Understanding Lloyd’s

This is the first in a two-part series on Lloyd’s of London and implications for Canadian Independent Adjusters

Lloyd’s of London is a famous, even venerable insurance brand. But behind the tradition and history of this market are several misconceptions. One of the first is that Lloyd’s is an insurance company similar to other firms, with a singular underwriting and claims department.

Lloyd’s is, in fact, a series of underwriting syndicates. If you go to the Lloyd’s building at One Lime Street in London (as I did recently), you will see several groups of desks, also known as underwriting “boxes.” Each box has a specific risk appetite, such as aviation or sports, and underwriters consult constantly with brokers on submissions. This immediate access to decision-makers means that answers on whether a risk can be placed are made quickly, enabling the broker to provide fast coverage solutions. In some ways, it is like a department store of risk, offering a high concentration of underwriting and insurance expertise in a small area.

Similarly, because Lloyd’s is an insurance market, not an insurance company, there is no central claims office. Instead, any covered loss is reported back to the broker or agent who wrote the policy on behalf of the insurance market. Lloyd’s underwriters review all reported losses and set standards for how claims are to be managed, but they leave much of the actual claims handling and fieldwork up to the entity that sold the policy – and its chosen adjusting firm.

Another misconception is that Lloyd’s is only a specialist underwriter. While it handles all sorts of unique risks, Lloyd’s is licensed in Canada for most classes of insurance and reinsurance. Canada is Lloyd’s underwriters’ third largest market, with premiums of approximately $2.2 billion in 2012 (of which approximately 15% is reinsurance business). In Canada, Lloyd’s is best known as a market for commercial risks in respect of property, casualty and specialty classes of business.

One enduring misperception is that Lloyd’s is supported by private individual “Names,” who supply capital and backstop the risks that the market takes on. That was once the case, but today members provide the capital to support the syndicates’ underwriting. These members include some of the world’s major insurance groups, as well as individuals and limited partnerships. In the modern era, corporate members provide most of the capital for the Lloyd’s market.

All of this makes Lloyd’s a highly distinctive insurance market. It also means that, for adjusters, they can’t just pick up and do business with Lloyd’s as they would with any other insurer. Lloyd’s represents an important and potential emerging market for many adjusters – but first they have to understand how it works. This is my overview of Lloyd’s as I understand it.

Lloyd’s underwriters work closely with brokers and local underwriting agents (coverholders) and are able to offer customized insurance products for large risks, as well as for the small and medium business market. In Canada, coverage is generally placed with Lloyd’s in one of two ways – as an open market correspondent or as a coverholder.

Open Market Correspondent (OMC)

An OMC is an insurance intermediary who introduces business to an accredited Lloyd’s broker for placement in the Lloyd’s market on an open market basis. This type of coverage, which is typically a “one-off” insurance coverage solution, is issued by Lloyd’s according to the individual risk profile presented. Lloyd’s requires that insurance entities in countries such as Canada must be approved or registered by its attorney in fact or general representative before they can produce business to one or more sponsoring Lloyd’s brokers for placement on an open market basis.

The following is a brief synopsis of how a risk is placed at Lloyd’s. A local broker, acting on behalf of a client, approaches an accredited Lloyd’s broker with the details of a risk to be insured. The Lloyd’s broker consults an underwriter to discuss premium, terms and conditions. If both parties remain interested, a proposal will be made to accept a percentage of the total risk. A number of underwriters may accept portions of one risk (either within Lloyd’s or outside). Often, there is a “lead” syndicate and “seconds” or following syndicates, which take a percentage of the risk.

The Lloyd’s broker feeds back the proposal to the local broker and client. If the local broker/client wants to proceed, the Lloyd’s broker prepares a ‘slip’ with the details of the insurance, which is signed by each of the underwriters that have agreed to accept part of the risk (“subscription”). The Lloyd’s broker deducts its fee from the premium paid by the customer and pays the net amount to Lloyd’s, which then allocates it to the syndicates. Any claims made under the policy are handled by the local broker, with reporting standards set by Lloyd’s.

Coverholder

Coverholders essentially allow Lloyd’s syndicates to operate in a region or country as if they were a local insurer. This is achieved by Lloyd’s syndicates delegating their underwriting authority to coverholders. A coverholder can have full or limited authority to underwrite on behalf of a Lloyd’s syndicate. It will usually issue the insurance documentation and will often handle claims. The document setting out the terms of the coverholder’s delegated authority is known as a binding authority.

Coverholders are given authority to write risks on behalf of Lloyd’s syndicates via binding authority contracts. If the coverholder can settle the claims, this is known as a Claims Authority. This may only be limited to claims below a certain agreed limit. Part of the contractual agreement is that the coverholder regularly reports claims to the Lloyd’s syndicate. Such information is required to ensure the correct movement of funds between coverholders, brokers and Lloyd’s syndicates; and to ensure Lloyd’s is able to meet its regulatory reporting obligations and maintain its licences in different territories.

All insurance entities wishing to become an approved coverholder must complete the application process. Each applicant requires a sponsoring Lloyd’s broker and managing agent, who perform their own due diligence of the application before it is submitted to Lloyd’s coverholder department for review.

Typically, a coverholder is expected to issue regular reports on premiums payable and claims paid, as well as any other reporting standards. This is referred to as bordereaux, which are commonly produced on a monthly or quarterly basis. They break down block premium payments that are made to underwriters and detail claim payments made on behalf of or due from underwriters.

For adjusting firms in Canada, one of the key opportunities in the Lloyd’s of London market is to become a third party administrator (TPA) for a domestic coverholder. For example, if a coverholder is writing a program for sports liability or taverns and restaurants across Canada, the adjuster, acting as the TPA, would be given claims handling and settlement authority, subject to binding authority. To function as such, adjusters have to be registered at Lloyd’s through a written TPA agreement and receive an individualized reference number in Lloyd’s electronic system.

This article represents a brief overview of my perceptions on how Lloyd’s of London operates as an insurance market, in terms of risk identification, coverage placement and claims reporting.

The second in this series will examine how the Lloyd’s claims management model represents a significant departure from current trends, such as volume agreements and flat-fee adjusting, in Canada. It is a model that, in my opinion, emphasizes professional claims handling, proper investigation and value for services rendered.

Fred Plant is president of Plant Hope Adjusters Ltd. and a Past President of the Canadian In
dependent Adjusters’ Association (CIAA), having served as National President 2007- 2008.