The new trading arrangements aim to move away from a position where Lloyd's centrally regulates and disciplines intermediaries, to one that is primarily driven by the commercial choices of the individual underwriting businesses within the market.
The proposed arrangements are designed to:
i) Attract a number of new intermediaries with the capability, quality and reliability to deal with the subscription market and all Lloyd's managing agents. Lloyd's proposes new and simplified criteria to admit such intermediaries (termed full access intermediaries).
ii) Recognise the strategies of the global broking groups which already contain a Lloyd's broker in London. Lloyd's proposes to work with these brokers to agree the most efficient method of access (termed group member access).
iii) Allow individual managing agents to "sponsor" intermediaries with whom they wish to do business on a one to one, non-subscription basis (termed sponsored intermediaries). Such business is likely to be personal lines, small commercial or motor business arranged on a 100% basis.
Full access intermediaries
An intermediary accredited with full access to the Lloyd's market would be:
- Entitled to do business with every managing agent operating in the Lloyd's market.
- Able to place subscription business with all Lloyd's underwriters.
- Expected to take part in Lloyd's Central Accounting facility in relation to subscription business, in order to ensure the efficient processing of premiums to, and claims from, subscribing underwriters.
- Expected to make a commitment to uphold Lloyd's service standards (these are currently being agreed at a London market level in discussions with the International Underwriting Association and Lloyd's brokers).
- Entitled to have their own employees admitted to the Underwriting Room at Lloyd's.
- Entitled to establish contracts for underwriting facilities, such as binding authorities, line slips and consortia.
- Entitled to use the title Lloyd's Broker and publicised as such, for example via Lloyd's Internet site (www.lloyds.com).
Group member access
Intermediaries admitted under the following proposals for group member access would be regarded as full access intermediaries.
A number of existing Lloyd's brokers are part of a larger group including other insurance intermediaries. There may be efficiencies to be realised by the group through more streamlined use of its global intermediary network.
This might, for example, enable the brokers concerned to establish their own criteria for access to the market taking into account the location of their expertise, their knowledge of the Lloyd's market and the growing ease of electronic communication.
Sponsored intermediaries
A sponsored intermediary would:
- Be permitted to deal with the sponsoring managing agent for risks placed on a 100% basis with the syndicate(s) of that managing agent, or where the syndicate(s) of the managing agent represents the only Lloyd's participation on the risk.
- Be entitled to use a term such as Associate Lloyd's Broker to signify their more limited access.
It is envisaged that managing agents will identify prospective sponsored intermediaries as a result of opportunities arising from business planning and investigation. There may also be circumstances where the managing agent has already developed a good business relationship with a particular intermediary.
Managing agents will be responsible for considering the suitability of sponsored intermediaries prior to engaging in a business relationship. Suitability will be assessed against a standard Code of Practice.
The Code of Practice will cover a number of areas relating to the intermediary including its:
- local/professional standing, e.g. whether it is licensed or regulated and by whom.
- knowledge and experience e.g. knowledge of the local market and experience of staff/management.
- business operations, e.g. the ownership/ control of the firm and the adequacy of systems and procedures.
- financial position, e.g. the handling of client monies and adequacy of errors and omissions cover.
Lloyd's would be responsible for checking the ability of managing agents to operate in accordance with the Code of Practice. Particular attention will be placed on the ability of agents to manage the ongoing relationship with, and credit risk posed by, their chosen intermediaries.
A sponsored intermediary will be able to become a full access intermediary and therefore able to access all managing agents, if it wishes to apply and is able to satisfy Lloyd's commercial standards in full.
The following criteria are suggested as a basis for discussion and these could be reflected in a "terms of business agreement" between the underwriter and intermediary:
- A defined level of knowledge and experience of the Lloyd's market (for those who have not had previous direct experience, Lloyd's would offer a form of familiarisation/training).
- A commitment to the upholding of Lloyd's service standards, particularly in relation to the timely issuance of policies and the prompt payment of claims.
- A prescribed level of errors and omissions insurance arranged with suitable insurers to cover dishonest or fraudulent loss of money and negligence.
- The provision of a letter of credit, suitable bond or equivalent, which could be drawn down by Lloyd's in agreed circumstances.
- The segregation of client and insurer funds from other monies to safeguard these from being used for brokers' own purposes, thereby reducing the credit risk to underwriters.
- Paid up capital of £500,000 or currency equivalent, to ensure that the intermediary has sufficient working capital to meet its day to day running expenses and to ensure that there is sufficient fixed capital to secure an orderly run-off in the event of a business failure.
Accreditation process
It is proposed that Lloyd's will operate a central accreditation process for both full access intermediaries and sponsored intermediaries. Key aspects are:
- The role of Lloyd's in accrediting full access intermediaries will comprise: "due diligence" checking of the suitability of the intermediary including a review of its local/professional standing; a review against relevant information sources available to Lloyd's; and checking compliance with the agreed commercial standards.
- The role of Lloyd's in accrediting sponsored intermediaries may be limited to a review against relevant information sources available to Lloyd's and the application of relevant commercial criteria based on the business proposed to be underwritten. This is in recognition of the work that will have been undertaken by the sponsoring managing agent under the proposals.
- On completion of the accreditation process, the intermediary will be added to the register of Lloyd's brokers, or registration may be denied if Lloyd's review highlights any material issues.
- After initial accreditation, individual managing agents will be responsible for ongoing monitoring of the credit risk posed by all intermediaries and for ensuring Lloyd's service standards are upheld. This responsibility will apply in relation to both full access intermediaries and sponsored intermediaries.
- Lloyd's role after accreditation will be essentially responsive. Lloyd's will notify managing agents, where possible, of any information received that may affect the ability of an intermediary to continue to meet Lloyd's accreditation requirements. As ultimate sanctions, Lloyd's will have the power to remove an intermediary from the register of accredited intermediaries, or disallow the processing of new business.
- Accreditation to the register of Lloyd's brokers will be for a set period of three years, after which the initial checks will be re-run. There will also be an annual review, which will include a process of self-certification.
The consultation period for the discussion document closes on December 17, 1999.
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If you have any comments on this document, or if you would like to receive a copy of the full document, or wish to be notified of the outcome of the consultation process, please contact: Steve Reid, Development Projects, Lloyd's, Tel: +44 (0)20 7327 6465 Fax: +44 (0)20 7327 5599 or email steve.p.reid@lloyds.com
