This template should be used in conjunction with Lloyd's "Guidance notes on gap analysis March 2009" and page

references are included below !dditional notes on completion of the rele"ant columns are included at the foot of this document

#$% &o you understand the re'uirement sufficiently at this stage

#2% (hat further wor)*help is re'uired to reach an understanding

#+%

#.% #-% (hen do you #/% &o you #,% !ction en"isage you (ho will be currently meet (here are you re'uired to will be able to responsible for this short on this address any meet this actions on this re'uirement re'uirement shortfall* gap re'uirement re'uirement

#9% #0% 1stimated time re'uired to address gap Le"el of resource needed to address gap

#$0% 2urrent status on re'uirement 3 * ! *G

Governance Section
General governance requirements (pages 5-6)
Existing
l l l

Governance standards Risk management standards &risk governance( - structure for governance that supports risk management by providing clearly defined accountabilities, e/pectations and reporting re'uirements for all parties Operational processes minimum standards:

key business and operational processes must be properly documented directors and staff should understand all the operational and business processes relevant to their role

Risk management standards - effective risk policy, subject to regular review Regular internal review of the system of governance Written policies for:

NEW
l l

internal control internal audit outsourcing

l l

olicies for risk management, internal control, internal audit and outsourcing reviewed at least annually rocesses for the identification and management of emerging risk issues

Fit & roper !equirements (page ")

Existing
l

0nderwriting .yelaw, para 12%, &appointments to senior positions( - fit and proper re'uirements for directors$partners$active underwriters$run-off managers !loyd"s process for notification and amendment of appointments to all senior positions, including active underwriters and run-off managers Governance standards #$% &no significant changes to !loyd"s re'uirements and processes anticipated at this stage(

l l

New
l

!is# $anagement (pages %-&)

Existing
l l

Risk management standards - governance structure to support the management of risk Risk management standards:

risk policy setting out risk management strategy, covering each risk category risk management process - risk identification and assessment, monitoring and reporting

l l l l

Risk management standards - process to identify all significant risks Risk management standards &risk governance( - structure of the risk management function )*% guidance minimum standard: +,apping to the risk register" *ontingency plans - operational processes minimum standards - appropriate business continuity plans Risk management function will need to address the following tasks relating to the internal model:

New
l

design and implementation testing and validation documentation informing the .oard about the performance of the model analysis of the performance of the model and production of summary reports

*ontingency planning &considered in a wider sense than operational business continuity(

This template should be used in conjunction with Lloyd's "Guidance notes on gap analysis March 2009" and page references are included below !dditional notes on completion of the rele"ant columns are included at the foot of this document

#$% &o you understand the re'uirement sufficiently at this stage

#2% (hat further wor)*help is re'uired to reach an understanding

#+%

#.% #-% (hen do you #/% &o you #,% !ction en"isage you (ho will be currently meet (here are you re'uired to will be able to responsible for this short on this address any meet this actions on this re'uirement re'uirement shortfall* gap re'uirement re'uirement

#9% #0% 1stimated time re'uired to address gap Le"el of resource needed to address gap

#$0% 2urrent status on re'uirement 3 * ! *G

'!S( (pages )*-)))

Existing
l

#$% &this is a new re'uirement under 3olvency )) consistent with the principles of the )*%3 regime( 4emonstrate the link between risk and capital management:

New
l

the assessment must be driven by risk appetite consideration should be given to all risks that the business faces, including those that fall outside the 3*R calculation &this applies whether the standard formula or an internal model is used( the OR3% should form an integral part of the business strategy and be taken into account on an ongoing basis in strategic decisions assessment at different confidence levels eg as re'uired for 3*R, economic capital longer term considerations - ie assessment beyond the 52 month time hori6on used for regulatory capital agents will also need to revisit the OR3% in line with their own needs$material changes in the business fre'uency of reassessment will be key in demonstrating use agents will be re'uired to inform !loyd"s of the results of any reassessment of the OR3%

3et out the methods used to determine overall solvency needs, including:

.e updated annually as a minimum:

+nternal control (page ),)

Existing
l l

)nternal controls as covered by e/isting franchise standards &including underwriting, claims, and risk management( 0nderwriting byelaw &paragraph 17( - compliance officer appointment *ompliance function to advise on laws, regulations etc relating to 3olvency )) %ssess the possible impact of changes in the legal environment on operations and the identification and assessment of compliance risk

New
l l

+nternal (u-it (page ).)

Existing
l l

Risk management standards - assurance processes Risk management standards - ensuring independence between risk management and assurance processes )nternal audit function, independent from the operational functions of the business Where outsourced, internal audit must remain subject to effective internal oversight )nternal audit should provide assurance over compliance with all internal strategies, processes and reporting procedures )nternal audit will also need to assess whether the internal control system remains sufficient and appropriate for the business )nternal audit findings:

New
l l l l l

should be reported to the %udit *ommittee and$or .oard on a timely basis %udit *ommittee and$or .oard will be responsible for ensuring compliance with findings

)nternal audit reporting lines

(ctuarial /unction (page )0-)5)

Existing
l l

!loyd"s 8aluation of !iabilities Rules &governing the production of 3tatements of %ctuarial Opinion and technical provisions( G#27 %ctuarial reporting under the !loyd"s 8aluation of !iabilities rules 9ach syndicate will need to ensure they have an actuarial function *ontribute to implementation of risk management system :ave relevant e/perience and e/pertise 9/press an opinion on the overall underwriting policy 9/press an opinion on the ade'uacy of reinsurance arrangements

New
l l l l l

'utsourcing (page )6)

Existing
l

Operational processes minimum standards - outsourced activities should be properly monitored and controlled

New

This template should be used in conjunction with Lloyd's "Guidance notes on gap analysis March 2009" and page references are included below !dditional notes on completion of the rele"ant columns are included at the foot of this document
l

#$% &o you understand the re'uirement sufficiently at this stage

#2% (hat further wor)*help is re'uired to reach an understanding

#+%

#.% #-% (hen do you #/% &o you #,% !ction en"isage you (ho will be currently meet (here are you re'uired to will be able to responsible for this short on this address any meet this actions on this re'uirement re'uirement shortfall* gap re'uirement re'uirement

#9% #0% 1stimated time re'uired to address gap Le"el of resource needed to address gap

#$0% 2urrent status on re'uirement 3 * ! *G

Where functions are outsourced, agents will remain fully responsible for discharging all of their duties under the draft 4irective

This template should be used in conjunction with Lloyd's "Guidance notes on gap analysis March 2009" and page references are included below !dditional notes on completion of the rele"ant columns are included at the foot of this document

#$% &o you understand the re'uirement sufficiently at this stage

#2% (hat further wor)*help is re'uired to reach an understanding

#+%

#.% #-% (hen do you #/% &o you #,% !ction en"isage you (ho will be currently meet (here are you re'uired to will be able to responsible for this short on this address any meet this actions on this re'uirement re'uirement shortfall* gap re'uirement re'uirement

#9% #0% 1stimated time re'uired to address gap Le"el of resource needed to address gap

#$0% 2urrent status on re'uirement 3 * ! *G

1ec2nical Section
Supervisor4 !eporting & u5lic 6isclosure (pages )"-)%)
Existing
l l l

Re'uirement to submit information to !loyd"s for annual regulatory return to the ;3% rovide syndicate annual reports to !loyd"s and the ;3% Report financial and solvency position to !loyd"s on a 'uarterly basis ;inal re'uirements will not be clarified until !evel 2 but it is envisaged that a new set of regulatory reporting forms will be developed

New
l

7aluation o/ 8ia5ilities (page )&-,*)

Existing
l l

!loyd"s 8aluation of !iabilities Rules G#27 %ctuarial reporting under the !loyd"s 8aluation of !iabilities rules *alculate technical provisions as specified under <)31:

New
l

definition of best estimate cashflows risk margin premium provisions

'wn Fun-s (page ,))

Existing
l

3yndicate assets comply with G9# R0 #$% - &!loyd"s do not anticipate applying any additional re'uirements for assets held at syndicate level over and above the draft 4irective re'uirements(

New
l

3se an- approval o/ internal mo-els

3se 1est (pages ,.-,0)
Existing
l

Risk ,anagement standards, capital allocation:

the capital assessment should be driven by the key business risks sound and appropriate capital assessment methodology organisation understands key drivers of its capital re'uirements the need to demonstrate clearly the link between the risk framework and the )*% calculation consistency with the syndicate business plan &3.;( embedding the )*% the need to reflect the agents" position against the franchise standards in the )*% the importance of the involvement of senior management and the .oard in deriving and challenging the capital assessment the re'uirement for an amended )*% where the risk profile of the syndicate has changed materially or a new 3.; is submitted during the year

!loyd"s )*% Guidance and ,inimum 3tandards:

New
l l l l l

4emonstrate use of the model in the business rocess for review of the internal model .oard and senior management understanding and constructive challenge *onsider the impact on the 3*R where the model is re-run to reflect changes in the business *hanges to the risk management framework, including the modelling process:

formal approval by .oard$senior management appropriate adjustments to be made when the risk profile changes

*lear link and consistency between the capital element of the internal model and other elements

This template should be used in conjunction with Lloyd's "Guidance notes on gap analysis March 2009" and page references are included below !dditional notes on completion of the rele"ant columns are included at the foot of this document Statistical qualit4 stan-ar-s (pages ,5-,6)
Existing
l l l

#$% &o you understand the re'uirement sufficiently at this stage

#2% (hat further wor)*help is re'uired to reach an understanding

#+%

#.% #-% (hen do you #/% &o you #,% !ction en"isage you (ho will be currently meet (here are you re'uired to will be able to responsible for this short on this address any meet this actions on this re'uirement re'uirement shortfall* gap re'uirement re'uirement

#9% #0% 1stimated time re'uired to address gap Le"el of resource needed to address gap

#$0% 2urrent status on re'uirement 3 * ! *G

9/tent of reliance on syndicate data Reference should be made to market data but needs to be adjusted to reflect syndicate characteristics 4ata should not be e/cessively smoothed as this is likely to understate volatilities 9/pect the person responsible for any analysis supported by data to =sign off> that data meets criterion allowing for proportionality

New
l

9ali5ration Stan-ar-s (pages ,"-,%)

Existing
l l l l l l l

,odel should be calibrated using a 8aR measure with a ??@AB confidence level, over a one year period #on modelled risks should be calibrated to the ??@AB confidence level and a suitable aggregation method should be used Che model must be able to calculate a separate )*% for each syndicate covering all years of account of the syndicate combined Che model should allow output into constituent risk groups and be capable of showing the result by risk group both pre and post diversification Che drivers of risk in each risk group should be identified and described Che model should allow sensitivity testing of the main parameters as re'uested rescribed sensitivity tests are re'uired as part of )*% pro-forma ,odel should be fle/ible enough to allow for outputs other than the 5:277 level result Output must address 3olvency )) risk categorisations for comparison with standard formula 3*R

New
l l

ro/it & loss attri5ution (page ,&)

Existing
l l

rovide analysis of model output against actual loss e/perience Review validity of past data over time as trends emerge and e/perience changes 9/plicit back testing of the model is re'uired *omparison of model output to emerging e/perience on a timely basis &e/pected to be at a class of business level( %nalysis of emerging e/perience versus model e/pectations may need to be regularly reported to !loyd"s

New
l l l

7ali-ation Stan-ar-s (pages .*-.))

Existing
l l l l l l

3tress tests are needed to validate the model output for reasonableness and to help with calibrating assumptions 3tress and scenario tests must be relevant to their business and sufficiently e/treme to represent the 5:277 level 3ufficient data over and above a syndicate"s own data should be considered and additional stress tests performed on uncertain assumptions %ll models must be subject to sensitivity analysis ,anagement and .oard understanding of sensitivity testing 8alidate )*% against 9*R and e/plain differences Output of internal model will have to be compared against standard formula 3*R for at least first two years of internal model use 8alidation function should be independent of the person parameterising the model to allow objective and robust challenge .oard should have overall responsibility for validation - management information on validation should be presented to the board and challenged by it 8alidation of the model should be carried out at least annually &appropriate fre'uency should be assessed by materiality( Goodness of fit of probability distributions should be tested where statistical techni'ues are used, including both the choice of distribution and the parameters %ctual vs e/pected analysis should be part of the validation process &e/pected to be at a class of business level( 8alidation should consider not only emerging claims e/perience but +all new data" including:

New
l l l l l l l

non-claims e/perience that could affect the profit and capital position new e/ternal 'uantitative information 'ualitative information, both internal and e/ternal

l l l

8alidation should check that all risks in the risk register are modelled and if not modelled there should be written justification %ssessment of accuracy, completeness and appropriateness of data should form part of the validation process@ 4ata 'uality and model sensitivity should drive design of calibration 4ocumentation should be ade'uate enough to allow independent verification of the validation process

This template should be used in conjunction with Lloyd's "Guidance notes on gap analysis March 2009" and page references are included below !dditional notes on completion of the rele"ant columns are included at the foot of this document

#$% &o you understand the re'uirement sufficiently at this stage

#2% (hat further wor)*help is re'uired to reach an understanding

#+%

#.% #-% (hen do you #/% &o you #,% !ction en"isage you (ho will be currently meet (here are you re'uired to will be able to responsible for this short on this address any meet this actions on this re'uirement re'uirement shortfall* gap re'uirement re'uirement

#9% #0% 1stimated time re'uired to address gap Le"el of resource needed to address gap

#$0% 2urrent status on re'uirement 3 * ! *G

6ocumentation Stan-ar-s (pages .,-..)

Existing
l l l l l l l l

9/plain the approach to deriving the )*% and how it links together the business plan, key risks inherent in the business, related risk management processes and practices and the capital re'uired by the risks Why the methodology chosen is appropriate to the syndicate"s business, taking account of its risk profile, risk appetite, track record with respect to risk e/perience and e/posure and the key principles upon which the )*% is based Che approach adopted towards the 'uantification of risk and the rationale for this approach Che stress and scenario tests used and why they are appropriate for the business Che sensitivity of key assumptions Che overall )*% figure split by major risk category, before and after diversification Che allocation of capital across risk groups and the rationale and method used to derive the figures for each %ll !loyd"s minimum )*% standards must be addressed *over the operational details of the internal model as well as the design %ddress articles 55D-522 and 521 .e detailed and complete enough to allow a skilled and knowledgeable professional to replicate the model 4etail the theory underlying the internal model and be relevant to comple/ity of model :ighlight any areas where model is deemed not to perform effectively &model weaknesses( and detail how these are addressed Outline the policy for changing the model %ll changes should be documented on an ongoing basis &model to be revisited regularly and updated as necessary in line with risk profile of business(

New
l l l l l l l

External mo-els an- -ata (page .0)

Existing
l l l

3et out how .oard$senior management are engaged in process particularly where outsourcing$consultants used 0se of e/ternal cat models$93G - )*% must allow for possibility of model error or risks not captured in e/ternal models 9/ternal loss databases, such as OR)* &operational risk consortium( for operational risk, to supplement own data when assessing 5:277 losses

New
l l l l

%ny reliance on e/ternal supplier to be documented together with role of product&s( and e/tent to which they are used %ble to demonstrate thorough understanding of use and limitations of any vendor software$products used 4ocument process undertaken to ensure e/ternal data$model chosen is appropriate to risk profile and should include sufficient sensitivity and scenario testing to validate use *lear strategy for regular review of any e/ternal models$data sources used

Notes $ %gents should detail whether they currently feel they have a sufficient understanding of the re'uirement and what it is trying to achieve, bearing in mind that further guidance and detail will be provided going forward as the !evel 2 implementing measures are developed@ %gents should
also consider the e/tent to which the understanding of the re'uirement is shared across the organisation@ provide to assist in reaching this understanding@

2 4etails should be provided as to what additional work the agent feels needs to be completed by them in order for the appropriate people at the agency to reach an ade'uate level of understanding of the re'uirement@ %gents should also include here anything that !loyd"s could do or + , . / 0 9
%gents should state whether they currently meet both the new and e/isting re'uirements@ Where the agent has identified a shortfall in meeting any of the e/pected re'uirements, they should provide detail as to where the gap arises@ ;or each identified gap, detail should be provided as to what actions are planned in order for the agent to address this gap and meet the re'uirement as it is currently envisaged@ ;or those re'uirements not currently met, agents should state the appro/imate date by which they e/pect to become compliant &in particular whether they e/pect to have addressed any gaps in time for the dry running process(@ %gents should state the name and job title of those individuals responsible for completing each specific action identified@ %n indication of the time re'uired to address this gap &e@g@ in person months( should be provided@ %gents should estimate here the amount and level of resource necessary to become compliant with the re'uirements where these are not currently met@ )n particular, agents should highlight areas where they e/pect that additional resource will be re'uired and what form this additional resource will take@

$0 %gents should select a status of red, amber or green to reflect the si6e and nature of the gap identified, and the level of risk associated with not complying with the re'uirement by the time of 3olvency )) implementation@