For reasons such as reputation, worldwide licences, access to business and underwriting expertise and flexibility, Lloyd's has several major companies wanting to create their own Lloyd's syndicate. This year, Mitsui Marine and Sorema have set-up Lloyd's syndicates and there are others looking at the concept.
These companies will have access to the relevant underwriting teams but are unlikely to have the necessary London-based personnel to run a Lloyd's-approved managing agency, which, in any event, will not be cost-effective for a small or new syndicate.
One solution is to employ an existing Lloyd's managing agency on a “turnkey basis”, allowing the new entrant to concentrate its resources on underwriting. To understand why the turnkey concept, as opposed to setting up a new managing agency, is becoming increasingly popular it is necessary to look at Lloyd's past.
The Lloyd's insurance market has a tradition for innovation stretching over more than 300 years. This has manifested itself in different forms over that time with the starting up of new businesses and the laying to rest of the moribund. The pace of change since 1982 – when the Lloyd's brokers were forced to divest their ownership of managing agents – has been fast and furious.
Broker-owned managing agents were bought by their management and during the 1980s numerous bright, young underwriters formed their own syndicates and often an allied managing agency. New agencies would frequently comprise the underwriter as chief executive, a senior market figure as non-executive chairman and an accountant to look after the finances, organise the administration and secure capital from members' agents. All was fine providing the underwriter was skilful, or lucky or both.
This led to a vibrant marketplace but also led to many businesses that were unlikely to survive more than one generation and which, after some successful years, would often end in significant losses for their capital providers. Following the crisis of the early 1990s, the Council of Lloyd's determined that the mistakes of the past would not be repeated.
New rigour
Of the many changes and improvements made to Lloyd's, one of the more significant – but least perceptible to outsiders – is the emphasis that Lloyd's is placing on the management and control of the underwriting businesses. Managing agents are now subject to strict guidance and regulation on every material aspect of running Lloyd's syndicates and are also cajoled by statements of best practice.
One of the most important of the changes being applied is the “300% rule”, whereby the agency must have on its board three full-time executives covering separate roles of managing director, compliance director and finance director. In addition, it is increasingly difficult to fulfil managing agency functions without an underwriting director, an in-house actuary and an IT director or senior manager. Combining these and the relevant support teams with an independent chairman and a couple of non-executive directors, will lead to a huge salary bill – before employing anyone who is going to try to make an underwriting profit to pay for the board and produce a return to capital providers.
The consequences are obvious: small managing agencies cannot exist as such, and even the medium-sized agencies will struggle to maintain profitability. It is estimated that £100m underwriting capacity is the absolute minimum, although management costs are a real burden until the business is two or three times that size. Existing small businesses can probably get by for a little longer, while some of Lloyd's stipulations are not yet compulsory. However, a new start-up business would not be given the leeway.
How then does an underwriting team start its own business; how does a foreign insurance company start in the Lloyd's insurance market; how does the Lloyd's market regenerate itself? Two answers – it can be done with lots of money, provided that critical mass is achieved rapidly. The alternative is the provision of managing agency services on a turnkey basis.
Having built the infrastructure to operate within the Lloyd's market and enjoying good working relationships with the regulators, a number of managing agents have surplus management capacity and are in a position to share this (for a fee) with new entrants to the market. This enables the new entrant to concentrate on underwriting and building its underwriting teams and management at its own pace. Although most new syndicates will probably wish to form their own agency in due course, this does not have to be the case, and the option to remain small and independent under a turnkey arrangement is always open.
For its part, the existing managing agency can make a good recovery of overhead costs and can resist the temptation to make acquisitions or to grow its own in-house syndicates too quickly to absorb these.
The turnkey agency can offer its managing agency services on a “menu” basis. At the very minimum all syndicates under management will be provided with peer review, monitoring, compliance and reporting support. This takes the form of developing jointly with the client an annual business plan with detailed underwriting levels and limits. The turnkey agency will monitor closely against this plan with a monthly presentation by the syndicate underwriter to the turnkey agency's board.
Turnkey add-ons
Additionally, the turnkey agency can provide technical, accounting and actuarial support for the new syndicate, as well as ad hoc financial reporting and services for the related corporate member. Alternatively, the turnkey agency can provide training and support to facilitate a handover of these functions to in-house teams.
If the turnkey agency has an in-house IT platform for syndicate operations it may be able to incorporate the turnkey syndicate within its existing system, or it can recommend a systems provider and reporting requirements.
Another area where the turnkey agency should be able to provide valuable assistance is the initial application process for the new syndicate. This requires a detailed business plan set out in a standard Lloyd's questionnaire, which is presented to Lloyd's regulators and ultimately to the Lloyd's authorisation committee. These processes, are daunting and complicated at the first attempt and much easier for the turnkey agency the third or fourth time.
Although there is no minimum size for a syndicate, the turnkey agency is likely to charge a minimum fee which means that it is generally uneconomic for a syndicate to have capacity of less that £20m (or able to reach that size in its second year of operation).
Turnkey syndicate management is not a panacea for the future structure of Lloyd's but provides a useful stepping stone for the introduction of new businesses to Lloyd's and will help provide the generation of new concepts and underwriting streams which is vital for the future development and health of the Lloyd's market.
