Articles - Navigating challenges in the Lloyds LCR submission

Barnett Waddingham recently brought Heads of Capital from several managing agents in the Lloyd’s market together to share insights on the latest Lloyd's Capital submissions process, as part of our “Lloyd’s Capital Returns” (LCR) roundtable. The meeting covered various themes, shedding light on communication gaps, the shifts in submission timelines, keeping up with external model changes, and the ever-evolving validation processes.

 By Julien Masselot, Principal and Head of Capital and Risk at Barnett Waddingham

 Here is a concise summary from our Insurance experts of the key takeaways.

 Overall feedback
 Overall, the roundtable participants found the capital submission process to be a smooth one. Some highlighted that it was a relatively calmer summer in terms of requests from Lloyd’s, after a couple of years of turbulence from Covid and Ukraine - some even wondered if it was too calm a summer! This was also aided by the change in Lloyds’ approach to the submission process, being a little more hands-off than they have been in previous years and placing more reliance on the validation and governance processes.

 Getting used to the new Lloyd’s oversight approach
 Participants noted that they were not used to the downward shift in the level of engagement from Lloyd’s compared to the past few years. Participants were keen to keep a regular engagement with their capital point of contact in line with their proactive approach to capital management, but some struggled this year with the change in Lloyd’s oversight approach. One participant, interestingly, expressed frustration at being put on a fast track for capital approval without any recent deep dive review, with automatic capital loadings being imposed and limited chances to challenge.

 Changes in submission timelines were generally accepted positively, but some syndicates felt the pain and concerns were raised about last-minute data/reports requests, impacting internal deadlines and resource constraints. Participants emphasised the need for more engagement with Lloyd's before templates are issued to avoid challenges during the submission process. It was noted that things were more pressured for syndicates that had the same first and second line submission deadline, as first line teams had to leave enough time for validation to complete their work before submission.

 Discussions highlighted the evolving nature of the Lloyd’s Focus Areas templates, with concerns raised about the expanding scope and difficulties in aligning with individual syndicate risk reporting profiles. Participants called for more flexibility in adapting to changing economic conditions within the focus areas.

 Opaque external models
 The level of challenge related to external model changes (e.g. economic scenario generators or natural catastrophe models) was quite variable from one syndicate to another, especially depending on the external model or software being used. Participants shared experiences of difficulties in validating changes due to a lack of input from some software providers in addition to resource constraints internally. This put them in the awkward position of not being able to fully explain movements in capital due to the change in external models.

 Our capital experts also shared insights on what boards care about, emphasising the need to link modelling to the actual market. More could also be done to ensure that Lloyd’s validation questions are more related and relevant to the business so that model use could be enhanced.

 Validation refresh?
 The attendees acknowledged the need for stability and improved relationship between validation team and the first line, with discussions on potential automation options. Nonetheless, it was felt that validation progressed well this year.

 Some participants questioned the effectiveness of standardised testing, suggesting it might lead to superficial adjustments to ensure a passing grade. Concerns were raised about outdated rules (e.g. negative market risk contribution tests), calling for their revision to reflect current market dynamics. This speaks to the relative maturity of the validation process and that now would be a good time to reassess the validation framework as fit-for-purpose.

 Many syndicates are already in the process of optimising the validation process, emphasising the importance of rationalising their test plan, early deep dives, standardising validation outputs, and exploring automation possibilities, especially regarding testing and reporting. The discussion touched on validation reporting inefficiencies, including governance and escalation processes, with suggestions for alternative methods such as using videos or interactive tools.

 The roundtable provided a valuable platform for industry experts to discuss challenges and share insights on the Lloyd's Capital submissions process. Key recommendations included enhancing communication, revisiting standardised testing, and fostering more engagement between Lloyd's and managing agents. As the industry continues to evolve, addressing these issues will be crucial for a smoother and more collaborative submission process in the future. 

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