Lloyd's and the International Underwriting Association have come a step closer to integrating their back office systems after signing a letter of intent with Xchanging, a newly formed company that specialises in creating internet systems.

The move should eventually unite the two market's claims-handling functions, the Lloyd's Policy Signing Office and the London Processing Centre, in the next three years.

Under the agreement, a new company, which is yet to be named, will be set up at the start of next year. The IUA, Lloyd's and Xchanging will have joint ownership of the company, with Xchanging making a substantial investment.

Xchanging will take a hands-on role in creating a workable system, while strategy will continue to rest with the IUA and Lloyd's.

The new company is expected to process premiums and claims worth more than £20bn a year on behalf of around 220 insurance companies and Lloyd's syndicates. The company will be one of the largest insurance service operations in the world, handling some 1.8 million accounting entries a year and generating more than 13 million electronic transactions.

Nick Prettejohn, chief executive of Lloyd's, said: “The new company will provide London with unified back-office processing, leading to lower costs and better service for our customers and their brokers.”

Integrating the back office systems is part of the modernisation of Lloyd's, which the Forum working group has been looking at. Other areas being examined are the use of ecommerce and standards and protocols.

A spokesman for Xchanging said it had been chosen from a shortlist of companies and began discussions on the project in July.

The company was founded by David Andrews, who now acts as chief executive and was formerly a managing partner and board member of Andersen Consulting.

Andrews said: “This is a tremendous opportunity because from day one, this company will have size and scale.”

He said from his experience it would take two to three years to fully implement the system. Andrews' past projects include the BP accounting system.

The IUA's deputy chairman, Tony Medniuk, said: “A well co-ordinated and streamlined approach to processing is critical to the future success of the market.

“This initiative will take us rapidly towards the latest internet-based generation of business-to-business processing, while simultaneously helping to take cost out of current procedures.”