EXPLANATORY NOTE NEW MODEL NON RISK TRANSFER TOBA RISK TRANSFER TOBA ENDORSEMENT TO LLOYD S MANAGING AGENTS AND LONDON MARKET INSURERS AND BROKERS

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1 EXPLANATORY NOTE NEW MODEL NON RISK TRANSFER TOBA RISK TRANSFER TOBA ENDORSEMENT TO LLOYD S MANAGING AGENTS AND LONDON MARKET INSURERS AND BROKERS MODEL DOCUMENTS AND LINKS The LMA, IUA and LIIBA have developed a new model non risk transfer (NRT) terms of business agreement (TOBA) for use between a managing agent or insurer and a London market broker. This replaces the 2005 model NRT TOBA. We are publishing the following documents: The new model NRT TOBA A comparison between the NRT TOBA 2011 and the previous model, the NRT TOBA 2005, marked-up to show the changes. (The IUA will also attach a comparison with their 2009 model.) A model endorsement to the 2005 risk transfer TOBA (RT TOBA 2005) for those who wish to continue with risk transfer arrangements see the Risk Transfer section below for an explanation. The section at the end of this note deals with the agreement process. The Associations recommend that new agreements are adopted to bring into trading relationships the new compliance and other provisions described below and the new model agreements have been developed to assist the process. For those firms currently trading on the terms of the existing model agreements and who wish to adopt the new models: those wishing to move from the model NRT TOBA 2005 to the NRT TOBA 2011, each Party needs to sign the new agreement (in duplicate, with one original for each party); those wishing to move from the model RT TOBA 2005 to the model NRT TOBA 2011, again, the new model agreement needs to be signed by each Party the agreement states that this will supersede previous TOBAs for new business, although old business will continue to be governed by the previous TOBAs; firms wishing to remain trading on a risk transfer basis, and which wish to update their existing RT TOBA 2005 to include the new compliance and other provisions, may achieve this by each Party signing the model RT TOBA Endorsement. Firms which currently have in place TOBAs which differ from the model agreements, or which wish to adopt bespoke arrangements, must tailor the relevant model agreement accordingly, if this is used as a reference point

2 NEW MODEL NON RISK TRANSFER TOBA (NRT TOBA 2011) Significant changes from the model NRT TOBA 2005 to the NRT TOBA 2011 [References to insurance and insureds include references, respectively, to reinsurance and reinsureds, unless the context requires otherwise.] Definitions and interpretation: this section has been amended to include new definitions (for example ICOBS replaces ICOB, and we define the BIPAR principles); and we give latitude to cater for successor bodies (the FSA is defined as the Financial Services Authority and any successor regulatory bodies see clause 1.4) and new regulations (see clause 1.14). The purpose is to give the NRT TOBA 2011 as long a life as possible in a changing regulatory environment. Scope Clause 2.1: As in the NRT TOBA 2005, the terms of the TOBA do not override the terms of an underlying contract of insurance or contract for insurance (for example, a binding authority). However, clause 6.6 of the TOBA in relation to the holding of monies, will apply if a binding authority agreement does not make provision for this in accordance with the CASS rules or other trust arrangement, where the Broker (TOBA Party) is the coverholder 1. Clause 2.2: we include a provision to define the legal relationships between the Parties, to give as much clarity as possible, particularly in respect of agency relationships. The basic relationship in the NRT TOBA is that the broker is the agent of the insured except in the particular circumstances specified in this clause. Clause 2.4: we include transitional arrangements, which say that if moving from a risk transfer TOBA to the NRT TOBA 2011, then monies which were held under the risk transfer arrangements will continue to be held by the Broker as agent of the Managing Agent/Insurer until paid by the Broker to the relevant party. Premiums and Claims Clause 6.2: under a NRT agreement, the agency relationship between the broker and carrier in relation to the holding of monies-in-transit (premiums, return premiums and claims) essentially follows the usual agency relationship, whereby the broker is the agent of the insured - this is reflected in clause 6.1. Clause 6.2 carves out certain exceptions to this, where the Broker holds monies as agent and trustee of the Managing Agent/Insurer, as follows: (a) where the Broker holds monies-in-transit as a coverholder or placing broker for a coverholder; (b) where the Broker holds monies such as adjusters fees or legal fees as agent of the Managing Agent/Insurer for onward payment; 1 Lloyd s issued a market bulletin on 13 November 2009 (Y4332) which provides guidance on the use of model LMA clauses (UK and US) relating to the holding of monies by coverholders

3 (c) and, a further category, where the Broker holds funds as agent of the Managing Agent/Insurer by reason of any legal or regulatory requirements or where specified in the Slip. The overseas regulations in question may be the governing law of the policy and/or the law in the broker's jurisdiction and/or the law in the insured's home jurisdiction if any of those laws provide that payment by the insured to the intermediary satisfies the obligation to pay the carrier (i.e. risk transfer); or which state that a claim is not paid to the insured until paid by the intermediary dealing with the insured such regulations exist in a number of overseas jurisdictions. Clause 6.3: this clause gives the Managing Agent/Insurer a right to information as to whether premium has been received by the Broker or not, where the broker is agent for this purpose under Clause 6.2 this replaces the old clauses 6.3 and 6.7 in the NRT TOBA Clause 6.4 payment of premium: we have deleted reference to the terms of trade schedule, which was included in the 2005 models but never used as a market standard, and instead make reference to the time permitted for payment contained in the Slip. If payment to the Broker is late, the NRT TOBA 2011 says that the broker shall pay the premium as soon as reasonably possible, provided the broker has received funds and the contract of insurance has not been validly cancelled. Compliance and Data Protection The compliance section contains additional clauses over and above the general compliance commitment of both parties contained in clause 8.1, as follows: Clause 8.2 the Parties will pay due regard to the Contract Certainty Code of Practice; Clause 8.5 each Party will pay due regard to the BIPAR Principles; Clause 8.6 each Party will pay due regard to, and co-operate in respect of the observance of, any applicable economic, financial or trade sanctions: this co-operation extends to the regulations applicable to the other Party and the customer, for example, where the Managing Agent/Insurer is exposed to more extensive sanctions regulations than the Broker, the co-operation extends to the wider regime; Clause 8.7 this provision relates to compliance with relevant anti-bribery law, including the UK Bribery Act 2010; and provides for the maintenance and enforcement of anticorruption/bribery policies and procedures, including adequate procedures under the Bribery Act 2010; the clause does not pre-suppose that the Managing Agent/Insurer and Broker are associated persons within the terms of the Bribery Act this is a matter of law and whilst it would follow that the Broker, as agent of the insured under a NRT TOBA, may not be an associated person of the carrier, the Act is drawn widely 2 ; 2 On the basis of the commitment given by each Party in clause 8.7 in relation to the maintenance and enforcement of adequate procedures, Lloyd s has decided with the LMA not to set up a separate system for the lodging of Bribery Act Comfort Letters by Lloyd s brokers and Managing Agents; however, this decision is on the basis that new TOBAs are entered into by Managing Agents and Lloyd s brokers containing the same or similar terms as this model clause

4 Clause 9.3 this contains data protection provisions, which meet the requirements of the Data Protection Act Authorisation Clause 17 there is an amendment to make it clear that the TOBA may only be assigned or varied in writing by the authorised representatives of the Parties. RISK TRANFER The LMA, IUA and LIIBA have agreed not to prepare a new model RT TOBA pending the review of the client money rules by the FSA, which is likely to lead to changes in the CASS sourcebook. The FSA expects to issue a Discussion Paper on this during the first quarter of 2012, which will be followed by a Consultation Paper in Summer 2012, and subsequent Policy Paper and rule changes towards the end of Under the current FSA rules, risk transfer, whereby the broker agrees to hold monies-intransit as agent of the carrier rather than as agent of the insured, has to be agreed in writing between the broker holding the money and the insurance undertaking to comply with CASS rules 5.2.3R and 5.1.5AR. The model RT TOBA 2005 performed this function and provided that these funds would be held co-mingled in the broker s client money trust account, and that the carrier s interests would be subordinated to the insureds interests, as required by the CASS 5.1.5A(2)R. Risk transfer therefore reverses the normal agency position in respect of the collection and holding of monies by the broker. Model Endorsement to the RT TOBA 2005 If Managing Agents, Insurers or Brokers wish to amend current risk transfer TOBAs, pending the FSA s consultation, to include the new clauses in the compliance section and other relevant amendments contained in the NRT TOBA 2011, then the model RT TOBA Endorsement (see link above) may be used in conjunction with the exiting model RT TOBA The model RT TOBA Endorsement may have to be tailored appropriately if the RT TOBA currently agreed between the parties is not in model form. AGREEMENT PROCESS The NRT TOBA 2011 is a model agreement and it is for each firm to agree appropriate terms. If a firm wish to use this model, it should be noted that Clause 2.4 provides that the terms of the NRT TOBA 2011 supersede the terms of any other TOBA already in place between the Parties for new business. Existing TOBAs will continue to govern old business; Clause 10.1 of the existing model TOBAs, if in use, provide that these may be terminated at any time by one party giving written notice of termination to the other. There are two basic ways to enter into the new NRT TOBA 2011 or to agree the RT Endorsement: (1) the Parties each sign and exchange (preferably in duplicate) the new Agreement; or - 4 -

5 (2) the Managing Agent/Insurer signs the new Agreement and sends it to the Broker giving clear and adequate notice that if the Broker places business with the Managing Agent/Insurer after a specified date, this would be under the terms of the new Agreement. If the Managing Agent/Insurer has taken appropriate soundings from the Brokers with which they deal, method (2) is likely to save considerable administrative time. The LMA, IUA and LIIBA are able to provide a model covering letter to assist members in method (2), on request. Lloyd's Market Association International Underwriting Association London & International Insurance Brokers' Association 15 December