Routes to the capital

Lloyd's has become more accessible over the past decade. This can be attributed to regulatory change and Lloyd's increased appetite for smaller, less exotic risks.

Until recently, any broker anywhere in the world wanting to take risks to Lloyd's had to channel the business through a London-based Lloyd's broker.

Today, regional brokers can place business in the market using several different routes, or they could become Lloyd's brokers, so gaining direct access to underwriters and eliminating the need for commission sharing.

The complexity of doing business in the Underwriting Room has restricted the numbers of those choosing the route of accreditation. Thus, the traditional route into the market - through a Lloyd's broker - has remained predominant.

Historically, these special intermediaries had the exclusive right to trade with Lloyd's underwriters. They were regulated and supervised by Lloyd's centrally and, in many cases, had an equity stake in Lloyd's underwriting agencies.

Shifted away
Over the years, Lloyd's brokers numbered on average about 250, but broker consolidation has nearly halved the population, to 142 in 2002. Under the Lloyd's Act 1982 they are no longer permitted to own managing agencies, the businesses that run the syndicates. And they are no longer regulated by Lloyd's: basic supervision of Lloyd's brokers has shifted away from Lloyd's itself to the General Insurance Standards Council (GISC), or equivalent local supervision for those outside the UK.

Lloyd's itself grants accreditation to intermediaries wishing to trade in the market, but no longer supervises them directly.

One company that received accreditation last year was Camberford Law. Chief executive Richard Sheikh says: " We were one of the first to become accredited and the whole process took about five months.

"We have always regarded ourselves as London Market brokers based in Bromley and a substantial amount of our business is underwritten in Lloyd's."

He says the benefits of accreditation include access to a wider range of underwriters - the decision makers - and the networking opportunity in the Underwriting Room.

He adds: " I really like the flexibility of Lloyd's and so far there has been no downside to our decision to become accredited."

Another change, one which is now well established, is the introduction of Lloyd's service companies. These operations allow Lloyd's syndicates to extend their underwriting reach beyond One Lime Street and into the wider world.

Policy issuance
By creating underwriting agencies, which are owned by the managing agencies, service companies can write business on the account of the managing agencies syndicates and do not require the involvement of a wholesale Lloyd's broker.

This type of company is particularly important in the UK, where it competes with non-Lloyd's insurance companies in lines of business ranging from mass market motor cover to small commercial business. It often has an underwriter on site in regional offices, or it refers business to Lloyd's for underwriting.

Typically, it handles policy issuance and other documentation work, rather than leaving these tasks to the central Lloyd's Policy Signing Office (LPSO).

One such service company is Markel UK, owned by Markel International, which manages the former Archer syndicates. It underwrites UK risks through offices in Birmingham, Leeds, Manchester, and Reigate, on behalf of fellow Markel Syndicate 3000 at Lloyd's.

Markel UK managing director Steve Carroll says service companies were set up because it was cumbersome for regional brokers to access Lloyd's underwriters and facilities. "The service company allows brokers to access the market without going to the box," he says. "They are like the regional offices of insurance companies, and provide a system that local brokers are used to. We deal with all the paperwork, any mid-term policy changes, there is no queuing up, and no LPSO."

Markel UK has four underwriters, one in each regional office. They do business with local and regional brokers, as well as the regional offices of some Lloyd's brokers.

"Historically the London Market has been known as a market for heavy, hazardous, and distressed risks, while business up to a certain size is placed locally," he says.

"Lloyd's has tended to ignore smaller business. It hadn't looked much for it in the UK when we started 12 years ago but, as an underwriter, you need a balanced book and a spread of business that includes the straightforward and the run-of the mill."

On a practical basis, service companies pay standard rates of brokerage, since no wholesale Lloyd's broker is involved.

Carroll says: "The local broker doesn't have to share his commission and, in terms of access and speed of response, it is generally much quicker. We get the documents out quickly, and get the risk put to bed."

Markel's strategy includes hiring from regional markets, rather than transferring city underwriters, but it ensures they have decision making authority and the autonomy to make "decent" decisions.

"In broad terms, it is no different than dealing with an underwriter in a box at Lloyd's."

Just as the service company extends a Lloyd's underwriters' reach into regional markets, coverholder agreements allow Lloyd's to source business from the UK regions and around the world.

Coverholder agreements can grant underwriting authority to third-party general underwriting agents, which operate in much the same way as service companies.

The difference is that the risk carrier - the Lloyd's syndicate - has no ownership stake in the underwriting operation. The underwriting agency, which might be a division of a Lloyd's broker, accepts business from regional brokers on behalf of specific Lloyd's underwriters under a binding authority agreement, and channels the business into Lloyd's through a Lloyd's broker.

Tony Docherty is chairman and managing director of ATD General, an independent composite underwriting agency in Manchester. It underwriters property and business interruption risks, general liability, professional indemnity, motor trade business, and other lines.

"We see inquiries, evaluate them, and put forward terms on some on behalf of our principals, the risk-carrying syndicates," Docherty says.

Agreed level
"Each principal gives us, through a binding authority, a kind of power of attorney to operate as if we are them, to hold their underwriting pen, to bind them to risks that we wish to underwrite, to issue appropriate documentation, and to pay claims up to an agreed level."

Binding authority contracts are very carefully configured, setting out strict rules within which coverholders must operate. They establish a framework outlining specific classes of business, limits on premium rates and sums insured, general exclusions, reinsurance arrangements, and which named underwriters are granted the authority to bind cover.

And, unlike some of their non-Lloyd's competitors, underwriting agents operating under binding authorities may have the flexibility to negotiate commissions.

Docherty says: "We are authorised to pay commissions up to certain maximum levels, which vary according to the class of business, the size of the risk, and the size of the premium. On a lot of business we are quoting net terms, and asking the brokers to either put a fee on top, or gross up within the limits set by our principals. Flexibility and commerciality are key."

Such arrangements have advantages for both the risk carriers and the producing brokers. The latter have indirect access to the Lloyd's market that otherwise would be difficult to obtain, and thus to capacity and coverage that may be in short supply locally.

In fact, some Lloyd's brokers are known to have called upon regional underwriting agents to test capacity in tight supply through conventional channels, turning the distribution chain on its head. And they also earn commission, of course.

One Lloyd's broker reports that a typical brokerage split might be 70/30 in favour of the producer, typically of a total brokerage of about 20%, with everything open for negotiation. As the market hardens, the commission environment changes swiftly, he says.

Hiscox Syndicate 33 bloodstock underwriter Julian Lloyd explains: "A binding authority puts an experienced individual with local knowledge on the spot, acting for you, sniffing out good business.

Underwriting authority
"If it works properly, it is a wonderfully effective tool. But it can be devastating when it goes wrong." Problems can arise when agents granted underwriting authority think more about volume than about the quality of the business they accept.

"Who you select to do business with is critical," Lloyd says.

"They have to understand your business and your underwriting requirements.

"If he thinks only of his commission, you have a disaster."

Over the years, coverholder arrangements have brought a fair mix of grief and glee to Lloyd's, but they remain a key tool in the market's distribution reach. And Lloyd's has been working for some time to reduce the grief factor.

Simplified arrangements
They have been shifting much more responsibility for vetting the quality of coverholders to the managing agents, and away from the Lloyd's brokers who introduce their business to the market.

In addition, as responsibility for regulating Lloyd's brokers has shifted out of Lloyd's itself, several categories of coverholder relationship have been eliminated, simplifying the arrangements.

For example, sub-agencies, umbrella arrangements, and guarantee agreements, all of which had been widely used in the UK, have been dropped in favour of binding authorities.

Meanwhile the number of binding authorities granted by Lloyd's underwriters is currently at a low ebb. "We have certainly seen a reduction this year," says Lloyd's spokesman Adrian Beeby.

"One reason is the reallocation of capacity away from commoditised business and towards reinsurance and bigger global risks, as a result of 11September.

"Another is a tightening up in the regulatory issues relating to binding authorities."