Economic Capital Assessment (Lloyd's)

A member financing 10% of a syndicate whose ultimate SCR comes out at 200 million pounds does not deposit 20 million at Lloyd's. It deposits 27. The gap is the uplift the Corporation has applied to each member's share for more than a decade, 35%, and the result is called the Economic Capital Assessment. The starting point is the managing agent's internal model. It calculates the syndicate's capital at the Solvency II 99.5% threshold, but to ultimate rather than over one year: it measures everything the coming year of account and the reserves of open years may still cost until they run off, which yields a heavier figure than the one-year SCR. That uSCR goes in with the business plan in the syndicate's capital submission, the Corporation challenges it, sometimes adjusts it, then allocates it among members in proportion to their shares. The uplift answers no requirement of the supervisor: it comes from the Corporation, which uses it to support the market's financial strength, licenses and common rating. The supervisor looks at the SCR of Lloyd's as a whole, calculated over one year by the Corporation's own internal model. For the member, the ECA becomes the basis of what it must hold as funds at Lloyd's, and it tops up at year end if it falls short. The weakness is well known. A uniform uplift multiplies model error as much as risk: a syndicate that understates its catastrophe tail sees that error grossed up by 35% along with everything else, hence the capital loadings the Corporation imposes on models it judges light. Not to be confused with economic capital in the general sense, which each insurer sets for itself, nor with the standard formula SCR.