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Lloyd's Insurance Market > Module 11: Delegated Underwriting > Flashcards

Module 11: Delegated Underwriting Flashcards

1
Q

What is a binding authority?

A
  • An agreement between an insurer and another party…
  • under which the insurer delegates to the other party authority to enter into contracts of insurance on behalf of the insurer.
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2
Q

What is a coverholder?

A

The party to whom authority is granted, who usually, but not always, is an insurance intermediary.

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3
Q

What are loss funds?

A

Funds held on behalf of underwriters by coverholders for paying claims.

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4
Q

What are the three levels of underwriting authority available to coverholders?

A
  1. Full authority - authorised to write business and issue documentation within agreed parameters without referral to managing agents.
  2. Pre-determined Risk selection and Rates - authorised to write business and issue documentation using pre-determined rates provided by managing agents, or by reference to an Internet rating system.
  3. Prior submit - risk is referred back to the managing agents to underwrite insuring document issued by coverholder.
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5
Q

Name three key aspects which are relevant for ways in which binders operate (in terms of contract certainty).

A
  1. Coverholders must not bind risks under binder until the managing agent of the lead syndicate has received written confirmation that coverholder accepts the terms of the binder.
  2. Binders cannot be registered at Lloyd’s until this confirmation is received.
  3. Coverholders must have all documentation including clarity as to any documentation he will be issuing under the binder before the inception of the binder.
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6
Q

What are the benefits of delegated underwriting contracts to coverholders?

A

Partnership with Lloyd’s syndicates by gaining access to Lloyd’s brand, security and ratings, as well as access to experienced underwriters and brokers.

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7
Q

What are the benefits of delegated underwriting contracts to managing agents?

A

Coverholders enable syndicates to underwrite locally.

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8
Q

What are the benefits of delegated underwriting contracts to policyholders/insureds?

A

Policyholders can access specialist insurance coverage.

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9
Q

What are the responsibilites of the policyholder?

A

The policyholder is the client of the retail broker and has a duty to disclose material facts to the managing agent when an insurance contract is being negotiated, subsequently amended or renewed.

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10
Q

What are the responsibilities of the retail broker?

A

The retail broker advises the policyholder about insurance options, choice of cover and associated risks.

He is the agent of the policyholder and the client of the coverholder and has a duty to act in law in the policyholders best interest.

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11
Q

What are the responsibilities of the coverholder?

A

The coverholder acts as the agent for the managing agent, rather than the policyholders agent.

A coverholder also acts as agent of the Lloyd’s managing agent by collecting premiums or handling claims.

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12
Q

What are the eight responsibilities of the Lloyd’s broker?

A

The role of the Lloyds broker, on behalf of the coverholder is to:

  1. Arrange and administer the binding authorities.
  2. Negotiate the terms and conditions of the binding authority with the Lloyd’s syndicate.
  3. Sponsor new coverholders.
  4. Manage the day-to-day relationship with the coverholder.
  5. Arrange renewal and find new syndicate if necessary.
  6. Handle items which fall outside the terms of the binding authority.
  7. Prepare and submit reports to the Lloyd’s syndicate and to Xchanging.
  8. Handle risks outside the binding authority and seeking to place with underwriters.

A Lloyd’s broker usually acts as the agent for the coverholder and acts as the point of contact between the Lloyd’s syndicate and the coverholder.

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13
Q

What are the responsibilities of the corporation of Lloyds?

A

Lloyd’s supervises coverholders as part of its statutory role in supervising the Lloyd’s market.

The supervision is carried out through the approval process and then through Lloyd’s ongoing supervision of all approved coverholders.

The Delegated Authority Team are responsible for coverholders on a day to day basis.

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14
Q

What are the four responsibilities of the managing agent?

A
  1. Establishing the syndicate business plan and capital.
  2. Managing and modelling the syndicates risks.
  3. Appointing underwriting and claims staff.
  4. Setting reserves.
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15
Q

What are the responsibilities of the syndicates?

A

Capital providers at Lloyd’s are called Lloyd’s members. A Lloyd’s member can provide capital to one or more Lloyd’s syndicates.

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16
Q

What are the responsibilities of Xchanging?

A

It provides the Lloyd’s and London Market with a single processing of regulatory and tax information and cash settlement of premiums and claims.

Within Xchanging, XIS (Xchanging Ins-sure Services) and XCS (Xchanging Claims Services) are responsible for Lloyd’s market processing.

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17
Q

What are the responsibilities of the Members?

A

Members provide the capital to support syndicates’ underwriting.

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18
Q

Which seven types of people can authority be delegated to?

A
  1. To a director or employee of the managing agent.
  2. To any other individual engaged to provide services to the managing agent, with the consent of the Franchise Board.
  3. To another managing agent or authorised insurance company, in accordance with the terms of a line slip.
  4. To another managing agent, in accordance with the terms of a registered binding authority (this includes agreements made under a consortium agreement).
  5. To an approved coverholder, in accordance with the terms of a registered binding authority (this includes to a ‘service company coverholder’).
  6. To a restricted coverholder, in accordance with the terms of a restricted binding authority.
  7. To the Society, or a representative or agent of the Society, in accordance with any other requirements of the Council.
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19
Q

What does the Franchise Board do?

A

Oversees the admission and removal of organisations operating under the Lloyd’s brand…

  • and works to make sure that the market’s business processes are more attractive to policyholders, brokers and those who provide capital.
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20
Q

What are the three main advantages of binding authorities?

A
  1. They can be used in any class of business and for any size of risk.
  2. In relation to smaller risks: they make it possible for London Market insurers to handle business, for which premiums charged per risk are too small for placement risk-by-risk on an open market basis to be cost effective OR which might not otherwise come into the London Market.
  3. The coverholder can make rapid decisions on acceptance or risks and give a much faster service when issuing documentation.
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21
Q

What are the three main disadvantages of binding authorities?

A
  1. The insurer will be judged by the coverholder’s actions and is responsible for the coverholder’s conduct of business.
  2. If the documentation issued is poor, or the coverholder is slow to deal with claims, this will reflect badly on the insurer.
  3. The insurer, NOT the coverholder, is liable for every contract of insurer to which the coverholder commits under the terms of the binding authority.
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22
Q

What is a restricted binding authority?

A

A binding authority that:

  1. Prescribes the terms and conditions to be included in each contract of insurance.
  2. Contains arrangements for determining premiums. The coverholder has a list of rates he can change.
  3. Only authorises the coverholder to enter into contracts for UK risks.
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23
Q

What are the three conditions for a restricted binding authority being held by a restricted coverholder?

A
  1. All restricted coverholders must be UK companies or partnerships.
  2. From 14 January 2005, they must have the FSA’s permission to act as an insurance intermediary.
  3. A restricted coverholder cannot hold any form of Lloyd’s binding authority other than a restricted binding authority.
24
Q

What is a registered binding authority?

A

A binding authority that:

  1. Has been registered by Lloyd’s.

All binding authorities other than restricted binding authorities must be registered by Lloyd’s.

  1. Must be held by an approved coverholder.

An approved coverholder may be based anywhere in the world and must be approved by Lloyd’s.

25
Q

What is BAR?

A

BAR stands for Binding Authority Registration.

Lloyd’s operates this system online for registered binding authorities.

26
Q

What does the Market Reform binding authority slip aim to do?

A

Facilitate greater contract clarity by:

  1. Using standard slip structure that clearly states the contractual terms.
  2. Encouraging more use of model wordings that are agreed before contract inception.
27
Q

How are the Market Reform binding authority slips templates structured?

A

All of the slip templates are divided into the following sections:

  1. Schedule
  2. Non-Schedule Agreements - additional contractual information, such as brokerage, other deductions from premium and taxes payable.
  3. Subscription Agreement Information
  4. Information - information provided to insurers to support the assessment of the risk at the time of placement.
  5. Fiscal and regulatory
28
Q

What is the binding authority model agreement for USA?

A

LMA 3018.

United States of America Non-Marine
Model Binding Authority Agreement.

29
Q

What is the binding authority model agreement for Canada?

A

LMA 3020.

Canadian Non-Marine
Binding Authority Agreement.

30
Q

What is the binding authority model agreement for “the Rest of the World”?

A

LMA 3019.

Non-Marine Binding Authority Agreement
(excluding USA & Canada domiciled Coverholders).

31
Q

What is the binding authority model agreement for Marine?

A

LMA 3021.

Marine Binding Authority Agreement.

32
Q

Where the Lloyd’s Broker is also acting as the Coverholder

A

LMA 3024.

Lloyd’s Brokers Non-Marine
Binding Authority Agreement.

33
Q

What is an approved coverholder?

A
  1. A company or partnership authorised to enter into a contract of insurance that will be underwritten by Lloyd’s syndicate under the terms of a binding authority. Must be registered on BAR.
  2. They may also have authority to issue insurance documents on behalf of Lloyd’s syndicates.
  3. They may be domiciled (permanently based) in any country where local regulations permit.
  4. Some approved coverholders may also be classified as Service Company Coverholders.
34
Q

What other terms are used to define coverholders in other countries?

A
  1. In the USA they are known as managing general agents (MGA’s).
  2. In some parts of Europe they can be described as underwriting agents or multi agents.
35
Q

What is the approval process for potential coverholders?

A

They must apply to Lloyd’s using the standard application form available on the Lloyd’s website.

36
Q

What does the standard application form to be approved as a coverholder contain?

A

Questions intended to facilitate Lloyd’s review of the application which focuses on:

  1. Suitability and experience of individuals employed by the coverholder.
  2. The applicant’s financial position and its regulatory position.

Applications must be sponsored by either a Lloyd’s broker or a Lloyd’s managing agent, who perform their own review of the application before it is submitted to Lloyd’s.

37
Q

Who at Lloyd’s considers the application of prospective coverholders?

A

The Delegated Underwriting Team.

38
Q

If a coverholder application is successful, what are the five conditions applying to the approval of a coverholder?

A
  1. The coverholder has three months from the date of approval to accept the application, otherwise the approval will lapse.
  2. The approval normally covers the territory in which the coverholder proposes to do business.
  3. They must comply at all times with laws and regulators in the territories in which they do business, as well as with Lloyd’s requirements.
  4. A coverholder is not permitted to sub-delegate his authority to any other party.
  5. A Lloyd’s coverholder may make use of Lloyd’s name and brand in accordance with Lloyd’s guidelines.
39
Q

What are the four Delegated Authority Standards set by Lloyd’s?

A
  1. The managing agent has a clear strategy for writing and managing delegated underwriting.
  2. The managing agent carries out thorough due diligence of coverholders to which he proposes to delegate authority.
  3. The managing agent ensures that he has binding authorities in place with each coverholder, clearly defining the conditions, scope and limits of that authority and which comply with Contract Certainty requirements.
  4. The managing agent proactively manages delegated underwriting contracts once incepted.
40
Q

What seven things must managing agents take into account with delegated underwriting arrangements?

A
  1. The number of coverholders
  2. The number of contracts which a syndicate leads or follows
  3. The extent of delegation
  4. The volume of income
  5. The classes of business
  6. The level of exposure
  7. The geographical distribution
41
Q

What eight things does the “code of practice for delegated underwriting” cover?

A
  1. Roles and definitions
  2. Producing the contract to delegate authority (contracts of delegation)
  3. The main provisions that will be in the contract of delegation
  4. Monitoring contracts of delegation
  5. Certificates issued by coverholders
  6. Claims handling
  7. Cancelling or not renewing contracts of delegation
  8. Assessment and criteria for new coverholders
42
Q

What two aspects of performance does Lloyd’s expect managing agents to monitor?

A
  1. Credit Control - to make sure that accounting statements or premiums from the coverholder via the Lloyd’s broker, are received on time.
  2. Terms of Trade - settlement shall be remitted by the coverholder via the Lloyd’s broker within the maximum number of days of the end of each bordereaux interval(s).
43
Q

What is the Annual Compliance Return?

A

It is an annual check of the coverholders data.

44
Q

How is the Annual Compliance Return completed?

A

Either by:

  1. Direct upload or
  2. Completing a paper compliance questionnaire

(which the Lloyd’s broker then uploads on the coverholder’s behalf).

45
Q

How is a coverholder audit performed?

A

A suitably qualified person (from the managing agents or a specialist external auditor):

  1. Visits the coverholder’s office
  2. Undertakes an assessment of the coverholder’s adherence to the terms and conditions of the binding authority.
  3. Undertakes an assessment of the suitability of the coverholder’s business systems, governance and controls over the risks.
46
Q

What is the audit scope for coverholder audits?

A
  1. Provides a ‘menu’ of audit requirements from which the managing agent is able to select the relevant sections for a particular audit.
  2. Helps facilitate the co-ordination of audit activity, whereby multiple managing agencies can audit the same coverholder at the same time.

The managing agent decides and agrees the timescales for the audit cycle.

  • Lloyd’s encourages a minimum of 24 months for each audit cycle and a 12 month cycle for coverholders of high importance/significance.
47
Q

What are the two main areas of concern when auditing coverholders?

A
  1. Financial crime

2. Conflicts of interest

48
Q

What four things does Lloyd’s expect coverholders to do in respect of conflicts of interest?

A
  1. Establish a conflicts policy
  2. Operate suitable conflicts management arrangements and ensure they are applied to all key staff.
  3. Ensure appropriated disclosures are made.
  4. Ensure the managing agent monitors those arrangements and that conflict procedures are checked as part of the coverholders audit process.
49
Q

Name three examples of managing conflict.

A
  1. A coverholder cannot act as a broker for the policyholder and as an agent of the insurers.
  2. Segregation internally of the underwriting and claims functions.
  3. As agent of the insurers, disclosing any financial interests or earnings received in Loss Adjusters or TPA’s.
50
Q

What are the coverholder reporting standards for premium and claims (three each)?

A

Premium Reporting Standards:

  1. Core information about the risk
  2. Information about premium transactions
  3. Class specific underwriting information, etc

Claims Reporting Standards

  1. Core information about the policy
  2. Information about the loss
  3. Status of claim information, etc
51
Q

What is the ACORD standard US property exposure reporting sometimes called?

A

ER3001 (Exposure Reporting version 3.1).

  • The standard allows Lloyd’s syndicates to have the information they require to be able to model the aggregate exposures,
  • and to make sure they have not exceeded their maximum aggregate exposure in particular regions.

It defines risk level information in force at the time the report is produced.

52
Q

What is a Line Slip?

A

A pre-agreed group of underwriters that provides the broker with instant capacity that he is free to use or not as he sees fit.

53
Q

What are the three advantages of line slips for the broker, lineslip leader and lineslip participants?

A
  1. For the broker - pre-agreed security that he can acces with the agreement of just one or two of them.
  2. For the lineslip leader - ability to write larger lines on behalf of the lineslip than individually.
  3. For lineslip participants - ability to access business that they might not otherwise see, and saves them time by not having to see the broker.
54
Q

What is a consortium?

A

Formal arrangement between insurers to write business as a group.

55
Q

What is the role of Lloyd’s service companies?

A
  1. They offer insurance processing and related services and a number of others providing restricted services such as marketing and placing.
  2. Established overseas by managing agents who seek to open up new distribution channels in order to compete with local markets.

Lloyd's Insurance Market (12 decks)

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