance recoveries). 

INDEMNITY

The principle according to which a person who has suffered a loss is restored (so far as possible) to the same financial position that he was in immediately prior to the loss, subject to any contractual limitation on the amount payable (i.e. the loss may be greater than the policy limit). The application of this principle is called indemnification. Most contracts of insurance are contracts of indemnity. Life insurances and personal accident insurances are not contracts of indemnity.

INSURANCE INTERMEDIARY

A person through whom an insurance contract is effected. It normally refers to an insurance broker and/or an agent of an insurer.

INTEGRATED LLOYD’S VEHICLE (ILV)

An arrangement in which a syndicate’s capital is wholly provided by corporate members that are under the same ownership and control as the syndicate’s managing agent.

INTERAVAILABILITY

The term used to describe funds at Lloyd’s that are used to support both a member’s current limited liability underwriting and any past unlimited liability underwriting.

INVESTMENT INCOME

This is the return received by syndicates from their investment portfolios. This could include interest, dividends and realized capital gains on stocks. It doesn't include the value of any stocks or bonds that the company currently owns. Most Lloyd’s syndicates have very conservative investment portfolios, where the bulk of their investment portfolio is composed of either UK Gilts or US Treasury Bonds and cash. Some syndicates do invest in the equity markets, but this is an area of their investment portfolio that is limited by Lloyd’s. Investment return forms a key part of the overall syndicate result, and can be expressed as a percentage of gross premium income, net premium income or stamp capacity.

INTERNAL RATE OF RETURN (IRR)

Internal rate of return (IRR) is a metric used to measure the profitability of potential investments. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. IRR calculations rely on the same formula as the NPV does.

 
L

LEAD UNDERWRITER

The underwriter of a syndicate who is responsible for setting the terms of an insurance or reinsurance contract, and who generally has primary responsibility for handling any claims arising under the contract.

LIABILITY INSURANCE

This is a class of insurance that pays claims on behalf of an insured for loss arising out of his responsibility, due to negligence to others, imposed by law or assumed by contract. In the US, it is sometimes referred to as casualty insurance.

LIFE INSURANCE

A policy that pays a specified sum to beneficiaries upon the death of the life assured, or upon the assured surviving a given number of years, depending on the terms of the policy. Life insurance policies may be for a fixed or an indefinite term.  Within the Lloyd’s market, this was a class of business that was underwritten by specialist syndicates.    

LIMIT OF INDEMNITY

Another term for policy limit. It refers to the maximum amount payable under a policy of insurance or reinsurance, either overall or with reference to a particular section of a policy.

LIMITED LIABILITY

This refers to the extent of a members’ liability (in the event of loss).

LIMITED LIABILITY PARTNERSHIP (LLP)

This is one of the two main limited liability underwriting vehicles used by limited liability members. It is a tax transparent, limited liability vehicle, where all of the income has to be paid out each year, and is taxed as income.

LIMITED LIABILITY UNDERWRITING

This is a method of underwriting where the member’s liability is limited to the assets contained within their limited liability vehicle. These assets usually include any underwriting profits, the value of their capacity and the funds at Lloyd’s backing the vehicle.

LIMITED TENANCY CAPACITY

Lloyd’s allows managing agents to offer capacity on syndicates with finite security of tenure, which at the end of its term reverts to the managing agent.  Members do not have to purchase this capacity and nor are they paid anything when it reverts to the managing agent.

LINE

The proportion of an insurance or reinsurance risk that is accepted by an underwriter or which an underwriter is willing to accept. When it refers to a line that is entered on a slip it is commonly expressed as a percentage of the limit of indemnity.

LLOYD’S OR SOCIETY OF LLOYD’S

The corporation of Lloyd’s and the marketplace that is the Lloyd’s underwriting room and its constituent parts.

LLOYD’S CENTRAL FUND

The fund financed by (among other things) contributions from Lloyd’s members and administered by the Council of Lloyd’s, whose primary purpose is to act as a fund for the protection of Lloyd’s policyholders.

LLOYD’S MARKET ASSOCIATION (LMA)

The association that represents Lloyd’s managing agents.

LLOYD’S STANDARD AGENCY AGREEMENT

A standard form agreement between members of a syndicate and the managing agent, setting out the powers and obligations of the parties to one another.

LONG TAIL BUSINESS

This business that takes longer than the standard 36 month term of the Lloyd’s year of account to settle fully.  At the close of a year of account, at 36 months, underwriters normally establish a reserve in order to cater for the ultimate development of the policy in question.  Long tail business is generally liability business.

LOSSES OCCURRING BUSINESS

This is business where the wording stipulates that claims against policies can be notified to the syndicate at any time following the issue of the policy.

LOSS RATIO

The ratio of incurred losses and loss-adjustment expenses to net premiums earned. This ratio measures the company’s underlying profitability, or loss experience, on its total book of business.

LLOYD’S CAPACITY AUCTIONS

These were introduced in 1995, and are now the main method by which members buy and sell their capacity on syndicates. There are now three capacity auctions held in the autumn of each year. Members can use these auctions in order to buy and sell capacity as part of the process of constructing their portfolios for the following year of underwriting. 

LOW-HANGING FRUIT

Popular expression used by underwriters to describe business that is easy to acquire, and/or very attractively priced.

 

M

MEMBERS’AGENTS POOLING ARRANGEMENT (MAPA)

 A MAPA is essentially a managed underwriting fund which contains a selection of syndicates, which have been arranged into a portfolio. It is similar to a unit trust, in that the MAPA is run by the manager, who buys and sells the syndicates within the portfolio, as and when they wish to amend or modify the composition of the portfolio. The first MAPA funds were introduced into the Lloyd’s market for the 1994 year of account. Members can opt to have some, or all, of their underwriting committed to a MAPA in any given year.

MANAGING AGENT

An underwriting agent responsible for managing a syndicate, its employees and its administration.

MANAGING GENERAL AGENT (MGA)

An independent non-Lloyd’s underwriting agency business which has been appointed by one or more insurers or Lloyd’s syndicates to underwrite insurance business on its behalf.

MARKET CYCLE

This is a term used to describe a period of development and time in the insurance market. Traditionally, it includes markets where the insurance rates are rising and falling and where the market is making profits and losses. In the past, insurance market cycles have usually lasted about 5 or 6 years.

MEMBER (OF THE SOCIETY OF LLOYD’S)

A person admitted to membership of the Society of Lloyd’s. A member of Lloyd’s can trade on an unlimited or limited liability basis.  In the event of trading on a limited liability basis, it is important to remember that it is the limited liability vehicle itself (the Nameco or the English Limited Liability Partnership), and the not the individual (s) within it, that is the member of Lloyd’s.

MEMBERS’ AGENT

An underwriting agent which has permission from Lloyd’s to be appointed by a member to provide services and perform duties of the same kind and nature as those set out in the standard Members’ Agent’s Agreement. These services and duties include advising the member on which syndicates he should join, the level of participation on such syndicates and liaising with the member’s managing agents. 

MEMBERS’ EXECUTIVE

This is an individual employed by a members’ Agent, whose job is to look after all aspects the affairs of members of Lloyd’s.

 

N

NAME

This is a term used to describe an individual member of the Society of Lloyd’s, who trades on an unlimited liability basis. The number of Names peaked at about 36,000 in 1988.  No new unlimited Names have been allowed into the market since 2003.  However, there are still 295 unlimited liability members of Lloyd’s still trading in 2016.

NAMECO

A NameCo is a limited liability underwriting vehicle at Lloyd’s whose members consist of a single individual or a group of connected individuals or their nominees. It is a UK company and it is treated and taxed as such. One of its key features is that it can determine its own dividend policy and is therefore able to reserve some of its profits within the company. There are 929 Namecos trading for the 2016 account.

NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS (NAIC)

A US Association of state insurance commissioners whose purpose is to promote uniformity of insurance regulation, monitor insurance solvency and to develop model laws for passage by US state legislatures.

NET CLAIMS

Gross claims less reinsurance recoveries.

NET WRITTEN PREMIUM

This is the amount of premium left once a syndicate has paid for its reinsurance programme.

NEW CENTRAL FUND

The New Central Fund constituted and governed by the New Central Fund Byelaw (No. 23 of 1996).

NICHE BUSINESS

A vernacular term used by some underwriters, often of a certain vintage and often found in the motor market, to describe areas of specialist business, which they believe are often not that exposed to competition.  These are often highly profitable areas of business, and are, therefore, much sought-after by competitors.

NOMINATED MEMBER

A member of the Council of Lloyd’s, who is not an external member or a working member, and whose appointment has been approved by the Governor of the Bank of England.

NON-PROPORTIONAL REINSURANCE BUSINESS

In non-proportional reinsurance business, layers of cover are purchased, excess of a specific deductible level, up to a specified limit, above which the risk is transferred to a reinsurer in return for a fixed premium. 

NORTH ATLANTIC HURRICANE SEASON

This runs from 1 June to 30 November each year. 

 

O

OPEN MARKET BUSINESS

Insurance business that may be offered to and placed with any managing agent that is willing to underwrite it on behalf of its managed syndicate. It excludes business that is underwritten pursuant to a binding authority.

OPEN YEAR

Each year of account at Lloyd’s runs for 36 months, and an open year is one that is still on risk, and which has not been closed by way of a reinsurance to close. When a year cannot be closed at the 36 month point, this is usually the result of the fact that there are still deemed to be material uncertainties as to the level of liability within the year of account. Open years have the ability to make funding cash calls each quarter.   

OVERRIDING COMMISSION

A commission that is paid by a reinsurer to the reassured to cover the latter’s overheads in administering the reinsurance.

OVERWRITING

This term is used to describe the way in which a syndicate can underwrite a larger amount of gross premium income than the size of its stamp capacity allows. Overwriting is not normally allowed without express permission to do so being granted by Lloyd’s.  The usual cause of overwriting is the receipt of reinstatement premiums in the wake of a large loss.  Dispensation is required from Lloyd’s to allow a syndicate to overwrite its stamp.

 

P

PERSONAL EXPENSES

These are expenses that are charged to members, such as managing agents’ fees and profit commission, central fund contributions and Lloyd’s subscriptions. These are declared in the results, and then stated in the syndicate report and accounts.  Members also pay members’ agents fees, and some members’ agents also charge their members a profit commission.

PERSONAL RESERVE FUND (PRF)

A fund where approved assets, that are used to support a Members’ underwriting, are held.  These funds form part of a Members’ FAL.

POLICY LIMIT

Another term for limit of indemnity.

PORTFOLIO

This term is used to describe a member’s collection of syndicate participations in any given year. Members have the option to change the composition of their portfolio by buying and selling syndicates (or any amount of capacity on a given syndicate) through the three Lloyd’s auctions that are held once a year. Members also have access to syndicates, such as Special Purpose Syndicates (SPS) and limited tenancy syndicates that do not trader their capacity through the auction system. These can also be used to form part of an underwriting portfolio.

PRE-EMPTION

This is the process whereby syndicates increase their capacity, and they have to offer this capacity equally to all members of the said syndicate. Pre-emption is akin to a nil-paid rights issue in the stock market, in that there is no cost associated with the acquisition of the new capacity. Members are under no obligation to accept pre-emption offers and can choose to sell their capacity through the auction system. If a member wishes to accept a pre-emption, then he or she has to show more FAL in order to underwrite the increased amount of capacity for the following years’ underwriting.

PREMIUM

The amount charged by an insurer or reinsurer as the price of granting insurance or reinsurance cover, as stated before or after the subtraction of brokerage and other deductions.

PREMIUM INCOME LIMIT (PIL)

This is the amount of capacity that a member underwrites in any given year.

PREMIUMS TRUST FUNDS (PTF)

The premiums and other monies that Members receive in respect of their underwriting at Lloyd’s are held by their managing agents in trust for them subject to the discharge of their underwriting liabilities. The premiums trust funds comprise a sterling fund, Lloyd’s American Trust Fund, Lloyd’s Dollar Trust Funds, Lloyd’s Canadian Trust Fund and the Lloyd’s Asia Trust Fund (which covers general business written through coverholders in Singapore). These premiums trust funds are available to fund overseas regulatory deposits, claims, return premiums, underwriting expenses and any profit that is payable to the member after providing for all future liabilities.

PRIOR YEARS

A term used to describe earlier years. This term usually refers to earlier years of account which have been closed into another year of account by reinsurance to close. Sometimes, these are also known as “old years”.

PRIOR YEARS’ RESERVE MOVEMENTS

This is calculated as the movement in reserves established for claims (that occurred in previous accident years) as a proportion of net premiums earned during the year. If there are deemed to be surpluses in the prior years, then syndicates have the option to make releases from prior years.

PROFIT COMMISSION

A commission that is payable according to a pre-determined formula as an incentive and reward for profitable underwriting. The following are examples of profit commission: (a) the commission paid to a coverholder by a managing agent for underwriting a profitable account; (b) the commission paid by a member to a managing agent in respect of the profitability of its syndicate in a given year of account; (c) the commission paid by a member to their members’ agent in a profitable underwriting year; and (d) the commission paid by a reinsurer to an insurer when a reinsurance treaty generates a profit.

PROGRAMME BUSINESS

This term is used to describe a package of small to medium property and non-marine liability business. 

PROPORTIONAL REINSURANCE

Proportional reinsurance transfers a risk in proportion to the premium received. An example of this would be a quota-share reinsurance (QQS), where say, 10% of a given risk was transferred to the reinsurer in return for 10% of the premium received.

PROTECTED CELL COMPANY (PCC)

A PCC is a simple and cost-effective way of setting up a reinsurance vehicle, which otherwise would not normally be economically viable. The idea behind a PCC is to offer clients all of the benefits of captive ownership without the excess costs associated with being a wholly owned subsidiary. Each client is effectively allocated a cell in which they can underwrite their own insurance account. The PCC is a single legal entity and the law allows it to create one or more cells for the purpose of segregating and protecting the individual cell assets (i.e. capital and premium). Creditors of any one cell have no recourse to the assets held within another cell. There is an established regulatory framework in Guernsey for PCCs.

PROTECTION & INDEMNITY (P&I) CLUBS

These are mutual associations of ship owners, who purchase reinsurance cover to protect against a number of liability eventualities, such as oil pollution. The majority of this cover is underwritten at Lloyd’s.

 

Q

QUALIFYING QUOTA SHARE (QQS) TREATY REINSURANCE

A QQS treaty may be purchased by a managing agent, with the permission of Lloyd’s, so as to increase the underwriting capacity of its managed syndicate, subject to a specified limit and subject to the treaty complying with certain terms and conditions.

QUOTATION

A statement of the premium that an underwriter requires to underwrite an insurance/ reinsurance risk based on the information supplied by the person seeking cover, either directly or via their broker. A quotation may be conditional, in that it may be subject to the provision of further information, or it may not. If a quotation is accepted before it is withdrawn, then subject to the satisfaction of any conditions that may attach to the quotation, an insurance/reinsurance contract will be made

 

R

RATE

The premium expressed as a percentage of the sum insured or limit of indemnity.

REALISTIC DISASTER SCENARIO (RDS)

A series of scenarios, such as US windstorms and earthquakes, which are used to model a given syndicate’s exposure to a variety of different catastrophe events. These are used by the Franchise Performance Directorate to enable better risk management practices within Lloyd’s. RDS are run on every members’ underwriting programme in order to enable them to monitor their own exposure to individual losses.  

RECONSTRUCTION AND RENEWAL

The description given to the major re-engineering of the Lloyd’s market in the early 1990s which, among other things, introduced corporate capital into the Lloyd’s market.

REINSURER

An underwriter of reinsurance business.  Most usually, this is a company that sells reinsurance cover to other insurance companies or to Lloyd’s syndicates. Some well-known companies include Munich Re and Swiss Re. Many Lloyd’s syndicates also underwrite reinsurance business.

REINSTATEMENT PREMIUM

These are premiums that charged by a syndicate, following a loss, which allow the assured to reinstate their cover or policy.  Reinstatements can also be given free of charge. 

REINSURANCE

This is effectively insurance that a syndicate buys in order to lay-off some of the risk on its own book, and to protect its own book from the effect of catastrophe losses. The effect of a disproportionately large loss, or a series of smaller losses, can be effectively mitigated by the judicious use of reinsurance. Reinsurance enables a syndicate or insurance company to expand its capacity; stabilize its underwriting results; finance its expanding volume; secure catastrophe protection against shock losses; withdraw from a line of business or a geographical area within a specified time period.

REINSURANCE PROGRAMME

This is the term that is used to describe all of the reinsurance cover that a syndicate has bought in a given year.

REINSURANCE TO CLOSE (RITC)

A reinsurance agreement under which members of a syndicate for a year of account to be closed are reinsured by members who comprise that or another syndicate for a later year of account against all liabilities arising out of insurance business written by the reinsured syndicate. At syndicate level, the RITC is the mechanism by which one of account closes into another.

REINSURANCE TO CLOSE (RITC) SYNDICATE

A syndicate set up solely to underwrite the reinsurance to close of other syndicates.

RENEWAL BUSINESS

This is business written by a syndicate that is insured once again at the expiry of the initial policy period.

RESERVE

This is an amount of money that represents actual or potential liabilities kept by an insurer to cover debts to policyholders. A reserve is usually treated as a liability.

RETENTION

Another word for deductible, or an excess limit.

RUN-OFF YEAR

A syndicate year of account that cannot be closed at the end of 36 months, by the normal means, because of material uncertainties about the ultimate development of the account. It can also be referred to as an “open year” of account.

RUN-OFF SYNDICATE

This is a syndicate that has ceased trading and has open years of account.

 

S

SCOTTISH LIMITED PARTNERSHIP

This is a method of underwriting with limited liability through a partnership established under the Limited Partnership Act 1907, governed by Scottish law. It can be formed by one person or a group of people.

SERVICE COMPANIES

These are usually insurance entities that produce business for syndicates.  They usually take a percentage of the premium in order to do this.

SHORT TAIL BUSINESS

This is business that normally settles at the end of the 36 month term of a Lloyd’s year of account.  Some common examples of short tail business include motor, property, cargo, specie, aviation hull, marine hull and catastrophe reinsurance business.

SIGNED LINE

This refers to the amount of a given risk that an underwriter has agreed to accept. It may be the same as the underwriter’s written line or, if there is signing down, a lower amount. The amount of a syndicate’s signed line should be shown in a table in the policy, where one is issued.

SIGNING DOWN

Where a risk is oversubscribed, which is to say that the underwriters’ written lines exceed 100% then, absent some contrary instruction, those lines will be proportionally reduced ('signed down') by the broker until they total 100%. An underwriter may insist on preserving his written line in which event the written lines of the other (following) underwriters will be proportionally reduced until they total 100% when added to the preserved written line of the other underwriter.

SLIP

There are two types of underwriting slip: a placing slip and a signing slip. A placing slip is a document created by a broker that contains a summary of the terms of a proposed insurance or reinsurance contract which is then presented by the broker to selected underwriters for their consideration. Underwriters may delete, amend or add terms on a slip as they consider appropriate for the purpose of providing an indication or a quotation. A signing slip is a document that is created by a Lloyd’s broker after a quotation has been accepted for the purpose of processing premiums under the contract that is evidenced by the placing slip. It is a cleaned up version of the final placing slip and shows underwriters’ stamps, signed lines and underwriting references, these details being inserted by each underwriter at the request of the broker. Provided that it shows the underwriters’ stamps, signed lines and underwriting references a placing slip may be used as a signing slip.

SOFT MARKET

This is a term that is used to describe a market where rates are low or are falling, or one where terms and conditions have been eroded or weakened.

SOLVENCY

This means that a member has sufficient assets to be able to satisfy the financial requirements laid down by Lloyd’s to allow the member to trade and to be eligible to transact insurance business and meet liabilities.  

SOLVENCY II

The new European Union inspired accounting standards for insurance businesses that came into effect on 1 January 2016.

SPECIAL PURPOSE SYNDICATE (SPS)

A syndicate set up solely to underwrite a quota-share reinsurance of another syndicate’s business for a year of account. SPSs are usually established to take advantage of specific market circumstances, most commonly the increase in rating levels that can follow in the wake of a major catastrophe loss.

SPECIAL RESERVE FUND

This is a tax-efficient fund that was set up to allow unlimited liability members to put aside part of their profits in order to use to pay losses at a later date. Members can set aside 50% of their annual underwriting profit, but the total amount of money in the SRF must not exceed 50% of the total PIL underwritten by the member in the previous year. Limited liability members cannot run a SRF.

SPREAD SYNDICATE

A syndicate whose capital is provided by a number of different members, including members who have separate ownership and control to the syndicate’s managing agent.

SPREAD VEHICLE

A corporate member which underwrites on a number of different syndicates.

SUBROGATION

The right of an insurer which has paid a claim under a policy to step into the shoes of the insured so as to exercise in his name all rights he might have with regard to the recovery of the loss which was the subject of the relevant claim paid under the policy up to the amount of that paid claim. The insurer’s subrogation rights may be qualified in the policy. In the context of insurance, subrogation is a feature of the principle of indemnity and therefore only applies to contracts of indemnity so that it does not apply to life assurance or personal accident policies. It is intended to prevent an insured recovering more than the indemnity he receives under his insurance (where that represents the full amount of his loss) and enables his insurer to recover or reduce its loss.

SUBSCRIPTION MARKET

This is a term used to describe syndicates in the Lloyd’s market, all of whom can be offered, and have the capability to underwrite a given risk. Lloyd’s is often described as a subscription market in that it can divide up the risks brought to it by brokers between the syndicates that trade within it.  Risks are usually led by a “lead” underwriter, who sets the terms, price and wordings on the insurance contract, and then the remainder of the risks is written by what is colloquially known as the “following” market. 

SUBSCRIBER

A member of Lloyd’s who bids for underwriting capacity in a Lloyd’s capacity auction.

SURPLUS LINES INSURANCE

These are insurance risks that have been certified by a local broker as having been declined by a prescribed number (usually three or four) of licensed insurers in a given state in the United States of America and which therefore can be underwritten as 'surplus lines'.    

SURPLUS LINES INSURER

An insurer that underwrites surplus lines insurance in the US. Lloyd’s underwriters are surplus lines insurers in all jurisdictions of the US, except Kentucky and the US Virgin Islands.

SYNDICATE

Syndicates are run by managing agents, and are constituted on annual basis. They are essentially collections of Lloyd’s members who band together to provide capital, which is used, by the syndicate, to transact insurance business at Lloyd’s. Syndicates transact different classes of insurance and reinsurance business. Syndicates have the ability of offer pre-emption and de-emption to their members each year. Their capacity can be traded at the three Lloyd’s capacity Auctions which are held each autumn.

SYNDICATE ANALYST

Syndicate analysts are employed by Lloyd’s members’ agents. Their main role is to analyse the performance and prospects of the existing syndicates trading in the Lloyd’s market, but they also vet potential start-up syndicates and monitor the wider insurance and reinsurance markets. The result of their work underpins the selection of syndicates, and the construction of members’ portfolios that is undertaken by the members’ agents each year.

SYNDICATE BUSINESS FORECAST

A statement of the expected range of results of each open year of account of a syndicate that is submitted to Lloyd’s by its managing agent in mid-year together with the managing agent’s expectations for the next year of account.

SYNDICATE BUSINESS PLAN

A plan of the underwriting of a given syndicate for a given year of account that is prepared by the managing agent of a syndicate and submitted to Lloyd’s for approval in advance of the commencement of underwriting for that year of account.

SYNDICATE EXPENSES

This term covers all of the day to day expenses associated with running a syndicate, such as the salaries of the staff, the rental of the box in Lloyd’s and Lloyd’s central charges.

SYNDICATE STAMP

This term may refer to – (a) a document which lists the names of all of the members of a syndicate for a given year of account and the amount of each member’s overall premium limit that is allocated to that syndicate; (b) the allocated capacity of a syndicate.

 

T

TENDERER

A member of Lloyd’s who seeks to sell some or all of his underwriting capacity in a capacity auction.

TENANCY IN PERPETUITY

The right of a member under the Lloyd’s Standard Agency Agreement to remain on a syndicate in perpetuity.

TERM LIFE INSURANCE

This is life insurance that provides protection for a specified period of time. Common policy periods are one year, five years, 10 years or until the insured reaches age 65 or 70. The policy doesn't build up any of the non-forfeiture values associated with whole life policies.

THIRD PARTY

Someone, other than the insured or his insurer, who has suffered injury or loss.

TOTAL LOSS

This is a term that is commonly used in the marine market, describing a loss of sufficient size that it can be said no value is left. The term also is used to mean a loss requiring the maximum amount a policy will pay.

TREATY

This is usually reinsurance business, written on a proportional or quota share basis.

TRIA

A terrorism event, where the US Government picks up 90% of the cost of any act of international terrorism (by a non-US citizen) up to an overall market loss of $100 billion.  If the loss exceeds $100 billion, the Government would then pay 100% of any further loss.

TRUST FUNDS

There are two main trust funds where assets are required to be held to cover incurred claims under US law.  The Surplus Lines Trust Fund (SLTF) covers direct business and the Credit for Reinsurance Trust Fund (CRTF) covers reinsurance contracts with insurance companies within the US.  In both cases, the funding of these does not allow syndicates to take full account of expected reinsurance recoveries for notified and expected claims.  The CRTF has to be funded 100% and the SLTF at 30%.

TURNKEY MANAGING AGENT

A managing agent which acts as the managing agent for a third party syndicate based on charging the syndicate a fee for its services rather than as the owner of the syndicate.

 

U

UNALIGNED CAPITAL OR UNALIGNED MEMBER

A member of a syndicate who is not affiliated to, or owned by, the managing agent of the syndicate. By definition, private capital is unaligned, but so would be an external trade capital member of a syndicate.

UNDERWRITING

This is the term used to describe the commitment of capital to the Market, and joining a selection of syndicates, with the intention to engage in assuming risks.

UNLIMITED LIABILITY UNDERWRITING

This describes the way in which traditional Lloyd’s members, known as Names, had no cap on the losses that they might incur through their underwriting activities. No new unlimited liability members have been allowed to enter the Lloyd’s Market since 2003.

UTILISATION OF CAPACITY

This refers to the amount of its stamp capacity that a syndicate underwrites. It is usually expressed as a percentage of the overall stamp capacity, and can be quoted on a gross (before the deduction of reinsurance costs) or a net basis (after the deduction of reinsurance costs). 

 

V

VANILLA BUSINESS

This is a vernacular term used by some underwriters to describe simple, straight-forward business that their syndicate writes. It is often used by underwriters of personal accident business.

 

W

WORDINGS

These are the terms and conditions of an insurance policy, as set out in the policy document. They are of paramount importance as underwriters can negotiate changes in wordings limiting the syndicate’s liability in certain circumstances. They set out what exposures are intended to be covered by the insurance policy and which are not.  

 

Y

YEAR OF ACCOUNT

The year to which a risk is allocated and to which all premiums and claims in respect of that risk are attributed. The year of account of a risk is usually determined by the calendar year in which the risk incepts. A year of account is normally closed by reinsurance at the end of 36 months.

 

 

                                                                                                                       

 

 

 


 


 


 

 

 

 

 






 

 



 

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