LLM1190 - Introduction to Lloyd's: capital structure: the chain of security: the premium trust fund
Lloyd’s rules require each member of Lloyd's to enter
into a premiums trust deed to create a premium trust fund (PTF).
The PTF’s trustees are appointed by the managing agent and
approved by Lloyd’s. The PTF income consists of premiums
received, reinsurance recoveries and investment income. Funds in
the PTF are subject to restrictions imposed by Lloyd’s on the
type of investment to ensure that they are available to meet claims
when required.
Funds are required to be held in trust funds in certain
territories, for example, the US regulator requires US dollar
premiums to be held in US dollar trust funds (‘LDTF’)
– see
LLM1090.
Subject to the rules on continuous solvency transfers (see
below), profits are only available to be distributed to members
when claims and expenses for the underwriting year have been
settled and the year closed by payment of a Reinsurance to Close
premium (
LLM2060). Where there are insufficient
funds available in a syndicate’s PTF to meet liabilities, the
managing agent makes a ‘cash call’ to the members. If a
member fails to meet a cash call, funds will be taken from his
Funds at Lloyd’s (
LLM1200).
The tax treatment of the PTF is discussed at
LLM2130.
Continuous solvency transfers
Under Lloyd’s traditional system of three-year accounting,
profits were not generally released from PTFs until the year of
account was closed at the 36 month point (
LLM2120). There were some ‘early
profit releases’ in the mid 1990s in connection with
Reconstruction and Renewal (
LLM5030).
From 2003, Lloyd’s permitted 50% of the surplus on open
years to be set against cash calls or used against the following
year’s capital requirements. These are referred to as
‘continuous solvency transfers’ (CSTs). From 2005, the
balance of unused CSTs can be released to members (subject to
capital requirements being met), up to 50% of the surplus on the
2003 and 2004 years of account. See
LLM5050 for the tax treatment of such
CSTs.
