Lloyd's settlements

Andy Cook, in his opinion piece "Fresh minds at the top can help Lloyd's restore its image"

(16 January, Insurance Times), commented on the large amounts of premium, from up to a decade ago, owed to syndicates by brokers.

The most obvious cause of the non-settlement of this money is a lack of interest on the part of both brokers and underwriters in the provision of effective back offices and systems to efficiently handle documentation and accounting.

There is also another reason, which stems directly from this.

It arises in this way. When a broker debits his client for a premium - adjustment on a policy (AP) placed 100% at Lloyd's, he debits his client for the premium and credits his brokerage account for his commission and the Lloyd's suspense account with the net premium.

When the client pays the broker the premium, the broker submits the premium advice note and the signing slip to the LPSO for stage 1 signing. The LPSO then debits or credits the broker's bank account for the net amount of all the premiums, APs, adjustments, claims, returned premiums (RP) and claim refunds included in that week's central settlement.

At the same time the LPSO sends an electronic signing message to the broker listing all the individual items included in the settlement.

In theory, the items on the electronic signing record will match the entries in the broker's Lloyd's suspense account. In practice, many items do not match up, and thus, over a period of time, the broker's Lloyd's suspense account becomes cluttered up with old unmatched entries and signings. Among these old items are a lot of small premiums and APs paid to the broker by his clients, but not paid to Lloyd's.

Policyholders never allow their brokers not to pay them their claims and RPs. On the other hand, Lloyd's and company underwriters have traditionally been very bad at keeping a proper record of premiums received against risks written. Thus the net balance of the old items in a broker's Lloyd's suspense account (and those suspense accounts for the insurance companies central accounting and settlement bureaux) is always a credit to underwriters.

Eventually the quagmire of old unmatched entries and signings in all a broker's bureau suspense accounts becomes so large and unmanageable that the broker decides to write off all the old items from his books. To give effect to this the broker will or may investigate the largest items - say £10,000 plus - and will then debit the various suspense accounts with the net debit balance of the old items being written-off and will credit his brokerage account for the same amount.

In the 1970s one of the larger Lloyd's brokers did this exercise every three or four years and netted some £2m on each occasion. The brokers department of Lloyd's regulatory division outlawed "credit write-backs" at the end of 1996.

In the late 1980s, the auditing standards board circulated a pamphlet seeking views on how auditors could improve the audits of both Lloyd's brokers and syndicates.