insurer can choose to delegate underwriting authority to:
- another insurer (set of insurers)
- a broker
- another entity altogether
2 forms of contract that can be set up in the London Market that allow an insurer to delegate underwriting authority to another insurer/ set of insurers:
- consortium
- lineslip
consortium
- group of insurers which formed an agreement to accept risks together, in a set proportion
- agreement sets out risks they’re prepared to accept and not. One insurer is designated the consortium leader, broker visits them and they accept/ decline risks on behalf of consortium. Consortium leader handles claims.
- consortium is set up for a year and has a unique identifying number and letter code (4 number code).
- consortium has a stamp which the leader use on the slip to indicate each member’s agreement to take a share of the risk.
- When premium is processed through Xchanging, its shared among consortium
The benefits of the consortium arrangement for the parties involved are as follows:
- Broker - placing process is shorter as a consortium can accept a larger share of a risk with one visit and one signature
- Consortium leader - commission +
fees to leader due to responsibilities. - Followers - consortium members have access to business without seeing a broker
- All parties
Lineslip
advantages of line slips for followers
lineslip consists of a set of insurers that have been brought together by a broker. broker finds insurers which are interested in writing similar business. lineslip put together using a MRC. Within lineslip, one participating insurer will act as the leader.
- Followers - Insurers access business without having to agree the risks
individually.
declaration to a broker or another entity
This is known as a ‘binding authority’ or ‘binder’.
Why might an insurer want to delegate some underwriting authority?
- Manpower - can’t underwrite everything directly
- Local access - access local business without setting up offices out of London.
- Other access - access business that wouldn’t come into the London market.
choice of partner for a delegated underwriting authority
- term used for partner is ‘coverholder’. when seeking a coverholder you want one with a good professional reputation and known in home market.
- currently 3,500 individual coverholders, writing business on behalf Lloyd’s syndicates, represents about 30–35% of Lloyd’s premium income.
- Brokers can be a coverholder, client base now contains insurer clients. Can give rise to a ‘conflict of interest’.
Setting up a new coverholder
- Before a syndicate insurer can start to delegate authority to a coverholder, must obtain approval from Lloyd’s.
- new coverholders are sponsored by broker and application supported by managing agent. They can be sponsored by a managing agent without a broker.
- Supporting MA should use coverholder, but once coverholder is approved, they are available for use by any MA. MA must complete investigation into coverholder (process of ‘due diligence’).
When reviewing applications from potential coverholders, Lloyd’s has to consider a number of different criteria:
- suitability and experience of individuals
- systems and controls used in applicant’s infrastructure
- financial status
- authority of applicant to operate in specified territories
Application process of a cover holder
electronic and starts by sponsoring broker via a system called ‘ATLAS’. The prospective coverholder has access to ATLAS to finish application form online and upload the necessary documents i.e. PI insurance certificates + financial statements. Application is considered by Lloyd’s within 25 working days. Once approved, coverholder signs ‘coverholder undertaking’ sets out standards of Lloyd’s.
The info held on ATLAS is available to parties who have a relationship with coverholder. Core info i.e. updated PI certificates and financial info, are provided to Lloyd’s annually.
Types of coverholders
2 main types within Lloyd’s Market:
- approved coverholder
- service company.
Both have to pass a Lloyd’s approval process and their authority controlled through delegated authority contracts that are received from insurer. if business is written in EEA on behalf of Lloyd’s Brussels, Lloyd’s coverholders have to obtain additional approvals from Lloyd’s Brussels.
types of authority that can be given to the coverholder
- Full authority - complete control is given within boundaries of contract of delegation
- Pre-determined rates - possible price matching or discretion are allowed for renewal businesses
- Pre-determined rates - no discretion, no change at all is made
- Prior submit - all risks are referred to underwriter prior to binding
binding authority document
captures details of the delegated underwriting contract, together with written lines, fiscal and regulatory info and subscription agreement.
Consists of three parts:
- binding authority schedule
- binding authority wording
- non-schedule sections (which mirror elements of MRC)
principles of doing business at lloyds which covers control over delegated underwriting
- Principle 1- Underwriting profitability
- Principle 4 - Claims management
- Principle 5 - Customer outcomes
- Principle 11 - Regulatory + financial crime
Principle 1: Underwriting profitability
Expects:
- underwriting strategy sets out the appetite for use of delegated authority;
- processes and controls are in place for approval of delegated authority
- business written under delegation to align with main business plan
- visibility of costs incurred by delegation
- pricing done under contracts of delegation aligns with the syndicate
- guidance is given to delegated authority partners concerning ESG matters.
Principle 4: Claims management
Expects:
-clearly articulated appetite for outsourcing of claims
- detailed reporting from any party to whom claims are outsourced
Principle 5 – Customer outcomes
Expects:
- the conduct culture set by the board promotes good customer outcomes
- third party service providers are engaged, managed and overseen properly
Principle 11 – Regulatory and financial crime
Expects:
- systems implemented by coverholders are appropriate standard and financial crime training is done
- actions arising from financial crime audits under delegated authorities are completed
- annual financial crime report considers risks posed by delegated authorities
- documented policies and procedures exist for identification and mitigation of financial crime risk, including delegation.
Registration in lloyds
- Lloyd’s requires registration of binding authority agreements. Registrations performed using an online system called Delegated Contract Oversight Manager (DCOM).2. Lloyd’s captures info about contracts being entered with coverholder.
- info is checked when binding authorities are registered and when paperwork is submitted to Velonetic for entry onto databases.
- Once binding authority is registered, date and unique number are allocated, which put on binding authority MRC elements, before submission to Velonetic for entry on risk data systems.
Reporting
- Analysis of the monthly/ quarterly bordereaux reporting received from coverholder allows insurer to identify potential breaches of authority.
- Analysis of data can be timely, so full time binding authority manager is needed
- Lloyd’s introduced a bordereaux management system called Delegated Data Manage. Aim is capture large data with ability to generate reports from it.
Auditing coverholders
Insurers audit policy for the coverholder states the:
* frequency of audits
* scope for review in the audit; and
* details of the auditors
If binding authority written by more than one insurer, leader is the party responsible for organising audits of coverholder, costs are shared between subscribing insurers who benefit from the audit . End of a audit, theres a follow-up with coverholder to discuss areas of concern.
Examples of areas that should be considered for audit of delegated underwriting are:
- underwriting
- accounting
- financial reporting
- credit control
- information technology systems
- documentation controls
- compliance with Lloyd’s or other regulations
Outsourcing
Premium processing and risk data recording
In Lloyd’s and London Company Market the functions of data capture of risk info and money movement for premiums are centralised. So insurers require fewer in-house data and accounting resources. These are performed by Velonetic (Xchanging Ins-sure Services).
