Chapter 9 - Delegated Underwriting

Question 1

What is ‘Delegation’?

Answer 1

Empowering another person or organisation to perform tasks on your behalf.

Question 2

Which parties delegate their activities in the insurance industry?

Answer 2

Insurers (both Lloyd’s and companies).

Question 3

Who can an insurer delegate ‘underwriting authority’ to?

Answer 3

1. another insurer.
2. a broker.
3. another entity altogether.

Question 4

(Overview) - What are the contract names for delegated underwriting, according to who it is being delegated to?

Answer 4

Delegation to an insurer:
1. Consortium.
2. Lineslip.

Delegation to a broker or another entity:
1. Binding authority or ‘binder’.

Question 5

What contracts allow an insurer to delegate its underwriting authority to another insurer, or set of insurers?

Answer 5

There are 2 main contracts.

1. Consortium.
2. Lineslip.

Question 6

What is a ‘Consortium’?

Answer 6

A consortium is a group of insurers which have formed an agreement to accept risks together in a set proportion. Insurers set a Consortium up themselves.

All risks written under the consortium are divided amongst the members of the consortium in the pre-agreed way.

Consortiums consider risks from a number of brokers.

Question 7

How long is a ‘Consortium’ usually set up for? How are Consortiums coded?

Answer 7

One year.

By a unique 4 number code.

Question 8

Who sets up a Consortium?

Answer 8

A Consortium is set up by the insurers themselves. (may have strong corporate relationship).

Question 9

Name some advantages of a Consortium?

Answer 9

Broker:
- Placing process is potentially shorter.

Consortium leader:
- Fees usually given to the consortium leader for their responsibilities.

Followers:
- Followers have access to business without needing to see a broker.
- In most cases the consortium is for niche classes of business.

Question 10

What is a ‘Lineslip’?

Answer 10

A lineslip is a group of insurers brought together by the broker, who agree to accept risks that attach to the lineslip. Usually one of the insurers participating will act as the lineslip leader and agree any risks attaching to the lineslip on behalf of the other insurers.

Having put together this pre-agreed group of insurers, the broker decides – for every risk they place – whether to use this pre-agreed group, or to place the risk in the open market (the broker visits underwriters individually).

Lineslips usually only consider risks submitted by one specific broker.

Using a lineslip is a form of market security.

Question 11

How is a Lineslip put together?

Answer 11

Using an MRC. The broker brings together a group of insurers.

Question 12

Name some advantages of a Lineslip?

Answer 12

Broker:
- Having pre-set security in place is more efficient when trying to place risks that fall within the set criteria.
- i.e… Lingo…
- ‘I am using Lloyd’s security on this risk.’
- ‘The security on the risk is all London Market.’

Followers:
- Insurers gain access to business without having to agree the risks individually
themselves.

There are fewer advantages of a lineslip leader because it is less usual to have commissions or fees for leaders of Lineslips, unlike a consortium arrangement.

Question 13

Name another term for a Lineslip?

Answer 13

Facility.

Question 14

What is the name of the process which attaches a risk to a lineslip?

Answer 14

Declaration.

Question 15

What is the KEY difference when setting up a Consortium and a Lineslip?

Answer 15

A lineslip is set up by a broker (on an MRC), whereas a consortium is set up by the insurers themselves.

Question 16

What is the KEY difference when presenting risks to a Consortium or a Lineslip?

Answer 16

Lineslips usually only consider risks presented by one specific broker, whereas Consortiums consider risks from a number of different brokers.

Question 17

What contracts allow an insurer to delegate its underwriting authority to a broker or another entity?

Answer 17

Binding authority or ‘binder’.

Question 18

Why might an insurer want to delegate some underwriting authority to a broker/other entity?

Answer 18

Manpower:
- Not enough time for insurer to underwrite everything directly.

Local access:
- Insurer wants to get access to local business without setting up offices out of London.

Other access:
- Insurer wants to get access to business that would not otherwise come into the London market.

Question 19

What is a ‘Coverholder’? What is the key quality insurers seek in a ‘Coverholder’?

Answer 19

This is the partner who has been delegated underwriting authority by the insurer, in accordance with the binding authority.

Insurers seek coverholder’s with a good professional reputation.

Question 20

What process must managing agents complete when investigating a new Coverholder?

Answer 20

The process of ‘due diligence’.

Managing agents should delegate their authority only to competent and well-run organisations. Brand reputation & protection of the insured are a key focus.

Question 21

When may a ‘conflict of interest’ arise if a broker is a ‘Coverholder’?

Answer 21

The broker’s client base is no longer only insured clients - it now includes insurer clients for which it is a Coverholder.

If they are a Coverholder for an insurer they are now acting as their agent, as well as for their insured client - so the conflict of interest arises when selecting insurers in the risk placement process.

So essentially: A broker that usually acts for insured client’s only, now holds a ‘binding authority’ from an inusrer.

Question 22

How does a prospective (broker) Coverholder apply?

Answer 22

The application process is electronic via a system called ATLAS.

Question 23

How long should Lloyd’s take to consider a prospective Coverholder?

Answer 23

25 working days.

Question 24

If a Coverholder is approved, what must they sign?

Answer 24

The ‘Coverholder undertaking’.

This sets out formally the high standards expected by Lloyd’s of its coverholder’s.

Question 25

What is the name of the system that will replace the ATLAS system in the near future?

Answer 25

Delegated Contract Oversight Manager (DCOM).

Question 26

What are the 2 main types of Coverholders?

Answer 26

1. ‘Approved Coverholder’.
2. Service company.

Question 27

What is a ‘Service Company’?

Answer 27

A service company is set up by managing agents as a separate company in various locations, to underwrite business on the behalf of the syndicate.

This allows Lloyd’s insurers to access more business overseas and have a presence in other countries if required.

Question 28

What types of authority can be given to a Coverholder? Explain what they are?

Answer 28

1. Full authority: (complete control is given to the Coverholder).
2. Pre-determined rates: (where possible price matching or discretion are allowed for renewal business).
3. Pre-determined rates with no discretion: (where no change at all is known from the rating matrix).
4. Prior submit: (where all risks are to be referred to the underwriter prior to the binding).

Question 29

How many parts does the document evidencing a ‘binding authority’ consist of? What are they?

Answer 29

Binding Authorities comprise Three parts.

1. Binding authority schedule.
2. Binding authority wording.
3. Non-schedule sections.

Question 30

Where does most of the binding authority business come from in the London Market?

Answer 30

The USA. Mostly non-marine business.

Question 31

What has Lloyd’s published in order to manage delegated underwriting?

Answer 31

Lloyd’s has published a set of minimum standards relating to the management of delegated underwriting.

Question 32

Name some of the KEY points of Lloyds’ ‘Minimum Standards’ (which relate to the management of delegated underwriting)?

Answer 32

• The managing agent has a clear strategy for writing & managing delegated underwriting as part of its overall business plan.
• The managing agent carries out thorough due diligence of coverholder’s to which it
  proposes to delegate authority.
• The managing agent ensures that it has binding authorities in place with each
  coverholder to which it delegates authority. The binding authority clearly defines the
  conditions, coverage, scope & limits of that authority & complies with contract
  certainty requirements, including the requirement to demonstrate regularly that insurance documents have been issued within required timescales.
• The managing agent proactively manages delegated underwriting contracts once incepted to ensure compliance with contract conditions. This involves, for example, putting in place a regular audit cycle.

Question 33

Who bears the liability of the actions of its agent?

Answer 33

The insurer has vicarious liability for the actions of its agent. It retains responsibility even if it is not aware of the actions being taken.

Question 34

What online system is used to register binding authority agreements?

Answer 34

Delegated Contract Oversight Manager (DCOM).

This allows Lloyd’s to observe the contracts being entered into with each Coverholder, and the types of business being conducted under the binding authority.

Question 35

(Overall) - What online system do coverholder’s apply on? And what system is used to register binding authority agreements?

Answer 35

Coverholder’s apply on ATLAS (this is to be replaced by DCOM) in the future.

DCOM is used to register binding authority agreements.

Question 36

What system in the London Market has been created to help insurers analyse reports of delegated underwriting business?

Answer 36

The Delegated Data Manager (DDM) system helps insurers analyse data reports from coverholder’s.

Insurers must review the regular reporting received from their coverholder’s.

Question 37

What is the documentation of a binding authority agreement typically known as?

Answer 37

A ‘Certificate’.

Question 38

What two activities must an insurer regularly carry out?

Answer 38

1. Review the regular reporting received from their coverholder’s.
2. Regular physical audits on the Coverholder.

Question 39

In the London Market, what activities does the term ‘delegation’ refer to? And what activities does the term ‘outsourcing’ refer to?

Answer 39

Delegation refers to underwriting.

Outsourcing refers to claims handling, data capture, and money movement.

(i.e. you wouldn’t describe underwriting as being ‘outsourced’).

Question 40

What system in the London Market processes premium and records risk data?

Answer 40

Xchanging Ins-sure Services.

Question 41

What system is used by the Lloyd’s and Company Markets to capture and communicate claims data?

Answer 41

On central systems run by Xchanging.