Service agreements may not offer best value to clients

The Lloyd's franchise board is believed to be considering an investigation into premium service agreements (PSAs).

Some Lloyd's underwriters fear the agreements potentially prevent insureds getting the best available terms at Lloyd's.

Brokers often ask underwriters to enter into PSAs in order to guarantee extra commission on large volumes of business introduced to the underwriter by the broker.

But the use of PSAs has raised concerns at Lloyd's that brokers are placing business with insurers offering the most favourable PSA terms, rather than insurers offering the best terms for the insured.

"Some large brokers have, in the past, effectively asked insurers to bid for premium income," said one Lloyd's broker.

As a result, it is understood that the Lloyd's franchise board is considering an inquiry into the use of PSAs at Lloyd's.

The issue of PSAs is causing much controversy in the market, with some underwriters complaining that the agreements are significantly increasing the cost of doing business at Lloyd's.

Consequently, there are fears that PSAs may force many clients to place business with alternative markets.

"The bottom line is that if acquisition costs are going up, it means the cost of doing business in Lloyd's is going up, therefore the London Market may not be as cost-effective as other markets," said a London Market Association spokesman.

The issue of whether or not PSAs are fully disclosed to clients is also understood to be causing concern among the Lloyd's hierarchy.

One Lloyd's managing agent said this week that "some brokers are not as transparent as they should be when it comes to disclosing these agreements to clients".

But another Lloyd's insider argued that the majority of Lloyd's brokers were completely transparent about PSAs.

One managing agent said: "In most cases, there is a legal agreement between syndicates and brokers regarding PSAs, and the insured is made aware of this."