§ Mr. GarnierTo ask the President of the Board of Trade what measures he intends to implement to improve the supervision of the solvency of Lloyd's of London. [20065]
§ Mr. NelsonFollowing the successful completion of Lloyd's reconstruction and renewal plan last year, I have been considering whether any steps need to be taken to strengthen further the protection to policyholders provided by the solvency margin regime in the Insurance Companies Act 1982, as adapted for Lloyd's.
I have concluded that it would be appropriate to introduce an additional solvency test for Lloyd's supplementing those already specified in the legislation. I have today laid regulations before the House that will achieve this with effect from the end of this year.
Under the arrangements provided for by the Insurance Companies Act 1982, Lloyd's is currently subject to two separate solvency tests. The first requires an auditor to certify that there are assets, including centrally held assets, of sufficient value to meet the liabilities of each member of Lloyd's. The second test treats Lloyd's as a whole as if it were a single insurance company and requires Lloyd's to maintain sufficient assets to cover its total liabilities plus a minimum margin of solvency. That global required solvency margin equates broadly to the greater of 16 per cent. of the total net premiums in the previous year or 23 per cent. of the average total claims incurred over a three-year period. Failure to meet either of these test would trigger the intervention powers of the Secretary of State.
The third test which I have now introduced requires Lloyd's to demonstrate that it can cover an additional "combined" minimum margin of solvency. This combined margin is calculated on the basis of a prescribed level of net assets for each member, in addition to that required to cover their liabilities. If any members are unable to demonstrate such net assets, Lloyd's will be required to show that sufficient centrally held assets—principally the central fund—are available to cover the aggregate of the individual shortfalls. The assets of other members which exceed their prescribed level of net assets may not be taken into account for these purposes. Failure to meet this additional test would also trigger the Secretary of State's intervention powers.
This additional test reflects better the fact that members of Lloyd's are not responsible for each other's losses, while recognising that Lloyd's does have centrally held assets that can be used to cover any shortfalls. It will provide policyholders with an additional degree of protection against adverse developments, and will also encourage a prompt response should financial difficulties ever begin to develop at Lloyd's in the future. Lloyd's is reviewing its own financial requirements, placed on its members and other aspects of the Lloyd's chain of 134W security, in ways which should complement the changes I am announcing today and which should enhance further the security of policyholders.